Royal Mail Holdings plc
Report and Accounts
Year Ended 26 March 2006
Royal Mail Holdings plc
Royal Mail Group is unique in reaching everyone in
the UK through its mails, Post Office® and parcels
businesses – which directly employ almost 193,000
people in the UK.
Every working day Royal Mail collects, processes and
delivers around 84 million items to 27 million
addresses for prices that are amongst the lowest in
Europe; each week we serve nearly 28 million
customers through our network of 14,376 Post
Office® branches and each year our domestic and
European parcels businesses – General Logistics
Systems and Parcelforce Worldwide – deliver some
337 million parcels.
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Royal Mail Holdings plc
Contents
Chairman’s Statement
Chief Executive’s Statement
Annual Review 2005-06
Operating and Financial Review
Royal Mail Holdings plc Board
Directors’ Report
Corporate Governance
Internal control
Directors’ Remuneration Report
Statement of Directors’ responsibilities in respect of the Group accounts
Independent Auditor’s Report to the members of Royal Mail Holdings plc
Group income statement for the years ended 26 March 2006 and 27 March 2005
Group statement of recognised income and expense for the years ended 26 March 2006 and 27 March 2005
Group balance sheet at 26 March 2006 and 27 March 2005
Group cash flow statement for the year ended 26 March 2006 and 27 March 2005
Notes to the Group accounts
1. Authorisation of financial statements and statement of compliance with IFRSs
2. Accounting policies
3. Segmental information
4. People costs and Directors’ emoluments
5. Revenues and expenses
6. Operating exceptional items
7. Income tax
8. Property, plant and equipment
9. Goodwill
10. Intangible assets
11. Business combinations
12. Investments accounted for using the equity method
13. Non current assets held for sale
14. Employee benefits - pensions
15. Employee benefits – annual leave
16. Inventories
17. Current trade and other receivables
18. Non-current other receivables
19. Cash and cash equivalents
20. Share capital
21. Total equity
22. Financial liabilities
23. Provisions for liabilities and charges
24. Current trade and other payables
25. Non-current trade and other payables
26. Commitments and contingencies
27. Related party transactions
28. Financial risk management objectives and policies
29. Financial instruments
30. Events after the balance sheet date
31. Transition to IFRSs
Group balance sheet at 29 March 2004
Group income statement for the year ended 27 March 2005
Group statement of recognised income and expense for the year ended 27 March 2005
Group balance sheet at 27 March 2005
Group cash flow statement for the year ended 27 March 2005
Group balance sheet at 28 March 2005
Group five-year summary
Parent Company accounts
Statement of Directors’ responsibilities in respect of the parent Company accounts
Independent Auditors’ report to the members of the parent Company
Parent Company balance sheet
Notes to the parent Company accounts
Forward Looking Statements
Corporate Information
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Royal Mail Holdings plc
Chairman’s Statement
A record year for service to customers – but major challenges ahead
Royal Mail has delivered a year of record high quality of service to its customers. Financial performance has also been
outstanding, especially in the face of competition, with an operating profit of £355 million – an increase of 17.5% compared
with last year – on record revenues of more than £9 billion.
Parcelforce Worldwide has made a full-year profit for the first time ever and Post Office Limited has performed strongly to
cut its losses in a year that finally saw the end of pension and benefit books. General Logistics Systems (GLS), Royal Mail’s
European parcels business, made a record profit and grew its revenues in a market where competition has intensified
strongly.
Our determination to share success with our people and reward them for excellent performance has been underlined with a
£418 Share in Success payment to people across the company, including, for the first time, subpostmasters who are the
backbone of our retailing network. The reward, which will be paid this month, amounts to a pay out of nearly £100 million
and follows last year’s payment of £1,074 to our people for successful delivery of the three-year Renewal Plan. Yet it doesn’t
seem that long ago when many doubted the company, which was losing well over £1 million a day in 2002, would again be
profitable or capable of hitting customer service targets.
We still have a mountain to climb. But last year showed that Royal Mail Group and its people have consolidated the gains we
made during the Renewal Plan. There was always a danger that we could have slipped back, that hard-won gains would have
crumbled – but we’ve sustained our turnaround and must continue to do so. That’s a big achievement in itself.
Crucially, we need to embark swiftly on the modernisation of Royal Mail. This is the key challenge the whole organisation is
facing. It’s an even more daunting task than the Renewal Plan we accomplished and it will test us all.
Putting in new technology and replacing obsolete equipment, in time and to budget; further streamlining our operations and
bringing our people with us at all times; increasing the focus on customers so that we deliver even better service in a market
where rivals are after our business – all this will be incredibly stretching. It will mean a great deal of hard work.
Meanwhile, we have to keep pumping cash into our pension fund – perhaps as much as £750 million a year – in order to
fund our pension commitments to employees and clear a deficit that has now reached £5.6 billion. To put the deficit into
stark perspective, it outstrips the Group’s pre deficit net asset value of £2.3 billion by £3.3 billion. We have to find the money
to clear the deficit. It’s a challenge that every one of us in the company can’t ignore.
And as hard as anything we do, the task of restructuring the Post Office network must be tackled to deal with chronic losses
on operations of some £2 million a week. It means creating a sustainable future for the rural service, where the majority of
the 7,854 branches are fundamentally loss-making and have needed every penny of the £150 million of funding made
available by the Government to stay open. We await a decision on future funding from the Government but it’s down to us to
give the 500 directly managed branches in high streets and shopping malls - currently losing £50 million a year – a much
stronger financial base, as well as making the busiest urban branches – directly managed or privately owned – much more
attractive to visit by our customers.
It’s all going to be very tough. But it’s encouraging that the building blocks we need are beginning to slot into place. A vital
part of our plans was securing, after lengthy negotiations with Postcomm, a price control that allows significant investment in
the business and gives us the ability to increase the cash payments into our pension fund whose deficit now totals £5.6
billion.
We have made tremendous progress in discussions with the Government – Royal Mail Group’s shareholder – on our
investment case for the future. We put a commercial plan to the Government which we are confident will enhance the value
of the organisation for the shareholder. It is not a Government subsidy but a clear investable case for our shareholder and
I’m pleased to say that we have reached agreement in principle with Government on this investment case as a whole. There
remains, inevitably, a huge amount of detail to be worked through over the coming weeks, including ensuring we get the
right incentive scheme in place for our people. We know taking our people with us is central to our plans. We believe giving
them a stake in the company would be a huge incentive for our people to achieve the efficiency gains essential if we are to
compete successfully to retain and win customers in the face of tough competition and importantly we know this is
something they want and would respond to. This commercially focused investment from our shareholder will give us an
opportunity to modernise and transform a business which is vital to the success of UK plc.
We can’t take anything for granted. The mail market opened to full competition and bulk mailers, already active, have in the
last 12 months handled more than one billion letters under access agreements with Royal Mail. Our postmen and
postwomen are still delivering this mail but we’ve lost revenue as it is transported directly into our mail centres. We face the
prospect of access volumes climbing to three billion items per annum within the next two years, which would amount to
around one in seven of the letters we currently handle.
We need to be more efficient. In the letters business, we need a £2 billion investment programme with financing both from
the Government and revenues we generate from turnover to replace ageing and obsolete equipment and put in place new
technology giving us the efficiencies, capabilities and a more flexible cost base in order to compete successfully and provide
the service our customers need.
4
Royal Mail Holdings plc
Chairman’s Statement (continued)
The Post Office network also needs investment to give it a sustainable future. We are seeing new revenues from the range of
new products introduced in the last couple of years in the network – the most recent have been the Instant Saver account
and a credit card – but we have also lost annual revenues worth £327 million as a result of the loss of traditional benefits
payments. The Post Office Card Account, used by 4.2 million pensioners and benefit recipients, will be phased out by 2010,
and the future of the rural network and the level of future financing available post 2008 lie in Government hands. We
continue to discuss with our shareholder the best way to secure Post Office services going forward. Balancing the need to
run the network as efficiently as possible while meeting the social need fulfilled by branches in communities nationwide is a
difficult challenge but it is one we are embracing.
The UK parcels market has become even more competitive in the last year. But the hard work the business and its people
have put into restructuring its operations and the focus on delivering high quality service to its 21,000 business customers
has paid off with the first full year of profitability. Parcelforce Worldwide will have to continue to work hard to ensure it stays
profitable in a market that gets tougher every year.
The star performer in the Group in terms of profitability is GLS which saw a 37% increase in profits to £100 million on
revenues which grew strongly to more than £1 billion. It’s an outstanding example of the achievements which flow from a
dedicated focus on customers and efficiency.
In fact, it’s what the whole of Royal Mail is seeking to do. Our number one priority remains to deliver consistent, excellent
quality of service to our customers. Underpinning that is an unceasing drive to run all our operations as efficiently as possible
- and making the right investments in our operations will be crucial to achieving higher productivity. The key to everything we
do is our people. We believe that to give them a real stake in the business will be a powerful incentive for increasing yet
further their commitment and dedication. We have made tremendous progress and have reached agreement in principle with
the Government on the investment case to achieve all this. The investment case will give us the means to build a successful
future. Then it will be down to everyone in Royal Mail to climb that mountain.
Allan Leighton
Chairman
17 May 2006
The prior year figures quoted have been restated for the impact of the transition to International Financial Reporting
Standards. All references to operating profit are before exceptional items.
5
Royal Mail Holdings plc
Chief Executive’s Statement
A solid base to launch transformation
Royal Mail Group’s outstanding performance last year shows we now have the solid base needed to launch the
transformation of the company.
There is a long way to go from the base camp we have consolidated and it will be essential to bring our people with us, all
the way. It is going to be a very tough challenge, more difficult than anything we have achieved so far. But we know we are
capable of success. The task for us now is to get on with the enormous changes needed to ensure we compete successfully
in markets where there are already many competitors. It is going to require a huge commitment from all of us.
Competition and the threat it poses are now part of daily life across Royal Mail. We delivered record customer service last
year but we have to do better. A total focus on our customers, consistently delivering to them the service they expect and
pulling out all the stops to be flexible and responsive to their needs and concerns, must become ingrained into everyone’s
daily life if we are to compete successfully. We will develop our products and services and create new ones to benefit our
customers. But we remain a people company and we will only ever be as good as the performance and commitment we all
give.
It’s right, then, to praise our people for the record performance they have delivered in 2005-06. Over the last year, 94.1% of
First Class letters arrived the day after posting, a record performance well ahead of anything we’ve previously achieved and
just over a full percentage point above the 93.0% target. Second Class mail was ahead of target too with a 98.8%
performance and the large bulk of business mail services also hit or exceeded their targets. It’s a world-class performance
by our people and they can take pride in what they have achieved. I am proud of them.
It was also an outstanding financial performance with the £355 million operating profit – up 17.5% compared to last year -
triggering a £418 Share in Success payment to our people. They have shown a real commitment to ensuring the operational
changes we made in the three-year Renewal Plan are now firmly embedded. And they understand, that with competition
growing, we cannot afford to slip back.
All four of Royal Mail Group’s businesses improved their financial performance last year. In Letters, there was a decline in
inland addressed mail with the impact exacerbated by some bulk mail customers switching to lower-priced services. The
impact of these adverse effects was offset by a below-inflation price rise and the business made a £344 million operating
profit, a £1 million improvement on last year. This performance masks the losses Royal Mail continues to make in fulfilling its
Universal Service “one-price goes anywhere” Obligation as we continue to lose money on First and Second Class stamped
letters.
With competition intensifying and clear signs that the letters market may well decline further, the need for Royal Mail to drive
efficiency changes is unmistakable. Improving efficiency in a declining market is much tougher than making productivity gains
in a growing one. A key challenge we face is to make rapid progress by investing in new technology and modernising the way
we work.
We remain determined to give a high priority to ensuring the integrity of the mail. We have introduced this year new
management processes, inclusion of mail integrity onto our performance management scorecards, an accountable director
and revised and updated policies. Last year was the first full year that we applied the vetting powers, which Royal Mail sought
and was granted, to check if applicants were attempting to conceal any past criminal convictions. It has armed us with an
additional layer of security. We have also reduced the number of casual employees to around 500 - in marked contrast to
the almost 20,000 employed in the autumn of 2004 and have deployed a new quarterly audit of the security of the mail in
all our mail centres and delivery offices. Our policy remains - zero tolerance to any form of wrongdoing.
Post Office Ltd made an operating loss of £111 million but this was a £12 million improvement on the previous year and
represented a real achievement as it showed solid progress in the business’s drive to replace lost revenue from pension and
benefit book payments with growing income from alternative products such as travel, car and home insurance, HomePhone,
foreign currency, a credit card and loans and savings products. But losses of some £2 million a week are unsustainable long-
term in the Post Office network. Restructuring is essential and we continue to discuss with Government the best ways of
creating a stable, sustainable network; we are hopeful these discussions will come to fruition this autumn.
Parcelforce Worldwide’s £5 million operating profit – the first full year operating profit the business has ever made – is the
result of a long haul involving a focus on business customers, exiting from loss-making contracts and cutting costs, while all
the time focusing on delivering quality service by well-motivated people. It’s a fantastic achievement but we are in no way
complacent as maintaining profitability in an intensely competitive market is a further tough challenge faced by the business.
General Logistics Systems (GLS) 37% improvement in operating profit to £100 million with a 9.6% margin on revenue which
grew strongly by 13.6% is another fantastic performance by a company widely recognised as an outstanding competitor in
the European parcels market. It is now established as a significant contributor to the Group’s profits but we know it can
improve its performance further and this is the challenge it faces.
The Group’s overall operating profit of £355 million was a fine achievement but it should also be noted that while the margin
on our revenue was a creditable 3.9%, it is well below the returns some of our biggest rivals in mail are achieving.
6
Royal Mail Holdings plc
Chief Executive’s Statement (continued)
The building blocks for Royal Mail Group’s modernisation are beginning to fall into place. We have made enormous progress
in securing the funds we need to modernise this business, service the pension fund deficit which needs around £750 million
of cash every year and restructure the Post Office network which loses around £100 million a year. We have reached an
agreement in principle with the Government on our overall investment case and have secured a price control agreement with
Postcomm. Together, these would allow us to modernise the business while making increased payments to the pension fund
under a funding plan that satisfies the independent pension fund trustees. We are also having a constructive dialogue with
the Government on restructuring the Post Office network, against a backdrop of Government business across our counters
declining to less than 10% of overall business in our branches in three years’ time.
The years ahead will be harder than anything we’ve been through before. Every area of our business – letters, parcels and
the services we provide in Post Office branches – is under increasing competitive pressure. The days when the company could
rely on customers beating a path to our door have gone forever.
That’s why it’s so important that Royal Mail Group has secured the agreement in principle of our shareholder to our
investment plan. We will be working to agree the details over coming weeks, including putting the right incentive in place to
reward our people for future success. We believe that a stake in Royal Mail Group – an equal stake for everyone – will
motivate our people and help deliver the transformation we need. Our people are fundamental to our modernisation plans
and we have stressed their role in the commercial investment plan we have submitted the shareholder.
I am also very determined that we make further improvements to benefit them. I want everyone to enjoy working for the
company and that means ensuring they are motivated, they have the right working environment, the tools to do the job and
they are treated properly at all times. Securing the means to tackle the pension deficit is also fundamental to our strategy
and it remains a key action point for us. Rewards, benefits and a real stake in future success are crucial – but they all have to
be earned. It’s not going to be easy.
But our vision remains – to be demonstrably the best and most trusted mail company in the world. The challenges are huge
but last year we did indeed take another major step towards realising our goal.
Adam Crozier
Chief Executive
17 May 2006
The prior year figures quoted have been restated for the impact of the transition to International Financial Reporting
Standards. All references to operating profit are before exceptional items.
7
Royal Mail Holdings plc
Annual Review 2005-06
Over the past year, the postal market in the UK changed forever – since 1 January 2006, Royal Mail has been facing full
competition. Our future success now depends on competing effectively in a market where customers have real choice.
Competition changes everything but we cannot afford to lose the momentum we built up over our three-year Renewal Plan
and have sustained over the last year. Improving service to customers has continued to be the number one priority of
everyone in the Company during 2005-06. Quality of service performance for both First Class and Second Class mail has
been above target levels for over a year - with 94.1% of First Class mail arriving the day after posting. Providing a consistent
high quality service to customers and giving them value-for-money will continue to be the top priorities in the current year
as these are key to keeping customers, and winning new ones, in a competitive marketplace.
Royal Mail values every letter and takes the security of the mail extremely seriously. The vast majority of our people are
scrupulously honest and trustworthy, and over 99.93% of our annual mailbag of 22 billion items arrives safely at the correct
destination.
Our people – our greatest asset
Royal Mail’s people are our greatest asset and we are committed to making the Royal Mail a great place to work. Engaging
and involving our people is the key to this and that is why we want them to have a stake in the Company. We hold regular
Worktime Listening and Learning sessions to hear and discuss how we are tackling the challenges we face and the direction
in which the Company is moving as well as raising issues of concern to our people.
We have improved basic pay for postmen and postwomen to over £310 per week and in March 2006 we agreed a ground-
breaking productivity scheme with the Communication Workers Union which will set the scene for higher basic pay. The
scheme means that pay will improve as efficiency improves, giving postmen and postwomen, for the first time, a chance to
influence the size of their pay packet. In addition we have implemented a 2.9% increase in their basic pensionable pay.
We continued to tackle bullying and harassment over the past 12 months. By June 2005, we achieved our target of
completing diversity training of 175,000 people in just over 18 months. This was the largest undertaking of its kind by a UK
employer. Our efforts in working to create an inclusive culture throughout the Company where everyone feels valued and
respected were recognised in July 2005 when Royal Mail was awarded the Centrica Diversity Award in the Business in the
Community National Awards for Excellence. Royal Mail also won a bronze award from Race for Opportunity in recognition of
its efforts to support and fully harness the talents of the diverse mix of people we employ and to ensure equal opportunities
for everyone in the business.
We continue to tackle absenteeism across the business, with improved support for people who are off sick and rewarding
those people who do not take any unplanned sick leave. Following the success of our initiatives last year, including a prize
draw to recognise good attendance, we saw a significant increase in the number of people at work on any one-day. We
intend to run a similar scheme going forward to raise attendance levels further.
We also recognise our people who go that bit further in the course of their jobs by inviting customers to nominate Royal Mail
postmen and postwomen who are the unsung heroes in their local community. These individuals could be ‘1st Class’ charity
fundraisers in their spare time, have performed a public-spirited act or dealt with an emergency whilst out delivering or
collecting the mail. They could also simply be someone who has shown a resounding dedication to delivering a great service
to customers. The 2005-06 overall winner was Helen MacKenzie from Scotland, who helped save the life of a man whose
arm became trapped in machinery.
Supporting good causes
Royal Mail’s people have a long history of giving their time and fundraising for good causes and in March 2005 Help the
Hospices was chosen as the organisation’s first ever major supported charity, following a Company-wide poll. As part of a
two-year partnership with the national charity of the UK hospice movement, Royal Mail has pledged to match money raised
by its people, up to a limit of £250,000. With the help of its people, Royal Mail hopes to raise £1m overall for Help the
Hospices over the course of the partnership.
Fundraising initiatives have so far included the sale of Christmas angel decorations through larger Post Office® branches,
and the publication of ‘Unseen UK’, a unique collection of photographs taken by postmen and postwomen around the country.
The images range from the everyday to the bizarre – from buildings, letterboxes and landscapes to wildlife and people, and of
course dogs. Proceeds from the sale of the book are going to Help the Hospices.
Every site across the business has been twinned with a nearby hospice so Royal Mail people are involved directly in their local
communities through their fundraising activities and volunteering. A network of community co-ordinators have been
appointed across the business to make it as easy as possible for our people to get involved as they want, whether working on
a regular or a one-off basis with their local hospice.
Additional funds are being raised for the hospice movement through Royal Mail’s award-winning payroll giving scheme – the
largest of its kind in the UK. Over the past 15 years, Royal Mail’s postmen and postwomen have donated more than £27.5m
to a wide range of charities through regular payroll giving.
8
Royal Mail Holdings plc
Annual Review (continued)
New opportunities through online shopping
Online shopping has continued to grow over the past 12 months, and Royal Mail continues to provide a range of services to
support the home shopping market, from warehousing and direct marketing expertise to delivery to all 27 million addresses
across the UK and return services. At Christmas, Royal Mail delivered around 2 billion items to customers in the run-up to 25
December, including a record breaking 70 million items that had been ordered over the internet – 15 million more than the
previous year.
The growing popularity of online shopping has seen retailers review their use of catalogues as a sales tool. A Royal Mail
survey of 20 leading retailers conducted last year revealed that catalogues are increasingly being used for generating online
orders as well as traditional sales. Nearly two thirds of the retailers surveyed sent catalogues or brochures to drive online
sales – double the number of five years ago.
Stamp celebrations
Royal Mail’s stamps have celebrated a wide range of occasions over the past 12 months. The wedding of HRH Prince Charles
and Mrs Camilla Parker Bowles in April was commemorated by the issue of a miniature sheet capturing two images of the
couple in a relaxed and informal mood. This proved a popular souvenir of the event, with record numbers of stamps sold on
a Saturday, the day of the wedding.
Sporting triumphs were also celebrated on stamps during the year. London’s successful bid to host the greatest sporting
event in the world in 2012, the Olympics, was marked by a set of stamps capturing images of athletes in motion.
The England cricket team’s victory in the Ashes competition was marked by the issue of four stamps featuring images of the
squad. This was the first time that living people other than the Royal Family had appeared so prominently on a set of Royal
Mail special stamps.
Royal Mail teamed up with the United States Postal Service to launch a set of stamps featuring classic characters from
timeless children’s illustrated stories. These included Paddington Bear, the Enormous Crocodile and the Very Hungry
Caterpillar, which, true to its character, took two ‘bites’ out of the stamp on which it appeared – the first time Royal Mail has
issued a stamp with holes in it.
Young letter writers
Royal Mail’s young letter writers competition has attracted over 5 million entries since it began 29 years ago – the biggest
letter-writing competition of its kind in the UK. Primary school children throughout the UK are invited to enter the
competition, and this year children were invited to write a First Class letter to anyone, anywhere. The judging panel includes
literacy and education specialists who have the hard task of picking the winner.
Post Office Limited – a challenging future
The 14,400-strong network of Post Office® branches continued to grow the range of products and services it offers to the
28 million weekly customers, as well as through sales via the Post Office® website and telephone orders, as the amount of
Government business undertaken through the Post Office® has declined. We have also undertaken a programme of sales
training for our people to give them the skills to sell more of our products.
The Post Office®, in response to a request from the Department of Trade and Industry, has tested a range of innovative
ways – other than the traditional village branch office – of providing Post Office® services in rural areas. These have included
partnerships with local service providers such as the police, mobile services as well as ‘hub and spoke’ arrangements where a
subpostmaster running a branch in a larger village provides Post Office® services in smaller communities in premises such
as a pub or village hall.
Over the last year, the Post Office® has extended its financial services products with the launch of a new instant saver
account as well as its ‘two in one’ credit card. The unique feature of the card is a loan-like facility, offering customers the
flexibility to make larger purchases at a discounted fixed rate of interest, together with a competitive rate of interest for
regular purchases. This builds on our success in other financial services – last year we handled 14 million foreign currency
transactions, making us the UK’s number one provider of foreign exchange services. We are also the largest independent
provider of travel insurance, with annual sales totalling more than one million policies.
Since November, Nationwide ‘Flexaccount’ personal current account customers have been able to withdraw their cash and
check their balances at any Post Office® branch free of charge. This is part of our continued commitment to work closely
with banks and building societies to increase accessibility to their services through our branches. More than one million
customers a day currently withdraw cash through the Post Office® network. The Post Office® now provides current account
banking services to 10 UK banks – with over 22 million current account holders able to access their cash, free of charge, at a
Post Office® branch. Our vision is to be able to offer free access to cash for all current account holders.
Post Office® customers can now buy gift vouchers for a wide range of high street retailers through a partnership with The
Gift Voucher Shop. The vouchers, which include those for ‘enjoyment’ and ‘experience’ days, can be purchased from any Post
Office® branch or ordered over the telephone and the internet. This makes it easy for customers to find and send a gift they
can be sure their family and friends will really want.
9
Royal Mail Holdings plc
Annual Review (continued)
The Post Office® entered the home telephony market in January 2005 with its HomePhone service. Twelve months after
launch, the fixed-line residential service had signed up over 260,000 live customers and is currently signing up more than
4,000 customers a day. Building on this presence in the telecoms market, the Post Office® launched a directory enquiries
service in January 2006 – with call costs cheaper than the two largest rival numbers in the market based on a one-minute
call from most UK landlines.
Parcels – in the UK and around the world
In the parcels market, Parcelforce Worldwide has continued to establish itself as a key player in the competitive, non-
regulated express parcels delivery service. It delivers some 45 million parcels a year, to customers in 239 countries and
territories across the world. Achieving a full year operating profit - £5 million - for the first time was a fantastic achievement
by the business.
Parcelforce Worldwide is the UK partner of General Logistics Systems (GLS), our European parcels business. GLS handles
over 1 million parcels a day through its network of nearly 700 depots and central transhipment points. Its core operation is
business-to-business parcels deliveries and it has 220,000 customers in 34 states across Europe. GLS’s 37% improvement in
operating profit was another fantastic performance, underlining the business’s reputation as one of the most admired parcel
companies in Europe.
10
Royal Mail Holdings plc
Operating and Financial Review
Introduction
Royal Mail Holdings plc (the Parent) is a public limited company wholly owned by the UK Government. It became a plc on 26
March 2001. The framework for change was the Postal Services Act 2000 that created a commercially focused company
with a more strategic relationship with the Government. The Postal Services Act also established a new regulatory regime
with an independent Regulator, Postcomm, and a reformed consumer body, Postwatch. Royal Mail Holdings plc together with
its subsidiaries, associates and joint ventures comprise ‘the Group’.
The Group has over 370 years experience of providing the public with postal services - through our trusted brands we reach
everyone every working day in mail, parcels and express services and through our Post Office® branches. Our market place
is, however, rapidly changing: Government revenue, such as benefit payments, is being lost from Post Office Limited whilst
the UK mails market has been fully liberalised since January 2006, resulting in full competition.
We are providing new services to meet these challenges – from a range of new Post Office® financial services including
personal loans and a ‘two-in-one’ credit card, to electronic ‘stamps’, online shopping fulfilment and mail-related data tools to
help companies improve their marketing performance. Our continued aim is to put the customer at the heart of everything
we do by - increasing value through excellent quality of service, our unique reach to every address in the UK, enhancing our
trusted brands, becoming easier to do business with, retaining our profitable business, and developing innovative products
and services for our customers.
Performance Highlights
In the following analysis, all references to operating profit are before exceptional items.
Financial highlights
Summary of results
£m unless stated otherwise
External turnover
Operating profit*
Return on sales* (%)
Exceptional items:
Share in Success costs
Other
Profit before interest and taxation
Net finance income
Profit before taxation
Taxation credit/(charge)
Profit after taxation
*before exceptional items.
Key non-financial highlights
2006
2005
9,056
8,956
Area
Key Performance Indicators
2006
2005
Customer
service
1st Class Stamp & Meter
94.1%
92.8%
355
3.9%
(143)
(91)
(52)
212
100
312
83
395
302
3.4%
(210)
(218)
8
92
75
167
(16)
151
No. of Complaints (millions)
1.63
1.94
Post Office Limited
Customer Service Index
Great Place
to Work
Employee Survey
”Great Place to Work”
RIDDOR Accidents/1000
staff
94%
94%
64%
62%
26.7
28.6
Sick Absence
4.9%
5.6%
Good
corporate
citizen
CO2 Emissions/1000 items
19.9
21.8
Donations (£m)
1.3
1.9
Governance
The EU Accounts Modernisation Directive (AMD) requires a mandatory addition to the existing Directors’ Report to provide an
enhanced review of a company’s business for accounting years beginning from 1 April 2005. The Directive states that the
review should provide a balanced and comprehensive analysis of the development, performance and position of the
Company’s business. The analysis should include both financial and, where appropriate, non-financial key performance
indicators (KPIs) relevant to the particular business. It is recognised that to the extent that this information appears in the
Operating and Financial Review (OFR), it does not need to be discussed in the Directors’ Report.
Although our reporting dates mean that the Group does not have to comply with the Directive until 2007, in line with our
commitment to comply with best practice and achieve the highest standards of Corporate Governance, the Group has moved
towards full compliance with the new requirement early via an enhancement of the OFR. The report provides a ‘snapshot’ of
the Company at a moment in time addressing the requirements of the EU AMD, including the principal risks and uncertainties
facing the organisation.
Operating and Financial Review (continued)
Legal Structure
Royal Mail Holdings plc is directly owned by the Department of Trade and Industry and is the ultimate parent company. It primarily
operates within the United Kingdom, having a number of subsidiaries and participating in several joint ventures, but also has presence in
most European countries, mainly through its General Logistics Systems business unit. It is organised into four principal operating units –
Royal Mail, Post Office Limited, General Logistics Systems and Parcelforce Worldwide. Its basic legal structure is as follows:
Royal Mail Holdings plc
Royal Mail Holdings plc
Royal Mail Group plc (1)
Pension Schemes (4)
Post Office Limited (3)
Royal Mail Investments Ltd
Other (2)
General Logistics
Systems B.V.
(1) Comprising Royal Mail and Parcelforce Worldwide
2) Other includes Royal Mail Pension Trustees Limited (100% owned), Romec Limited (51% owned), NDC 2000 Limited (51% owned), Quadrant Catering Limited (51% owned), Camelot Group plc (20% owned) and Camelot
International Services Limited (20% owned) plus other non-trading central businesses
(3) Owns Midasgrange Limited (50% owned venture with Bank of Ireland) and First Rate Travel Holdings Limited (50% owned)
(4) Royal Mail Group plc is the sponsoring employer for the Royal Mail Pension Plan, the Royal Mail Senior Executive pension Plan and the Royal Mail Retirement Savings Plan.
Our Operating Units
Royal Mail
Royal Mail collects and delivers over 84 million letters and packages to 27 million addresses every working day, in line with its unique
Universal Service Obligation. It is also responsible for designing and producing the UK’s stamps and philatelic products.
Post Office Limited
The Post Office®’s national network of branches is at the heart of communities across the country. They provide a trusted access point
for everyday products, services and information in: postal services, financial services, travel, banking, telephony, bill payments,
Government information, retail and the secure transportation of cash.
General Logistics Systems B.V. (GLS)
GLS is a pan-European company providing reliable, high-quality parcel and express services as well as value-added logistics solutions.
Parcelforce Worldwide
Parcelforce Worldwide is a leading provider of collection and delivery services for urgent packages and parcels within the UK and
throughout the world, providing both business and private addresses with a range of timed delivery options.
Other
Other Group businesses comprise Postcap (Guernsey), our captive insurer (100% owned), Royal Mail Pension Trustees, our pension
administrators (100% owned), Romec, our facilities management operation (51% subsidiary), NDC, our building engineering services
operation (51% subsidiary), Quadrant, our catering services (51% associate), and Camelot UK national lottery operator (20% associate).
Our pension schemes
Royal Mail Group plc’s pension assets and liabilities are materially larger than its other operating assets and it is one of the most exposed
UK corporates to pension scheme volatility, particularly with respect to movements in equity values and bond rates.
