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Post Office Board Agenda bla we
27 March 2018 + Tim Parker ( Chairman) + Jane MacLeod (Company Secretary)
+ Richard Callard + Veronica Branton (Minute Secretary)
Start Time Finish Time + Tom Cooper + Micheal Passmore (Finance Director) (item 5)
11.00hrs 16.00hrs + Tim Franklin + Cem Oztoprak (Finance) (item 5)
+ Virginia Holmes + Mark Ellis (Network Operations Director) (item 6)
+ Ken McCall + Russell Hancock (Supply Chair Director) (item 6)
Room 1.19 Wakefield + Carla Stent * Oven Woodey’ (CEO . FS&qT) (items id & 8)
+ Paula Vennells + Colin Stuart (Finance Director, FS&T) (item 7)
+ Alisdair Cameron + Martin Edwards (MD, Identity Services) (item 10)
+ Chrysanthy Pispinis (Head of Post Office Money) (item 8)
+ Debbie Smith (CEO — Retail) (item 9)
+ Andrew Goddard (Head of Payment Services) (item 9)
+ Paul Squire (Programme Manager) (item 9)
+ Rob Houghton (CIO) (item 11)
Agenda Item Action Purpose Lead
Needed
43 POL Board and subsidiary board Ratification To ratify appointments of the POL, POMS and Tim Parker 11.00
appointments FRES Boards.
2. Minutes of previous Board and Committee I Decision Minutes formally agreed. Jane MacLeod 11.05
meetings including Status Report
3. CEO Report Noting CEO to update the Board on the report. CEO 11.10
4 Financial Performance Report Noting CFOO to update the Board on the report. CFOO / Micheal Passmore 11.30
Annual Strategic Plan & Quarterly Funding
5.1 Annual Strategic Plan 2018/19 Decision Board sign-off. CFOO / Micheal Passmore / 11.50
Cem Oztoprak
5.2 Quarterly Funding Request Decision For the Board to approve the quarterly funding CFOO / Micheal Passmore / 12.10
request. Cem Oztoprak
Post Office Board Agenda
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Agenda Item
Action
Needed
Purpose
Timing
6. Cash Efficiency Noting CFOO to update the Board CFOO / Mark Ellis / 12.30
Russell Hancock
LUNCH 13.00
as FS&T Performance Noting To update the Board Owen Woodley / Colin Stuart 13.30
8. International Remittances Noting To update the Board Owen Woodley / 13.50
Chrysanthy Pispinis
9. Project Panther Decision To note progress and to approve setting up a Board Debbie Smith / Andrew 14.20
Sub-Committee Goddard / Paul Squire
10. Identity Noting & input To update the Board Martin Edwards 14.40
11. Microsoft Enterprise Agreement Decision To approve the renewal of the Microsoft Enterprise Rob Houghton 15.10
Renewal Agreement across 3 years
12 Postmaster Litigation Noting To update the Board Jane MacLeod 15.20
12.1 Terms of reference: Postmasters’ Decision For the Board to approve the terms of reference
Litigation Subcommittee
13. Board Committee Chair updates Noting To update the Board 15.30
(reread Carla Stent
13.1 ARC
14, Board Governance items Jane MacLeod 15.35
14.1 Delegated Authorities and Decision For the Board to approve revisions to the Delegated
authorised signatories Authorities and authorised signatories
14.2 Terms of reference Noting For the Board to note the annual review against terms
of reference
14.3 Register of Interests and Review For Board Directors to review their Conflicts of Interest
Conflicts of Interest and advise of any amendments.
Post Office Board Agenda
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Agenda Item
Items for Noting
15.1 Sealings
15.2 Health & Safety
15.3 Future Meeting dates
15.4 Forward agendas
Action
Needed
Noting
Noting
Noting
Noting
Purpose
For the Board to be aware of the affixing of the seal
To update the Board on Health & Safety
For Board to note future meeting dates for 2018
For Board to note
Jane MacLeod
CFOO
Jane MacLeod
Jane MacLeod
Timing
16.
Any Other Business
15.55
CLOSE
16.00
POST OFFICE
POST OFFICE LIMITED BOARD
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POL and subsidiary Board
appointments
Author: Veronica Branton, Head of Secretariat Sponsor: Jane MacLeod, Company Secretary
Meeting date: 27 March 2018
Executive Summary
ie
Recruitment has concluded for Non-Executive Director appointments to Post
Office Management Services. The Nominations Committee has approved the
appointments of Tim Franklin and Andrew Torrance for ratification by POL. The
Remuneration Committee has approved the fees for these appointments.
Recruitment has concluded for the CEO - Retail Services and Debbie Smith took
up post in January 2018. The Nominations Committee has approved Debbie
Smith’s appointment as a Director to FRES and POL is asked to ratify this
appointment.
Recruitment has concluded for the CEO - FS&T and Owen Woodley moved into
his new role in February 2018. The Nominations Committee has approved Owen
Woodley’s appointment as a non-independent Non-Executive Director of Post
Office Management Services subject to FCA clearance and as a POL Director of
FRES. POL is asked to ratify these appointments.
The Secretary of State for Business, Energy and Industrial Strategy (BEIS) has
approved the appointment of Tom Cooper to POL, acting in his capacity as
Special Shareholder which allows him to appoint a Non-Executive Director. The
length of time in the role is determined by SoS but is subject to the usual
requirements to comply with POL's terms of appointment. Tom Cooper will take
up post on 27 March 2018 when Richard Callard steps down. POL is asked to
note Tom Cooper's appointment to POL and to approve his appointment to the
Audit and Risk Committee.
Decisions
POL is invited to NOTE:
1)
The appointment of Tom Cooper as a Non-Executive Director of POL with effect
from 27 March 2018 and until such as time as the Secretary of State BEIS shall
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DECISION PAPER
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determine, subject to the appointee complying with his terms of appointment.
POL is invited to RATIFY:
2) The appointment of Tim Franklin as a Non-Executive Director of Post Office
Management Services for a period of three years from 20 March 2018
3) The appointment of Andrew Torrance as Senior Independent Director of Post
Office Management Services for a period of three years from 20 March 2018
4) The appointment of Debbie Smith, CEO - Retail, as a POL Director of FRES for
the duration of her time in post
5) The appointment of Owen Woodley, CEO - FS &T, as:
- anon-independent Non-Executive Director of Post Office Management
Services for the duration of his time in post following FCA clearance
- a POL Director of the FRES Board for the duration of his time in post.
The Board is asked to APPROVE:
1) The appointment of Tom Cooper as a member of the Audit and Risk Committee
for an initial period of three years with effect from 27 March 2018.
va
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Board Meeting
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD
ON MONDAY 29TH JANUARY 2018 AT 20 FINSBURY SREET, LONDON EC2Y 9AQ AT
12.15PM
Present: Tim Parker Chairman (TP)
Richard Callard Non-Executive Director (RC)
Tim Franklin Non-Executive Director (TF)
Ken McCall Senior Independent Director (KM)
Carla Stent Non-Executive Director (CS)
Virginia Holmes Non-Executive Director (VH)
Paula Vennells Group Chief Executive (CEO)
Alisdair Cameron Chief Financial and Operations Officer (CFOO)
In Attendance: Jane MacLeod General Counsel & Company Secretary (JM)
Marla Balicao Minute Secretary (MB)
Tom Cooper UKGI Observer (TC)
Debbie Smith Chief Executive, Retail (DS) (items 5,6,7 & 8)
Cathy Mayor Finance Director, Retail (item 5 & 7)
Martin Kirke Group HR Director (MK) (item 6)
Julie Thomas DMB Programme Director (item 6 & 8)
Tom Wechsler Programme Manager Mediation Scheme (TW) (item 7)
Andrew Goddard Head of Payment Services (AG) (item 7)
Rob Houghton Group Chief Information Officer (RH) (item 9)
Apologies: None
ACTION
1. INTRODUCTION, CONFLICTS OF INTEREST, MINUTES OF THE PREVIOUS
BOARD MEETING INCLUDING STATUS REPORT
1.1. A quorum being present, the Chairman opened the meeting.
1.2 The Directors declared that they had no conflicts of interest in the matters to be
considered at the meeting in accordance with the requirements of section 177 of the
Companies Act 2006 and the Company's Articles of Association.
1.3 Minutes of the meeting of the Board held on 23 November 2017 were APPROVED
and AUTHORISED for signature by the Chairman.
1.4 The actions status report was NOTED as accurate.
2. CEO’s REPORT
2.1 The Board NOTED the CEO report. In response to questions, the CEO made the
following additional points:
2.2 The CEO:
(a) noted the strong retail trading performance over Christmas, which would be
covered in more detail in the report from the CE, Retail later in the meeting.
(b) provided an update on Peregrine discussions following the conversations with
the new Bol CEO., as a result of which negotiations have been more positive.
Bol appear keen to do a deal and hope to get formalised through Heads of
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(c)
(d)
(e)
(f)
(g)
(h)
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Terms by the end of February. The scope of discussions includes FRES
however they have flagged that they do not want to change the ‘contract
construct’ which we interpreted that they wish the contract to remain
evergreen.
reported that the payroll module of Success Factors (“SF”) had gone live on
8th January with only a minor issues, and congratulated Martin Kirke and his
team for their work delivering to that timetable. Overall feedback has been
positive.
advised that she had met Stephen Jones, CEO UK Finance in December in
relation to the Banking Framework. A further update would be brought to
the Board in May on the further development of the Banking
Framework.
noted that RMG have signed a deal with the CWU although details of this deal
still to be announced. Post Office was in discussions with CWU through ACAS
to seek to resolve the dispute about the move from weekly to monthly pay.
There are a number of other discussions ongoing with CWU in relation to
operational developments such as telemetry etc.
noted that the L300 event was taking place the next day with three main areas
of discussion around IT Strategy, wider digitisation and people change, with a
focus on strategy and key priorities.
informed the Board that due to Prime Minister’s reshuffle, there is a new Postal
Minister - Andrew Griffith MP. This is still to be confirmed officially and PV is
still to meet him.
reported that Martin Kirke, Group HR Director has announced his intention to
retire later in the year and a search for his replacement has started. Debbie
Smith joined as Chief Executive, Retail on 8th January.
The Chairman questioned whether Post Office would seek compensation from
Gemalto in relation to the disruption to our AEI services in December. PV responded
that contractual compensation had been discussed and that this had been reported
at the ARC earlier in the day.
FINANCIAL PERFORMANCE REPORT
The CFOO presented the P9 financial performance report covering December 2017.
The Board NOTED the financial performance report and in discussion the CFOO made
the following points:
(a)
(b)
(c)
There had been strong Christmas trading however he noted that this only
added an extra £600k to EBITDAS reinforcing that mails are a low margin
business.
EBITDAS for P9 was £6.8m, giving us a £1.7m upside against forecast, but
£1.5m adverse to budget, driven by strong mails trading, interest rate rises
supporting POCA performance and accelerated IT costs savings, offset by
additional agents pay.
Balance sheet headroom in P9 was £127m which was £129m worse than P8&
due to Christmas trading, but £36m better than forecast.
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DS/M
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(e)
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POMS trading performance was behind by £(0.5)m predominately due to profit
share not being met.
ATM performance is being watched as availability has fallen: 420 ATMs have
been experiencing issues resulting in 65% availability. This is partly due to the
introduction of new £10 notes. Both Bol and Post Office are reviewing
performance and seeking to understand the impact of the new interchange fee
structures. AC noted that ATMs would be part of the cash strategy
which would be coming to back to the Board in May. The Board
requested that this review also consider whether there was value in
talking to manufacturers, and review the location strategy.
The CFOO noted that the Scorecard was showing positive outcomes (slide 3 in the
Performance paper), and the following were discussed:
(a)
(b)
(c)
Number of branches and ‘trapped Postmasters’ and PV responded that this,
together with the ‘white space’ strategy would be coming back to
Board as part of the review of the retail strategy.
Branch technology conversions are progressing however there is a need to exit
from BT and onto Verizon and this is affecting the shape of the delivery.
Health & safety performance in Supply Chain was starting to cause concern.
There are no significant trends or particular issues requiring specific
intervention but rather a higher incidence of not taking care, especially on our
premises. This will be addressed through activities seeking to engage peoples’
hearts as well as their minds.
Other matters flagged by the P9 report included:
(a)
(b)
(c)
Forecast EBITDAS for the year was still expected to be c£33 million, however
there were a number of issues that would need to be managed to achieve this
outcome.
Project costs were much closer to forecast than they had been, apart from
changes in the timing of DMB announcements.
There is still ongoing work to reduce network cash levels back to the pre-
Christmas levels, and branch cash are being managed more proactively.
KM queried the relationship between reductions in staff costs as franchising was
rolled out, and increases in agents pay, and queried whether costs were reducing at
the expected level?- The CFOO noted that there were a number of factors affecting
agents’ pay including simplification and product mix. On staff and non staff costs,
the next step change required the deployment of new technology and this could not
be introduced scalably until the underlying systems programmes such as Back office
Transformation are complete. He expected costs to be broadly flat in 2018/19, falling
in 2019/20 and achieving more significant savings in 2020/21.
ANNUAL BUDGET 2018/19
The CFOO presented the Annual Budget for 2018/19 as set out in the paper which
was NOTED by the Board. The CFOO highlighted the following:
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DS/
MK
DS
4.2
4.3
(a)
(b)
(c)
(d)
(e)
(f)
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The focus of the paper was on EBITDAS. The GE had reviewed progress
during December and January and detailed budget reviews would start the
following week.
The CFOO noted that in October, the Board had approved an EBITDAS target
of £40m for 2018/19. The impact of accounting changes including the
exclusion of the costs of the Group Litigation meant that £47m would be
consistent with the 3 year plan and was recommended. This represented
significant growth given that there was no profit share from the Bank of
Ireland (c£11 million), a significant Ofcom pricing challenge (c.£15 million
gross impact) and growth in marketing of c. £15m. The CFOO noted that the
gap still to close against the 2018/19 target was £12 million.
The Board discussed the EBITDAS target and indi d that £47m now felt
conservative and the target should beat, least £50m. vit was noted that the
FS&T revenue lines were disappointing. The CFOO noted that savings
products were still being impacted by low interest rates, and POMS had been
struggling due to changes within Post Office relating to the withdrawal of
mortgage and financial specialists, and the delay in roll out of marketing
plans, as a result of which the ‘hockey stick’ uptick had been delayed. The
CEO noted that a new marketing director has been appointed for POMS which
should start to see a difference and she noted the new advertising campaign
which had just been launched.
The Board commented that the portfolio should be reviewed to ensure that
Post Office could compete effectively in the financial services market, and
consideration should be given to focussing efforts in those areas where the
Post Office brand would allow us to compete most effectively. The Board
challenged whether the balance was right between short and longer term
objectives, and whether management were sufficiently ambitious for the
POMS business. The CEO undertook to come back to the Board to
update on the POMS acquisition strategy, and the Chairman noted it
would be helpful to get some wider background briefings from
insurance experts.
TP noted that he would like a target figure of at least £50. a n for 2018/19,
that the Board needed to understand how the growth fund would contribute
to this, and there should be some contingency in the plans. He noted that he
was encouraged by initiatives however those projects that underpin the plan
- and deliver longer term benefits, will be key.
The Board then discussed how other initiatives such as Panther, New Call
acquisition and Identity would contribute to the overall strategy. The CEO
noted that the strategy for the retail business was being reviewed by
the new Chief Executive, Retail who had only recently joined and
would be covered at the Board away day in June, however an update
would be provided at the March board.
The CFOO noted that proposals would be brought to the Remco at its meeting the
following week, for the STIP and LTIP measures. He noted that management's view
was that the measures for the two incentive schemes should be different, and that
following discussion at Remco, the recommended measures would be brought back
to the Board in March. He noted that the GE had debated supplementing a retained
EBITDAS with two critical pieces of delivery: (i) the replacement of legacy and
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DS
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outdated infrastructure including POLSAP, HRSAP and HNGX; and (ii) the delivery of
customer hub functionality with products available for customers in Travel and
Identity.
CE PERFORMANCE REPORT - RETAIL SBU
The Chairman welcomed Debbie Smith, the new Chief Executive, Retail and Cathy
Mayor and the Board NOTED the paper.
DS noted that she had attended the recent opening of the first 24 hour branch in
New Oxford Street.
CM reported on the following:
a) Christmas trading had been strong with increased customer sessions and trading
as compared with the previous year, although these had come through later in
the trading period, and reflected structural changes in the market.
b) Customer services levels had improved year on year, including customer effort
scores and wait time acceptability. The no queues at Christmas initiative had
brought wait times down by an average of 2 minutes, an improvement by 4%.
c) Mails performance was underpinned by continued growth in home shopping
returns and local collect which help offset ongoing decline in stamps.
d) Overall, the trading trends are positive and the current forecast is that Retail will
end the year £7m ahead of EBITDAS budget.
e) The Board brought up the discussion of Agents pay and it was agreed DS would
be looking into this and come back to the Board in June with a strategy.
The Board NOTED that transaction simplification was a key enabler for much of the
network and was materially important to the larger multiples. DS commented that
being able to convince retailers of the footfall benefits that Post Office could deliver
through the Banking Services Framework, click and collect, etc, was key to
leveraging the Post Office brand. Further work remained to be done on quantifying
the DPC of the various products - presently many of the central costs are not well
understood and therefore are not taken into account which may mean that products
look more profitable than they actually are.
DMB STRATEGY
The Chairman welcomed Julie Thomas and Martin Kirke to the meeting.
The following points were highlighted to the Board:
a) DS introduced the paper and noted that it was clear that DMB’s are not meeting
customers’ needs due to the restrictions on opening hours, and are not profitable
due in part to the significant central costs required to support them. Work is
ongoing to consider options to reduce costs including property options, reviewing
employment terms. franchising options etc; nevertheless exiting DMBs becomes
progressively more expensive due to the related central costs.
b) JT reported that the proposed revised franchising programme has been designed
to enable the franchise of all 227 DMB’s and staff over a three year period,
however at this point approval was only being sought for the first phase of the
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roll out. JT explained the model worked in two stages: (i) temporary operators
would be approached to operate a franchised DMB in the same premises, with
flexible lease terms. This should enable immediate staff cost savings while the
recruitment of the long-term operator and branch location is progressed in
parallel.
c) While there are currently 3 well established organisations who each can manage
approximately 30 branches on a temporary basis at any time, it is proposed that
a compliant procurement process should be undertaken for operators of
temporary branches across the network. The proposition should be attractive for
temporary operators as it is low risk and involves minimal investment.
d) The Chairman queried the impact on employees and whether union consultation
would be required? JT noted that under the current structures, it can take up
to six months to complete a franchise and that employees are often keen to
leave but are prevented from doing so because of the local consultation
processes. She advised that the plan was to start the staff consultation process
by telling staff about new Branches being advertised in the area and the strategy
of replacement of DMB’s over the next three years.
e) The Board queried the impact of the proposal on the underlying costs of the
business and JT replied that the benefits step down over time as set out in the
table on page 5 of the paper.
The Board was supportive in principal of the revised strategy however approval
was only sought for a one year roll out following which the strategy would be re-
assessed. APPROVAL was given on this basis including drawdown of the first
year of funding of £23.1m for 2018/19 which would allow the roll out of the
Franchise Programme to 56 branches.
PROJECT PANTHER
The Chairman welcomed Tom Wechsler and Andrew Goddard to the meeting.
DS summarised the benefits of Project Panther and TW and AG took the Board
through the progress of negotiations to date. The Board raised a number of questions
about Payzone and the proposed transaction, and in the course of addressing those
questions the following points were made:
a) the biggest hurdle would be CMA approval as the effect of the transaction would
be to reduce the market to 2 participants and to increase Post Office’s market
share. Additionally Paypoint would be incentivised to challenge the transaction.
The deal team were working with legal advisers to prepare for these issues.
b) Significant due diligence had been undertaken on the Payzone technology and
added security costs on implementation had been factored into the business
case. There was also potential value add from their technology and an
opportunity cost on building on their technology.
c) State Aid challenges had been considered, however analysis confirms that there
are sufficient financial resources independent of State funding that should enable
any challenge to be successfully rejected.
d) Significant additional value to Post Office has been identified resulting from the
transaction - included avoided cost, which would provide ‘upside’ over and
above the actual assets being acquired, and this supports management's
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“valuation of the business.
e) The model assumed a 12% cost of capital and a 3 year Rol which were the
standard Post Office investment metrics.
The Board discussed the implications of the proposed transaction and were in
agreement that this was a good opportunity for Post Office and that management
should be authorised to proceed to the next stage including entry into non-binding
Heads of Terms. Management were however requested to review the
language in the Heads of Terms regarding conditions to the CMA clearance.
It was proposed that a further update on progress should be provided to the Board
later in February which would, seek to confirm the valuation, satisfy outstanding
questions and recommend that we proceed to signing Heads of Terms. This could
be supported by a Board call if considered appropriate.
It was RESOLVED that the Board authorised management to progress Project
Panther in line with recommendations set out in the Board paper. It was further
agreed that once valuation had been confirmed and outstanding questions resolved
then a further Board meeting be called in February to sign Heads of Terms.
EUM
The Chairman welcomed Julie Thomas back to the meeting to present the business
case for EUM paper.
Debbie Smith introduced the paper which was noted by the Board.
a) JT explained that since the Board approved the initial EUM business case of
£7.8m in January 2017, it had become clear that a key design assumption that
all training could be delivered through Success Factors could not be delivered
and the current Horizon system does not support web-enabled training.
b) This updated Business Case requests £2.53m of additional funding to deliver:
new IT developments needed to ensure EUM will work for agents using the
current Horizon system.
c) Approval of funding will allow the programme to rollout to the entire network of
c11,600 branches by November 2018 with a workable design, allowing us to be
fully compliant with all relevant sales-related regulation and contractual
requirements.
d) To the extent possible, EUM had been designed to ensure compatibility with
HNGT.
e) Data collection regarding postmasters and their assistants was taking longer
than expected, however those branches which were critical for POMS sales were
being prioritised and it was still expected that the target of July 2018 which
POMS were relying on, would be achieved.
The Board noted their concerns over the delay in the roll out of this programme, and
queried what could be done to accelerate delivery to ensure delivery for POMS by
the July target date? The Board also commented that management needed to review
the project and understand what could have been done differently.
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It was RESOLVED to approve the revised scope and business case including the
further funding of £2.53m, including an immediate draw down of £1.3m. The
Drawdown of the balance £1.23m in due course should be brought to the Investment
Committee.
BACK OFFICE TRANSFORMATION
The Chairman welcomed Rob Houghton to the meeting and the CFOO presented the
replacement Back Office Transformation business case.
a) The CFOO gave an update on the progress of Back Office Transformation since
the last update in September and explained the proposed changes to the
Business Case with a request for a further drawdown of funds that will allow the
programme to complete Phase 1.
b) Phase 1 remains focused on ensuring we exit from POLSAP by June 2018,
delivering as much transformation as possible. In the next 2 months deliveries
include: Agent Remuneration process transformation & data migration from
HRSAP to CFS, and Cash Processing functionality migrated from POLSAP to
Transtrack for Belfast cash centre (soft launch).
c) It was noted that while costs have increased slightly by £0.3m to an expected
total of £21.2 million, the annualised IT benefits have reduced by £0.8m to
£3.1m as set out in the Board paper
d) RH noted that Credence had now transitioned and that this creates further
capacity in the Fujitsu environment, which of itself, decreases the risk.
The Board queried whether the CIO had now addressed the resourcing challenges in
his team, and whether he was confident in the capability and capacity of that team
to deliver the necessary changes required? RH advised that the Chief technology
Officer had been the last key role to fill however there now remained a challenge to
recruit the necessary IT architecture skills, although this was underway, with a much
better operational team in house now in place.
It was RESOLVED that the Board approve the revised business case and additional
£5m drawdown of budgeted spend to enable the completion of Phase 1, noting the
reduction in IT cost benefits.
BOARD COMMITTEE CHAIR UPDATES (VERBAL)
ARC
CS as Chair of the ARC noted that all directors other than VH had attended the ARC
which had been held that morning, and accordingly agreed to provide a separate
brief to VH.
ITEMS FOR NOTING
Sealings
It was RESOLVED that the affixing of the Common Seal of the Company to
documents numbered 1604 to 1636 inclusive in the seal register was confirmed.
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Health & Safety
The Board NOTED the report.
a) The CFOO noted that ‘across the pavement’ attacks were the greatest current
area of concern in Supply Chain. Supply Chain is trialling body cameras to test
usability: attacks are rare and they cannot be tested for impact. It is likely that
if workable the cameras would be rolled out across high risk areas.
b) The Board noted that the expansion of the Banking Services Framework would
result in increased cash in branches and that management would need to review
whether MI and technology were adequate to cope with increased risks and
demands.
c) The CFOO noted that work was underway to assess the impact of the expansion
of the banking Services Framework, and further that an external audit of the
Health and Safety framework had been commissioned, the results of which would
be shared with the Board once available.
d) The Chairman noted that it would be helpful if the reporting could separate
robberies and criminal activity from the more traditional health and
safety measures, so as to enable management and the Board to prioritise
what needs to be done to reduce violence to employees.
Conflicts of Interest
The Board NOTED that the Company secretary would circulate details currently
held about other directorships and conflicts and that these would be updated and
presented to the March board.
Meeting Dates and Forwards Agenda
The Board NOTED the future meeting dates and January's agenda.
AOB
Bank Ring-Fencing Changes
The Company Secretary advised that the Board previously approved Post Office
entering into a Facilities Agreement dated 26 November 2015 with the Royal Bank
of Scotland plc (RBS) under which RBS makes available: a £400m intra-day facility;
a £350m overnight NRF facility (for the purpose of providing overnight collateral to
the Bank of England); and a £1m collateral facility used in connection with our crime
insurance (Facilities Arrangement).
As a result of the UK government's ring-fencing requirements which come into force
on 1 January 2019, RBS has to restructure their activities and legal entities (which
includes the National Westminster Bank plc (Nat West). Nat West will sit within the
ring-fence of retail & business banking within the RBS Group.
Consequently, POL needs to enter into an Amended and Restated Facilities
Agreement with RBS and Nat West to allow Nat West to provide the Facilities
Arrangement going forward.
IT WAS RESOLVED THAT:
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JM
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1) The terms of and the entry by the Company into the Amended and Restated
Facilities Agreement with RBS and Nat West (‘ARA’) and the other 2018 Ring-
fencing Documents, and all other documents which are required to be entered
into by the Company from time to time in connection with or pursuant to any of
the foregoing (the “Ancillary Documents”), be and are hereby approved;
2) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
3) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to execute and enter into (and in the case of any deed, to
4) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to do all such acts and things as may be required in connection
with the ARA and the other Ring-fencing Documents and the Ancillary
Purposes of the resolutions passed at this meeting, and to give or execute any
notices, communications and other documents on behalf of the Company in
connection therewith;
5) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to approve and execute other documentation with any other UK
regulated bank which is of a similar nature and has a similar effect as the ARA
and the other Ring-fencing Documents and the Ancillary Documents, and to
equally to such other documentation as if passed specifically in respect of
thereof.
12.3. Postmaster Litigation Update
JM provided the Board with a verbal update on the Postmaster Litigation noting that
there was a procedural hearing scheduled for Friday 2 February. At that hearing the
Court would be requested to determine the scope of disclosure required to be given
by Post Office to support the trial in November 2018,
The Board NOTED the update and RESOLVED to establish a sub-committee for the
Purposes of monitoring the development in and strategy for the litigation. The
members of that sub-committee would be the Chairman, Ken McCall and Tom Cooper
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(once appointed as a director). JM was requested to provide the committee
members with details of the key dates mandated by the Court so that JM
appropriate time could be scheduled for the sub-committee to be briefed.
12.4 There being no further business the Chairman declared the meeting closed at
16:00pm.
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ni
29/01/18
POL Actions as at 20.03.18
To bring an update on the further development of the
Debbie Smith
24% May 2018
Slot included on May Board agenda
Open
REPORT ~ RETAIL SBU
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Page 1 of 2
CEO'S REPORT Banking Framework to the May Board. (Martin Kearsley)
29/01/18 (a) To include the value of talking to manufacturers and a Debbie Smith 24" May 2018 Noted for inclusion in the May Open
FINANCIAL review of location strategy as part of the paper in cash (Martin Kearsley) Board paper
PERFORMANCE strategy coming to the May Board.
REPORT
(b) To cover the issue of “trapped Postmasters” and “white Debbie Smith 26% & 27" June Noted for inclusion in the June Open
space” strategy within the review of retail strategy at the 2018 Strategy paper
June strategy session.
29/01/18 (a) To provide an update on the POMs acquisition strategy (it Owen Woodley 26% & 27" June PO Insurance will be presenting Open
ANNUAL BUDGET was suggested that it would be helpful to include wider 2018 strategic growth options at the POL
2018/19 background briefings from insurance experts). Board awayday in June, including
potential acquisition options.
