Royal Mail Holdings plc
Report and Accounts
Year ended 30 March 2008
Royal Mail Holdings plc
Royal Mail Group is unique in reaching everyone in the UK
through its mails, Post Office and parcels businesses –
which directly employ over 181,000 people in the UK.
Every working day Royal Mail processes and delivers over
80 million items to 28 million addresses for prices that are
amongst the lowest in Europe; each week we serve over 24
million customers through our network of 13,852 Post
Office branches and each year our domestic and European
parcels businesses – General Logistics Systems and
Parcelforce Worldwide – handle some 390 million parcels.
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Royal Mail Holdings plc
Contents
Chairman and Chief Executive’s Statement
Annual Review 2007-08
Operating and Financial Review
Royal Mail Holdings plc Board
Directors’ Report
Corporate Governance
Internal control
Directors’ Remuneration Report
Statement of Directors’ responsibilities in relation to the Group financial statements
Independent Auditors’ Report to the members of Royal Mail Holdings plc
Group income statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
Group statement of recognised income and expense for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
Group balance sheet at 30 March 2008 and 25 March 2007
Group cash flow statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
Notes to the Group accounts
1. Authorisation of financial statements and statement of compliance with IFRSs
2. Accounting policies
3. Segment information
4. People information
5. Operating costs
6. Auditors’ remuneration
7. Operating exceptional items
8. Net finance income (excluding net pensions interest)
9. Income tax
10. Property, plant and equipment
11. Goodwill
12. Intangible assets
13. Business combinations
14. Investments in joint ventures and associates
15. Non-current assets held for sale
16. Inventories
17. Current trade and other receivables
18. Cash and cash equivalents
19. Financial liabilities
20. Provisions for liabilities and charges
21. Current trade and other payables
22. Non-current other payables
23. Financial risk management objectives and policies
24. Financial instruments
25. Employee benefits – pensions
26. Share capital
27. Total equity
28. Commitments
29. Related party transactions
Group five-year summary (unaudited)
Parent Company accounts
Statement of Directors’ responsibilities in relation to the parent Company financial statements
Independent Auditors’ report to the members of the Company, Royal Mail Holdings plc
Parent Company balance sheet
Notes to the parent Company accounts
Forward Looking Statements
Corporate Information
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103
Chairman and Chief Executive’s Statement
Royal Mail Holdings plc
It has been a year of tough challenges and achievements involving a groundbreaking agreement with our people allowing the
modernisation of Royal Mail to proceed and changes to the Pension Plan put in place. The Group made an operating profit before
exceptionals of £162million, which, while down a third on the previous year, was ahead of expectations and was against the backdrop of a
3.2% year on year decline in the overall UK mails market volumes and an increase in the proportion of mail carried by rival operators.
Daunting challenges remain but the Group is now implementing plans to modernise the Letters business and ensure the Post Office
branch network has a sustainable future. Royal Mail’s quality of service had been at or above target levels in the first quarter of 2007-08
but fell as a result of industrial action last summer and autumn. Despite the effects of industrial action, the large majority of mail was
back to being delivered at above target levels by the year end.
Key elements of the year were:
•
Landmark agreements with our people on pay, pensions and modernisation, enabling Royal Mail to launch the second phase of
modernisation of the Letters operations - through automation - using the investment provided by the Shareholder in the form of
commercial loans agreed in March 2007.
Reform of the Pension Plan to help the Company continue meeting the huge cash cost – of over £800million in the year - of both
ongoing and deficit contributions, while providing the best pension benefits Royal Mail can afford for its people.
The launch of new products and services for customers including Tracked™ which allows the movement of parcels and packets
through the Royal Mail network to be tracked, and Online Business Account, which enables business customers to handle their
accounts electronically instead of by dockets. More new services are planned as the Company strengthens further its focus on
customer service.
The first steps in the roll-out of new technology and equipment in delivery offices and mail centres – making the job better for our
people, improving the business’s efficiency and, above all, providing the foundation and capability for new products and services for
customers.
The launch of more new services and products by the Post Office to bring in new revenue and customers and help support the
branch network.
Strong revenue growth by Parcelforce Worldwide and GLS, the Group’s UK and European parcels businesses, both of which operate
in highly competitive markets. GLS is now by far the biggest contributor to Group profit.
•
•
•
•
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Financial Performance
The biggest change in performance across the Group was the move from profitability to loss by the Royal Mail Letters business which
made a £3million operating loss on its £6.8billion revenue - down on the previous year despite the annual price increase in April 2007.
The fall in mail volumes, continued downtrading by Royal Mail customers to lower priced products, and the increasing impact of
competition, resulted in Group operating profit falling by almost a third from £233million to £162million. If the impact of the Social
Network Payment (which supports loss-making Post Office branches) is taken out of the picture, Group operating profit in 2007-08 was
less than half the comparable figure in the previous year. The huge cost of servicing the Pension Plan continues to bear heavily on the
Company and has again had a huge impact on the operating profit.
Business unit performance
Royal Mail
General Logistics Systems
Parcelforce Worldwide
Post Office Limited
Other businesses
Group
External revenue
Operating profit/(loss)*
2008
£m
6,830
1,232
379
911
36
2007
£m
6,857
1,082
337
868
35
9,388
9,179
2008
£m
(3)
114
8
(34)
77
162
2007
£m
136
115
7
(108)
83
233
* Operating profit/(loss) is before exceptional items. For 2006-07 the results by business unit have been restated for the impact of the
new subsidiary Royal Mail Estates Limited - there is no impact at Group level.
4
Chairman and Chief Executive’s Statement (continued)
Royal Mail Holdings plc
•
•
•
•
•
•
•
Group revenue rose by just over £200million, largely driven by increased sales by GLS and Parcelforce Worldwide but also because
the 2007-08 accounts include the full £150million Social Network Payment to support loss-making Post Office branches while in
2006-07, only half of this payment, £75million, was included as revenue.
Revenue in Royal Mail Letters fell by £27million. The overall mail market declined again and volumes handled by Royal Mail fell 3.2%
- more than the 2.3% volume fall in the Letters business the previous year. The average daily mail bag now contains 80 million
letters; it was 83 million in 2006-07 so Royal Mail is handling on average three million fewer letters a day.
Royal Mail regulated prices rose in April 2007 by around 5% on average. However, there was continued downtrading in 2007-08 by
customers, for example, from First Class to Second, or from premium business mail services to less expensive ones. This trend,
together with volume falls, meant that overall revenue in the Letters business declined for the second year running.
The Universal Service made an estimated loss - for the first time – of around £100million with the overall price controlled area of
the business making an estimated loss of around £200million.
Post Office Limited’s revenue increased but when the additional impact in 2007-08 of the Social Network Payment is removed, the
underlying trend was downwards. There was less income overall from traditional business but this was partly offset by growth in
sales of new products and services.
GLS grew its revenues through higher parcel volumes, with particularly strong growth in Eastern Europe, as well as from the
acquisition of ABX Belgium. There was also a beneficial impact in the accounts from the strengthening of the euro against Sterling.
Profit fell by £1million, however, but this was again a strong performance by GLS as it operated in a difficult and highly competitive
market and had to make significant network changes to deal with recently changed road speed laws in France.
Parcelforce Worldwide grew its revenue in a market where competitive pressures got even tougher, and also increased its profit and
maintained its operating margin. Quality of service improved further to 96.5% for the year - an impressive performance in a crowded
marketplace.
Pension Fund Reform
A series of changes to the Pension Plan began to take effect on 1 April 2008 after intensive talks with the unions and other employee
representatives that began a year earlier, and a formal consultation with every pension scheme member. The length of time taken over
talks and consultation reflected the Company’s determination to listen carefully to the representations it received and as a result a
number of significant amendments were made to the original proposals first tabled in the early summer of 2007. The changes to the
fund were agreed by the Pension Trustee in March 2008. They encompass:
•
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•
•
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The Plan closed to new members from 31 March 2008.
All pensions and benefits earned before 1 April 2008 are still linked to final salary at the time of retirement.
From 1 April 2008, defined benefits building up for employee members of the Plan are earned on a Career Salary basis.
A new defined contribution plan will be launched in April 2009.
New recruits joining the Company from 31 March 2008 will be able to begin paying contributions to the new plan after they have
worked for the Company for a year.
Employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 for benefits earned
from 1 April 2010.
From 1 April 2010 it will be possible to draw pension earned before the change to normal retirement age at 60, and continue
working while still contributing into the Pension Plan until the maximum level of benefits has been reached.
The action taken to reform the Pension Plan, together with the establishment of a £1billion escrow account for the sole benefit of the
Plan, if needed, has enabled the Group to have an achievable funding programme based on the last actuarial valuation of the deficit of
£3.4billion in March 2006. However our estimates indicate that the actuarial deficit has since increased significantly due to market
changes, further underlining how pensions remain a significant and volatile risk to the Group. The continuing heavy cash calls on the
Company - more than £800million in 2007-08 - to service the Plan and pay the deficit - demonstrates again how crucial it is for the
Company to succeed in modernising the Letters business and provide a sustainable future for the Post Office network. The Pension Plan
deficit fell in accounting terms from £5.0billion to £2.9billion.
5
Chairman and Chief Executive’s Statment (continued)
Royal Mail Holdings plc
Royal Mail – modernisation underway
The landmark agreement on pay, pensions and modernisation reached with the CWU in the autumn of 2007 has opened the door for the
roll-out of a far-reaching modernisation plan for Royal Mail on which its future hangs. The technology we are now deploying is tried and
tested so we know it can be effective. The task facing everyone in the Letters business is to make it work for Royal Mail and, crucially, our
customers.
The work underway includes:
•
•
The deployment of the first of a new range of sorting equipment to deal with “flats”, the A4 sized magazine, catalogues and
brochures which make up around one in six items of the typical daily mail bag.
Successful trials for hand-held keypads that allow postmen and women to record customers’ confirmation of the delivery of packets,
and other mail such as Special Delivery – a huge improvement on the traditional paper-based method.
Contracts have been placed for a wide array of sorting equipment, including upgrades for existing Integrated Mail Processors (IMPs),
and replacements for existing automated mail sorters. By March 2008 the codemark printers that print machine-readable
instructions on mail to speed its sortation had all been replaced. In addition, to date, 21 IMPs have been upgraded.
• We have ordered 400 walk-sequencing machines the first of which will be delivered to the network this summer under a
•
deployment programme that will last around two years. Trials have been successful, both operationally and from the perspective of
delivery postmen and women who have been pleased at the machines’ capability in sorting mail down to the route they follow on a
round, vastly reducing the need to sort the mail manually.
The new technology will, we are confident, improve efficiency and cut costs. But we are very clear that one of the greatest benefits of
modernisation is the foundation it provides from which to launch new products and services for customers, so meeting their needs and
expectations, and improving Royal Mail’s competitive edge in a market where competition is rapidly increasing. We will be launching
further new products and services this current year with the aim both of providing customers with innovative solutions while at the same
time making it easier for them to do business with Royal Mail.
Our strategy for the Letters business is to implement programmes that will provide a more efficient operation, improve Royal Mail’s ability
to compete and, crucially, have products and services that both satisfy and excite customers large and small. We are aiming at delivering
a hitherto unseen degree of flexibility and responsiveness by Royal Mail.
Post Office Limited – creating a sustainable network
Among the most difficult challenges of the year has been the implementation of the Government’s decision to close up to 2,500 Post
Office branches. The closure of any branch is always difficult as every outlet is appreciated by its customers, and subpostmasters are
rightly regarded as key members of the communities they serve.
The Network Change programme, therefore, which is reducing the size of the branch network in line with the funding provided from the
Shareholder, is a major challenge for the business. We are seeking to implement the programme as sensitively as possible, and create the
most accessible network within the customer access criteria determined by the Government. There have been more than 75,000
responses to the programme by the end of March 2008, around the halfway mark, and the high level of feedback from customers shows
the attachment communities feel to their local branches, despite the fact that some four million fewer people have been visiting a Post
Office branch each week compared to three years ago.
That reduction has been spurred by a further decline in traditional products and services on offer in our branches or, in the case of the TV
Licence, the ending of the service altogether. Card Account transactions went down in 2007-08 and more motorists renewed their car tax
online rather than at a Post Office counter.
However, declines in traditional revenue were partly offset by income from new services we have introduced with new products launched
in 2007-08. We are now:
•
•
•
•
Selling one in 50 of all car insurance policies in the UK;
Issuing one in every 40 new credit cards in the UK;
Insuring one in every 200 homes in the UK; and
Handling savings from almost half a million savers.