Royal Mail Group plc is the sponsoring employer for the Royal Mail Pension Plan, the Royal Mail Senior Executive Pension Plan and the
Royal Mail Retirement Savings Plan. These plans together constitute the sixth largest pension scheme in the UK. The key facts and figures
include:
•
•
•
•
•
170,000 active members; 105,000 deferred; 174,000 retired;
Accounting deficit under IAS19 ‘Employee benefits’ of £5.6bn;
Assets of £21.8bn – comprising equities £17.2bn, bonds £2.7bn, property £1.8bn, other £0.1bn and liabilities of £27.4bn;
Pensionable payroll of £2.7bn; and
Key accounting assumptions:
Discount rate 4.9%
Inflation 2.8%
Salary increases 3.8%
Overall expected return on assets 7.1%
Increase in pensions 2.8%
•
•
•
•
•
12
Operating and Financial Review (continued)
Operating Unit facts and figures
Unit and % of
Group external
revenue
No. of
employees
174,202
Region Revenue (£m)
Profit (£m)*
Margin (%)
Revenue
£6,859m
UK
Profit
£344m
Margin
5.0%
Revenue
£838m
Loss
(£111m)
Margin
(13.2%)
Revenue
£1,037m
Profit
£100m
Margin
9.6%
Revenue
£314m
Profit
£5m
Margin
1.6%
Revenue*
£8m
Profit
£17m
* For
subsidiaries
only
75.7% of Group
external revenue
11,327
UK
9.3% of Group
external revenue
11.5% of Group
external revenue
3.5% of Group
external revenue
Other
11,045
Europe
4,092
UK
UK
3,348
Wholly
owned
4,852
Part
owned
* before exceptional items
Royal Mail Holdings plc
Facts and Figures
Vision
…to be ‘demonstrably
the best and most
trusted postal services
company in the world’
…to ‘sell products and
services that are
important to our
customers simply and at
a profit’ backed up by a
business approach of
being ‘community
minded and profit
driven, and putting
customers at the heart
of the business’
…to provide ‘service,
flexibility, quality and
reliability’, with local
expertise and knowledge
of different cultures
being integral to the
end-to-end service
To be the UK’s most
trusted worldwide
carrier
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
113,000 pillar boxes
70 Mail Centres
1,400 delivery offices
Over 30,000 vehicles
33,000 bicycles
Over 84 million items handled every
day
Deliver to 27 million addresses a day
1st Class Quality of Service – 94.1%
2nd Class Quality of Service – 98.8%
Handle equivalent of 17p in every £1
transacted in the UK through the Post
Office network
14,376 branches, of which 6,522
urban branches (including 495 directly
managed) and 7,854 rural branches
Approx 61,000 customer facing
colleagues - including those employed
by Post Office Ltd, by subpostmasters
and/or by franchisees
3.7bn transactions a year
Nearly 28 million customers a week,
making over 45 million visits a week
UK’s leading supplier of foreign
currency
Customer Satisfaction Index – 93.9%
29 hubs
667 depots
17,700 vehicles
Over 1 million parcels handled every
day
• 2 national hubs
•
•
•
48 depots
1,600 vehicles
160,000 parcels delivered every day,
250,000 every day in December
Parcelforce 24 Quality of Service –
96.1%, delivered on time and with
electronic proof of delivery
•
PostCap (Guernsey) – captive insurers
(100% subsidiary)
Royal Mail Pensions Trustees – pension
administrators (100% subsidiary)
Romec - facilities management operation
(51% subsidiary)
NDC - building engineering services
operation (51% subsidiary)
Quadrant - catering services (51%
associate)
Camelot, UK national lottery operator (20%
associate).
13
Royal Mail Holdings plc
Operating and Financial Review (continued)
Group financial analysis
In the following analysis, all references to operating profit are before exceptional items.
This year we report an operating profit of £355m compared to £302m for 2004-05, an increase of £53m or 17.5% mainly driven by the
performance of our unregulated parcels businesses. All operational business units contributed to this increase, with General Logistics
Systems improving profitability by £27m (37.0%), Post Office Limited by £12m (9.8%), Parcelforce Worldwide by £11m (>100%) and Royal
Mail Letters by £1m (0.3%).
Operating profit/(loss) by business unit - £m
Operating profit/(loss) growth by business unit - £m
344
355
12
2
355
100
5
17
11
27
302
1
Royal M ail
General
Logist ics
Syst ems
Parcelf orce
Worldwide
Post Of f ice
Limit ed
(111)
Ot her
Group
2004-05
Royal M ail
General
Logist ics
Syst ems
Parcelf orce Post Of f ice
Ot her
2005-06
Limit ed
External revenue
Group external revenue increased by £100m (1.1%) from £8,956m to £9,056m driven primarily by increases in Royal Mail and GLS.
Royal Mail increased its revenue by £96m (1.4%) of which £118m arose from domestic mail price increases of 1.7%, £95m (1.4%) from
non-addressed and international products, offset by underlying inland addressed mail volume decline of £50m (0.7%), a £5m (0.1%)
negative mix impact and a £62m (0.9%) negative impact relating to customers switching to the cheaper Downstream Access products.
General Logistics Systems increased its revenue by £124m (13.6%) from £913m to £1,037m, mainly due to volume growth. Parcelforce
Worldwide increased its revenue by £16m (5.4%) from £298m to £314m reflecting higher volumes from increases in national account
products and favourable product mix. Post Office Limited reported a revenue decrease of £138m (14.1%) from £976m to £838m,
primarily as a result of the expected erosion of traditional benefits volumes, partially offset by new revenues.
Costs (excluding exceptional items)
Total costs of £8,733m have increased by £51m (0.6%), which is well below inflation.
Cost by type - %
Cost growth by type - £m
People Costs
68%
Other Operating
Costs
18%
Distribution &
Conveyance
Costs
14%
8,682
2005
129
35
8,733
(113)
People,
Subpostmasters,
Temporary
Resource
Distribution &
Conveyance
Other Operating
Costs
2006
People costs of £5,968m represent 68.3% of the Group’s cost base and have increased year-on-year by £129m (2.2%). This is partly due
to pay increasing for the majority of our frontline people from 1st April 2005 of 3.8% being offset by decreases in overtime, contract
labour and subpostmasters’ costs. During December 2004, the status of Romec Limited changed from a joint venture to a subsidiary,
which impacted how we accounted for Romec costs. This change had the effect of increasing people costs in the current year by around
£70m compared to prior year (accounting for 54% of the £129m increase), with a corresponding reduction to non-people costs.
Distribution and conveyance costs of £1,218m, representing 13.9% of the Group’s cost base, have increased by £35m (3.0%), driven
mainly by increased volumes in GLS.
Other operating charges of £1,547m representing 17.7% of the Group’s cost base have decreased by £113m (6.8%) due to continuing
efficiency improvements in a number of areas, including central support functions and property costs.
14
Royal Mail Holdings plc
Operating and Financial Review (continued)
Pensions
Pension charges within operating profit
Operating Profit before exceptionals
Exceptionals (relating to redundancy)
Operating profit
2006
£m
2005
£m
529
24
553
489
22
511
The last full triennial valuation of the pension schemes as at March
2003 confirmed a substantial funding deficit due principally to
changes in asset valuations, lower discount rates, a fall in the
expected long-term investment returns and increased life
expectancy of employees and pensioners. The IAS 19 deficit has
increased this year from a liability of £3,958m in 2005 to £5,588m.
The increase in the deficit of £1,630m during the year mainly
relates to an actuarial loss of £1,659m, which principally arose from
the lower discount rate assumption and revised mortality assumptions. Full pension disclosures are made in note 14 to the accounts.
Pension cash funding: Group contributions
Regular pension contributions
Funding of pension deficit
Payments relating to redundancy
Net cash payments
2006
£m
2005
£m
343
113
209
665
187
138
5
330
Payments into our pension scheme more than doubled from £330m in
2005 to £665m in 2006, mainly driven by regular contributions
increasing by £156m (83%) and redundancy related £204m. In
addition, further payments of £44m relating to redundancy and £34m
relating to the deficit - taking total deficit contribution to £147m -
were made in the first week of 2006-07.
Share of profits in associates and joint ventures
The Group’s share of profits in associates and joint ventures of £32m (2005 £28m) comprises profits of £41m (2005 £39m) from
Camelot, POL’s Bureau de Change joint venture (First Rate Exchange Services Limited), Quadrant our catering associate and G3
Worldwide Mail N.V. (Spring), offset by a loss of £9m (2005 loss of £11m) from Bank of Ireland’s financial services venture with Post
Office Limited. The losses from Post Office Financial Services were expected and are a result of sales and marketing expenditure to
promote new products.
Net exceptional items (including operational exceptional items and profits/(losses) relating to business and property disposals)
Net exceptional costs of £143m (2005 £210m) comprise £91m (2005 £218m) relating to the Share in Success payments, £44m (2005
£23m) for impairment and £75m (2005 £36m) for redundancy costs, offset by profits of £67m (2005 £67m) from property and business
disposals.
Net finance income
Net finance income of £100m (2005 £75m) comprises notional pension interest of £101m (2005 £59m), interest earned on investments
of £48m (2005 £55m) and other interest receivable of £3m (2005 £3m), offset by interest payable on loans of £48m (2005 £36m) and
other interest payable of £4m (2005 £6m). Interest earned on investments decreased by £7m due to lower average investment balances,
because of the funding of POL’s loss making social network, offset by higher interest rates. Interest payable increased primarily due to
higher average borrowings in our Post Office® network needed to fund benefits payments. The notional pension finance income has
increased by £42m due to higher returns on pension scheme assets more than offsetting interest cost on higher pension scheme
liabilities.
Taxation
The taxation credit of £83m (reported rate -27%) comprises £25m current tax payable on overseas profits; a £7m deferred tax credit with
respect to overseas operations; a UK current tax charge of £11m and a UK deferred tax credit of £112m. Last year a charge of £16m
was recorded comprising £8m current tax charge with respect to UK operations; a £12m current tax charge on overseas profits; a £19m
UK deferred tax charge and a £23m overseas deferred tax credit. The negative reported rate is mainly due to the increased amount of
deferred tax asset recognised.
Royal Mail Holdings plc
Operating and Financial Review (continued)
Cash flow and capital expenditure
The Group made significant payments with respect to costs recorded in 2004-05, the last year of the Renewal Plan, of £486m, mainly
Share in Success £218m, and pension top-ups £208m. The adjacent table is a summary of the Group cash flow statement.
Summary of cash flows
Cash utilised in operations
2006
£m
(10)
2005
£m
(220)
Cash utilised in operations is £10m (2005 £220m), which comprises:
• Earnings Before Interest, Tax, Depreciation and Amortisation
Dividends from JVs and associates
30
19
(EBITDA) inflows of £497m (2005 £422m);
Capital expenditure and disposals
(170)
(132)
• Working capital inflows of £17m (2005 £387m outflow);
Tax, interest and other
Business acquisitions and disposals
Movements in borrowing
Net cash outflow
Add back:
Share in Success relating to prior year
Other exceptionals relating to prior year
In year cash flow
4
(17)
(16)
(179)
218
268
307
23
(2)
287
(25)
-
243
218
• Share in Success payments of £218m relating to last year’s Renewal
Plan; and
• Other payments relating to exceptional items of £306m (2005
£255m), including pension top ups of £209m (2005 £5m) and
further rationalisation costs of £97m (2005 £250m).
Dividends received from joint ventures and associates of £30m (2005
£19m) are mainly from First Rate Travel Services Limited £17m (2005
£10m), Quadrant, £4m (2005 £2m) and Camelot, £7m (2005 £5m).
Capital expenditure net of disposals of £170m (2005 £132m) comprises £243m (2005 £227m) of expenditure, including motor vehicles
of £56m, further payments with respect to the International Mail Centre near Heathrow of £36m, £42m for GLS projects, and £76m for
property and equipment improvements with the remaining £33m on software and other intangibles, offset by inflows of £73m (2005
£95m), mainly from surplus property disposals. Tax, interest and other inflows in the year of £4m (2005 £23m) comprise net interest
inflows of £1m (2005 £10m), tax recovered of £4m (2005 £13m) offset by the net purchase of other financial assets of £1m (2005 £nil).
The net £17m outflow from business acquisitions and disposals (2005 outflow of £2m), relates to deferred consideration payments of
£22m and £1m payment on the acquisition of the remainder of GLS Stafetten A/S, offset by inflows from the sale of RM Netherlands of
£2m and receipts of £4m in respect to the outsourcing of IT operations to the Prism Alliance.
Provisions
Provisions at the end of March 2006 were £111m (March 2005 £172m). The decrease of £61m comprises cash spend of £99m, and
transfers to short-term pension creditors of £48m, offset by £86m of new provisions relating to rationalisation and onerous property
contracts.
Special reserves
During the period, £147m of the Rural Network reserve has been used by Post Office Limited, representing the financing required during
the period to maintain the rural network of Post Office® branches.
16
Royal Mail Holdings plc
Operating and Financial Review (continued)
Group strategy
The following supports our Operating Units’ objectives:
Customers
Our customers are at the heart of everything we do. The key to winning and keeping customers is to provide a consistently high quality of
service (QofS) – this has been the number one priority of everyone in the business over the past year, and it is at the heart of our strategy
moving forward. That means delivering a high quality of service and mail integrity, developing products that really match the needs of our
customers and provide value for money, as well as becoming easier to do business with.
People
The ‘Great Place to Work’ initiative, which has been established within the organisation since 2003, works on the basis that we can only
move forward and succeed as a business if we involve our people in making change happen. The plan focuses on engaging and involving
people in managing and improving their workplace.
Profitability and cash flow
Ensuring a sustainable and reasonable level of profitability and cashflow is key so we can reinvest in our future and eventually provide a
commercial return to our stakeholder. The Group is seeking to address the historic underinvestment it has seen in its Letters business,
along with continuing to develop better and more efficient ways of working. This will help to ensure we are flexible and efficient enough to
succeed in a competitive marketplace.
Corporate citizenship
Corporate Social Responsibility in the Group is doing the right thing for our people, our business and the communities we operate in.
We do the right thing because our:
•
•
•
customers want to buy from companies that share their values:
colleagues want to work for companies that provide a healthy and safe environment and whose values align to theirs; and
communities want companies that create the incomes, the jobs and contribute to the cohesion that builds the neighbourhoods
where people want to live and work.
These key strategies and objectives are communicated widely across the Group, embedded into its day-to-day activities and measured on
a timely basis by appropriate KPI’s and monitored by the Royal Mail Holdings Board and its sub Committee. The major KPI’s are
highlighted below:
Customer
Service
Customer
Great Place
to Work
Profitability and
Cash flow
Good Corporate
Citizen
People
Financial
Environmental
QofS targets
Employee survey
Turnover
Number of complaints
Health & Safety
Operating profit*
Customer service index
RIDDOR/1000 staff
Return on sales*
CO2 emissions/1000
items
Social & Community
Business and
employee donations
Sick absence
Operating cashflow
* before exceptional items
17
Royal Mail Holdings plc
Operating and Financial Review (continued)
Treasury management
The Group operates a central Treasury function that manages some £1bn of current asset investments, £866m of borrowings and
£829m of cash primarily in the Post Office® network, in accordance with investment restrictions set by the Government. It also acts as
internal banker for the Group’s business units. The Group finances its operations largely through retained profits and borrowings.
Group Treasury derives its authority from the Royal Mail Holdings plc Board, and provides quarterly monitoring reports for their review.
The Treasury function only has the authority to undertake financial transactions relating to the management of the underlying business
risks and it does not engage in speculative transactions and does not operate as a profit centre. All strategies are risk averse, and the
treasury policy has remained unchanged during the year. The principal financial instruments for liquidity management are deposits and
short-term borrowings; and for commodity and currency hedging are spot/forward purchases, and swaps.
The Group is financed from the following facilities provided by the DTI and HM Treasury:
Borrower
Royal Mail Group plc
Royal Mail Group plc
Post Office Limited
Purpose
Acquisition funding
Restructuring and working capital
Network cash repayable on demand
Facility
end date
2021-2025
2007-2009
2010
Facility
£m
500
844
1,150
Utilised
£m
500
Nil
360
Average
loan
maturity
date
2023
-
2006
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of
cash funds within the Royal Mail Group and the purposes for which they can be used.
The principal treasury risks arising from the Group’s activities are currency, counterparty, commodity (fuel) and liquidity risk. These are
managed as follows:
• the Group is exposed to foreign currency risk due to Royal Mail International’s obligation to pay overseas postal operators for
carrying UK mail abroad, revaluation of the currency balances held to operate the Bureau de Change services within Post Office
Limited and various sales and purchase contracts denominated in foreign currency. Hedging programmes managed by Group
Treasury mitigate these risks. Where possible, exposures are netted internally and any remaining exposure is hedged using a
combination of external spot and forward contracts;
• the Group’s obligation to pay overseas postal operators is denominated in Special Drawing Rights (SDRs) – a basket currency
comprising of US Dollar (USD), Japanese Yen, Sterling and euro. The Group has a policy of matching receipts and payments for
individual currencies where possible and then hedging any material net exposure. The policy is that up to 80% of the forecast
net exposure is hedged with agreement of the internal business unit. Group Treasury operates a rolling 18-month programme,
which is subsequently reviewed on a quarterly basis. There has been no external hedge in place throughout the financial year
2005-06 due to there being no material net exposure;
• Bureau de Change balances are grouped into baskets of closely correlated currencies. Each currency basket (e.g. USD or euro)
is then sold forward creating a liability to match the underlying asset;
• significant foreign currency risk arising from sales and purchase contracts, primarily in USD and euro, may be hedged up to
100% depending upon the reliability of the forecast of the underlying cash flows;
• the Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries;
• the Group is exposed to fuel risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 150
million litres of fuel per year, and a jet fuel risk from the purchasing of air freight services. The Group’s fuel risk management
strategy aims to reduce uncertainty created by the movements in the oil and foreign currency markets. The strategy operates
within the parameters set by the Board, which allow the use of over-the-counter derivative products to manage these
exposures; and
• counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength.
These exposures are reviewed regularly and adjusted as appropriate.
The policies for financial assets - investments and derivative financial instruments are shown in note 2.
18
Royal Mail Holdings plc
Operating and Financial Review (continued)
Business environment
Regulation
Until the last few years, Royal Mail had enjoyed a monopoly status in the UK letters industry. However, in 2000 the Postal Services Act
created an independent postal Regulator – Postcomm – and allowed Royal Mail to have greater commercial freedom. Postcomm regulates
the prices of nearly 90% of Royal Mail’s letters business, controls the terms and conditions for nearly all its services, fixes the quality of
service targets in its Licence with Royal Mail Group plc and determines compensation arrangements.
An overview of significant regulatory events since Postcomm was created is highlighted below:
Royal Mail willing to accept Postcomm's
Royal Mail willing to accept Postcomm's
proposal for 3rd price control,
proposal for 3rd price control,
4yr duration, including pension
4yr duration, including pension
risk corridor
risk corridor
Jan 2006
Jan 2006
Royal Mail gets go ahead
Royal Mail gets go ahead
for introduction of
for introduction of
Pricing in Proportion
Pricing in Proportion
May 2006
May 2006
Aug 2005
Aug 2005
UK Postal Market
UK Postal Market
opened up to full
opened up to full
competition
competition
Feb 2005
Feb 2005
Postcomm announces
Postcomm announces
acceleration of competition
acceleration of competition
by 15 months to January 2006
by 15 months to January 2006
Royal Mail agrees ground
Royal Mail agrees ground
breaking downstream
breaking downstream
access control with UK Mail plc
access control with UK Mail plc
Feb 2004
Feb 2004
March 2003
March 2003
Postcomm announces its
Postcomm announces its
decision on the phased
decision on the phased
introduction of competition in
introduction of competition in
the UK postal market – an
the UK postal market – an
accelerated programme
accelerated programme
compared to the rest of Europe
compared to the rest of Europe
aiming for full competition by
aiming for full competition by
April 2007
April 2007
March 2001
March 2001
Postal Services Act
Postal Services Act
and creation of
and creation of
Postcomm –
Postcomm –
Independent regulation
Independent regulation
Royal Mail accepts Postcomm’s
Royal Mail accepts Postcomm’s
proposal for 2nd price control,
proposal for 2nd price control,
3yr duration including new
3yr duration including new
bulk mail compensation scheme
bulk mail compensation scheme
May 2002
May 2002
Royal Mail granted
Royal Mail granted
15yr licence 1st two
15yr licence 1st two
year price control
year price control
July 2000
July 2000
Post Office Limited is increasingly subject to regulation in financial services and in telephony. Post Office Limited is an appointed
representative of the Bank of Ireland, which in turn is regulated directly by the Financial Services Authority.
It is the Group’s policy to be fully compliant with the regulatory framework in which we operate. During 2005-06 we have continued to
strengthen our compliance activities working in close liaison with our Regulators.
Competition
All of the Group’s business units now operate in a competitive marketplace.
•
•
•
•
Parcelforce Worldwide and GLS have been operating in an open market since their inception;
Post Office Limited, due to reduction in income from benefit payments and a significant and continuing decrease in Government
use, has developed new revenue streams from financial services products (including car insurance, a ‘two-in-one’ credit card, a
personal loan etc.), its HomePhone and directory enquiries services etc. These products are, however, in direct competition with
services offered by banks, insurance and telephony companies, as are many of the services it has traditionally offered, e.g. bill
payments, renewal of car tax discs, travel services etc;
Royal Mail has faced competition via ‘Downstream Access’ (DSA) agreements with companies since February 2004. DSA allows
competitors to collect and sort mailings of 4,000 items or more, before handing them over to us via our mail centres. Our
postmen and women then deliver these items the ‘final mile’ and last year we delivered over 1 billion DSA items – the volume
Postcomm had anticipated Royal Mail reaching within four years. Since January 2006, the UK mail market has been fully
liberalised so competitors are able to offer customers the opportunity of an end-to-end service for collection, sorting and
delivery of their mail. While Royal Mail has to maintain its universal service obligation, competitors have no such obligation and
are therefore able to target the most profitable areas of the letters business; and
Royal Mail’s previous monopoly position has created an imbalance in prices, which do not reflect the cost of handling the mail.
For Royal Mail to compete effectively in an open market, its postage prices need to reflect its costs. Rebalancing these prices will
benefit some users more than others but it would stimulate innovative pricing structures giving consideration to customer base,
presentation, timing and planning of postings, location of both posting and delivery, speed of posting and mechanisation of
posting.
19
Royal Mail Holdings plc
Operating and Financial Review (continued)
Changing markets
On top of this liberalisation, the market faces changes including:
•
•
•
e-substitution – the role of mail is changing as people are increasingly using a wider number of channels for communication,
including email, mobile telephone calls and texting etc. This offers an opportunity as well as a challenge to keep mail relevant to
customers;
e-fulfilment - the use of the Internet as a sales channel has and continues to increase demand for end-to-end delivery of
packets and parcels at affordable prices; and
advertising/Direct Mail – the use of mass mail advertising campaigns tends to reflect the health of the UK economy. Companies
are also developing as more innovative, targeted campaigns based on greater sales intelligence and greater integration with
other mediums.
While these changes present risks and challenges to Royal Mail they also present significant opportunities to work with our customers to
deliver the service they need for their companies to succeed.
Macroeconomics
There are a number of macroeconomic issues that will impact the Group over 2006-07:
•
•
•
•
Gross Domestic Product (GDP) in 2006-07 is forecast to come in below trend at 2%. These low rates of increase may impact
letter traffic growth over the next 2 years;
overall inflation is low, this will impact on both our prices, as our prices are based on an RPI-x formula, but also our costs;
gas, electricity and oil prices are set to remain high, which will add to the Group’s costs; and
despite increasing unemployment and a poor economic outlook in certain areas of the country, full employment will continue
elsewhere - leading to a challenge to contain high rates of natural turnover of our people.
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a key component in supporting the business to be recognised as a responsible organisation that
seeks to optimise the beneficial impacts inherent in our business and reduce the negative impacts. Through improving our CSR
performance and ensuring it is integrated into the way we work, we can make ourselves more productive and competitive, we are working
to reduce the number of accidents, reduce our production of CO2 and make our people healthier. We recognise that the route to achieving
and sustaining our goals is through our people and our relationship with customers, business partners, suppliers, communities and other
stakeholders.
A more comprehensive overview of our CSR will be found in the 2006 Corporate Social Responsibility report, published in September
2006.
20
Royal Mail Holdings plc
Operating and Financial Review (continued)
Key Relationships
Royal Mail has several key relationships that are critical to its day-to-day activities and its overall success.
People - Our people are the lifeblood of the organisation and brands. Without their continued support and dedication it will be impossible
to function on a day-to-day basis and embrace the change within our markets. Training, diversity, flexible resourcing and making the
business a great place to work are some of the ways we continue to improve this relationship.
Unions – The Communications Workers Union (CWU) represents non-managerial staff, with the Communication Managers Association
(CMA) representing managerial staff. The Company’s policy is to work with the CWU and CMA to engage staff in the development and
execution of business decisions.
Pension trustees – Our pension trustees comprise an independent body of 10 people including employees, union representatives,
pensioners and independent members. They take professional advice, including from Watson Wyatt LLP (actuary) and
PricewaterhouseCoopers LLP. They are responsible for full and interim valuations and agreeing with Royal Mail appropriate funding for
the pension schemes. The pension trustees now face increasing regulation from the pensions regulator, which was created in the
Pensions Act 2004.
Subpostmasters - The vast majority of Post Office Limited‘s 14,376 Post Office® branches are operated by subpostmasters and franchise
partners. The National Federation of Subpostmasters (NFSP) represents subpostmasters and currently has approximately 9,300 members.
Post Office Limited conducts annual remuneration negotiations with the NFSP and work closely to support a viable network. The NFSP is
separately a very active body lobbying Government, regulators and consumer bodies. There are several major retailers who are also
significant partners operating between them around 1,700 branches across the country. Post Office Limited liaises closely with these
companies to maintain successful working relationships. It is through effective partnership with these various organisations that the business
takes into account the interests of agents and seeks to support the achievement of their sales potential and longer-term network viability.
Customers – The Group’s businesses and brands are used or recognised by almost everyone in the UK – from the largest of companies to
individuals. However, the 30 largest customers generate almost 14% of Group turnover and consequently Royal Mail is reliant on a small
customer base. As competition increases the Group will have to continue to simplify ways of doing business and design products around
customers’ needs. Customers are offered standard terms and conditions for the markets and countries in which the Group operate.
Suppliers – The Group has a wide range of suppliers, with its primary reliance on those relating to outsourcing of non-core services, such
as IT support. It works in partnership with its suppliers to ensure the right products/services are delivered at the right time at competitive
costs. A central purchasing team monitor compliance to Group policy in awarding contracts or new business and adheres to agreed credit
terms.
The Regulator: Postcomm - 90% of Royal Mail letters’ revenues are price-controlled and the price control is set periodically by Postcomm
in the form of a cap on the average price of a basket of products. The price increases or reductions allowed by Postcomm through the
price control have a very material impact on the likely levels of cash flow the company can generate. Postcomm also investigates
compliance with licence conditions and has broad powers to publicly reprimand or fine the Company if it finds it in breach of those
conditions.
The consumer body: Postwatch – Postwatch’s role is to act as a consumer advocate in postal matters. Its public views on the effect of
Royal Mail’s policies and management actions on customers can have a damaging effect on Royal Mail’s reputation, regardless of the
quality of service achieved. This can translate into increased customer complaints.
Shareholder – The Group is a plc that is 100% owned by the Government. The Shareholder Executive (within the Department of Trade and
Industry) manages the shareholder relationship with Royal Mail as a commercial shareholder. While management of the company
therefore lies with the Board of Directors, the shareholder is kept up-to-date through quarterly performance reviews and is asked
annually to approve the Company’s business plan. Any new funding required by the company can only come from Government and can
only be approved by the Shareholder Executive if it meets market economic investor principles.
21
Operating and Financial Review (continued)
Segmental analysis – revenue and profitability
In the following analysis, all references to operating profit are before exceptional items.
Group external revenue of £9,056m (2005 £8,956m) and operating profit before exceptionals of £355m (2005 £302m) are made up as
follows:
Royal Mail Holdings plc
External revenue
Operating profit/(loss)
Business unit performance
2006
£m
2005
£m
Royal Mail
6,859
6,763
General Logistics Systems
1,037
Parcelforce Worldwide
Post Office Limited
Other businesses
314
838
8
913
298
976
6
Group
9,056
8,956
2006
£m
344
100
5
(111)
17
355
2005
£m
343
73
(6)
(123)
15
302
A further analysis of results, on a unit-by-unit basis, is shown below:
Royal Mail
External revenue
2006
£m
2005
£m
6,859
6,763
Operating profit before exceptionals
344
343
External revenue grew by £96m (1.4%) to £6,859m, which is primarily a
result of average price increases of 1.7%, partially offset by a decline in
inland addressed volumes of 0.7% including stamps, meters and Mailsort.
The price increases are across most products as permitted by the price
control set in 2003, which allows Royal Mail to increase its prices by RPI-
1%.
Royal Mail’s £1m operating profit improvement from £343m to £344m is due to a 1.4% improvement in revenue growth (but versus a
3.2% growth in the corresponding period last year). The revenue growth of £96m is mainly due to tariff increases of £118m (1.7%) arising
mainly from domestic mail, £95m (1.4%) from non-addressed and international products, offset by underlying inland addressed mail
volume decline of 0.7% (£50m), a £5m (0.1%) negative mix impact and a 0.9% (£62m) negative impact relating to customers switching to
the cheaper Downstream Access products. There is limited scope to reduce operational costs in the short term due to our Universal
Service Obligations.
General Logistics Systems
External revenue
2006
£m
2005
£m
1,037
913
External revenue rose by 124m (13.6%) from £913m to £1,037m. The
growth results from strong increases in domestic core parcel volumes and
the continuing expansion of the European network, including acquisitions
in Poland and Italy.
Operating profit before exceptionals
100
73
Operating profit increased by £27m (37.0%), from £73m last year to
£100m this year, driven by a combination of increased revenue, and a
continuing focus on cost control and operational efficiency.
Parcelforce Worldwide
External revenue
Operating profit/(loss)
before exceptionals
2006
£m
2005
£m
314
298
5
(6)
External turnover rose by £16m (5.4%) in difficult market conditions as
Parcelforce Worldwide saw the benefits of its refocused commercial
direction.
Service focus continues to be on delivering high levels of reliability and
also improving customer access via the web, telephone contact, and staff
training. As a result Parcelforce Worldwide continues to enjoy growth
particularly in the business to consumer market. Operational efficiency improved by 16% compared to last year. Operating costs are 1.7%
higher than last year but this includes absorbing 7% additional volumes. The second half of the year saw an acceleration of unit cost
improvement as revisions introduced in the first half of the year began to take effect. Strong improvements in vehicle and logistics costs
have in part been offset by higher fuel costs and international conveyance costs as international volumes have risen. Operating profit of
£5m has improved by £11m 183% from the loss of £6m in 2005. This is the first time that Parcelforce Worldwide has generated a full
year operating profit reflecting the success of the refocused direction and dedication from all of its people.
22
Operating and Financial Review (continued)
Royal Mail Holdings plc
Post Office Limited
External revenue
2006
£m
2005
£m
838
976
Operating loss before exceptionals
(111)
(123)
Revenue decreased by £138m (14.1%) due to reduced traditional benefit
revenue as a result of migration to direct payment and reduced revenue
from motoring services, mostly due to migration by the DVLA to
payment via the internet partly offset by new product initiatives such as
Homephone and Post Office Financial Services, and further growth in
banking revenue.
Although Post Office Limited saw substantial revenue losses it succeeded in reducing losses from £123m to £111m. The loss of the
traditional benefits income of £168m (35%) was offset by attracting new revenue streams, primarily from Telephony, Banking and
Financial Services activity, together with continued improvements in overall cost efficiency. The £111m loss includes the cost of
maintaining the uneconomic part of the rural network. Had this activity been funded by an arm’s length commercial contract with
Government, Post Office Limited would have made a profit.
Other businesses
External revenue
Operating profit before exceptionals
2006
£m
2005
£m
8
17
6
15
Other Group businesses comprise Postcap (Guernsey), our captive
insurer (100% owned), Royal Mail Pension Trustees, our pension
administrators (100% owned), Romec, our facilities management
operation (51% subsidiary), NDC, our building engineering services
operation (51% subsidiary), Quadrant, our catering services (51%
associate), Camelot UK national lottery operator (20% associate).
External revenue from subsidiaries has increased to £8m (2005 £6m).
Operating profit is £2m higher primarily due to increased profits in Quadrant of £3m, Romec £1m, offset by decreased profits in Camelot
and NDC. The results of other associates and joint ventures not held centrally are included within Post Office Limited’s and Royal Mail’s
results.