(b) The CEO noted that the Mails strategy was being reviewed Debbie Smith 27% March 2018 Update now included on May Board Open
by the new Chief Executive, Retail, and would be covered agenda
in June at the away days; however an update would also
be provided at the March Board. ~
29/01/18 To look at agents’ pay and come back with a strategy to Debbie Smith 26% & 27% June Noted for inclusion in the June Open
CE PERFORMANCE the Board in June 2018. 2018 Strategy paper
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POL Actions as at 20.03.18
Page 2 of 2
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POST OFFICE BOARD
CEO's Report
Author: Paula Vennells Meeting date: 27 March
PAGE 1 OF 7
Executive Summary
Context
Our target for 2017/18 is to achieve EBITDAS of £30m. Our 3 year goals are to:
~ Accelerate the transformation of the Post Office.
— Secure commercial sustainability for the long term.
+ Establish a business that can ultimately fund investments and the social Rou
bs
purpose from profits rather than subsidy. oa — >
In summary, our strategy is to secure our position as the UK’s number one
parcels and letters retailer, grow in financial services and protect our network
and social purpose ~ all supported by a much leaner central organisation.
Kpenahar R\SY = teeiticbs Coase
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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The Report
Looking Back
WHAT HAS GONE WELL?
e Financial Performance
-» P11 benefitted from continuing strong trading and delays in programme spend
versus forecast expectations. EBITDAS (excl. GLC) was £0.2m, £1.4m
favourable to forecast and in line with budget. YTD EBITDAS (excl. GLC) is
£20.1m, £4.4m favourable to forecast and £4.0m favourable to budget.
-» Balance sheet headroom in P11 was £299m. This was £10m lower than prior
month as increases in cash holdings £66m and investment spend £22m were
funded through an increase in the bond facility. Cash holdings increased by
c.£40m due to the temporary impact of introducing high speed note counters in
cash centres. Headroom will tighten again as we approach Easter and move
more cash into the network.
—» Retail P11 performance is strong and YTD on track. FS P11 performance
EBITDAS is £(1.3)m adverse to forecast. Revenue overperformance offset by
additional costs and different revenue mix in agents pay, annual mortgage
check fees and a reconciliation of full year performance on FRES.
e Financial Services
~» The Savings book will end the year strongly at £14bn (vs expectation of
£12bn) following the base rate change in November and lower than expected
attrition on the back book. The new mortgage lead generation and
qualification model through the Chesterfield contact centre went live on 12th
March and our new mortgage proposition launches next month.
—» Peregrine negotiations continue in depth following the arrival of the new BOI
Group Chief Executive in November. We are likely to be offered an enhanced
package across both the core products and FRES and expect to make a
recommendation to Board, with some independent advisor analysis, in May.
~ Moneygram - work continues to improve our commercial terms and we have a
proposal which will be discussed later in this Board.
— The Q4 insurance campaign continues to perform in line with plans and is
showing a 300% increase in protection sales versus P11 16/17. We are
building our new home insurance model and have released an invitation to
tender to underwriting companies to work with us on design and the customer
solution. We aim to have this in place by June and will then move to the
design phase.
~» Telecoms - Project Galaxy [voluntary pricing agreement between BT and
Ofcom in the HomePhone only market; POL has 10% market share] has now
moved into implementation with around 100,000 customers already contacted
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and response levels under 10% and lower than expected, which is
encouraging. The agreement between BT and Ofcom is to reduce monthly
customer pricing by £7 per month (£18.99 to £11.99), Post Office have
agreed to offer eligible customers HomePhone customers, free Broadband or
the option of HomePhone only at £11.50pm to maintain price competition
with BT.
~ Customer Hub: The first launch is targeted for May 2018. The initial
proposition is focused on the Travel Monday Card and Travel Insurance
products which will be served through a new Post Office Travel App. The
project is in development with both FRES and BOI. Following the launch, all
new TMC customers will be directed to the Customer Hub where we will also
be able to offer them travel and gadget insurance add-ons; this will be
introduced as part of our summer campaign.
¢ Retail
~— Work continues on the Future of Cash business case to be presented at the
May Board. Following the recent reorganisations, both ATM and POCA
strategies will be included.
~ Banking Framework continues to over perform with increased Business
Banking supporting performance above budget and forecast. Increased
engagement from banks as well as new engagement with Credit Unions helps
support our Financial Inclusion agenda. We continue to work closely with UK
Finance on a joint proposal to send to John Glen MP, Economic Secretary of
the Treasury, regarding the future plans for the framework.
— The VOC results remain very strong with YTD Waiting Time Acceptability
maintaining the all-time high of 94.2% against a target of 95% and Effort at an
equally impressive 80.6% against a target of 76%.
¢ Mails
— Royal Mail re-entered the FTSE 100 on 19" March with shares closing at 564p
on the FTSE cut-off date; up more than 50% from a closing low of 370p in
November. The market has responded positively as the risk of industrial action
faded and the terms of the principle agreement with CWU became clear. The
deal was unanimously agreed by the CWU’s Postal Executive and will be
recommended to the union’s 110,000 postal members in a forthcoming national
ballot.
~— Discussions regarding the prospect of extending the current MDA have begun
and the Mails team will provide an update on progress at the May Board.
eT
— Everest (Fujitsu negotiation) continue and there is good progress on application
maintenance, cloud migration and commercial contracts. The contract note on
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the principle of switching revenue from operational expenditure to capital
expenditure has been signed. FJ demonstrated good innovation and customer
journey ideas to the Group Executive at our recent GE meeting.
— The network and branch technology rollout continues and is going well. We
have passed the 10,000 branch level on network and hope to be virtually
complete and transitioned to Verizon by end of March. Branch rollout is around
7,000 counters and the Admin network is almost complete with a complex set
of issues overcome. There will be a high level of change taking place in the last
two weeks of March to complete these plans.
e Our 101 digital innovation centre is fully active; we have employed our first
software engineers and developments in customer hub, agent portal and the
next generation Horizon (HNGT) are ongoing.
WHAT HAS NOT GONE WELL?
e Severe weather and impact on the Network
~» Due to the recent snow and bad weather all branches were affected across the
network, but with minimal impact. 400 branches needed to close at some point
due to severe conditions, however a maximum 210 branches were closed at
anytime, which means at all time Post Office maintained around 98% of
branches open to the public. Supply chain was affected minimally. During this
time branch transactions were down as people chose not to travel.
+ Royal Mail and ParcelForce were unable to collect and deliver in some areas and
special delivery guarantees were cancelled during this time. Our POMS call
centre in Scotland closed for two days and the NSBC closed early on two days;
no branches reported any issues with this. Our IT equipment continued to
operate as normal.
— Overall Post Office continued to operate as near normal throughout resulting in
little impact and no customer complaints. We estimate £200k in lost revenue.
¢ IT Transformation
~» The full year target has slipped as a number of controls are currently actioned
to be delivered in June/July, these controls are reliant on the implementation of
the Security Operations Centre which will be fully commissioned in July. A
review of the TrAction Controls Management tool tool is currently underway to
ensure that control issues are being reported consistently.
e Branch safety
~» There were two incidents in branches recently due to branch colleague
negligence with electrical appliances. An explosion in our DMB in Romford and
a fire in the Hounsditch branch; thankfully both branches were closed and no
one was hurt. Both issues were dealt with quickly and both reopened quickly.
We have issued new communications to all colleagues highlighting the
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importance of turning off equipment when the branch is closed as well as
reviewing and reissuing our white goods security policies.
Looking Ahead
FUTURE FOCUS
¢ Simplification
~ Having assessed our change portfolio and the current strength of our
~ proposition with agents, we have changed our plans on Simplification. Phase
1 of Mails simplification is fully implemented and will deliver £4.6m of
recurring EBITDAS benefit through reduced remuneration. We have reviewed
Phase 2 (which would deliver further efficiencies and £6.5m recurring benefit)
and decided not to continue for three main reasons:
— 1- the agent reaction to this particular Simplification approach has been
as expected negative and we believe that implementing could put future
numbers at risk;
— 2- implementing Phase 2 would require a further £8.0m, (and the time of key
subject matter experts), which we can re-allocate to other change initiatives;
:. ~— 3- we need to minimise any further investment in our current codebase
a ‘HNGA’ given we are developing ‘HNGT’, which will radically simplify our
Lega customer and user experience. Our message to agents will be that
I simplification remains critical to our success and we are deferring, rather than
stopping, plans to reduce remuneration where we can create genuine savings
I for agents.
¢ Back office Transformation
— The first phase of Back Office Transformation is live with agents now being
paid through the new systems. This was on time and on budget. However, the
remaining phases are signalling delay and our expectation is that the
programme will be re-planned to complete end September rather than end
June to avoid compromising testing, controls or management information.
The CIO's view is that the infrastructure can sustain this delay. However,
further delays would not be acceptable. The cash module has been more
complicated than anticipated and the Belfast pilot has successfully gone live,
2 months behind plan. We are also behind on design and testing of the sales
and finance workstream. A full re-plan is close to completion and will be
subject to independent challenge.
¢ Government Affairs
— Iam meeting with the new Minister for Postal Services, Andrew Griffiths MP
on 19" March. Andrew was appointed Parliamentary Under Secretary of State
at the Department for Business in the January 2018 reshuffle. This is the first
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meeting we have had and will provide an opportunity to update the Minister
on our strategy and our key priorities.
—» I will also be attending the first meeting of the Financial Inclusion Policy
Forum, jointly chaired by the Economic Secretary to the Treasury (John Glen
MP) and the Minister for Pensions and Financial Inclusion at the Department
for Work and Pensions (Guy Opperman MP). The purpose of the forum is to
ensure that individuals, regardless of their background or income, have
access to useful and affordable financial products and services.
~» Debbie Smith will be attending the Future of the High Streets Forum, hosted
by Jake Berry MP the Ministry for Housing, Communities and Local
Government.
— The first phase of a brand activation campaign called #Commonunity ~
celebrating communities and local activities, has been launched. The
campaign explores the changing nature of community in the UK, with the Post
Office telling the story in the context of modern Britain. We are giving Post
Offices the chance to win upto £1,000 bursary by nominating and highlighting
how community matters to them. Prize funds can be used for anything that
supports the community.
¢ Building an inclusive culture
+ Ihave implemented a campaign internally which stresses the importance of
speaking out against bullying and harassment. On the back of this we have
received an increase in people coming forward to speak out, which is both
encouraging and worrying. I am committed to ensuring we provide a safe
and transparent workplace for our colleagues and that we remember and live
by our PO values: Care, Challenge and Commit.
e Personnel & Business unit changes
~» Martin Edwards has formally moved into his role as Managing Director of the
newly created Identity Services business unit.
— I have created a new Strategy Group working to agile principles which will be
. led by Tom Moran, who also retains his role as Network Development
Su 6 Director. Tom will have a small centratteam reporting into him and they will
a be responsible for the broader business strategy, as well as leading on
i strategy for Retail and the preparations for the Board Away Day. There are
“three key topics-for-that agenda:-Retail, IT and Post Office Insurance.
-» Nick Kennett left the business last month and I have made two changes to
the Retail and FS business units; Banking has moved into the Retail business
and I have promoted Owen Woodley to Chief Executive of Financial Services &
Telecoms (FS&T).
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posT OFFICE
RISKS OR CONCERNS?
Postmaster Litigation
_5 A verbal update will be provided in the Board meeting.
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BOARD DISCUSSION PAPER
February 2018 (P11) « Performance
Author: Micheal Passmore Sponsor: Alisdair Cameron Meeting date: 27 March 2018
Executive Summary
Context
YTD P10 EBITDAS, excluding Group Litigation Costs (GLC) £19.8m, £3.0m favourable
to forecast and £4.1m favourable to budget.
At end of Fy 16/17, cash in Network was £666m and balance sheet headroom was
£189m.
P11 forecast EBITDAS (excl. GLC) £(1.2)m, budget £0.3m. Balance Sheet headroom
forecast was £286m from the facility limit, £86m from the Board limit.
@uestiens this Paper addresses
1. What is the financial and scorecard Performance in P11?
2. Does the Performance highlight concerns over future delivery?
3. What are we anticipating for the full year outturn?
Conclusions
P11 benefitted from Continuing strong trading and delays in BAU Programme spend
versus forecast expectations, EBITDAS (excl. GLC) was £0.2m, £1.4m favourable to
forecast and in line with budget. YTD EBITDAS (excl, GLC) is £20.1m, £4.4m favourable
to forecast and £4.0m favourable to budget.
Balance sheet headroom in P11 was £299m. This was £10m lower than prior month as
increases in cash holdings £66m and investment spend £22m were funded through an
increase in the bond facility. Cash holdings increased by c.£40m due to the temporary
impact of introducing high speed note counters in cash centres, Headroom will tighten
again as we approach Easter and move more cash into the network,
Network numbers are 11,510 which is very close to the contractual minimum of 11,500
branches. a number of new Openings are Planned and we anticipate the year end
number will be closer to 11,600.
Change and Capital spend of £28.6m, £3.0m More than 5+7 forecast suggesting
continuing improvements over control and delivery.
The full year outturn is Now anticipated to be c£36m, £6m above forecast due to higher
Bank of Ireland Profit Share and release of Growth Fund.
Input sought
The Board is asked to note the financial performance,
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The Report
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Scorecard
, Pil YTD Full Year
Key Performance Indicators Act Target Var. Act Target Var. Target
Growth
Total Gross Income (excl NSP) £m 74.9 73.2 872.6 857.4 945.0
EBITDAS (excl. GLC) £m 0.2 0.3 20.1 16.0 30.0
Headroom £m (vs Board minimum limit) 499 > 200 499 > 200 > 200
Digital Net Income £m (digital team) 4.6 3.7 43.7 40.9 45.0
Net profit £m * (8.2) (0.1) 14.9 3.9 0.0
Customer
[Customer Effort 84% 76% 81% 76% 76%
Net Promoter score Financial Services 26 25 25 25 25
[Acceptable Wait Time % 96% 95% 94% 95% 95%
Branch Compliance (FS - basket of 11 measures) 80 <=50 66 <=50 <=50
People
Representation (Senior Managers) - Gender 39% 37% 39% 37% 37%
IAttendance * is 3 a - = = 96.7%
TT Lost Time (Number of Sev1/Sev2 IT incidents) 9 13 81 143 <156
Safety LTIFR 0.000 __0.180 0.000 _ 0.180 0.180
Modernisation
Number of branches (one month in arrears) Same as YTD 11,510 11,700 >=11,700
INT and ND Branches Transformed in Year 58 30 4660371 400
HNGA Network Only Rollout 1,484 700 7,091 3,400 4,000
HNGA Branch Counter Refresh Rollout 461 1,500 2,456 6,500 8,000
ITT Transformation (% of IT controls implemented) 77% 90% 77% 90% All high risk
gaps closed
1. Net Profit metric target based on 5+7 forecast for Depreciation.
2. Attendance: Data currently not available due to Success Factors implementation.
Growth
1. Headroom at P11 was £499m (£299m above the £200m board limit) and security
headroom was £223m. Ensuring facility headroom was higher than security
headroom was a key target of the cash work as set out in the summer.
2. Net profit YTD is £11.0m favourable to budget; EBITDAS (incl. GLC) up £2.3m.
Underspend on change charged to the profit and loss account is £3.9m and
unbudgeted profit on disposal of property of £4.6m drive the remainder of the
variance.
Customer
3. Acceptable Wait Time scores remain at 96% and continue to track above targets for
DMB, agency branches and W.H. Smith. Acceptable Wait Time is 1% below target
ytd.
4. P11 Branch compliance was rated Amber following 3 months of red ratings, YTD the
rating remains Amber. Improvement was due to Bol reviews of FS promotional
material held in branch that are no longer rated Red. Whilst this is encouraging we
need to maintain our focus to ensure these improvements have been embedded.
5. The overall rating is Amber due to Counter Mystery Shopping continue to produce
challenging results. The key reason for non-compliance was the failure to provide a
Savings Summary Box leaflet with the application pack as well as Bol’s assessment
of other compliance requirements. To address this we have published a Branch
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Focus communication, online training for completion by 7" February and focussed
the Business Control Team to support the network with compliance issues.
People ‘
6. Attendance Reporting: Still not available following the implementation of Success
Factors in P9. Absence and hours reports for P10 and P11 are being worked on but
a number of anomalies have been identified with the data. A fix has been identified 1
but has not been implemented.
7. Safety LTIFR: There were 7 employee accidents during P11 and 104 YTD v 112 for
the equivalent period last year. However, LTIFR which measures the severity of the ]
impact of accidents as a proportion of hours worked remains above budget.
Modernisation
8. Network: Network numbers are 11,510 which is very close to the contractual
minimum of 11,500 branches. A number of new openings are and we anticipate the
year end number will be closer to 11,600. YTD there have been 201 unplanned
closures with 104 branches remaining closed following postmaster suspension.
9. NT and ND Transformation: 466 branches have now been transformed in the
year exceeding the full year target of 400.
10. Branch Counter and Network Rollouts: Snow delays in the week commencing
26th February resulted in a 30% reduction to the weekly deployment. This will be
addressed in week commencing 19th March schedule where 83 branches will be
rescheduled. Project currently tracking green.
11. IT Transformation (% of IT controls implemented): The full year target is now
unlikely to be achieved as a number of controls will be implemented when the
Security Operations Centre is delivered in July.
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Period 11 Financial Performance
Pil YTD
Var Var Var YTD Var Var Var
ém Act! Fest Bud PY Act] Fest Bud Py
Gross Income 74.9 2.6 1.8 3.9 872.6 8.5 15.2 9.8
Direct Costs (9.9) (0.4) 0.2 (0.8) I (112.2) (0.7) 3.9 (8.6)
Net Income 65.1 2.2 1.9 3.1 760.4 7.8 19.1 1.3
Agents Pay (28.7)I (0.3) (1.4) (1.0) (343.1) (3.0) (10.5) 12.7
Staff Costs (15.3)I (0.6) (1.9) 0.6 I (168.5) (0.3) (10.3) 18.2
Non-Staff Costs (23.2) 0.5 1.5 (2.2) I (260.5) 0.3 5.6 (6.7)
Expenditure (67.3)I (0.3) (1.5) (772.1)I (3.0) (15.3) 24.2
FRES - Share Of Profits 2.5) (0.4) (0.4) 31.7 (0.4) 0.2 (1.5)
EBITDAS (excl. GLC) 0.2 (0.0) 20.1 4.4 4.0 23.9
Group Litigation Cost (GLC) (0.4) (0.3) (3.5) (1.3) (1.7) (2.2)
EBITDAS (0.2) (0.3) 16.5 3. 2.3 21.8
Network Subsidy 5.4) O - 64.6) (0.0) (0.0) (9.2)
EBITDA 5.2 1.2 (0.3) 81.1 3.1 2.3 12.5
Depreciation (4.8) (0.3) (0.3) (45.3) (1.7) (1.7) (44.9)
Interest (0.3) 0.3 0.3 (4.6)I 0.4 1.8 (6.2)
Impairment - ~ « a * m 88.6
Change Spend (14.1) (6.6) (7.7) (85.1) 14.0 3.9 44.9
Investment Funding 5.8] ~ id (5.8) 64.2) - - (64.2)
Profit On Asset Sale (0.1)I (0.1) (0.1) 0.0 4.6] 1.3 4.6 50.2
Profit Before Tax (8.2)I (5.5) (8.1) ~~ (6.2) 14.9 171 11.0 80.9
Retail 41.6 1.7 1.6 (0.5) 492.7 6.7 20.7 (25.9)
FS&T 27.8) 0.9 0.0 3.6 323.4) 3.0 (2.0) 33.6
POMS 45 0.2 0.3 1.0 43.5] (1.1) (3.2) 4.0
Other 1.0) (0.1) (0.1) (0.2) 13.1 (0.1) (0.2) (1.9)
Total Revenue 74.9) 2.6 18 3.9 872.6 85 15.2 9.8
EBITDAS
Retail 8.6] 3.8 2.3 0.5 84.7) 9.4 13.1 (7.7)
FS&T 12.3} (1.3) (1.6) 0.2 157.0 (3.0) (0.4) 24.7
POMS. 24 0.2 0.3 0.7 17.4] (0.6) (2.0) (0.6)
Other (22.8) (1.3) (1.0) (1.0) I (239.1) (1.3) (6.6) 7.6
EBITDAS (excl. GLC) 0.2 1.4 (0.0) 0.5 20.1 44 4.0 23.9
12. Pil EBITDAS was £0.2m, £1.4m favourable to forecast with strong revenue
performance dropping through to the bottom line. Costs delays from programme
spend were offset by incremental costs in the month. The full year outturn is now
anticipated to be c.£36m, £6m above forecast due to higher Bank of Ireland Profit
Share and release of Growth Fund.
13. Retail performance driven by Government Services revenue overperformance
+£1.9m (POCA +£0.9m and Verify +£0.6m) and delays in programme spend
£1.1m until 2018/19.
14. FS&T shortfall due to true-up in FRES position £(0.4)m for full year given volume
shortfalls and annual mortgage check fees £(0.3)m not forecast.
15. POMS +£0.2m with strong response from the Q4 campaign (including DRTV)
driving incremental Protections revenues. Still anticipating to achieve full year
forecast position (less impact of Russet).
16. Other costs include the annual audit fee £0.4m (timing) a provision for losses
£0.5m and a £0.3m fine for non-compliance with AML regulations. Change spend
expenditure is £6.6m above forecast but this was shifted from capital spend in the
period,
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Change Spend
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Pi YTD FY
Act] Var Var Act} Var Var I Fest] Var Var ]
PSF Bud PSF Bud PSF Bud I
TT & Digital 10.0] 1.2 (4.7) I 76.8] (2.7) 27.0 I 104.7] (9.5) 8.0
Network Development Programme 8.3] (2.6) (1.8) I 46.7] 26 9.5 I 49.1] 10.3 21.7 '
DMB Network Development 4.8] (2.0) (2.7) I 29.4) 13.1 (9.7) I 32.7) 11.5 (11.1) I
Back Office Transformation 14 0.0 0.4 14.6] 13 3.6 18.5] (1.0) 1.6
FS&T 1.8] (0.5) (0.3) 14.8) 18 180 I 17.6) 0.8 16.7
Retail 04] 06 0.7 6.5] 2.7 10.5 10.1 - 80 ]
LEAN Centre 0.4] (0.4) (0.4) 3.7] 05 05 3.5] 12 © 12
People and Engagement Transformation 0.7I (0.6) (0.6) 5.6] (1.5) (0.7) 4.8] (0.7) 0.1
Property (0.5)) 0.9 0.9 25] 130 44 3.3] 08 0.6 1
POMS. 0.1} 0.1 O01 3.3] (0.7) (0.1) 4.0] (1.2) (0.6)
Supply Chain 0.9] (0.8) (0.3) 3.6] 1.2 (0.0) 4.8I - (1.0) .
Other Transformation (0.0)} 0.0 0.3 0.9] (0.9) 1.8 16] 05 14 ;
Corporate Services Transformation 0.0] 0.3 0.3 0.2) 09 16 13) 0.2 10 I
Identity -I 04 - -I 20 40 I (0) 26 47
Finance 0.3) (0.2) (0.3) 0.4) 0.1 O01 04, 0.1 O14
Digital & marketing - - 0.2 - - 2a - - 23 ]
Network Operations 0.0] 0.5 (0.0) 0.0] 21 18 2.3I 0.1 (0.5) I
Total 28.6I (3.0) (5.4) I209.0I) 23.8 71.3 [258.8] 15.8 54.5
Capital 14.6 3.7 0.8 +412 24.7 80.1 ‘
Change 14.1] (6.6) (6.2) 7]? 85.1] (0.8) (8.9)
Total 28.6I (3.0) (5.4) [209.0] 23.8 71.3
17. In month, the total capital and change spend was £28.6m, £3.0m higher than 1
forecast but continuing the trend of being much closer to forecast than prior
months.
18. The key programmes have a number of major mil
in P12 and it is currently anticipated that up to£35m)of costs in the P5 reforecast
could fall into 2018/19.
Strictly Confidential
tones and cost trigger points
POST OFFICE
Balance Sheet and Cashflow
£m
Fixed Assets
Cash
Stock
Pension Surplus
Debtors (excl. Clients)
Creditors (excl. Clients)
Client Debtors
Client Creditors
Provisions
Loan
Net Assets / (Liabilities)
Capital and Reserves
Network Cash
Cash at Bank - POL
Gross POL Cash
Cash at Bank - POMS.
Demonetised
Net Cash
Net Funding Position £'m
Government Loan
Demonetisation - NCS
Cash at Bank - POL
Net Funding
Headroom £'m
Government Loan - Available Amount
Government Loan - Drawn Amount
Headroom
Target Minimum Headroom
Headroom Above/(Below) Target
Security Headroom £'m
Total Security
Total Obligations
Headroom
Summary Cashflow £'m
EBITDAS less JV Income
Working capital - non client related
Network Subsidy Payment
Network cash inventory (gross)
Working capital - client related
Capital, investment and financing
Net cash inflow / (outflow)
Strictly Confidential
Pil Var Var Var
Fest Pio Pi2
16/17
466.9 (12.8) 12.9 75.9
502.5 I (178.2) (14.7) (177.5)
7.2 (1.3) (0.2) (0.8)
L7 0.1 0.1 0.7
164.2 I (20.2) (3.4)_—(30.4)
(269.9) 9.8 10.4 23.4
132.1] (21.9) (2.4) (12.3)
(285.4)I 25.5 5.3 3.3
(65.0) 3.7 (5.4) 23.0
(451.0)} 213.1 (10.0) 110.0
203.3] 17.8 (7.4) 15.3
203.3I 17.8 (7.4) 15.3
761.8] (124.0) 65.6 (150.2)
0.4 0.4 (2.3) (0.2)
762.2 I (123.6) 63.3 (150.4)
10.8 (4.2) - (2.6)
(270.4)} (50.4) (77.9) (24.4)
502.6 I (178.2) (14.6) (177.4)
(451.0)] 213.1 (10.0) 110.0
(270.4)I (70.4) (77.9) (24.4)
0.4] (14.6) (2.3) (0.2)
(721.0)I 128.1 (90.2) 85.4
950.0 - - -
(451.0)I 213.1 (10.0) 110.0
499.0 I 213.1 (10.0) 110.0
200.0 - - -
299.0 I 213.1 (10.0) 110.0
774.2 I (245.0) (22.4) (230.8)
(551.0)] 228.1 (15.3) 121.0
223.2 I (16.9) (37.8) (109.8)
(26)I 1.6 (2.6)
2.8 0.3 (34.9)
(65.6)} (95.3) (310.8)
(2.9)} (22.6) (15.9)
(22.0) 3.0 1.9
(90.2)] (113.0) (362.2)
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PAGE 6 OF 6
19. Our net funding
position increased by
£90m to £721m in
P11 as cash in the
network increased by
£66m and £22m of
capital and
investment spend in
the month.
Cash in the network
increased primarily due
to an increase in Cash
Centres balances of
£39m. This is a
temporary increase as
the new note counting
machines were rolled
out.
21. The loan balance
with BEIS increased
by £10m but
headroom of £299m
above target is
maintained against
the facility. This is
anticipated to reduce
as we approach
Easter.
20.
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Appendices
1. EBITDAS Bridge v Forecast
2. Revenue by Pillar
3. Retail
4. FST
5. POMS
1. EBITDAS Bridge v Forecast
EBITDAS Bridge v Forecast
ae oe!
aa
10
—co— 990
eo
a : Een,
(2.0) Y
(2.5)
Forecast fetal FSAT.— POMS Agets Programme, loner POCA tude Mange Otber Acta
Agents Pay
Revenue Direct Costs Variable Net Cont.
Mails Trading 0.4 - (0.2) 0.2
Retail and Lottery (0.6) 0.4 (0.0) (0.2)
Payment Services (0.1) (0.0) (0.1)
Card Account 0.9 0.3 1.2 !
ID - Assurance (Verify) 0.6 (0.2) 0.3 J
Other Government Services 0.4 0.3 (0.2) 0.5
Retail 17 0.6 (0.4) 1.9
Post Office Money 0.4 ~ (0.1) 0.3
MoneyGram (0.0) - 0.0 (0.0)
Banking Services (0.3) 0.0 0.2 (0.2)
Telecoms 0.7 (0.7) (0.2) (0.2) I
Postal Orders 0.1 0.0 (0.0) 0.0 I
FS&T 0.9 (0.7) (0.2) (0.0) !