The business’s stretching goal remains – to create a network that has long-term sustainability. We are investing in our Crown office
network to improve their attractiveness to customers, and have agreed a new remuneration package for subpostmasters, giving them
greater rewards for achieving product sales; we are cutting our overheads and reducing back office costs for the computer system that
links the network, and we will continue to develop new products and services.
6
Chairman and Chief Executive’s Statement (continued)
Royal Mail Holdings plc
Many achievements – but many challenges remain
The Group began its journey of transformation in 2002 when change on the scale we have already achieved was regarded by many as
unthinkable and unachievable. At that time, we were failing quality of service targets repeatedly, the Company was losing more than
£1million a day and without change, our chances of succeeding in a changing and opening market were non-existent.
We’ve demonstrated we can deliver consistent, target-beating quality of service; the Group is profitable and has the funding in place to
modernise; strategies are underway to achieve a transformation of the Letters business and to create a sustainable Post Office network;
and we have a determination to succeed, spurred on by the hurdles we have already overcome.
Daunting challenges remain:
•
Our tender for the new contract for the Card Account handling benefit and pension payments for many of the most vulnerable
people in society from April 2010 is currently being considered in competition with other bids and it is vital for the future health of
the Post Office network that we succeed in winning the work.
• Modernising Royal Mail to make it much more efficient while providing flexible and responsive products and services to our
customers is a challenge in its own right but to meet it in a market where mail volumes are now falling and with heavy cash calls on
the business from its pension fund will be very stretching indeed.
Online shopping has provided opportunities across our business but it has also created more competition at the delivery end,
affecting not just the Royal Mail Letters business but Parcelforce Worldwide and GLS.
The costs of funding the new technology that is now being rolled out to the Letters business will increasingly be felt, as the
Shareholder’s financing package comprises loans at commercial rates that do, of course, have to be repaid from our earnings.
•
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We are contributing to the independent review of the impact to date of competition on the UK postal service. The key issue will be the
preservation of the one-price-goes-anywhere Universal Service which, in 2007-08 is estimated to have lost around £100million – the
first time there has been a loss in this vital bedrock of the postal service which is a powerful benefit to the UK economy and every user of
the postal service. The question begging an answer is how to preserve and nurture the Universal Service when the only business with a
commitment to delivering it – Royal Mail Letters – is now loss-making. The Letters business has traditionally relied on profit from business
mail – the only part of the market to face competition from other operators – to underpin the Universal Service, which is used by social
customers to send personal letters, birthday cards and Christmas greetings, by businesses, large and small, and Government, both local
and central. We are very clear that the answer, in part at least, has got to involve regulation reduced to a minimum so that Royal Mail has
the freedom to compete fully in both the postal and wider communications market – while having the right amount of protection for social
customers and small and medium sized businesses (SMEs) who are finding that other mail carriers have no interest in competing for their
letters and cards, when stamped mail loses on average 6p a letter.
Our overall vision through this review is to achieve a high quality, efficient and profitable Universal Service with a Price Control focused on
our social customers and SMEs and forming the backbone of an innovative fully competitive business mail market - provided by an
efficient, transformed, integrated and lightly regulated Royal Mail competing with a variety of rivals, both wholesale and end-to-end.
Central to achieving this vision is the need to continue to take and execute the often difficult decisions that will turn Royal Mail Group into
a world class postal services company.
Allan Leighton
Chairman
19 May 2008
Adam Crozier
Chief Executive
19 May 2008
All references to operating profit/(loss) are before exceptional items.
7
Annual Review 2007-08
Royal Mail Holdings plc
This has been a year of huge significance for the future of the Company. A groundbreaking deal was agreed on modernisation of the
Letters business and reform of the Pension Plan. New products and services were launched and the Company continued working to
reduce its environmental impact while investing in the health and wellbeing of its people. There were also remarkable achievements by
individual employees who demonstrated again our people’s dedication and service to the communities in which they live and work. The
difficult Network Change programme, crucial to creating a sustainable Post Office got underway as we began to implement the
Government decision to reduce the size of the branch network in line with the available funding.
Giving back to the community
Simon Illingworth was named Royal Mail’s “Postman of the Year” at the business’ 2008 1st Class People Awards. Thousands of customers
put forward their postman or woman for an “unsung hero” accolade. Simon had run more than 20 marathons to raise £7,000 for charity
and awareness of testicular cancer, having been being diagnosed with the disease himself.
More than 12,000 people across the Company took part in fundraising activities in 2007-08 while individuals themselves dipped into their
own pockets to support charities with 50,000 of our people – more than one in every four - making payroll donations directly from their
wages. It means our people contributed at the rate of almost £300 every hour of every day and the large number of payroll donors
across the Group compares to just 4% of the overall working population who contribute to charities via payroll giving. The Company’s
encouragement for payroll giving and its people’s generosity were recognised with prizes and accolades at the Institute of Fundraising’s
National Payroll Giving Awards in October 2007.
A three year partnership – the first of its kind for Royal Mail - between the Company and Help the Hospices raised £2 million for the
charity – double the target of £1 million. More than 10,000 employees took part in fundraising activities - a tremendous level of support -
and nearly 6,000 gave payroll donations.
There were further improvements in attendance at Royal Mail last year with absence rates having fallen by more than 20% over the last
five years. Initiatives in 2007-08 which had helped drive the improvement included campaigns focusing on health promotion such as
advice on diet and nutrition. There were health fairs in a number of workplaces, a health bus toured many of our offices and centres,
while an internet facility was set up to provide health and lifestyle advice online.
Royal Mail also began a four year partnership with Access to Work and Jobcentre Plus, to encourage the employment of disabled people
to build on our existing efforts to welcome applications from all sections of the community and nurture diversity in our workforce.
Working towards a better environment
The Company has set itself the goal of operating in a carbon neutral way by 2015. In 2007-08, the Letters business took delivery of 140
double-deck trailers, each with the capacity to hold 50 per cent more mail than conventional trailers. We are seeking, through these
trailers, to reduce carbon emissions by cutting road mileage annually by the equivalent of twice the circumference of the earth.
The Company has also developed an online calculator so that any employee can easily calculate their environmental impact and make
donations to the Woodland Trust to allow the charity to plant trees to offset carbon emissions. The online calculator has been gifted to the
Woodland Trust, which has called on other companies to follow Royal Mail’s lead.
A further initiative in the Letters business has involved the provision of telemetry technology in around 8,000 vehicles with training in its
use for the drivers. The equipment tracks the vehicles’ movements, fuel consumption, speed and braking patterns so that the best routes
can be chosen in tandem with the best way of driving the vehicle, to minimise its carbon output. Royal Mail is aiming to cut its fuel usage
by 2.5 million litres of diesel a year through use of the technology as well as reducing the number of vehicles it has on the road.
Technology leads new product development
Despite the decline in overall mail volumes, Royal Mail saw further growth in its delivery of goods ordered online. Christmas 2007 saw
Royal Mail deliver a record c.120 million items which had been ordered online. In July 2007, the business handled orders for 600,000
copies of JK Rowling’s Harry Potter and the Deathly Hallows – a copy for one in every 43 homes in the UK.
New technical developments also improved the service for online shoppers – Royal Mail’s TrackedTM service allows customers to track the
progress of their order online while the Safeplace service was launched allowing shoppers to specify a safe place at their address – for
example, a garden shed – where a package can be left safely if nobody is at home to take personal delivery.
Royal Mail also launched a number of initiatives designed to strengthen the effectiveness of direct mail as a key advertising and marketing
medium. “Sensational” mail allows companies to build on the visual impact of direct mail by incorporating other features that engage
senses other than eyesight. For example, a mailshot can include a relevant aroma or taste about a product or service to heighten the
impact when the mail is opened.
A partnership with Sony DADC allows advertisers and marketers to include in their mailing a CD which is personalised for the recipient of
the mail. The combination of traditional post with digital technology allows companies to communicate with a wide range of their
customers but in a personal, tailored way for each of them.
As part of its investment in data services, Royal Mail has also launched a new source of expert advice on direct mail aimed at improving
the effectiveness of direct mail campaigns.
8
Annual Review 2007-08 (continued)
Royal Mail Holdings plc
Celebrations through stamps
Royal Mail’s Special Stamps issues in 2007-08 covered a diverse range of subjects. The enthusiasm for Harry Potter was celebrated in a
set of stamps which featured illustrations from the series of books which have captured the imagination of children and many adults for a
decade.
Another set of stamps with a literary theme paid tribute to Ian Fleming’s fictional secret agent, James Bond, showcasing book jackets from
the novels including titles such as Dr No and Casino Royale.
Arnold Machin’s iconic image of the Queen which has appeared on more than 175 billion stamps has been famously unchanged since its
introduction in 1967. A miniature sheet was issued in June 2007 to celebrate this timeless, masterwork of modern art and it included a
picture of Machin himself on one of the stamps.
Ten rare British birds featured on the first of a series of stamps showing how endangered UK species are benefiting from conservation
work. The set featured the corncrake, the white-tailed eagle and the avocet, the emblem of the Royal Society for the Preservation of
Birds. The next issue available from May, will feature six of the best-loved Cathedrals in the UK.
Building a new Post Office – “The People’s Post Office”
Just over three years after launching its financial services partnership with the Bank of Ireland, the Post Office has served its one millionth
customer – in May 2007 - and has continued to grow. During the year the number of customers increased further by over one third,
making the Post Office one of the fastest growing financial service providers in the UK. The achievement means that the Post Office:
•
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•
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sells one in 50 of all car insurance policies in the UK;
issues one in every 40 credit cards in the UK;
insures one in every 200 homes in the UK ; and
has almost half a million savings customers.
The portfolio of financial services grew further in 2007-08 with the launch of a Post Office mortgage, which quickly established a
reputation as one of the best rates available in the housing market, while other new services launched in 2007-08 included life cover for
the over 50s and PayOut, which enables payments to be made using barcoded letters or text messages, avoiding the need to issue
cheques.
The MoneyGram service, which customers can use to send cash swiftly and securely abroad, was extended to every branch in the
network. Growing numbers of people took out a Post Office insurance policy to cover their car, van or home with the number of active
policies exceeding 600,000.
The Post Office’s commitment to providing free access to cash was underlined by the installation in December 2007 of the business’ one
thousandth fee-free ATM. More cash machines are being added every week to the network of branches with the aim of making the Post
Office, with its banking partner, the Bank of Ireland, one of the biggest providers of cash machines nationwide.
A television advertising campaign featuring a number of celebrities including Joan Collins and the boy band, Westlife, helped raise
awareness of the wide range of services available in “The People’s Post Office.” These have included the launch of the broadband service,
designed to appeal to a wide range of customers including older people who may not have been online before but are seeking the re-
assurance of the trusted Post Office brand, as well as those customers who want to pay for the service in cash at a Post Office branch
rather than set up a standing order.
The Post Office’s Christmas Savings Club was launched in January 2008 to provide savers with a simple and safe way to save for the
festive season. From February 2008, the Post Office offered a pet insurance scheme to its customers.
Parcelforce Worldwide
Parcelforce Worldwide's impressive underlying growth in revenue and volume of over 10% outpaced the UK express parcels market in
2007-08, with a key driver behind the increase coming from high quality of service which improved on the previous year's performance.
Quality over the Christmas period was excellent when processed volumes hit an all time record of 325,000 on 18 December 2007.
The business also helped reduce its environmental impact with a carbon offsetting scheme allowing customers despatching goods online
to make a donation via the Woodland Trust. With around 25% of online retail users using the scheme, it demonstrates both the business's
commitment to reducing its carbon footprint as well as the appetite among customers to support effective environmental programmes.
A comprehensive review of service was conducted during 2007-08, resulting in plans for additional service developments. The business is
aiming to announce in the summer of 2008 the first two of a number of initiatives to drive further growth.
9
Annual Review 2007-08 (continued)
Royal Mail Holdings plc
General Logistics Systems
Royal Mail’s European operation, General Logistics Systems (GLS), continued to grow and develop its operations as the “Quality leader in
European parcels logistics”. GLS provides reliable, high quality parcel services, logistics and express services throughout Europe.
Through its own start-up companies, acquisitions and its network partners, GLS has created a strong European network providing
customers with services in 36 European states. In August 2007, GLS Romania was established and a new franchise area was acquired in
Milan in October 2007 - increasing the number of GLS managed depots in Italy to 26. In March 2008, new global partnership
agreements were signed with MNG Cargo in Turkey, and GATI in India.