Way forward
The Group has registered a strong profit growth in the first year post Renewal Plan whilst at the same time delivering excellent quality of
service. This is also the fourth consecutive year of underlying growth in profitability, driven this year by our unregulated parcels
businesses which continue to increase volumes, revenues, margin and profit; Post Office Limited reducing its losses in the face of
significant volume and revenue decline; and Royal Mail managing its costs to mitigate the material loss of volumes to lower priced access
products. However, this performance needs to be considered in the context that the Group still only generates a 3.9% return on sales,
which is considerably below that of our competitors, and that both Royal Mail and Post office Limited continue to support significant loss
making products or sectors – Royal Mail continues to make losses on stamps, whilst part of the Post Office Limited network continues to
make losses.
Royal Mail has recently indicated to Postcomm that it is ready to accept Postcomm’s proposals for the third price control for the next four
years, but finds itself further burdened by restrictions on its ability to change its non-price terms at a time when markets are being
opened and flexibility will be key. It also expects to see further volume loss to Downstream Access over and above the 1 billion loss in
2005-06. However, Royal Mail continues to drive efficiencies, but now must significantly invest in its network to ensure it can continue to
do so and compete with domestic and European rivals.
Post Office Limited expects to lose further revenues over the short term and will continue to try to find new revenues and reduce its cost
base – this is becoming increasingly difficult. Our parcels businesses are expected to grow, albeit at lower rates than experienced in the
past, due in part to the industry-wide consolidation that is taking place.
But our biggest hurdles by far are tackling our £5.6bn pension deficit whilst ensuring that the Group has an appropriate financing package
to permit Royal Mail to invest in its network, provide a long term sustainable solution to Post Office Limited’s loss-making branches, the
rebalancing of prices within Royal Mail, and to provide adequate headroom to manage the significant commercial risks with respect to
liberalisation and the loss of traditional revenues within Post Office Limited.
23
Royal Mail Holdings plc
Operating and Financial Review (continued)
Risks Disclosures
The Group uses a business-wide framework for the identification, assessment, treatment, monitoring and reporting of risk. The process
helps support the business objectives by linking into business strategy, identifying and reacting to emerging risks, developing cost effective
solutions to risk and, where appropriate, exploiting risks to gain competitive advantage.
Group-level risks have been identified and are being managed to support the long-term sustainability of the Group:
The Group operates in an environment subject to regulation, which imposes restrictions on operations and the risk of penalties for non-
compliance
The Postal Services Commission (Postcomm) issued to Royal Mail a 15-year operating licence in March 2001. The Licence contains
material restrictions on the operation of Royal Mail’s business, including restricting its freedom to set its own prices and requiring it to
permit competitors access to its downstream delivery network. If Royal Mail breaches certain licence conditions it may be subject to
compensation payments and fines. There is inevitable uncertainty as to how the regulatory regime will affect Royal Mail in the future,
possibly to the detriment of the Group’s profitability.
Royal Mail, unlike other postal licence holders, is obliged by its licence to provide a ‘Universal Service’, resulting in a higher, less flexible
cost base than its competitors
Royal Mail's licence requires it to comply with the Universal Service Obligation (USO). This means that a letter must be delivered within the
UK for the same price irrespective of the distance or remoteness of the destination. The USO also requires one delivery of mail for every
UK household and business, and one collection of mail, six days a week. This is still a requirement for us in the now fully liberalised
market, resulting in a higher and less flexible cost base in comparison to our competitors. However, the USO ensures Royal Mail has the
largest, distribution network in the country – which may present future opportunities.
Liberalisation of the UK’s postal markets may lead to competitors ‘cherry picking’ the most profitable customers, which could adversely
affect revenues and profitability
As of 1 January 2006 Royal Mail was subject to full competition. Rival companies have been able to collect, sort and then access our
network via ‘Downstream Access’ since 2004. However, a fully liberalised UK mail market means that competitors can by-pass our
network altogether. With 80% of Royal Mail’s revenue coming from its business customers, it will be these customers that competitors
target but without the licence stipulation of a USO.
Ease of entry into, and exit from, the UK postal market could distort the market leading to volume volatility
A number of competitors who are not established postal service providers may initially enter the UK postal market and then rapidly exit. If
this is the case it will distort the market and be increasingly difficult to plan and accurately forecast the future capacity requirements.
The increasing substitution by alternatives to mail delivery services could lead to declining volumes, which would have an adverse impact
on profit
Business mail is an integral part of our business, delivering items for organisations such as Government departments, utilities, financial
services, local authorities and charities. Technologies such as e-mail and the Internet can be used to send information or make available
such information faster and, in many cases, at a lower cost than traditional mail services. Many organisations are now giving incentives to
customers to take up these alternatives. If substitution continues, mails volumes will decrease resulting in the associated fall in revenue.
Due to the USO however, Royal Mail will need to continue to maintain a comprehensive delivery network. As a result costs will not
decrease in line with decreasing volumes. This would have an adverse impact on profitability.
Royal Mail is largely dependent on the Regulator for its pricing, which could result in pricing inflexibility
Royal Mail’s prices for most of its letters products are determined by price control reviews and negotiations with Postcomm. Although
such prices are well defined by a regulatory formula, Royal Mail’s ability to rebalance its prices to better reflect the costs of handling the
mail is dependent on Postcomm. Royal Mail has some of the cheapest stamp prices in Europe, as historically business mail has subsidised
the losses made on stamped mail. Unless the applicable regulatory restraints permit Royal Mail to recover from this imbalance, there is a
risk that Royal Mail will always lose money on stamped mail, whilst its competitors cream-skim more profitable products such as business
mail.
Royal Mail derives a significant amount of its revenue from a relatively small number of customers; if a number of these were lost it
would have an adverse impact on profit
Competitors are successfully targeting larger customers and the most profitable areas of this business, yet will not be required to comply
with the Universal Service Obligation (USO). Also, socioeconomic changes are leading to a decline in mail volumes. Due to the USO,
however, costs may not decrease in line with falling volumes. This may have an adverse impact on profitability unless the Group can flex
its operational cost base.
If the UK’s economy slows or goes into recession this is likely to have a detrimental impact on the Group’s profits
The global economy is in the midst of a radical transformation, with far-reaching and fundamental changes for the pattern of economic
activity. These changes pose challenges and opportunities for the UK and all advanced economies. Historically there has been a correlation
between the state of the UK economy and level of revenue, if the economy continues to slow or goes into recession it will have a direct
impact on mail volumes, and consequently on the Group’s profits.
24
Royal Mail Holdings plc
Operating and Financial Review (continued)
The Group has a unique relationship with the Government, which may be affected by any future change in Government policy
The Government is Royal Mail’s only shareholder. The influence of public policy considerations on Government thinking may adversely
affect the Group’s ability to promote an effective business strategy. This is particularly significant in the case of Post Office Limited, which
is frequently viewed as a public service provider but is required to run its branch network as a commercial business. The Government’s
policy in relation to the social value of rural Post Office® branches may have a prejudicial effect on Post Office Limited’s ability to run an
efficient and profitable retail network, since rural branches are fundamentally unviable without material financial support from the
Government. Furthermore, a change in Government or its thinking may lead to a different perception of the business and different
requirements, which may have an impact on the long-term strategy of the business.
The Group is subject to changes in both domestic and European regulation and legislation, which could expose it to possible additional
costs
Various recent proposed changes to European or domestic law will have a direct impact on the Group; such as the European Working
Time Directive, International Financial Reporting Standards, speed restrictions on our vehicles and increased liberalisation of the market
for postal service providers. Any future changes may have a material impact on the Group and its individual business units.
Post Office Limited is now an appointed representative of the Bank of Ireland who are authorised and regulated by the FSA and has to
satisfy them that it is meeting the relevant regulatory requirements. It is also subject to anti-money laundering regulations issued under
the Proceeds of the Crime Act and enforced by HM Revenue and Customs. In 2005 Post Office Limited entered the telecommunications
market and is licensed as a telephone service provider by OFCOM. OFCOM has issued a Code of Conduct that service providers must
adhere to.
The business is people centred and depends on quality employees to be able to deliver its objectives
Royal Mail is one of the largest employers in the UK, employing about 193,000 people throughout its UK operations. Currently
employment within the UK is at an all time high leading to potential skills shortages and competition between employers for staff. This
combined with the fact that some areas of the country in which Royal Mail operates have a high natural turnover in staff, could lead to a
potential shortage in the number and/or quality of available new recruits.
Without a continued change of culture within the organisation future development may be affected
The nature of the organisation relies on a large number of unionised people to ensure continuity and quality of service. The business has
undergone a huge amount of operational change, and while this has produced a return to profitability it has also coincided with a
changing market place; both in terms of financial pressures from competition and regulation and increased customer expectations. Due to
these emerging pressures future growth and development needs to be supported by a cultural change within the organisation. Without a
flexible, efficient and cooperative culture, Royal Mail could quickly become loss-making in an open market as mail volumes decline, labour
rates increase, and customers have a choice of postal operator. In the event of significant industrial action this could have a major
detrimental effect on the Group’s reputation and profits.
The Group relies on a number of key suppliers and could be at risk from adverse changes in price or performance
There are certain critical suppliers to the Group. If for some reason any of them were unable to meet their service obligations or were to
increase prices significantly, this would adversely impact Royal Mail’s operations and results.
The Group’s business activities are time critical. This means that if certain infrastructure facilities were disrupted it would have an impact
on our business and operating results
The Group operates 14,376 retail outlets and a complex nationwide network delivering to every postal address in the UK. The business is
subject to a number of operational risks outside its control, including natural disasters, fire, flood, explosion, possibility of work stoppages
or civil unrest, transport infrastructure disruption, power failures, breakdown or failure of equipment, health pandemics, terrorism and the
normal hazards associated with running a complex infrastructure. Any such disruption would have an adverse impact on business and
operating results.
Insufficient investment in the operational network could affect productivity levels and our ability to compete effectively in a liberalised
market
To maintain and improve on our business and operational performance, large on-going investments in infrastructure are required. An
historic underinvestment has lead to equipment and technology nearing the end of its life cycle without being replaced with new
technology. A continued lack of investment in the Group’s operational network could lead to an inability to compete effectively in an open
market, due to deterioration in productivity levels or an inability to improve productivity in comparison to its competitors.
The Group’s brands are amongst the most recognised and most trusted in the UK; however, our reputation may be adversely affected by
reports of poor customer service
The Group’s brands - Royal Mail, Post Office® and Parcelforce Worldwide are some of the most well-known and trusted brands in the UK
and therefore major intangible assets of the Group. Negative perceptions of these brands and may lead to a loss in confidence and
potential loss in revenue, profits and cash flow.
25
Royal Mail Holdings plc
Operating and Financial Review (continued)
The Group operates a substantial treasury operation, which is subject to financial exposures
Group Treasury is responsible for the liquidity of the Group and its subsidiaries. The Group is exposed to foreign currency risk and fuel
price risk. The former is due to Royal Mail international division’s obligation to pay overseas postal operators for carrying UK mail abroad
and the balances held to operate the bureau de change services within Post Office Limited. The fuel price risk arises from operating one of
the largest vehicle fleets in Europe, which consumes over 150 million litres of fuel per year, and a jet fuel risk from the purchasing of air
freight services.
If the treasury strategy is inappropriate to cover the Group’s exposures this could result in funds not being readily available when required
to pay liabilities or having a negative impact on profit due to increased costs.
The Group has a pension scheme deficit, which is subject to any volatile movements in actuarial assumptions and equity values
Royal Mail operates the 6th largest occupational pension scheme within the UK. It has some 170,000 active members and 279,000
pensioners/deferred pensioners. Due to its relative size to the Company (£5.6bn of pension liability compared to £2.3bn company net
assets excluding the pension deficit), and the longer life expectancy of people, even minor changes to assumptions used to calculate
pension costs and liabilities could have a severe impact on the Group’s balance sheet. This, combined with the fact that asset values are
dependent on the UK equity markets, means that there can be large volatility in the pension costs recorded in the income statement and
the deficit recorded in the balance sheet.
Royal Mail Group plc’s balance sheet has liabilities that exceed its assets, which could lead to various exposures, not least that the Licence
to operate could be terminated
Royal Mail Group plc’s negative balance sheet is due to the pensions deficit exceeding the Company’s assets. This may lead to a number of
remote risk exposures: Royal Mail’s postal licence could be terminated with 24 hours’ notice, and certain commercial customer and
supplier agreements may be terminated.
Frank Schinella
Acting Group Finance Director
17 May 2006
The prior year figures quoted have been restated for the impact of the transition to International Financial Reporting Standards.
26
Royal Mail Holdings plc
Royal Mail Holdings plc Board
Non Executive Directors
ALLAN LEIGHTON (53) joined the Board in April 2001 as a Non Executive Director, becoming Chairman in March 2002. He is also a Director
of Post Office Limited, and a member of the GLS Supervisory Board.
Allan began his career with Mars Confectionery and moved to Pedigree Petfoods as Sales Director. In 1992 he became Group Marketing
Director of Asda Stores Limited, and Chief Executive in 1996, becoming President and CEO of Wal-Mart Europe when Wal-Mart bought
Asda in 1999. He is currently Chairman of BHS Limited, Non Executive Director of BSkyB, Selfridges & Co, and George Weston Ltd. Allan
is also Chairman of Race for Opportunity.
DAVID FISH (57) joined the Board in January 2003. He is Chairman of the Remuneration Committee, and a member of the Nomination
Committee.
David was a member of the Mars Inc Operating Board from 1994 to 2001 and Joint President of Masterfoods Europe. He has also been
President of Snackfoods Europe, and held European Vice-President positions in marketing and personnel. He is currently Chairman of
United Biscuits Group (Investments) Limited and Chairman of Christian Salvesen.
RICHARD HANDOVER (60) joined the Board in January 2003. He is Chairman of the Nomination Committee, and a member of the
Remuneration Committee.
Richard was Chairman of WH Smith plc until January 2005. He is currently Chairman of the Adult Learning Inspectorate and is a Non
Executive Director of the Nationwide Building Society.
SIR MICHAEL HODGKINSON (62) joined the Board in January 2003. He is the Senior Independent Director, and a member of the
Remuneration Committee. In May 2003 he was appointed Chairman of Post Office Ltd and Chair of the Corporate and Social
Responsibility Governance Committee, and is Post Office Limited’s nominated director on the Bank of Ireland Board.
Sir Mike was Chief Executive of BAA plc until retiring in June 2003. He is currently a Board Member and Chairman of the Finance
Committee of Transport for London, a Non Executive of FKI plc and Non Executive Chairman of First Choice Holidays plc.
JOHN NEILL CBE (58) joined the Board in January 2003 and is a member of the Audit and Risk Committee.
John has been Group Chief Executive and Deputy Chairman of the Unipart Group of companies since 1987. He was formerly a Director of
the Court of the Bank of England, and is Non Executive Director of Charter plc. He is also Vice- President of the Society of Motor
Manufacturers and Traders and a Director of the SMMT industry forum, and Business in the Community.
BARONESS MARGARET PROSSER (68) joined the Board in November 2004 and is a member of the Nomination Committee and Audit and Risk
Committee.
Margaret has been a Member of the House of Lords since 2004. She is a Non Executive Director of the Trade Union Funds Managers and
has been Chair of the Women and Work Commission since July 2004. She is also Chair of the Women’s National Commission.
HELEN WEIR (43) joined the board in January 2006 and is a member of the Audit & Risk Committee.
Helen has been Group Finance Director at Lloyds TSB Group since 2004. Prior to that she was Group Finance Director of Kingfisher, she
is a member of the Accounting Standards Board.
BOB WIGLEY (45) joined the Board in April 2003, and is Chairman of the Audit and Risk Committee.
Bob is Chairman of Merrill Lynch’s business in Europe, the Middle East and Africa, and a Deputy Chairman of Business in the Community.
Executive Directors
ADAM CROZIER (42) joined the Company in February 2003. He is Group Chief Executive, and leads the Group Executive Team. During the
year he also had direct day-to-day control of the Letters Business.
Adam was Chief Executive of the Football Association from 2000-2003. Between 1988 and 1999 he held a number of senior roles at
Saatchi and Saatchi Advertising, including that of Joint Chief Executive from 1995.
IAN GRIFFITHS (55) joined the Company as Managing Director of the Letters Business in February 2006. He is a member of the Group
Executive Team.
Ian was previously at GKN from 1975. Ian was a member of the senior GKN Driveline management team since 1990 during which time
he was responsible for operations in the US and for global marketing and engineering. He was appointed Chief Executive GKN Driveline in
2000 and to the Board in 2001 as Managing Director GKN Driveline. In October 2004 he became responsible for the Group's worldwide
Driveline, Powder Metallurgy and Auto Components operations. Ian is also Non-executive Director of Ultra Electronics Holdings plc.
27
Royal Mail Holdings plc
Royal Mail Holdings plc Board (continued)
ALAN COOK CBE (52) joined the Company in March 2006 as Managing Director of Post Office Ltd, having been a non-executive Director of
Post Office Ltd since February 2005. He is a member of the Group Executive Team.
Before joining as MD of Post Office Limited, Alan was Chief Executive of National Savings and Investments, prior to which he had been
Chief Operating Officer of the Prudential Assurance Company. Alan is also currently serving on the Council of the Institute of Financial
Services.
TONY McCARTHY (50) joined the Company in January 2003 and is Group Director, People and Organisational Development. He is a member
of the Group Executive Team, the Pensions Committee and the Corporate and Social Responsibility Governance Committee.
Tony had previously been Group Human Resources Director of BAE Systems, where he had worked in a variety of HR roles since 1978.
DAVID BURDEN (59) joined the Company in November 2002, was appointed to the Board in July 2004, and is Group Technology Director.
He is a member of the Group Executive Team and chairs the Corporate Risk Management Committee.
David was previously Group Executive General Manager, Technology and Services at Qantas Airways Ltd in Sydney, responsible for IT,
purchasing, property, motor transport and fuel services. He was a member of the Executive Committee throughout the transition from
Government ownership to a successful listed public company.
JONATHAN EVANS OBE (54) joined the Company directly from university in 1974 and has been Company Secretary since 1999, having held a
wide range of management positions throughout the Group. He is a member of the Group Executive Team, and Pensions Committee,
Secretary to the Audit and Risk, Remuneration and Nomination Committees, a Trustee Director of the Royal Mail Pension Plan and a
member of the GLS Supervisory Board.
Directors who resigned during the year
MARISA CASSONI (Group Finance Director) resigned from the Board on 17 November 2005.
DAVID MILLS (Chief Executive of Post Office Limited) resigned from the Board on 31 December 2005.
28
Royal Mail Holdings plc
Directors’ Report
The Directors present the Group accounts for Royal Mail Holdings plc. These accounts relate to the 52 weeks ended 26 March 2006
(2005 52 weeks ended 27 March 2005).
Principal activities
The Group provides a nationwide and international distribution service, principally of mails and parcels. The Group also provides access to
a wide range of financial and retail services through its network of Post Office® branches across the United Kingdom.
Review of the business and future developments
A review of the Group’s business and future developments is presented in the Chairman’s Statement, Chief Executive’s Statement, Annual
Review and the Operating and Financial Review.
Results and dividends
The profit before taxation amounted to £312m (2005 £167m). After taxation, the profit was £395m (2005 £151m). Of the profit after
taxation, £nil (2005 £nil) is attributable to minority interests. The Directors do not recommend a dividend (2005 nil dividend).
Political and charitable contributions
During the year the Group made charitable contributions of £1m (2005 £2m). No political contributions were made in the year (2005
£nil).
Research and development
Research and development expenditure during the year amounted to £1m (2005 £1m).
Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries is to use their purchasing power fairly. Payment terms are agreed in
advance for all major contracts. For lower value transactions, the standard payment terms of the supplier apply. It is the Company’s policy
to abide with the agreed terms. The Company and its principal operating subsidiaries in the UK have sought to comply with the DTI’s
Better Payment Practice Code. Copies of this can be obtained from the DTI. As the Company is a non-operating company, the creditor
days are zero. The creditor days of the operating subsidiaries can be found in their accounts.
Land and buildings
In the opinion of the Directors, the aggregate market value of the Group’s land and buildings exceeds the net book value, based upon a
historic cost accounting policy, of £1,125m (2005 £1,157m) by £660m (2005 £466m).
Financial instruments
Details of financial instruments are shown in note 29.
Directors and their interests
The Directors of the Company and details of changes during the year are given on pages 27 and 28. The Secretary of State appoints the
Chairman; all other Directors are appointed by the Company with the Secretary of State’s consent.
HM Government is the Company’s sole shareholder and accordingly the Directors have no interest in shares of the Company.
Qualifying third party indemnity provisions for Directors
At the time the Directors’ Report was approved under section 234A of the Companies Act 1985, a partial qualifying third party indemnity
provision was and remains in force for the benefit of all Directors of the Company and was and remains in force for the benefit of one or
more persons who were then Directors of the Company. The indemnity is granted under article 129 of the Company's Articles of
Association. The indemnity is partial in that it does not allow the Company to cover the costs of an unsuccessful defence of a third party
claim.
People
Royal Mail Group employs almost 193,000 people (2005 over 196,000) in our UK wholly owned subsidiaries. A reconciliation to the Group
headcount is shown in note 4 to the accounts. Our people are our strategic strength and competitive advantage.
The Group’s policy is to encourage effective communication and consultation between our people, particularly on matters relating to
strategy, financial and economic factors that may influence the Group’s performance. This is achieved through the use of an extensive
range of communication channels, including magazines, briefings, open forums and an intranet website. Our people have various bonus
schemes, significant elements of which are based on business-related targets.
We actively encourage continuous training and skill development for all our people to ensure achievement of corporate and individual
objectives. Management development and training programmes have been designed to attract and retain the best. The Group has worked
with the unions to introduce several innovative working practices to improve efficiency.
An Equal Opportunities policy is maintained in all respects including disability, age, religion, colour, sex, nationality, ethnic origin, sexual
orientation, race, creed and marital status.
In 2002, the Chairman created a programme to make Royal Mail Group a ‘Great Place to Work’ and made it a priority for everyone across
the business. The purpose of the programme is to encourage people to contribute to improving their working environment, to equip our
people with the skills they need, to develop pride in and understanding of the business and to drive respect for colleagues - in short, to
ensure people considerations are at the heart of all major business decisions. The programme is ongoing and will remain an integral part
of our people strategy.
29
Royal Mail Holdings plc
Directors’ Report (continued)
Our people strategy will ensure we realise our potential as an organisation through the strength of our people by developing a high-
performing, sustainable culture where everyone feels involved and valued. It focuses on seven key areas:
• creating interesting, meaningful jobs with more flexible working patterns;
•
identifying and developing in all our people a set of core behaviours that determine how we treat each other, our customers and
our Shareholder;
• building a fluid, innovative and adaptive organisation to improve our response to environmental and market changes;
• developing a high-performance culture in which everyone understands their contribution and is motivated to achieve their full
potential;
• defining, recruiting and developing the core capabilities we need to thrive in a competitive, deregulated market;
• recruiting, attracting and developing the leadership and management capability we need to deliver our goals; and
• enhancing our ability to attract and retain the talent required to compete successfully.
Our intention is to underpin our people strategy with a measurement system that will objectively demonstrate the value of our people and
their contribution to the success of our business.
Currently, the way we monitor our progress towards becoming a ‘Great Place to Work’ is by using Have Your Say, our employee opinion
survey, launched in January 2003. This is carried out on a rolling basis, across all employees and the results are reviewed monthly right
through the business – from local level up to Board level.
Corporate Social Responsibility
Royal Mail is committed to carrying out its activities in a socially responsible manner in respect of the environment, employees, customers
and local communities. A Corporate and Social Responsibility (CSR) Governance Committee reports to the Board, which publishes an
annual report of its activities. Further details of our CSR governance structure and activities will be available in our 2006 CSR Report, due
to be published in September 2006.
Disabled employees
The Group’s policy is to give full consideration to applications for employment from disabled persons. Employees who become disabled
whilst employed receive full support through the provision of training and special equipment to facilitate continued employment where
practicable. The Group provides training, career development and promotion to disabled employees wherever appropriate.
Going concern
After analysis of the financial resources available and cash flow projections for the Group, the Directors consider that it is appropriate to
prepare the financial statements on a going concern basis.
Auditors
A resolution to reappoint Ernst & Young LLP as auditors will be put to the Annual General Meeting.
By Order of the Board
Jonathan Evans
Company Secretary
17 May 2006
30
Royal Mail Holdings plc
Corporate Governance
Statement by the Directors on compliance with the Combined Code
The Board is committed to high standards of Corporate Governance and supports the Combined Code on Corporate Governance (the
Code), published in July 2003, which took effect for Royal Mail on 29 March 2004. The following statement is intended to explain our
governance policies and practices in light of the Code principles and provisions in so far as they are appropriate to a public company with
a single shareholder, and to provide insight into how the Board and management run the business for the benefit of the Shareholder. The
Company has fully complied with the provisions of the Code.
The Board
The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance. The Board currently
comprises a Non Executive Chairman, six Executive Directors and seven Non Executive Directors. There is currently a vacancy for a Group
Finance Director. The biographies of each of the Directors, setting out their current roles, commitments and previous experience, are on
pages 27 and 28. The Board usually meets monthly, and has defined those matters that are reserved exclusively for its consideration.
These include the approval of financial statements, acquisitions and disposals, material agreements, non-recurring projects, major capital
expenditure and strategic plans. It also delegates responsibilities to the Board Committees detailed below. For each scheduled meeting of
the Board, the Company Secretary, on behalf of the Chairman, collates and circulates the papers, aiming to allow sufficient time for the
Directors to review the information provided. The Board is confident that all its members have the knowledge, talent and experience to
perform the functions required of a Director of the business. Executive Directors have rolling 12-month contracts and Non Executive
Directors are generally appointed for a three-year term.
The Board considers that each of the seven Non Executive Directors is independent. This means that in the view of the Board, they have
no links to the Executive Directors and other managers, and no business or other relationship with the Company that could interfere with
their judgement. Sir Michael Hodgkinson is the Senior Independent Director. There is also a clear division of responsibilities between the
Chairman and the Chief Executive. Performance evaluation of the Board, its Committees and individual Directors takes place on an annual
basis. The Board initiated a systematic approach to the evaluation of the effectiveness of the Board, its Committees and individual
Directors. This was undertaken by the Chairman and implemented in collaboration with the Committee Chairmen and with the support of
the Company Secretary. The evaluation was conducted by way of a formal questionnaire that enabled Directors’ perspectives on the
effectiveness of the Board and Committees to be fed back to the Chairman and the full Board. Performance evaluations of Board
Committees were conducted on behalf of the Chairman by the Chairmen of the respective Board Committees. The Non Executive
Directors, led by the Senior Independent Director, reviewed the performance of the Chairman and the Executive Directors.
Directors may take independent professional advice in the furtherance of their duties, at the Group’s expense. All Directors have access to
the advice and services of the Company Secretary, the appointment and removal of whom is a matter for the Board as a whole.
All Directors, appointed by the Board, are required by the Company’s Articles of Association to be elected by the Shareholder at the first
AGM after their appointment. On appointment, the Directors take part in an induction programme where they receive information about
the Royal Mail Group, the role of the Board and matters reserved for its decision, the terms of reference and membership of the principal
Board Committees, the Company’s Corporate Governance arrangements and the latest financial information about the Group. This is
supplemented by visits to key business locations. The Company engages in two-way communication with the Shareholder to discuss
information on its strategy, performance and policies. The Board receives feedback on these meetings from the Directors attending the
meeting.
During the year, the Directors attended the following number of meetings of the Board and its main Committees:
31
Royal Mail Holdings plc
Remuneration
Committee
Nomination
Committee
9
9
9
9
6
6
6
2
Corporate Governance (continued)
Number of meetings
Number of meetings during the year
Non Executive
Allan Leighton
David Fish
Richard Handover
Sir Michael Hodgkinson
John Neill
Baroness Margaret Prosser
Helen Weir1
Bob Wigley
Executive
Adam Crozier
David Burden
Alan Cook1
1
Ian Griffiths
Tony McCarthy
Former Directors
Marisa Cassoni2
David Mills3
Board
12
Audit and
Risk
Committee
7
7
5
1
7
11
12
10
12
10
12
3
11
12
12
1
2
12
8
9
1.
2.
3.
Attended all Board and respective sub committee meetings since becoming a Director during the year
Resigned 17 November 2005
Resigned 31 December 2005
Outside appointments
The Board believes that there are significant benefits to both the Company and the individual from Executive Directors accepting Non
Executive Directorships of companies outside of the Group, and for which the Director may retain the fees (see the Directors
Remuneration Report on page 42 for details). The Board’s policy is normally to limit Executive Directors to no more than one Non
Executive Directorship.
The following Committees deal with specific aspects of the Group’s governance. The terms of reference for each of the principal
Committees are available on the Company’s website (www.royalmailgroup.com) or on written request from the Company Secretary:
32
Royal Mail Holdings plc
Corporate Governance (continued)
Group Executive Team
Chair
Adam Crozier, Group Chief Executive
Membership
David Burden, Group Chief Information Officer
Alan Cook, MD, Post Office Limited
Jonathan Evans, Company Secretary
Mary Fagan, Group Corporate and Government Affairs Director
Ian Griffiths, MD Royal Mail Letters
Vanessa Leeson, MD Parcelforce Worldwide
Tony McCarthy, Group Director People & Organisational Development
Alex Smith, Director of Strategy
Group Finance Director
Role
The Group Executive Team comprises all Executive Directors of Royal Mail Holdings plc and Royal Mail Group plc and
certain other senior executives of the Group. Its responsibilities include:
•
•
•
to develop and monitor deployment of the Group’s strategy, annual operating plans and budgets for
Board approval;
to review operational activities, and set policies where these are not reserved to the Board; and
to allocate resources, both people and financial, across the Group.
The Holdings Board has delegated authority to the Investment Committees of the Group Executive Team to make
investment decisions of up to £20m.
Audit and Risk Committee
Chair
Bob Wigley, Non Executive Director
Membership
John Neill, Non Executive Director
Baroness Margaret Prosser, Non Executive Director
Helen Weir, Non Executive Director
The Board is confident that the collective experience of the Audit and Risk Committee members enables them,
as a group, to act as an effective Audit and Risk Committee. The Committee also has access to the financial
expertise of the Group and its auditors, and can seek further professional advice at the Company’s expense if
required.
Role
The Committee, which is assisted by the Corporate Risk Management Committee, provides a forum for
reporting by both internal and external auditors and is responsible for a wide range of matters including:
•
•
•
•
•
•
•
to monitor the integrity of the financial statements of the Company;
to review the Company’s internal financial control system and, unless addressed by the separate Risk
Management Committee or by the Board itself, internal control and risk management systems;
to monitor and review the effectiveness of the Company‘s Internal Audit function;
to make recommendations to the Board for Shareholder approval in general meetings, in relation to the
appointment of the external auditors, and to approve the remuneration and terms of engagement of the
external auditors;
to monitor and review the external auditors’ independence, objectivity and the effectiveness of the audit
process;
to develop and implement policy on the engagement of the external auditors to supply non-audit services;
and
where the Audit and Risk Committee’s monitoring and review activities reveal cause for concern or scope
for improvement, to make recommendations to the Board on action needed to address the issue or to
make improvements.
33
Royal Mail Holdings plc
Corporate Governance (continued)
Remuneration Committee
Chair
David Fish, Non Executive Director
Membership
Richard Handover, Non Executive Director
Sir Michael Hodgkinson, Non Executive Director
Role
The Committee’s responsibilities include:
•
•
•
to determine and recommend for the Board’s approval, the framework for the remuneration of the
senior executives of the Company;
to determine the individual remuneration packages for the Chairman, the Executive Directors and
the Company Secretary, subject where necessary to the consent of the Secretary of State; and
to agree the targets for any performance-related incentive schemes applicable to Executive
Directors and senior executives.