POMS 0.2 “lt (0.2) - (0.0)
Strictly Confidential
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2. Revenue by Pillar
Pil YTD
Var Var Var YTD Var Var Var
- Act] Fest Bud py I Actual) Fest Bud Py
Parcelforce 1.5] (0.0) 0.1 0.1 18.3] 0.2 2.6 1.3
‘Special Delivery 3.8] 0.1 0.1 0.0 45.4) 0.5 0.9 (0.3)
International Priority & Standard 2.4] (0.1) 0.0 (0.0) 31.7] (0.8) 11 0.4
Stamps (ist & 2nd) 1.3] (0.0) (0.1) (0.1) 2u5] 0.1 (1.5) (2.1)
Labels (1st & 2nd Class) 6.9] 0.4 0.2 0.4 84.3] 0.6 2.0 44
RM Signed For 18] 0.0 0.2 0.0 21.2; 0.2 2.7 0.2
Home Shopping Returns 1.3} O14 0.1 0.3 16.2] 0.5 0.9 3.2
Other Trading 13] 0.2 0.1 (0.2) 14.6] 0.4 (1.4) (3.9)
Total Mail Trading 20.3} 0.4 0.9 0.3 253.2 1.8 7.3 3.3
Fixed fee 3.8] 0.0 0.1 (0.2) 46.0] 0.0 0.7 (2.7)
Mailwork & Mails non trading 0.8} (0.0) (0.1) (0.3) 9.21 (0.0) (0.9) (2.7)
Total Mail Non-Trading 4.7} 0.0 (0.0) (0.5) 55.1) 0.0 (0.3) (5.4)
Retail (Inc Gift cards & Other) 0.3} (0.7) (0.9) (0.6) 12.5] (0.8) (1.6) (0.4)
Lottery 2.5] 0.1 0.5 04 29.0) 15 5.3 (1.2)
Retail and Lottery 2.8] (0.6) (0.4) (0.5) iid) WNolewaas 7 MeN (its)
Payment Services 21 0.0 0.3 0.2 25.5 0.8 2a (4.6)
ATM 2.4 (0.1) (0.1) (0.2) 27.8] (1.6) (2.4) (2.7)
Payment Services 4.5] (0.1) 0.2 (0.0) 53.3] (0.8) (0.4) (7.3)
Motoring Services 0.6) 0.1 0.2 (0.1) 6.4 0.5 14 (1.1)
Card Account 3.9 0.9 11 (0.6) 41.6] 2.3 5.4 (15.1)
Passport Services 2.3] 0.1 (0.7) (0.0) 18.7] (0.1) 3.6 (1.4)
Digital ID Serv UKVI & Asylum 1.2] 0.2 (0.1) 0.2 13.6] 0.7 1.2 0.5
ID - Assurance (Verify) 1.3) 0.6 05 0.7 8.4 1.3 (1.3) 3.3
Other Government Services 0.0} 0.0 (0.0) (0.1) 0.9} 0.3 (0.1) (1.4)
Government Services 9.3 T1o MOS MRLOM 89.6] 5.0 _10.2__(14.9)
Total Retail 41.6 1.7 1.6 (0.5) 492.7 6.7 20.7 (25.9)
Mortgages 03} 02 00 0.2 27I 0.7 (0.9) 0.1
Credit Cards and lending 0.3} 0.2 00 0.2 24 0.5 (0.8) 0.1
Savings 3.4] (0.0) (0.0) (0.5) 37.0} (0.0) (0.0) (4.2)
Travel Money 16] 0.0 0.0 00 23.5] 0.5 1.0 0.9
MoneyGram 2.3] (0.0) (0.2) 0.2 24.2] (1.7) (4.6) (3.3)
Post Office Money 7.9] 0.4 (0.1) 0.1 89.5] 0.0 (5.3) (6.3)
Banking Services 6.4] (0.3) 0.2 2.2 80.4) 1.0 5.1 23.4
Telecoms 12.4 0.7 0.6 14 139.9] 1.8 2.3 20.2
Postal Orders Ld 0.1 (0.1) (0.2) 13.6] O41 (1.4) (3.6)
Other Income 0.0] 0.0 (0.5) __(0.0) 0.0] (0.0) _(2.7) __(0.0)
FS&T 27.8] 0.9 0.03.6 I 323.4I 3.0 (2.0) 33.6
POMS 45[ 0.2 0.3 1.0 43.5I (1.1) (3.2) 4.0
Total FS&T 32.3 ii 0.3 4.6 366.9 1.9 (5.2) 37.6
Supply Chain 0.7) (0.1) (0.1) (0.1) 9.8] (0.1) (0.3) (1.4)
Other Income 0.3] (0.0) (0.0) __(0.1) 3.3] 0.0 _—0.0__—(0.5)
Total Revenue 74.9 2.6 1.8 3.9 872.6 8.5 15.2 9.8
Strictly Confidential
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POST OFFICE PAGE 3 OF 5
3. Retail I
Pil YTD
Var Var_—sVar Var Var Var
em Act] Fest Bud PY Act] Fest Bud PY
Gross Income 41.6] 1.7 16 (0.5) I 492.7] 6.7 20.7 (25.9) 1
Direct Costs (1.8) 0.6 0.8 0.9 I (26.8) 0.8 17 2.2
Net Income 398] 23 24 04 I 465.9I 7.5 22.3 (23.7)
Agents Pay (22.8) 0.1 (0.4) (0.0) I (273.9) (1.6) (8.1) 1.7
Staff Costs (64)I (0.1) (0.8) 0.0 I (75.9) 17 (5.7) 8.8 ]
Non-Staff Costs (2.0) 14 11 o1 I (31.3) 18 43 (4.5)
Expenditure (31.3)} 45 (0.4). I (381.2) 1.9 (9.4) 16.0
FRES - Share Of Profits 3 E - - - z : -
EBITDAS a6I Saas! oP ia Sos 84.7, 9.4 129 (7.7)
Revenue
Mails Performance 20.3 0.4 0.9 03 I 253.2 1.8 7.3 33 ,
Mails Non Trading 4.7] 0.0 (0.0) (0.5) 55.1 0.0 ©(0.3) (5.4)
Retail and Lottery 28] (0.6) (0.4) (0.5) 41.4 0.6 3.7 (1.5)
Payments Services 4.5] (0.1) 0.2 (0.0) 53.3] (0.8) (0.4) (7.3)
Govt. (excl. Verify) 8.0 1.4 0.5 (0.6) 81.2 37 115 (18.2)
Verify 13 0.6 0.5 0.7 8.4 130 (1.3) 33
Total Revenue 416] 17 16 (05) I 492.7 6.7 20.7 (25.9)
P11 EBITDAS £3.8m favourable to forecast driven by strong revenue performance and
delays in programmes spend until 2018/19 as identified as part of the P9 risks and
opportunities update.
Gross Income beat forecast by £1.7m:
Government Services +£1.9m with POCA +£0.9m (£0.5m Interest Rate, £0.3m closed
accounts, £0.1m volumes) and Verify +£0.6m due to strong trading performance with
volumes doubling to c.11,000 per month. Small volume gains in Passports & DVLA also.
Mails +£0.4m with continuation of recent trends.
Retail and Lottery £(0.6)m, being £(0.3)m shortfall for trading (timing with no impact
on full year) and £(0.3)m accounting impact for the new contractual agreement with
WHSmiths where margin only is recognised (minimal EBITDAS impact as offset in COS
also)
Agents Pay +£0.1m: In line with revenue mix. Revenue overperformance in products
with limited agents pay impact.
Non Staff Costs +£1.4m: Due to delays in programme spend (costs deferred until
2018/19) and delays in marketing spend, partially offset by incremental costs of
£(0.4)m in the month for POCA statements.
Strictly Confidential
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4. FST
Pil YTD
Var Var Var Var Var_—sVar
aa Act) cst Bud PY Act) gest. «Bud PY
Gross Income 27.8) 09 00 36 I 3234] 3.0 (2.0) 336
Direct Costs (7.Y} 0.7) (0.2) 1.3) I (76.8)} (0.5) 4.8 (7.1)
Net Income 20.8) 02 (0.2) 23 I 2465 2.5 28 © 265
Agents Pay (5.9)I (0.4) (0.7) (2.0) I (69.19) 1.3) (2.4) 1.0
Staff Costs (1) 2) (1) @.1) I at.0)} (0.6) 0.0 0.7
Non-Staff Costs 39) (0.5) (0.2) (1.0) I (4.a)} 3) 4.0) (2.0)
Expenditure (10.9)} (4.4) (4.4) (2.4) I (22.3)] (5.4) (3.4) (0.3)
FRES - Share Of Profits 2.5] (0.4) (0.4) 0.1 31.7] (0.4) 0.2 (1.5)
EBITDAS 12.3] (4.3) (1.6) 0.2 I 157.0] (3.0) (0.4) 24.6
Revenue
Post Office Money 7.9 0.4 (0.1) on 89.5 0.0 © (5.3) (6.3)
Banking Services 6.4] (0.3) 0.2 2.2 80.4 1.0 S1 23.4
Telephony 12.4 0.7 0.6 1.4 139.9 18 2.3 20.2
Postal Orders Li 0.1 (0.1) (0.2) 13.6 01 (1.4) (3.6)
Other Income 0.0} 0.0 (0.5) (0.0) 0.0] (0.0) (2.7) _—— (0.0)
Total Revenue 278) 09 00 3.6 I 323.4] 3.0 (2.0) 33.6
P11 EBITDAS £(1.3)m adverse to forecast. Revenue overperformance offset by cost
pressures and a true-up of full year performance on FRES.
Gross Income +£0.9m better than forecast:
Post Office Money +£0.4m due to Credit Cards and Lending, Moneygram back in line
with forecast in the month.
Telecoms +£0.7m continues to over perform with higher ARPU and customer numbers.
Banking Services £(0.3)m (reversal of overestimate in prior month — no impact on next
year budget target)
Agents Pay £(0.4)m adverse: In line with revenue mix.
Non Staff Costs £(0.5)m: predominantly due to annual mortgage check fees £0.3m (not
accrued).
FRES £(0.4)m: adverse based on the revised full year expectation now anticipated given
decreasing volumes.
Strictly Confidential
POST OFFICE
5. POMS
£m
Gross Income
Direct Costs
Net Income
Agents Pay
Staff Costs
Non-Staff Costs
Expenditure
FRES - Share Of Profits
EBITDAS
Revenue
Travel
Car
Home
Life
Other
Total Revenue
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Pil YTD
Var Var —sVar Var Var Var
Act) Fest. = Bud PY Act) Fest Bud py
a5I soo os Ate 43.5] (1.1) (3.2) 4.0 1
(0.9)} (0.2) (0.3) (0.4) (8.1)] (0.6) (2.2) (3.2)
3.6] (0.0) (0.1) 07 35.3] (1.7) (5.3) 0.8
(0.3) 0.0 0.0 (0.0) (3.5) 0.3 0.7 (0.4) ]
(1.1) o1 0.4 0.0 I (14.5) 0.7 26 © (1.1)
(us)} 02 04 ~~ 0.0 I (18.0) i 3.3 (1.4)
aa ae2 ews 207 17.4] (0.6) (2.0) (0.6) I
1.0] (0.3) (0.1) O.1 14.0, (1.7) (L.A) 24
0.9] (0.1) 0.1 (0.2) 10.7] 0.3 0.7 © (2.1) I
0.8) (0.1) (0.1) 0.0 8.8 01 (0.5) 0.8
1.6 0.7 07 1.2 73] 0.2 0.7 2.9
0.2I 0.0 (0.2) 0.0 27 0.0 (2.6) (0.0)
AsI S902 COs tae 43.5] (1.1) (3.2) 4.0
POMS has performed ahead of P5 forecast in the month and is in line with the updated
view performed at the end of P9 (comparatives above refer to the Board approved PS
reforecast). The full year EBITDAS target is £19.9m and management continue to
believe that this is deliverable (P5 forecast adjusted to remove the impact from the
removal of Mortgage Specialists £0.3m).
The decisive factor in POMS hitting its full year EBITDAS target is the continued
performance of the Q4 campaign which includes the Life Over 50’s DRTV test and learn
and associated activities. The campaign launched on the 22nd of January has achieved
a step change in performance. In P11 3,464 Protection (Life, Easy Life and Over 50’s)
policies were sold which is 2,462 higher than P11 last year, an increase of 246%.
Strictly Confidential
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POST OFFICE LIMITED PAGE 1 OF 5
BOARD DECISION PAPER
Author: Cem Oztoprak Sponsor: Alisdair Cameron Meeting date: 27 March 2018
Executive Summary
Context
The purpose of this paper is to finalise the annual plan for formal submission to Government. At its review
in January the Board requested EBITDAS of £50m, up from £47m.
RemCo has agreed on STIP targets and recommending a gateway criteria for STIP to remain above
41,500 branches, with incentives paid on three measures: EBITDAS; removing POLSAP, HRSAP and
HNGx from the business; and having the Customer Hub operational, serving customers in two pillars of
Travel and Identity.
Questions addressed in this report
4- How has the budget moved since the last Board meeting?
2- What is the 2018-19 change plan?
3- How are we proposing to manage the balance sheet in 2018-19?
Conclusion
There have been a number of moving parts within the budget which largely net off. We are not
recommending any change to the £50m EBITDAS target.
We are budgeting for a change plan of c. £255m.
We will maintain cash control staying within headroom limits in spite of the growing banking framework.
Input Sought
The Board is asked to approve the annual Plan for submission to Government as summarised in this paper
and detailed in the attached slides.
Strictly Confidential
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The Report
How has the Budget moved since the last Board meeting?
1. The Board paper in January proposed a number of changes to finalise the budget delivering £50m
EBITDAS. These changes have now been incorporated and the final proposed P&L is as following:
2017-18 2018-19
£m P5Forecast* Budget Variance YoY }
Gross Income 949 968 19 +2.0% )
Cost of Sales (121) (121) -
Net Income 828 847 19 +2.3%
FRES 35 34 (1) ]
Agents’ Pay (369) (364) 5
Staff Costs (184) (182) 2 ;
Non-Staff Costs (276) (285) (9)
EBITDAS 34 50 16 +66.7%
* Latest view on 2017-18 EBITDAS is £36m and overperformance vs budget is due to
underspend in growth fund and increase in Bol profit sharing which will not recur next year.
2. There are still a number of moving parts which might have an impact on 2018-19 EBITDAS. However,
it is anticipated that these will not have a net negative impact on EBITDAS and expected to be
managed within business unit targets.
Retail: Decision on not proceed with Simplification Phase 2 (£2.7m)
A decision not to implement network simplification Phase
2 which would reduce the agents’ pay by £6.5m pa
however materially increase our network risk through
increased resignations and disengagement of partners.
FS&T: Moneygram Deal £2.0m - £3.0m
Negotiations to get additional guaranteed payments
against the reducing volumes and change the existing
exclusivity clause to allow us to pursue digital capabilities.
3. We don't have a deal with Bol and therefore no assumption has currently been made with regards to
the wider negotiations with BOI (Peregrine) and it was agreed with the Board in January that the impact
of this would lead to a change in the budget targets.
4. Although the growth on EBITDAS looks like only £14m YoY (from latest view of £36 to £50m). Ona
like for like basis the growth is £54m.
17/18 expected EBITDAS £36m
Bol value share, not recurring next year as we don't a deal with Bol (£13m)
Impact of Ofcom regulatory changes (£15m) :
YoY Marketing increase, including £5m growth fund (£12m)
£40m Change benefits plus trading improvements £54m .
18/19 EBITDAS Target £50m
Strictly Confidential
POST OFFICE
What's the 2018-19 change plan?
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5. 2018-19 is the first year of 3-Year Plan. The budgeted change spend for this year is £255m and the
expectation by strategic priority is as following:
Strategic Priority I Forecast
Simplify the retailer proposition
Build innovative, flexible and secure IT
Modernise our products and services
Digitise and optimise the business
Modernise our skills, culture, HR policies and processes
Regulatory & Group Litigation Costs
TOTAL
£55m to £65m
£80m to £90m
£70m to £80m
£15m to £20m
£4m to £6m
£11m to £14m
£235m to £275m
6. Among the projects planned for 2018-19, the below projects are crucial to deliver the EBITDAS target
given that these projects will contribute with ca. £40m in-year benefit.
Simplify the retailer proposition
- Further franchising DMBs
- Network Expansion
- Multi-year Crown Projects
- Self Service Kiosk Rollout
Build innovative, flexible and secure IT
- Branch Printer Replacement
- CDP re-procurement
- EUC Branch Deployment
HNGT Lite
- PCI/Payments Hub
- Project Everest — Cloud enablement
- Project Nelson
- Software Asset Management
Modernise our products and services
- POMS Investments
- Project Galaxy
~ Falcon — Travel Hub
Digitise and optimise the business
- Success Factors Ph1 Completion
Modernise our skills, culture, HR policies and processes
- Back Office Transformation
Group Litigation
TOTAL
2018-19
Investment
£61.5m
£22.8m
£18.7m
£17.9m
£2.0m
£33.8m
£3.6m
£1.4m
£6.4m
£1.8m
£2.5m
£15.2m
£2.5m
£0.4m
£19.7m
£11.3m
£4.8m
£3.6m
£0.3m
£0.3m
£6.0m
£6.0m
£9.0m
£130.3m.
In-Year
Benefit
£11.8m
£1.6m
£2.0m
£8.1m
£0.1m
£7.3m
£0.5m
£0.5m
£0.6m
£0.9m
£0.2m
£4.0m
£0.5m
£0.1m
£17.1m
£4.6m
£11.6m
£0.9m
£3.5m
£3.5m
£0.5m
£0.5m
(£9.0m)*
£31.2m
* Group Litigation costs will be reported as exceptional spend and will not impact EBITDAS. Please see
the appendix for YoY EBITDAS reconciliation.
Strictly Confidential
UKGI00043693
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POST OFFICE PAGE 4 OF 5
7. In addition to the above projects, there are further key investments to secure either the current income I
stream (income protection) or contribute to the future profitability beyond 2018-19.
2018-19 Pro-Forma
Investment NPV
Simplify the retailer proposition £6.0m
- Agents/Postmasters Portal £6.0m TBD
Build innovative, flexible and secure IT £20.5m
- Full Thin Client Deployment (Solar Full) £9.0m TBD
- End-of-Life Replacements £4.0m TBD
~ Risk & Resilience £7.5m TBD
aed oe _~“ ome’ £46.7m
~ Identity Services Investments : 7 £11.4m £25.5m
- Banking framewor — Future of Cash incl. vehicles £10.0m £4.1m
- Mails Projects £8.0m £3.5m
~ Falcon — Additional Verticals £11.3m £13.0m
~ Property £6.0m TBD
Digitise and optimise the business £15.5m
- Enabling supply chain and back office improvement £12.0m £2.0m
- Project Arrow (BI Strategy) £3.5m TBD
Regulatory £4.0m
- GDPR £4.0m (£4.0m)
TOTAL £92.7m
8. The above project are currently either at their design stage or even initiation stage and therefore the
NPVs are high level estimates. All these projects are subject to Investment Committee/Board approval
before being kicked off.
9. The projects with in-year benefit (£130m) and further key investments (£93m) represents over 85% of
the planned spend for 2018-19. The remaining is made up of smaller projects and are also subject to
governance approval.
10. Current plan doesn't reflect Project Panther costs. If this materialises, the project will be self-funded.
Strictly Confidential
UKGI00043693
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POST OFFICE PAGE 5 OF 5S
How are we proposing to manage the balance sheet in 2018-19?
11. The Balance Sheet, Cash and Headroom positions have been prepared and are subject to update
following the final 2017-18 outturn position. The key assumptions made are:
e Government funding will be drawn down on a quarterly basis in line with the proposed spending
pattern and there will be no significant fluctuations in spend profile vs. drawdowns.
e Banking Framework is assumed to require an additional £36m of cash in the network (future of cash
paper is still in development)
¢ Branch holdings are reduced down to £486m, including the adverse impact of banking framework
by end of next year vs. 2017-18 ytd avg. of £550m.
¢ Cash centre balances are held at current levels, subject to seasonal fluctuations.
12. The net inflow for the year is ca.£60m leading to a reduction in the net funding position. Month-end
headroom is not expected to exceed the £750m threshold but as always will be tight over the Christmas
period and will need to be closely monitored.
Cash and Loan
1,200
1,100
1,000
00
rs 800
“700
600
500
400
300
Pl oP2 P38 PSPS PGT PBCPLOCPALPa
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
=== Gross Cash 18/19 ——Loan 18/19 === Gross Cash 17/18 + ——Loan 17/18
Net Funding
1,000
950
900
850
800
E 750
700
650
600
550
500
Pl P2 P33 PSG? BCP PLLA
2018 2018 2018 «2018 «2018-2018 «2018 «2018-2018 «201820182018
—Net Funding 18/19 ——=Net Funding 17/18
Strictly Confidential
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Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
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Post Office®
Post Office Limited — Commercial in Confidence
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Overview
UKG100043693
2017/18 Another year of progress:
* We continue to modernise, over 7,500 branches now modernised. These branches are delivering longer opening
hours, more efficient ways of working and more attractive environments for customers in their local communities.
+ Supply Chain rationalisation (Project Iris) implemented in early 2017 is now embedded into the organisation and
settling down as BAU.
* Back Office Transformation continues with Phase 1 implementation ongoing and expected to complete in Aug 18.
+ IT transformation continues with the network change to Verizon expected to complete by Mar 18 and Branch
Technology upgrade in Aug 18.
* 3 year funding plan agreed and EBITDAS (excluding Group Litigation Costs (GLC) ahead of 2017/18 targets as we
continue to deliver momentum towards commercial sustainability.
But trading conditions look challenging:
* £50m EBITDAS (£3m ahead of funding plan*) in spite of challenging trading conditions in Retail, Telecoms and
Financial Services.
+ 2018/19 will represent a year of stabilisation and delivery of key transformation projects as we set ourselves up to
successfully deliver the next round of significant cost reductions in 2019/20.
78
50
25
= (25)
(50)
(75)
* 3 Year Plan adjusted for (200)
known changes. See al
reconciliation on slide 7.
Post Office”
=" 14
2013/14 2014/15 2015/16 2016/17 2017/18
50
2018/19
BEBITDAS (excl. GLC) = Growth Fund Release
Post Office Limited — Commercial in Confidence
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As identified in the 3 Year Plan the Post Office still faces :
major challenges that must be addressed to secure its
long-term sustainability
Comment
+ Government services, payments and traditional mails products are all facing downward « Core retail revenues
pressure due to the continued shift to alternative channels and growing competition. declining .
+ While we have reduced costs significantly since 2012, because of legacy operating systems across * Detaies! cost reviews
the business we still have more work to do to reduce costs which otherwise drag on our Ketek
Income is declining
in our core markets
with more work to
do on costs
“ ye + Budget assumes
profitability. condnung
+ In the absence of further investment to complete the transformation we estimate that we will investment spend in
revert back to an EBITDAS loss of nearly £30m by 2020/21, compounded by the fire sale of line with SYP
assets to generate cash.
+ Limited digital capabilities across our product range, with no single view of customer. We are. customer hub
at risk of losing relevance to customers, with 60% of customers in our target segments saying they launched in 2018/19
prefer to access services online. with marketing
investment to
capabilities are
insufficient to meet
consumer + This is particularly crucial for financial services and identity, but even in mails many customers support. Benefits
expectations and want to be able to start their journey online, accelerated by developments like the roll out of eBay’s expected in outer
drive growth online shipping platform. YSEISS
machines to parcel services. transformation and
plan assumes
+ While retailers see the value of hosting a post office, for many this is offset by concerns delivery of c300
around the operational cost and complexity and the prospect of declining direct remuneration. additional sites in
2018/19
We need to secure
the right retailers to
host ot etwork
are ” + These issues are creating the potential for network instability, with 1,000-2,000 branches at
risk over the next few years if we don’t act.
+ We are approaching the sunset years of the current contract with Royal Mail, with an urgent - negotiations ongoing
Our major need to work more effectively together to respond to intensifying competitive pressures. with Royal Hal
commercial +The current relationship with Bank of Ireland is no longer delivering decent growth ped nee ication
partnerships need
to be realigned
Prospects, due to a combination of their balance sheet constraints and the wide ranging exclusivity . pian currently
which prevents us from working with new suppliers better equipped to support our commercial assumes no
plans. agreement with BOI
+The core operating system used in the branch network (Horizon) was designed two decades 8 EN ee ena
ago in a paper-based, non-networked world, and for a different purpose to the one we need today. branch technology
roll out expected to
Our IT systems need
modernising to
provide greater
+ Both our branch and back office systems are at the end of their life, leaving us unsupported by y
%y a . lelivery by Au 18.
suppliers or exposed to unacceptable cost demands and operational risks. We have suffered several significant IT cost
significant service outages in recent months, and these incidents will continue if we do not invest. songs pact in
4
+ Retailers have more choice than ever for ancillary services which range from self-serve coffee + Continued network
18/19
Ned
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Five strategic priorities address these challenges and
complete the transformation
STRATEGIC a INVESTMENT
PRIO! Key INITIATIVES 2018/19 - 2020/21 inane ain BENEFITS & OUTCOMES 2018/19
+ Simplification of product transactions and branch operations ~£36m pa benefits by 2020/21 état
Simplify the }}* Network expansion in urban areas to meet customer demand Increased retailer demand for post offices, _ benefits from
pei fe I; Further franchising of DMBs (177 assumed in Plan) £190 To strengthening our ability to attract and transformati
roposition f° Roll out of self service kiosks for agency branches, development £210 retain the best agents (at lower on in plan.
BESPO of more flexible POS solutions (via HNGT) and the creation of an remuneration).
‘agent hub’ to digitise and simplify services to postmasters A better network for customers, with more
locations in areas of high demand
+ Replace end-of-life branch hardware and invest in improving ~£23m pa benefits by 2020/21 IT program
security and addressing recurring outages and system failures ‘Operationalitiale file shifted to withit continues
innovative, j)- Transition Horizon to cloud based architecture with increased £80M To alen pa - - Prat is shifted to within with £9m
flexible and business flexibility via development of ‘thin client’ £90M eS Mi . benefit.
secure IT + Restructure IT operating model to take back control of core Flexible vs architecture to enable cette
functions at lower operating cost services for customers, agents and sta'
+ Creation of integrated digital platform (the ‘Customer Hub’) to
drive growth across financial services and our wider product ~£31m pa benefits by 2020/21 =" Hub,
Modernise our range e90"'r0) 10% of revenue base from new products & Services &
products and []I- Development of multi-channel mails services to deliver improved “Py 19, propositions, stabilising overall top line Banking
services convenience for both SMEs and consumers. ms Digital innovation used to improve every ‘Framework
+ Investment in capabilities to lead the market in digital identity possible product transaction growth
+ Further expansion of the Banking Framework included
+ We will deliver a further 20% reduction in central staff costs by aj BOT ongoing
Digittee snd streamlining and automating key processes across the £16m pa benefits by 2020/22 in 18/19 with
optimise the fp 9anisation and digitising our services to agents £30M To ou people are able to focus more of their oct
panes + Supported by transformation and replacement of back office £35M Eine on serving clistomersvand 2cng, 4, reductions
usiness —f/ — systems to deliver improves processes and the MI our people agi acane be joing processes that from 19/20
need to run the business re heiihar pecteTend Ry HEIN: planned
Trust our + Talent and career progression: provide an environment where Underpins delivery of the above Review on
people to find our people have a chance to learn, grow and thrive, with the Culture and talent in place to deliver the going
the best way right succession planning and early career talent development. ESM next stage of the POL transformation
todo their [J Learning & Development: everyone who wants to learn and Tiiproved stafriengagement levels
jobs and help develop will be fully supported through a range programmes. sORRrar sas tease ieee
our customers I * Reward and Recognition: attract and retain the talent we need. GE SERIO FOES ME DY interns
candidates
Post Office”
Post Office Limited — Commercial in Confidence
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The 18/19 proposed budget delivers £50m EBITDAS. +£3m
ahead of 3 Year Plan target
UKG100043693
Gross Income
Direct Costs
Net Income
Net Margin
Agents Pay
Staff Costs
Non-Staff Costs
Expenditure
FRES - Share Of Profits
EBITDAS (pre GLC)
GLC
EBITDAS
Target Reconciliation
Per3 YP
Project Costs into BAU*
GLC (per SYP)
Target pre GLC
Board Challenge
2018/19 Budget
2018/19
Bud
971.3
(125.7)
845.6
87.1%
(363.7)
(181.9)
(283.8)
(829.4)
33.8
50.0
(9.0)
41.0
2018/19
50.0
2017/18
PSF A~
949.2
(121.1)
828.1
87.2%
(368.5)
(184.3)
(276.0)
(828.8)
35.0
34,.3**
(2.4)
31.9
Var %
PSF Var
22.1 2.3%
(4.5) 3.8%
17.5 2.1%
(0.2%)
48 (1.3%)
2.4 (1.3%)
(7.8) 2.8%
(0.6) 0.1%
(1.2) (3.4%)
15.7 45.7%
(6.6) 275.0%
9.1 28.4%
* 3 Year Plan approved by the Board included a £5m adjustment for
project costs moving into BAU. Net adjustment in 2018/19 is £3m
leading to the “target” being increased by £2m.
* PS Forecast updated to reflect assumed release of Growth Fund £3.9m.
™ Latest view on 2017-18 EBITDAS is £36m and overperformance vs
budget is due to underspend in growth fund and increase in Bol profit
sharing which will not recur next year.
Gross Income
* Revenue growth 2.3% despite continuing pressures in Retail underlying
trading, Telecoms pricing pressures (Ofcom) and removal of the profit
share agreement with Bank of Ireland.
Direct Costs
+ Growth in costs driven by Telecoms and Government Services growth.
Slight margin decline.
Agents Pay
+ Reductions in agents pay with simplification savings offsetting
incremental costs from franchising DMB’s. Changing revenue mix
drives year on year improvements.
Staff Costs
* 3.0% payrise assumption impacts by c.£5m partially offset by £3m
pension saving.
* £8m benefit from franchising DMB network (offset by increase in agent
pay)
* £4m Incremental investment to fund skills gaps identified
Non Staff Costs
+ Marketing and growth spend, including a £10m growth fund (2017/18
estimated to be c.£5m) and £5m of incremental marketing year-on-
year.