In addition to the investments in the physical network, the continuing development of information technology remains an area of specific
focus. GLS's European parcel shops, where private or commercial customers can take parcels for delivery, increased by more than 1,000
to 6,362 outlets.
GLS's network now comprises 32 central transhipment points and 655 depots, providing services through wholly owned and partner
companies in 36 European states. A workforce of over 13,000 people and nearly 18,000 vehicles deliver 335 million parcels annually for
220,000 customers throughout Europe, generating £1,232m of revenue in the last year.
10
Operating and Financial Review
Royal Mail Holdings plc
Introduction
Royal Mail Holdings plc (the Company) 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 continues to change rapidly as a result of declining volumes and strengthening competition in the UK mails market since
its full liberalisation in January 2006. We are engaging with the Government review of the UK postal services market and progressing
transformation plans throughout the business. Our vision for the future of the postal services market provides significant benefits for all
types of customers and competitors. We continue to provide services to meet our challenges – from a range of Post Office financial services
including savings and insurance products, to broadband, electronic ‘stamps’, online shopping fulfilment and mail-related data tools such as
online electronic pricing news and product information to help companies improve their marketing performance.
Our continued aim is to put the customer at the heart of everything we do by:
being the UK’s lowest cost operator delivering market leading quality of service;
be the most trusted provider of essential services to every person in the land;
our unique reach to every address in the UK;
enhancing our trusted brands;
becoming easier to do business with; and
•
•
•
•
•
• maximising profitable revenue and volume by meeting customer needs through innovation and efficiency.
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 Revenue
Operating Profit
Return on Sales* (%)
ColleagueShare costs
Other exceptional items
Net exceptional items
(Loss)/profit before
financing and taxation
Net finance income
Net pensions interest
(Loss)/profit before taxation
Taxation credit/(charge)
Profit after taxation
*before exceptional items
2008
9,388
162
1.7%
(277)
(106)
(383)
(221)
13
131
(77)
212
135
2007
9,179
233
2.5%
-
(125)
(125)
108
6
199
313
(27)
286
Key Non-Financial Highlights
Area
Customer
Service
Key Performance
Indicators (KPIs)
1st Class Stamp & Meter
Quality of Service
2008
2007
85.2%
94.0%
No. of Complaints (millions)
1.44
1.41
Post Office Limited
Customer Satisfaction Index
99.8%
95.1%
Engagement Index ^
54%
-
Employee Survey ^ (“Great
Place to Work”)
-
66%
RIDDOR Accidents/1000
staff
26.9
26.1
Sick Absence
4.9%
4.8%
CO2 Emissions/1000 items#
18.0
18.7
Great Place
to Work
Good
Corporate
Citizen
Charitable Donations (£m)
1.8
1.2
^ In April 2007 the Engagement Index based on the ‘Have Your Say’ Employee
Survey replaced the ‘Great Place to Work’ Employee Survey as a key non-financial
KPI.
#represents preceding year
11
Operating and Financial Review (continued)
Royal Mail Holdings plc
Governance
The EU Accounts Modernisation Directive (AMD) applies for all medium and large EU companies including listed companies and requires a
mandatory inclusion to the existing Directors’ Report to provide an enhanced review of a company’s business.
The Directive states that the review should provide a balanced and comprehensive analysis of the development, performance and position
of the company’s business, including the principal risks and uncertainties facing the organisation. The analysis should include both financial
and, where appropriate, non-financial KPIs relevant to the particular business including information relating to environmental and
employee matters. It is recognised that to the extent that this information appears in the Operating and Financial Review (OFR), it is
incorporated by reference into the Directors’ Report.
Legal Structure
Royal Mail Holdings plc is directly owned by HM Government and is the ultimate parent company of the Group. The Group primarily
operates within the United Kingdom, having a number of subsidiaries, joint ventures, and associates, but also has presence in most
European countries, mainly through General Logistics Systems B.V. Its basic legal structure is as follows:
Royal Mail Holdings plc
Royal Mail Group Ltd (1)
Pension Schemes
Post Office
Limited
Royal Mail Investments
Limited
Royal Mail
Estates Limited
(2)
General Logistics
Systems B.V.
(1) The Royal Mail and Parcelforce Worldwide business units included in Royal Mail Group Ltd are not separate legal entities
Further details on the principal subsidiaries are provided in note 29 to the accounts.
Our Operating Units
The Group is organised into four principal operating units:
Royal Mail
Royal Mail processes and delivers over 80 million letters and packages to 28 million addresses every working day, in line with its unique
Universal Service Obligation (USO). It is also responsible for designing and producing the UK’s stamps and philatelic products.
General Logistics Systems B.V. (GLS)
GLS is a pan-European company providing reliable, high quality parcel services, logistics and express services throughout Europe.
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.
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. Post Office Limited owns the Group’s investments in Midasgrange Limited (50%
associate, financial services) and First Rate Exchange Services Holdings Limited (50% joint venture, Bureau de Change services).
Other
Further details are provided under the operating unit facts and figures section.
Our Pension Schemes
Royal Mail Group Ltd is the sponsoring employer for the Royal Mail Pension Plan and Royal Mail Senior Executives Pension Plan (both
defined benefit schemes), and for the Royal Mail Retirement Savings Plan (a defined contribution scheme). Based on assets, the Royal
Mail Pension Plan is the fourth largest pension scheme in the UK.
The assets and liabilities of the defined benefit schemes, as measured under accounting standards, are reported as a net pension deficit in
the Group balance sheet. The gross assets and liabilities and the net deficit are significantly larger than any of the Group’s other assets
and liabilities. This results in the Group being one of the most exposed UK corporates to pension scheme volatility, particularly with
respect to movements in equity values and bond rates.
12
Operating and Financial Review (continued)
Royal Mail Holdings plc
Operating Unit Facts and Figures
Unit and % of
Group External
Revenue
No. of
Employees
Region
164,995
UK
Revenue*
(£m)
Profit/(loss)*
(£m)
Margin (%)
Revenue
£6,830m
Loss
(£3m)
Margin
(0.04%)
Facts and Figures
Vision
…to be ‘demonstrably
the best and most
trusted postal services
company in the world’.
• 115,400 pillar boxes;
• 69 mail centres;
• 1,400 delivery offices;
• 30,800 vehicles;
• 29,900 bicycles;
• Over 80 million items handled every
working day;
• Deliver to 28 million addresses a day;
• 1st Class Retail Quality of Service –
85.2%; and
• 2nd Class Retail Quality of Service –
95.7%.
13,135
Europe
Revenue
£1,232m
Profit
£114m
• 32 hubs;
• 655 depots;
• 17,800 vehicles;
• 220,000 customers;
• Over 1 million parcels handled every
…to be ‘the best
European B2B parcel
logistics & express
system with global
reach’.
working day;
Margin
9.3%
• 21 Subsidiaries; and
• Covers 36 states in Europe.
4,464
UK
9,163
UK
Revenue
£379m
Profit
£8m
Margin
2.1%
Revenue
£911m
Loss
(£34m)
Margin
(3.7%)
…to ‘be the UK’s most
reliable high value
express carrier’.
…‘be at the heart of
customers’ thinking by
becoming the most
trusted provider of
essential services to
every person in the land’
and focusing on ‘a
successful commercial
business with a social
purpose – one that is
actively on the side of
customers’.
• 2 hubs (1 national, 1 international);
• 47 depots;
• 1,800 vehicles;
• 207,000 parcels delivered every day,
289,000 every day in December; and
• Parcelforce 24 Quality of Service –
96.5%, delivered on time and with
electronic proof of delivery.
• Equivalent 15p in every £1 transacted
in the UK is handled through the Post
Office network;
• 13,852 branches, including 393 Crown
Offices;
• Over 30,000 customer facing positions
- including those employed by Post
Office Limited, by subpostmasters
and/or by franchisees;
• Over 24 million customers, making
over 37 million visits a week,
conducting almost 63 million
transactions;
• UK’s leading supplier of foreign
currency; and
• 99.8% of customers satisfied with their
branch.
72.8% of Group
External
Revenue
13.1% of Group
External
Revenue
4.0% of Group
External
Revenue
9.7% of Group
External
Revenue
* Revenue is for subsidiaries only, profit/(loss) is before exceptional items
13
Operating and Financial Review (continued)
Royal Mail Holdings plc
Unit and %
of Group
External
Revenue
Other
0.4% of
Group
External
Revenue
No. of
Employees
Region
Revenue*
(£m)
Facts and Figures
2,654
in wholly
owned
subsidiaries
4,313
in part
owned
subsidiaries
Profit/(loss)*
(£m)
Margin (%)
Revenue
£36m
UK
Including:
• Our Group Property unit - including Royal Mail Estates Limited
(100% subsidiary);
Profit
£77m
• PostCap Guernsey Limited - captive insurers (100% subsidiary);
• iRed Redefining Document Management Ltd – end to end
document management operation (100% subsidiary)
• Romec Limited - facilities management operation (51%
subsidiary);
• NDC 2000 Limited - building engineering services operation (51%
subsidiary);
• Quadrant Catering Limited - catering services (51% associate);
• Camelot Group plc - UK National Lottery operator (20%
associate); and
• Central shared services for the UK and corporate centre – not
a revenue or profit centre.
*Revenue is for subsidiaries only, profit/(loss) is before exceptional items
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd made a loss in 2007-08, after bearing losses relating to stamped mail and carrying out its Universal Service
Obligation. In addition it has been facing 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. On 23 March 2007 a funding package
totalling £1.2bn up until 2016 was completed with Government.
The European Commission is continuing its investigation under the EC Treaty’s rules on State Aid into a series of funding measures taken
by the United Kingdom Government in its capacity as Shareholder in favour of Royal Mail between 2001 and 2007, including the funding
agreement completed on 23 March 2007. In its response to the EC in relation to this investigation the United Kingdom Government has
stated that it believes that the measures being investigated by the EC were concluded on commercial terms.
Post Office Limited
Following a consultation process, on 17 May 2007 the Secretary of State for Trade and Industry (now Secretary of State for Business
Enterprise and Regulatory Reform) announced (i) a funding package for Post Office Limited up to March 2011, (ii) a closure programme
involving the compulsory compensated closure of up to 2,500 Post Office branches and (iii) the imposition of certain access criteria
designed to ensure the continued maintenance of a national network of Post Office branches. As part of the funding package, the Group
received £313m during the year under the Industrial Development Act 1982, to compensate Post Office Limited for the other net costs of
providing certain specified “services of general economic interest”. An additional £150m (2007 £75m) was paid to Post Office Limited
during the year to fund the maintenance of a rural network of post offices, which was recorded within revenue as a Social Network
Payment - in the prior year an additional £75m of such costs were borne by the Group from reserves.
Both of the above payments made during 2007-08 were in accordance with approval received from the European Commission under
relevant State Aid rules.
14
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. The 2006-07 operating profit has been restated
for each UK operating business unit due to the impact of the new subsidiary Royal Mail Estates Limited, as explained in note 3. There is
no impact on the Group operating profit. As 2007-08 is a 53 week period and 2006-07 was a 52 week period, where relevant, revenue
and costs have been restated to make them more comparable.
This year we report an operating profit of £162m compared to £233m for 2006-07, a fall of £71m (30.4%), driven by the worsening
performance of Royal Mail. Although Post Office Limited’s position has improved, this is wholly attributable to the additional £75m from
Government for the Social Network Payment (SNP) compared to last year.
Operating profit/(loss) by business unit - £m
Operating profit/(loss) growth/(decline) by business unit - £m
114
8
162
233
77
(3)
Royal Mail
Parcelforce
Worldwide
(34)
Post Office
Limited
General
Logistics
Systems
Other
Group
74
(6)
162
1
(139)
(1)
2007
Royal Mail
General
Logistics
Systems
Parcelforce
Worldwide Post Office
Limited
Other
2008
External Revenue
Group external revenue increased by £209m (2.3%), from £9,179m to £9,388m driven by increases in GLS, Post Office Limited,
Parcelforce Worldwide and Other businesses, offset by a decline in Royal Mail despite the impact of the additional week. The 53rd week
this year has increased Group revenue by £113m; therefore underlying revenue growth is 1.0%.
Royal Mail revenue declined by £27m (0.4%) even with an average price increase on regulated products in April 2007 of around 5%.
Declining market volumes, increased losses to competition and customers continuing to downtrade to cheaper products have led to this
decline, with the only growth area for revenue being Downstream Access, i.e. increasing competition.