Nomination Committee
Chair
Richard Handover, Non Executive Director
Membership
David Fish, Non Executive Director
Margaret Prosser, Non Executive Director
Role
The Committee’s responsibilities include:
•
•
•
to lead a formal, rigorous and transparent process both for appointments to the Board of the
Company, and for appointments to subsidiary boards. Some appointments will be subject to the
consent of the Secretary of State, as provided in the Articles;
to advise the Board on succession planning for the positions of Chairman, Chief Executive and all
other Board appointments and other senior appointments; and
to keep under review the balance of membership and ensure that the Boards have the required mix
of skills, knowledge and experience.
In addition to the principal Committees above there are also the following Committees:
Corporate and Social Responsibility Governance Committee
Chair
Sir Michael Hodgkinson, Non Executive Director
Membership
Tony McCarthy, Group Director People & Organisational Development
Director Corporate and Social Responsibility
Head of Environment
Head of Health and Safety
Other senior executives across the Group
Role
The Corporate and Social Responsibility Governance Committee reports to the Board and has responsibilities
including:
•
•
to act on behalf of the Group Executive Team to provide an overview of the social environmental
and ethical impacts of the Group’s activities; and
to make recommendations on minimum Corporate and Social Responsibility standards and policies.
34
Royal Mail Holdings plc
Corporate Governance (continued)
Pensions Committee
Chair
Group Finance Director
Membership
Tony McCarthy, Group Director People & Organisational Development
Jonathan Evans, Company Secretary
Role
The Committee’s responsibilities include:
•
•
to review funding, benefits, scheme structure and strategic developments impacting on the Group’s
occupational pension schemes; and
to represent the Group in discussions with the Trustees of the Group’s occupational pension
schemes.
Non-audit services provided by the external auditors
In some cases the nature of advice required makes it more timely and cost effective to select the external auditors who already have a
good understanding of the Group. In order to maintain the objectivity and independence of the external auditors, the Board has
determined what work can be provided by the external auditors and the approval processes associated with them. The Audit and Risk
Committee monitors the level of non-audit fees paid to the external auditors.
35
Royal Mail Holdings plc
Internal control
Overview
The Directors are responsible for the Group’s system of internal control and risk management, as well as the timely review of its
effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only
provide reasonable but not absolute assurance against material misstatement or loss.
The Group’s approach to internal control is based on the underlying principle of line management accountability for control and risk
management. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group in accordance
with the guidance detailed by the Turnbull Committee as part of the Code, including financial and operational risks and risks to reputation.
The Board regularly reviews this process. The process has been in place throughout the year and up to the date of approval of these
accounts. The responsibility for joint ventures and associates rests, on the whole, with the senior management of those operations. The
Company monitors its investments and exerts influence through Board representations.
The Board has reviewed the effectiveness of the system of risk management and internal control. The key elements include a review of
Internal Audit reports, regular confirmations from local management and communications from the Chair of the Audit and Risk Committee
on the outcome of Audit and Risk Committee meetings.
Audit and Risk Committee
The Committee reports to the Board and meets as a minimum on a quarterly basis to monitor and review the effectiveness of the control
environment. The Committee reviews the scope of work, authority and resources of the Internal Audit and Risk Management function.
Corporate Risk Management Committee
This is a sub-committee of the Audit and Risk Committee. It sets the framework for risk management within the Group and ensures
integration with strategic planning. It also facilitates regular reporting of key risks and the actions to manage the risks to a desired level.
The members of this Committee include David Burden (Chair), the Group Treasury Director, the Internal Audit and Risk Management
Director, the Director Corporate and Social Responsibility and other senior executives from across the Group.
Key control processes
The key processes used to assess the effectiveness of systems are ongoing and include the following:
•
•
•
•
•
•
•
•
the business units have authority to manage within the limits set by the Board and within the scope of reserved powers. The
Group’s Code of Business Standards sets the principles of professionalism and integrity for our people;
discussion and approval by the Board of the strategic direction, plans and objectives of the Group and each operating company,
and the risks to achieving them;
reviews and approval by the Board of budgets and forecasts;
monthly reviews of performance by reference to key performance indicators, updated forecasts and information on the key risk
areas;
at least quarterly reviews by the Audit and Risk Committee of the scope and results of internal audit work across the Group. The
scope of the work covers all key activities of the Group and concentrates on higher risk areas;
reviews of the scope of the work of the external auditors by the Audit and Risk Committee and any significant issues arising;
reviews by the Audit and Risk Committee of accounting policies and delegated authority levels; and
consideration by the Audit and Risk Committee of the major risks facing the Group and procedures to manage them.
Risk Management process
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process has been in
place throughout the year under review, and up to the date of approval of the Annual Report and Accounts, and accords with the Turnbull
guidance. The effectiveness of the process is reviewed annually by the Audit and Risk Committee, which then reports to the Board.
The process consists of:
•
•
•
•
formal identification by management at each level of the Group through a self assessment process of the key risks to achieving
their business objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated;
certification by management that they are responsible for managing the risks to their business objectives and that the internal
controls are such that they provide reasonable but not absolute assurance that the risks are appropriately identified, evaluated
and managed;
quarterly reporting and review by the management of each business unit of risk management activities and action taken to
address non-compliance with controls or to improve their effectiveness; and
independent assurance by Internal Audit as to the existence and effectiveness of the risk management activities described by
management.
The system of internal control and risk management is embedded into the operations of the Group, and the actions taken to mitigate any
weaknesses are carefully monitored.
36
Royal Mail Holdings plc
Directors’ Remuneration Report
Information not subject to audit
This report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations). The Company
confirms that throughout the year it has complied with the principles in Section 1 of the Combined Code on Corporate Governance (the
Code).
The Royal Mail Group strategic plan commits to extensive transformational change to ensure that its customers are offered high-quality
and cost-effective services. The Board believes that an effective remuneration strategy is essential to support the plan by ensuring that
the company has people of the right calibre and skills to meet the considerable challenges the company faces. Incentives which create an
identity of interest between employees and the Shareholder form a vital part of this strategy.
The Remuneration Committee
The Board retains overall accountability for the framework and costs of executive remuneration and the terms of the service contracts
offered to all Executive Directors, which require the consent of the Secretary of State for Trade and Industry. The Secretary of State also
approves the remuneration of Non Executive Directors. The Remuneration Committee’s role is to develop the remuneration policy for
Executive Directors and their immediate reports and specifically to make recommendations on their salary, benefits, bonuses and other
terms and conditions of employment. The Committee also recommends appropriate compensation on the cessation of employment, giving
careful consideration to what compensation should be paid taking into account the circumstances of the particular case and ability of the
individual to mitigate.
The Remuneration Committee is made up wholly of independent Non Executive Directors. Membership of the Committee is disclosed on
page 34. The Chief Executive, Adam Crozier, and the Director People & Organisational Development, Tony McCarthy, may attend these
meetings by invitation but are not present at the discussion of their own remuneration.
Advice to the Remuneration Committee
The Committee calls for information and advice from inside and outside the Group. It takes advice from those independent, professional
organisations that are best able to assist its consideration of the particular topics under discussion.
During 2005-06, advice on the performance of key executives was given by the Chairman and the Chief Executive. Information on the
external marketplace was given by Monks Partnership (a trading name of PriceWaterhouse Coopers), Deloitte, and Watson Wyatt Limited.
Internal support is primarily provided by the Director People & Organisational Development, Tony McCarthy, and from the Company
Secretary, Jonathan Evans. Other advice and information has been provided by specialists from People & Organisational Development and
Finance.
During the year, advice was given to the Company by Watson Wyatt Limited on pension and actuarial matters.
Remuneration policy
The Company’s policy on Directors’ remuneration is that:
•
•
•
the overall remuneration package should be sufficiently competitive to attract and retain executives of the necessary
quality in a complex business and a competitive market place, who will deliver success for the Shareholder and high
levels of customer service, safety and environmental performance;
a significant proportion of the remuneration package should be dependent on performance in both the short and the
long-term; and
the system of remuneration should establish an identity of interest between senior executives, customers and the
Shareholder.
The policy for senior executives takes into account pay and employment conditions elsewhere in the Group.
The Committee regularly reviews the structure of the package and its competitiveness against appropriate marketplaces. The Committee
aims to ensure that the package is proportionate and effective, and that it is developed in accordance with accepted best practice. During
2005-06, as part of its regular review, the Committee has given particular consideration to annual and long-term incentive
arrangements.
The main components of remuneration
The main components for Executive Directors are: basic salary, an annual performance-related bonus, a Long-Term Incentive Plan,
pension and other benefits. The Committee believes that there should be a continuing emphasis on those elements of remuneration that
are performance-related.
37
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Base salaries
The Committee believes that base salaries should be set at levels that are sufficient to recruit and retain high calibre executives. In making
its judgement, the Committee is informed by a variety of data aimed at making a fair comparison with enterprises of a similar size and
complexity to Royal Mail. This data is provided by independent consultancies. Increases are recommended where the Committee believes
that it is necessary to reflect contribution, increased individual responsibilities and market levels. All increases are approved by the
Secretary of State.
Performance-related, personal annual bonus 2005-06
The Chairman and Executive Directors may earn a performance-related bonus for achievement of financial and customer targets.
In the case of the non-executive Chairman a bonus of up to £180,000 is payable. The level of bonus has not changed since the Chairman
was appointed in March 2002.
The Remuneration Committee concluded that it was in the Shareholder’s interest to encourage performance from executive directors
above the level of the budget and accordingly, in line with market practice and with the consent of the Secretary of State, have put in
place bonus arrangements for above target performance.
The percentages of base salary available through the bonus plan are as follows:
Threshold level
On-target level
Maximum
Chief Executive
Other Executive Directors
30%
24%
60%
48%
100%
80%
The on-target level bonus of 60% for the Chief Executive is a reduction from the previous 75% level. For other executive directors, the
on-target level has increased from 40% to 48%.
The measures used are annual operating profit before exceptional items and quality of service.
The quality of service measures are as follows:
•
•
•
•
•
•
•
•
First Class stamped and metered
Second Class stamped and metered
Mailsort 2
Mailsort 3
Special Delivery
2nd Class PPI
Parcelforce 24
Post Office Limited new products sold
Quality Targets are those in the Postcomm licence agreement and a number of these, including First Class stamped and metered, have
been increased since last year. The first six of these quality measures account for the overwhelming bulk of mail and include the key
products of interest to the general public.
The annual operating profit before exceptional items and the basket of quality measures are weighted so that if the on-target or threshold
levels are achieved against all measures they each make up 50% of the bonus. At the maximum level, the weighting moves to 60% on
profit and 40% on quality of service. Each measure in the bonus plan is independent of the others. In the case of the Managing Directors
of the Letters business and of Post Office Limited, 30% of their bonus is related to the profit and quality measures relating to the Group
and 70% to the profit and quality measures of their particular businesses.
Bonuses for intermediate amounts are calculated pro rata.
The Executive Directors are also entitled to a Share in Success payment at the same level as that paid to all other employees.
Long-Term Incentive Plan 2005-06
The Company operates a Long-Term Incentive Plan (LTIP) for the Executive Directors and certain other senior employees. The objectives
of the LTIP are to incentivise the delivery of the long-term business goals of the Group and to reward success in achieving or exceeding
these goals.
The Remuneration Committee has extensively consulted the Government on the most appropriate form of this incentive, but while the
discussions with Government on the strategic plan continue, the LTIP has not yet been finalised.
The discussions with Government have taken the previous LTIP as a model. The previous LTIP had the following key features:
•
•
Annual Company Performance Awards which accrued on a sliding scale above a threshold level of performance and begin at
12.5% of annual base salary. For on-target performance, the Company Award was 25% of annual base salary and for
exceptional performance this rose in accordance with a stepped scale to a maximum of 37.5%;
Bonus Awards. A bonus award could be made each year by the Remuneration Committee. They were equivalent to the
amount of annual bonus waived by the employee. An employee had the discretion to waive a maximum of one half of any
annual bonus up to the on-target level. In the new plan, if a bonus above on-target would otherwise be payable, then three
quarters of this additional amount will be compulsorily waived; and
38
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
•
A final enhancement. At the end of the performance period the amounts which had been set aside as both Annual Company
Performance Awards and as Bonus Awards could be further increased depending on a further performance factor. If the on-
target level was achieved then an additional one third was added. In the case of exceptional performance then up to a
maximum addition of 100% could be added.
Other than the requirement that three quarters of any annual bonus earned above the on-target level must be waived and an award of
equivalent value be made in the LTIP, it is envisaged that the potential rewards that can be earned under the plan will be broadly similar
to the previous arrangement.
The Company has made an estimate in its accounts for a Company Award for 2005-06 due under the new LTIP and is making an
appropriate recommendation to the Secretary of State. This award will not exceed 37.5% of the participants’ base salary.
Benefits
Benefits include the provision of company cars, health insurance, or the cash equivalent of any benefits not taken.
Pensions
The Group has a liability to pay pensions in respect of Directors’ services and for some Executive Directors makes contributions to pension
schemes for this purpose. The Company has set up a retirement pension arrangement, which will provide benefits to Directors whose
contributions to the Company scheme are restricted by the Inland Revenue earnings cap. Following the recent changes in pensions
legislation the Company will continue to apply the previous earnings cap, indexed by inflation each year, as a constraint on the amount of
salary which is pensionable through the Company scheme.
Fixed and performance-related elements of Executive Directors’ remuneration (excluding pensions)
For 2004-05, 42.5% of Directors’ potential annual earnings related to fixed elements, whilst 57.5% related to annualised performance
elements. For the CEO 37% was fixed and 63% was variable. The current Long-Term Incentive Plan is still under discussion but is
expected to be broadly similar in terms of potential payments as the current plan. The annual bonus plan was changed in 2005-06 to
include a stretch element for performance above target and the percentage of total remuneration at risk to performance is therefore
higher than in the previous year.
Service contracts
The Committee’s policy is that Executive Directors appointed to the Board are offered notice periods of one year. The Committee has a
defined policy on compensation and mitigation, to be applied in the event of a Director’s contract being prematurely terminated. In such
circumstances, steps would be taken to ensure that poor performance is not rewarded.
The rolling service contracts and letters of appointment of the Directors include the following terms:
Date of contract
Expiry date of current service
contract 1
Unexpired term
(months)
Non Executive Chairman
Allan Leighton
Executive Directors
Adam Crozier
Ian Griffiths
Alan Cook
Tony McCarthy
David Burden
25 March 2005
25 March 2008
1 February 2003
6 February 2006
1 March 2006
6 January 2003
1 July 2004
24
12
12
12
12
12
The Non Executive Directors do not have
service contracts. The dates of the current Non Executive Director appoint
ments are as follows:
Non Executive Directors
Sir Michael Hodgkinson2
David Fish2
2
Richard Handover
John Neill2
1 January 2003
1 January 2003
1 January 2003
1 January 2003
30 June 2006
30 June 2006
30 June 2006
30 June 2006
Baroness Margaret Prosser
1 November 2004
31 October 2007
3
Bob Wigley
Helen Weir
1 April 2003
30 June 2006
1 January 2006
31 December 2008
3
3
3
3
19
3
33
39
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
1 All Executive Directors have a contracted 12-month notice period from the Company; the Director must give six-months notice. The standard term for compensation
for loss of office is a maximum payment of 12-months basic salary, which may be subject to mitigation. The Company is committed for the full three-year term for Non
Executive Directors, including the Chairman.
2With the consent of the Secretary of State, the director agreed to extend the contract by up to 6 months.
3With the consent of the Secretary of State, the director agreed to extend the contract by up to 3 months.
Non Executive Directors
The fees paid to the Non Executive Directors are determined by the Executive Directors and approved by the Secretary of State.
Independent market surveys are consulted in determining them. Fees may comprise a basic fee for Board membership and, as
appropriate, additional fees for the membership or chairmanship of the Audit and Risk, Remuneration and Nomination Committees.
Details of the fees are given below.
Audited information
Directors’ remuneration, excluding pensions and Long-Term Incentive Plan, was as follows:
Annual performance bonus
Current
annual
salary/fees
£000
Salary/
fees
£000
Performance-
related bonus
£000
Deferred
into LTIP
£000
Annual
performance
bonus paid
£000
Deferred
bonus
from
prior
years
£000
Compensation
for loss of
office
£000
Benefits
£000
Non Executive Chairman
Allan Leighton
25
21
180
-
180
Executive
Adam Crozier
Ian Griffiths1
Alan Cook1
Tony McCarthy
David Burden
Non Executive
Sir Michael Hodgkinson
David Fish
Richard Handover
John Neill
Baroness Margaret
Prosser
Helen Weir1
Bob Wigley
Former Directors
Marisa Cassoni2
David Mills2
Elmar Toime
Total 2006
Total 2005
615
500
250
335
275
83
45
45
35
40
35
43
-
-
-
568
73
21
331
272
79
41
41
34
35
9
40
260
310
-
454
36
-
198
163
(248)
(18)
-
(108)
(89)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
206
18
-
90
74
-
-
-
-
-
-
-
-
-
-
2,326
2,135
1,031
(463)
2,033
2,227
981
(406)
568
575
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
458
-
16
15
1
33
13
-
-
-
-
-
-
-
17
20
-
115
125
-
-
-
-
-
-
-
-
-
-
-
-
-
379
486
-
865
720
Total excluding pensions
and Long-Term Incentive
Plan
2006
£000
2005
£000
201
330
790
106
22
454
359
79
41
41
34
35
9
40
656
816
-
704
-
-
406
255
72
36
36
32
13
-
35
428
381
1,377
3,683
-
-
4,105
1Ian Griffiths, Alan Cook and Helen Weir joined the Board on 7 February 2006, 1 March 2006 and 1 January 2006, respectively.
2Marisa Cassoni and David Mills left the Board on 17 November 2005 and 31 December 2005, respectively.
The figures in the table represent emoluments earned and receivable as Directors during the financial year, whenever paid. Such
emoluments are normally paid in the same financial year with the exception of the annual, performance-related bonus, which is paid in
the year following that in which it is earned and the amount deferred into LTIP.
40
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Payments to former Directors
Marisa Cassoni, former Group Finance Director, had been with the Company for over four years but did not wish to commit to another
three years in her role. It was agreed that Marisa would leave the Company on 31 December 2005. In accordance with her contract she
was paid £346,500 base pay in lieu of her notice period and was allowed to keep her car and private medical insurance benefits until the
end of the financial year. Reasonable outplacement costs were also met and her accumulated FURBS pension rights, accrued over her
time with the Company, of £651,473 is being held awaiting instructions.
After three and a half years with the Group, David Mills agreed with the Company that he did not wish to remain with Group during its
next stage of development. He stepped down from the Holdings Board on 31 December 2005 and left the Company at the end of the
financial year on 26 March 2006. Within the terms of his contract, he was paid £365,017 base pay in lieu of notice and £80,000 in
respect of annual bonus for 2005-06. His benefits ceased at the end of the financial year. Reasonable outplacement costs were also met.
The Company is grateful for the contribution made by Marisa Cassoni and David Mills.
Performance-related, personal annual bonuses for 2005-06
As agreed with the Secretary of State, the Remuneration Committee has the role of authorising the annual performance-related bonuses
for the Chairman and the Executive Directors.
The details of the scheme are outlined on page 38. For 2005-06, the Remuneration Committee concluded that the financial performance
was between the on-target and the maximum and that the majority of the quality of service targets set for the Group had been met or
exceeded, triggering payment of 73.8% of maximum bonus potential to the Chief Executive and Executive Directors. As the Company had
exceeded its financial target and had overall exceeded its quality targets it was decided to award the Non-Executive Chairman a bonus of
£180,000.
Each of the Executive Directors are also entitled to a Share in Success payment of £418.
Company Awards and Bonus Awards in respect of the Long-Term Incentive Plan at 26 March 2006
The Company has made an estimate in its accounts for a Company Award for 2005-06 due under the new LTIP and is making an
appropriate recommendation to the Secretary of State. This award will not exceed 37.5% of the participants’ base salary.
The Directors have waived over half of their bonus and it is anticipated that an equivalent Bonus Award will be made in 2006-07 as set
out in the table below:
Executive
Adam Crozier
Tony McCarthy
David Burden
Ian Griffiths
Alan Cook
Bonus Awards
to be made in
2006-07
in respect of
2005-06
£000
248
108
89
18
-
Total
£000
248
108
89
18
-
The Long Term Incentive Plan for 2002-2005 was paid during the year. Full disclosure was made in last years accounts.
Non Executive Directors
The fees of the Chairman and the Non Executive Directors are agreed with the Secretary of State, and are currently £20,000 per annum
and £30,000 per annum respectively.
As a result of a review undertaken by the Board in the light of the greater role for Board Committees arising from recent reviews of the
Combined Code on Corporate Governance and emerging market practice, with effect from 1 October 2005 a new fee structure was
adopted which increased the annual payment for committee membership from £2,500 to £5,000 and the fee for chairmanship from
£5,000 to £10,000 in the case of the Remuneration and Nominations Committees and from £7,500 to £12,500 in the case of the
chairman of the Audit and Risk Committee. Sir Michael Hodgkinson receives additional fees of £37,500 (2005 £37,500) for his position as
Chairman of Post Office Limited and £10,000 for his role as Senior Independent Director. Sir Michael is also a Non Executive Director of
the Bank of Ireland, the fee for which he has agreed to waive.
41
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Executive Directors outside appointments
The Executive Directors may retain fees from their Directorships. The annual fees due to Executive Directors in respect of their Non
Executive Directorships are shown in the table below:
Ian Griffiths
Ultra Electronics Holdings plc
Directorship
2006
£
33,000
2005
£
29,000
Pensions
The Group normally offers its most senior people membership of the Royal Mail Senior Executive Pension Plan (RMSEPP). Details of the
RMSEPP are set out in note 14 to the accounts. The Plan is a funded, Inland Revenue-approved final salary occupational pension scheme.
The scheme provides for a two-thirds final pensionable salary at a normal retirement age of 60, subject to the necessary pensionable
service and Inland Revenue earnings cap. Pensions in payment are increased annually in line with Retail Prices Index (RPI), subject in
some cases to a cap. Pensions are also payable to dependants on the death of the member and a lump sum is payable if death in service
occurs.
For senior executives whose membership of the RMSEPP is restricted by the earnings cap, pension provision is made by a combination of
the Company scheme and an appropriate Funded Unapproved Retirement Benefits Scheme (FURBS) or equivalent. Ian Griffiths receives a
cash supplement of 40% of base pay above the earnings cap. Alan Cook is not a member of the Company scheme and receives a cash
supplement of 40% of base pay less the equivalent member pension contributions payable under the Company scheme. The Company has
made provision for retirement pension arrangements at a rate of 40% of base pay above the earnings cap for Adam Crozier and David
Burden. A reserve has been established for the additional pension for Tony McCarthy to provide the total retirement pension, including the
pension from his previous employer’s pension scheme, of two-thirds of base pay at normal retirement age. The total provision for Adam
Crozier, Tony McCarthy and David Burden at the year end is £1,421,447 (2005 £674,379). Marisa Cassoni’s reserve amounted to
£535,193 at the end of March 2005.
Disclosure of Directors’ pension transfer values is required under two separate requirements:
• Stock Exchange Listings Rules: the requirements are the same as disclosed in last year’s accounts and are designed to
indicate the increase in the value of Directors’ accrued benefits during the period. The transfer value is calculated on the
basis of actuarial advice in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions; and
• Directors’ Remuneration Report Regulations 2002: this is designed to assess the change in transfer values during the
year, taking into account movement in investment market conditions. Falls in market values may generate a negative
movement in the transfer values.
The transfer values disclosed represent a potential liability of the pension plan rather than any remuneration due to the individual and
cannot be meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive.
42
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
The pension entitlements (under Stock Exchange Listing Rules) of the Directors at the year end were:
Age at
year
end
Accumulated
accrued benefit
at 26 March 2006
£000
Increase in accrued
benefits during the
period*
£000
Increase in accrued
benefits during the
period (net of
inflation)*
£000
Transfer value* of
increase before
inflation less
Directors’
contributions
£000
Executive
Directors
Adam Crozier
Ian Griffiths
Tony McCarthy1
David Burden
42
55
49
59
60
1
51
12
6
1
11
4
4
1
10
4
32
7
122
68
* Excluding any increase arising from the transfer-in of pension entitlements accrued with previous employers.
1 Restated to reflect the detailed calculations of the pension promise agreed in 2005.
Transfer value
at 27 March
2005
or at date of
appointment to
Board if later
£000
Plus transfers-in
received
£000
Sub total
£000
Transfer value*
at 26 March
2006
£000
Movement in
the period
less Directors’
contributions
£000
342
-
368
132
-
-
-
-
342
-
368
132
581
8
720
247
233
7
339
109
Age at
year
end
42
55
49
59
Executive
Directors
Adam Crozier2
Ian Griffiths
Tony McCarthy1
David Burden
* The Royal Mail Senior Executive Pension Plan transfer value basis was changed in 2005.
1 Restated to reflect the detailed calculations of the pension promise agreed in 2005.
2 Adam Crozier’s transfer-in service credit was recalculated in the year.
By Order of the Board
Jonathan Evans
Company Secretary
17 May 2006
43
Royal Mail Holdings plc
Statement of Directors’ responsibilities in respect of the Group accounts
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable UK law and
those International Financial Reporting Standards (IFRSs) as adopted by the European Union that present fairly the financial performance,
financial position and cash flows of the Group for that period.
In preparing those accounts Directors are required to:
• select suitable accounting policies and apply them consistently;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information; and
• state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial
statements.
Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy, at any time, the
financial position of the Group, and which enable them to ensure that the accounts comply with the Companies Act 1985 and article 4 of
the IAS Regulation. Directors are also responsible for ensuring that the assets of the Group are safeguarded and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
44
Royal Mail Holdings plc
Independent Auditor’s Report to the members of Royal Mail Holdings plc
We have audited the Group financial statements of Royal Mail Holdings plc for the year ended 26 March 2006 which comprise the Group
income statement, the Group balance sheet, the Group cash flow statement, the Group statement of recognised income and expense and
the related notes 1 to 31. These Group financial statements have been prepared under the accounting policies set out therein.
We have reported separately on the parent company financial statements of Royal Mail Holdings plc for the year ended 26 March 2006
and on the information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an
auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United
Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union as set out in the Statement of
Directors’ Responsibilities.
Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial
statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report
to you if, in our opinion, the Directors’ Report is not consistent with the Group financial statements, if we have not received all the
information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other
transactions is not disclosed.
We review whether the Corporate Governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not
required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s Corporate Governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial
statements. The other information comprises only the Chairman's Statement, the Chief Executive's Statement, the Annual Review, the
Operating and Financial Review, the Directors' Report, the Corporate Governance statement, the Internal Control statement, the unaudited
part of the Directors' Remuneration Report and the Statement of Directors' responsibilities. We consider the implications for our report if
we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do
not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It
also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial
statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to
provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation
of information in the Group financial statements.
Opinion
In our opinion the Group financial statements:
• give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 26
March 2006 and of its profit for the year then ended; and
• have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.
Ernst & Young LLP
Registered auditor
London
17 May 2006
45
Group income statement for the years ended 26 March 2006 and 27 March 2005
Royal Mail Holdings plc
Revenue
People costs
Royal Mail Group people:
Wages and salaries
Pensions
Social security
Subpostmasters
Temporary resource
Distribution and conveyance costs
Other operating costs
Share of post tax profit from associates and joint ventures
Operating profit before exceptional items
Operating exceptional items
Operating profit
Profit/(loss) on disposal of businesses
Profit on disposal of property, plant and equipment
Profit before financing and taxation
Finance costs
Finance income – net pensions interest
- other
Profit before taxation
Taxation credit/(charge)
Profit for the financial year from continuing operations
Profit attributable to:
Equity holder of the parent company
Minority interest
Notes
5
4
2006
£m
9,056
2005*
£m
8,956
(5,968)
(5,839)
(4,530)
(4,330)
5
5
12
6
5
5
5
7
(529)
(326)
(507)
(76)
(1,218)
(1,547)
32
355
(210)
145
6
61
212
(52)
101
51
312
83
395
395
-
(489)
(319)
(544)
(157)
(1,183)
(1,660)
28
302
(277)
25
(3)
70
92
(42)
59
58
167
(16)
151
151
-
* Results are restated for the transition to IFRSs, apart for IAS 32 and IAS 39, which were adopted on 28 March 2005 – see note 31.
46
Royal Mail Holdings plc
Group statement of recognised income and expense for the years ended 26 March 2006 and 27 March 2005
Translation differences on foreign currency net investments
Notes
2006
£m
-
Actuarial (losses) and gains on defined benefit schemes
14
(1,659)
Gains on cash flow hedges taken to equity during the year
Transfers to income statement on cash flow hedges
Transfers to the balance sheet – on the carrying amount of non financial assets and liabilities
Taxation on items taken directly to equity
7/21
Net (expense)/income recognised directly in equity
Profit for the financial year
Total recognised (expense)/income for the period
Attributable to:
Equity holder of the parent company
Minority interest
Effects of changes in accounting policy:
3
(10)
(1)
(26)
(1,693)
395
(1,298)
(1,298)
-
2005
£m
8
411
-
-
-
367
786
151
937
933
4
Loss on first time adoption of IAS 32 and IAS 39
(3)
-
47
Group balance sheet at 26 March 2006 and 27 March 2005
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Financial assets - investments
Investments accounted for using the equity method
Other receivables
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Financial assets - investments
- derivatives
Cash and cash equivalents
Non-current assets held for sale
Total assets
Current liabilities
Trade and other payables
Income tax payable
Financial liabilities – interest bearing loans and borrowings
– derivatives
Provisions
Non-current liabilities
Financial liabilities - interest bearing loans and borrowings
Retirement benefit obligation
Provisions
Deferred tax liabilities
Other payables
Total liabilities
Net liabilities
Equity
Retained earnings
Hedging reserve
Foreign currency translation
Other reserves
Equity attributable to equity holder of parent company
Minority interest
Royal Mail Holdings plc
Notes
8
9
10
29
12
18
7
16
17
29
29
19/29
13
2006
£m
1,594
132
42
5
124
6
393
2005*
£m
1,591
131
21
7
131
14
334
2,296
2,229
27
1,093
694
3
1,161
2,978
11
5,285
27
1,091
691
-
1,340
3,149
-
5,378
24
(2,014)
(2,352)
22/29
29
23
22/29
14
23
7
25
21
21
21
21
21
(7)
(361)
(3)
(58)
(2,443)
(505)
(5,588)
(53)
(3)
(32)
(6,181)
(8,624)
(3,339)
-
(375)
-
(124)
(2,851)
(506)
(3,958)
(48)
(5)
(48)
(4,565)
(7,416)
(2,038)
(4,270)
(3,085)
-
8
919
(3,343)
4
-
8
1,035
(2,042)
4
(2,038)
Total equity
*Results are restated for the transition to IFRSs, apart for IAS 32 and IAS 39, which were adopted on 28 March 2005 – see note
The accounts on pages 46 to 101 were approved by the Board of Directors on 17 May 2006 and signed on its behalf by:
(3,339)
31.
Allan Leighton
Adam Crozier
48
Group cash flow statement for the year ended 26 March 2006 and 27 March 2005
Notes
2006
£m
2005*
£m
Royal Mail Holdings plc
Cash flow from operating activities
Operating profit before exceptional items
Depreciation and amortisation
Other non-cash movements (profits from associates and joint ventures)
Changes in working capital and other non cash items
Decrease in stock
(Increase)/decrease in receivables
Increase in payables
Decrease in client balances
Increase/(decrease) in provisions
Cash payments in respect of exceptional items: Share in Success
other
(a)
(a)
Cash utilised in operations
Income tax recovered
Net cash outflows from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Dividends received from associates and joint ventures
Investment income (interest) received
Purchase of property, plant and equipment
Payment of deferred consideration in respect of prior years’ acquisitions
Proceeds from sale of business
Purchase of business
Purchase of intangible assets
Proceeds from sale of other financial assets
Purchase of other financial assets
Net cash outflow from investing activities
Net cash outflow before financing activities
Cash flows from financing activities
Payment of capital element of finance lease liabilities
Finance costs (interest) paid
Repayment of borrowings
New borrowings
Net cash (outflow)/inflow from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
19
355
174
(32)
497
17
-
(7)
91
(75)
8
(218)
(306)
(10)
4
(6)
73
30
53
(210)
(22)
6
(1)
(33)
2
(3)
(105)
(111)
(1)
(52)
(15)
-
(68)
(179)
1,340
1,161
302
148
(28)
422
(387)
5
125
53
(444)
(126)
-
(255)
(220)
13
(207)
95
19
52
(219)
(2)
-
(4)
(4)
-
-
(63)
(270)
(34)
(42)
(4)
325
245
(25)
1,365
1,340
*Results are restated for the transition to IFRSs, apart for IAS 32 and IAS 39, which were adopted on 28 March 2005 – see note 31.