+ Significant IT cost reductions of ¢.£10m.
+ Increase in regulatory costs from POCA £6m and £2m card processing.
FRES
+ Reduced trading performance due to AML regulations.
Group Litigation Costs
+ Excluded from targets. Costs anticipated to be £7-£9m in 2018759),
Post Office®
Post Office Limited — Commercial in Confidence
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UKGI00043693
£16m year on year EBITDAS improvement achieved against
significant trading challenges
70
60
50 Pes
40
20
10
e 3 & 5 2 s§ 2 8 . 3 ne 2 I 8 2
a = . ae ® GE H 3 S . 3 .
ra fs = 2 2 =
= 22
Bos
Trading Programmes Invest
+ £7m growth from FST including growth from Banking Services due to inflationary increases and continuing growth in Banking Framework
+ £15m potential impact of Ofcom price reduction offset by volume growth and mitigating actions.
+ £11m BOI value share and guaranteed income excluded from 2018/19 (currently under negotiation).
+ Network Programmes deliver £14m of improvement — Network Transformation £9m and Simplification £5m.
* Transformation of the IT cost base continues with significant year on year savings delivered.
+ Savings from Mortgage Specialists with announcement in January.
+ £12m of incremental marketing costs (inc. Growth Fund) and £2m increase in marketing headcount.
Note: £34m is 2017/18 anticipated outturn as per the P5F adjusted for £2m impact of GLC and £4m anticipated release of the Growth Fund. fay
a
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Key income drivers, initiatives & investments in 3 Year Plan
IDENTITY & BANKING
Liat GOVERNMENT SERVICES SERVICES EATRENTS
+ Traditional mails volumes declining by 2- + Legacy services in ‘ Traditional bill payments
9 3% pa due to increased digitisation and continued decline, with net prlny do paneN market declining by >5%
> wi competition. Our plan seeks to offset this income from POCA, DVLA, 2017 alone) a increased pa due to shift to
lu >! by tapping into faster growing segments UKVI & passports declining awareness of Bankin alternative channels,
=< Fe] of the parcels market as set out below. from £62m to £33m. Plan Feameworedenin ee although our strategy seeks
a) Overall income also held up by RPI linked partly offsets this with of c5% pa 9 9 to drive outperformance vs
fee mechanism with RMG. growth in digital identity. . the market.
Up to £40m invested to strengthen our + Launch of Digital Check Further enhancements to Targeting large clients
network coverage and multi-channel & Send for passports: the Banking Framework: directly and enabling the
capabilities, including through: improving the customer ongoing programme of technical capability
My] + Drop & Go: growing the SME user base journey and supporting product innovation, such as required to leverage
> and improving the online service with HMPO’s aim to remove quicker deposit processes growing segments such as
E additional features like loyalty discounts. paper. Delivers c£12m for business customers. pre-pay smart metering and
< I+ Click & Collect: improving the customer income by 2020/21. Discussions underway transport ticketing.
cS. journey for parcels collections and + Identity services: building with major banks around Project Panther currently
ia potentially extending to other carriers and the UK’s digital identity further extensions to the being assessed - seeks to
z platforms. market to improve security Banking Framework to accelerate improvements to
al ag Multi-channel expansion and eBay & convenience for support more radical our network, retailer
lu integration: enabling customers to start customers and reduce costs reconfiguration of their technology & product range
p” transactions online and complete in for clients. Underpinned by network, which would (£15-20m investment).
branch, and potentially selling RMG ¢.£20m investment in necessitate additional ATMs: new contract
tracked services directly through our own digital platform and in- investment and financing required during Plan period
digital channels. branch technology. arrangements. - options under review.
+ Significant uncertainty associated with + Up to £15m pa profit at risk Bill payments income and
wn both the pace of market developments by 20/21 if identity market Readvien Eanes ES ath volumes subject to
- (e.g. shift to eBay shipping platform) and does not evolve as planed. ie rena beeen Pe id of significant binary risk
cI the outcome of negotiations with RMG - + Potential for additional the plan period, I recent associated with winning
[= impact of these events could worsen mails regulatory costs of £5-10m both riske:&.ci tas ti 9 large client contracts
income by £10-30m pa by 2020/21. pa on POCA. ! PRSreuntties: against intense competition.
fs)
9
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Key income drivers, initiatives & investments in 3 Year Plan
PO Money POMS TELECOMS
+ Bank of Ireland balance sheet constraints and + Against the backdrop of a competitive Fixed line net income -
2 alignment of incentives are the major factors market, POMS plan seeks to deliver traditionally the mainstay of the
> wi influencing outlook for PO Money product range - c£20m profit increase by 2020/21, by PO telco business — is set to
ii >I currently assuming £7m income drop from savings. building on the investments to date to decline, not least from impact of
=< f& Offset by investment in own capabilities (see below). increase control of the value chain, retain Ofcom interventions. Our plan
QI- Plan assumes we maintain our c25% share of a more value and improve distributional seeks to offset this through growth
broadly flat travel money market. capabilities. in new products & customers.
_ - . 7 POMS strategy review underway, reporting
Ld Negotiations with Bank of Ireland ongoing, with to POMS Board in Nov 2017 - assessing Improving the efficiency of the
aim to recalibrate FRES value share, establish greater range of options for driving growth: current operations, driving
wo product sourcing flexibility and align sales incentives. % Further I . evel . io higher yield from irre: efficient
w Outcome currently uncertain (see Sept 2017 Board MRUVEE IDELSASNG CONT OL OVE em y! dur
= paper for further detail) to-end product delivery to improve targeting of existing customers,
E + Building the digital 7 tf *Custo! Hub’ value capture, including by re- channels and pricing propositions.
< et ge “ Ka eh - ait cous ie rranciat ) negotiating (or exiting) the arrangement Broadening the customer reach
Fa] sb PP meurean rene! with JBF (the intermediary for motor & to appeal to new customer
[= services and other B2C product lines, delivering an home insurance). segments, leveraging the
= integrated proposition to customers to meet their ri i La a § - Mio
tal needs. Requires investment of c£30m over the period. Beapening caps pilites:in pricing lovesemne ne LD Bie user lab:
a ais pli BIS PRNGLCR alt GromUENT toneiial management, digital sales and Expanding the product
iu Developing PI Rrepes y sid analytics, leveraging the investment in portfolio to capture greater
= to PUG TreUgiine [ew platform, starting with those the wider Customer Hub. revenue and increase retention
which are already within our control like travel, + az " ; i
5 i ‘ ; fj] + Potential acq ion opportunities to rates - potentially including TV,
identity & insurance. Intention to launch retail fa ars . I
i broaden distribution reach and move into energy and mobile.
investment products in 2019. pes sna
MGA / underwriting capabilities.
+ POMS plan is predicated on ambitious
+ Inevitable uncertainty around our ability to gain profit growth - a combination of external Precise impact of Ofcom review of
wn traction in new product areas like investments factors (regulation, Competition, landline pricing currently unknown-
a (forecast to generate £8m pa revenue by 20/21). macroeconomics) and internal capability could add £5-10m pa risk
II+ As indicated above, relationship with Bank of Ireland is dependencies could put some of this Broddbaiid iarket Parris subject
[+4 the key swing factor over the plan period, with both £20m growth at risk. The impact of #6 intense’ priaa-led coripetition.
risks and opportunities against our baseline forecast. Russet (£2.3m) and funding of additional Pp .
central marketing costs are included.
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Post Office Limited ~ Commercial in Confidence
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Key 2018/19 planning assumptions 2
* Bank of Ireland — No value share included (targets would change dependant
on outcome of negotiations). Prior year forecast had c.£11m impact.
° VAT — 9% irrecoverable rate assumed, no change from 17/18.
* Inflation — Where possible specified contract terms used, if not CPI at 2.6%
used.
¢ Interest — assumes rate remains constant
° Pay rises — c.£5m budgeted (3%).
* Bonuses (inc. NI) — LTIP (£1.6m) and STIP (£16m) budgeted on a consistent
basis with 2017/18
©
Post Office® Post Office Limited — Commercial in Confidence
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Strategic context and priorities
Overview of 2018/19
income = =
Margin
Costs
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
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£22m (2.3%) YoY increase in Gross Income despite
significant reductions due to Ofcom pricing impact and no
Bank of Ireland income support.
ee)
2018/19 2017/18
Var % Var %
em 18/19 7/18 var I 17/18) 46/17 Var
Mail Trading 288.4 16.0 5.9% 272.3 5.4 2.0%
Mail Non-Trading 55.8 (4.0) (6.7%) 59.8 (5.9) (9.0%)
Retail and Lottery 39.0 (5.2) (11.7%) 44.2 (2.1) (4.5%)
Payment Services 58.0 0.0 0.0% 58.0 (7.6) (11.6%)
Government Services 86.4 (5.8) (6.3%) 92.2I (22.0) (19.3%)
Total Retail 527.6 1.1 0.2% I 526.5I (32.2) (5.8%)
Post Office Money 99.5] (7.9) (7.4%) 107.4 (10.0) (8.5%)
Banking Services 97.0 10.7 12.3% 86.3 19.0 28.1%
Telecoms 162.8 13.2 8.8% 149.6 19.5 14.9%
Postal Orders 12.3 (2.2) (15.3%) 14.5 (4.0) (21.7%)
Other Income (0.3)I (1.5) (127.8%) 1.2} (0.1) _ (5.6%)
FS&T 3274.3)) 12.2 3.4% I 359.1 24.3 7.3%
POMS 57.9 8.7 17.8% 49.2 6.1 14.3%
Supply Chain 10.9 0.0 0.0% 10.9 (1.2). (9.6%)
Other Income 3.6I (0.0) _ (0.7%) 3.6] (0.2) _ (4.0%)
Total Revenue 971.3I 22.1 2.3% I 949.2] (3.0) (0.3%)
(13)
Post Office”
Post Office Limited ~ Commercial in Confidence
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Retail: Mails Trading and Verify growth offsetting continuing
declines in Fixed Fees, Retail and Lottery
2018/19 2017/18 Mail
+ Overall trading flat with favourable variance driven
Var % var % i iti
£m 18/19 17/18 var I 17/18 16/17 wat by RPI increase and additional week.
parsewsree! 2.8 an ~— son 19 ue * Fixed fee £4m decrease split between contractual
Special Delivery 50.4 16 33% 48.8} (1.0) (2.0%) efficiencies and Annual Count reduction.
International Priority & Standard 37.5 2.4 6.9% 35.1] 24.9 243.6% «Royal Mail request for changes to Mailwork pricing
Stamps (1st & 2nd 22.1) (1.0) 4.2%) 23.0] (2.3) (9.3% se . ‘ ss
Tee Hace ee saz) 95.2 ( ne ( Be 90.71 ¢ re) ( vse) to be mitigated and will not impact 18/19 income.
RM Signed For 24.3} 15 6.4% 22.8 0.0 0.0% ;
Home Shopping Returns 21.6 4.6 26.8% 17.0) 2.9 20.6% Retail and Lottery
Other Trading 15.8 0.4 2.8% 15.3] (24.2) (61.2%) il i
Total Mail Trading 288.4] 16.0 5.9% I 272.3 5.4 2.0% ST Whice impacted by DME closures:oftaetby
Fixed fee 45.8] (4.0) (8.0%) 49.8] (2.9) (5.5%) new contract.
Mailwork & Mails non trading 10.0} (0.0) (0.0%) 10.0] (3.0) (23.1%) : 9
Total Mail Non-Trading 55.8] (4.0) (6.7%) 59.8] (5.9) (9.0%) Camelot lottery sales declines by 9.5%.
Retail (Inc Gift cards & Other) 11.2] (3.1) (21.9%) 14.3} 0.6 = 4.3% ji
Lottery 27.8] (2.0) (6.8%) 29.8] (2.7) (8.3%) Payment Services
Retail and Lottery 39.0) (5.2) (11.7%) 44.2) (2.1) (4.5%) + ~HNGT Lite & new contract opportunities offsetting
Payment Services 26.8 0.5 2.0% 26.3] (6.3) (19.4%) aymentsidetiine.
ATM 31.2] (0.5) (1.6%) 31.7] (1.3) (3.9%) Pay’ :
en eeuiees pel A ene Pea ees) peed + POCA decline reduces ATM usage. Improvements
Card Account 39.1] (3.1) (7.3%) I 42.2) (19.0) (31.1%) in availablity to 26%. emibeddediin: 2016/12)
Passport Services 14.5] (6.6) (31.3%) 21.1) (1.4) (6.2%) ji
Digital ID Serv UKVI & Asylum 13.0] (1.0) (7.1%) 14.0] (0.1) (0.7%) Government Services
ID - Assurance (Verify) 12.9 5.1 66.3% 7.7 2.1 37.9% +» POCA interest gains partly offsetting volume
Other Government Services 0.7] (0.0) (5.1%) 0.7} (1.7) (70.4%) daciiies:
Government Services 86.4 (5.8) (6.3%) 92.2I (22.0) _(19.3%)
Total Retail 527.6I 1.1 0.2% I 526.5] (32.2) (5.8%) ~ Passports decline led by HMPO announcement on
differential pricing that makes online applications
cheaper.
+ Verify expecting consistent YOY volume growth vs.
latest view of 17/18 exit
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Post Office® Post Office Limited — Commercial in Confidence
UKGI00043693
€69EP0001ID4N
Mails: Fixed fee reductions offset by RPI increases. Growth
driven by home shopping returns ad Week 53.
£m 2017/18 to 2018/19 Budget Bridge
Mo
Contractual Trading One-offs
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FYF 1748 Fixed fee ‘Stamps: Other Labels Home Shopping Parcelforce: Week 53 RPI Proposed Budget
Returns 18/19
Decline Items Growth Items
+ Fixed fee reduction includes efficiency £(2)m and annual
count £(2)m. No reduction in Mailwork fees budgeted.
+ Stamps declining by 6% in line with volume YTD trend.
. Labels include 1 class £(0.4m) and 2" class +£0.4m
trending in line with volumes YTD.
+ Other includes; special delivery £(0.8m), signed for
+£0.3m, acceptance £(0.3)m and international +£0.6m.
Home Shopping Returns increasing 21%, reflecting growth
slowdown from latest 22% trend and broader industry trend
slowing.
Parcelforce increasing 4% in line with volumes YTD trend.
Parcelforce confirm Rewards4U promotion will continue.
RPI rate assumed in budget was 4% (RPI-1% applied to
calculate contractual rate increase).
Post Office®
Post Office Limited — Commercial in Confidence
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UKG100043693
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Mails: 5 priority initiatives to defend income and build improved
customer journeys as part of our strategy to be No 1 in mails and
parcels
. 2018/19 Mails initiatives are focused on retaining core income and profit streams in the marketplace segment while
preparing for the imminent renegotiation of the MDA with Royal Mail.
* This includes proactive creation of optionality in the Click and Collect market inline with our strategic ambitions, and
ensuring we are able to react to the possible inflection point created by Royal Mail's response to eBay's shipping
platform.
+ The scale and phasing of some initiatives have been revised as our strategy has progressed this year
Initiative What? Why? How? Costs I Benefits
Mails Strategy Preparation, execution and To secure new agreement with Continued funding of dedicated £3.4m reduced from £4.9m ‘Secure mails income
implementation of MDA RM from 2020 that delivers best project team and specialised (exceptionalised) of~£330m p.a. for
renegotiation including POL value for Post Office resource. Includes provision for next 10 years
NBA legal and implementation costs
‘Small Continue technical High volume marketplace sellers I Upgrading Drop & Go platform to £2.2m £1.2m p.a. recurring
Business development of Drop & Go account for~£60m of POL reduce user attrition, provide user income retention
Club/Drop & and create ofa dedicated parcels income and are visibility & MI allowing direct (£0.5m EBIT)
Go ‘small business CRM vulnerable to competition & communication & incentive
programme ‘online programme
Clickand Increase POL's market share Defend core mails by preventing Improve existing customer joumey £3.6m £22m pa
Collect from 6% to 31% by 2025. competitor building brand and and extend network to increase incremental income
user awareness & grow income capacity and convenience by 2025
‘stream including possible automation DPC at 22% =£5m
eBay/Online Arrange of responses to RM new Tracked Online service Range from dedicated eBay role £4.6m Minimises risk of
secure POL's relationship with & eBay shipping platform to acquisition of full online sales ~£16m pa income
high value e-Bayers challenges POL high value and pew platform. Includes POL (£15m exceptional deferred until (£6.5m EBIT) loss
depending on speed and scale __ sellers transactions building RM Tracked online trigger points reached) by yr 3 (from volume
of customer migration plus joumey on horizon loss or rate dilution)
RM's response
Multi-channel In branch preparation to ‘Some changes may be required Options include prepare online, £0.2m seed funding Retain £6-9m p.a.
customer accommodate online or part jin customer joumeys, dependent — complete in branch, in branch £5m capex deferred to 2019/20 income (£2.5 -3.6m
journey ‘online customer journeys ‘on the response to eBay above printing EBIT) by 2021/22
based on RMjoint
strategy
(18)
Post Office® Post Office Limited — Commercial in Confidence
UKGI00043693
e69eP0001IDNN
Mails and Income Graphs
6,000
5,000
4,000
3,000
2150
1,950
1,750
4,850
1,350
1.150
950
750
Period 1 Period 2 Period 3 Period 4 Period S Period 6 Period 7 Period 8 Period 9 Period 10Period 11 Period 12
erie
Period 1 Period 2 Period 3 Period 4 Period S Period 6 Period 7 Period 8 Period 9 Period 10Period 11Period 12
ems FY 17/18
Stamps
eo Actuals 16/17
eo Budget 18/19
Home Shopping Returns
oe Actuals 16/17
—o— Budget 18/19
=o = Week 53
== Week 53
Labels
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10Period 11 Period 12
SS FVI7/18 oe Budger 18/19 —o— Actuals 16/17 = — Week 53
Stamps — Continues to decline 7% YoY (excl. Christmas) due to e-
substitution and overall market decline. UK letters market decline is (5)%
including high volume business mail (statements and direct mail. (Note:
RPI formula doesn't apply to Stamps).
Labels — YoY income broadly flat with 1% decline in 1%‘ class volumes
and flat 2" class volumes.
2017/18 volumes have held up despite challenges from Hermes and eBay
price promotions and RM's channel strategy (online price differential and
delivery confirmation)
Labels remains the main area of risk and opportunity going forward with
substantial challenges deferred from this year.
Home Shopping Returns - Continues to grow +21% inline with UK online
sales. Retailers facing growing economic pressure to reduce paid for
returns are challenged by growing customer expectation and competition
offering improved returns and refunding experiences
Post Office®
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Post Office Limited — Commercial in Confidence
UKGI00043693
€69EP0001ID4N
UKGI00043693
®
Continuing decline in Retail and Lottery. Gift cards continue
to grow over and above market.
Retail (excl. Gift Cards) Gift Cards
100
Period 1 Period 2 Period 3 Period 4 Period Period 6 Period 7 Period 8 Period 9 Period 10Period 11 Period 12
FV I7/18 9 —O— Actuals 16/17
—o— budget 18/19
Lottery - Variable
1,700
Period 1 Period 2 Period 3 Period 4 Period S Period 6 Period 7 Period 8 Period 9 Period 10Period 11Period 12
EEE FYI7/18. I —@— Actuals 16/17
—o— Budget 18/19
=o = Week 53
== Week 53
Period 1 Period 2 Period 3 Period 4 Period § Period 6 Period 7 Period 8 Period 9 Period 10Period 11 Period 12
EE FYI7/18 Oo Actuals 16/17 —e— Budget 18/19 = Week 53
Retail (Includes Photo-Me booths) - decline driven by DMB closures
(23 residual from 17/18 and 38 planned for 18/19). Retail sales income
reflects the new WHS contractual arrangement and assumes a sales uplift
of 40% due to new fit out and product range. c.£3m reduction in revenue
and cost of sales (minimal EBITDAS impact) as we move to recognising
commission only.
Gift Cards — Continues to grow +10% YoY above overall market growth
(5% in 2016).* Predicted slowing of growth due to Amazon's departure.
Lottery Variable — Continues to decline 8% YoY based on prior two year
average trend. The fixed fee for Camelot is assumed the same but is
subject to a new mechanism based on our success in audits of prize
*Source: UK Gift Card & Voucher Association 2016 Summary H2
Post Office”
— Commercial in Confidence
payout tickets.
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Payment Services: ATM declines from POCA volume
reductions offset by increased availability and HNGT Lite.
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Key Items FYF 17/18 Payments Decline ATMDecline HNGTLITE — NewOpportunties Sord Week Budget 18/19
Direct Clients budgeted at 8% YoY decline & reseller a decline of 6%. Currently both direct and reseller volumes are declining at 9% YoY.
Payment Services are expected to generate 102.5m (Bill Payments 95m + mobile top up 5m + 2.6m HNGT) transactions for 18/19 vs 104.4m in
forecast.
Decline in ATM resulting from a decline in POCa volume of (3.5)m withdrawals, partially offset by improved ATM availability from 94% to 96%
which increases withdrawals by 2.8m YOY.
HNGT Lite business case assumes annual benefits of £2.3m, of which £0.3m will be realised in 18/19.
New Opportunities includes; Allpay exclusive £0.2m, smart £0.1m & payout £0.1m & BT payout £0.1m.
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Post Office® Post Office Limited — Commercial in Confidence
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UKGI00043693
®
ATMs £(0.5)m Income driven by 10% volume decline
ATM Volumes ATM Availability
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
Jy: A
es
e e
mmm 2017/18 FY forecast (latest) —@==2016/17 FY Actuals =@==2018/19 Budget ‘16/17 Actual Availability —®— 17/18 Actual Availability —®== 18/19 Budgeted Availability
+ Decline in ATM resulting from a decline in POca volume of (3.5)m withdrawals, partially offset by improved ATM availability from 94% to 96% which
increases withdrawals by 2.8m YOY.
Availability issues:
+ Of 2,370 live ATMs 2,110 are transacting at average availability of 98.2% (i.e. 2.2% above 96% target) @ P10 17/18
= The remaining 260 ATMs have been experiencing average availability of 65%. This is primarily being driven by a high number of cash dispenser
faults and cash jams following the introduction of polymer £10 notes.
. YoY reduction (10%) is driven by POCA (3.2%), Out of Grounds ATM (2.6%) , Reduction in cash transactions (2.3%), Service issues (2%)
* 18/19 volumes will be supported through (i) service levels to remain above 96% target, (ii) £5 note dispense on additional 300 ATMs and (iii) 50
external ATMs to be installed in WHS
(20
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Post Office” Post Office Limited — Commercial in Confidence
€69€70001ID4N
Government Services (excl. Verify) continues underlying decline.
Interest and hedge benefit from POCA offset declines but also
impacted by additional regulatory costs
a Net Income Bridge
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FYF 1718 Passport Services POCa Volume UKVI.& ID Decine UKVBRP POCaInferest_ © POCaHedge Digital CRS] Week ©—Budgot 18/19,
Key Items Decline
Assumed decline of £(6.5)m for Home Office pricing announcement. Continuation of current YOY run rate of 7% decline £(1.4)m.
POCa Active accounts are dropping YoY by 30% due to DWP migration of customers onto basic bank accounts £(4.9)m, income from overnight
balances is up YoY by £5.0m due to the uplift in LIBOR rate in Nov 2017 (following BoE increase in base rate).
Current UKVI contract due to expire October 18, expected to delay until December 18 £(1.9)m, partially mitigated by £0.3m from winning the
new Front End Service. Annualised volumes will decrease from 400k to 50k, with a price change from £16 to £25 per transaction. SIA and
Secure Collect contracts expire in July18. Budget assumes that will extend for a further year mitigating £1.7m net income exposure.
Planning to enter a 3-year interest rate swap, Libor hedged at 0.725% across the period. Assumption that actual Libor will be at 0.5% in April
18, increasing to 0.6% in March 19, resulting in annual hedging gains of £1.5m.
Digital Passport implementation P7 onwards £0.8m, with assumption of 50/50 split of volume paper to digital.
(37)
©
Post Office® Post Office Limited — Commercial in Confidence
UKG100043693
e69eP0001IDNN
UKGI00043693
Government Services Income Graphs
450,000
350,000
20,000
150,000
100,000
Passports
Period 1 Period2 Period 3 Period Period'S Period Period? Period Period9 Period 10 Period 11 Period 12
EESFYI7/18 em Actuals 16/17 —e—Budget 18/19
Motoring
1,200,000
1,000,000
200,000
‘400,000
200,000 :
Period 1 Period 2 Period 3. Period Period'S Period 6 Period? Period 8 Period 9 Period 10 Period 11 Period 12
SESFYI7/18 em Actuals 16/17 em Budget 18/19 ee =S3rd work
POCA
2n0np00: Passports - Budget has been revised and shows a year on year decline of
1,900,000 39%. The key driver of change is the HMPO announcement on differential
1,600,000 pricing that makes online applications cheaper than those made through
1,400,000 check and send. This change comes into effect at the start of the new
1,200,000 financial year and will therefore impact branch volumes.
1,000,000
ssid Motoring - volume decline is planned at 9% YOY, in line with current
cape performance and reflects the slow down in decline over the past two
pained years. The volume decrease is prominently led by tax discs, 10 year
Som renewals are planned to remain static.
Period 1 Peviod2 Pesiod3. Peviod 4 Period Period Period 7 Period 8 Period’ Period 10 Period 11 Period 12
SEE FYI7/18 —eActuals 16/17 —e=Budget 18/19 POCA - volumes are planned to continue to decrease steadily as account
holders are migrated onto bank accounts.
©
Post Office” Post Office Limited — Commercial in Confidence
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®
POCa — Income 30% volume decline offset by £6.5m Interest uplift
following interest rate increase in Nov 17.
(Note: No changes to interest rates have been assumed in 2018/19)
Active Accounts Interest Income on O/N balances
2,000,000 1,200,000
1,500,000 1,000,000 on Cond
1,000,000 800,000 105% gePOPOeeces
500,000 600,000 1
400,000 (a
200,000 bed
mmm Actuals 17/18 —@—Actuals 16/17 —@—Forecast —@®=Budget 18/19 as RGR aes ee oe f ge PPP
* Active accounts are dropping YoY by 30% due to DWP migration of customers onto basic bank accounts. The rate of migration has
been less than DWP targeted and therefore they have started to target young pensioners as well as working-age customers. This will
continue throughout this year as they attempt to hit their target of 720k customers (they are currently about half way through).
+ Income from O/N balances is up YoY by £5m due to the uplift in LIBOR rate in Nov 2017 (following BoE increase in base rate) and
additional £1.5m from the interest rate swap (approved by ARC).This is also helped by total balances remaining higher than originally
forecast although this is expected to return to forecast as pensioners are encouraged onto other products.
Post Office® Post Office Limited — Commercial in Confidence
UKG100043693
€69EP0001ID4N
Passports £(0.7)m Income driven by 7% volume decline
500,000
400,000
300,000
200,000
100,000
Passport Volumes
Period Period Period Period Period Period Period Period Period Period Period Period
i 2
mas Actuals 17/18
3
4 i} 6
Actuals 16/17
zi 8 9 10 11° «12
—@-Forecast —@=—Budget 18/19
50%
40%
30%
20%
10%
Market Share
Qa a2 a3 a4 Qt a2 @
2016 2016 2016 2016 2017
—O—Post office
eae 17/18 FYF 18/19 Budget
Net Income
Counter —o—Postal
£21.1m
a4 2018
2017 2017 2017
Online
£20.4m
+ Budget assumes an 8% decline in volume YOY. The current trend shows a 7% YOY decrease which has been embedded into the
plan, with a further 1% reduction derived from new Home Office digital product launches expected in 2018/19.
+ Market share of passports has continued to decline between 0.2% and 0.5% per month in 17/18, with a market share of circa 37.5%
anticipated in March 18 compared to 44% in March 2017. HMPO have announced that PMA registered companies (Photo Me,
Timpsons etc) will be able to provide digital photographs to support online applications and also that the online service will be extended
to 16 -24 year olds. Both these actions are expected to impact 2018 volumes. We expect HMPO to increase the activity to promote
online services in Q4 17/18, which may see additional pressure in 2018.
Post Office®
Post Office Limited ~ Commercial in Confidence
Lae
or
UKG100043693
€69EP0001ID4N
Identity Services revenue in line with recent volume trends
ry
80,000
70,000
60,000
50,000
440,000
40,000
20,000
10,000
Net Income Bridge Key Items
os
> H fF PF £ f 5
Overperformance expected over the remainder of 2017/18 based
‘on recent month revenue trends.
Level of Assurance (LOA) 2 volume growth assumed to remain
static at 31% for 2018-19.
LoA2 margin improvement of £1.45 per transaction gained via
contractual volume achievements.
LoA1 was launched in P5 17/18, budgeted consistently with recent
trends circa 2,000 transactions per week.
Verify in branch anticipated rollout in P9, dependent on digital
passport implementation in P7, benefits phased with incremental
growth, steady state is £1.5m per annum.
Volume Key Items
Verify Volume
E i
Period 1 Period 2 Period 3 Period 4 Period $ Period 6 Period 7 Period 8 Period 9 Period Period Period
ar
SSSFVIZ/B Se Actunls 16/17 —e—nudger 18/19
Verify volume growth is anticipated to remain static at 31% YOY,
this is in line with current year performance.