General Logistics Systems increased its revenue by £150m (13.9%) from £1,082m to £1,232m, driven by volume growth in domestic and
export parcels – this includes the impact of acquisitions - and the strengthening of the euro. Parcelforce Worldwide increased its revenue
by £42m (12.5%) from £337m to £379m, through higher volumes particularly in regional and international sales. Post Office Limited
showed a revenue increase of £43m (5.0%) from £868m to £911m, although without the £150m (2007 £75m) SNP received from
Government, there was an underlying decline in revenue of £32m to £761m. This reduction is due to the revenue decline in Government
and financial services exceeding the growth in revenue from the telephony products stream.
Costs (excluding exceptional items)
Total costs of £9,273m have increased from £8,985m by £288m (3.2%). The additional week this year has increased Group costs by
£112m; therefore the underlying increase is 2.0%.
Cost by type - %
Cost growth by type - £m
Other
Operating
C o sts
19%
D istributio n &
C o nveyance
C o sts
14%
P eo ple C o sts
67%
120
9,273
104
8,985
64
2 0 0 7
Peo p le
D ist rib ut io n &
C o nveyance
C o st s
Ot her Op erat ing
C o st s
2 0 0 8
People costs of £6,209m represent 67% of the Group’s cost base, and have increased year on year by £64m (1.0%) – this includes the
impact of the 53rd week. The majority of front line staff received an increase of 5.4% on basic pay and weekday overtime from 1 October
2007. After adjusting for the impact of the additional week, people costs actually reduced year on year, reflecting efficiencies delivered to
absorb the impact of the pay award.
Distribution and conveyance costs of £1,341m, representing 14% of the Group’s cost base, have increased by £104m (8.4%). This is driven
mainly by GLS (including acquisitions) and Parcelforce Worldwide, and their associated costs of volume growth.
Other operating costs of £1,723m, representing 19% of the Group’s cost base, have increased by £120m (7.5%). This includes increases in
depreciation and IT costs, linked to the phased roll-out of our major capital investment programme as part of our transformation plans,
primarily within Royal Mail.
15
Royal Mail Holdings plc
Operating and Financial Review (continued)
Pensions
Pension charges within operating profit
Within operating profit before
exceptionals
Within exceptionals (relating to
redundancy)
Within operating profit
2008
£m
2007
£m
701
722
42
743
51
773
Pension costs (pre-exceptionals) have reduced by 2.9% from £722m
to £701m. The £21m reduction principally relates to past service
costs of £16m included in 2007.
The balance sheet pension deficit has decreased from £4,985m in
March 2007 to £2,923m. The decrease in the deficit of £2,062m
principally relates to an actuarial gain of £1,798m and net pensions
interest of £131m.
The actuarial gain arose due to changes in market conditions giving rise to an increase in the assumed real discount rate, although this
has been partly offset by a lower than expected return on the assets in line with general market returns. This gain is recorded in the
statement of recognised income and expense.
The net pensions interest reflects the long-term expected rate of return on the schemes’ assets, less the unwinding of the discount on the
schemes’ liabilities. Although liabilities are higher than assets, the expected rate of return on these assets (biased toward equities) was
substantially higher than the discount rate for liabilities (high quality corporate bond rate) resulting in a net interest credit. This interest is
recorded in the income statement after (loss)/profit before financing and taxation.
As part of the recent funding package, the Group established £1bn of investments in escrow shortly before the 2007 year end as security
for the Royal Mail Pension Plan, in support of the 17 year deficit recovery period from 31 March 2006.
Pension cash funding: Group
contributions
2008
£m
2007
£m
Regular pension contributions
Funding of pension deficit
Payments relating to redundancy
Prepayment of 2008-09 regular pension
contributions
550
284
36
50
543
243
74
-
Net cash payments
920
860
Regular pension contributions increased by 1.3% from £543m to
£550m. The regular rate of employer contributions for the Royal
Mail Pension Plan has remained at 20.0% of pensionable pay,
effective from the beginning of the previous year. The regular rate
of employee contributions for the Royal Mail Pension Plan remains
unchanged at 6.0%.
Deficit recovery payments by the Group increased by £41m (16.9%)
principally arising as a result of the latest full actuarial valuation of
the Royal Mail Pension Plan. The Group had been contributing an
average of some £140m per year to fund the deficit in the Royal
Mail Pension Plan. This increased significantly last year, and further
again this year, to over £260m per annum for the remaining 16 years from the beginning of 2007-08. There have been no employee
deficit contributions.
Share of Profits in Joint Ventures and Associates
The Group’s share of profits in joint ventures and associates of £47m (2007 £39m) comprises profits from Post Office Limited’s Bureau
de Change joint venture (First Rate Exchange Services Holdings Limited), Camelot Group plc associate - UK National Lottery operator,
Quadrant Catering Limited our catering associate, Post Office Limited’s financial services associate (Midasgrange Limited) and G3
Worldwide (Spring) N.V. our international mail distribution associate.
Net Exceptional Items
Net exceptional items of £383m (2007 £125m) comprise operating exceptionals of £441m (2007 £243m) offset in part by profits from
property disposals of £58m (2007 £118m with £74m arising from the disposal of a property group). Operating exceptional costs include
£277m for ColleagueShare costs (2007 £nil), £165m for redundancy (2007 £180m), a £141m exceptional charge for subpostmasters’
compensation (2007 £nil), £97m for impairments (2007 £64m), £43m for Agency Network Change programme and WH Smith project
costs (2007 £nil), £10m exceptional property charges (2007 £1m credit) with other Group restructuring costs amounting to £21m (2007
£nil). This was offset in part by Government grant income of £313m (2007 £nil) received to compensate Post Office Limited for providing
certain specified “services of general economic interest”.
ColleagueShare Scheme
On 17 May 2007 the Group introduced a phantom share scheme, ColleagueShares; all associated costs for the year have been treated as
an operating exceptional item. The value of ColleagueShares is based on a Group share plan valuation model which is updated regularly.
This has generated a discounted charge to the income statement of £116m for 2007-08. Fully eligible employees have been allocated
408 notional shares in the Company with part time staff holding a proportion of this amount. Further allocations will be made over the
next two years. ColleagueShares will be sold back to the Company by 2012 and each fully eligible employee has the opportunity to receive
up to £3,700 from the sale of the phantom shares. A related stakeholder dividend for the year totalling £161m represents a payment of
up to £800 to each eligible employee in recognition of meeting certain Group and business unit targets. This is payable in 2008-09.
Net Finance Income
Net finance income of £13m (2007 £6m) comprises finance income of £84m (2007 £62m), offset by finance costs of £71m (2007
£56m). The increase in finance income of £22m is mainly due to higher average investment volumes and higher average investment
rates. The increase in finance costs of £15m is mainly due to higher commitment, arrangement and advisor fees on the Royal Mail Group
Ltd loan facilities from Government and higher average borrowing rates, partially offset by lower average borrowing volumes.
16
Operating and Financial Review (continued)
Royal Mail Holdings plc
Net pensions interest
Net pensions interest of £131m (2007 £199m), a non-cash item for the Group, has decreased by £68m as a result of expected returns
on Plan assets increasing by less than the interest on Plan liabilities as a result of the increase in the discount rate.
Taxation
The taxation credit in the income statement of £212m comprises £25m current tax receivable with respect to UK operations, a £29m
current tax charge on overseas profits, a UK deferred tax credit of £226m and an overseas deferred tax charge of £10m. A tax charge of
£18m was taken directly to equity. Last year a taxation charge of £27m was recorded comprising £45m current tax charge with respect
to UK operations, a £31m current tax charge on overseas profits, a £59m UK deferred tax credit and a £10m overseas deferred tax
charge, with a credit of £27m being taken directly to equity. The tax credit reported in relation to the pre-tax loss is mainly due to the
increased amount of deferred tax asset recognised.
Cash Flow
The following table is a summary of the Group cash flow statement.
Summary of cash flows
2008
£m
2007
£m
Cash inflow from operations is £483m (2007 £117m), which
comprises:
Cash inflow from operations
483
117
Dividends from joint ventures and
associates
Property, plant & equipment,
intangibles purchases and disposal
proceeds
36
39
(259)
(173)
Acquisition and sale of financial assets
(61)
(318)
Proceeds from issue of ordinary shares
-
430
Net drawdown/(repayment) of
borrowings and financing
Tax, interest and other
Net cash inflow
33
(23)
209
(64)
4
35
• Earnings Before Interest, Tax, Depreciation and Amortisation
(EBITDA) inflows of £351m (2007 £392m);
• Government grant income of £313m (2007 £nil) to compensate
Post Office Limited for providing certain specified “services of
general economic interest”;
• Payments relating to exceptional items of £188m (2007 £192m),
comprising restructuring costs of £152m (2007 £118m) and
pension top ups of £36m (2007 £74m);
• Share in Success payments of £nil (2007 £90m); and
• Working capital inflows of £7m (2007 £7m).
Dividends received from joint ventures and associates of £36m (2007
£39m) are from First Rate Exchange Services Holdings Limited, £24m
(2007 £23m), Quadrant Catering Limited, £5m (2007 £10m) and
Camelot Group plc, £7m (2007 £6m).
Property, plant & equipment, intangibles purchases and disposal proceeds of £259m outflow (2007 £173m) comprises £330m (2007
£309m) of expenditure, including motor vehicles of £67m (2007 £75m), plant and equipment £108m (2007 £84m), £88m (2007 £85m)
for property improvements and the remaining £67m (2007 £65m) on software. This analysis includes £36m (2007 £52m) in respect of
GLS projects. The expenditure was offset by inflows of £71m (2007 £65m) mainly from surplus property disposals and £nil (2007 £71m)
relating to the sale of a property group.
Acquisition and sale of financial assets of £61m outflow (2007 £318m) represents the net purchase of investments made by the Group
from cash and cash equivalent resources. It principally relates to interest of £57m on the investments in escrow, provided as security for
the Royal Mail Pension Plan. The comparative figure for 2007 represents the investment of £1bn in escrow partially funded by the
realisation of other investments.
During the prior year, five ordinary shares in the Company were issued to the Secretary of State for Trade and Industry under section
63(1) of the Postal Services Act 2000. The consideration of £430m was used to fund ongoing cash and funding requirements for Post
Office Limited, including repayment of advances from Royal Mail Group Ltd.
Net drawdown/(repayment) of borrowings and financing of £33m inflow (2007 £64m outflow) largely comprises £55m cash received
(2007 £nil) on sale and leasebacks offset by £20m (2007 £60m) net repayment of the Department of Business Enterprise and
Regulatory Reform (BERR) loans to Post Office Limited.
Provisions
Provisions at the end of March 2008 were £411m (2007 £111m). The £300m net increase comprises new provisions relating to
ColleagueShares, restructuring and onerous property contracts of £478m offset by cash spend of £149m and transfers to short-term
pension creditors of £29m.
17
Royal Mail Holdings plc
Operating and Financial Review (continued)
Group Strategy and Key Performance Indicators (KPIs)
Our success is measured by the four areas central to our operating units’ objectives. 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 KPIs and
monitored by the Royal Mail Holdings plc Board and its sub Committees, as highlighted below:
Customer
Service
Great Place
to Work
Profitability and
Cash Flow
Good Corporate
Citizen
This initiative established
in 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 initiative has
undergone a refresh to
keep aligned to our long
term strategy and
ensure maximum
benefit to our people.
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.
This has been the top
priority of everyone in the
business and is at the
heart of our strategy
moving forward. That
means:
• delivering a high
quality of service and
mails integrity;
• developing products
that match the needs
of our customers; and
• becoming easier to do
business with.
Corporate Social
Responsibility (CSR) is
doing the right thing
for our people, our
business and the
communities we
operate in, as our:
• customers want to
buy from companies
that share their
values;
• colleagues want to
work for companies
that provide a
healthy and safe
environment and
whose values align
to theirs; and
• communities want
companies that
create the incomes,
the jobs and
contribute to the
cohesion that builds
the neighbourhoods
where people want
to live and work.
Funding from
Government on
commercial terms has
been secured enabling
the Group (excluding
Post Office Limited) to
support the capital
investment
programme which
addresses the historic
underinvestment in
the Letters business.
Post Office Limited
and Government have
agreed a long-term
funding package which
will maintain a
national network and
put Post Office Limited
on a sustainable
footing.
Continuing to develop
more efficient ways of
working will empower
us to succeed in a
competitive
marketplace, allowing
us to maintain
sustainable
profitability and cash
flow to eventually
generate a return for
our stakeholders.