49
(a) Cash flows relating to operating exceptional items charged in both current and prior years
The net cash outflows relating to the above were as follows:
Net cash outflow relating to:
Current year exceptional items
Prior year exceptional items
Total
Royal Mail Holdings plc
2006
£m
38
486
524
2005
£m
12
243
255
The net cash outflow of £524m comprises the £96m in respect of exceptional provisions, including £1m relating to pensions redundancy liabilities,
a further £208m relating to the settlement of the prior year pension redundancy liabilities, £2m in respect of other costs which were recorded
within creditors, and £218m Share in Success payment.
50
Royal Mail Holdings plc
Notes to the Group accounts
1. Authorisation of financial statements and statement of compliance with IFRSs
The Group’s financial statements for the year ended 26 March 2006 were authorised for issue by the Board on 17 May 2006 and the balance sheet
was signed on the Board’s behalf by Allan Leighton and Adam Crozier. Royal Mail Holdings plc is a public limited company owned by HM Government.
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union as they apply to the financial statements of the Group for the year ended 26 March 2006. The principal accounting policies adopted by
the Group are set out in note 2.
2. Accounting policies
The adoption of IFRS has resulted in changes to the Group’s accounting policies. The amended accounting policies are:
Basis of preparation and accounting
This is the first year in which the Group has prepared its financial statements under IFRSs and the comparatives have been restated from UK Generally
Accepted Accounting Practice (UK GAAP) to comply with IFRSs. The Group issued its preliminary IFRSs financial statements for 2005 and the
reconciliations to IFRSs from the previously published UK GAAP financial statements in November 2005, and these are published on the Royal Mail
website and in note 31.
The Group financial statements are presented in sterling and all values are rounded to the nearest million pounds except when otherwise indicated.
Royal Mail Group plc is exposed to the risk of being fined by its industry Regulator and of being required to pay compensation to certain customers, as a
result of failing to meet operational targets set by the Regulator in the Company’s licence. The amount of such fines and compensation will be
determined by the Regulator after further representations from the Company and no further information is being disclosed on the grounds that it can
be expected to prejudice the outcome of that process.
Funding
Royal Mail Group plc
Royal Mail Group plc has net liabilities at 26 March 2006, primarily because of the pension deficit within its main pension plan, the Royal Mail Pension
Plan. Consequently, Royal Mail Group plc is in default of its borrowing facilities with Government, but has received formal waivers from the Department
of Trade and Industry, in its capacity as lender.
Royal Mail Group plc is profitable, even though it has to bear losses relating to stamped mail and carry out its Universal Service Obligations, but it now
faces considerable cash requirements with respect to its proposed investment in plant and equipment and funding its pension deficit at a time when the
market has been opened up to full competition.
It is therefore currently in discussion with its Shareholder around a new funding package, which will enable the transformation of the Company to take
place and permit appropriate discussion with its pension Trustee with respect to the funding of its pension deficit. The Directors of Royal Mail Group plc
believe that the financing package will be delivered shortly. If new financing is not made available, the Directors will have to review the cash
requirements of its strategic plan that will result in a delay to the planned benefits. On the basis of careful consideration of cash flow projections the
Directors have concluded that it is appropriate that the accounts have been prepared on a going concern basis.
Post Office Limited
Post Office Limited had net liabilities as at 26th March 2006 and, as explained in the Directors’ Report and Operating Financial Review, continues to
operate at a loss, primarily because of supporting the loss-making rural network.
To become viable in the longer term, new profitable business areas are being developed to replace the lost contribution from traditional income sources,
significant cost reduction programmes are being implemented and continuing support for any loss-making rural network required by Government policy
is being sought from Government.
However, until the above activities have been successfully completed, Post Office Limited will continue to be dependent on financial support from its
parent company, Royal Mail Group plc, its ultimate parent company Royal Mail Holdings plc, and from the Government.
During the year, the Post Office Limited has produced a five-year strategic plan and its future financing is underpinned by:
•
•
•
•
•
two tranches of rural network funding of £150m per annum for 2006-07 and 2007-08 for which state aid clearance has now been obtained;
an existing short-term funding agreement of £145m with its parent through to March 2007;
a new additional short-term funding agreement of £231m with its parent through to March 2008;
an understanding that Government will agree a long-term funding arrangement; and
Government being committed to a timetable, route map and consultation processes and, for any additional financing, that the necessary state aid
applications will be commenced as soon as practical.
It is understood that the above process will specifically address the following financing issues:
•
•
extending the existing working capital facility of £1.15bn which expires in March 2010; and
providing a funding solution for the loss-making parts of the network.
Whilst the process referred to above is not expected to be completed for several months, after careful consideration, the Directors are confident that a
satisfactory long-term resolution will be achieved during 2006-07 and that the Group will be able to meet future liabilities as they fall due.
Accordingly, on that basis, the Directors consider that it is appropriate that the accounts have been prepared on a going concern basis.
51
Royal Mail Holdings plc
2. Accounting policies (continued)
Basis of consolidation
The consolidated financial statements comprise the accounts of Royal Mail Holdings plc and its subsidiary undertakings. The financial statements of the
major subsidiaries are prepared for the same reporting year as the parent Company, using consistent accounting policies.
All intragroup balances and transactions, including unrealised profits arising from intragroup transactions, have been eliminated in full. Transfer prices
between business segments are set on a basis of charges reached through a negotiation with the respective businesses.
Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is no
longer held by the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the
reporting year during which the Group has control.
Investments in associates and joint ventures
The Group’s investments in its associates and joint ventures are accounted for under the equity method of accounting. Under the equity method, the
investment is carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the associate/joint venture, less
any impairment in value. The income statement reflects the Group’s share of post tax profits of the associate/joint venture.
Any goodwill arising on acquisition of an associate, representing the excess of the cost of the investment compared to the Group’s share of the net fair
value of the identifiable assets, liabilities and contingent liabilities acquired, is included in the carrying amount and not amortised. To the extent that the
net fair value of the associate’s identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised and
added to the Group’s share of the associate’s profit or loss in the period in which the investment is acquired.
Revenue
Mails revenue
Account revenue is derived from specific contracts and recognised when the mail delivery is substantially complete. Prepaid revenue mainly relating to
stamp and meter income is recognised when the sale is made, adjusted to reflect a value of stamp and meter credits held but not used by the customer.
Parcelforce Worldwide revenue
Account revenue is derived from specific contracts and recognised when the delivery of an item is substantially complete.
Post Office Limited revenue
Revenue is recognised when retail and financial services are provided.
General Logistics Systems
Revenue is derived from specific contracts and is recognised at the time of delivery.
Distribution and conveyance
Distribution and conveyance costs relate to third party costs incurred in carrying mail. These include conveyance by rail, road, sea and air, together with
costs incurred by international mail carriers and Parcelforce Worldwide delivery operators. These costs are disclosed separately on the face of the
income statement.
Operating profit before exceptional items.
Operating profit is the profit arising from the normal, recurring operations of the business. This incorporates revenue, people costs, operating costs
including distribution and conveyance, and the Group’s post tax share of profits from associates and joint ventures. Operating exceptional items are
separately identified.
Operating exceptional items
Operating exceptional items are material items of income and expenditure which due to the nature of the events giving rise to them, require separate
presentation on the face of the income statement or in a note to allow a better understanding of financial performance in the year, in comparison to
prior years.
Operating profit
Operating profit is the profit arising from the normal, recurring operations of the business and after charging operating exceptional items defined above.
It excludes the non operating items for profit or loss on disposal of businesses and profit or loss on disposal of surplus property, plant and equipment.
These items are not part of the normal recurring operations of the business but are material, so are presented separately on the face of the income
statement to allow a better understanding of financial performance in the year, in comparison to prior years.
Goodwill
Business combinations on or after 29 March 2004 are accounted for under IFRS 3 ‘Business Combinations’ using the purchase method. Any excess of
the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is
recognised in the balance sheet as goodwill and is not amortised.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill arising from business combinations is reviewed for
impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. An impairment loss is
recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit) exceeds its recoverable amount,
which is the higher of an asset’s net realisable value and its value in use.
For the purpose of these impairment reviews, goodwill is allocated to the related cash generating units as monitored by management.
Goodwill arising on the acquisition of equity accounted entities is included in the cost of those entities and therefore not reported in the balance sheet as
goodwill.
52
Royal Mail Holdings plc
2. Accounting policies (continued)
Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured reliably on initial
recognition. Intangible assets acquired separately or generated internally are initially recognised at cost and are assessed to have either a finite or
indefinite useful life. Those with a finite life are amortised over their useful life and those with an indefinite life are reviewed annually or more frequently
if events or changes in circumstances indicate that the carrying value may be impaired. An impairment loss is recognised in the income statement for
the amount by which the carrying value of the asset exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value
in use.
Finite lives of intangible assets are in the range of 1-6 years. Amortisation of intangible assets with finite lives is taken annually to the income
statement.
Property, plant and equipment
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into working condition for its intended use.
Depreciation of property, plant and equipment is provided on a straight-line basis by reference to original cost and to the remaining useful economic
lives of assets and their estimated residual values. The useful lives and residual values are reviewed annually and adjustments, where applicable, are
made on a prospective basis. The lives assigned to major categories of property, plant and equipment and remaining lives are:
Land and buildings:
Freehold land
Freehold buildings
Leasehold land and buildings
Plant and machinery
Motor vehicles and trailers
Fixtures and equipment
Average
remaining lives
Not depreciated
14 years
9 years
5 years
3 years
2 years
Range of asset lives
Not depreciated
Up to 50 years
The shorter of the period of the lease, 50 years or the estimated remaining useful life
3-15 years
1-12 years
2-15 years
Property that the Group has identified as surplus is classified as ‘available for sale’. When authority to market property categorised in this manner has
been approved and the property is vacant and therefore available for immediate occupation, the property is transferred in line with IFRS 5 into ‘Non-
current assets held for sale’, a separate category on the balance sheet. Such properties are expected primarily to generate economic cash flow by sale of
the asset rather than by operational activities.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Group are capitalised at the
inception of the lease with a corresponding liability recognised for the fair value of the leased item or, if lower, at the present value of the minimum
lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases and rentals
are charged to the income statement over the lease term. The aggregate benefit of incentives are recognised as a reduction of rental expenses over the
lease term on a straight-line basis.
Inventories
Inventories are valued at the lower of cost and net realisable value after adjusting for obsolete or slow moving stock. In the case of Post Office®
Counter Services, inventories include retail stocks and lottery products.
Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable amounts. An estimate for doubtful
debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity date of three
months or less. In addition the Group use Money Market funds as a readily available source of cash, which are bought and sold on a daily basis to meet
the cash requirements of the business. These funds are also categorised as cash equivalents.
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdrafts.
53
Royal Mail Holdings plc
2. Accounting policies (continued)
Financial assets - investments
Financial assets within the scope of IAS 39 ‘Financial Instruments: Recognition and Measurement’ are classified as; financial assets at fair value through
income statement; loans, and receivables; held to maturity investments; or as available for sale financial assets, as appropriate. The Group determines
the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year end. When financial assets are
recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial assets not at ‘fair value through the income
statement’, any directly attributable transactional costs. The Group has followed the transitional provisions of IFRS 1 ‘First time Adoption of IFRS’ to
adopt IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ from 28 March
2005, the first day of the 2005-06 financial year, and not restate comparative amounts on first applying IAS 32 and IAS 39. The comparative
disclosures therefore reflect the requirements of FRS 13 ‘Derivatives and other Financial Instruments: Disclosures’.
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at fair value through the income statement (held for trading)
Financial assets are classified as held for trading if they are acquired for sale in the short term. Derivatives are also classified as held for trading unless
they are designated as hedging instruments. Assets are carried in the balance sheet at fair value with gains or losses on ‘financial assets at fair value
through the income statement’ recognised in the income statement.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as ‘held to maturity’ when the Group has the
positive intention and ability to hold to maturity. Held to maturity investments are carried at amortised cost using the effective interest rate method.
Gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation
process. Investments intended to be held for an undefined period are not included in this classification. Prior to 28 March 2005, the Group held such
investments at historic cost less any provision for impairment, except Government gilt-edged securities, which were stated at market value and will now
be categorised as ‘held for trading’.
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have
not been designated as either ‘fair value through the income statement’ or available for sale. Such assets are carried at amortised cost using the
effective interest rate method if the time value of money is significant. Gains and losses are recognised in the income statement when the loans and
receivables are derecognised or impaired, as well as through the amortisation process.
Available for sale financial assets
‘Available for sale financial assets’ are non-derivative financial assets that are designated as such or are not classified in any of the three preceding
categories. After initial recognition, available for sale financial assets are measured at fair value with gains or losses being recognised as a separate
component of equity until the investment is derecognised, or until the investment is deemed to be impaired at which time the cumulative gain or loss
previously reported in equity is included in the income statement.
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no
active market, fair value is determined using valuation techniques. These include using recent arm’s length market transactions; reference to the current
market value of another instrument which is substantially the same; and discounted cash flow analysis and pricing models. Otherwise assets will be
carried at cost.
Income tax and deferred tax
The charge for current taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using
rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date, between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary differences except:
•
•
•
initial recognition of goodwill;
the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction affects neither
the accounting profit nor taxable profit or loss; and
taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the
reversal of the temporary differences can be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future.
Other than stated below, deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax
losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry-forward of unused
tax assets, and unused tax losses can be utilised. Deferred tax assets are not recognised in respect of:
•
•
deductible temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and
deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except to the extent that
it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the
temporary difference will be utilised.
54
Royal Mail Holdings plc
2. Accounting policies (continued)
The carrying amount of deferred tax assets is reviewed at each balance sheet date and increased or reduced to the extent that sufficient taxable profit
will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the liability is
settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax balances are not
discounted.
Deferred tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise it is recognised in the income
statement.
Supplier payment policy
The policy of the Company and its principal operating subsidiaries is to use their purchasing power fairly. Payment terms are agreed in advance for all
major contracts. For lower value transactions, the standard payment terms of the supplier apply. It is the Company’s policy to abide with the agreed
terms. The Company and its principal operating subsidiaries in the UK have sought to comply with the DTI’s Better Payment Practice Code. Copies of
this can be obtained from the DTI. As the Company is a non-operating company, the creditor days are zero. The creditor days of the operating
subsidiaries can be found in their accounts.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of
resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of
money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments
of the time value of money and, where appropriate, the risks specific to the liability.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Group. All members of defined benefit schemes are
contracted out of the earnings-related part of the State pension scheme. Overseas subsidiaries make separate arrangements for the provision of
pensions and other post-retirement benefits.
The plans’ assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an actuarial basis using the projected unit credit
method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term. Full
actuarial valuations are carried out at intervals not normally exceeding three years as determined by the Trustees and are updated at each balance
sheet date. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet.
For defined benefit schemes, the amounts charged to operating profit and included as part of people costs are the current service costs and any gains
and losses due on settlements and curtailments. Past service costs are charged to operating profit immediately if benefits have vested. If the benefits
have not vested immediately, the costs are recognised by equal annual instalments over the period until vesting occurs. The net difference between the
interest costs and the expected return on plan assets is recognised as finance costs or finance income respectively. Actuarial gains and losses are
recognised immediately in the statement of recognised income and expense (SORIE). Any deferred tax movement associated with the actuarial gains
and losses is also recognised in the SORIE.
For defined contribution schemes, the Group’s contributions are charged to operating profit as part of people costs in the period to which the
contributions relate.
Research and development
Expenditure on research is written off in the year it is incurred. Development costs are capitalised where they meet the criteria required under IFRS. If
these criteria are not met, then the costs are recognised in the income statement as they are incurred.
Foreign currencies
The functional and presentational currency of Royal Mail Holdings plc is sterling (£). The functional currency of the overseas subsidiaries in Europe is
mainly the euro (€).
The assets and liabilities of foreign operations are translated at the rate of exchange ruling at the balance sheet date. The trading results of foreign
operations are translated at the average rates of exchange for the reporting period, being a reasonable approximation to the actual transaction rate.
The exchange differences arising on the translation, since the date of transition to IFRS, are taken directly to the foreign currency translation reserve in
equity.
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the
balance sheet date. All differences are taken to the income statement, except when hedge accounting is applied and for differences on monetary assets
and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the net
investment, at which time they are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the
initial transactions. Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date when the fair
value is determined.
Derivative financial instruments
The Group uses derivative instruments such as foreign currency contracts in order to manage the risk profile of any underlying risk exposure of the
Group, in line with the Group’s treasury management policies. Such derivative financial instruments are initially stated at fair value.
For the purpose of hedge accounting, hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that is either
attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction.
In relation to cash flow hedges to hedge the foreign exchange risk of firm commitments that meet the conditions for hedge accounting, the portion of
the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is
recognised in the income statement.
55
Royal Mail Holdings plc
2. Accounting policies (continued)
When the hedged firm commitment results in the recognition of a non financial asset or non financial liability, then, at the time the asset or liability is
recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost
or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the
income statement in the same year in which the hedged firm commitment affects the net profit/loss, for example when the future sale actually occurs.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income
statement in the period.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.
At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast transaction occurs. If
a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement for the
year.
In accordance with the exemption under IFRS 1, comparative information has been prepared under previous UK GAAP (FRS13) and not IAS 32 and IAS
39. As a consequence derivative assets and liabilities were not included in the balance sheet at 27 March 2005. The comparative information in the
financial statements is presented in line with the accounting policy followed under UK GAAP as follows.
The Group uses forward foreign currency contracts to reduce exposure to foreign exchange rates. The Group’s policy is that its derivative instruments
qualify for hedge accounting when the following criteria are met:
-
-
-
the instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identified;
it must involve the same currency as the hedged item; and
it must reduce the risk of foreign currency movements on the Group’s operations.
The contracted rates are used to record the hedged item. As a result, gains and losses are offset against the foreign exchange gains or losses on the
related financial assets and liabilities. Where the instrument is used to hedge a committed or probable future transaction, gains or losses are not
recognised until the transaction occurs.
In addition, over-the-counter derivative products are used to manage both the commodity and foreign exchange risks associated with the fuel
procurement policy. Further details on financial instruments can be found in note 29 to the accounts.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at the fair value of the consideration received, less directly attributable issue costs.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the liabilities are derecognised or impaired, as well as through the amortisation process.
Segmental information
The Group discloses segmental results as required by IAS 14 ‘Segment Information’. The Group’s primary reporting format is by business segments and
its secondary format is by geographical segments. The operating segments are organised and managed separately according to the nature of the
products and services provided, with each segment representing a strategic business unit that offers different products and serves largely different
markets.
Royal Mail is the Group’s letters business and delivers letters to all addresses in the United Kingdom. Royal Mail offers a number of products to both
business and domestic users.
Parcelforce Worldwide is the parcels business unit operating within the UK.
Post Office Limited is a limited company responsible for the ‘High Street’ Post Office® ‘counters’ branches offering a series of retail services to its
customers.
General Logistics Systems is the European parcels business, which via its subsidiaries and partners offers its services in 34 European countries.
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective businesses.
56
Royal Mail Holdings plc
2. Accounting policies (continued)
New standards and interpretations not applied
During the year, the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have
issued the following standards and interpretations with an effective date for accounting periods beginning on or after the date of these financial
statements:
International Accounting Standards (IAS/IFRSs)
IFRS 1 Amendment relating to IFRS 1
IFRS 4 Insurance Contracts (Amendments to IAS 39 and IFRS 4 – Financial Guarantee Contracts)
IFRS 6 Exploration for and Evaluation of Mineral Assets
IFRS 6 Amendment relating to IFRS 6
IFRS 7 Financial Instruments: Disclosures
IAS 1 Amendment – Presentation of Financial Statements: Capital Disclosures
IAS 21 Amendment – the Effects of Changes in Foreign Exchange Rates - net investment in a Foreign Operation
IAS 39 Fair Value Option
Effective date
1 January 2006
1 January 2006
1 January 2006
1 January 2006
1 January 2007
1 January 2007
1 January 2006
1 January 2006
IAS 39 Amendments to IAS 39 – Transition and Initial Recognition of Financial Assets and Financial Liabilities (Day 1 profits)
1 January 2006
IAS 39 Cash Flow Hedge Accounting
IAS 39 Amendment to IAS 39 and IFRS 4 – Financial Guarantee Contracts
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 4 Determining whether an Arrangement contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
1 January 2006
1 January 2006
1 January 2006
1 January 2006
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment
1 December 2005
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of IFRS 2
1 March 2006
1 May 2006
IFRIC 9 Reassessment of Embedded Derivatives
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements
in the period of initial application.
1 June 2006
Upon adoption of IFRS 7 ‘Financial Instruments: Disclosure’, the Group will have to disclose additional information about its financial instruments, their
significance and the nature and extent of risks they give rise to. More specifically, the Group will need to disclose the fair value of its financial
instruments and its risk exposure in greater detail. There will be no effect on reported income or net assets.
57
3. Segmental information
The Group discloses its segmental results into five classes of business: Royal Mail, Parcelforce Worldwide, Post Office Limited, General Logistics
Systems and other businesses. The latter comprises two fully owned subsidiaries – Postcap (Guernsey) Limited and Royal Mail Pensions Trustees
Limited, two part owned subsidiaries – Romec Limited and NDC 2000 Limited - and the Group’s investments in the following associates – Quadrant
Catering Limited, Camelot Group plc and Camelot International Services Limited.
Analysis of segment revenue by class of business and geographic area of origin
Royal Mail Holdings plc
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Total revenue from continuing operations
Year to 26 March 2006
Revenue
between
segments
Segment
revenue
(107)
6,859
(5)
(336)
-
(448)
-
314
838
8
8,019
1,037
(448)
9,056
Total
revenue
6,966
319
1,174
8
8,467
1,037
9,504
Year to 27 March 2005
£m
Total
revenue
Revenue
between
segments
6,873
313
1,287
6
8,479
913
9,392
(110)
(15)
(311)
-
(436)
-
(436)
Segment
revenue
6,763
298
976
6
8,043
913
8,956
Transfer prices between business segments are set on a basis of charges reached through a negotiation with the respective businesses.
Analysis of segment result by class of business and geographic area of origin
Less
share of
profit from
joint
ventures Operating
and exceptional
items
associates
Profit on
disposal of
property
plant
and
equipment
Operating
profit
before
exceptional
items
344
5
(111)
17
255
100
(1)
-
(19)
(12)
(32)
-
(152)
(2)
(56)
-
(210)
-
53
-
8
-
61
-
Year to 26 March 2006
£m
Profit on
disposal of
businesses
Segment
result
6
-
-
-
6
-
250
3
(178)
5
80
100
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Segment result from continuing operations
180
Not included in the segment result is share of profit from joint ventures and associates £32m (2005 £28m), net pensions interest of £101m (2005 £59m),
other finance income £51m (2005 £58m), finance costs of £52m (2005 £42m) and taxation credit of £83m (2005 charge of £16m), which when added
reconciles to the ‘profit for the financial year from continuing operations’ in the income statement of £395m (2005 £151m).
(210)
355
(32)
61
6
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Segment result from continuing operations
Less
share of
profit from
joint
ventures
and
associates
Operating
profit
before
exceptional
items
Profit on
disposal of
property
plant
and
equipment
Operating
exceptional
items
343
(6)
(123)
15
229
73
302
-
-
(17)
(1
1)
(2
8)
-
(251)
8
(34)
-
(277)
-
(2
8)
(277)
56
-
14
-
70
-
70
Year to
27 March 2005
£m
Loss on
disposal of
businesses
Segm
ent
result
(3)
145
-
-
-
(3)
-
(3)
2
(
160)
4
(9)
73
64
58
3. Segmental information (continued)
Analysis of net assets/(liabilities) by class of business
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Unallocated
Total assets/(liabilities)
Royal Mail Holdings plc
Year to 26 March 2006
(Liabilities)
Assets
£m
£m
Year to 27 March 2005
(Liabilities)
Assets
£m
£m
2,000
111
1,179
75
3,365
457
1,463
5,285
(6,162)
(396)
(957)
(56)
(7,571)
(174)
(879)
(8,624)
1,943
121
1,322
62
3,448
406
1,524
5,378
(5,020)
(314)
(985)
(44)
(6,363)
(168)
(885)
(7,416)
The above analysis may differ to individual company statutory accounts, mainly due to unallocated assets and liabilities and the exclusion of
intercompany balances.
‘Non-current assets held for sale’ of £11m (2005 £nil) have been allocated to Royal Mail £8m, (2005 £nil), Post Office Limited £2m (2005
£nil), and Parcelforce Worldwide £1m (2005 £nil).
Unallocated assets and liabilities comprise the following items:
Cash
Financial assets - investments
Interest receivables/(payables)
Loans and borrowings
Derivative financial assets/(liabilities)
Current tax
Deferred tax
Total
Year to 26 March 2006
Unallocated
(liabilities)
£m
Unallocated
assets
£m
Year to 27 March 2005
Unallocated
(liabilities)
£m
Unallocated
assets
£m
361
699
7
-
3
-
393
1,463
-
-
(1)
(865
)
(3)
(7)
(3)
(879)
484
698
8
-
-
-
334
1,524
-
-
-
(879)
(1)
-
(5)
(885)
59
3. Segmental information (continued)
Other segment information
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Total
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
Total UK operations
General Logistics Systems (principally Europe)
Total
Royal Mail Holdings plc
Year to 26 March 2006
Additions
Property,
ntandequipment angibleassets
£m
£m
164
2
11
-
177
42
219
27
-
15
-
42
-
42
Non-cash expenses
Depreciation/
amortisation
£m
Impairment
(148)
-
(1)
-
(149)
(25)
(174)
£m
(11)
(1)
(31)
(1)
(44)
-
(44)
Year to 27 March 2005
Additions
Property,
lantandequipment
£m
angibleassets
£m
Non-cash expenses
Depreciation/
amortisation
£m
Impairment
£m
190
4
8
-
202
22
224
-
-
-
-
-
-
-
(131)
-
(1)
-
(132)
(16)
(148)
-
(4)
(19)
-
(23)
-
(23)
60
Royal Mail Holdings plc
4. People costs and Directors’ emoluments
(a) People costs – including Directors’ emoluments (see note (b))
Wages and salaries
Pensions (see note 14)
Social security
Subpostmasters
Temporary resource
Total
2006
£m
4,530
529
326
507
76
5,968
The staff numbers, calculated on a headcount basis, were:
Period end employees
Average employees
Royal Mail
Parcelforce Worldwide
Post Office Limited
Other businesses
UK wholly owned subsidiaries
Partially owned subsidiaries
Overseas, including GLS
Group total
2006
174,202
4,092
11,327
3,348
192,969
4,852
11,045
208,866
2005
176,030
4,363
12,145
3,906
196,444
4,944
10,768
212,156
Number of subpostmasters at the end of the year
(b) Directors’ emoluments
Directors’ emoluments
Amounts receivable under Long-Term Incentive Plans
Number of Directors accruing benefits under defined benefit schemes
5. Revenues and expenses
Revenue:
Revenue - rendering
of services
Finance income
Total revenue
Expenses:
(a) Group operating profit before exceptional items is stated after charging:
Pensions charge:
Cash
Non-cash
61
2006
176,415
4,183
11,774
3,588
195,960
4,854
10,671
211,485
2006
11,608
2006
£000
3,683
463
4
2006
£m
9,056
152
9,208
2006
£m
529
343
186
2005
£m
4,330
489
319
544
157
5,839
2005
174,431
4,715
12,510
4,296
195,952
4,963
10,408
211,323
2005
12,020
2005
£000
4,105
3,832
5
2005
£m
8,956
117
9,073
2005
£m
489
314
175
5. Revenues and expenses (continued)
Depreciation and amortisation:
Depreciation of owned property, plant and equipment
Depreciation of property, plant and equipment under finance leases and
hire purchase agreements
Amortisation of intangible assets
Distribution and conveyance costs:
Operating lease charges on vehicles
Other distribution and conveyance
Property, facilities and maintenance costs
Computers and telephones costs
Consultancy, marketing and legal fees
Research and development expenditure
Operating lease charges on property, plant and equipment (excluding vehicles)
Regulatory body costs:
Postcomm
Postwatch
(b) Finance costs
Interest payable on DTI borrowings
Other interest payable
Finance income
Interest received on investments
Other interest receivable
Net pensions interest (note 14)
Royal Mail Holdings plc
2006
£m
174
149
18
7
1,218
66
1,152
254
276
174
1
179
20
9
11
(52)
(48)
(4)
152
48
3
101
2005
£m
148
126
21
1
1,183
93
1,090
329
317
186
1
178
20
10
10
(42)
(36)
(6)
117
55
3
59
Included within finance income is £5m (2005 £6m) relating to income on assets at fair value through the income statement. The remaining
finance income (excluding net pensions interest) of £46m (2005 £52m) is interest income on financial assets not at fair value through the
income statement. All finance costs £52m (2005 £42m) are on financial assets that are not at fair value through the income statement.
(c) Auditors’ remuneration
Auditors’ remuneration:
Audit of statutory financial statements
Audit of regulatory accounts
Other assurance services
Tax services
Total auditors’ remuneration
2006
£’000
2,026
303
787
368
3,484
2005
£’000
1,686
287
570
602
3,145
62
6. Operating exceptional items
Operating exceptional items:
Share in Success
Provision for restructuring (note 23)
Impairment of property plant and equipment (note 8)
Impairment of intangible assets (note 10)
Impairment of goodwill relating to associates (note 12)
Impairment of property subsequent to categorisation as non-current assets held for
sale (note 13)
Total operating exceptional items
Royal Mail Holdings plc
2006
£m
(91)
(75)
(17)
(15)
(9)
(3)
(210)
2005
£m
(218)
(36)
(23)
-
-
-
(277)
The £75m restructuring charge is all in respect of employee related costs (2005 £34m employee related and £2m other operating costs
respectively). Of the above impairments, £31m (2005 £19m) relates to Post Office Limited (see note 3). Due to ongoing losses, the carrying
value of asset purchases made by Post Office Limited during the year have been impaired to recoverable amount. The £9m impairment of
goodwill relating to associates comprises £8m for G3 Worldwide Mail N.V. (Spring) and £1m for Camelot International Services Limited.
The Share in Success scheme was launched during 2002. Under the scheme, eligible employees received a one-off discretionary payment on
the successful completion of the Group's three-year Renewal Plan. The cost of the three-year scheme was charged to the income statement in
2004-05. A second Share in Success scheme was launched during 2005. Eligible employees and subpostmasters receive a one-off
discretionary payment if a specific profit target is met.