Post Office”
Post Office Limited — Commercial in Confidence
UKGI00043693
€69EP0001ID4N
UKG100043693
Verify +£3.1m Income driven by 31% volume growth
LoA2 Volumes Market Share
80,000 80%
60,000 60% ~
40,000 40% —
20,000 20%
0%
¢ ai Q2 a3 a4 al Q2 Q@3 Q4 2018
e& 2016 2016 2016 2016 2017 2017 2017 2017
PO —e=Competition
mmm Actuals 17/18 —®=Actuals 16/17 —®—Forecast —®=Budget 18/19
+ Verify volume growth is anticipated to continue at 31% YOY, this is in line with P1-P8 aes 147/18 FYE 18/19 Budget
2017/18 performance.
i Net Income £4.4m £7.5m
+ Growth will be driven primarily by the on boarding of new services, which is handled by
Government Digital Service. Improved conversion rate is the other driver, which itself is
driven by improved and new data sources. Conversion Rate
+ LOoA2 is still Verify's biggest income driver, contributing 93% of Verify income since 80%
LoA‘s launch in Week 20
60%
* LoA1s launch did not have the impact anticipated on LoA2 volumes mainly because ”
DWP (View your state pension) service hasn't migrated away from LoA2 yet. ‘sO
+ Conversion rate has increased YoY from 46% to 50% and is expected to reach 58% in sai
2018/19 0%
Actuals 15/16 Actuals 16/17 Actuals 17/18 Budget 18/19
+ PO remains market leader with circa 40% market share. We will be looking to improve
this through marketing in 18/19, with an ambition of 47% during marketing campaigns
(36)
©
Post Office® Post Office Limited — Commercial in Confidence
€69EP0001ID4N
FS&T: £12m growth despite removal of BOI £(11)m and
potential risk of Telecom pricing reductions c.£(15)m which
have been mitigated
2018/19 2017/18
Var % Var %
em 18/19) 7/18 var I 17/28) 46/17 Var
Mortgages 1.8] (0.3) (15.0%) 21 (0.6) (21.7%)
Credit Cards and Lending 1.9 0.2 9.6% 17 (1.2) (41.5%)
Savings 39.3) (8.0) (16.8%) 47.2) (7.5) (13.8%)
Travel Money pie aS 11.8% 27.8 0.5 2.0%
MoneyGram 25.5I (3.1) (10.8%) 28.6] (1.2) (4.0%)
Post Office Money 99.5 (7.9) (7.4%) 107.4} (10.0) (8.5%)
Banking Services 97.0 10.7 12.3% 86.3 19.0 28.1%
Telecoms 162.8 13.2 8.8% 149.6 19.5 14.9%
Postal Orders 12.3 (2.2) (15.3%) 14.5) (4.0) (21.7%)
Other Income (0.3)I__ (1.5) (127.8%) 1.2I (0.1) _ (5.6%)
FS&T 37223252 3.4% I359.1 24.3. 7.3%
Savings - £9.5m reduction due to no Bank of Ireland income support not continuing into 2018/19 (Savings value share &
no Savings guaranteed income). Negotiations with Bank of Ireland are ongoing. Additional shortfall in other income for
£1.5m brings impact to £11m revenue shortfall y-on-y.
Moneygram - decline in volumes anticipated to continue into 2018/19. Our international money transfer contract is up for
renewal in 2018/19 and options being explored to mitigate downside risk.
Banking Services - £2m inflationary rate increase and continuing growth in Banking Framework (£7m) and 53 week
(£1m).
Telecoms - Impact of OFCOM pricing £(15)m mitigated by various initiatives (e.g. offering broadband, renegotiating
supplier contracts).
Post Office”
Post Office Limited — Commercial in Confidence
@
UKG100043693
e69eP0001IDNN
Post Office Money: Bank of Ireland Savings and Value Share
reductions drive significant year on year reductions
a
100
£m
95
2017/18 Moneygram Travel Money Week 53 Customer Hub BOI (no savings / value 2018/19
share)
Key Items
* Moneygram year on year decline is a continuation of the current volume and value trends. No uplift included for any potential
mitigation through contract renegotiation.
+ Travel Money increase is due to higher transaction volumes, albeit at a lower average transaction value following the Anti
Money Laundering regulations.
+ Customer Hub is anticipated to deliver incremental revenue from the initial product launches.
+ The impact of the BOI Income support (value share, guaranteed minimum savings commission) is not continuing into 2018/19.
Negotiations with BOI are ongoing. Additional £1.5m shortfall in Other Income brings BOI impact to £11m.
UKGI00043693
(28)
=
Post Office® Post Office Limited — Commercial in Confidence
e69eP0001IDNN
Banking Services: Inflationary increases and continuing
growth from the banking framework agreement
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90)
= I es sca
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85
80 +
2017/18 Inflation Travel Money New Banks Week 53 2018/19
Key Items
£2m Inflation is the impact of the contractual RPI increase (3% assumed) on the rate card which we charge to the banks.
* Growth trends are driven by further bank closures and more customers using the service, including business banking.
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Post Office® Post Office Limited — Commercial in Confidence
€69EP0001ID4N
£10m growth in Telecoms revenues despite c.£(15)m from
Ofcom price ruling
165
160
32
iad eee
a. eee
: , 3 * Fa
£m
140
135 4
130 +
2017/18 Closing Run Rate & Underlying decline in Annual Price Increase Impoact of Ofcome _Mitigiatioin of Pricing Growth from. Week 53 2018/19
New Call customer numbers Pricing Impact Marketing
Key Items
+ The full year impact of the New Call / Fuel acquisition (completed P4 2017/18) is £3.8m in 2018/19.
* Telecoms numbers, particularly Homephone, are facing underlying decline, with a £(6.6)m impact in 2018/19 offset by £7.1m
incremental revenue from the annual price increases.
+ — Impact of Ofcom price ruling is offset by mitigating actions.
* — Incremental marketing activity is driving £3.3m of revenue from additional customers.
®
Post Office” Post Office Limited — Commercial in Confidence
UKG100043693
€69EP0001ID4N
UKG100043693
Strategic context and priorities
Overview of 2018/19
Income
Costs
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
Post Office® Post Office Limited ~ Commercial in Confidence
€69EP0001ID4N
Net Income margin remain stable due to changing product
mix
2018/19 Var
Rev COS Margin % Margin Rev COS Margin % Margin
Em em em em £m em oem em im
Mail Trading 288.4 288.4 100% 16.0 16.0 -
Mail Non-Trading 55.8 55.8 100% (4.0) = (4.0) =
Retail and Lottery 39.0 1137.9 97% = (5.2) (2) 7%
Payment Services 58.0 58.0 100% 0.0 © 0.0 0.0 0%
Goverment Services 86.4 22.1 64.3 74% (5.8) 3.7__—(2.0)__—2%
Retail 527.6 23.2 504.5 96% 116.8 8.01%
Mortgages 18 18 100% (0.3) = (03) ci
Credit Cards and Lending 19 1.9 100% 0.2 0.2
Savings 39.3, 39.3 100% (8.0) (8.0)
Travel Money Ba 341 100% 3.3 3.3
MoneyGram 255 25.5 100% (3.1) ay
Post Office Money 99.5 = 99.5 100% = (7.9) =a) =
Banking Services 97.0 1.3 95.7 99% 10.7 (0.2) 10.4 (0%)
Telecoms: 162.8 92.6 70.2 43% 13.2 (10.9) 2.3 (2%)
Postal Orders 123.1 122 99% = (2.2) 0.0 (2.2) (0%)
Other Income (0.3) = (0.3) 100% (1,5) = (1.5) :
FS&T 371.3 94.0 277.3 75% _ 12.2 (42.4) 1-1 (2%)
POMS 57.9 85 49.4 85% 87 (0.2) 862%
‘Supply Chain 10.9 10,9 100% 0.0 : 0.0
Other Income 3.6 = 3.6 100% (0.0) (0.1) __(0.1)_(3%)
Total 971.3 125.7 845.6 87.1% 22.1 (4.5) 17.5 (0%)
: a
o
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g ¢
Portal Orders
—
oer ts
ootee
ans
Comments
* Net margin remains stable at 87%.
Retail
+ Retail reflects the new WHS contractual
arrangement and assumes a sales uplift
of 40% due to new fit out and product
range.
* c.£3m reduction in revenue and cost of
sales (minimal EBITDAS impact) as we
move to recognising commission only.
FST
* Growth driven by Telecoms at lower at
margin impacts overall POL position.
Post Office”
Post Office Limited — Commercial in Confidence
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UKGI00043693
€69EP0001ID4N
UKG100043693
Strategic context and priorities
Overview of 2018/19
Income
Margin
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
Post Office® Post Office Limited — Commercial in Confidence
€69EP0001ID4N
UKG100043693
Cost control maintained but planned investment in marketing
and POMS growth plan
Agents Pay
Expenditure by Cost Area . ee ;
+ Reduction in agents pay with simplification savings
450 offsetting incremental costs from changing network
shape. Changing revenue mix drives year on year
388
400
364 369 improvement.
350
300 274 974 274 Staff Costs
250 202 * 3.0% payrise assumption impacts by c.£5m partially
200 182 184 offset by £3m pension saving.
151 * £8m benefit from franchising DMB network (offset by
10 increase in agent pay)
5 * £4m Incremental investment to fund skills gaps
10 5 identified.
3 ——
Agents Pay Staff Costs Non Staff Costs Growth Fund* Non Staff Costs
2018/19 ™2017/18 m2016/17
£'m
oes
+ Marketing and growth spend, including a £10m growth
* Adjusted to include release of Growth Fund in 2017/18 fund (2017/18 estimated to be c.£5m) and £5m of
incremental marketing year-on-year.
* Significant IT cost reductions of c.£9m.
+ Increase in regulatory costs from POCA monthly
statements £6m
(34)
SF
Post Office Post Office Limited — Commercial in Confidence
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Agents Pay: Reduction of £5m from £369m to £364m despite
increased revenue volumes and additional trading week
370 I
365
360
355
350
Fixed Variable
2
1 gee
0
9
6
2 2 =¢ g * ¢§ ® 2 7 5
s 8 A s 8 °3 =
é 3 € é &
ES “ &
2018I 2017 2016
/19 /18 /17
Fixed 46.5 48.9 59.2
Variable 317.2} 319.6 328.8
Total 363.7} 368.5 388.0
Fixed % 12.8%] 13.3% 15.3%
Variable Y% 87.2%I 86.7% 84.7%
2018/19
Movements
NT conversions planned for next year include
70 locals and 30 mains. Fixed cost savings
expected to be c. £1.3m
National Insurance will continue to fall in line
with the network transformation, but at a
slower rate as we convert contracts from a
C2I basis to C2C
Trading mix — £9.0m reduction in government
(POCA) and lottery variable costs
Savings from simplification broadly offsets
the incremental cost from changing the
network shape through further franchising.
Variable costs are now 87.2% of overall
agent spend as we continue to move from
fixed to variable.
(35)
®)
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®
Agents Remuneration — YOY By Pillar
Agency Remuneration Net Income (Wk'52)
Budget Adjusted
Pillar 17/18F Week53 Adj for Budget vs eee
17/18 (E) 17/18 %
S2wks
Mails 2.0%
A. IGovernment Services 28.7 21 (77) (0) 21.0 0%)
Payment Services 25.7 248 (0.9) (0.5) 243
Retail & Lottery
Total Variable Rem 319.6 310.6 (9.0) (5.6) 305.0 (4.6%) (0.2) (0.0%)
Fixed 48.9 46.5 (2.4)
Total Fixed Agents Rem I 48.9 465 (2.4)
ICND Programme
INT Programme 0.0 13 13
Total Agents Rem 368.5 363.7 (4.8)
+ Mails — agents remuneration increasing less than income as it includes £5.0m of simplification
° Government Services — agents remuneration reduction led by passports (-31%) YOY and anticipated loss of UKVI contract
. Payment Services — agent remuneration reduction led by reduction in rates due to contract renewals.
+ Retail & Lottery reduction in agents remuneration driven by decline in Camelot volume, increase in gift card remuneration based on 10% expected
growth.
+ FS&T— Agents remuneration falling faster than income led by mix, driven by Moneygram & Banking Services volumes. fae)
Post Office” Post Office Limited — Commercial in Confidence a
A Government services income has been adjusted to remove POCa interest income which doesn't attract agents pay.
€69EP0001ID4N
Fixed Agents Remuneration By Component
Fixed Remuneration 18/.
Part Time Rural
One-off Sales Incentives
Mi
18/19 B
w/1gF Var
Community
Fixed Programmes
Community without retail
The £46.5m fixed agents remuneration budget is built from £23.7m
community costs, £7.1m of income related Mailwork costs and £15.8m from
hard to place branches.
The £15.8m associated with hard to place branches is the future focus for
cost reductions to fixed agents remuneration.
Fixed agents remuneration is
decreasing £2.4m YOY to £46.5m
ND/NT conversions planned for next
year include 70 locals and 30 mains.
Fixed cost savings expected to be c.
£1.7m
Planned to increase wage cost for
outreaches by 10% in H2 18/19
(£0.3m), this is due to a pay freeze
since 2013
National Insurance will continue to fall
in line with the network transformation,
but at a slower rate as we convert
contracts from a C2I basis to C2C
Fixed Remuneration Type 18/19 BEm
Post Office®
Post Office Limited — Commercial in Confidence
Community 28h:
Income Related (Mailwork) 7.1
Hard to Place Branches 15.8
Total 46.5
®
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Staff Costs reduced by £2.4m as DMBs continue to be
franchised. Investment in POMS to support future growth.
Wages and Salaries
£'m 2018/19} 2017/18 Var
. 9 if if i
Wages & Salaries 137.7 128.2 (9.4) Includes 3' mo paylise assumption impact cenit)
Pension 12.4 16.1 37° Incremental investments of c£4m to fund skills
" . . a gaps currently identified in the organisation. £2m
Overtime - 5.9 48 (1.1) incremental support for Marketing heads.
Bonus & Productivity 14.0 13.7 (0.3). £1m increase in Central Staff costs due to
Employers NI 15.4 17.3 1.9 payrise partially held centrally awaiting final
Contractors & Temporary Resource 1.2 48 3.6 decision.
Staff Costs Efficiency Target (4.6) (0.6) 4.0 Pension
Staff Costs 181.9 184.3 2.4 + £3m reduction following the removal of the 1
“ year uplift in contributions following the closure
peer 76.3 83.6 7.3 of the DB scheme.
10.6 11.3 07 . Pension autoenrolement has limited impact in
POMS 74 4.2 (3.2) the current year.
Finance & Ops 51.6 51.5 (0.1) Bonus
CEO 0.4 0.3 (0.0) - Budget for STIP and LTIP consistent with current
clo 6.2 5.0 (1.2) year.
Strategy 0.6) 0.6 0.0 Employers NI
LRG 6.0 5.6 (0.4) + Benefit from Network Transformation (Costs
HR 18.1 18.3 0.2 moved from Salaries to Agents Pay).
Communications 1.6 1.6 (0.0) Efficiency
Central 3.1 2:0 (0.9) + £4.6m efficiency target to be identified in budget
Total 181.9 184.3 24 and detailed planning (primarily Finance & Ops)
@
Post Office® Post Office Limited — Commercial in Confidence
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£2m decrease in staff costs to £182m.
192
190
188 4
Ss
186
é - : eS
£
182 1 ees , =
180
178
176
a 3 < t 3 . ' — 7 - « . >
s = Ss & S Ss Fy ad = z¢ i) g a
= aa Fs 6 5 2 E vA 8 8 & ® B38 =
Pay award at 3% c. £5m impact
Pension Savings of £3.2m following removal of 1 year uplift in 2017/18 following the closure of the Defined Benefit scheme.
Skills Gap Investment £4.0m to support Retail £1.4m, Digital Capability within FST £1.1m, F&O £1.0m for Supply Chain (revised
structure post OSOP) and LRG £0.5m for compliance team currently not resourced.
DMB Conversions savings of £8m (offset by incremental agents pay £6m)
IT £1.0m to bring security team inhouse as part of continuing IT transformation programme.
POMS £3.3m investment in POMS heads to support the investment business case.
®
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Non Staff Costs
Consultancy & Advisory Costs
£m 2018/19] 2017/18 Var
Staff & Agency Related Costs 10.3 10.2 (0.1) + Incremental contractual costs as part of the Bank
Consultancy & Advisory Services 9.6 3.6 (6.0) of Ireland agreement.
Brand & Marketing 22.8 18.2 (4.7) Brand and Marketing
Legal Costs 23 3.0 0.7 + £4.7m increases in marketing includes:
Property & Facilities Management 40.1 41.9 1.8 + £4m to support POMS growth plan
Nenicis es ot (04) * £2m support for customer hub
IT Infrastructure & IT Services 86.0] 968 108 ae a
Finance & Losses 29.4 26.0 (3.4) * £(1)m reduction driven by customer insights
Other Operating Costs 79.1 72.6 (6.5) + Additional £5m increase in Growth Fund (Other
Non staff Costs 283.8 276.0 (7.8) Operating Costs) supports overall investment.
Retail 43.9 374 (6.5) IT and Infrastructure
FS&T 47.5) 41.4 (6.1) * Continuing cost savings from the IT
POMS 21.7 16.5 (5.2) transformation programme.
Finance & Ops 70.5 70.5 0.1 Other Operating Costs
CEO 0.0 0.0 (0.0) + Significant increase driven by POCA regulatory
clo 83.2 93.7 10.5 requirement to deliver monthly statements £6.3m
Strategy 0.2 0.1 (0.1) Growth Fund
ae ca os Gal + Growth Fund currently maintained at £10m in
a 6.5 63 (0.2) 2018/19 (2017/18: c.£5m).
Communications 32 3.2 (0.0)
Central 41 3.7 (0.3)
Total 283.8 276.0 (7.8)
©)
Post Office® Post Office Limited — Commercial in Confidence
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UKG100043693
Non-staff costs increase £8m, but includes significant °
marketing investments, support for POMS investment case
and regulatory increases from POCA statements.
“ =
7 eS :
285 f= ncaa) os 2
£'m
280
275
270
- ie
POCA
Card
Processing
B01
POMS
Investment
Week 53
Other
18/19
Case
Growth Fund
T
Transformati
on
* POCA costs of £6.3m following the requirement to deliver monthly paper statements and technology
refresh.
* Marketing increase to support POMS investment growth plan, customer hub and incremental Telecoms
volumes. Growth fund held at £10m (£4m challenge to reduce gross marketing increase).
+ IT Transformation continuing significant cost savings from the IT transformation programme.
(ar)
Post Office” Post Office Limited ~ Commercial in Confidence YY
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@
Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
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FTE reductions driven by continuing programme to exit
DMB’s via franchising and temporary operators
4,300
16 12
4,200
4,100
4,000
3,900
3,800
FTE
3,700
3,600
3,500
3,400
3,300
g
3
w7/1s
Py
£3
ae
6
cio
Inhousing
Mortgage
Specialists
Identity
Services
POMS
Investment
4 Man
#2 ge
2% 23
o se
& Z2
Some planned investments in the year;
* c.18 heads identified as currently being project funded and moving to BAU
* Marketing increase to support POMS investment growth plan and move to digital capabilities. Current
marketing is under resourced.
* ClO continue to reduce overall cost base by in housing activities.
- Removal of mortgage specialists reduces FST headcount
+ Investments to support Identity Services growth and POMS
©)
Post Office® Post Office Limited — Commercial in Confidence
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@
Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
PROMS 2S
Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
©
Post Office” Post Office Limited — Commercial in Confidence
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POMS — Exec Summary
18/19 will see POMS continue it’s transition. We will leverage developments delivered in
2017/18 and increase investment in product, pricing and direct sales capability. Each will
deliver benefits in year and provide a platform for long-term growth. We will being the
transformation of a new Home insurance model.
= POMS has 3 strategic objectives:
= Business Operating model designed for customer — led growth
= Distinctive customer offer
= Scalable customer management and distribution engine
= Our business operating model has evolved rapidly with Travel and Protection businesses being re-engineered generating
£5m of additional revenue from 16/17 to 17/18 after absorbing the losses arising from the removal of Financial Specialists
= It includes a number of new and previously untested initiatives which are forecast to achieve in year payback. The bottom
line impacts of these will be proactively managed through a series of test and learn activities with focus on hitting the
EBITDA target
* We will continue to organise the business to capitalise on the capabilities delivered by Project Zeus (Policy Admin
Platform) and Hera (Protection business model) as well as commence the development of a replacement Home insurance
business model
= Together with the development of our new Home insurance model, the investments support our growth ambitions and
drive revenue and group EBITDA contribution to £77.3m and £41.1m respectively (up 89% and 103% compared to
2017/18) by 22/23 whilst maintaining our group contribution of £20.3m in 18/19.
= As a result of proposed CAPEX spend a further capital injection will be required to ensure sufficient regulatory capital is
maintained (£5m in 18/19, £2.5m in 19/20)
= The submission aligns to the POMS 5 year growth plan
Post Office” Post Office Limited — Commercial in Confidence
©
UKG100043693
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POMS — Net Income Trajectory
22/23 v 16/17 CAGR
75 Headline +13%
Underlying +14%
65
55
773
70.0
45 63.4
14 55.6
49.4
35 i
39.5
34,7
25 .
16/17 wns 18/19 19/20 20/21 21/22 22/23
Underlying © Mortgage Specialists Financial Specialists
* POMS has faced trading headwinds from the loss of Financial and Mortgage Specialists.
° Underlying income growth between 16/17 and 18/19 is +42%
° New Home model delivers 50% improvement in home margin from H2 19/20
° Underlying portfolio growth delivers increased re-occurring income from 19/20
e Optimised marketing investment and pricing supports on-going growth throughout the planning period
+ Improved CVM generates £2.5m of income in 19/20, rising to £11.8m in 22/23
*Net Income is commission income and profit share less Cost of Sales (predominately aggregator costs)
@
Post Office” Post Office Limited — Commercial in Confidence
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POMS - Operating Costs Trajectory
40
22/23 v 16/17 CAGR
5 Headline +11%
3
30
25
20
15 -
10
16/17 17/18 18/19 19/20 20/21 21/22 22/23
+ Operating costs increase by £8.4m (+41%) 18/19 versus 17/18. This represents the investment in business
capability and marketing
+ Cost growth beyond 19/20 (post launch of new Home model) is 5% PA
Post Office” Post Office Limited — Commercial in Confidence
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POMS — Group EBITDA Trajectory
45
22/23 v 16/17 CAGR
4o Headline +13%
Underlying +16%
35
30
25
20
16
ez.
; ”
10
16/17 17/18 18/19 19/20 20/21 21/22
© Underlying Mortgage Specialists = Financial Specialists
Underlying EBITDA growth between 16/17 and 18/19 is +21% during a year of transition.
Post the migration of Home from BGL in September 2019, EBITDA growth is driven by CVM and margin enhancements
from the new model
22/23
Post Office”
Post Office Limited — Commercial in Confidence
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POMS Budget Submission Summary
—m
Gross Income
Cost Of sales
Net Income
People Costs
Staff & Agency Related Costs
Consultancy & Advisory Services
Brand & Marketing
Legal Costs
IT Infrastructure & IT Services
Finance & Losses
Other Operating Costs
Non-Staff Costs
Operating Costs
Group EBITDAS
POL Commision & MSA
POMS EBITDAS.
2018 / 19 Budget Summary
2016/17 2017/18 I 2018/19 IFY Budget V 2017/18
Act
43.0
(5.5)
37.5
(3.3)
(0.2)
(0.4)
(3.0)
(0.0)
(0.6)
(0.9)
(9.4)
(14.6)
(17.9)
19.6
(11.8)
78
S+7 FY Budget £m
49.2 57.9 8.7
(8.2) (8.5) (0.3)
40.9 49.4 8.5
(4.2) (7.6) (3.4)
(0.4) (0.6) (0.2)
(0.7) (0.7) 0.0
(3.3) (7.5) (4.2)
(0.1) (0.1) (0.1)
(1.7) (2.0) (0.3)
(1.0) (0.9) 0.1
(9.4) (9.7) (0.3)
(16.5) (21.5) (5.1)
(20.7) I (29.1) (8.4)
20.2 20.3 0.1
(12.7) (15.6) (2.9)
7.5 47 (2.8)
%
18%
3%
21%
(80%)
(56%)
1%
(129%)
(146%)
(19%)
11%
(4%)
(31%)
(41%)
0%
(22%)
(37%)
= Group EBITDA is held flat with investment
driving revenue growth and returns in future
years.
= Net income is +£8.5m with growth driven by:
* Protection +£4.0m
* Travel +£5.2m
= Home +£0.7m
* Motor £(1.4)m
= Post Offices investment in a number of
initiatives supports delivery of increased
revenue;
= Customer Hub
= CRM's
= People Costs are +£3.4m due to higher head
count with investment in marketing and
underlying capability.
= Non-Staff costs are +£5.1m due to marketing
costs +£4.2m.
= Business acquisition and mew _ product
solutions remain under consideration “ee
Post Office”
Post Office Limited — Commercial in Confidence
further growth potential 49
Le
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EBITDAS in line with current year but investment of £8.5m t
support longer term growth.
35.0
im
07
30.0
25.0
62
a)
20.0 a
15.0
x) eo og os A>
ef as eno <0 ort? ew wor oo at go? owe’ ot git
Protection income growth is driven by a combination of improved margin, expanding distribution (Aggregators and DRTV) and new
product initiatives (Easy Life)
Travel income growth is driven by additional marketing activity (including investment fund initiatives) coupled with distribution, product
and pricing actions
22 new hires in the year of which 10 are dedicated POMS staff in Post Office marketing team
Non-staff costs are driven by increased marketing costs (+£4.2m)
(50)
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Post Office® Post Office Limited — Commercial in Confidence
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POMS Resourcing Plans
The submitted budget includes 22 new hires (10 Marketing and 12 POMS)
10 Dedicated POMS Central Marketing Staff (£0.7m).
These staff allow POMS to deliver budgeted revenue (campaign delivery). The staff are split into Digital Optimisation,
SEO and CVM/ Lead capture. These staff will generate revenue with a life time value of £2.9m in 18/19
The POMS resource (annual cost £1.2m) is made up of:
+ 4 Pricing — for Travel and Home, pricing optimisation
+ 2 Marketing Analysis and Marketing Executive, 1 role held over from 17/18
+ 2(CVM -data analytics, cross product holdings etc.
+ 2Ml-—dedicated POMS MI team, current model not fit for purpose
+ 1 Customer Proposition Manager (Product)
+ 1 Finance / Ops — focus on Duck Creek controls / recs
7 hires are in the plan for 20/21, then no further hires are anticipated.
Resourcing Costs
40
2
20
°
178 18/19 hires 18/19 - 19/20 20/21 hires. 2021
8
Post Office® Post Office Limited — Commercial in Confidence
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POMS Non Staff Costs — YoY Movement
170
eel (04)
160
m0
20
200 +£5.1m
190
180
140 =
« we oo oo oo of oo o
* roa ail “ ou wn on ww al
Key Items
* Total year on year increase is £5.1m of which marketing is £4.2m. Increase supports revenue growth of 21%, see next slide for
full analysis of spend.
+ Other Operating costs and IT are volume related variable costs.
Post Office® Post Office Limited — Commercial in Confidence
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POMS 18/ 19 Marketing Costs
£000s
Direct Channel Var vs
Branch __Mail/EDM__ Search Web Expansion DRTV TOTAL 17/18
Travel 455 25 1,009 465 1,369 3,323 1,712
Over 50s 45 150 30 1,380 1,605 1,417
life 200 25 200 510 650 1,585 1,018
Car 20 409 60 489 (151)
Home 25 353 60 438 116
Minor Products 22 75 97 133
767 962 1,404 975 2,049 1,380 7,537 4,245
Key Items
. Branch — covers in-branch leaflets and application packs along with campaign collateral for Travel and Life.
. Direct Mail / EDM — regular GI renewal mailings, plus 121 activity across Life and Travel and any costs associated
with lead-capture not already covered in the project.
+ Search — included branded search, generics and SEO investment.
. Web — non-search media costs for display and social, conversion rate optimisation.
+ Channel expansion — building on learnings from 2017 up-weighted marketing investment to support growth plan
including test and learn.
. DRTV - this spend is subject to the results of the test and learn activities in Q4 17/18
Post Office® Post Office Limited — Commercial in Confidence
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Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
POMS
"Risks and Opportunities
Capital and Investment Spend
Cashflow and Headroom
Post Office® Post Office Limited — Commercial in Confidence
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The 2018/19 budget plan is balanced through control over
expenditure on the Growth Fund
Area Total Weighted Comment
Risk Risk
Retail Passports decline, Mailwork negotiation, Disintermediation
FS&T 1.0 1.0 Current challenge to be identified
Trading risk due to growing activities from untested markets. Could be
POMS 5.0 25) mitigated through reducing investment but this would impact longer term
growth.
clo - - Detailed plans for savings delivery being finalised. Planning session on 20.
F&O 40 2.0 Ungrounded plans for efficiency in H2 plus underlying trends
Total 14.5 v7 fi
Investment could be held back to hit targets if trading results not
Growth Fund (5.0) (2.5) ee peat
Net 9.5 5.2
Key Items
é Net Risk identified of c.£5m.