Customer
People
Financial
Environmental
Quality of Service targets
Employee Survey
Turnover
CO2 Emissions/1000
items
Number of Complaints
Health & Safety
Operating profit*
Social & Community
Customer Satisfaction
Index
RIDDORs (reportable
accidents)/1000 staff
Return on sales*
Return On Total
operating Assets#
Sick Absence
Operating cash flow
Charitable Donations
*before exceptional items
#as defined in the Directors’ Remuneration Report
With the exception of the Employee Survey, no change has been made to the sources of data or calculation methods used for the KPIs
above.
18
Royal Mail Holdings plc
Operating and Financial Review (continued)
Treasury Management
The Group operates a central Treasury function that manages £1.1bn of financial asset investments (substantially all of which are now
held in escrow in favour of the pension fund trustees) and £1.4bn of cash and cash equivalent investments (including £933m cash in the
Post Office network funded mainly by a Government loan facility), in accordance with investment restrictions set by the Government. It
also manages £847m of financial liabilities and acts as internal banker for the Group’s business units. The Group finances its operations
largely through cash generated from its operations, borrowings and grants.
Group Treasury derives its authority from the Royal Mail Holdings plc Board, and provides quarterly monitoring reports for their review. It
only has the authority to undertake financial transactions relating to the management of the underlying business risks; it does not engage
in speculative transactions and does not operate as a profit centre. All strategies are risk averse, and the treasury policy has remained
substantially unchanged during the year. The principal financial instruments are Treasury bills, Government gilt edged securities, deposits
and long and short term borrowings.
At the balance sheet date the Group is financed from the following facilities provided by BERR:
Purpose
Borrower
Royal Mail Group Ltd Acquisition funding
Royal Mail Group Ltd Capital Expenditure and Restructuring
Royal Mail Group Ltd General Purpose / Working Capital
Royal Mail Group Ltd General Purpose / Working Capital
Post Office Limited
Network cash repayable on demand
Facility
end date
2021-2025
2014
2014
*
2010^
Facility
£m
500
600
300
300
1,150
Utilised
£m
500
Nil
Nil
Nil
280
Average
loan
maturity
date
2023
-
-
-
2008
*Expires on the later of 2016 and the release of the pension escrow investments. This Royal Mail Group Ltd facility is subordinate to all
other creditors.
^On 18 April 2008, the facility was extended until March 2011.
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of
cash funds within the Group and the purposes for which they can be used.
The principal treasury risks arising from the 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 trading with overseas postal operators for carrying UK mail abroad and
delivering foreign origin mail in the UK, revaluation of the currency balances held to operate the Bureau de Change services within
Post Office Limited 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 (US$), Japanese Yen, Sterling and euro. The Group has a policy of matching receipts and payments for
individual currencies where possible and then hedging any material net exposure. The policy is that up to 80% of the forecast net
exposure is hedged with agreement of the internal business unit. Group Treasury operates a rolling 18-month programme, which is
subsequently reviewed on a quarterly basis. There has been no external hedge in place throughout the financial year 2007-08 due
to there being no material net exposure;
Bureau de Change balances are grouped into baskets of closely correlated currencies. Each currency basket (e.g. US$ or euro) is
then sold forward, up to 100% of the exposure, creating a liability to match the underlying asset;
significant foreign currency risk arising from capital purchase contracts, primarily in 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 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 up to 100% of these exposures;
the Group actively manages its liquidity risk through regular reviews of plan and budget projections against all available sources of
funding. The projected headroom on these sources of financing is assessed regularly for adequacy; 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.
19
Royal Mail Holdings plc
Operating and Financial Review (continued)
Business Environment
Regulation
Until the last few years, Royal Mail had 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, sets the quality of service
targets and determines compensation arrangements.
Post Office Limited is increasingly subject to regulation in financial services (Financial Services Authority) and in telephony (Ofcom). Post
Office Limited is an appointed representative of the Governor and Company of the Bank of Ireland, which in turn is regulated directly by
both the Irish Financial Regulator and Financial Services Authority (FSA) for conduct in the UK.
It is the Group’s policy to be fully compliant with the regulatory framework in which we operate. During 2007-08 we continued to
strengthen our compliance activities working in close liaison with our Regulators.
Postcomm Interim Review completed
Jan 2008
March 2001
Dec 2007
March 2001
Government Review of UK Postal Industry announced
Postcomm commences its Interim Review
focusing on cost reflective pricing
March 2007
March 2001
Royal Mail willing to accept Postcomm's proposal for
3rd Price Control, 4 year duration, including pension
risk corridor
Aug 2006
Jan 2006
Royal Mail gets go ahead for introduction of Pricing
in Proportion in August 2006
Postcomm commences its Strategic Review of
the UK Postal Market; Pricing in Proportion
introduced
May 2006
Aug 2005
Aug 2005
UK Postal Market opened up to full
competition
Feb 2005
Postcomm announces acceleration of
competition by 15 months to January 2006
Royal Mail agrees ground breaking Downstream
Access contract with UK Mail plc
Feb 2004
March 2003
May 2002
Royal Mail accepts Postcomm’s proposal for 2nd Price
Control, 3 year duration including new bulk mail
compensation scheme
Postcomm announces its decision on the
phased introduction of competition in the UK
market – an accelerated programme compared
to the rest of Europe aiming for full completion
by April 2007
May 2002
March 2001
March 2001
Royal Mail granted 15 year Licence; first two
year Price Control
Postal Services Act and creation of
Postcomm – independent regulator
July 2000
Competition
The Group’s business units now all operate in a competitive marketplace. Parcelforce Worldwide and GLS have been operating in an open
market since their inception. These units have demonstrated their ability to perform in a non-regulated and competitive environment,
which is reflected in their annual results.
Post Office Limited, due to a reduction in income from benefit payments and a significant and continuing decrease in Government use,
has developed revenue streams from financial services products (including car and home insurance, a ‘two-in-one’ credit card and range
of savings products) and its HomePhone and broadband services. These products are in direct competition with services offered by banks,
insurance and telephony companies, as are many of the services it continues to offer, e.g. bill payments, renewal of car tax discs and
travel services.
Royal Mail’s operating environment has gradually been opened up to competition since February 2004, with the letters market fully
liberalised in January 2006, well in advance of the rest of Europe. Competitors are now able to offer customers the opportunity of end-
to-end service for the collection, sorting and delivery of their mail.
20
Royal Mail Holdings plc
Operating and Financial Review (continued)
Major Regulatory Activity in 2007-08
In November 2007 the Group responded to Postcomm’s Strategy Review “Emerging Themes” and believes that four key regulatory
principles need to be addressed which will result in a truly competitive industry whereby all stakeholders benefit:
•
•
•
•
Realign prices to underlying costs - to create transparency for business customers and to ensure that competition is sustainable.
Some competitors in the UK are basing their entry strategies on unsustainable business models that target the historical cross-
subsidies in Royal Mail’s pricing structure, but cross-subsidies are fundamentally incompatible with an effectively functioning
competitive market. Royal Mail believes it should be allowed to remove these cross-subsidies, so that customers face the right pricing
signals and competitor models going forward are based on efficiency;
A narrower range of universal service products - focused on the needs of all social customers and fully funded through stamp prices.
Business customers tell us they do not need the protection that the Universal Service Obligation (USO) provides – Postcomm
describes many of these customers as “non-captive” and we agree, given the ample choice they have across mail and other
communications providers. The USO should therefore be refocused on stamped mail only, and prices should reflect the true costs of
this provision;
Full retail deregulation of business products - the explosion in access competition, representing 40% of bulk mail this year, is
encouraging business customers to demand more commercial and innovative responses from Royal Mail. However, Royal Mail is
prevented from responding rapidly by regulatory requirements such as an involved process for changing terms and conditions. Royal
Mail envisages a near term future in which the intense competition in the business mail market replaces the need for regulation; and
Continued operational integration of the postal network - we have put in place measures to ensure that competitors and customers
have access to our network on fair and reasonable terms. Separation of the postal network would create confusion for customers,
introduce complex and costly interfaces, endanger quality of service and put at risk delivery of the transformation programme.
In March 2007, Postcomm commenced an Interim Review. Royal Mail has asked Postcomm to consider the following pricing proposals in
this review, all of which are consistent with realigning prices to costs and entirely driven by the need to react to both the volume erosion
and significant downtrading that has been evident for the last eighteen months:
•
•
•
•
Reducing the headroom between Downstream Access (DSA) and the equivalent retail prices from a high level set to encourage
competition, to a level which reflects the underlying upstream costs, because entry has been significantly higher than the Price
Control assumptions;
Allowing Royal Mail’s retail business to price its non-USO bulk mail products by zone, thereby making prices of cheap to deliver areas
lower by up to 5% and prices of expensive to deliver areas higher by up to 5%. This does not change the price of the “one price goes
anywhere” stamp;
Allowing Royal Mail to further rebalance its prices so that it has the flexibility it needs to keep up with the pace of change in the
postal sector; and
Providing dispensation to Royal Mail with respect to bulk mail compensation and C factor adjustments if they are directly linked to
service failures relating to industrial action over Royal Mail’s transformation plan.
In January 2008, Postcomm confirmed the following decisions with respect to its Interim Review:
•
•
•
Its rejection of a change to the headroom between DSA and equivalent retail prices;
Its rejection of Royal Mail’s retail zonal application; and
Its agreement to increase the level of rebalancing.
Royal Mail continues to work with Postcomm on industrial action dispensation.
In December 2007, BERR announced a review of the UK postal services market to examine the impacts of liberalisation of UK postal
services, trends in the future market development and the likely impact of this on Royal Mail, alternative carriers and consumers. Royal
Mail has submitted its first response to this review in March 2008 followed by its second response in May 2008.
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 annual Corporate Social Responsibility report, to be published later in the
year.
21
Royal Mail Holdings plc
Operating and Financial Review (continued)
Key Relationships
The Group 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 Unite the Union - Communication and
Managers’ Association (CMA) sector representing managerial staff. The Group’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 trustee board for the main pension plan comprises an independent chairman plus 10 people including
employees, union representatives, a pensioner and independent members. They take external professional advice, from Sacker & Partners
LLP (legal), Watson Wyatt Limited (actuary), KPMG LLP (auditors) and PricewaterhouseCoopers LLP (financial). They are responsible for
obtaining regular actuarial valuations of the plan to satisfy the statutory funding objective, which involves reaching agreement with Royal
Mail Group on the statement of funding principles, the recovery plan and the schedule of contributions. There is a separate trustee board
for the senior executives pension plan which comprises the chairman plus 5 individuals including employees, pensioners and an
independent member.
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 c.15% of Royal Mail’s turnover and consequently the business 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.
Subpostmasters - The vast majority of Post Office Limited’s 13,852 Post Office branches are operated by subpostmasters and franchise
partners. The National Federation of Subpostmasters (NFSP) directly represents the interests of their members; currently the
membership stands at 9,297. As a consequence of this direct representation, the NFSP indirectly influences all other agents through the
representations and negotiations conducted on behalf of the majority of subpostmasters. Post Office Limited conducts annual
remuneration negotiations with the NFSP whilst also working closely with them on the many agent related aspects of Post Office Limited’s
Forward:four2eleven strategy, designed to deliver a viable physical network by 2010-11.
There are several major retailers who are also significant partners operating between them around 2,000 branches across the country.
Post Office Limited liaises closely with these companies to maintain successful working relationships. It is through the effective partnership
with the NFSP and these various retail organisations that the business takes into account the interests of all agents whilst seeking to
support the development and achievement of their sales potential and importantly the longer-term viability of the network.
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 and services are delivered at the right time at
competitive costs. A central purchasing team monitors compliance to Group policy in awarding contracts or new business and adheres to
agreed credit terms.
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 an impact on Royal Mail’s reputation, regardless of the quality of
service achieved.
The Regulator: Postcomm – Nearly 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 Royal Mail if it finds it in breach of
those conditions.
Shareholder – The Company is a plc 100% owned by the Government. The Shareholder Executive (within BERR) manages the
shareholder relationship with the Company as a commercial shareholder. While management of the Group therefore lies with the
Company’s Board of Directors, the Shareholder is kept up-to-date through quarterly performance reviews and is asked to approve the
Group’s strategic plan. Any new funding required by the Group (apart from short term borrowings of less than one year) can only be
approved by Government if it meets commercial principles.
22
Royal Mail Holdings plc
Operating and Financial Review (continued)
Segmental Analysis – Revenue and Profitability
In the following analysis, all references to operating profit are before exceptional items. The 2006-07 operating profit has been restated
for each UK operating business unit due to the impact of the new subsidiary Royal Mail Estates Limited, as explained in note 3. There is
no impact on the Group operating profit.