7. Income tax
The major components of income tax (credit)/expense for the years ended 26 March 2006 and 27 March 2005 are:
Tax charged in the consolidated income statement
Current income tax
Current UK income tax charge
Foreign tax
Adjustments in respect of current income tax of previous years
Deferred income tax
Relating to origination and reversal of temporary differences
Income tax (credit)/expense reported in the consolidated income statement
Tax charged to equity
Income tax related to items charged or credited directly to equity
Deferred income tax related to actuarial gains/(losses) in the pension deficit
Current income tax relief for pension deficiency payment
Income tax debit/(credit) reported in equity
2006
£m
21
25
(10)
(119)
(83)
58
(32)
26
2005
£m
28
12
(20)
(4)
16
(326)
(41)
(367)
63
7. Income tax (continued)
A reconciliation between tax expense and the product of accounting profit multiplied by the UK rate of Corporation Tax for the years
ended 26 March 2006 and 27 March 2005 is as follows:
Royal Mail Holdings plc
Accounting profit before tax from continuing operations
At UK standard rate of Corporation Tax of 30%
Overseas current tax rates
Tax overprovided in previous years
Non-deductible expenses
Associates' profit after tax charge included in Group pre-tax profit
Net decrease in tax charge resulting from recognition of deferred tax assets
Profit from asset disposals eligible for relief
Other
At the effective income tax rate of (27)% (2005: 10%)
Tax (credit)/charge in the income statement
Deferred tax relates to the following:
Liabilities
Accelerated capital allowances
Assets
Deferred capital allowances
Provisions
Pensions temporary differences
Losses available for offset against future taxable
income
Goodwill qualifying for tax allowances
Gross deferred tax assets
Net deferred tax asset
2006
£m
312
93
8
(10)
19
(7)
(169)
(17)
-
(83)
(83)
2005
£m
167
50
4
(21)
17
(7)
(5)
(20)
(2)
16
16
Balance sheet
Income statement
2006
£m
2005
£m
2006
£m
2005
£m
(3)
(5)
2
(4)
36
(14)
93
1
1
-
25
(44)
9
18
36
11
317
10
19
393
390
-
25
282
9
18
334
329
Consolidated income statement
119
4
The Group has unrecognised deferred tax assets of £1,380m (2005 £970m) relating to the retirement benefit obligation, £224m (2005
£245m) relating mainly to fixed asset timing differences, and £113m (2005 £108m) relating to tax losses in subsidiaries that are available to
offset against future taxable profits. The Group has capital losses carried forward, the tax effect of which is £12m (2005 £11m). The Group has
rolled over capital gains of £83m (2005 £78m); no tax liability would be expected to crystallise should the assets into which the gains have
been rolled be sold at their carrying value, as it is anticipated that a capital loss would arise.
At 26 March 2006, there was no recognised or unrecognised deferred income tax liability (2005 £nil) for taxes that would be payable on the
unremitted earnings of certain of the Group’s subsidiaries, associates or joint ventures as the Group has no liability to additional taxation should
such amounts be remitted due to the availability of double taxation relief or other exemptions.
64
8. Property, plant and equipment
Cost
At 28 March 2005
Exchange movements
Reclassification
Additions
Disposal of subsidiaries
Disposals
Reclassification to assets held for sale
Royal Mail Holdings plc
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures and
equipment
£m
2006
Total
£m
1,498
254
476
743
199
798
3,968
1
(10)
62
-
(14)
(47)
-
3
7
-
-
(4)
260
-
7
16
-
(5)
-
-
-
54
(1)
(2)
-
494
794
-
-
60
-
(29)
-
230
-
-
20
-
(7)
-
1
-
219
(1)
(57)
(51)
811
4,079
At 26 March 2006
1,490
Depreciation and impairment
At 28 March 2005
Exchange movements
Reclassification
Charge for the year
Impairment
Disposal of subsidiaries
Disposals
Reclassification to assets held for sale
At 26 March 2006
Net book value
At 26 March 2006
At 28 March 2005
704
147
-
-
42
6
-
(8)
(21)
723
767
794
-
-
7
-
-
-
(4)
150
110
107
423
111
772
2,377
220
-
-
25
6
-
(5)
-
-
-
51
-
(1)
(2)
-
246
471
248
256
323
320
-
-
30
-
-
(28)
-
113
117
88
-
-
12
5
-
(7)
-
-
-
167
17
(1)
(50)
(25)
782
2,485
29
26
1,594
1,591
Depreciation rates are disclosed within the accounting policies. No depreciation is provided on freehold land, which represents £131m (2005 £144m) of
the total cost of properties. The net book value of the Group’s property, plant and equipment held under hire purchase contracts and finance leases
amounts to £54m (2005 £72m) all relating to plant and machinery. The net book value of the Group’s property, plant and equipment includes £73m
(2005 £128m) in respect of assets in the course of construction.
Cost
At 29 March 2004
Exchange movements
Reclassification
Additions
Acquisition of subsidiaries
Disposals
At 27 March 2005
Depreciation and impairment
At 29 March 2004
Exchange movements
Reclassification
Charge for the year
Impairment
Disposals
At 27 March 2005
Net book value
At 27 March 2005
At 29 March 2004
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures and
equipment
£m
2005
Total
£m
1,494
246
457
693
190
779
3,859
3
(48)
84
7
(42)
-
5
11
-
(8)
1,498
254
-
43
-
-
(24)
476
2
-
47
3
(2)
743
-
-
60
-
(51)
199
1
-
22
1
(5)
798
6
-
224
11
(132)
3,968
691
1
(11)
41
6
(24)
704
794
803
141
203
375
136
763
2,309
-
9
26
7
(25)
220
256
254
1
-
48
-
(1)
423
320
318
-
-
18
4
(47)
111
88
54
1
-
8
4
(4)
772
26
16
3
-
147
23
(105)
2,377
1,591
1,550
-
2
6
2
(4)
147
107
105
65
8. Property, plant and equipment (continued)
Impairment of property, plant and equipment
An impairment loss of £17m (2005 £23m) was recognised as an operating exceptional item (note 6), to reduce the carrying amount of certain
asset purchases during the year to their recoverable amount. Of the impairment loss, £15m (2005 £19m) related to Post Office Limited (due
to its loss-making activities), £1m (2005 £4m) to Parcelforce Worldwide and £1m (2005 £nil) to properties.
Royal Mail Holdings plc
9. Goodwill
Cost
At 28 March 2005 and 29 March 2004
Exchange movement
Additions
Disposal of business
At 26 March 2006 and 27 March 2005
Impairment losses
At 28 March 2005 and 29 March 2004
Exchange movement
Disposal of business
At 26 March 2006 and 27 March 2005
Net book value
At 26 March 2006 and 27 March 2005
At 28 March 2005 and 29 March 2004
2006
£m
475
-
1
-
476
344
-
-
344
132
131
2005
£m
479
7
22
(33)
475
372
5
(33)
344
131
107
The carrying value of goodwill arising on business combinations of £132m (2005 £131m) at the balance sheet date, includes £131m (2005
£130m) relating to the General Logistics Systems (‘GLS’) business segment. In line with the accounting policy (see note 2), this goodwill has
been reviewed for impairment. An impairment loss is recognised for the amount by which the carrying value of an asset or cash generating
unit exceeds the recoverable amount. The recoverable amount is the higher of net realisable value and value in use. The carrying value of GLS,
excluding interest bearing and tax related assets and liabilities, is £283m at year end (see note 3) and the operating profit before exceptional
items is £100m for the year (see note 3). The carrying value represents a multiple of 2.8 on operating profit before exceptional items. The net
realisable value of GLS, for the purposes of the impairment review (i.e. the ‘fair value less costs to sell’), has been assessed with reference to
earnings multiples for quoted entities in a similar sector. On this basis, the net realisable value of GLS has been assessed to be in excess of the
carrying value. No reasonable possible change in the earnings multiplies referenced would reduce the net realisable value to below the carrying
value.
From 29 March 2004, the date of transition to IFRS, goodwill is no longer amortised but subject to annual impairment reviews.
66
Royal Mail Holdings plc
10. Intangible assets
Cost
At 28 March 2005 and 29 March 2004
Additions
Acquisition of subsidiaries
At 26 March 2006 and 27 March 2005
Amortisation
At 28 March 2005 and 29 March 2004
Impairment
Amortisation
At 26 March 2006 and 27 March 2005
Net book value
At 26 March 2006 and 27 March 2005
At 28 March 2005 and 29 March 2004
2006
2005
Master
franchise
licences
£m
Customer
listings
£m
Software
licences
£m
Total
£m
Master
franchise
licences
£m
Customer
listings
£m
Software
licences
£m
19
-
-
19
4
-
4
8
11
15
6
-
1
7
-
-
3
3
4
6
-
42
-
42
-
15
-
15
27
-
25
42
1
68
4
15
7
26
42
21
19
-
-
19
3
-
1
4
15
16
-
-
6
6
-
-
-
-
6
-
-
-
-
-
-
-
-
-
-
-
Total
£m
19
-
6
25
3
-
1
4
21
16
The intangible assets recognised in the Group’s balance sheet do not have indefinite lives.
The net book value of intangible assets at 26 March 2006 consists of:
• master franchise licences of £11m. These are being written down on a straight-line basis over their remaining economic life of between 2
and 5 years;
•
•
customer listings of £4m. These are being written down on a straight-line basis over their remaining economic lives of between 1 and 4
years; and
software costs of £27m. These are being written down on a straight-line basis over their remaining economic lives of between 1 and 5
years.
The amortisation charge of £7m relating to intangible assets is aggregated within ‘other operating costs’ within the income statement and
disclosed in note 5 to the accounts.
67
11. Business combinations
The acquisition method of accounting has been used. There have been no material acquisitions during the year and therefore the
following disclosures have been made on an aggregated basis.
The following table sets out the identifiable assets and liabilities acquired at their provisional fair value to the Group, which was
consistent with their book values.
Royal Mail Holdings plc
Property, plant and equipment
Current assets
Debtors
Cash and bank
Total assets
Liabilities
Trade creditors
Net assets acquired
Minority interest
Carrying value of investment in related joint venture/associates at date of change in
status to subsidiary undertaking
Intangible assets arising on acquisition
Goodwill arising on acquisition
Carrying amount of investment
Discharged by:
Purchase consideration paid in the year
Deferred purchase consideration
Fair value of consideration
2006
£m
-
-
-
-
-
-
-
-
1
1
2
1
1
2
2005
£m
11
37
6
54
(40)
14
(4)
(10)
6
22
28
4
24
28
Fair values have been assigned to the identifiable assets and liabilities acquired, as detailed above. The in year acquisitions comprise
£1m in respect of the remaining 9% shareholding of GLS Stafetten A/S (giving the Group 100% ownership) in April 2005 and £1m
relating to customer listings for GLS Italy in December 2005. Profits generated from these acquisitions are not material for 2005-06.
The prior year acquisitions represent GLS Poland £20m, and the acquisition of franchisee businesses in GLS Italy, namely DGE
Vicenza £5m and DGE Firenze £3m.
12. Investments accounted for using the equity method
Investments in associates
Investments in joint venture
Investments accounted for using the equity method
(a) Investments in associates
2006
£m
72
52
124
At 28
March
2005
£m
65
25
90
Impairment
£m
-
(9)
(9)
Share of post
tax pre
dividend
profit from
associates
£m
4
-
4
Dividends
£m
(13)
-
(13)
Share of net assets in associates
Goodwill relating to associates
Net investments in associates
2005
£m
90
41
131
At 26
March
2006
£m
56
16
72
During the year impairments of £9m, relating to goodwill with respect to G3 Worldwide Mail N.V. (Spring) £8m, and Camelot International
Services Limited (CISL) £1m, were made and are recognised as operating exceptional items (note 6).
68
12. Investments accounted for using the equity method (continued)
Royal Mail Holdings plc
Share of net assets in associates
Goodwill relating to associates
Net investments in associates
Current assets
Non-current assets
Share of gross assets
Current liabilities
Non current liabilities
Share of gross liabilities
Share of associates’ net assets
Share of associates’ revenue and profit:
Revenue
Profit after tax
At 29
March
2004
£m
32
25
57
Reclassification
£m
38
-
38
Dividends
£m
(9)
-
(9)
Share of post
tax pre dividend
profit from
associates
£m
4
-
4
2006
£m
116
33
149
(92)
(1)
(93)
56
1,084
4
At 27
March
2005
£m
65
25
90
2005
£m
118
37
155
(87)
(3)
(90)
65
1,032
4
Details of the Group’s 2005-06 and 2004-05 principal associate investments and their reporting dates are:
Company
Reporting date
Proportion of shares held
Country of incorporation
Quadrant Catering Limited
30 September 2005
Camelot Group plc
31 March 2006
Camelot International Services Limited
31 March 2006
G3 Worldwide Mail N.V. (Spring)
31 December 2005
Midasgrange Limited
31 March 2006
51%
20%
20%
24.5%
50%
UK
UK
UK
Netherlands
UK
The Group has accounted for its share of operating profits of associates for the financial years 2005-06 and 2004-05 using the equity
method and has included estimates of the operating profits of Quadrant Catering Limited and G3 Worldwide Mail N.V. (Spring), from their
reporting date to March 2006 and March 2005 respectively, to ensure that the reported share of profits of associates aligns with the
Group’s financial year.
The amounts shown in the reclassification column for 2004-05 relate to:
- the change in status during the year of Midasgrange Limited, from a joint venture to an associate of the Group; and
- the change in status during the year of GLS Poland and NDC 2000 Limited from associates to subsidiaries of the Group.
There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends, repayment of
loans or advances.
69
Royal Mail Holdings plc
12. Investments accounted for using the equity method (continued)
(b) Investments in joint ventures
Share of net assets in joint
ventures
Goodwill relating to joint ventures
Net investments in joint ventures
At 28
March
2005
£m
40
1
41
Share of post
tax pre dividend
profit from
joint ventures
£m
Reclassification
£m
-
-
-
28
-
28
At 26
March
2006
£m
51
1
52
Dividend
£m
(17)
-
(17)
During the 2005–06 financial year, the Group’s only joint venture investment is a 50% interest in First Rate Exchange Services Holdings
Limited (formerly First Rate Travel Services Holdings Limited), whose principal activity is the provision of Bureau de Change. The Group
accounted for this investment using the equity method.
Share of net assets in joint ventures
Goodwill relating to joint ventures
Net investments in joint ventures
Share of joint ventures’ assets and liabilities
Current assets
Non-current assets
Share of gross assets
Current liabilities
Non-current liabilities
Share of gross liabilities
Share of joint ventures’ net assets
Share of joint ventures’ revenue and profit
Revenue
Profit after tax
At 29
March
2004
£m
73
2
75
Reclassification
£m
(47)
(1)
(48)
Share of post
tax pre dividend
profit from
joint ventures
£m
24
-
24
At 27
March
2005
£m
40
1
41
2005
£m
101
2
103
(63)
-
(63)
40
124
24
Dividend
£m
(10)
-
(10)
2006
£m
162
2
164
(113)
-
(113)
51
55
28
70
Royal Mail Holdings plc
12. Investments accounted for using the equity method (continued)
During the 2004-05 financial year the Group held investments in three joint ventures being:
Company
Reporting date
Proportion of shares held
Country of incorporation
First Rate Exchange Services Holdings Limited
31 March 2006
Midasgrange Limited
Romec Limited
31 March 2006
31 December 2005
50%
50%
51%
UK
UK
UK
The Group accounted for these investments using the equity method.
The amounts shown in the reclassification column in 2004-05 relates to the change in status of Midasgrange Limited from a joint venture to
an associate and Romec Limited from a joint venture to a subsidiary.
13. Non current assets held for sale
Net book amount
At 28 March 2005
Reclassification from property, plant and equipment
Impairment
Disposals
At 26 March 2006
Freehold
£m
-
26
(3)
(12)
11
Long
leasehold
£m
-
-
-
-
-
Total
£m
-
26
(3)
(12)
11
Freehold and leasehold properties that are being actively marketed and are fully vacant (indicating that a sale is highly probable and the
property is available for immediate sale), are classified as ‘non current assets held for sale’ on the basis that their primary recovery is through
sale and not occupancy. The expected disposal of these properties is as a result of the Group continuing to rationalise its portfolio and exit
surplus properties. These properties are expected to be disposed of within one year.
During the year, a gain of £20m (2005 £nil) was recognised in the income statement in relation to the disposal of such property.
Any impairment is as a result of reassessing the carrying values of properties after they have been reclassified to ‘non-current assets held for
sale’. During the year, an impairment of £3m was recognised as an operating exceptional item (note 6).
Properties held as ‘non-current assets held for sale’ have been allocated to Royal Mail, Post Office Limited and Parcelforce Worldwide for
segmental reporting purposes.
71
Royal Mail Holdings plc
14. Employee benefits - pensions
The Group operates pension schemes as detailed below.
Name
Royal Mail Pension Plan (RMPP)
Royal Mail Senior Executive Pension Plan (RMSEPP)
Royal Mail Retirement Savings Plan (RMRSP)
Eligibility
UK employees
UK senior executives
UK employees
Overseas subsidiary
Type
Defined benefit
Defined benefit
Defined contribution
Various other small-scale schemes operated by overseas subsidiaries
employees
Defined contribution
Defined Contribution
A charge for the defined contribution schemes of £2m (2005 £1m) was recognised in operating profit before exceptional items within the
income statement. The Company contributions to these schemes was £1m (2005 £1m).
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The latest full actuarial
valuations of both schemes were carried out as at 31 March 2003 using the projected unit method. The next full valuations are due to be
carried out as at 31 March 2006.
The regular future service contributions for RMPP, expressed as a percentage of pensionable pay, are expected to increase from 12.6% to 20%.
For RMSEPP, contributions are at 20.9% and future rates will be discussed with the Trustee during the 2006 actuarial valuation. Payment of
£113m (2005 £138m) was made during the year to fund the deficit in the schemes. It is anticipated that further such payments will be made
in future as required. A current liability of £47m (2005 £208m) has been recognised for payments to the pension schemes relating to
redundancy. During the year, payments of £209m (2005 £5m) relating to redundancy were made.
The following disclosures relate to the RMPP and RMSEPP defined benefit scheme plans:
a) Major assumptions
The size of the pension deficit, which is large in the context of the Group and its finances, is materially sensitive to the assumptions
adopted. Small changes in these assumptions could have a significant impact on the deficit and overall income statement charge. The
major assumptions were:
At 26 March 2006
% pa
At 27 March 2005
% pa
Rate of increase in salaries
Rate of increase in pensions and deferred pensions
Discount rate
Inflation assumption
Expected average rate of return on assets
Mortality
3.8
2.8
4.9
2.8
7.1
4.2
2.7
5.5
2.7
7.4
Over recent months the Group and the RMPP Trustee have discussed potential changes to the mortality assumptions to be adopted for the 2006
actuarial valuation. These discussions have been based on an analysis carried out by the Trustee of the experience of the plan’s pensioner
population up to 31 March 2005. The Trustee has proposed a particular mortality basis - based on the 1992 series mortality tables allowing for
‘medium cohort’ projections of future improvements - and this has been applied to RMPP at the current year end. For consistency, the same
improvement has been assumed for RMSEPP. This differs from the prior year, when assumptions consistent with the latest full actuarial
valuations were used. The table below illustrates how these assumptions have changed.
Average expected life expectancy from age 60:
For a current 60 year old male RMPP member
For a current 60 year old female RMPP member
For a current 40 year old male RMPP member
For a current 40 year old female RMPP member
2006
26 years
29 years
28 years
30 years
2005
22 years
25 years
24 years
27 years
72
14. Employee benefits - pensions (continued)
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were:
At 26 March 2006
Royal Mail Holdings plc
Equities
Bonds
Property
Other assets
Fair value of plans’ assets
Present value of plans’ liabilities
Deficit in schemes
At 27 March 2005
Equities
Bonds
Property
Other assets
Fair value of plans’ assets
Present value of plans’ liabilities
Deficit in schemes
Market value
£m
Long-term rate of return expected
% pa
17,190
2,682
1,835
140
21,847
(27,435)
(5,588)
7.7
4.2
5.9
3.8
Market value
£m
Long-term rate of return expected
% pa
13,376
2,006
1,639
336
17,357
(21,315)
(3,958)
8.0
4.8
6.4
3.7
The pension plans have not invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group.
73
14. Employee benefits - pensions (continued)
c) Recognised charges
An analysis of the separate components of the amounts recognised in the income statement and statement of recognised income and expense
(SORIE) is as follows:
Royal Mail Holdings plc
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost
Loss due on settlements
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments
Total charge to operating profit
Analysis of amounts charged/(credited) to finance income:
Interest on plans’ liabilities
Expected return on plans’ assets
Total net credit to finance income
Total charge to income statement before deduction for tax
Analysis of amounts recognised in the statement of recognised income and
expense (SORIE)
Actual return on plans’ assets
Less: expected return on plans’ assets
Other actuarial losses
Actuarial (losses)/gains and recognised in SORIE before deduction for tax
2006
£m
527
-
527
24
551
1,162
(1,263)
(101)
450
4,684
(1,263)
3,421
(5,080)
(1,659)
2005
£m
482
6
488
22
510
1,068
(1,127)
(59)
451
2,170
(1,127)
1,043
(632)
411
74
14. Employee benefits - pensions (continued)
d) Movement in plans’ assets and liabilities
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Plans’ liabilities at beginning of period
Current service cost
Settlements
Curtailment costs*
Finance cost
Employee contributions
Actuarial loss (recognised in SORIE)
Benefits paid
Plans’ liabilities at end of period
Royal Mail Holdings plc
2006
£m
(21,315)
(527)
-
(48)
(1,162)
(162)
(5,080)
859
2005
£m
(19,594)
(482)
(76)
(208)
(1,068)
(151)
(632)
896
(27,435)
(21,315)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated compensation costs. Estimates of both
are included, for example, in any redundancy provisions raised. The curtailment costs above represent the costs associated with those people paid
compensation in respect of redundancy in 2005-06. This may occur in an accounting period subsequent to the recognition of costs in the income
statement.
Changes in the fair value of the plans’ assets are analysed as follows:
Plan assets at beginning of period
Company contributions paid
Movement in company contributions accrued
Employee contributions
Finance income
Settlements
Actuarial gain (recognised in SORIE)
Benefits paid
Plans’ assets at end of period
e) History of experience gains and losses
Fair value of assets
Present value of liabilities
Deficit in schemes
Actuarial gains arising on assets
Actuarial losses arising on liabilities
Total actuarial gains and losses (recognised in SORIE)
2006
£m
21,847
(27,435)
(5,588)
2006
3,421
(5,080)
(1,659)
2005
£m
15,200
329
343
151
1,127
60
1,043
(896)
17,357
2004
£m
15,200
(19,594)
(4,394)
2006
£m
17,357
664
(161)
162
1,263
-
3,421
(859)
21,847
2005
£m
17,357
(21,315)
(3,958)
2005
1,043
(632)
411
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of recognised
income and expense is £1,248m loss (2005 £411m gain). The Directors are unable to determine how much of the pension scheme deficit
recognised in transition to IFRSs is attributable to actuarial gains and losses since inception of the pension schemes. Consequently, the
Directors are unable to determine the cumulative amount of actuarial gains and losses that would have been recognised in the statement of
recognised income and expense since inception of the pension schemes, before transition to IFRSs.
75
Royal Mail Holdings plc
15. Employee benefits – annual leave
Under IAS 19 ‘Employee benefits’ businesses are required to recognise for all short-term accumulating compensated absences such as holiday
entitlement earned but not taken at the balance sheet date. The business’ holiday entitlement coincides with the financial year. Employees are
allowed to carry forward untaken leave outstanding at the year end if this is approved by the business. The impact of these provisions within
IAS 19 on the Group’s financial statements is to recognise an annual leave accrual in the balance sheet at 26 March 2006 of £39m (2005
£42m) and to reflect a release to the income statement in respect of the year-on-year movement of £3m (2005 £2m charge).
16. Inventories
Supplies (uniforms, fuel, printing and stationery, mailbags)
Merchandise (Post Office Limited retail and lottery products)
Materials (engineering spares)
Total inventories at the lower of cost and net realisable value
During the year £nil (2005 £1m) of inventory items were written off.
17. Current trade and other receivables
Trade receivables (net of bad debt provision of £24m (2005 £30m))
Other prepayments and accrued income
Total
Details of related party transactions can be found in note 27.
18. Non-current other receivables
2006
£m
16
10
1
27
2006
£m
836
257
1,093
2005
£m
15
8
4
27
2005
£m
737
354
1,091
Other non-current receivables of £6m (2005 £14m) mainly represent amounts receivable from employees in respect of the ‘home computer’
initiative originally launched in November 2003.
76
19. Cash and cash equivalents
Cash within the Post Office® network
Other cash in hand
Cash at bank
Short-term deposits
Total
Royal Mail Holdings plc
2006
£m
782
18
29
332
1,161
2005
£m
849
7
34
450
1,340
Cash in the Post Office® network and in hand of £800m (2005 £856m) is non-interest bearing. Cash at bank of £29m (2005 £34m) earns
interest at either floating or short-term fixed rates based upon daily bank deposit rates. Short-term deposits are made for varying periods of
between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-
term deposit rates. The fair value of cash, short-term deposits and cash equivalent current asset investments is £1,161m (2005 £1,340m). At
26 March 2006, the Group had available £1,634m (2005 £1,634m) of undrawn committed borrowing facilities in respect of which all
conditions precedent had been met. These are detailed in note 22.
20. Share capital
Authorised
Ordinary shares of £1 each
Special Rights Redeemable Preference Share (Special Share) of £1 each
Total
Allotted and called up
Ordinary shares of £1 each
Special Rights Redeemable Preference Share (Special Share) of £1 each
Total
2006
£
100,000
1
100,001
2006
£
50,000
1
50,001
2005
£
100,000
1
100,001
2005
£
50,000
1
50,001
The Special Share can be redeemed at any time by its holder (the Secretary of State). The Company cannot redeem the Special Share
without the prior consent of the Secretary of State. No premium is payable on redemption. Subject to, and in accordance with, the
provisions of the Postal Services Act 2000, the Secretary of State can at any time require the Directors to declare and pay a dividend to
the Secretary of State or its nominee.
On distribution in a winding up of the Company, the Secretary of State is entitled to repayment of the capital paid up on the Special Share
in priority to any repayment of capital to any other member. The Special Share does not carry any rights to vote.
In accordance with section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 1985, the shares issued to the
Secretary of State shall be treated as if their nominal value had been fully paid up.
77
Royal Mail Holdings plc
21. Total equity
Distributable reserves
Retained
earnings
£m
Mails
£m
Rural
Network
£m
Foreign
Currency
Translation
reserve
£m
Hedging
reserve
£m
Other
reserves
£m
Equity
holder
of the
parent
£m
Minority
interest
£m
At 28 March 2005
(3,085)
801
171
Restatement for the effect of IAS 32
and IAS 39 at 28 March 2005
(11)
-
-
Restated balance at 28 March 2005
(3,096)
801
171
Profit for the financial year
395
Actuarial losses on defined benefit
schemes
(1,659)
Taxation on items taken directly to equity
(26)
Transfer of Rural Network reserve
147
-
-
-
-
-
-
-
(147)
Transfer of interest income
(39)
35
Translation differences
Gain on cash flow hedge deferred into
equity
Gain transferred from equity to income
during the year
Gain transferred from equity to the
initial carrying value of non financial
asset
Transfer of unrealised gain
-
-
-
-
8
-
-
-
-
-
4
-
-
-
-
-
At 26 March 2006
(4,270)
836
28
8
-
8
-
-
-
-
-
-
-
-
-
-
8
-
8
8
-
-
-
-
-
-
3
(10)
(1)
-
-
63
(2,042)
-
(3)
63
(2,045)
-
-
-
-
-
-
-
-
-
(8)
395
(1,659)
(26)
-
-
-
3
(10)
(1)
-
55
(3,343)
4
-
4
-
-
-
-
-
-
-
-
-
-
4
Distributable reserves
Retained
earnings
£m
Mails
£m
Rural
Network
£m
Foreign
Currency
Translation
reserve
£m
Hedging
reserve
£m
Other
reserves
£m
Equity
holder
of the
parent
£m
Minority
interest
£m
At 29 March 2004
(4,118)
765
311
Profit for the financial year
Actuarial gain on defined benefit schemes
Taxation on items taken directly to equity
Transfer of Rural Network reserve
Transfer of interest income
Translation differences
151
411
367
151
-
-
-
-
(47)
36
-
-
-
-
-
(151)
11
-
At 27 March 2005
(3,085)
801
171
-
-
-
-
-
-
8
8
-
-
-
-
-
-
-
-
63
(2,979)
-
-
-
-
-
-
151
411
367
-
-
8
63
(2,042)
-
4
-
-
-
-
-
4
Total
equity
£m
(2,038)
(3)
(2,041)
395
(1,659)
(26)
-
-
-
3
(10)
(1)
-
(3,339)
Total
equity
£m
(2,979)
155
411
367
-
-
8
(2,038)
The Mails reserve was created in Royal Mail Group plc on 3 February 2003, following directions issued by the Secretary of State for Trade and
Industry under section 72 of the Postal Services Act 2000. The amounts allocated to the reserve are to be applied as if they were profits available
for distribution and they are to be principally used to provide financial assistance to Post Office Limited and security for loans to Royal Mail Group
plc.
The Rural Network reserve was initially set up during 2003-04 to provide funding for a three-year period to maintain the rural network of Post
Offices. The Rural Network Reserve has been reduced by £147m (2005 £151m), representing the financing required during the year.
The Foreign Currency Translation reserve has been created to record the gains and losses arising from the translation of assets and liabilities of
subsidiaries denominated in currencies other than the reporting currency from 29 March 2004.
78
Royal Mail Holdings plc
21. Total equity (continued)
The Hedging reserve is used to record gains and losses arising on cash flow hedges from 28 March 2005.
Other reserves represent the unrealised gains arising from the acquisition of interests in associates and joint ventures in prior years. In the year
£8m has transferred to retained earnings in respect of the impairment of the investment in G3 Worldwide Mail N.V. (Spring) (see note 12).
The transfer of interest income relates to income recorded in the income statement, which has been earned on the assets that support the Mails and
Rural Network reserves.
22. Financial liabilities
Amounts falling due in:
One year or less or on demand
More than one year
More than one year but not more than two years
More than two but not more than five years
More than five years
Total
Amounts falling due in:
One year or less or on demand
More than one year
More than one year but not more than two years
More than two but not more than five years
More than five years
Total
Finance
lease/hire
purchase
agreements
£m
Deferred
consideration
Derivative
liabilities
£m
1
1
1
-
-
2
3
-
-
-
-
3
3
-
-
-
-
3
Finance
lease/hire
purchase
agreements
£m
Deferred
consideration
£m
Derivative
liabilities
£m
1
2
1
1
-
3
16
8
8
-
-
24
n/a
n/a
n/a
n/a
n/a
-
Loans
£m
361
505
1
2
502
866
Loans
£m
375
506
1
2
503
881
2006
Total
£m
368
506
2
2
502
874
2005
Total
£m
392
516
10
3
503
908
In accordance with the exemption under IFRS 1, ‘First time adoption of IFRS’, comparative information has been prepared under previous UK
GAAP (FRS 13) and not IAS 32 and IAS 39. As a consequence, derivative liabilities were not included in the March 2005 balance sheet. In order
to comply with IAS 32 and IAS 39 the derivatives would have been valued at fair value and included in the March 2005 balance sheet on this
basis. The fair value of derivative liabilities at 27 March 2005 was £1m – all due within one year.
Average
interest/interest
range of loan
%
2006
Average maturity
date
of loans drawn
Year
2023
2006
2010
Further
facility
£m
844
790
1,634
Total
facility
£m
1,344
1,150
2,494
5.8
4.8
-
6
3.1-6.9
1,634
2,500
Analysis of loans and facilities
DTI loans to Royal Mail Group plc
HM Treasury loans to Post Office Limited
Committed facilities
Miscellaneous bank loans in overseas subsidiaries
Total
Loans
£m
500
360
860
6
866
79
22. Financial liabilities (continued)
DTI loans to Royal Mail Group plc
HM Treasury loans to Post Office Limited
Committed facilities
Short-term loan from associate
Miscellaneous bank loans in overseas subsidiaries
Total
Loans
£m
500
360
860
14
7
881
Royal Mail Holdings plc
Average
interest/interest
range of loan
%
2005
Average maturity
date
of loan
Year
Further
facility
£m
844
790
1,634
-
-
Total
facility
£m
1,344
1,150
2,494
5.8
5.0
14
7
4.8
3.1-6.9
1,634
2,515
2023
2005
2005
2009
The short-term loan from the associate was repaid during the year.