. Budget excludes any benefits from potential negotiations with Bank of Ireland or potential increase in Interest rates.
Post Office® Post Office Limited — Commercial in Confidence
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I SS re Se ee es ee Be es es oe Bee Bees Bee ee ee I
UKG100043693
@
Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
POMS
Risks and Opportunities
~ Capital and Investment Spend
Cashflow and Headroom
®
Post Office” Post Office Limited — Commercial in Confidence
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The budgeted change spend for this year is £255m
———————————
Simplify the retailer proposition £55m to £65m
Build innovative, flexible and secure IT £80m to £90m
Modernise our products and services £70m to £80m
Digitise and optimise the business £15m to £20m
Modernise our skills, culture, HR policies and processes £4m to £6m
Regulatory & Group Litigation Costs £11m to £14m
TOTAL £235m to £275m
The anticipated spend profile is:
aco
so
60
> New Projects
ao ™ Carry Forward
20
°o ' Cc
x
(57) a)
57 S
“hey 8
Post Office® Post Office Limited — Commercial in Confidence 5
oS
o
The following projects deliver in year benefit and are key to
delivery of 2018/19 budget target
~ oer 2018-19 In-Year
Simplify the retailer proposition
- Further franchising DMBs
bl Network Expansion
om Multi-year Crown Projects
- Self Service Kiosk Rollout
Build innovative, flexible and secure IT
a Branch Printer Replacement
= CDP re-procurement
3 EUC Branch Deployment
- _HNGT Lite
= PCI/Payments Hub
= Project Everest — Cloud enablement
- Project Nelson
- Software Asset Management
Modernise our products and services
- POMS Investments
- Project Galaxy
- Falcon — Travel Hub
Digitise and optimise the business
i Success Factors Ph1 Completion
Modernise our skills, culture, HR policies and processes
7 Back Office Transformation
Group Litigation (Group Litigation costs will be reported as exceptional spend and will not impact EBITDAS.)
TOTAL
£61.5m
£22.8m
£18.7m
£17.9m
£2.0m
£33.8m
£3.6m
£1.4m
£6.4m
£1.8m
£2.5m
£15.2m
£2.5m
£0.4m
£19.7m
£11.3m
£4.8m
£3.6m
£0.3m
£0.3m
£6.0m
£6.0m
£9.0m
£130.3m
£11.8m
£1.6m
£2.0m
£8.1m
£0.1m
£7.3m
£0.5m
£0.5m
£0.6m
£0.9m
£0.2m
£4.0m
£0.5m
£0.1m
£17.1m
£4.6m
£11.6m
£0.9m
£3.5m
£3.5m
£0.5m
£0.5m
(£9.0m)
£31.2m
Post Office®
Post Office Limited — Commercial in Confidence
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Further key investments required to secure the current
income stream (income protection) or contribute to the future
profitability beyond 2018-19.
©
UKG100043693
2018-19
Strategic Priority BEY
Simplify the retailer proposition £6.0m
- Agents/Postmasters Portal £6.0m TBD
Build innovative, flexible and secure IT £20.5m
= Full Thin Client Deployment (Solar Full) £9.0m TBD
- End-of-Life Replacements £4.0m TBD
- Risk & Resilience £7.5m TBD
Modernise our products and services £46.7m
- Identity Services Investment £11.4m £25.5m
- Banking Framework — Future of Cash incl. vehicles £10.0m £1.1m
ef Mails Projects £8.0m L-
- Falcon — Additional Verticals £11.3m om
£6.0m TBD
= Property
Digitise and optimise the business £15.5m
- Enabling supply chain and back office improvement £12.0m £2.0m
- Project Arrow (BI Strategy) £3.5m TBD
Regulatory & Group Litigation £4.0m
= GDPR £4.0m (£4.0m)
TOTAL £92.7m (£17.2m)
(59)
Post Office® Post Office Limited — Commercial in Confidence a
S- eS eS ee ee
€69€70001ID4N
UKG100043693
@
Strategic context and priorities
Overview of 2018/19
Income
Margin
Costs
FTE
POMS
Risks and Opportunities
Capital and Investment Spend
6000060 6000
_ Cashflow and Headroom
®
Post Office® Post Office Limited — Commercial in Confidence
€69EP0001ID4N
UKG100043693
®
Headroom held at >£200m at month end but is likely to
breach intra month during Christmas trading
Cash and Loan * The current budget on cash includes the
1,200 following assumptions:
_.” See coeeenere ea, " = — Government funding will be drawn down on a
‘ quarterly basis in line with the proposed
ei spending pattern.
= 800
& 700 * Banking Framework is assumed to require
aa and additional £36m of cash in the network
=a (future of cash paper is still in development)
400 = Branch holdings are reduced down to £450m
300 by end of year. 2017/18 average ytd is
Pl P2s PZ PGC PBC PIO PLP c.£550m.
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
=== Gross Cash 18/19 Loan 18/19 ===Gross Cash 17/18 ——Loan 17/18 id Cash centre balances are held at current
levels (subject to seasonal fluctuations)
Netrunding + Change spend at £255m is offset by
anne. government funding of £228m (Subsidy:
_ £60m and Change: £168m).
850 + EBITDAS of £50m will fund movements in
nt working capital, finance costs and
oe continuing pay down of provisions.
650
600
550
500
Pl P2 3, Pa PS PG °7 P8 Po PIO) P11 PA
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
—Net Funding 18/19 ——Net Funding 17/18
©)
Post Office” Post Office Limited — Commercial in Confidence
€69EP0001ID4N
UKG100043693
Cash Efficiency improvements and EBITDAS generation
will drive reductions in Net Funding Position
(600) +
(550)
(600)
(650) I
£m
(700)
(750)
(800) I
I
168 —— 36
7
(250) ons 5
(900)
Net Funding EBITDAS (Cash) Investment Network Subsidy Change Spend Finance Costs Working capital - Working capital - Cash Efficiency Banking Network Cash ~—_Net Funding
bitwd Funding Payment client related non client related Improvements Framework (Other) clfwd
* The current budget on cash includes the following assumptions:
* Government funding will be drawn down on a quarterly basis in line with the proposed spending pattern.
* Banking Framework is assumed to require and additional £36m of cash in the network (future of cash paper is still in
development)
* Branch holdings are reduced down to £450m by end of year. 2017/18 average ytd is c.£550m.
= Cash centre balances are held at current levels (subject to seasonal fluctuations)
* Change spend at £255m is offset by government funding of £228m (Subsidy: £60m and Change: £168m).
+ _ EBITDAS of £50m will fund movements in working capital, finance costs and continuing pay down of
provisions. (62\
Ss
Post Office” Post Office Limited — Commercial in Confidence
e69eP0001IDNN
Balance Sheet
£m
Fixed Assets
Cash
Stock
Pension Surplus
Debtors (excl. Clients)
Creditors (excl. Clients)
Client Debtors
Client Creditors
Provisions
Loan
Net Assets / (Liabilities)
Capital and Reserves
+ — Minimial movements in balance sheet anticipated excluding the impact of change spend. Capital element
2018/19 2017/18 Var
569.5 477.1 92.4
570.5 588.3 (17.7)
7.2 7.2 -
2.6 1.8 0.8
201.3 212.2 (10.9)
(246.7) (256.0) 9.4
147.4 147.4 -
(312.2) (307.4) (4.8)
(49.8) (63.6) 13.8
(568.0) (586.3) 18.3
321.8 220.6 101.2
321.8 220.6 101.2
only £160m offset by depreciation of c.£67m.
Post Office”
Post Office Limited — Commercial in Confidence
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©)
UKGI00043693
e69eP0001IDNN
Appendices — P&L by Product
@
Mails
Retail
Other Retail & Lottery
Payment Services & ATM
Government Services
Identity Services
Mortgages
Cards and Lending
Savings
Travel Money & Fres
Moneygram
Banking Services
Telecoms.
@)
Post Office®
Post Office Limited ~ Commercial in Confidence
UKG100043693
€69EP0001ID4N
Mails is expecting to deliver income and EBITDAS growth in 2018/19
Gross Income
Direct Costs
Mail Trading Income
Parcelforce
Special Delivery
International Priority & Standard
Stamps (1st & 2nd)
Labels (11st and 2nd Class)
RM Signed For
Home Shopping Returns
Other Trading
Mail Fixed Income
Fixed Fee
Mailwork
Net Income
Variable Agents Pay
Staff Costs
Non-Staff Costs
Consultancy & Advisory Services
Brand & Marketing
TT Infrastructure & IT Services
Other Operating Costs
Expenditure
EBITDAS
2018 / 19 Budget Summary - Mails
2017/18
FYF
332.1
19.6
48.8
35.1
23.0
90.7
22.8
17.0
15.3
49.8
10.0
332.1
176.2
0.6
o1
0.2
0.1
2.5
179.8
152.3
2018/19
FY Budget
341.2
21.2
49.8
37.2
22.1
94.2
24.0
21.2
15.7
45.8
10.0
341.2
183.7
0.8
O.1
0.2
0.2
2.0
187.0
154.2
2018/19
I Adjusted
FY Budget Budget adj
vsi7/is Wek I for S2 wis I SCORN
9.1 5.4 335.8 1%
1.6 0.4 20.8 6%
1.0 0.9 48.9 0%
24 0.7 36.5 4%
(1.0) 0.4 21.6 -6%
34 1.8 92.4 2%
12 0.5 23.5 3%
43 0.4 20.8 23%
0.4 0.3 15.4 0%
(4.0) 0.0 45.8 -8%
(0.0) 0.0 10.0 0%
9.1 5.4 335.8 1%
75 3.3 180.4 -2%
0.2 0.0 0.8 -37%
(0.0) 0.0 0.1 45%
(0.0) 0.0 0.2 19%
0.1 0.0 0.2 -199%
(0.5) 0.0 2.0 20%
7.2 3.3 183.7 -2%
1.8 zai 152.0 0%
“Includes total staff costs for Mails, Retail and Lottery
Mails EBITDAS is up £4.8m YOY to £157.2m
Despite contractual reductions of £4m,
Mails net income is +£12m YoY due
mainly to RPI (£7.7m), now confirmed at
net 3% (RPI-1%) and benefit of 53%
week (£5.4m).
Excluding these benefits, underlying
income and EBITDAS are flat, reflecting
the change in mix (fewer letters, more
parcels)
Variable Agents Pay is +£7.5m on 17/18,
of which £3.3m relates to the 53 week.
The balance reflects the move from fixed
to variable costs resulting from DMB
closures and change in agent contracts.
Staff costs are +£0.2m on 17/18 due to
personnel transferring from projects
back to BAU.
IT costs reflect inclusion of £0.1m for
ongoing maintenance of Drop & Go.
Favourable £0.5m variance in Other
Operating Costs is due to a one-off loss
(fraud) on Parcelforce in 17/18.
Post Office”
Post Office Limited — Commercial in Confidence
@)
UKG100043693
€69EP0001ID4N
Retail
____2018 / 19 Budget Summary-Retal___________ Retail EBITDAS is down £0.3m YOY to
£2.9m
£m 2017/18 I 2018/19 2018/19 —
FY Budget Budget adj
FYF FY Budget Week S3 Budget vs
meus for S2wks I “37/18 + Budget income reflects the new WHS
retail contract whereby stock is owned
Gross:Income 79 a4 @5) 0:2: a2 AT by WHS and commission is earned on
Direct Costs 42 4a (3.4) 0.0 aa sales revenue. Additionally there is a
direct contract with Royal Mint for the
WHS Retail Sales - 28 = O41 27 sales of coins within DMB's
Royal Mint - 0.4 - 0.0 0.4 .
ea ee 37 3.2 (0.5) O14 Ba “17% ° Closure of OMB's results in -
-£0.7m net income decline however is
Non-Staff Costs partially offset by WHS contract which
Consultancy & Advisory Services 0.1 0.1 0.0 0.0 0.1 54% provides a +£0.3m uplift.
Legal Costs 0.1 0.1 - 0.0 0.1 0% ‘
Other Operating Costs 0.3 O14 (0.2) 0.0 0.1 76% 8 Direct costs (cost of sales) reduce by
Expenditure o5 0.3 0.2 0.0 0.3 41% £1.3m due to the change in the Retail
contract. £1.1m direct costs relate to
EBEDAS) ea as oe) a ae Etsae) purchase of Royal Mint coins.
*Staff costs included in Mails P+L
Retail Income (excl. Gift Cards)
Period 1 Period2 Period Petiod 4 Period Period G Perlod 7 Period 8 Period 9 Period 10 Period 11 Period 12
RFI —O— Actuals 16/17 eo Budgr 18/19
eWeek ss
. YoY non staff costs decrease by
£0.2m due to procurement costs no
longer required going forward.
Post Office”
Post Office Limited — Commercial in Confidence
(56) —
UKGI00043693
€69EP0001ID4N
Other Retail & Lottery
UKGI00043693
2018 / 19 Budget Summary - Other Retail & Lottery
Other Retail & Lottery EBITDAS is down £0.5m YOY to £10.7m
Other Retail
£m 2017/18 I 2018/19 2018/19 "
Adjuste: i '
Fre ry Budget I OS%et — weekss I Budget ad Cadget vs Gift Vouchers +£0.7m - Continues to grow +10% YoY above overall
ail market growth (5% in 2016).*
Gross Income 36.3 34.8 (2.5) 0.6 34.1 6% .
Bese * . = * There is a predicted slowing of growth compared to 17/18 in Gift cards
certs due to Amazon's departure.
Other Retail .
Photo-Me 0.6 0.8 (0.2) 0.0 04 “ye + Photo-booth revenue is also reduced due to the closure of DMB's and the
Gift Vouchers 59 66 07 on 6.4 10% . Be
Lottery move onto a lower tier of commission payments
Variable income 28.5 26.7 (1.8) 0.5 26.2 8%
Fixed fee 14 ei (0.3) 0.0 43. o% Lottery
Net Income 36.3 I 348 I (1.5) 0.6 344 -6%
peeenn “xs sy (ay ox ai im Variable -£1.8m - 8% decline on Camelot sales based on prior two year
Non-Staff Costs - average trend.
Consuancy & Advisory Services 0.0 0.0 0.0 0.0 7
France 8 Losses oz I o1 I ca) 00 I ot s7m * Fixed Fee — No change for 2018/19.
Legal Costs : oa 0.1 0.0 ot 5 i i i
oa arti Casts oe ta na i na cei The fixed fee for Camelot is assumed the same but is subject to a new
Expenditure 25.4, 244 1.0 0.4 23.7 6% mechanism based on our success in audits of prize payout tickets.
— aamalnwosil Res oanck aes -7% “Source: UK Gift Card & Voucher Association 2016 Summary H2
“Staff costs included in Mails Pet
Lottery values Gift Cards Income
70,000,000 2,500
60,000,000 2,000,
‘50,000,000
40,000,000 ii
30,000,000 34000
20,000,000
500
10,000,000
Perod1 ered? Pred? Pereds Periods Perods Perod? Perods Pred’ Perodi0 Peed 11 Perod 2 Period 1 Period 2 Period 3 Period 4 Period S Period 6 Period 7 Period 8 Period 9 Period 10Period 23 Period 12
EEE 1718 Actuals §=——-1617 Actuals ——1819 Budget men FY17/18 —O— Actuals 16/17 —@-— Budget 18/19 Wook 53
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Post Office® Post Office Limited — Commercial in Confidence Bee
€69EP0001ID4N
Payment Services & ATMs
£m
Payment Services
ATM
Gross Income
Direct Costs
Payment Services
AT™
Net Income
Variable Agents Pay
Staff Costs
Non-Staff Costs
Expenditure
" EBITDAS
2018 / 19 Budget Summary
2017/18
FYF
26.3
317
58.0
0.0
26.3
3157
58.0
25.9
0.9
13.5
40.4
17.7
2018/19 2018/19
26.8 0.5 0.5 26.3
31.2 -0.5 0.6 30.6
58.0 0.0 ea 56.9
0.0 0.0 0.0 0.0
26.8 0.5 0.5 26.3
31.2 -0.5 0.6 30.6
58.0 0.0 ae 56.9
25.4 0.5 0.2 25.2
12 -0.3 0.0 1.2
15.1 “1.6 0.0 15.1
417 (1.4) 0.2 415
16.3 (1.4) 0.9 15.4
Adjusted
Budget vs
17/18
0%
-3%
-2%
0%
0%
-3%
-2%
2%
-28%
-12%
-3%
-13%
Payment Services EBITDAS is
down £1.4m YOY to £16.3m
HNGT lite benefits £0.3m & new
opportunities of £0.5m are
offsetting underlying declines in
the payments market, direct clients
at (8)% and resellers at (6)%.
* POCa accounts decline impacts
ATM performance by 3.5m
withdrawals, this is partially offset
by planned improved availability to
96%.
+ Staff costs increasing with
investment of 4 new roles, 2 x bill
payments, 1 x non cash & 1 x
ATMs.
+ Non-staff costs increases from
card processing costs led by UK
cash converting to card at a rapid
rate and effective rate increases.
Payment Services & ATMs EBITDAS not representative as Non-Staff Costs include companywide card processing costs; 2017/18 at £11.3m, 2018/19 at £12.9m.
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Post Office Limited — Commercial in Confidence
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=
UKG100043693
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UKG100043693
Government Services
2018 / 19 Budget Summary
£m 2017/18 I 2018/19 2018/19 Bias re aes reese
; I Adjusted ver i is
FYF FY Budget weinite: Week 53 Suse ad Budget vs down £3.0m YOY to £21.2m
17/18
POCa Accounts 39.3 29.7 -9.6 0.0 29.7 -32%
POCa Interest 2.9 9.4 6.5 0.0 9.4 227% + Net Income adverse by £(5.8)m
spacey aoe 18.5 768 On 14.4 “46% YOY, led passport volume decline
Motoring 6.4 6.2 -0.2 0.1 6.1 -5% due fo HMPO pricing
UKVI 14.0 13.0 -1.0 0.0 13.0 -8% :
Other Gov Products 0.7 0.7 0.0 0.0 0.7 -5% Bonu eee Ng poe ete
Gross Income 84.5 73.5 (10.9) 0.2 73.3 -13% income offsetting volume declines.
+ Agents pay reduction YOY in line
Direct Costs 22.5 17.3 5.1 0.0 17.3 23% with variable income.
POCa Accounts 17.3 12.6 (4.7) 0.0 12.6 -27% + Staff costs increasing with
POCa Interest 2.9 9.4 6.5 0.0 9.4 227% investment of 2 new roles, 1 x Snr
Passports 2b1 14.5 (6.6) 0.1 14.4 -32% Propositions Manager & 1x
Motoring 6.4 6.2 (0.2) 0.1 6.1 -5% Propositions Manager .
= el “7 10.8) 2 md pied + Non staff costs higher YOY led by
Other Gov Products 0.7 0.7 (0.0) 0.0 0.7 -5% POCa contract costs: additional
Net Income 62.0 56.2 (5.8) 0.2 56.0 10% postage £(4.0)m, JPM tech refresh
£(1.5)m, additional intermediary
Variable Agents Pay 28.9 21.6 73 0.1 215 26% Repke i
Staff Costs 0.5 0.7 -0.3 0.0 07 -59% roe Paral at ae
Non-Staff Costs 8.4 12.7 -4.3 0.0 12.7 -51% eeu
Expenditure 37.8 35.0 27. 0.1 34.9 8% jel ey Cale decine et aee costs
EBITDAS 24.2 21.2 (3.0) 0.1 21.1 -13%
©
Post Office” Post Office Limited — Commercial in Confidence
€69EP0001ID4N
Identity Services
2018 / 19 Budget Summary
Identity Services EBITDAS is up £2.5m
YOY to £6.9m
£m 2017/18 I 2018/19 2018/19
, I Adjusted
FY Budget Budget adj
FYF FY Budget Week 53 Budget vs .
wee vs 17/18 for S2wks I 7/18 + LOA2 has continued volume growth of
Gross Income 7.7 12.9 5.1 0.2 12.7 64% 31% planned for 18/19, coupled with
margin improvement of £1.45 per
Direct Costs 3.3 47 (1.4) 0.0 47 -42% transaction gained via contractual
volume achievements.
Net Income 44 8.1 3.7 0.1 8.0 82% + Further EBITDAS improvement from
LOA1 income lapping and planned
Variable Agents Pay 0.0 0.0 0.0 0.0 0.0 0% launch of verify in branch in P9.
a -1009
Seamenae pa md se 0.0 ae 100% + Implementation of team of 4; Sales
Non-Staff Costs 0.0 0.0 0.0 0.0 0.0 0% 7 7
Bement £7 7’ 0.0 17 -5667% Director, Head of Partnerships, Product
Pennies: 0:0 z a7) cs . i Manager & Business Analyst.
EBITDAS 4.4 6.4 2.0 0.1 6.3 43%
@
Post Office” Post Office Limited — Commercial in Confidence
UKG100043693
€69EP0001ID4N
UKG100043693
e
Mortgages: Yoy impacted by Project Russet
Mortgages
18/19Bud 17/185+7F Var —-17/18.9+3F_ Var S+7F 4. Proj
rs is ject Russet
Gross income 18 24 (0.3) 2.3 0.2
Costof Sales 0.0 0.0 irr 0.0 0.0 * Impact of removal of branch advised
FRES profit share 0.0 00 0.0 0.0 0.0 channel estimated to be £0.3m
Net income including FRES 18 24273023) 2.3 0.2 + Investment in residual distribution
capability - CRA contact centre and FS
Direct Costs Capability Manager team
Agent's Pay (0.0) (0.1) 0.1 (0.1) 0.0
Staff Costs (0.1) (0.1) 0.0 (0.1) 0.0 2. Broker channel expansion — incremental
Staff & Agent Related Costs (0.0) (0.0) (0.0) (0.0) 0.0 opportunity
Vehicles (0.1) (0.1) (0.0) (0.1) 0.0 ‘
Brand & Marketing 0.0 0.0 0.0 0.0 0.0 5 Broker expansion agreement about to be
Other Non-Staff Direct Costs: (0.0) 0.0)" 0.0) (0.0) 0.0 signed with Bol
+ Expected 2018/19 volume of £0.5-0.8bn
Indirect Costs resulting in £0.5-0.8m of incremental
Staff Costs (0.0) (0.0) 0.0 (0.0) 0.0 income at 9bps
Non-Staff Indirect Costs: (0.1) (0.1)" (0.0) (0.1)” 0.0
Project Costs (0.3) 0.2)" (0.1) (0.3) (0.1)
FS&T Contribution 12 1.5" (0.3) 1.6 0.4
- YoY gross income waterfall
15
1.0
0.5
0.0
17/18 S+7F Project Russet 18/198
@)
Post Office® Post Office Limited — Commercial in Confidence
€69€70001ID4N
Cards & Lending: Personal Loans growing, but credit cards not
performing
18/19Bud 17/18 5+7F Var 17/189+3F Var v S+7F +? a Fy
Garinesns ao) ier On Fifa 02. 1: Significant growth in personal loan
Cost of Sales 0.0 0.0 0.0 0.0 0.0 volumes
FRES profit share 0.0 0.0 0.0 0.0 0.0 a i i i
Net income including FRES 19 1.7 02 19 0.2 improved Hekappette:by:Bol Which
has led to increased volumes
ss + Enhancement to the customer
Agent's Pay (0.1) (0.1) (0.0) (0.1) 0.0 . msludina find ilable t
Staff Costs (0.1) (0.1) 0.0 (0.1) 0.0 journey including funds available to
Staff & Agent Related Costs (0.0) (0.0) (0.0) (0.0) 0.0 customer next day
Vehicles 0.0 0.0 0.0 0.0 0.0 . A :
Brand & Marketing 0.0 0.0 0.0 0.0 0.0 + Loans income projected to increase
Other Non-Staff Direct Costs: (0.0) (0.0)” (0.0) (0.0) 0.0 from 17/18 of £0.5m to 18/19
. budget of £0.8m
Indirect Costs
Staff Costs (0.0) (0.0) 0.0 (0.0) 0.0 7 ‘
Non-Staff Indirect Costs: (0.1) (0.1)" (0.0) (0.1)” 0.0 2. Poor performance in credit cards
Project Costs (0.3) (0.2)" (0.1) (0.3) (0.1) + Bol risk appetite continues to be
FS&T Contribution 14 a37 0.4 1.4 0.4 limited
25 + Poor profitability resulting in the
YoY gross income waterfall
7 ———ewn
15
likely loss of the profit share for the
foreseeable future
1.0 ;
0.5
0.0
17/18 5+7F Loans Initiatives Other Var 18/19B .
()
Post Office” Post Office Limited — Commercial in Confidence
UKG100043693
€69€70001ID4N
Savings
Savings
18/19Bud 17/18 5+7F Var 17/18 9+3F Var v S+7F Fy
GSSRNCSRS ae 472 (82) aaa a Strong performance in 17/18 under
Cost of Sales 0.0 00 = ©=—0.0 0.0 0.0 Value Share
FRES profit share 0.0 0.0 0.0 0.0 0.0 * Cost of funds (NIM) reduced
Net income including FRES 39.0 47.2 (8.2) 48.9 17 significantly, supported by Bol
Direct Costs wholesale funding activity and
Agent's Pay (1.8) (2.2) 04 (2.2) 0.0 November's base rate increase
Staff Costs (1.2) (1.7) 0.4 (1.7) 0.0 .
Staff & Agent Related Costs (0.2) (0.1) (0.1) (0.1) 0.0 Balances expected to reach
Vehicles 0.0 0.0 0.0 0.0 0.0 £14.5bn target by year end
Brand & Marketing 0.0 0.0 0.0 0.0 0.0
Other Non-Staff Direct Costs: (0.8) (0.8)" 0.0 (0.8) 0.0 Expiry of Value Share
Indirect Costs + Agreement ends in March, with
Staff Costs (0.3) 05), 02 re i 0.0 broader negotiation aiming to
Non-Staff Indirect Costs: (0.0) 0.3" (0.3) ; 0.0 Pais
pajedcate (03) 02)" ©.) 03) 0.1) replace it with an overall value share
. + Current £39m budget income figure
ESéeiContibution Sa een ast a represents the likely outcome based
. on the current FSJVA model
60.0 YoY gross income waterfall
50.0
—17—_ — 06 —
400 rae
30.0
20.0
10.0
0.0
17/185+7F 53rdWeek GrowthTrends Value Share 18/198
®-
Post Office” Post Office Limited — Commercial in Confidence
UKG100043693
€69€70001ID4N
Travel Money & FRES: Financials
o
18/19 Bud 17/18S+7F = Var «17/18 943F Var S+7F
Gross income* 314 278 33 28.3 0.5
Cost of Sales 0.0 0.0 0.0 0.0 0.0
FRES profit share 34.4 35.0 (0.9) 345 (0.5)
Net income including FRES 65.2 628 24 628 0.0
Direct Costs
‘Agent's Pay (23.9) (23.6) (0.2) (23.6) 0.0
Staff Costs (2.4) (2.2) 0.4 (2.2) 0.0
Staff & Agent Related Costs (0.3) (0.1) (0.2) (0.2) (0.1)
Vehicles 0.0 0.0 0.0 0.0 0.0
Brand & Marketing 0.0 0.0 0.0 0.0 0.0
Other Non-Staff Direct Costs: (2.0) (2.0) (0.0) (22) (0.2)
Indirect Costs
Staff Costs (0.5) (0.7) 02 (0.7) 0.0
Non-Staff Indirect Costs: 0.0 0.3 (0.3) 0.3 0.0
Project Costs (0.3) (0.2) (0.1) (03) (0.1)
FS&qT Contribution 36.2 34.3" 19 33.9 (0.4)
* submitted 18/19 budget less distorting double count of Customer Hub income with POMS €1.5m
Strategy & Market
Economic uncertainty and rising inflation are putting pressure on consumers’
holiday finances. GDP is forecast to grow by 1.4% in 2018 but is slowing.
The Travel Market is expected to remain flat and Consumer confidence is at
a low ebb of -13 (post Brexit it was -12).