Group external revenue of £9,388m (2007 £9,179m) and operating profit before exceptionals of £162m (2007 £233m) are made up as
follows:
External revenue
Operating profit/(loss)
Business unit performance
Royal Mail
General Logistics Systems
Parcelforce Worldwide
Post Office Limited
Other businesses
Group
2008
£m
6,830
1,232
379
911
36
2007
£m
6,857
1,082
337
868
35
9,388
9,179
2008
£m
(3)
114
8
(34)
77
162
2007
£m
136
115
7
(108)
83
233
A further analysis of results, by business unit, is shown below:
Royal Mail
External revenue
Operating (loss)/profit before
exceptionals
2008
£m
2007
£m
6,830
6,857
(3)
136
External Revenue fell by £27m to £6,830m, despite this year being 53
weeks long and an average price increase on regulated products in
April 2007 of around 5%. A reduction in mail volumes offset the benefit
of the price rise together with increasing losses to competition and
customers switching further to lower priced products. For the
Addressed Inland products market, volumes declined 3.2% after
adjusting for the 53rd week.
Profitability continued to decline from an operating profit of £136m to an operating loss of £3m driven by decreasing revenues through
continued market decline and increased operating costs as a result of the additional 53rd week. The business has however made progress
on its strategic initiatives aimed at creating a more modern and efficient operation, delivering efficiencies to largely absorb the impact of
inflation and additional investment costs.
General Logistics Systems
External revenue
2008
£m
2007
£m
1,232
1,082
Operating profit before exceptionals
114
115
External revenue rose by £150m (13.9%) from £1,082m to £1,232m
including a £45m positive impact as a result of the strengthening of the
euro. The underlying growth of £105m (9.7%) results from higher
domestic and export parcel volumes and the impact of the acquisition
of ABX Belgium (completed 31 December 2006). Growth rates
continued to be particularly strong in Eastern Europe.
Operating profit decreased by £1m (0.8%), from £115m last year to £114m. This represents a good performance in light of the
challenging market conditions and also significant network and operational changes implemented to adapt the depot network to the
recently amended speed limit law in France.
Parcelforce Worldwide
External revenue
2008
£m
2007
£m
379
337
Operating profit before exceptionals
8
7
External revenue rose by £42m (12.5%), with volume growth of 12.2%
(10.4% after adjusting for the 53rd week). The majority of this growth
was attributable to increases in UK regional sales and international
import volumes. The average unit price has remained largely flat year
on year, principally due to increased price pressures across both
domestic and international markets.
Revenue growth has been underpinned by the continued focus on customer service and quality of service. Quality of service for the year
has improved by 0.3%, to 96.5%, whilst carrying significant extra volume in the network. The emphasis on customer service has led during
the year to a 4.4% improvement in first time deliveries.
Operating profit of £8m has grown by 10.9%. Inflationary cost pressures have been more than offset by the strong revenue growth and
improvements in operating efficiencies.
23
Operating and Financial Review (continued)
Royal Mail Holdings plc
Post Office Limited
Turnover
Social Network Payment
External revenue
Operating loss before exceptionals
Underlying operating loss before
exceptionals
2008
£m
2007
£m
761
150
911
793
75
868
(34)
(108)
(184)
(183)
Revenue shows an increase of £43m (5.0%) over the prior year; however
2008 includes an additional £75m compared to last year for the Social
Network Payment (SNP) from Government. This SNP has been recognised
as revenue and relates to a Government grant to match the related loss
during the year, of providing the network of public post offices that the
Secretary of State for BERR considers appropriate, and which would
otherwise not be provided.
Underlying trading revenue decreased by £32m (4.0%) mainly due to
reduced Card Account transactions, loss of remaining TV Licensing work
from the BBC and migration of motoring volumes to the DVLA web
application. These decreases have been partly offset by increases in Post
Office Limited’s new commercial products of which HomePhone revenue (now including broadband) is higher than last year. The business
also continues to expand its presence in the fiercely competitive financial services sector.
Overall expenditure has decreased year on year in line with transformation plans. Increases in subpostmasters costs were offset by
decreases in staff costs as expected. Improved performance of Post Office Limited’s joint venture (First Rate Exchange Service Holdings
Limited) and associate (Midasgrange Limited) also offset the revenue decline, ensuring the underlying operating loss was virtually flat year
on year, adjusting for the 53rd week.
Other businesses
External revenue
Operating profit before exceptionals
2008
£m
2007
£m
36
77
35
83
External revenue from other subsidiaries has increased slightly to
£36m (2007 £35m) and includes the consolidation of Romec Services
Limited. Operating profit includes the impact of revenue between
segments (refer to note 3) and is largely attributable to the activities of
Royal Mail Estates Limited. The decline in operating profit year on year
of £6m is driven by start-up losses of the new subsidiary, iRed
Redefining Document Management Ltd.
Principal Risks and Uncertainties
The Group uses a business-wide framework for the identification, assessment, treatment, monitoring and reporting of risk. The process
helps support business objectives by linking into business strategy, identifying and reacting to emerging risks, and developing cost effective
solutions to the management of risk.
The following Group-level risks have been identified and are being managed to support the long-term sustainability of the Group. The
impact of some of these risks could be impairment to the value of the Group’s brands - Royal Mail, GLS, Parcelforce Worldwide and Post
Office which are some of the most well known and trusted brands in the UK, and major intangible assets of the Group.
The financial restructuring package agreed with the Government needs to be managed effectively
The business has agreed a financial restructuring package that will allow it to restructure the business, invest in new equipment and
address the pension fund deficit that has a major impact on Group profit and balance sheet. Effective management of this package is
crucial for the business to remain within the agreed financial restructuring parameters and to avoid potential sanctions or penalties that
could ensue.
Ineffective investment in the operational network could affect productivity levels and our ability to compete effectively
The business is embarking on a major investment programme to replace equipment and technology that is nearing the end of its life
cycle. The investment programme needs to be deployed effectively and future ongoing investment in the Group’s operational network
maintained to ensure the Group’s ability to compete effectively in the open market.
The Group has a large pension fund deficit that requires funding
The Group’s pension fund deficit is being funded in line with a schedule of contributions agreed with the pension fund trustees. Future
pension risk has been mitigated in part by the closure to new employees of the final salary pension scheme and other measures
introduced as part of the pension reform commencing 1 April 2008. There remain uncertainties over the impact of fluctuations in the
equity and debt markets affecting the value of the funds’ assets and liabilities and the ability of the business to achieve the required levels
of profitability and maintain our contributions at the agreed level.
Weakness in the UK economy or recession is likely to have a detrimental impact on the Group’s profits
Ongoing changes in the global economy 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 mails revenue. Economic weakness or recession will have a direct
impact on mail volumes and consequently on Group profit.
The Government is the Company’s only shareholder and the Group may be affected by any future change in Government policy
The influence of public policy considerations on Government may adversely affect the Group’s ability to promote an effective business
strategy. This is particularly significant for Post Office Limited which is required to run our branch network as a commercial business and
is reliant on Government support for loss making branches.
24
Operating and Financial Review (continued)
Royal Mail Holdings plc
Group revenues and profit are subject to several uncertainties
The postal market has evolved rapidly as a result of liberalisation. Competitors are aggressively targeting business customers. Additionally
business customers are downtrading using less profitable products. In addition overall mail market volumes are declining. Technological
innovation is increasing, customers can now switch to alternative offerings and information can be sent or made available faster and, in
many cases, at a lower cost than traditional mail services. If technological substitution continues, market volumes will decrease further.
Furthermore Royal Mail’s regulatory regime impacts the business’s profitability in two key areas:
•
•
The Universal Service Obligation (USO) requires Royal Mail to maintain a national collection and delivery network. The USO results in
Royal Mail incurring a higher fixed cost base than our competitors. 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 competitors
procure more profitable products such as business mail. The USO does however ensure that Royal Mail has the largest distribution
network in the country – which may present future opportunities; and
Royal Mail’s prices for most of its letters products are determined by Price Control reviews and negotiation with Postcomm, which
can reduce our flexibility and profitability, leading to uncertainty over how the future Licence and regulatory regime will affect Royal
Mail.
The Group is subject to regulatory restrictions on our operations and the risk of penalties for non-compliance
Royal Mail’s postal operator’s Licence contains material restrictions on the operation of the business. These include:
•
•
•
Obligations over the delivery and collection of mail;
Restrictions over the freedom to set prices; and
Obligations to give competitors access to our network.
If Royal Mail breaches certain postal operator's Licence conditions or other regulatory requirements it may be subject to financial
penalties. In addition to our postal operator’s Licence the Group is also subject to oversight by other regulators. This affects Post Office
Limited which has to satisfy the FSA's requirements as an appointed representative of The Governor and Company of the Bank of Ireland
who are regulated by the FSA in respect of investment, mortgage and insurance intermediation activity in the UK. It is also subject to anti-
money laundering regulations issued under the Proceeds of Crime Act 2002 and enforced by HM Revenue and Customs. Post Office
Limited is also licensed as a telephone service provider by Ofcom, who require service providers to issue and adhere to Codes of Practice.
Without a continued change of culture within the organisation future development may be affected
The business has undergone, and will continue to undergo, a significant amount of change. Additionally the changing and uncertain postal
market place, the impact of competition and regulation and increased customer expectations place major challenges on all employees to
adapt and improve productivity to levels that will allow the business to compete effectively.
These challenges need to be met by ongoing cultural change within the organisation. Without a flexible, efficient and co-operative culture,
Royal Mail could become loss making as mail volumes decline and labour rates increase. Significant industrial action could have a major
detrimental effect on the Group’s reputation and profits.
The Group’s business activities are time critical and if key infrastructure facilities were disrupted it could have an impact on
results
The business is subject to a number of operational risks to its nationwide delivery and retail outlet networks, including natural disasters,
fire, flood, explosion, possibility of work stoppages or civil unrest, transport infrastructure disruption, power failures, unavailability of key
supplies, breakdown or failure of equipment, health pandemics, terrorism and the normal hazards associated with running a complex
infrastructure. A major disruption could have an adverse impact on customer services as well as business and operating results.
The Group may be affected by future environmental and related fiscal measures
The Group operates a large vehicle fleet and a substantial property portfolio that consume large amounts of energy. Although the Group
is disposing of surplus property and is deploying a Carbon Management Programme, it may be affected by future environmental
measures and adverse fiscal impact from increased energy costs and “green” taxation. The increasing awareness and focus on
environmental issues may also impact on the Group’s current product and service offerings.
The Group operates a substantial treasury operation and is exposed to foreign currency risk and fuel price risk
The Group is exposed to foreign currency risk and fuel price risk. The former is due to trading with overseas postal operators for carrying
UK mail abroad and delivering foreign origin mail in the UK, revaluation of currency balances held to operate the Bureau de Change
services and various sales and purchase contracts denominated in foreign currency. The fuel price risk arises from operating a large
vehicle fleet and on jet fuel risk from purchasing 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 or a negative impact on profit due to increased costs.
The Group is subject to changes in both domestic and European regulation and legislation, which could expose it to possible
additional costs
Various changes to European or domestic law will have a direct impact on the Group; such as the European Working Time Directive,
speed restrictions on the Group’s 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.
25
Royal Mail Holdings plc
Operating and Financial Review (continued)
Summary
The Group has produced a robust financial performance with operations remaining profitable before exceptional items and cash
generative even with difficult trading conditions and challenges experienced during the year. Despite continued efficiency improvements,
the Letters business made a loss as revenues have continued to fall with core market decline, increased losses to competition and
customers downtrading further to cheaper products. Post Office Limited’s underlying performance is broadly flat, largely due to losses in
traditional income streams which have been partially mitigated by new commercial product revenues and cost savings. Both of our parcels
businesses, GLS and Parcelforce Worldwide, have improved their revenue performance, with strong growth underpinning solid profits in
highly competitive markets this year.
Our main achievement is to have secured landmark agreements on pay, pensions and modernisation for the business - we are now well
placed to press ahead with the vital investment in Royal Mail Letters to improve our efficiency and productivity. With the full support of
our people, our strategy to modernise and transform the Letters business - with investment in both our people and technology – will
provide the platform for new and more flexible products and services for our customers, who remain at the heart of everything we do.
Ian Duncan
Group Finance Director
19 May 2008
Understanding the Operating and Financial Review
Statement of compliance
This OFR is intended to develop the Group’s narrative reporting to meet many of the recommendations of the Accounting Standards
Board’s ‘Reporting Statement of Best Practice on the OFR’. This OFR ensures compliance with the legal requirement under the Companies
Act to provide a Business Review and is referenced from the Directors’ Report.