The miscellaneous bank loans in overseas subsidiaries are either unsecured or secured on various assets (mainly property) of the overseas
subsidiaries. The loans are repayable in variable and fixed amounts over their maturity periods.
The obligations under finance leases and hire purchase contracts are either unsecured or secured on various assets of the overseas
subsidiaries. These are repayable in variable and fixed amounts over their maturity periods. The average interest rate is 6% (2005 6%). The
average maturity date is within one to two years (2005 – within one to two years).
The deferred consideration is unsecured and is repayable over the maturity period. The deferred consideration is non-interest bearing (2005
non interest bearing) and the average maturity date is within one year (2005 within one year).
The Group has various borrowing facilities available to it. The undrawn committed facilities available at 26 March 2006, in respect of which all
conditions precedent had been met at that date, are as follows:
Expiring in one year or less
Expiring in more than one year, but not more than two years
Expiring in more than two years
Total
2006
£m
200
150
1,284
1,634
2005
£m
-
200
1,434
1,634
The undrawn amounts comprise multiple loan facilities amounting to £1,634m. £860m of the committed facilities had been utilised at 26
March 2006. The DTI loans to Royal Mail Group plc are secured by way of a fixed and floating charge on various assets of the Group.
Royal Mail Group plc has received a waiver from the DTI, in its capacity as lender, for an insolvency default arising on adoption of IFRS, to
record the Group’s pension deficit as a balance sheet liability. As a condition of this waiver, the lender shall only be obliged to make an advance
to Royal Mail Group plc if the Board resolves that without such an advance Royal Mail Group plc will be unlikely to meet its liabilities as they fall
due.
The HM Treasury loans to Post Office Limited, which are secured by way of a floating charge on various assets of the Group and a negative
pledge over cash and near cash items are short dated on a programme of liquidity management drawn down on the facility that expires in
2010.
The following securities apply to the Group’s committed facilities:
Amount
£m
Security
DTI drawn down loan
DTI further facility
HM Treasury loan
500
Investment in GLS and floating charge over non regulated assets
844 Floating charge over all assets and cash deposits with National Loans Fund
1,150 Cash in the Post Office Limited network
The HM Treasury loan provides a total facility of £1,150m, but is restricted to funding the cash and near cash items held within the Post Office
Limited network. As at 26 March 2006, the balance of this cash was £782m as shown in note 19.
80
Royal Mail Holdings plc
23. Provisions for liabilities and charges
Current Non-current
provisions
£m
provisions
£m
At 28 March 2005
Charged in the year
Reclassification to current provisions
Utilised non-cash
Utilised cash
At 26 March 2006
124
82
(3)
(48)
(97)
58
48
4
3
-
(2)
53
At 29 March 2004
Charged in the year
Reclassifications to current provisions
Utilised non-cash
Utilised cash
At 27 March 2005
Current Non-current
provisions
£m
provisions
£m
408
35
26
(130)
(215)
124
71
12
(26)
-
(9)
48
Total
£m
172
86
-
(48)
(99)
111
Total
£m
479
47
-
(130)
(224)
172
and
Parcels
£m
Counter
Services
£m
160
71
-
(39)
(83)
109
Mails
and
Parcels
£m
429
47
-
(116)
(200)
160
12
15
-
(9)
(16)
2
Counter
Services
£m
50
-
-
(14)
(24)
12
Total
£m
172
86
-
(48)
(99)
111
Total
£m
479
47
-
(130)
(224)
172
The cash utilisation of £99m includes £96m of spend relating to exceptional rationalisation and £3m relating to other operating costs. Total
cash spend in the year relating to exceptional rationalisation is shown in the cash flow statement. Included within provisions is £51m (2005
£67m) relating to onerous property contracts and £13m (2005 £13m) of decommissioning costs.
The Mails and Parcels provision includes amounts relating to redundancy and other non-redundancy items (onerous property contracts and
decommissioning costs), which relate to restructuring programmes. During the year £60m (2005 £36m) was charged to exceptional items
and £11m (2005 £11m) to other operating costs. £39m was transferred to creditors due within one year mainly relating to amounts due to
the pension scheme for redundancies with early retirement. £58m of this provision is expected to be utilised in 2006-07 and the remainder
over the following two to three years, except for £12m relating to decommissioning costs and £31m relating to onerous property contracts,
which are expected to be utilised over a longer period. The timing of cash flows for these provisions are by their nature uncertain and
dependent upon the outcome of related events. The best estimates of the amounts are shown in the table above.
Counter Services provisions include amounts relating to the continuing headcount reduction programme. During the year £15m was
charged to exceptional items and £9m was transferred to creditors due within one year mainly relating to amounts due to the pension
scheme for redundancies with early retirement. The balance is expected to be utilised in 2006-07.
The change in the carrying value of the discounted element of the provision due to the passage of time is not material.
81
24. Current trade and other payables
Obligations under finance leases and hire purchase agreements (note 22)
Client services balances
Trade payables and accruals
Advance customer payments
Other taxation and social security
Deferred consideration (note 22)
Annual leave entitlement creditor
Lease incentives
Other payables
Total
Royal Mail Holdings plc
2006
£m
1
248
1,345
255
104
3
39
1
18
2005
£m
1
323
1,628
224
102
16
42
1
15
2,014
2,352
The Group, through its Post Office Limited subsidiary, receives and disburses cash on behalf of Government agencies and other clients to
customers through its Post Office® branch network. Amounts owed to these parties are separately shown as client service balances (above).
The level of cash held and the related creditors can vary significantly at each balance sheet date.
Details of related party transactions can be found in note 27.
25. Non-current trade and other payables
Obligations under finance leases and hire purchase agreements (note 22)
Lease incentives
Deferred consideration (note 22)
Other long-term payables
Total
2006
£m
1
8
-
23
32
2005
£m
2
6
8
32
48
Other long-term payables represent £18m (2005 £20m) in respect of deferred income and £5m (2005 £12m) for the ‘home computer’
initiative.
26. Commitments and contingencies
Operating lease commitments
The Group is committed to the following future minimum lease payments under non-cancellable operating leases as at 26 March 2006:
Within one year
Between one and five years
Beyond five years
Total
Land and buildings
2006
£m
124
419
755
2005
£m
128
434
850
Vehicles and equipment
2005
£m
2006
£m
49
76
2
52
63
2
1,298
1,412
127
117
IT equipment
2005
£m
46
175
117
338
2006
£m
46
169
77
292
Existing property leases have an average term of 17 years and any new leases entered into generally have a 15-year term with a 10-year
break clause. Vehicle leases generally have a term of between 3 and 7 years, depending on the asset class, with the average term being 4
years. The existing leases will mature between 2006 and 2011. The IT contract has a term of 10 years with 7 years remaining at the balance
sheet date.
Capital commitments
At 26 March 2006, the Group has commitments of £59m (2005 £146m), which are contracted for but not provided in the accounts.
82
Royal Mail Holdings plc
26. Commitments and contingencies (continued)
Guarantees
The Group has the following contingent liabilities at 26 March 2006:
Royal Mail Group plc, a subsidiary of the Company, has guaranteed the performance of a third party in relation to lease payments payable
over the 15-year term of a lease entered into on 21 December 2000, and has given certain tax indemnities to the US lessors. In the opinion
of the Directors, no loss will result to the Group as a result of these guarantees.
As required by the Notes Sorting Facility rules, notes in transit to cash handling centres and those processed overnight, for which the Group
has received credit, are secured by gilts deposited with the Bank of England. On default, the estimated maximum liability would be £104m.
Royal Mail Group plc has given a guarantee to the Secretary of State for Work and Pensions, the Department for Social Development
(Northern Ireland) and the Commissioners of Inland Revenue, to underwrite the performance of Post Office Limited of its obligations
under the Universal Banking Contract (Post Office Card Account).
Royal Mail Group plc has also given a guarantee to Electronic Data Systems Limited to underwrite Post Office Limited’s performance of its
obligations under the Universal Banking Contract (Post Office Card Account).
83
Royal Mail Holdings plc
27. Related party transactions
The ultimate parent
Royal Mail Holdings plc is the ultimate parent company of the Group. There were no transactions between Royal Mail Holdings plc and its
subsidiary undertakings during the year (2005 £nil).
Principal subsidiaries
The consolidated financial statements include the financial statements of Royal Mail Holdings plc and the principal subsidiaries listed in the
following table:
Name
Country of incorporation
% equity interest
Royal Mail Group plc
Post Office Limited
Royal Mail Investments Limited
General Logistics Systems B.V.
Romec Limited
NDC 2000 Limited
Joint venture
United Kingdom
United Kingdom
United Kingdom
Netherlands
United Kingdom
United Kingdom
2006
100%
100%
100%
100%
51%
51%
2005
100%
100%
100%
100%
51%
51%
The Group has a 50% interest in First Rate Exchange Services Holdings Limited (previously known as First Rate Travel Services Limited until its
name change on 23 February 2006), a company registered in the United Kingdom.
Associate
The following companies are associated undertakings of the Group:
Company
Country of incorporation
Quadrant Catering Limited
Camelot Group plc
Camelot International Services Limited
G3 Worldwide Mail N.V. (Spring)
United Kingdom
United Kingdom
United Kingdom
Netherlands
2006
51%
20%
20%
24.5%
2005
51%
20%
20%
24.5%
Midasgrange Limited
The majority of the Board and voting power in Quadrant Catering Limited is held by the Group’s partner, hence it is not a subsidiary.
United Kingdom
50%
50%
Related party transactions
During the year the Group entered into transactions with related parties. The transactions were in the ordinary course of business and
included administration and investment services recharged to the Group’s pension plan by Royal Mail Pensions Trustees Limited, a 100%
subsidiary. The transactions entered into and the balances outstanding at 26 March 2006 were as follows:
Sales to related party
2005
£m
2006
£m
Purchases from
related party
2005
£m
2006
£m
Amounts
owed from related
party including
outstanding loans
2005
£m
2006
£m
Amounts
owed to related
party including
outstanding loans
2005
2006
£m
£m
Royal Mail Pension Trustees Limited
Quadrant Catering Limited
Camelot Group plc
G3 Worldwide Mail N.V.
First Rate Exchange Services
Holdings Limited Group
9
-
49
1
26
8
-
11
2
24
-
42
-
13
-
-
43
-
17
-
-
-
1
11
-
1
-
1
12
-
-
6
-
2
-
-
15
-
2
1
Midasgrange Limited
Romec Limited (subsidiary from
December 2004)
Companies listed above are joint ventures and associates of the Group with the exception of Royal Mail Pensions Trustees Limited and Romec
Limited.
127
n/a
n/a
n/a
n/a
18
1
6
3
3
-
-
-
-
-
-
Terms and conditions of transactions with related parties
The sales to and purchases from related parties are made at normal market prices. Outstanding balances at the year end are unsecured,
interest free and settlement is made by cash.
84
27. Related party transactions (continued)
Key management compensation
Short-term employee benefits
Post-employment benefits
Termination benefits
Other long-term benefits
Total compensation paid to key personnel
Royal Mail Holdings plc
2006
£000
2,818
688
865
463
4,834
2005
£000
3,385
344
720
3,832
8,281
Key management comprise Executive and Non Executive Directors on the Royal Mail Holdings plc Board.
HM Government is the Company’s sole shareholder and accordingly the Directors have no interest in the shares of the Company.
Transactions with other related parties
Bob Wigley, a Non Executive Director, is Chairman of Merrill Lynch’s Europe, Middle East and Africa Business. The Trustees of the Royal Mail
Pension Plan, not the Company, had a commercial relationship with Merrill Lynch Investment Management, for two UK equity portfolio
mandates to the value of £950m (2005 £1.1bn) during the year. Bob Wigley is not a Trustee of the Royal Mail Pension Plan.
John Neill, a Non Executive Director, is Group Chief Executive and Deputy Chairman of the Unipart Group, which has a contract for the supply
of operational support services and expertise with Royal Mail for improvements to mail centres. The total value of the contract is £1.7m (2005
£1.5m) of which £0.5m (2005 £1.5m) was paid during the course of the year. In accordance with normal Board procedures, John Neill took no
part in the Board’s decision to appoint Unipart Group. The amount outstanding at 26 March 2006 was £1.2m (2005 £nil).
28. Financial risk management objectives and policies
The Group's principal financial instruments, other than derivatives, comprise short-term deposits, money market liquidity investments,
Government gilt edged securities, loans, finance leases and hire purchase contracts and cash. The main purposes of these financial instruments
are to raise finance and manage the liquidity needs of the business operations. The Group has various other financial instruments such as
trade debtors and trade creditors, which arise directly from operations.
The Group also enters into derivative transactions, principally commodity swaps and forward currency contracts. The purpose is to manage the
commodity and currency risks arising from the Group's operations.
It is, and has been throughout the year under review, the Group's policy that no speculative trading in financial instruments shall be
undertaken.
The main risks arising from the Group's financial instruments are interest rate risk, liquidity risk, foreign currency risk, commodity price and
credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.
Interest rate risk
The Group's exposure to market risk for changes in interest rates relates to the Group's debt obligations and interest bearing financial assets.
The DTI loans to Royal Mail Group plc (£500m as at March 2006) are at a fixed interest rate to maturity (average date 2023). The HM
Treasury loans to Post Office Limited (£360m as at March 2006) are at short-dated fixed interest rates (average maturity 4 days as at March
2006). The total interest bearing financial assets of the group (£1,060m as at March 2006) are at short-dated fixed interest rates (average
maturity 50 days as at March 2006). Both of these short-dated financial instruments are maturity managed to obtain the best value out of the
interest yield curve.
The Group's policy is to manage its net interest expense using an appropriate mix of fixed and variable rate financial instruments. No external
hedging of interest rate risk is undertaken.
85
Royal Mail Holdings plc
28. Financial risk management objectives and policies (continued)
Foreign currency risk
The Group is exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and delivering foreign
origin mail in the UK, and the balances held to operate the Bureau de Change services within Post Office Limited. These risks are mitigated by
hedging programmes managed by Group Treasury. Where possible, exposures are netted internally and any remaining exposure is hedged
using a combination of external spot and forward contracts. All other significant exposures are considered individually; hedging will not
normally be considered for exposures of less than £1m; hedging is normally confined to 80% of the forecast exposure where forecast cash
flows are highly probable.
The Group’s obligation to settle with overseas postal operators is denominated in Special Drawing Rights (SDRs) – a basket currency comprising
of US Dollar (USD), Japanese Yen (JPY), Sterling and euro. The Group has a policy of matching receipts and payments for individual currencies
where possible and then hedging any material net exposure. The policy is that up to 80% of the forecast net exposure is hedged with
agreement of the internal business unit. Group Treasury operates a rolling 18-month programme, which is subsequently reviewed on a
quarterly basis. There has been no external hedge in place throughout the financial year 2005-06 due to there being no material net
exposure.
Balances of major currency holdings along with minor currencies showing a closely correlated movement for the Bureau de Change business
are hedged.
The Group’s obligations to settle USD invoices on a specific capital project were hedged. This programme matured during the year.
Two further hedge programmes have been initiated during the year. The Group’s obligations to settle conveyance charges in USD and euro has
been hedged (as far forward as March 2007). Additionally the Group’s obligation to settle euro invoices on a small capital project has been
hedged.
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries.
Commodity price risk
The Group is exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 150 million
litres of fuel per year, and a jet fuel price risk arising from the purchasing of air freight services. The Group’s fuel risk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets. The strategy operates within the parameters set
by the Board, which allow the use of over-the-counter derivative products (in both USD commodity price and USD/Sterling exchange rate) to
manage these exposures.
In addition, the Group is exposed to the commodity price risk of purchasing electricity and gas. The Group’s risk management strategy aims to
reduce uncertainty created by the movements in the electricity and gas markets. These exposures are managed by locking into fixed rate price
contracts with suppliers.
Credit risk
Royal Mail operate a Credit Policy, which provides a fair and equitable platform for all its customers to do business with. The level of credit
granted is based on the customer's risk profile. The Credit Policy is applied rigidly within the regulated products area so as to ensure that Royal
Mail is not in breach of compliance legislation. Assessment of credit for the non-regulated products is based on commercial factors, which are
commensurate with the Group's appetite for risk.
Royal Mail has a dedicated credit management team, which set the credit limits, monitor credit limits exceeded on a regular basis and take
corrective action as and when appropriate. Despite all the controls in place Royal Mail does suffer from bad debts, but the level of bad debts
incurred is below 0.2% of turnover.
With respect to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalent investments, available for sale
financial assets, held to maturity financial assets, held for trading financial assets, loans and receivables financial assets and certain derivative
instruments, the Group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying
amount of these instruments.
There are no significant concentrations of credit risk within the Group.
Liquidity risk
The Group's primary objective is to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due. This is
achieved by aligning short-term investments and borrowing facilities with forecast cash flows. Typical short-term investments include money
market funds, time deposits with approved counterparties, UK Government gilts and treasury bills. Borrowing facilities are regularly reviewed to
ensure continuity of funding. Of the current facilities, £300m is uncommitted lines of credit, which are reviewed annually, £1.6bn expires within
5 years.
86
29. Financial instruments
In accordance with the exemption under IFRS 1, comparative information has been prepared under previous UK GAAP (FRS 13) and not
IAS 32 and IAS 39. Comparatives for 2005 have been provided in full at the end of this note.
Set out below is a comparison by category of the carrying amounts and fair values of all the Group's financial instruments.
Royal Mail Holdings plc
Financial assets
Cash
Cash equivalent current asset investments
Sub-total cash and cash equivalent
Financial assets at fair value through the income statement
Held to maturity financial assets
Loans and receivables financial assets
Sub-total Financial assets - investments (current)
Financial assets - investments (non-current)
Derivative assets
Total
Financial liabilities
Obligations under finance leases and hire purchase contracts (note 22)
Deferred consideration (note 23)
Sub-total included in current other payables
Obligations under finance leases and hire purchase contracts (note 22)
Deferred consideration (note 23)
Sub-total included in non-current other payables
Other loans:
HM Treasury loans to Post Office Limited (note 22)
Short-term loan from associate (note 22)
Miscellaneous bank loans in overseas subsidiaries (note 22)
Sub-total financial liabilities – loans (current liabilities)
DTI loans to Royal Mail Group plc (1) (note 22)
Miscellaneous bank loans in overseas subsidiaries (note 22)
Sub-total financial liabilities – loans (non-current liabilities)
Derivative liabilities
Carrying amount
and fair value
2006
£m
829
332
1,161
133
549
12
694
5
3
1,863
1
3
4
1
-
1
360
-
1
361
500
5
505
3
Total
874
Trade debtors, creditors, prepayments, accruals and client services balances have been omitted from this analysis on the basis that carrying
value is a reasonable approximation for fair value. Pension scheme assets and liabilities are excluded.
(1) The only financial instrument where the carrying amount is different to the fair value is the ‘DTI loans to Royal Mail Group plc’. At the year
end the respective fair value is £520m.
All the above financial assets and liabilities are recorded in the accounts at amortised cost with the exception of the following:
•
•
•
Financial assets – investments (non-current) are valued at fair value with the movement taken to reserves;
Financial assets at fair value through the income statement (all of which are classified as held for trading) are valued at fair value with the
movement taken straight to the income statement; and
Derivative assets and liabilities are valued at fair value. Effective changes in the fair value of derivatives, which are part of a designated
hedge under IAS 39, are deferred into equity. All other changes in derivative fair value are taken straight to the income statement.
87
Royal Mail Holdings plc
29. Financial instruments (continued)
Fair values have been calculated using current market prices (forward exchange rates/commodity prices) and discounted using appropriate
discount rates.
Interest rate risk
The following table sets out the carrying amount by maturity of the Group’s financial instruments that are exposed to interest rate risk:
Financial year ended 26 March 2006
Fixed rate
Cash at bank
Cash equivalent current asset
investments
Financial assets at fair value
through income statement
Available for sale financial assets
Held to maturity financial assets
Loans and receivables financial
assets
Obligations under finance leases and
hire purchase contracts (note 22)
HM Treasury loans to Post Office
Limited
DTI loans to Royal Mail Group plc
Miscellaneous bank loans in
overseas subsidiaries
Total
Floating rate
Cash at bank
Obligations under finance leases
and hire purchase contracts (note
22)
Short-term loan from associate
Miscellaneous bank loans in
overseas subsidiaries
Total
Non-interest bearing
Cash in hand or in Post Office
Limited network
Deferred consideration
Derivative assets
Derivative liabilities
Total
Average
effective
interest rate
%
Within
1 year
£m
1-2
years
£m
2-3
years
£m
3-4
years
£m
4-5
years
£m
More than
5 years
£m
2.7
12
4.4
332
4.4
4.5
4.5
4.8
6.1
4.8
5.8
6.1
133
-
549
12
-
(360)
-
(1)
677
-
-
-
3
-
-
(1)
-
-
(1)
1
-
-
-
2
-
-
-
-
-
-
2
Average
effective
interest rate
%
Within
1 year
£m
1-2
years
£m
2-3
years
£m
2.0
17
6.4
n/a
3.1
(1)
-
-
16
-
-
-
-
-
-
-
-
(1)
(1)
-
-
-
-
-
-
-
-
-
(1)
(1)
3-4
years
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(500)
(1)
(501)
4-5
years
£m
More than
5 years
£m
-
-
-
-
-
-
-
-
(1)
(1)
Within
1 year
£m
1-2
years
£m
2-3
years
£m
3-4
years
£m
4-5
years
£m
More than
5 years
£m
800
(3)
3
(3)
797
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
£m
12
332
133
5
549
12
(1)
(360)
(500)
(4)
178
Total
£m
17
(1)
-
(2)
14
Total
£m
800
(3)
3
(3)
797
Interest on financial instruments classified as floating is repriced at intervals of less than one year. Interest on financial instruments classified
as fixed rate is fixed until the maturity of the instrument.
A one-percentage increase in interest rates throughout the period would have increased profit before tax by £6m. Calculated as the increase in
interest income less expense on floating rate financial instruments and fixed rate financial instruments that matured during the year plus the
profit/loss impact on fixed rate financial instruments that are carried at fair value.
88
Royal Mail Holdings plc
29. Financial instruments (continued)
The following table sets out the carrying amount of the currency of the Group’s financial instruments.
Financial assets
Cash at bank, in hand or in Post Office Limited network
Cash equivalent current asset investments
Financial assets at fair value through the income statement
Held to maturity financial assets
Loans and receivables financial assets
Financial assets/investments (non-current)
Derivative assets
Sterling
£m
715
332
133
549
12
5
-
USD
£m
13
-
-
-
-
-
3
euro
£m
79
-
-
-
-
-
-
Other
£m
22
-
-
-
-
-
-
2006
Total
£m
829
332
133
549
12
5
3
1,746
16
79
22
1,863
Financial liabilities
DTI loans to Royal Mail Group plc
HM Treasury loans to Post Office Limited
Short-term loan from associate
Miscellaneous bank loans in overseas subsidiaries
Obligations under finance leases and hire purchase contracts
(note 22)
Deferred consideration
Derivative liabilities
Sterling
£m
500
360
-
-
-
-
-
860
USD
£m
euro
£m
Other
£m
-
-
-
-
-
-
3
3
-
-
-
6
2
3
-
11
-
-
-
-
-
-
-
-
Total
£m
500
360
-
6
2
3
3
874
89
Royal Mail Holdings plc
29. Financial instruments (continued)
Hedging Activities
Cashflow hedges
The Group had four designated cash flow hedge programmes during the year:
i) The diesel fuel hedge programmes uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and US$/£ exchange rates for forecast diesel fuel purchases.
ii) The air conveyance hedge programme uses US$ and euro forward currency purchase contracts to hedge the exposure arising from
US$/GBP and GBP/euro exchange rates for forecast air conveyance purchases.
iii) The euro capital programme uses euro forward currency purchase contracts to hedge the exposure arising from GBP/euro exchange rates
for contracted capital expenditure.
iv) The US$ capital programme used US$ forward currency purchase contracts to hedge the exposure arising from US$/GBP exchange rates
for contracted capital expenditure. This programme matured during the year.
The following tables show the derivatives outstanding at the year end for each of these hedge programmes:
Currency
Nominal
amount
Maturity date
Diesel fuel
Air conveyance
Air conveyance
Capital programme
Capital programme
US$
US$
Euro
Euro
US$
$81m
Apr 06-Jul 07
$24m
Apr 06-Apr 07
€4m
€4m
n/a
Apr 06-Apr 07
Apr 06-Nov 06
n/a
Hedge programme
Commodity
Nominal
amount
Maturity date
Average
contracted
exchange rate
Derivative
asset
fair value
26 March 2006
£m
Derivative liability
fair value
26 March 2006
£m
US$/£1.77
US$/£1.74
£/euro0.69
£/euro0.69
n/a
Average
contracted
commodity
price
1
-
-
-
-
(1)
-
-
-
-
Derivative
asset fair
value
£m
Derivative liability
fair value
£m
Diesel fuel
Diesel fuel 131k tonnes
Apr 06-July 07
US$/tonnes 618
2
(2)
The following table shows the movements (net of deferred tax) on the hedging reserve for each of these hedge programmes:
Gain deferred into equity during
year
£m
Gain released from equity to profit
during year
£m
Gain released from equity to
initial carrying value of fixed
asset during year
£m
Diesel Fuel
Air Conveyance
Capital Programme - euro
Capital Programme - US$
3
-
-
-
10
-
-
-
-
-
-
1
For all the above cash flow hedge programmes, the underlying cash flows being hedged are expected to occur at the same dates as the hedge
instruments (derivatives) mature. For the non-capital programmes (Diesel and Air Conveyance), the profit or loss will be taken on maturity. For
capital programmes, the impact on the income statement will be the depreciation charge over the life of the asset being hedged.
In addition to the above hedge programmes, the Group hedges other foreign exchange and commodity price exposures, which are not
designated as hedges under IAS 39 (including the hedge of currency holdings as part of the Bureau de Change services within Post Office
Limited). The total fair value of the derivatives in these hedge programmes as at 26 March 2006 were £nil assets, and £nil liabilities.
90
29. Financial instruments (continued)
The Group had outstanding forward transactions to hedge foreign currency and fuel purchases as follows:
Royal Mail Holdings plc
Maturing within one year
Euro
US Dollars
Australian Dollars
Fuel (US Dollars)
Maturing after one year
US Dollars
Fuel (US Dollars)
In currency (millions)
Sterling equivalents (millions)
2006
2006
103
140
7
94
15
12
71
80
3
53
9
7
Note - the fuel hedge (which fixes the GBP cost of purchasing fuel) consists of two elements:
•
•
a commodity forward transaction fixing the cost in US Dollars of purchasing fuel; and
a currency forward transaction fixing the GBP cost of these US Dollars.
The table above contains both of these transactions for the fuel hedge. The commodity forward transactions are shown under the heading Fuel
(US Dollars) - $94m maturing within one year and $12m maturing after one year. The related currency forward transactions are contained
within the total of US Dollars - $140m maturing within one year and $15m maturing after one year.
Comparative information
IAS 32 and IAS 39 were adopted for the financial year ending 26 March 2006 in line with the transitional arrangements for IFRS. The
following disclosure provides comparative information for the year ending 27 March 2005 based on UK GAAP. This is replicated from the
accounts for the year to 27 March 2005.
An explanation of the Group’s treasury policy and controls is included in the Operating and Financial Review, as well as the role of financial
instruments in creating or changing the risks the Group faces in its activities.
Financial assets and liabilities are a subset of the overall assets and liabilities of the Group and include balances which generally have interest
rate and/or foreign currency risks attached. FRS 13, permits exclusion of items such as trade debtors, trade creditors, prepayments and
accruals. The assets and liabilities, which fall under the definition, along with their fair values, are highlighted in (i) below:
(i) Fair value of financial assets/(liabilities)
Fair value is defined as the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and
willing parties and is calculated by reference to market rates discounted to current value. Where market rates are not available, fair values
have been calculated by discounting cash flows at prevailing rates transacted at year end exchange rates.
Cash
Current asset investments
Other investments (Government gilt-edged securities)
Borrowings
Client services balances
Total
Gross
asset
£m
890
1,141
7
-
-
Gross
liability
£m
Net book
value
£m
-
-
-
(908)
(323)
890
1,141
7
(908)
(323)
807
2,038
(1,231)
2005
Fair
value
£m
890
1,141
7
(898)
(323)
817
Fair values for borrowings and deposits have been calculated by discounting at an appropriate rate.
The carrying value of gilts is £141m, of which £134m is included in current asset investments above and £7m in the other investments
figures. The Group portfolio of gilt holdings showed a loss of £4m during the financial year when revalued.
91
Royal Mail Holdings plc
29. Financial instruments (continued)
(ii) Maturity profile of the Group’s financial liabilities
The maturity profile of the Group’s financial liabilities at 27 March 2005 is set out below:
One year or less or on demand
More than one year but not more than two years
More than two years but not more than five years
More than five years
Total
Borrowings
£m
392
10
3
503
908
Client
balances
£m
323
-
-
-
2005
Total
£m
715
10
3
503
323
1,231
(iii) Maturity profile of the Group’s undrawn committed borrowing facilities
Details of the Group’s borrowings and undrawn committed borrowing facilities can be found in note 22.
(iv) Interest rate profile and foreign currency analysis:
2005
Financial liabilities
2005
Financial assets
Sterling
£m
euro
£m
Other
£m
Gross
total
£m
Sterling
£m
USD
£m
euro
£m
Other
£m
Fixed rate
Floating rate
Non-interest bearing
(860)
(14)
(323)
(7)
(3)
(6)
-
-
(17)
(18)
(347)
13
785
(867)
1,148
Total
(1,197)
(16)
(18)
(1,231)
1,946
13
2,038
Gross
total
£m
1,148
34
856
-
6
7
Net
total
£m
281
17
509
807
-
-
16
16
-
15
48
63
The fixed rate sterling financial liabilities of £860m have a weighted average interest rate of 5.5% and an average time to maturity of 11 years.
The fixed rate sterling financial assets of £1,148m have a weighted average interest rate of 4.73% and an average time to maturity of 46 days.
The floating rate sterling financial assets have a weighted average interest rate of bank rate minus 1% and an average time to maturity of one
day.
The fixed rate euro financial liabilities have a weighted average interest rate of 6.1% and average time to maturity of four years.
The floating rate euro financial liabilities have a weighted average interest rate of euro LIBOR plus 2% and an average time to maturity of three
years. The floating rate euro financial assets have a weighted average interest rate of bank rate minus 1% and an average time to maturity of
one day.
Of the £347m of non-interest bearing financial liabilities, £323m is payable on demand and £24m has an average maturity date of one year.
All the non-interest bearing financial assets are receivable on demand.
A one-percentage increase in interest rates throughout the period would have increased profit before tax by £11m.
(v) Derivative financial instruments held to manage currency and commodity price fluctuations:
Foreign currency transactions
Fuel derivatives
2005
Fair value
£m
138
28
At the balance sheet date, the Group held contracts to purchase foreign currency for £138m and £28m for fuel contracts. No carrying
amounts are shown as all these items are held off balance sheet. The difference between the contracted forward rate and mark to market rate
was £nil for currency contracts and a gain of £8m for fuel contracts.
92
29. Financial instruments (continued)
(vi) Forward transactions
The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases as follows:
Royal Mail Holdings plc
In currency (millions)
Sterling equivalents (millions)
2005
2005
Maturing within one year
Euro
Japanese Yen
US Dollars
Australian Dollars
Fuel (US Dollars)
Maturing after one year
US Dollars
Fuel (US Dollars)
86
-
138
3
46
6
5
60
-
74
1
25
3
3
(vii) Gains and losses on transactional exposures
The Group’s currency transactional exposures give rise to net currency gains and losses recognised in the profit and loss account. These
liabilities arise from the net payments due to overseas postal administrations for delivery of mail, and are denominated in Special Drawing
Rights (SDRs). This is a basket of currencies comprising US Dollar, euro, Japanese Yen and Sterling. Such exposures comprise the monetary
liabilities of the Group that are not denominated in the functional currency of the operating unit involved.
For 2005 there was no material unhedged SDR exposure.
At 27 March 2005, the Group also held various open forward contracts that were taken out to hedge expected future foreign currency
payments (as shown in note (vi) above).