Consumers continue to be price conscious so online and TMC are expected
to grow whilst on demand sales will fall by 5.7% due to reduced footfall and
new AML thresholds
Income and cost
+ Travel Money increases 12% yoy, of which 5% is due to Customer Hub
+ Contribution is impacted by agents pay increases due to higher turnover
Income and costs
+ Increase of HMRC Fee from £115-£130 per Branch
Risks & Opportunities
+ Strengthening/Weakening of sterling
+ Brexit Negotiations
+ Delay in launching customer hub capabilities
* 1% growth/decline in travel market impacts £14M in branch turnover
Change Activity
+ Customer Hub, eKYC , Combined Journey on TMO (currency and
card)
Constituents of income
‘On Demand 13,619,161
Pre Order 521,834
Click and Collect 980,000
Home Delivery t)
TO 687,190
Euro on Demand 400,000
TMC New Cards 1,901,528
TMC Top Ups 1,681,250
Total Variable Fee I 19,790,963
Customer Hub 1,355,000
Fixed Fee 10,000,000
Total income 31,145,963
Post Office”
@
Post Office Limited ~ Commercial in Confidence
UKG100043693
€69EP0001ID4N
Travel Money & FRES: Volumes and transactions
This revenue table is representative of the following considerations:
On Demand sales/buys decline of ~5%
TMO + 9%
TMC +20%
Footfall decline and switch from notes to TMC
Increase in sales/buy transaction fee £1.99 from £1.92
Travel market growth of 1%
New AML eKYC ID&V requirements
Reduced impact of Easter ie early 2018/late 2019
ATV increase of 2%
Blended product margin of 5.16%
Revenue £k B
TMC 1,902 1,600 19%
TMC Top Ups 1,700 1,300 31% N
TMO 1,699 1,352 26%
Network 14,458 13,900 4%
Fixed Fee 10,000 10,000 0%
Customer Hub 1,380 0
Total Travel Money 31,139
Transaction Volumes vs. Values
_ ro have fallen,
no benefit to POL with the
ute, «I increase ATV
120,000,000
100,000,000 4 ——Turnover 2017-18
—Total Target
80,000,000
60,000,000 --
40,000,000 +
20,000,000
4 6 11 16 21 26 31 36041 46 SL
Post Office®
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MoneyGram: Strategy, market and budget
MoneyGram Strategy & Market
18/19Bud 17/185+7F Var —17/18.943F Vary 5S+7F Moneygram and Western Union remain the two largest operators of the cash
Gross income 25.5 28.6 (3.1) 26.6 (2.0) to cash remittance market however digital providers continue to penetrate and
ee iar a8 ee ea o Hs grow marketshare. New AML regulations that came into effect in 2017 and the
= 4 5 ; “ 5 ’ - continued uncertainty over Brexit and the strength of sterling is having an
Netincomelinchaing ERES! ae si aoe (20) adverse affect on both the ATV and number of transactions being conducted
Direct Costs
‘Agent's Pay (11.6) (11.5) 0.1) (11.5) 0.0 We are currently in discussions with MoneyGram on new agreement terms as
Staff Costs (0.8) (1.0) 0.2 (1.0) 0.0 our existing contract requires us to confirm the existing agreement extending
Staff & Agent Related Costs (0.1) (0.1) (0.1) 06 0.7 through to 2021. Alongside these discussions we have engaged an outside
Vehicles 0.0 00 0.0 0.0 0.0 consultant to help us better underside the full market picture and capabilities
Brand & Merketing 0.0 00 ©6000 0.0 0.0 prior to making our recommendations to the GE
Other Non-Staff Direct Costs: (0.5) (0.5)" (0.0) (0.5) 0.0
RSTO SEES 2018/19 Budget & YoY (Profit) ;
Staff Costs (0.2) (03) 0.4 (03) a0 I Weare predicting that the market will see a continued decline in the balance of
Non-Staff Indirect Costs: 0.4 02” (0.2) 02” 0.0 2017/18 impacting our forecasted revenues by ~£400k so our 18/19 budget is
Project Costs 0.0 0.0 0.0 0.0 0.0 based off a declining baseline
FS&T Contribution 124 15.5" (3.4) 14.2 (1.3) Return on revenue is expected to decline to just below 50%
Income and costs
Post Office and MoneyGram have a commitment to contribute up to £250k each (£500k) towards joint marketing activity. PO will be taking a more
active role in managing these marketing initiatives. (Awaiting Penny confirmation this is sitting in Marketing budget)
MoneyGram have given a short term commitment to fund an increase in remuneration for cash to account transactions to India. This funding
supports the postmasters as their remuneration will be the same as a cash to cash transaction. Following a review of these results we will be
looking to agree ongoing funding from MoneyGram and expand destinations.
Risks & Opportunities
Depending on the outcome of our strategic review, we would expect to improve our financial position through enhanced remuneration form
MoneyGram alternatively if we move to an RFP process we will have to increase our oversight of the relationship to ensure that MoneyGram do
not divert their resources to the RFP. The RFP process is also expected to impact 18/19 as we do not expect M/Gram to deliver digital capabilities
Opportunity We are working with MoneyGram to develop more direct marketing campaigns in 2018/19 to maximise penetration of existing
customer relationships. This focussed approach is also aimed at stabilising the current send and receive RPT. =
a?
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Banking Services: Income up £8.7m yoy; 10.1%
18/19 Bud 17/185+7F Var 17/18943F Varv5+7F — 1000 YoY gross income waterfall
Gross income 95.0 86.3 8.7 88.0 17 o4 —=20—=
Cost of Sales (1.3) (1.1) (0.2) (ty 0.0 —,— is
FRES profit share 0.0 0.0 © ©0.0 0.0 0.0 i
Net income including FRES 93.7 8530 85 87.0 17
Direct Costs
Agent's Pay (27.6) (29.3) 17 (29.3) 0.0
Staff Costs (0.5) (0.3) (0.2) (0.3) 0.0
Staff & Agent Related Costs (0.0) (0.0) (0.0) (0.4) (0.4)
Vehicles 0.0 (0.0) 0.0 (0.0) 0.0
Brand & Marketing 0.0 0.0 0.0 0.0 0.0
Other Non-Staff Direct Costs: (0.2) (0.0)" (0.2) (0.0) 0.0
Indirect Costs
Staff Costs (0.3) (0.7) 04 (0.7) 0.0
Non-Staff Indirect Costs: 0.2 0.7" (0.5) 07" 0.0
Project Costs (0.7) (0.5) (0.2) (0.5) 0.0
FS&T Contribution 64.6 552" 94 56.5 1.3 17/185+7F © WeekS3 GrowthTrends_ New Banks Inflation 18/198
Key elements
+ Versus the 5+7 forecast, gross income is up £8.7m (10.1%), which is £7.4m (8.5%) excluding the 53% week
+ £2m of the growth is due to tier increases in the framework fee due to volume increase which rises from £20.7m to £22.3.m, together with
£400k RPI increases on transaction rate cards from P10.
+ The remaining £5m is due to the ongoing volume increases resulting from Bank closure programmes and increased awareness. Which is an
increase of 7.5% on 2017/18 transactional income base of £63.6m
+ Agents Pay has reduced YoY by £1.6m to £27.6m versus the £29.3m in the 5+7 Forecast
+ Other costs, are broadly flat YoY aside from £150k audit costs.. £180k of marketing was charged to the Development Fund in 2017/18
Since the budget was submitted
* Transactional income has exceeded forecast — likely end of 17/18 will be c. 67m vs £63.6m in initial budget.
+ Trading in the period since the budget was submitted has been strong, and the expected outcome for 2017/18 is £1.7m better than the 5+7
forecast. The growth in Business Deposits (18.43% in 17/18) is significant, and as a result we believe that there is upside of up to £2m income
versus the current submission, most of which is offset by measures to improve the agents’ situation, and marketing spend. These are set out in
more detail in the following pages. JEN
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Banking Services
Total volumes (all transaction types) by period
14,000,000
12,000,000
49,000,000 Se ee SS iti
8,000,000
6,000,000
4,000,000
2,000,000
a 2 a 4 s 6 7 8 ° 10 an 2
2016/17 —2017/185+7F —2017/18 Actual —2018/19 Budget
YoY volume growth f 2 3 4 5 6 7 8 9 10 11 12 TOTAL
2017/18 5+7F 36% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36%
2017/18 Actual 36% 36% 36% 36% 36% 36% 40% 40% 40% 40% 40% 40% 38%
2018/19 Budget 16% 18% 21% I 22% 23% 23% 19% 19% 19% 19% 19% 48% 22%
Volumes
* The graph shows the yoy increase on volumes incorporated in the 2018/19 budget submitted in November.
+ The trend is in line with last year, rising from 16% YoY in Period 1 to 23% in period 6, after which the volume increases
from Lloyds and RBS seen in2017/18 annualise and growth settles to 19%.
+ The large growth in Period 12 is driven by the 53 week.
@
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Telecoms: FY 18/19 budget: HomePhone regulatory change and .
customer reaction to Galaxy proposition present the main
risk/opportunity
Strategy & Market
1ef29 Bud I 7/87 Var__ 17/38 5436 + HomePhone — Market move by BT £7pm price reduction from
Gross income ST 01.04.18. PO implementation of Free Broadband (Galaxy) leads to
Pek eras soe ah ia a increased revenue and cost, customer reaction to offer is unknown
Net aes including FRES 719) 679 39 690 + Broadband - Market will remain highly competitive in both ADSL and
* . . FTTC’, with competitor mass marketing of high speed FTTH" products
Direct Costs + Customer Strategy
Agent's Pay (1.6) (1.4) (0.2) (1.4) * Gross Ads - activity phased in H1
Staff Costs (09) (0.5) (0.4) (0.5) + Online and Telesales increased focus (69% of total)
Staff & Agent Related Costs (0.0) (0.0) (0.0) (0.0) + Branch network flat YoY
Vehicles 0.0) (0.0) 0.0 (0.0) + Churn — budgeted reduction from 0.44% to 0.33% per month
Brand & Marketing 0.0) 0.0 0.0 0.0 + Call centre retention (51% to 70%) through enhanced call
Other Non-Staff Direct Costs: (31.0) (29.3)" (1.8) (31.1) centre availability and agent capability
Indirect Costs
Staff Costs (0.4)I (05), 0.1 (0.5) 2018/19 Budget & YoY (Profit)
Non-Staff Indirect Costs: 04 05" (0.4) 05 + +7% YOY gross revenue
Project Costs (1.3) (0.3) (1.0) (0.3) + +6% YOY growth in net Income
FS&T Contribution 36.8 36.4" 0.3 35.7
Income and costs:
+ Increased costs in Homephone due to Project Galaxy decision (£7.39 cost now £10.31 blended), partially offset with lower ADSL pricing (~£1pm)
Price increase planned May '18 (£6.1m in year DPC benefit)
Risks
+ £1.0m remaining risk, resulting from financial modelling (£2.4m) and Galaxy COS (£6.5m)
+ Project Galaxy assumptions highly sensitive to customer reaction, potential for positive or negative commercial impact
+ Mid year price rise subject to competitor pricing changes, PO rise will be reviewed at end Q1 when impact of Galaxy and Q1 trading is known
179 }
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Postal Orders: Income decline anticipated to continue at a similar
rate to 2017/18
Orde!
18/19Bud 17/18 S+7F Var 17/18. 9+3F Vary S+7F
Gross income 1230 aS ORE 44s 03 Income as % its a
Gostot Sales Oy "or 20100 —_—roftstucure ex) I vole ME comet) METEP cogs ek) Teale) [Contin
FRES profit share 0.0 0.0 0.0 0.0 0.0 as
Net income including FRES. 12.2 14.6 (2.4) 14.9 0.3 e505) ool 103% aa To) a) al a]
Direct Costs £5 - £9.99 (1.00) 248,758] 16.8% 29 (718) ) (4) (480)
‘Agent's Pay @9) 3) 04 (3) 0.0 :
sei oma, 00 00 oc 00 00 £10 - £99.99 (12.50%) 2,142,532] 12.5% 8,138 (6,181) (57) (38) 1,862]
Staff & Agent Related Costs 0.0 0.0 0.0" (0.1) (0.1) {£100 - £250 (£12.50) 180,317] 8.1% 2,254 (520) (5) (3) 1,726
Vehicles 0.0 0.0 0.0 0.0 0.0 [Breakage 2,814,206 12.5% 1,538 (75) (50)} 1,413)
Brand & Marketing 0.0 0.0 0.0 0.0 0.0
Other Non-Staff Direct Costs: 0.0 0.0" 0.0 0.0 0.0 5,628,412} 12,300 (8119) (150) (100) 3,934
Indirect Costs
staff Costs @1) 2), (0.2) 0.0 Profit structure
Non stoffinaieet Costs ed -s E =I Re = The table above shows a graduated structure for fees depending on the
sian On io) 8S transaction size. For total transaction values in 2018/19 of £186.7m Post Office
FS&T Contribution 94 41.4" (1.9) 11.3 02 will take £10.8m fees (5.8%) and take the benefit of the 12.5% of Postal Orders
Postal Order Volumes not cashed (£1.5m).
bscpei Agents are paid a flat fee per transaction (preparation and encashment), which
Pn means that for transaction values less than £10 Post Office loses money.
2 I 2a ae Pa ose Overall, Post Office contribution is £3.9m after agents pay of £8.1m and other
100,000 costs of £0.2m. This equates to 70p on an average transaction of £33.18
——2016/17, —2017/18 5+7F 2017/18 Actual ~ — 2018/19 Budget income and costs .
Costs are flat yoy. The £2.2m yoy income decline is driven by:
160 02 P ‘i rd i
a —i2. ees An upside of £0.2m from the 53 week in 2018/19
120 26 + £0.2m income from the 2017/18 instore advertising spend
10.0 YoY income waterfall + Anunderlying volume decline of 18% decline in volumes (compared to 20%
ea, in 17/18 £(2.7)m
. 14.5 a5 , (2.7)
ov Risks
20 + Mod has indicated that it will stop paper Postal Orders in prisons due to high
00 7. admin costs, but have asked PO for a solution. Timing for the withdrawal
17/18 5+7F Week 53 Marketing Growth Trends «18/198 expected is to be end 2018/19 at the earliest.
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POST OFFICE LIMITED PAGE 1 OF 4
BOARD DECISION PAPER
Quarterly Funding Request I
Author: Cem Oztoprak Sponsor: Alisdair Cameron Meeting date: 27 March 2018 I
Executive Summary
Context
The Post Office is undertaking a complex transformation programme, designed to
modernise both its retail network and IT infrastructure whilst optimising the cost base
and creating a platform for customer-led growth. The strategic goal is to create a
commercially sustainable business within the next 3 years.
£210m of investment funding is available from Government, if needed, across 2018-19
and 2019-20. We have agreed to submit a quarterly report to Government on our
progress which will support a drawdown of funding. The first full quarterly report will
come to the July Board for approval with submission to UKGI following the Board
approval. The purpose of this paper is to request funding for the first quarter of the new
plan
Questions addressed in this report
. What is the 2018-19 change plan?
. What is the change plan details for Q1?
. What funding is requested for Q1?
. How does the future funding requirements look like?
PBWnNne
Conclusion
The forecasted investment in Q1 of the 2018-19 financial year is £65m, £35m of which
will be government funded.
Input Sought j
The Board is asked to approve a request of £35m of funding from government for Q1.
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The Report
1. As part of the latest 3-Year Plan, five strategic priorities have been identified to address
the strategic objectives with an investment ranging from £375m to £450m over the next
3 years.
¢ Simplify the retailer proposition (£170m to £210m)
¢ Build innovative, flexible and secure IT (£80m to £90m)
e Modernise our products and services (£90m to £110m)
e Digitise and optimise the business (£30m to £35m)
e Modernise our skills, culture, HR policies and processes (~£5m)
2. Over half of the investment will be funded from trading profits, with the remainder being
provided by £210m government investment fund over 2 years. Following this funding
period, Post Office will be on a run-rate to commercial sustainability.
What is the 2018-19 change plan?
3. 2018-19 is the first year of 3-Year Plan. The budgeted change spend for this year is
£255m and the expectation by strategic priority is as following:
Simplify the retailer proposition £55m to £65m
Build innovative, flexible and secure IT £80m to £90m
Modernise our products and services £70m to £80m
Digitise and optimise the business £15m to £20m
Modernise our skills, culture, HR policies and processes £4m to £6m
Regulatory & Group Litigation Costs £11m to £14m
“TOTAL £235m to £275m *
*The details of the change plan is provided in the budget update paper.
4. The spend profile for 2018-19 is expected to be as following. Within that spend is c. £30m
of change activity deferred from 2017-18 which we will fund from the business and not
from the new investment funding. In addition, we will self-fund any investment in Project
Panther, which is not in the budget.
30 le 4
60
40 New Projects
Carry Forward
20
a2 a3 aa
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What is the change plan for Q1?
5. Qi Spend is expected to be ca. £65m, including the carry forward from 2017-18 and will
be mainly consist of deliveries of the strategic projects which are already in execution
phase or being designed.
Qi Approval
Investment Status ]
Carry Forward projects from Q4 £30.0m
Simplify the retailer proposition £9.9m ;
- Further Franchising DMBs £4.7m v
- Network Expansion £4,.3m v
- Agents / Postmasters Portal £0.6m v
- Other smaller projects £0.3m
Build innovative, flexible and secure IT £18.2m
- Branch Printer Replacement £1.8m v
- CDP re-procurement £1.1m v
- EUC Branch Deployment £2.9m a
- HNGT Lite £1.5m
- Project Everest - Cloud enablement £3.3m ¥
- Project Nelson £1.5m
- Risk and Resilience £1,9m v
- Software Asset Management £0.3m v
- Full Think Client Deployment (Solar Full) £0.8m v
- Other End-of-life replacements £1.2m v
- Other Smaller Projects £1.9m
Modernise our products and services £15.5m
- POMS Investments £2.3m v
- Banking Framework - Future of Cash incl. Vehicles £0.6m
- Project Galaxy £2.4m v
- Mails Projects £2.1m
- Digital Check & Send £1.2m v
- Property £1.5m
- Falcon - Travel Hub £1.5m v
- Other smaller projects £3.9m
Digitise and optimise the business £2.4m
- Project Arrow £1.5m v
- Success Factors £0.6m v
~ Other smaller projects £0.3m
Modernise our skills, culture, HR policies and processes £0.9m
- Back office Transformation £0.9m Vv
Regulatory & Group Litigation £1.0m
- GDPR £1.0m v
Estimated to be delivered in Q2 (13.0)
TOTAL £65.0m
~ Vv Approval at Gate 2 or beyond, development in progress
v Approval at Gate 1, designing the project
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What funding is requested for Q1?
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6. To fund expected £65m change spend in Q1, £35m funding is requested.
How does the future funding requirements look like?
7. Based on the current spend profile, we expect to have the following funding requirements
Spend Funding I Cumulative Funding
Qi I £65m (incl. 30m carry forward) I £35m £35m
Q2 I £65m to £75m £55m £90m
Q3 I £50m to £60m £50m £140m
Q4 I £60m to £70m £28m £168m
8. The above figures are indicative only and subject to change based on project delivery
performance. At the end of each quarter, we will provide delivery update and revise the
future outlook accordingly.
apt
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BOARD DISCUSSION PAPER I
Cash Efficiency
Author: Mark Dixon, Russell Hancock, Mark Ellis Sponsor: AlCameron Meeting date: 27 March 2018
Executive Summary
Context ]
Many of our customers want to transact in cash including the unbanked, people who
are resistant to technology, people who prioritise privacy and security etc. Our cash
enables our agents to support customer preferences and is, through Banking
Framework, a product in itself for small business.
We operate at scale, managing around £1.5b of cash in a typical day and moving
around £60b over the course of a year. The rules we operate under, set by BEIS and I
the Bank of England, are unique. An explanation is set out in the Appendix. .
At the last Strategy Awayday, we agreed that we would improve the efficiency with
which we use cash, creating future flexibility and improving our facility headroom to
be greater than our security headroom.
Putting cash to use with agents creates the risk that they will steal or lose it, creating
losses. Minimising cash availability reduces losses and it was agreed with the Board in
January that we would provide a combined update.
The purpose of this paper is to set out progress and next steps.
Questions addressed in this report
1. What progress has been made in improving flexibility?
2. What else can be done?
3. What is happening with agent losses?
Conclusions
We reduced cash in use by £180m by end January, reducing to £127m in February due
to the temporary impact of installing new High Speed Notes Counters. £24m extra was
borrowed from the Bank of England, giving a total balance sheet reduction of £151m.
This was partly offset because, as planned, we spent more on change in the period than
we received in funding. Borrowing from BEIS fell by £110m.
This improvement has been made in spite of growing Banking Framework activity and
is sustainable. We will always see seasonal impact, with an earlier Easter bringing I
forward higher branch cash in March compared to last year.
Facility headroom under the BEIS facility increased to £299m and now exceeds security
headroom. We believe that a further £40m improvement should be possible without J
significant investment.
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Security headroom reduced to £223m due to the net change spend. As forecast, using
less cash reduces the borrowing and the security without benefitting headroom.
However, with higher facility headroom we can monetise security headroom if we need
to. yY
To improve security headroom, we are about to trial using smaller genomination notes _
in branches and are in discussions with the Bank of England about an amendment to
increase off-balance sheet funding. We are not pursuing any changes to the rules
governing security headroom as we do not believe we will make progress.
bo
Reducing cash in branches can also reduce fraud. As the Board is aware, due to the
impact of the Postmaster Litigation, we are currently restricted as to the legal action,
including County Court proceedings, we are able to bring against Postmasters with
unexplained branch losses.
This is likely to remain the case for at least another year and is well known across the
network. To combat higher levels of loss we have reduced excess cash in individual
branches from £90m to £27m, improved conformance with cash declarations, improved
the speed and accuracy of fraud analysis and significantly increased the number of
audits. We now find a problem in 81% of directed audits with no significant issues
identified in random audits.
In spite of this, losses have risen and the inherent risk will continue to rise. We are
assessing whether we need to further increase resources.
We will focus on managing future impacts of the Banking Framework (the future of cash
work will be brought to Board in May) and improving our MI on the back of the POLSAP
replacement. A longer-term Phase will likely be created to introduce better technology,
possibly including the internet of things and/or smarter counter safes transforming our
knowledge of where cash is and reducing losses. od
Our long term goal remains -c! ing for cash deli and inventory to align our
interests with those of agents. However, this is a major change and would only be
introduced as part of a package of measures. This will form part of the Retail Strategy.
Input Sought
The Board is asked to note the progress made and comment on the next steps.
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The Report
What progress has been made in improving flexibility?
1. We have c. £151m less cash on our balance sheet. We believe there is limited 1
seasonal impact in this comparison:
Cash position, £m Feb 2018 March 2017 Variance ]
Sterling 498 551 5S
FX 57 85 28 I)
Total Branch Cash 555 636 (a) I
Inward REMs 48 83 “35
Outward REMs/Other 91 74 (17)
Total for Processing 139 157 18
Other, cheques, cards 68 120 52
Total Cash in Use 762 913 151 }
2. January's cash in use was even lower at £708m: the rise in February is primarily
due to £42m of extra cash in the machine processing rooms as we switch to the 1
ee DSUEHION Speed Note Counters.
3. This reduction reflects progress in a number of the planned areas. We worked with
3,000 branches to recover cash after Christmas. Branch Sterling has fallen by c.
£53m and as we will set out later in the paper, we believe this has been
successfully focused on branches with excess cash (£60m) and has not risked
trading through a general rationing of cash. We changed the way we provide Euros
and US Dollars to send the amounts we thought branches needed rather than the
amounts branches chose to order. FX holdings have fallen by £28m with at least
£20m due to this initiative.
4. The next significant area of focus was cash being processed back into bond.
Deploying overtime and 9 extra FTE in cash centres, inward rems are now £48m
versus £83m last year and a peak of £160m in Q1 as the Banking Framework !
volumes increased.
5. We have spent £224m on capital and change while receiving £160m from trading
and Government support. As a result our net funding from client and other
creditors has fallen by £75m. We have borrowed more from the Bank of England,
enabling us to reduce borrowing from BEIS by £110m: I
Borrowing position, £m Feb 2018 March 2017 Variance
Cash at bank : 1 @ .
BEIS Revolving Credit Facility (RCF) (451) (561) 110
Off balance sheet BoE Funding (NRF) (270) (246) (24) ]
Other (41)) (107) 66
Total (762) (913) 151
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6. Our facility headroom on the RCF is measured against an effective limit of £750m:
the facility limit of £950m less the Board’s £200m internal cap. Our headroom has
increased by £110m to £299m.
7. Our security headroom is relatively unaffected by the improvement because
reductions in cash in use reduce both the limit and the balance. However, it is
affected by the drop in the net funding provided by other sources as follows:
Security Headroom, £m Net Security Usage (RCF) Headroom
March 2017 894 (561) 333
Reduction in branch cash (40) I 40> -
Other “ (80) (30) (110)
February 2018 WA 674 (451) 223
8. We agreed with the Board last summer that our immediate task was to ensure that
Facility Headroom increased above Security Headroom, creating flexibility. That
has been achieved.
What else can be done? —, Joo
9. Overall, we estimate that a further( £40m of cash can be removed by targeting
excess cash in individual branches (this will never be nil), analysing whether it
would be cost effective to bring back c. £10m of surplus foreign currency in less
used currencies held in small amounts across the network and continuing to
optimise the end to end process.
10.We identified four other potential opportunities last Summer. Firstly, reducing
overall borrowing by creating a £50m third party facility: this is with HMT for
approval. Secondly, creating additional capacity in the NRF: we have dialogue with
the Bank and trials which in combination could benefit security headroom by c.
£60m, partly by using lower denomination notes in branches.
11.Thirdly, we may be able to reduce our buffer if we forecast better. We are
forecasting more often and working with KPMG to understand what else we can do
in the current state of our systems. However, this has not yet led to a systematic
improvement. Once we have replaced POLSAP, we expect to work on re-basing
both our financial and cashflow forecasts on trends in the underlying £60b of
transactions, for which information is not easily available today.
2.Finally, we discussed the potential to change the security headroom rules with HMT
‘I but believe they will not change as it could impact the way the loan is
u — characterised on their balance sheet. We have stopped this workstream.
13.As we revert with the Future of Cash work, the banking framework may lead to
further phases being required. In the long term, we would like alignment with
agents on their use of cash by sharing the drivers of our cost base and charging for
y cash delivery and inventory.
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14.We have intentionally not made any progress in this area: we do not have
sufficient, reliable data to support any charge for inventory, which could be the
greatest driver of agent behaviour; and secondly, we can’t assess this in isolation
of the broader agent remuneration and retail strategy, due to the Board in June.
Whether we charge for services, offer different levels of service and how we
maintain people interested in taking and retaining Post Offices is complex and
finely balanced. Nonetheless, this would remain our preference.
What is happening with agent losses?
15.In the 11 months to end February, we saw an increase in debt provisioning net of
c. £4.3m - annualised c. £5m. This represented gross losses of £7.1m and
recoveries or £2.8m of which the bulk happen within a few days of the loss being
identified. This compares to net losses of c. £2.9m in 2016-17.
16.The pattern of rising network losses was discussed with the Board earlier in the
year. It is some years since we have felt able to routinely prosecute agents for
fraudulent activity and we are not now pursuing county court actions. This may
contribute to an increase in incidents: in the first quarter of the year we saw three
~ material losses of more than E300k each. We set out plans to improve
conformance with and simplify the cash declaration process, giving us better data,
to improve fraud analytics and to increase the number of audits.
17.We are working hard to combat the trend:
« ,Cash declaration conformance has increased steadily over the last year from 85% _
Pf January 2017 to 91% in February 2018 with a continuing upward trend. This is
the result of thousands of phone calls.
¢ The project to simplify declarations is underway for delivery in July. It is taking a
long time because making changes to Horizon code is slow.
« We have reduced estimated excess cash at branches from £90m (£126m after
Christmas) to c. £27m. This does not represent a static population of branches.
e We have worked with a third party to improve the accuracy and speed of
identifying fraud. We have completed 594 risk audits YTD versus 425 for the whole
of last year. When the team request an audit there is a loss and /or excess cash to
return 81% of the time, 75% have some sort of cash loss. 97 random counts have
7 pao carried out with 40 showing small losses totalling £18k, an average loss of
~£450/) highest individual loss £2.3k.
143 postmasters have been suspended compared to 116 last year, with 101 j
branches remaining closed. The majority relate to audit issues. I & ows oH
So cep [og he]
18.The net impact is that the average loss has fallen from £24k in Q1 to£16k now but (,, 5
that is a rising trend from Q2 at £9k. We are not seeing the very large losses - our = -4
largest loss in Q4 is £130k
19.Within a future phase, technology options can be used to reduce theft, including
potentially using internet of things sensors on cash packets and new counter safes
pioneered by the Norwegian Post Office which reduce handling of and access to
cash. These are potentially game changing. The immediate systems priority
however is to manage the transfer of cash management from POLSAP to new
Transtrack software. We are working on improved data flows, analytics and
forecasting to flow from this core change.
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APPENDIX - HOW DOES CASH WORK IN POST OFFICE?
The purpose of this Appendix is to remind people of the way we manage cash, the
rules we operate under and the jargon we use. For consistency, we are using the data
at the March 2017 year-end throughout.
Cash under our control
On that date we had £1,444m! of physical cash under our control. We operate as a
member of the Bank of England’s Note Circulation Scheme (NCS) which supports us
operationally and with funding in exchange for us distributing cash throughout the
country.
Cash we manage for other people but do not own
Of that £1,444m, £532m was in Bank of England (BoE) vaults in our Birmingham and
London cash centres or in a Clydesdale Bank vault in our Glasgow. Once the cash is in
the vaults, it belongs to the bank and not to us - neither the cash nor any related
borrowing appears on our balance sheet.
There are very specific rules that govern the operation of the vaults from opening
hours (broadly 9-5), to security to processing requirements. Either bank can and does
send teams in without notice to audit us: to date we have always passed.
Our main risks are the security of the cash and ensuring that the amount of cash held
does not exceed our insurance limits for that site or across our business. Limits can be
stressed by the build-up of £50 notes. Oddly, people across the world will take £50
notes in their original wrapping but not once they have been used even if they remain
in perfect condition (A-FiT). A-FiT £50s come in via FRES and tend to build up until we
can persuade the BoE to take them back. To date, they have done that (to the tune of
c. £210m this year) and we have not had to refuse FRES.