We will continue to review the narrative disclosures we provide in the annual Report and Accounts to ensure that the disclosures provided
meet the requirements of our stakeholders.
Cautionary statement
The OFR focuses on matters that are relevant to the interest of the Shareholder of the Company. The purpose of the OFR is to assist the
Shareholder of the Company in assessing the strategies adopted by the Company and the potential for those strategies to succeed. It
should not be relied on by any other party or for any other purpose.
Where this OFR contains forward looking statements, these are made by the Directors in good faith based on the information available to
them at the time of their approval of this report. These statements should be treated with appropriate caution due to the inherent
uncertainties underlying any such forward looking information.
26
Royal Mail Holdings plc
Royal Mail Holdings plc Board
Non Executive Chairman
ALLAN LEIGHTON (55) 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 President and Deputy
Chairman of Loblaw Companies Ltd, Deputy Chairman of George Weston Limited and Selfridges and Co Ltd, as well as a Non Executive
Director of BSkyB.
Non Executive Directors
DAVID FISH (59) 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.
President of Snackfoods Europe, and held European Vice-President positions in marketing and personnel. He has also been Chairman of
Christian Salvesen and is currently Executive Chairman of United Biscuits Topco Limited.
RICHARD HANDOVER CBE (62) joined the Board in January 2003. He is the Senior Independent Director and is Chairman of the
Nomination Committee, and a member of the Remuneration Committee and the Audit and Risk Committee. Richard was Chairman of WH
Smith plc until January 2005, and is currently Non Executive Chairman of Alexon Group plc.
BARONESS MARGARET PROSSER OBE (70) joined the Board in November 2004 and is a member of the Nomination Committee, Audit
and Risk Committee and Remuneration 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 Deputy Chair of the Commission for Equality and Human Rights.
HELEN WEIR CBE (45) joined the Board in January 2006 and is Chair of the Audit and Risk Committee. Helen is Group Executive Director
at Lloyds TSB plc with responsibility for UK Retail Banking, having joined as Group Finance Director in 2004. Prior to that she was Group
Finance Director of Kingfisher plc. She is a member of the Said Business School Advisory Board, and previously sat on the Accounting
Standards Board. Helen is a Fellow of the Chartered Institute of Management Accountants.
Executive Directors
ADAM CROZIER (44) joined the Company in February 2003. He is Group Chief Executive, and leads the Group Executive Team, and is the
Company’s Shareholder representative on the Board of Camelot Group plc. Adam is a Non-Executive Director of Debenhams plc, and
Chairman of the Employers’ Forum on Disability. He was Chief Executive of the Football Association from 2000-2003. Between 1988 and
1999 he held a number of senior roles at Saatchi and Saatchi Advertising, including that of Joint Chief Executive from 1995.
ALAN COOK CBE (54) joined the Company in March 2006 as Managing Director of Post Office Limited, having been a Non-Executive
Director since February 2005. He is a member of the Group Executive Team, Chairman of Post Office Financial Services and First Rate
Exchange Services Holdings Limited. Alan was previously Chief Executive of National Savings and Investments, prior to which he had been
Chief Operating Officer of the Prudential Assurance Company. Alan is also on the Council of the Institute of Financial Services, and on the
board of the Financial Ombudsman Service.
IAN DUNCAN (47) was appointed as Group Finance Director in September 2006, and is a member of the Group Executive Team and the
GLS Supervisory Board. He joined from Westinghouse Electric Company based in the USA, where he had been Chief Financial Officer since
1999. Prior to joining Westinghouse, Ian was Corporate Finance Director at British Nuclear Fuels plc and before that in corporate finance
with Dresdner Kleinwort Benson Ltd and Lloyds Merchant Bank Ltd. Ian started his career with Deloitte & Touche in London, and is a
member of the Institute of Chartered Accountants of England and Wales.
MARK HIGSON (52) joined the Company in November 2007 as Managing Director of the Letters Business, and is a member of the Group
Executive Team. Mark was previously divisional Chief Executive and Group Operations Director of BPB plc. Prior to that, he held senior
positions at Courtaulds Plc, including CEO at its UK Coatings division. He has also worked at HJ Heinz and British Aerospace.
27
Royal Mail Holdings plc
Royal Mail Holdings plc Board (continued)
Company Secretary
JONATHAN EVANS OBE (56) 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, Secretary to the Audit
and Risk, Remuneration and Nomination Committees, a Trustee Director of the Royal Mail Pension Plan, Chairman of the Royal Mail
Senior Executives Pension Plan and a member of the GLS Supervisory Board.
Directors who left during the year
IAN GRIFFITHS 30 April 2007
DAVID BURDEN 31 July 2007
SIR MICHAEL HODGKINSON 31 August 2007
JOHN NEILL 31 August 2007
TONY McCARTHY 7 December 2007
STEPHEN CARTER 8 January 2008 (appointed 1 September 2007)
28
Royal Mail Holdings plc
Directors’ Report
The Directors present the Group accounts for Royal Mail Holdings plc. These accounts relate to the 53 weeks ended 30 March 2008
(2007 52 weeks ended 25 March 2007).
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 and Chief Executive’s Statement, Annual Review
and the Operating and Financial Review.
Results and dividends
The loss before taxation amounted to £77m (2007 £313m profit). After taxation, the profit was £135m (2007 £286m). Of the profit after
taxation, £nil (2007 £nil) is attributable to minority interests. The Directors do not recommend a dividend (2007 nil dividend).
Political and charitable contributions
During the year the Group made charitable contributions of £2m (2007 £1m). No political contributions were made in the year (2007
£nil).
Research and development
Research and development expenditure during the year amounted to £1m (2007 £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
Department for Business Enterprise and Regulatory Reform (BERR) Better Payment Practice Code. Copies of this can be obtained from
the BERR. As the Company is a non-operating company, the creditor days are zero. The creditor days of the operating subsidiaries are set
out in their accounts.
Land and buildings
The net book value of the Group’s land and buildings, based upon a historic cost accounting policy and excluding fit-out, is £669m (2007
£667m). In the opinion of the Directors, the aggregate market value of the Company’s land and buildings exceeds this net book value by
£713m (2007 £798m).
Financial instruments
Details of financial instruments and financial risk management objectives and policies are shown in note 24 and note 23 respectively.
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.
Audit information
The Directors confirm that, so far as they are aware, there is no relevant audit information of which the auditors are unaware and that
each Director has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the
auditors are aware of that information.
Qualifying third party indemnity provisions for Directors
A partial qualifying third party indemnity provision (as defined in section 234 of the Companies Act 2006) was and remains in force for
the benefit of all the Directors of the Company and former Directors who held office during the year. 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
The Group employs over 181,000 people (2007 almost 185,000) in our UK wholly owned subsidiaries. An analysis of 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, TV screens 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.
29
Royal Mail Holdings plc
Directors’ Report (continued)
In 2003, 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 them
with the skills they need, to develop pride in and understanding of the business and to drive respect for colleagues - in short, to ensure
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.
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 for all our people a set of core behaviours that determine how we treat each other, our customers and
our Shareholder;
building a fluid, innovative and 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
The Group 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 2008 CSR Report, due
to be published later in the year.
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. Further details are provided under funding in note 2 to the accounts.
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
19 May 2008
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 and revised in June 2006. The Company has fully complied with the Code during the year. 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 Board
The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance. At the end of the year, the
Board comprised a Non Executive Chairman, four Executive Directors and four Non Executive Directors. At that date there were one
executive and two non-executive Director vacancies. The biographies of each of the Directors, setting out their current roles,
commitments and previous experience, are on pages 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 strategic plans, financial statements, acquisitions and
disposals, major contracts, projects, and capital expenditure. It delegates responsibilities to the Board Committees detailed below. For each
scheduled meeting of the Board, the Company Secretary, on behalf of the Chairman, collates and circulates the papers, 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 three-year terms.
The Board considers that each of the 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. During the year Richard Handover replaced Sir Mike Hodgkinson as 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. This is led by the Senior Independent Director with the support of the Company Secretary. The
evaluation is conducted by way of a formal questionnaire that enables Directors’ perspectives on the effectiveness of the Board and its
Committees to be fed back to the full Board. Performance evaluations of Board Committees are conducted by the Chairmen of the
respective Board Committees. The Non Executive Directors, led by the Senior Independent Director, review the performance of the
Chairman and the Executive Directors. The Executive Directors, led by the Group Chief Executive, review the performance of the Non
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 in which they receive information about
the Group, the role of the Board and matters reserved for its decision, the role of the principal Board Committees, the Group’s Corporate
Governance arrangements and the latest financial information about the Group. This is supplemented by visits to key business locations.
The Group 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 them.
31
Royal Mail Holdings plc
Corporate Governance (continued)
Number of meetings
During the year, the Directors attended the following number of meetings of the Board and its main Committees with the maximum
number that each could have attended shown in brackets.
Number of meetings during the year
12
5
9
9
Board
Audit and
Risk
Committee
Remuneration
Committee
Nomination
Committee
Non Executive Chairman
Allan Leighton
Executive
Adam Crozier
Alan Cook
Ian Duncan
Mark Higson
Non Executive
David Fish
Richard Handover
Baroness Margaret Prosser
Helen Weir
Former Directors
David Burden
Ian Griffiths
Tony McCarthy
Sir Mike Hodgkinson
John Neill
Stephen Carter
11 (12)
12 (12)
12 (12)
12 (12)
5 (5)
11 (12)
10 (12)
10 (12)
9 (12)
4 (4)
0 (1)
8 (9)
5 (5)
3 (5)
3 (4)
9 (9)
7 (9)
5 (6)
9 (9)
9 (9)
8 (9)
3 (3)
4 (5)
5 (5)
3 (3)
2 (2)
Outside appointments
The Board believes that there are significant benefits to both the Group and the individual from Executive Directors’ accepting Non
Executive Directorships of companies outside of the Group. The Board’s policy is normally to limit Executive Directors to one Non
Executive Directorship, for which the Director may retain the fees (see the Directors’ Remuneration Report on page 42 for details).
Board Committees
The following Committees deal with specific aspects of the Group’s governance. The full terms of reference for each of the principal
Committees are available on the Company’s website (www.royalmailgroup.com) or on written request from the Company Secretary. The
details of Committee membership shown are as at 30 March 2008.
32
Royal Mail Holdings plc
Corporate Governance (continued)
Group Executive Team
Chair
Adam Crozier
Membership Alan Cook (Managing Director Post Office Limited), Robin Dargue (Chief Information Officer), Ian Duncan
(Group Finance Director), Jonathan Evans (Company Secretary), Mary Fagan (Group Corporate and
Government Affairs Director), Mark Higson (Managing Director Letters), Alex Smith (Group Director of
Strategy) and David Smith (Managing Director Parcelforce Worldwide).
Role
The Committee’s responsibilities include:
(cid:131) to develop and monitor deployment of the Group’s strategy, annual operating plans and budgets;
(cid:131) to review operational activities, and set policies where these are not reserved to the Board; and
(cid:131) 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
Helen Weir
Membership Richard Handover, Baroness Margaret Prosser.
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:
(cid:131) to monitor the integrity of the financial statements of the Group;
(cid:131) to review the Group’s internal financial control system and, unless addressed by the Corporate Risk
Management Committee or by the Board itself, internal control and risk management systems;
(cid:131) to monitor and review the effectiveness of the Group‘s Internal Audit function;
(cid:131) to recommend to the Board for Shareholder approval the appointment of the external auditors, and
to approve their remuneration and terms of engagement;
(cid:131) to monitor and review the external auditors’ independence, objectivity and the effectiveness of the
audit process;
(cid:131) to develop and implement policy on the engagement of the external auditors to supply non-audit
services; and
(cid:131) where the Committee’s monitoring and review activities reveal cause for concern or scope for
improvement, to make recommendations to the Board or management on action needed to
address the issue.
Audit & Risk Committee report
See Internal control on page 36
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 Committee has
determined what work can be provided by the external auditors and the approval processes associated with them. The Committee
monitors the level of non-audit fees paid to the external auditors.
33
Royal Mail Holdings plc
Corporate Governance (continued)
Remuneration Committee
Chair
David Fish
Membership Richard Handover, Baroness Margaret Prosser.
Role
The Committee’s responsibilities include:
(cid:131) to determine and recommend for the Board’s approval, the framework for the remuneration of the
senior executives of the Group;
(cid:131) to determine the individual remuneration arrangements for the Chairman, the Executive Directors
and the Company Secretary, subject where necessary to the consent of the Secretary of State; and
(cid:131) to agree the targets for any performance-related incentive schemes applicable to senior executives.