(viii) Gains and losses on hedges
Foreign exchange exposures are hedged using currency deposits, currency borrowings, forward currency contracts and currency options. Gains
and losses on these instruments are not recognised until the hedged exposure itself is recognised. Unrecognised gains and losses on these
instruments used for hedging are not material.
Commodity price exposures are hedged using commodity swaps and options. Gains and losses on these instruments are not recognised until
the hedged exposure itself is recognised. Unrecognised gains at the start of the financial year totalled £1m and were all realised in the current
financial year. Unrecognised gains at the end of the financial year totalled £8m and are all expected to be realised in the next financial year.
There are no gains/losses carried forward in the balance sheet.
30. Events after the balance sheet date
There are no events that warrant disclosure.
93
Royal Mail Holdings plc
31. Transition to IFRSs
The Royal Mail Holdings plc (Royal Mail) financial year ends on the last Sunday in March.
In previous years, the accounts have been prepared under UK Generally Accepted Accounting Principles (UK GAAP). From this accounting year Royal
Mail will produce its consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union (EU).
This note explains how the Group’s previously reported financial performance and position are reported under IFRS. The note includes the following
financial statements restated on an IFRSs basis:
•
•
•
The Group’s consolidated balance sheet at 29 March 2004, the Group’s date of transition;
The Group’s income statement, statement of recognised income and expense (SORIE) and cash flow statement for the year ended
27 March 2005, and balance sheet at 27 March 2005; and
The Group’s balance sheet at 28 March 2005 reflecting the adoption of IAS 32 and IAS 39 for the 2005-06 financial year.
Basis of preparation
The restated financial statements of the Group have been prepared in accordance with IFRS’s that had been issued and adopted by the EU at 26 March
2006 and use the historic cost convention with the exception of derivative financial instruments that have been measured at fair value.
The rules for first time adoption of IFRS are set out in IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’. IFRS 1 requires an
entity to comply with each IFRS effective at the reporting date for its first full set of IFRS financial statements. As a general principle IFRS 1 requires the
standards effective at the reporting date to be applied retrospectively. However, retrospective application is prohibited in some areas, particularly where
retrospective application would require judgements by management after the outcome of the particular transaction is already known. In addition a
number of limited optional exemptions from full retrospective application of IFRS are granted where the cost of compliance is deemed to exceed the
benefits to users of the financial statements. Where applicable, the options selected by management are set out in the notes to the accounts and below.
The significant changes as a result of the adoption of IFRSs are detailed below:
Balance sheet reclassifications
To aid comparability the UK GAAP format has been reconfigured into the IFRSs format as far as possible from the available, previously published
information. The balance sheet reclassifications required by IFRS are as follows:
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
IAS 1 ‘Presentation of Financial Statements’ requires intangible assets to be separated from goodwill on the balance sheet. At March 2004
£107m was reclassified from intangible assets to goodwill (March 2005 £129m);
At March 2004 long-term debtors previously included within trade and other receivables in current assets under UK GAAP of £14m are
included within non-current assets under IFRSs (March 2005 £14m);
A deferred tax asset of £nil at March 2004 (March 2005 £16m) was also included within trade and other receivables in current assets under
UK GAAP and is now disclosed separately within non-current assets under IFRSs;
At March 2004 trade and other payables under UK GAAP include £10m (March 2005 £nil) and £53m (March 2005 £375m) for income tax
payable and bank loans respectively. These figures are disclosed separately as current liabilities under IFRSs;
IFRS requires provisions expected to be settled within one year of the balance sheet date to be shown within current liabilities. This has resulted
in a reclassification of £408m at March 2004 (March 2005 £124m) from non-current liabilities;
Deferred income tax liabilities at March 2004 are also included in provisions under UK GAAP and £96m (March 2005 £94m) is shown
separately as a non-current liability under IFRSs;
Interest bearing loans under UK GAAP are included in “other payables” at March 2004. These are disclosed separately under IFRSs and £507m
(March 2005 £506m) has been reclassified within non-current liabilities; and
IFRSs requires that foreign currency translation within reserves is separately identified on the face of the balance sheet. There is no
reclassification required at March 2004 as the Group has elected not to apply IAS 21 retrospectively. The effect at March 2005 is £8m.
IAS 19 Employee benefits
IAS 19 requires separate recognition of the operating and financing costs of defined benefit pension schemes, together with other employee benefits, in
the income statement. The standard permits a number of options for the recognition of actuarial gains and losses. Royal Mail has adopted the IFRS 1
transitional exemption and recognised the full actuarial pension deficit at the date of transition. The business will then recognise any actuarial gains and
losses immediately in the SORIE. The option to account for actuarial gains and losses in this way is part of an amendment to IAS 19 ‘Actuarial Gains and
Losses, Group Plans and Disclosures’. This amendment is effective from 1 January 2006 with earlier adoption allowed.
The impact of the standard on the balance sheet at the date of transition is to recognise a pension liability of some £4.4bn at 29 March 2004 and a
liability of £4.0bn at 27 March 2005. Additionally, pension prepayments of £770m (2005 £834m) have been derecognised.
94
Royal Mail Holdings plc
31. Transition to IFRSs (continued)
The impact of the standard on operating profits before exceptional items for the year ended 27 March 2005 is a reduction of £98m with an increase to
interest and other financial income of £59m.
Under UK GAAP, Royal Mail did not accrue for annual leave not taken either at the half year or year ends. Under IAS 19 Royal Mail is required to accrue
for all short-term accumulating compensated absences such as holiday entitlement earned but not taken at the balance sheet date. The impact of IAS
19 on Royal Mail’s transitional balance sheet is to recognise an annual leave accrual of £40m at 29 March 2004. There is also a charge of £2m to the
March 2005 income statement reflecting the increase in the accrual at that year end.
IFRS 3 Business combinations, IAS 36 Impairment of assets and IAS 38 Intangible assets
IFRS 3 prohibits merger accounting and the amortisation of goodwill. The standard requires goodwill to be carried at cost with impairment reviews both
annually and also when there are indications that the carrying value may not be recoverable.
As permitted in IFRS 1, Royal Mail has chosen to apply IFRS 3 prospectively from the date of transition and has chosen not to restate previous business
combinations. Therefore, goodwill is stated in the transitional balance sheet at its UK GAAP carrying value of £107m with subsequent amortisation in
the year to 27 March 2005 being reversed. The increase in operating profit from reversing goodwill amortisation is £11m for the year to 27 March
2005.
Under IFRS 3, the identification of assets and liabilities within acquired businesses includes intangible assets not previously recognised under UK GAAP.
The principal intangible assets recognised separately from goodwill on an acquisition are listings. These intangible assets are valued for each acquisition
after 29 March 2004 and are amortised over their estimated economic lives.
The principal acquisitions in 2004-05 were of franchisee businesses in GLS Italy and GLS Poland. The value of the customer listings for these
businesses amounted to £6m, with economic lives of 2 to 4 years. In addition, Romec Limited, previously a joint venture, and NDC 2000 Limited,
previously an associate, became subsidiaries of the Group. Neither the Romec Limited nor NDC 2000 Limited acquisitions resulted in the identification of
any intangible assets.
IAS 12 Income taxes
IAS 12 requires entities to calculate deferred tax based on temporary differences, as opposed to timing differences under UK GAAP. Temporary
differences are defined as the difference between the carrying value of assets and liabilities and their tax base. The standard requires deferred tax
assets and liabilities to be disclosed separately on the Group balance sheet.
Whilst the adoption of IAS 12 does not itself result in any restatement of the Group’s tax charge, the deferred tax has been reassessed taking into
account other accounting adjustments arising from the transition to IFRSs. The deferred tax liability at the transition date in March 2004 was reduced
from £96m to £1m due to derecognition of the pension prepayment and the recognition of a defined benefit pension liability. Similarly, in the balance
sheet at March 2005 an additional £318m of deferred tax asset and a reduction in deferred tax liability of £89m is recognised.
IAS 7 Cash flow statements
Under UK GAAP the cash flow statement focuses on movements in cash with details of these movements under seven headings. Under IAS 7 the focus
is widened to cash and cash equivalents and details are classified under three headings – operational, investing and financing. The transition does not
alter the Group’s cash flow but the presentation of information on the cash flow statement changes. £316m and £450m of investments in March 2004
and March 2005 respectively, are now classified as cash equivalents. These are now reconciled within the cash flow statement rather than being
disclosed under the heading of ‘management of liquid resources’ under UK GAAP. The Group continues to produce its cash flow statement using the
indirect method.
SIC 15 Operating leases – Incentives
This interpretation requires that all incentives for the agreement of a new or renewed operating lease should be recognised as an integral part of the
net consideration agreed for the use of the lease, irrespective of the incentive’s nature or form or the timing of the payments. Lessees must recognise
the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis.
The Group has recognised lease incentives of £8m at the date of transition at March 2004. This has been amortised by £1m during 2004-05 leaving a
balance of £7m on the balance sheet at 27 March 2005.
IAS 32 and IAS 39 Financial instruments
The requirements of IFRSs are different to UK GAAP in a number of areas. The changes that impact Royal Mail relate to hedging instruments and
investments. Royal Mail has taken advantage of the exemption not to adopt IAS 32 and IAS 39 until the 2005-06 financial year.
Hedging instruments
Under IAS 39, all financial assets and liabilities are recognised at fair value with the corresponding debit entry booked to the hedging reserve in equity
for those instruments which meet the requirement for hedge accounting. Derivative instruments of £9m assets and £1m liabilities have been
recognised at fair value at 28 March 2005.
95
Royal Mail Holdings plc
31. Transition to IFRSs (continued)
Under UK GAAP, foreign exchange gains and losses on an unsettled hedge programme were carried in the balance sheet. On introducing IAS 32 and IAS
39 at 28 March 2005, losses amounting to £11m have been written off against retained earnings.
Investments
Under UK GAAP investments are held at cost less provision for any permanent impairment. Under IFRSs, investments are initially recognised at fair
value. The impact at 28 March 2005 is to re-categorise the £691m investments on the balance sheet as £134m of ‘Held for trading investments’, and
£549m of ‘Held to maturity investments’ and £8m ‘Loans and receivables’.
96
Group balance sheet at 29 March 2004
UK GAAP
£m
Reclass
£m
Pensions
IAS 19
£m
Holiday
pay
IAS 19
£m
Cash
equiv
IAS 7
£m
Lease
incentives
SIC 15
£m
Royal Mail Holdings plc
Non-current assets
Property, plant and equipment
1,550
Goodwill
Intangible assets
Financial assets - investments
Investments accounted for using
the equity method
Other receivables
Current assets
Inventories
Trade and other receivables
Financial assets - investments
Cash and cash equivalents
Non-current assets held for sale
Total assets
Current liabilities
Trade and other payables
Income tax payable
Bank overdrafts and loans
Provisions
Non-current liabilities
Financial liabilities - interest bearing
loans and borrowings
Retirement benefit obligation
Provisions
Deferred tax liabilities
Other payables
Total liabilities
Net assets/(liabilities)
Equity
Retained earnings
Hedging reserve
Foreign currency translation
Other reserves*
Equity attributable to equity holders
of parent company
Minority interest
Total equity
-
123
7
131
-
1,811
32
1,955
999
1,049
4,035
-
5,846
(2,590)
-
-
-
(2,590)
-
-
(575)
-
(543)
(1,118)
(3,708)
2,138
999
-
-
1,139
2,138
-
2,138
-
107
(107)
-
-
14
14
-
-
-
-
-
-
-
-
-
(14)
(770)
-
-
-
-
(14)
(770)
-
-
-
(770)
63
(10)
(53)
(408)
(408)
(507)
-
-
-
-
-
-
-
(4,394)
-
95
-
(4,299)
(4,299)
(5,069)
504
(96)
507
408
-
-
-
-
-
-
-
-
-
(5,069)
(40)
-
-
-
(5,069)
-
(5,069)
-
-
-
(40)
-
(40)
-
-
-
-
-
-
-
-
-
-
-
-
-
(40)
-
-
-
(40)
-
-
-
-
-
-
(40)
(40)
-
-
-
-
-
-
-
-
-
(316)
316
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
-
-
-
(1)
-
-
-
-
(7)
(7)
(8)
(8)
(8)
-
-
-
(8)
-
(8)
IFRS
£m
1,550
107
16
7
131
14
1,825
32
1,171
683
1,365
3,251
5,076
(2,568)
(10)
(53)
(408)
(3,039)
(507)
(4,394)
(71)
(1)
(43)
(5,016)
(8,055)
(2,979)
(4,118)
-
-
1,139
(2,979)
-
(2,979)
*The other reserves comprise Mails reserve £765m, Rural Network reserve £311m and Other £63m.
97
Group income statement for the year ended 27 March 2005
Royal Mail Holdings plc
UK GAAP
£m
Pensions
IAS 19
£m
Goodwill
IFRS 3
£m
Associates/JV’s
IFRS 3/
IAS 28/31
£m
Holiday
pay
IAS 19
£m
Lease
incentives
SIC 15
£m
Revenue
People costs
Wages and salaries
Pensions
Social security
Subpostmasters
Temporary resource
Distribution and delivery costs
Other operating costs
Share of profit from associates and joint ventures
Operating profit before exceptional
items
Operating exceptional items
Operating profit
Loss on disposal of subsidiary undertaking
Profit on disposal of property, plant and equipment
Profit before financing and taxation
Finance costs
Finance income – net pensions interest
- other
Profit before taxation
Taxation credit/(charge)
8,956
-
(5,739)
(98)
(4,328)
(391)
(319)
(544)
(157)
(1,183)
(1,669)
34
399
(277)
-
(98)
-
-
-
-
-
-
(98)
-
122
(98)
(3)
70
189
(42)
-
60
207
28
-
-
(98)
59
-
(39)
(55)
(94)
-
-
-
-
-
-
-
-
8
3
11
-
11
-
-
11
-
-
-
11
-
11
-
-
-
-
-
-
-
-
-
(9)
(9)
-
(9)
-
-
-
(2)
(2)
-
-
-
-
-
-
-
(2)
-
(2)
-
-
(9)
(2)
-
-
(2)
(11)
11
-
-
-
-
-
(2)
-
(2)
(2)
-
IFRS
£m
8,956
(5,839)
(4,330)
(489)
(319)
(544)
(157)
(1,183)
(1,660)
28
302
(277)
25
(3)
70
92
(42)
59
58
167
(16)
151
151
-
-
-
-
-
-
-
-
-
1
-
1
-
1
-
-
1
-
-
-
1
-
1
1
-
Profit for the financial year from continuing operations
235
Profit attributable to:
Equity holders of the parent company
235
(94)
11
Minority interest
Group statement of recognised income and expense for the year ended 27 March 2005
-
-
-
-
Previously
reported
under UK
GAAP
£m
235
8
Profit for the period
Translation differences on foreign currency net investments
Actuarial gains and losses
Taxation on items taken directly to equity
Total recognised income and expense for the period
243
Attributable to:
Equity holder of the parent company
Minority interest
98
Pensions
IAS 19
£m
Goodwill
IAS 38
£m
Holiday
pay
IAS 19
£m
Lease
incentives
SIC 15
£m
Restated
under
IFRS
£m
(94)
-
411
367
684
11
(2)
-
-
-
-
-
-
11
(2)
1
-
-
-
1
151
8
411
367
937
933
4
Group balance sheet at 27 March 2005
UK GAAP
£m
Reclass
£m
Pensions
IAS 19
£m
Goodwill
IFRS 3
£m
Intangible
assets
IAS 38
£m
Holiday
pay
IAS 19
£m
Cash
equiv
IAS 7
£m
Lease
incentives
SIC 15
£m
Royal Mail Holdings plc
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Financial assets - investments
Investments accounted for using the
equity method
Other receivables
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Financial assets - investments
Cash and cash equivalents
Non-current assets held for sale
Total assets
Current liabilities
1,591
-
144
135
-
-
-
1,870
27
1,955
1,141
890
4,013
-
5,883
-
129
(129)
(131)
131
14
16
30
-
(30)
-
-
-
-
-
-
-
-
318
318
-
(834)
-
-
(30)
(834)
-
-
-
(516)
Trade and other payables
(2,684)
375
Income tax payable
Bank overdrafts and loans
Provisions
Non-current liabilities
Financial liabilities - interest
bearing loans and borrowings
Retirement benefit obligation
Provisions
Deferred tax liabilities
Other payables
Total liabilities
Net assets/(liabilities)
Equity
Retained earnings
Hedging reserve
Foreign currency translation
Other reserves*
Equity attributable to equity
holders of parent company
Minority interest
Total equity
-
-
-
(2,684)
-
-
(266)
-
(548)
(814)
(3,498)
2,385
-
(375)
(124)
(124)
(506)
-
-
-
-
-
-
-
(3,958)
218
(94)
506
124
-
-
-
89
-
(3,869)
(3,869)
(4,385)
1,346
(8)
(4,385)
-
-
1,035
2,381
4
2,385
-
8
-
-
-
-
-
-
-
(4,385)
-
(4,385)
-
8
-
3
-
-
-
11
-
-
-
-
-
-
11
-
-
-
-
-
-
-
-
-
-
-
-
11
11
-
-
-
11
-
11
-
(6)
6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(42)
-
-
-
(42)
-
-
-
-
-
-
(42)
(42)
(42)
-
-
-
(42)
-
(42)
-
-
-
-
-
-
-
-
-
-
(450)
450
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
*The other reserves comprise Mails reserve £801m, Rural Network reserve £171m and Other £63m.
99
IFRS
£m
1,591
131
21
7
131
14
334
2,229
27
1,091
691
1,340
3,149
-
5,378
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
(2,352)
-
-
-
-
(375)
(124)
(1)
(2,851)
-
-
-
-
(6)
(506)
(3,958)
(48)
(5)
(48)
(6)
(4,565)
(7)
(7,416)
(7)
(2,038)
(7)
(3,085)
-
-
-
-
8
1,035
(7)
(2,042)
-
4
(7)
(2,038)
Royal Mail Holdings plc
Group cash flow statement for the year ended 27 March 2005
UK
GAAP
£m
Cash flow
statements Pensions
IAS 19
£m
IAS 7
£m
Associates Holiday
Goodwill
/JVs
IFRS 3 IAS 28/31
£m
£m
Lease
pay incentives
SIC 15
£m
IAS 19
£m
IFRS
restated
£m
Cash flow from operating activities
Operating profit before exceptional items*
Depreciation and amortisation
Other non-cash movements (profits from
associates and joint ventures)
Changes in working capital
Cash payments in respect of exceptional items
Cash utilised in operations
Income tax recovered
Net cash outflow from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and
equipment
Dividends received from associates and joint
ventures
Investment income (interest) received
399
156
(34)
521
(486)
(255)
(220)
13
(207)
95
19
52
Purchase of property, plant and equipment
(219)
Payment of deferred consideration in respect of
prior years’ acquisitions
Disposal of subsidiary undertaking
Purchase of other financial assets
Net cash outflow from investing activities
Net cash outflow before financing activities
Cash flows from financing activities
Payment of finance lease liabilities
Repayment of borrowings
Finance costs (interest) paid
New loans
Net cash inflow from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the
period**
Cash and cash equivalents at the end of the
period
(2)
-
(142)
(197)
(404)
(34)
(4)
(42)
325
245
(159)
1,049
890
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
134
134
134
-
-
-
-
-
134
316
450
(98)
-
-
(98)
98
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11
(8)
(3)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9)
(2)
-
9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2)
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
1
302
148
(28)
422
(1)
(387)
-
-
(255)
(220)
13
-
(207)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
95
19
52
(219)
(2)
-
(8)
(63)
(270)
(34)
(4)
(42)
325
245
(25)
1,365
1,340
*The operating profit before exceptional items of £399m is after taking account of £34m profits from associates and joint ventures. This
compares to a published Group operating profit before exceptional items of £365m under UK GAAP, which was before taking account of the
£34m profits from associates and joint ventures.
**The cash and cash equivalents under UK GAAP are defined as cash whereas, under IFRS, cash and cash equivalents includes investments
with a maturity date of less than three months at the date of acquisition and money market funds in line with the revised accounting policy.
The adjustment of £450m reflects the reclassification of the appropriate short-term investments as cash equivalents.
100
Group balance sheet at 28 March 2005
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Financial assets - investments
Investments accounted for using equity method
Other receivables
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Financial assets - investments
Held for trading investments
Held to maturity investment
Cash and cash equivalents
Derivatives
Non-current assets held for sale
Total assets
Current liabilities
Trade and other payables
Bank overdrafts and loans
Provisions
Derivatives
Non-current liabilities
Financial liabilities - interest bearing loans and borrowings
Retirement benefit obligation
Provisions
Deferred tax liabilities
Other payables
Total liabilities
Net liabilities
Equity
Retained earnings
Hedging reserve
Foreign exchange reserve
Other reserves*
Equity attributable to equity holders of parent company
Minority interest
Royal Mail Holdings plc
IAS 32 & IAS
39
£m
Opening
balance sheet
£m
IFRS
£m
1,591
131
21
7
131
14
334
2,229
27
1,091
691
-
-
1,340
-
3,149
-
5,378
(2,352)
(375)
(124)
-
(2,851)
(506)
(3,958)
(48)
(5)
(48)
(4,565)
(7,416)
(2,038)
-
-
-
-
-
-
-
-
-
(11)
(691)
134
557
-
9
(2)
-
(2)
-
-
-
(1)
(1)
-
-
-
-
-
-
(1)
(3)
1,591
131
21
7
131
14
334
2,229
27
1,080
-
134
557
1,340
9
3,147
5,376
(2,352)
(375)
(124)
(1)
(2,852)
(506)
(3,958)
(48)
(5)
(48)
(4,565)
(7,417)
(2,041)
(3,085)
(11)
(3,096)
-
8
1,035
(2,042)
4
8
-
-
(3)
-
8
8
1,035
(2,045)
4
(2,041)
Total equity
*The other reserves comprise Mails reserve £801m, Rural Network reserve £171m and Other £63m.
(2,038)
(3)
101
Royal Mail Holdings plc
Group five-year summary
Income statement
Revenue
(Loss)/profit from operations
Add pensions benefit/(charge) in respect
surplus/(deficit) under SSAP 24
of pensions
Operating (loss)/profit before exceptional items
Operating exceptional items
Operating (loss)/profit
Non-operating exceptional items
(Loss)/profit before interest
Finance income and costs
(Loss)/profit before tax
Taxation
(Loss)/profit after tax
Balance sheet
Goodwill and intangible assets
Property, plant and equipment
Prepared under
UK GAAP
2003
£m
2002(1)
£m
2004
£m
Prepared or
restated under
IFRS
2005
£m
2006
£m
8,408
8,299
8,633
8,956
9,056
(318)
(197)
220
250
(68)
(1,126)
(1,194)
14
246
49
(721)
(672)
26
(1,180)
(646)
56
35
(1,124)
(611)
179
(945)
2002
£m
146
52
(559)
2003
£m
156
(132)
88
(64)
24
64
88
17
105
(98)
7
2004
£m
123
-
-
-
-
302
355
(277)
(210)
25
67
92
75
167
(16)
151
145
67
212
100
312
83
395
2005
£m
2006
£m
152
174
1,783
1,648
1,550
1,591
1,594
Fixed asset investments and other non-current assets
94
83
138
Net current assets
Non-current liabilities
Net assets/(liabilities)
Cash flow
486
298
528
534
1,987
1,785
1,445
(1,405)
(1,584)
(1,118)
(4,565)
(6,169)
2,605
2,088
2,138
(2,038)
(3,339)
2002
£m
2003
£m
2004
£m
2005
£m
2006
£m
Net cash outflow before use of liquid resources and financing
(100)
(486)
(222)
(304)
(163)
Note
(1) 53 week year. All the other years are 52 week years.
Paragraph 37 of International Financial Reporting Standard 1 – First time adoption of IFRS, requires that information prepared under a previous
GAAP is clearly labeled. Disclosure is also required of the nature of the main adjustments that would be necessary to comply with IFRS.
Quantification of those adjustments is not required. The main adjustments to the Group accounts on the adoption of IFRS are:
•
•
the inclusion of a retirement benefit obligation on the face of the balance sheet;
trade and other receivables no longer include an element of pension prepayment;
• deferred tax charges to reflect the introduction of the retirement benefit obligation;
• a holiday pay accrual is included in trade and other payables;
•
the income statement reflects a number of minor changes which are mainly presentational but changes to the pension charge
and related taxation are the major amendments; and
•
the cash flow statement is now produced in IFRS format showing operating, financing and investing activities.
102
Royal Mail Holdings plc
Parent Company accounts
Statement of Directors’ responsibilities in respect of the parent Company accounts
Company law requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of
the Company.
In preparing those accounts Directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent; and
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and
explained in the accounts.
Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy, at any time, the
financial position of the Company, and which enable them to ensure that the accounts comply with the Companies Act 1985. Directors are
also responsible for ensuring that the assets of the Company are safeguarded and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
103
Royal Mail Holdings plc
Independent Auditors’ report to the members of the Company, Royal Mail Holdings plc
We have audited the parent company financial statements of Royal Mail Holdings plc for the year ended 26 March 2006 which comprise the Balance
Sheet and the related notes 1 to 6. These parent Company financial statements have been prepared under the accounting policies set out therein. We
have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
We have reported separately on the Group financial statements of Royal Mail Holdings plc for the year ended 26 March 2006.
This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been
undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the parent Company financial statements in
accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) as set out in the
Statement of Directors’ Responsibilities.
Our responsibility is to audit the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance
with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the parent Company financial statements give a true and fair view, and whether the parent Company
financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies
Act 1985.
We also report to you if, in our opinion, the Directors’ Report is not consistent with the parent Company financial statements, if the Company has not
kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law
regarding Directors’ remuneration and other transactions is not disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited parent Company financial statements.
The other information comprises only the Chairman's Statement, the Chief Executive's Statement, the Annual Review, the Operating and Financial
Review, the Directors' Report, the Corporate Governance statement, the Internal Control statement, the unaudited part of the Directors' Remuneration
Report and the Statement of Directors' responsibilities. We consider the implications for our report if we become aware of any apparent misstatements
or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in
the preparation of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the parent Company financial statements and the part of the Directors’ Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the parent Company financial statements and the part of the Directors’ Remuneration Report to
be audited.
Opinion
In our opinion:
•
•
the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting
Practice, of the state of the Company's affairs as at 26 March 2006; and
the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985.
Ernst & Young LLP
Registered auditor
London
17 May 2006
104
Royal Mail Holdings plc
Parent Company balance sheet
at 26 March 2006 and 27 March 2005
Fixed assets
Investments
Total net assets
Capital and reserves
Called up share capital
Profit and loss account
Shareholders’ funds
Notes
4
6
5
2006
£m
3,784
3,784
-
3,784
3,784
2005
as restated
£m
3,784
3,784
-
3,784
3,784
The accounts on pages 105 to 106 were approved by the Board of Directors on 17 May 2006 and signed on its behalf by:
Allan Leighton
Adam Crozier
105
Royal Mail Holdings plc
Notes to the parent Company accounts
1. Parent Company accounting policies
The following accounting policies apply:
Financial year
The financial year ends on the last Sunday in March and accordingly, these accounts are made up to the 52 weeks ended 26 March 2006 (52
weeks ended 27 March 2005).
Basis of preparation
The accounts on pages 105 to 106 have been prepared in accordance with applicable accounting standards in the United Kingdom, under the
historic cost accounting convention and the requirements of the Companies Act 1985.
Royal Mail Holdings plc (the Company) has not presented its own profit and loss account, as permitted by the Companies Act s230 (3).
However, the results of the Company for the year are disclosed in note 5 to the accounts.
No new Financial Reporting Standards, which affect the presentation of these accounts, have been issued by the Accounting Standards
Board.
Fixed asset investments
Investments in subsidiaries, joint ventures and associates within the Company’s accounts are stated at cost less any accumulated impairment
losses. The Company has a single investment: Royal Mail Group plc, a 100% subsidiary.
Change in accounting policy
A change in accounting policy for fixed asset investments has been adopted giving rise to a prior period adjustment (see notes 4 and 5). Previously,
investments in internally formed companies were recognised at the net asset value of the internally formed company. The current accounting
policy, as disclosed above, is believed to be more appropriate, providing more relevant and reliable presentation in the accounts. Application of the
current accounting policy in 2005 would have reduced the reported profit for the year from £184m to £nil.
2. Directors emoluments
The Directors of the Company are not paid fees by the Company for their services as Directors of the Company. The Directors of the
Company are paid fees by other companies of the Group. These emoluments are disclosed in the Group accounts.
3. Auditors remuneration
The Auditors of the Company are not paid fees by the Company. The Auditors of the Company are paid fees by the other companies
of the Group. This remuneration is disclosed in the Group accounts.
4. Fixed asset investments
As reported at 27 March 2005
Prior period adjustment (see note 1)
As restated at 27 March 2005
Movement
At 26 March 2006
5. Profit and loss account
As reported at 27 March 2005
Prior period adjustment (see note 1)
As restated at 27 March 2005
Profit/(loss) for the year
At 26 March 2006
£m
2,330
1,454
3,784
-
3,784
£m
2,330
1,454
3,784
-
3,784
The profit/(loss) dealt with in the accounts of the parent company was £nil (2005 restated £nil). The Company is a non-trading company and any
profit/(loss) for the financial year arises as a result of the accounting policy on fixed asset investments. This states that investments are stated at
cost less any accumulated impairment losses. Accordingly, the Company’s profit for the financial year is eliminated in the Group accounts and does
not therefore form part of the Group results.
6. Share capital
Details of the share capital are disclosed in the Group accounts on page 77.
106
Royal Mail Holdings plc
Forward Looking Statements
This document contains statements concerning the Group’s business, financial condition, results of operations and certain of the Group’s
plans, objectives, assumptions, projections, expectations or beliefs with respect to these items.
The Company cautions that any forward looking statements in this document may and often do vary from actual results and the
differences between these statements and actual results can be material. Accordingly, readers are cautioned not to place undue reliance
on forward looking statements. The Company undertakes no obligation to release publicly the result of any revisions to these forward
looking statements that may be made to reflect events or circumstances after the date of this document, including, without limitation,
changes in the Group’s strategy, or to reflect the occurrence of unanticipated events.
By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that
will occur in the future. Such forward looking statements should, therefore, be considered in light of various important factors that could
cause actual results and developments to differ materially by those expressed or implied by these forward looking statements. These
factors include, among other things: the impact of competitive products and pricing; the occurrence of major operational problems; the
loss of major customers; limitations imposed by the Group’s indebtedness; undertakings and guarantees relating to pension funds;
contingent liabilities; risks of litigation and risks associated with the Group’s overseas operations.
Corporate Information
Registered Office and Group Head Office
Royal Mail Holdings plc
148 Old Street
LONDON
EC1V 9HQ
020 7250 2888
Registered No: 4074919
Royal Mail, the Cruciform, the colour red, Parcelforce Worldwide and the Parcelforce Worldwide logo are registered trademarks of
Royal Mail Group plc. Post Office and the Post Office symbol are registered trademarks of Post Office Limited. Report and Accounts
2006 © Royal Mail Group plc 2006. All Rights Reserved.
Corporate website
Additional corporate and other information can be accessed on the following website (www.royalmailgroup.com). Information made
available on the website is not intended to be, and should not be regarded as being, part of the accounts.
The maintenance and integrity of the Group’s websites is the responsibility of the Directors; the work carried out by the auditors does not
involve consideration of these matters and accordingly, the auditors accept no responsibility for any changes that may have occurred to
the financial statements since they were initially presented on the website.
Auditors
Ernst & Young LLP
1 More London Place
LONDON
SE1 2AF
Actuaries
Watson Wyatt Limited
Watson House
London Road
Reigate
Surrey
RH2 9PQ
Solicitors
Slaughter and May
1 Bunhill Row
LONDON
EC1Y 8YY
Regulator (Postcomm)
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE1 7DB
Consumer Body
Postwatch
28 Grosvenor Gardens
LONDON
SW1W 0TT
107