Cash we use in our business
Cash is used in our business from the moment it leaves the vault until it is paid to a
customer and from the moment it is paid in to our till until it is back in the vault.
Cash is considered branch cash from the point at which it is barcoded (remm’‘d) into a
branch as the Supply Chain driver delivers it. It is remm‘d out when it is packaged for
return and the barcode swiped — it may then stay in the branch safe until Supply
Chain picks it up again.
Once it has been barcoded for return it becomes an Inward Rem. It will be picked up,
and returned to one of 15, local depots. It will then be put on larger lorries to be
“trunked” back to one of the cash centres. The cash is then counted by machine under
camera. We are currently replacing our old machines with High Speed Note Counters
that meet the BoE’s new rules for polymer notes. The cash is processed in alignment
Shown as £1,479m in June 2017 paper reflecting change in presentation of debit cards and
Clydesdale funding arrangements
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with BoE rules and goes back into the vault at which point the cash is owned by BoE 1
and disappears from our balance sheet and funding requirement.
Cash will also be doing the same journey in reverse (Outward Rems) and we maintain ]
other cash between vault and branch for a variety of reasons - local stocks of coin to
speed up delivery, Scottish notes etc.
The cash in use in our business at year-end was therefore £913m, broken down as
follows:
Cash position, £m March
2017 .
Sterling notes and coin 551
Foreign currency notes 85
Total Cash in Branches 636
Inward REMs 83
Outward REMs/Other 74
Total for Processing 157
Other distributed inventory, cheques, cards 120
Total Cash in Use 913
Funding
That £912m of cash was funded as follows:
RCF Clients NRF Total
561 106 246 913 .
The NRF
£246m was borrowed from the BoE under a complex arrangement within the NCS
known as the Note Recirculation Facility (NRF). The BoE wants us to distribute cash
around the country preferably using smaller denomination notes. Every note we
process over the course of a year (October to October) creates capacity and the
smaller the note, the more capacity it creates. Over the course of a year, the notes
we distribute earn us capacity of some £250m every day. j
We are allowed to sell that capacity to the BoE overnight. Effectively the cash sits in
our branches and would sit as borrowing on our balance sheet during the day. At end I
of day, an amount is formally transferred to the BoE and both the cash and the
borrowing are removed from our balance sheet.
We only have to stay within our capacity over the course of the year - on a given day
we can sell capacity to the BoE up to a limit of £350m, giving short-term flexibility. If
we over-use the facility across a year, we have to pay the BoE an interest charge on 5
the additional amount. We work hard not to do this in case we risk the relationship.
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GROUP EXECUTIVE PERFORMANCE UPDATE
Author: Owen Woodley Meeting date: 15" March 2018
Executive Summary
Context
This report provides an update to GE on the drivers of income and the current
performance of the products across FS&T together with a full year outlook.
Questions this paper addresses
1. How do we make money in FS&T?
What are our propositions for customers?
What contribution does each of our products make?
How are we performing?
Where do we expect to be at year end?
uUbhWNn
Conclusion
e The FS&T trading portfolio (including Banking Services) has performed well against
headwinds and is expected to land £0.6m off the full year budget contribution.
e« MoneyGram remains an area of concern given wider market conditions in advance
of Brexit. We are in detailed negotiations —- see separate paper.
e The growth in the Bol product set continues to be constrained by the current
contract. Again, we are in detailed negotiations.
e Work is progressing well on the launch of the Customer Hub and Project Galaxy is
now into implementation in Telco to address the BT price regulation.
¢ FS&T Performance to P11:
s Income (£m)
Patiod 11,V1D) Full Year
Actual 5+7Fest_ Var Out-turn 5+7Fest_ Budget Bud Var
IFS& incl PO Insurance I [318s 317.2 13 I I 3615 3615 372.2 (10.6) I
Banking Services 804 79.4 10 87.4 86.3 79.8 76
{Fs@q,PolandBankingServices I I 3989 3966 23 I I 4489 4478 4520 (3.1) I
FS&T Profit Contribution after Agents’ fees (£
Period 141 Full ¥ear
Actual 5+7F est Var Out-turn 547 Fest Budget Bud Var
IFS&q incl PO Insurance I [1349 137.4 (25) I I 1599 161.4 1671 ——(7.2)_—I
Banking services 52.8 52.3 0s 57.6 57.1 51.0 6.6
Central Marketing (10.4) (20.1) __(0.3) (22.3) __(12.1)__(12.3)_(1.0)
{Total FS&T, PolandBankingSevicesI I 177.3 179.7 (2.4) I I 205.1 207.5 ~~ 206.7 ~—(1.6)_—I
Input Sought
The GE is requested to review and note the report and approve it for Board submission.
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The Report
Balance Sheet Product Set ]
1. How we Make Money
e Mortgage income is based on the total completions value: 30bps for contact ]
centre/online and 9bps for brokers. Cards and Loans are based on transaction !
volumes and balances - 45bps of total written lend value and £21 for each card sale.
e In Savings, under the current value share, we receive a fixed payment of £43m.
There is also variable income based on a Net Interest Margin (NIM) target of 55bps
in March 2018, with £0.55m of income for each additional 1bp below this target.
2. Core Proposition for our Customers
Today we offer good value, straightforward retail banking products but we need to move
away from being price-led into differentiated propositions that build long-term customer
relationships. The first will be two new mortgage propositions launching in April.
3. Product P&L P11 YTD
BU Ye: Bee
Actual S+7Fest_ Var Out-turn S#7Fest Budget Bud Var
Mortgages 2720 28 213608)
Credit Cards and Lending 21 16 Os 2200737 (a)
Savings 37.0379 __(00)_ 5224724784
(B/s Products 2 r z 510552 -20_—I
is
‘Actual S#7Fest— Var Outturn S+7Fest Budget Bud Var
Mortgages 200 «14 200048 32h)
Credit Cards and Lending as 1208 16 1336 (20)
Savings 3S MB (03) 492 46 45032 )
Agent's Pay (22) (2)__(00) (24) (23)__(23)__ (0.0)
B/S Products [sa ~353 0s] [sos as.
4. Review of Performance
Savings performance has been very strong, supported by the partnership’s pricing
responses to the base rate increase. We expect NIM to be c.46bps, leading to a J
forecasted income level £4.4m above budget.
Mortgages are tracking ahead of last year but remain behind target in both apps and 1
completions. Price is the key driver which has restrained volumes but we are launching
two new propositions in April, backed by a major marketing campaign. Our unsecured
lending journeys are improving with higher accept rates (68% in cards/55% in loans).
S. Year-End Outlook
Contribution is expected to end the year in line with budget and £5.5m ahead of
forecast. We are not expecting to receive any profit share from credit cards (budget I
£0.9m) or personal loans, however this will be offset by the additional savings income.
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Transactional Product Set
1. How we Make Money
e Our foreign currency products deliver income on a transactional basis (£1.92 per
‘normal’ FX transaction, 0.4% of ‘click & collect’ turnover, £4.58 per new ‘travel
money card’ sale and 0.625% of all top-ups) plus an annual fixed payment of £10m.
* MoneyGram income is generated through three streams: the FX margin (c.34%),
customer fee (c.36%) and a fixed 65p per transaction. We get c£6.35 per Send and
£10.50 per Receive and there is also an additional £3m annual payment to POL.
e Postal Orders (“POs”) cost 50p for transactions 50p-£4.99, £1 for £5.00- £9.99 and
above that 12.5% capped at £12.50. We also recognise income from expired POs.
2. Core Proposition for our Customers
Post Office is the number one provider for in-branch foreign currency sales, with a
market share of 25% and online share of 17%. We also have the largest network of
money transfer branches in the UK and hold a c.13% share of cash money transfer
business. Postal Orders are in structural decline and subject to a wider strategic review.
3. Product P&L Pil YTD
eat
Budget
ais io
317 (88)
Travel Noney & FRES
MoneyGram
Postal Orders 16218)
ffransactional ProductsI 1098 (5.4)
Actual S#7 Fest Var Out-tum 5¢7Fest Budget Bud Var
Travel Money & FRES 48 501 (02) 67 sa SSS COD
MoneyGram me ous tA) Bs m2 7 (82)
Postal Orders B21 00 “24259 (1)
Agent's Pay (362) (355) __(07) (21) sa) 6578) (13)
[Transactional ProductsI [C46 23 20 I [572 oa 3 7.0)
4. Review of Performance
Travel Money & FRES revenue is £1m ahead of budget and £0.5m better than YTD
forecast, principally due to the performance of the TMC but also recently better volumes
in branch. However, AML limits are a risk to FRES profit (£E2k+ transactions down 40%).
MoneyGram is behind its original income budget by £(4.8)m and YTD forecast by
£(1.7)m. Key drivers are migrant levels and uncertainty around Brexit, the value of £
and FX margins and stricter AML regulations requiring ID on higher value transactions.
PO volumes are declining by c.20% YoY and are 13% lower than budget.
5. Year-End Outlook
We are expecting Travel Money to end c.5% behind target due to competitive pricing in
the online market but this has been offset by the good performance of the TMC. We are
reviewing our remittances strategy and are in commercial dialogue with MoneyGram.
Postal Orders contribution is expected to end the year in line with the 5+7 forecast.
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Telco
1. How we Make Money
e We offer consumer telephony products (HomePhone, Broadband ADSL and Fibre)
and telephony services (voice calls, premium install, virus protection etc). The
products offer 3 contract lengths (12/18/24 mths) ensuring that new promotional 1
offers can be rotated to balance ASA compliance with avoiding “always on” offers.
e Customer monthly Average Revenue per User ("ARPU”) and average tenures vary
by product and promotional price points. In HomePhone, the average ARPU is £24.46 ]
over 57 months and in Broadband it is £27.48 over 32 months. ARPU is a mix of
fixed contract income (c70%) and variable income from call packages etc.
2. Core Proposition for our Customers
Broadband (ADSL) & Fibre (FTTC): For Q1 18/19 we will be launching our most
competitive Standard Broadband price point at just £18pm through our key affiliate
partners (U-Switch, Moneysupermarket, Broadband Choices) and improving Fibre retail
prices from £32 to £31pm on our most popular tariffs. This increased aggression is
primarily supported through wholesale cost reductions negotiated with Talk Talk.
HomePhone: The base HomePhone offering will be reduced from £16.99 to £11.50 on
ist May in response to the OfCom’s market pricing intervention. We are also introducing
a £1.50 charge for paper billing for customers moving to the £11.50 tariff but we expect
POL to remain competitive vs BT with better value through free call features and rates.
3. Product P&L P11 YTD
“2 srull Year
Out-tum 5+7Fest Budget Bud Var
1521 149.6. 149426
149.6 149.4 2.6
Telecoms
Actual S#7 Fest Var Out-tun 5+7 Fest Budget Bud Var
Telecoms 35.1 35.3 (0.3) 38.0 31.2 5.7
Agent's Pay (43) (13) (00) f (1.4) (0.0),
[Telecoms Products I r [ 33
4. Review of Performance
Telecoms gross income is £1.8m better than forecast due to higher customer numbers
and greater ARPU. YTD contribution variance to forecast is (£0.3m) due to accounting J
treatment of contract set-up costs, partly offset by higher customer numbers and an
early price increase and lower cost of sales, particularly for HomePhone only customers.
5. Year-End Outlook
Telco gross income should outturn c£2.6m ahead of forecast due to higher customer ]
take up and ARPU. At the same time, amortisation costs have increased since the 5+7
forecast through a changed accounting treatment adding £1.5m to the cost base.
Overall, Telco contribution is expected to outturn (£1.1m) adverse to 5+7 forecast. J
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Post Office Insurance (“POI”)
1. How we Make Money
° Travel Insurance (“TI”): Revenue is through commission income. 84% of sales
are single trip policies with one-off revenue. The rest are Annual Multi-Trip (AMT)
policies which builds annuity income. AMT retention is c18%. There is an
underwriting profit share; returned as revenue or rate reduction.
° Life & Over 50s: Income is generated through commission, reflecting the lifetime
value of the sale to POI and is subject to clawback for policies cancelling within the
indemnified period (up to 48 months). An annuity income stream is received monthly
for all policies that continue beyond the indemnity period and a monthly income
stream of 2.5% of premiums is paid to POI as commission on these policies.
* Home, Car & Van: Revenue is generated through a combination of commission
income, add-on margins (e.g. Legal Expenses, Roadside Assistance etc), service
fees, instalment income and First Notification of Loss income. Policies generate an
annuity income stream from both new sales and renewals, plus a profit share.
2. Core Proposition for our Customers
POI propositions are simple to understand, easy to access and offer good customer
value while not being the cheapest in the market. Propositions for Travel and GI remain
mass market with limited differentiation although plans to refresh this are in
development. Protection products are evolving at pace, providing the platform to
successfully build a material share of the growing direct to consumer protection market.
3. Product P&L P11 YTD
‘Actual S#7Fest_ Var uttum se7Fest Budget EEE
Travel Insurance wo 57— (17) 64 170166 (1.1)
Life & Over 50s 73-70 87 80725
Hi 22214 09 (39)
(las aan —65)_I
Travel insurance
Life & Over 50s
Home, Car, Van & Other
PO Insurance costs
Products I
4. Review of Performance
Q4 protection campaign continues to build momentum. Marketing is delivering above
expectations driving response for over 50’s into all channels. We are seeing early signs
of success in respect of our 1 on 1 customer communication and digital marketing for
Life insurance. Month on month digital sales of protection are up by 323% (P10 to P11).
Renewal retention for car insurance continues to outperform plan by 2%. We continue
to track behind plan for Travel Insurance sales volume across multiple channels.
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5. Year-End Outlook ‘
POI forecast group EBITDA outturn is £20.2m, prior to a £0.3m risk from Project Russet.
As of P11 YTD EBITDA was £17.5m, The continued strong performance of Life Over 50's
DRTV, Life sales and Easy Life will be critical in hitting the year end number.
Customer Hub
1. Programme Plan Summary
The Customer Hub is targeting a first launch in May 2018. The initial MPV is focused on
the TMC and TI products which will be served through our own Travel App. The project
is in its product development sprint cycle, application build and API integration with
both FRES and POI. FRES now has dedicated development, test and production
environments and we are now working on a clear, POL-wide Hub operating model.
2. Achievements to Date
We have introduced Agile Ways of working to support rapid product and application
development - learnings which will need to be shared more widely in POL. The Post
Office Digital Innovation Centre has been launched and key people recruited. The
procurement of the OutSystems platform & development is ongoing. UI/UX prototyping
for TMC is now completed, and continuing for TI.
3. Launch Proposals
Following launch in May, all new TMC customers will be directed to the Customer Hub
where we will also be able to offer them TI and Gadget Insurance as add-ons. Sales
support kits and call centre briefings are being prepared.
4. Expected Take Up and Usage
Assumptions for the first MPV are based on an approach of co-existence with the current
FRES TMC App initially. This will be followed by a period of migration for existing TMC
customers to the Travel Hub (expected to complete by the end of Q4 2018/19). We also i
intend to migrate existing TI customers into the Hub at their renewal point and from
this base, we will cross-sell TI, TMC, Gadget Insurance and Identity products. Regular
usage is critical via personalisation, velocity of new services and some key capabilities:
« Active customer management based on data analytics, e.g. nudging.
¢ Additional functionality to increase self-serve (e.g. insurance add-ons, Mid-Term
Adjustments, Claims, Chat bot, TMO, onboarding TMC etc)
¢ Improved propositions (e.g. affinity arrangements such as HolidayExtras).
5. The Future
We are developing a process to include additional verticals in the future. This process i
will be discussed and approved in the Customer Hub Steerco and brought to GE for
information.
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Appendix - Brief Market Overview
Mortgages
Current market size c£1.4bn; POL’s total stock c£5.4bn; market share c0.38%.
Mortgage lending has been growing consistently over recent years, with accelerated
growth in 2016 compared to 2014 and 2015 but base rate rises would impact the market
over the coming period. The dominant players in the market are Lloyds Banking Group,
Nationwide, RBS, and Santander. Digital channels are most important when customers
are researching a product, but many customers still value face-to-face advice at the
application stage. The intermediary channel continues to grow in importance.
Savings
Current market size £1.45trn; POL’s book size c£14.5bn; market share c.1%
Savers have been disadvantaged by extremely low interest rates for a number of years
and as such customers have often been turning to interest-bearing current accounts
instead as a means of bolstering their savings income. The major retail banks together
with Nationwide and NS&I remain the largest providers of retail savings accounts.
Personal Loans
Unsecured loans market size c£38bn; POL written lending c£120m; market share 0.3%
The unsecured lending market grew by 40% between 2012 and 2016, reaching £260
billion by the end of the period, with estimates from Mintel showing a further 5% growth
for 2017, spurred on by low interest rates making repayment levels more affordable.
Credit Cards
Current market size 36m (vol); POL active accounts 406k (vol); market share 1.12%
Credit card lending has maintained growth levels of 5-10% over the last five years. Low
interest rates have driven hard competition with increasing balance transfer offers and
rewards. The number of credit cards in circulation has been roughly stable at 60 million
over the last five years. Barclaycard remains the largest provider with an estimated
market share of 16% followed by LBG at 15% and HSBC at 11%.
Travel Money
Market transaction value £9-12bn; POL transaction value £2.5bn; market share 25%
UK residents spent £43.4 billion abroad in 2016. However the Brexit vote led to an
immediate fall in the value of the pound which has yet to recover its pre-referendum
levels. This has significantly reduced consumer spending power abroad and as a result,
consumers are paying closer attention to exchange rates and are much more likely to
spend more time shopping around to find the best deal. Fintechs like Revolut are
performing well in the pre-paid multi-currency card arena.
Telco
Homephone only market c2m households and POL market share is 10%; Broadband
market is c25m households and POL market share is c1%
There are four major providers in the Telco market - BT, Sky, Virgin and TalkTalk. All
are focused on fibre broadband to support fully converged 3 or 4 play offers. Fibre offers
lower margin returns, but which these are offset by converged offers of TV and Mobile
by most of the big four. ADSL broadband (up to 17mb) is still in over 9m UK homes,
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and remains highly attractive to value seeking or smaller households. Over 50% of
customer switching is now happening online and through affiliate websites such as U-
Switch.
Travel Insurance
Market Gross written premium c£730m; POI’s GWP is c£50m; market share 6.8%
Steady market growth predicted with the current market size of £730m written premium
forecasted to grow to 920m over the next 5 years. This will lead to the continuation of
intensified price competition from a crowded market. Annual Multi Trip continues to be
c.40% of the overall TI market, but this is inflated by policies offered by Banks/Credit
cards. Market share of packaged accounts with travel insurance is on the decline with
customers expected to revert back into the direct travel insurance market.
Motor Insurance
Car insurance market GWP c£11.5bn; POI’s GWP is c£80m, market share 0.7%
Whole car market growth is estimated at c1%pa to 2020 with aggregator expected to
grow at the same rate. There is little to no impact from insuretech/fintech in motor
given high entry barriers and costs and business/product model highly commoditised.
The short term outlook for motor is favourable with a short and shallow drop in rates
expected as some providers move for growth.
Home Insurance
Market GWP c£5.7bn; POI’s GWP is c£98m; market share 1.7%
Insurable households currently total 20.1m and expected to fall by an average of 2%
p/a over the next 3 years (eBenchmarkers). This reflects changes in home ownership
especially for younger segments. Aggregator share is still expected to grow by 7% pts
between now. The home market is likely to be more challenging in the short term as
traditional insurers have not sufficiently adjusted their business models to reflect
increased competition from aggregator distribution.
Term Life
Total non-advised market 250k new policies pa, £70m APE; POI’s market share 2.5%
There remains a significant protection gap in the UK market - very difficult to scale but
believed to be multiple £bn. Mintel forecasts 1-2% market growth per year over next 3
years with a trend for direct to consumer new business comprising an increasing portion
of the market. Aggregator growth is expected to continue too at c10% pa.
Over 50's
Market is 280k new policies pa; £55m APE; POI’s market share 7%
The market is expected to be flat in 2018/19 with potential for limited growth in 19/20
and beyond. It should be noted however that market size has shown a strong historical
correlation to the TV advertising expenditure of the market leader, Sun Life.
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BOARD DECISION PAPER
International Remittances
Authors: N. Boden / C. Pispinis Sponsor: Owen Woodley Meeting date: 27" March 2018
Executive Summary
Context
« Following on from the Remittances paper presented to the December GE', Post Office
Money has completed its review of our current contractual obligations with our in-
branch cross border payment provider, MoneyGram (MG).
e Money Transfer Operators (MTOs) have seen continued impact to consumer
spending caused by a number of key factors - Brexit, falling immigration rates, the
weakness of sterling and continued focus on AML requirements - all of which will
remain ongoing considerations over the short to longer term.
«The financial impact to POL continues to be challenging with double digit YOY decline
in transaction numbers. Our 2017/18 YE income outlook is £26.2m, £2.4m adverse
to the 5+7 forecast.
* Digital capabilities, in contrast to the traditional cash-to-cash send and receive
transactions, continue to increase in popularity with remittance customers. It is
estimated that digital remittances have grown from 5% of the UK market to around
20% over the last three years. Currently, our existing agreement with MG contains
‘an exclusivity clause removing our flexibility to operate in this digital arena with
other providers, yet this is not a strength for MG's European operations.
® Our current exclusive contract with MG runs to September 2019, with the option
Questions addressed in this report
1, What is the size of the current market and estimated share by MTO within the UK?
2. What would be our key RFP considerations and how would these balance against
improved value from an extended MoneyGram contract?
3. What is our current 3-year forecast and how does it compare to the negotiated
outcome with MoneyGram?
4, What are our recommendations and next steps?
Conclusions
1. As digital activity continues to build in the remittances market, and growth in the
total market remains flat at best, we expect cash-initiated remittances to see single
to double digit decline over the next three years. Further changes in AML transaction
thresholds and lower immigration into the UK will exacerbate this decline rate, as
Sew ts egy &
Please refer to the December ‘International transfer and remittance’ paper in the Reading
room for further background on the market & competitive landscape, and contractual set-up
with MG.
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we have seen following the current £800 limit introduced in 2017 and Brexit. Our
future revenue expectations will therefore be under growing pressure unless we have
access toa complementary digital solution.
2. Our discussions in the market would suggest that we are unlikely to get an enhanced
offer on our branch proposition from an alternative provider and critically, any new
agreement would only commence in late 2019 by which point we expect the digital
market to have moved even further. We believe we need to act sooner than that.
3. We do not believe that it is feasible for POL to own the full value chain for the
foreseeable future, given the need for a global network of correspondents: current
branch, online and digital providers operate in >100 countries and come with
recognised and trusted brands. We also believe that a multi-partner branch
Proposition would be untenable given differing provider tariffs and exchange rates,
and would be potentially less beneficial commercially.
4. Based on the above and our earlier analyses, we have two primary choices: 1
e Option 1: Move to FPS this would corroborate, or otherwise, the sense we are
getting from the market and determine whether MG would provide enhanced terms
from late 2019 onwards under competitive pressure. However, this would certainly
delay our ability to launch a digital proposition until early-mid 2020. Furthermore, it
is expected that any new Provider would be seeking a significant new contract period
and likely request full exclusivity across branch and digital.
* Option 2: Negotiate better commercial terms through to September 2021 and
remove exclusivity on digital capability with MG immediately. This would keep the
focus and continuity on our current branch product; help protect against any further
declines in performance from the Political landscape affecting immigration (our core
customer base); and enable us to develop our digital product offering and test the
market faster than if we had to wait to go to RFP.
5. We believe option 2 Provides better customer and business outcomes, particularly
with a clear commitment from MG to build out their non-European corridors; as such,
we have sought and secured an improved guaranteed income stream from our
—_ existing branch channel which will mitigate against any further revenue decline. This
\ amounts to a net income of £5.6m over the life of the extended MG contract to 2021.
We have also secured MG's consent to give us more flexibility on digital remittances,
including full freedom on pure digital transactions. We think this is a compelling offer
which helps to mitigate our market risk over the next three and a half. years and we
therefore recommend that the MG contract is extended to September 2021, subject
to legal terms.
Input Sought
The Board is asked to support the recommended next steps.
I { Rw ce we mfr
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The Report
What is the current size of the UK market, estimated share by
MTO and product differentiators?
4, The UK is an outbound market with send transactions accounting for 90% of all
transactions. We estimate the send market to be c£6bn p.a. with 2im send
transactions in 2017 by MTOs for walk-in and online business. Share by operator
(banks excluded) is as follows:
a. Western Union (“WU”) 43%
b. MoneyGram 19%* (*POL represents 70%)
c. RIA 8%
d. World Remit 7%
e. Transferwise 5%
f. Others 18%
2. POL is the largest single network with a UK market share of 13%.
3. WU primarily operates across a network of independent operators, similar to RIA;
RIA commenced a pilot with Asda in 2017 for a white-label online solution, the
success rates of which are unknown. RIA‘s owner, Euronet, also owns HIFX and XE
who are competitors of POL in the digital sphere.
4. The three largest MTOs - WU, MG and Ria ~ are all US companies and between them
have over 1m send and receive locations globally. They also operate in most
countries and territories. They all offer a 10-minute person-to-person cash send/pick
up service, as well as bank account deposits and deposits to mobile wallets in certain
markets. These markets are growing and a key focus of each operator. The very
broad and established network locations in ‘receive’ countries are the main reason
why POL would not be in a position to become a provider in its own right over the
short to medium term, and therefore is better off partnering with an existing,
recognised branded network.
5. FinTech MTOs operate simple internet/mobile low cost models and provide an
alternative to the walk-in cash-to-cash models, by signing agreements directly with
banks and mobile operators. Similar to the cash-to-cash providers, these digital
operators are also focussed on owning the customer data to directly market their
new services and influence customer behaviour, e.g. through prompt and
personalised notifications of exchange rate movements.
6. We believe there is a significant opportunity for POL to engage in the digital space
by partnering with a FinTech - either the established names, such as Azimo,
Transferwise or Revolut - or the less established, such as Smallworld or TransferGo.
There are also opportunities for POL to disrupt the market in terms of a more simple
pricing structure which we will be exploring further.
What are core RFP considerations and how do these balance
against improved value from an extended MoneyGram contract?
7. WU and RIA are expected to require a minimum five-year agreement as this
timescale is currently a recognised payback period for signing fee, branch rebranding
and marketing investments for a partner with our branch footprint. We would also
expect to be required to accept an exclusivity clause for this time period consisting
of cash-to-cash and digital capabilities.
Pros “os
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8. Additionally, we think that an RFP would result in loss of focus from MG on the core
business during the critical period in the run up to Brexit, which would likely further
impact POL’s decline in revenues over the next 18 months. MG's current agreement
expires at the end of September 2019, unless POL requests an extension through to
September 2021, to be requested by 30' March 2018.
9. Whilst the recent ANT Financial planned purchase of MG was blocked by US
authorities, MG remains open to further takeover bids. If this situation was to occur,
POL would have a right to terminate if MG were acquired directly or indirectly by an
entity outside of MG’s group, provided we can explain our motives, which must be
reasonable.
10.Of course, an RFP would give us the opportunity to engage with the market leader,
Western Union. This has its benefits, though we should also consider:
o The market is changing rapidly; waiting for the RFP, which means we would
not be contracting with a (new) party until October 2019, would further
exacerbate the current declining income trend, by less focus on the business
given diversion of resource to the RFP, and further falling behind in the digital 1
space.
© Informal engagement with WU indicates they could provide digital capability
within 3-4 months, subject to POL tech; the negotiating approach we have
taken with MG (i.e. more digital flexibility) would still give us the opportunity
to partner with WU in the digital space.
o WU has also indicated they would not be prepared to give us access to customer
and behavioural data; this would limit the wider payment capability we are
looking to leverage across POL, and through Customer Hub specifically. This
would apply to physical and digital transactions
o Whilst some of the points above could be negotiated, WU, as any new provider,
would most likely be looking for exclusivity for a minimum of five years to
ensure payback; this would take us out to late 2024.
11.Other areas we have considered in moving to an RFP process include: timescale to
complete; opportunity cost of the RFP process, including senior management, legal
and procurement resources and cost; unknown financial impact to October 2019
(date from which a new agreement would run and by which time the digital part of
the market is likely to have continued its rapid growth); removal of existing signage
and rebranding of our branches; employee training; and system investments.
12. As such, we devised a negotiation strategy with MG, developed on the basis of three
key objectives: (i) protect against current revenue decline, (ii) release/reduce our
current “exclusivity” contractual obligations to allow us to develop/partner on new
digital capabilities and, (iii) create a financial benefit for POL if MG is unable to deliver
against a pre-committed new market and product development schedule. Through
our negotiations we have made significant progress against the first two of these
objectives. MG’s reliance on third party agreements to deliver against the schedule
means that they are not willing to agree on the third objective.
13. To help MG get to their final offer, we have actively supported a review of their cost
base and received a 12-month new market and product development plan.
14. The table overleaf shows a summary of MG's offer and our commentary. It is
important to share at this point that we do not think that the cost reductions MG has 4
Proposed to part-fund the additional fixed payment will exaggerate further revenue
decline, except for point 3 which is expected to impact our gross income by £0.2m
p.a.
Strictly Confidential ~ International Remittances March 2018
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