Remuneration Committee Report
See page 37.
Nomination Committee
Chair
Richard Handover
Membership David Fish, Baroness Margaret Prosser.
Role
The Committee’s responsibilities include:
(cid:131) to lead a formal, rigorous and transparent process for appointments to the Board of the Company,
to the boards of subsidiaries and to other senior executive positions;
(cid:131) to advise the Board on succession planning for the positions of Chairman, Chief Executive and all
other Board appointments and other senior appointments; and
(cid:131) to keep under review the balance of Board membership to ensure that it has the required mix of
skills, knowledge and experience.
Nomination Committee Report
The Committee met nine times during the year. The Committee’s main focus was on the selection and recruitment of Non-
Executive and Executive Directors and other senior executives. The Committee took external advice from executive search
consultants, and considered internal candidates where appropriate. All Board appointments require the consent of the
Shareholder, representatives of whom were involved in the selection, giving input to the Committee
In addition to the principal Committees above there are also the following Committees:
Corporate and Social Responsibility Governance Committee
Chair
Adam Crozier
Membership Group Director of People and Organisational Development, Managing Directors of business units, Director of
Corporate and Social Responsibility, Head of Environment, Head of Health, Head of Safety and other senior
executives from across the Group.
Role
The Committee’s responsibilities include:
(cid:131) to provide an overview of the social environmental and ethical impacts of the Group’s activities; and
(cid:131) to make recommendations on Corporate and Social Responsibility standards and policies.
Corporate and Social Responsibility Committee Report
The Committee is chaired by the Group Chief Executive and met on four occasions during the year. The principal activity of the
Committee was to undertake a thorough review of the Group’s CSR Strategy, Engagement & Inclusion and Social policies.
34
Royal Mail Holdings plc
Corporate Governance (continued)
Pensions Committee
Chair
Ian Duncan
Membership Doug Evans, Jon Millidge.
Role
The Committee’s responsibilities include:
(cid:131) to review funding, benefits, scheme structure and strategic developments impacting on the Group’s
occupational pension schemes; and
(cid:131) to represent the Group in discussions with the Trustees of the Group’s occupational pension
schemes.
35
Royal Mail Holdings plc
Internal control
Overview
The Directors are responsible for the Group’s system of risk management and internal control as well as the timely review of its
effectiveness. The system 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, operational, compliance risks and risks to
reputation. The Board regularly reviews this process. The process has been in place throughout the year and up to the date of approval of
these 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 risk
management processes and the control environment. The Committee reviews the scope of work, authority and resources of the Internal
Audit and Risk Management function. The Audit and Risk Committee regularly reviews the Group risk profile.
Key control processes
The key control processes are ongoing and include the following:
(cid:131) 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;
(cid:131) 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;
(cid:131) reviews and approval by the Board of budgets and forecasts;
(cid:131) monthly reviews of performance by reference to key performance indicators, updated forecasts and information on the key risk
areas;
(cid:131) 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;
(cid:131) reviews of the scope of the work of the external auditors by the Audit and Risk Committee and any significant issues arising;
(cid:131) reviews by the Audit and Risk Committee of accounting policies and delegated authority levels; and
(cid:131) consideration by the Board of the major risks facing the Group and procedures to manage them.
Risk Management process
The process consists of formal identification by management at each level of the Group of the key risks to achieving their business
objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated. The process also
includes:
(cid:131) bi-annual certification by management that they are responsible for managing the risks to their business objectives and that the
internal controls are such that they provide reasonable but not absolute assurance that the risks are appropriately identified,
evaluated and managed; and
(cid:131) independent assurance by Internal Audit as to the existence and effectiveness of the risk management activities described by
management.
The system of risk management and internal control 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
This Report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations). The Company’s
remuneration policy follows the Combined Code and best practice in other UK organisations. The Royal Mail Group strategic plan requires
fundamental change to make sure that customers are given high quality services which are good value for money. The Board believes
that to achieve this it is necessary to have people of the right calibre who are given incentives to produce results which benefit customers
and the Shareholder.
The parts of this Report that have been audited are:
• Directors’ emoluments with respect to 2007-08;
• Performance-related, annual bonuses outturn for 2007-08;
• Company Awards and Bonus Awards under Long Term Incentive Plans (LTIP); and
• Pensions.
Directors’ emoluments with respect to 2007-08
Annual performance bonus
Current
annual
salary/fees
£000
Salary/
fees
£000
Performance-
related bonus
including
ColleagueShare
£000
Waived
into
LTIP*
£000
Annual
performance
bonus
payable in
June
£000
Waived
bonus
from prior
years
£000
Total excluding
LTIP, pensions and
pension
supplement
Compensation
for loss of
office
£000
Benefits
£000
2008
£000
2007
£000
Non Executive Chairman
Allan Leighton
Executive
Adam Crozier
Alan Cook
Ian Duncan
Mark Higson 1
Non Executive
David Fish
Richard Handover
Baroness Margaret
Prosser
Helen Weir
Former Directors
David Burden 2
Ian Griffiths 3
Tony McCarthy 4
Stephen Carter 5
Sir Michael Hodgkinson 6
John Neill 6
Bob Wigley
Total 2008
Total 2007
20
20
180
-
180
633
257
300
420
45
60
45
43
-
-
-
-
-
-
-
633
257
300
170
45
48
43
43
94
42
236
11
34
15
-
381
142
142
82
(191)
(70)
(70)
(41)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
190
72
72
41
-
-
-
-
-
-
-
-
-
-
-
1,823
1,991
927
(372)
2,628
2,513
1,513
(609)
555
904
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
18
-
20
18
88
6
-
-
-
-
4
1
14
-
-
-
-
151
287
-
200
200
-
-
-
-
-
-
-
-
-
500
-
-
-
-
-
843
347
460
217
45
48
43
43
98
543
250
11
34
15
-
500
3,197
859
346
3647
-
45
45
40
38
370
813
459
-
83
35
25
-
-
3,722
* The annual performance bonus waived into LTIP is explained on page 40.
1 Mark Higson joined the Board on 5 November 2007
2 David Burden left the Board on 31 July 2007
3
Ian Griffiths left the Board on 30 April 2007
4 Tony McCarthy left the Board on 7 December 2007
5 Stephen Carter joined the Board on 1 September 2007 and left on 8 January 2008
6 Sir Michael Hodgkinson and John Neill left the Board on 31 August 2007
7
Ian Duncan joined the Board on 1 September 2006, therefore this represents pro-rated payment for the year.
As noted above there has been a number of changes to the Board. 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 that is
not paid until the LTIP matures.
37
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
In addition some Directors receive supplements in lieu of pension contributions (see page 42):
Adam Crozier1
Alan Cook
Ian Duncan
Mark Higson
Ian Griffiths
Cash supplement in lieu of pension (see page 42)
2007
£000
140
100
45
-
157
442
2008
£000
208
105
75
68
13
469
Total emoluments excluding
LTIP and pensions
2007
£000
999
446
409
-
970
2008
£000
1,051
452
535
285
556
1 Adam Crozier elected with effect from August 2006 to take his pension provision above the earnings cap as a cash supplement.
The total Directors’ remuneration, excluding pensions and Long-Term Incentive Plan and including cash supplement in lieu of pension, is
£3,666,000 (2007 £4,164,000).
These payments are consistent with the policy of the Remuneration Committee. The following sections describe the Committee, its
general policy and the main elements of remuneration.
Remuneration Policy
The Remuneration Committee
The Board retains overall accountability for the framework and costs of executive remuneration and the terms of the service contracts
offered to all Executive Directors. These also require the consent of the Secretary of State for Business, Enterprise and Regulatory
Reform. The Secretary of State also gives consent for the remuneration arrangements for 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 ending of employment, giving careful consideration to the circumstances of the particular case and the
ability of the individual to mitigate.
The Remuneration Committee is made up wholly of independent Non Executive Directors. Membership of the Committee is given on page
34. The Chief Executive, Adam Crozier, and the Group Director People & Organisational Development, may attend these meetings by
invitation and 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 it on the particular topic under discussion.
During 2007-08, 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 PriceWaterhouseCoopers), Deloitte & Touche LLP, Hay
Management Consultants and Watson Wyatt Limited. Internal support is primarily provided by the Group Director People & Organisational
Development, and from the Company Secretary, Jonathan Evans. Other advice and information has been provided by specialists from the
People & Organisational Development and Finance Departments.
During the year, advice was given to the Company by Watson Wyatt Limited on pensions 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 - both short and long-term; and
the system of remuneration should bring together the interests of senior executives, customers and the Shareholder.
The policy for senior executives takes into account pay and employment conditions elsewhere in the Group.
The Committee regularly reviews the package and its competitiveness against appropriate marketplaces. The Committee aims to ensure
that the package is proportionate and effective, and that it follows accepted best practice.
The main components of remuneration
The main components for Executive Directors are: basic salary, an annual performance-related bonus, a Long-Term Incentive Plan (LTIP),
pension and other benefits. The Committee believes that there should be a particular emphasis on performance-related elements.
38
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 considers information from several sources so that a fair comparison can be made with enterprises of a
similar size and complexity to Royal Mail. This data is provided by independent consultancies, usually based on the published annual
reports of other organisations. Increases are recommended where the Committee believes that it is necessary to reflect contribution,
increased individual responsibilities and market levels. The Secretary of State’s consent is required for all material changes to Directors’
remuneration.
There was no increase to base salaries for Executive Directors for 2007-08. For 2006-07 the increase was 2.9%.
Performance-related, annual bonus 2007-08
For 2007-08, the annual bonus plan followed the model of the previous year, which included the following weightings:
•
•
all Business roles had a weighting of 30% on Group performance and 70% Business performance. This applied to the Managing
Directors of Letters and Post Office Limited; and
all Group roles had a weighting of 90% on Group performance and a further 10% weighting given to Post Office Limited’s
performance in view of the importance of supporting the recovery of that business.
The following tables show the make up of the annual bonus plan as percentages of annual salary.
Maximum levels
Chief Executive
Other Executive Directors
On-target levels
Chief Executive
Other Executive Directors
Threshold levels
Chief Executive
Other Executive Directors
Profit
70%
56%
Profit
36%
29%
Profit
15%
12%
Service Quality
30%
24%
Service Quality
24%
19%
Service Quality
15%
12%
Total
100%
80%
Total
60%
48%
Total
30%
24%
The financial target was based on Group profit.
The Service Quality measures were:
•
•
•
•
•
•
•
•
•
Retail First Class;
Retail Second Class;
Bulk First Class;
Bulk Second Class;
Bulk Third Class;
Special Delivery;
Parcelforce 24;
A Post Office Limited Customer Service Effectiveness measure; and
A Post Office Limited measure of new products sold.
Executive Directors also participate in the ColleagueShare plan on the same terms as all other eligible employees. This is explained in note
2 on page 53.
Long-Term Incentive Plans
A three-year LTIP was in place for 2005-06 to 2007-08 and a further three-year plan covers the period 2007-08 to 2009-10. This
arrangement will allow the last plan to come to an end at the same time as the next Postcomm price control review. Half of the awards
for 2007-08 are attributed to the 2005-06 to 2007-08 plan and the remaining half to the 2007-08 to 2009-10 plan.
Performance is measured by Return on Total operating Assets (ROTA).
For the three years 2005-06 to 2007-08 the principles of the plan were as follows:
(a) Annual Company Performance Awards which accrue 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 is 25% of annual base salary and for exceptional performance
this rises to a maximum of 37.5%.
39
Directors’ Remuneration Report (continued)
Royal Mail Holdings plc
(b) Bonus Awards. A Bonus Award can be made each year by the Remuneration Committee. These are only made in situations where
the Director waives a proportion of their annual bonus. Bonus awards do not exceed the amount waived. A Director has the
discretion to waive a maximum of one half of any annual bonus up to the on-target level. If a bonus above on-target would
otherwise be payable, then three quarters of this additional amount will be compulsorily waived.
(c) A Multiplying factor. Company and Bonus Awards may be increased by a factor that measures ROTA across the plan. If the on-
target level is achieved for the relevant period then each of the Company Awards and Bonus Awards to which it applies may be
increased by an additional one third. In the case of exceptional performance, then up to a maximum addition of 100% can be added.
Payments under the plan will be made in June 2008.
The 2007-08 to 2009-10 LTIP has the same principles as the previous LTIP.
The Company and Bonus Awards for 2007-08 are effectively shared equally between the two plans.
The performance targets for the last two years of the 2007-08 to 2009-10 plan are still under discussion with the Government.
Company Awards
These are measured against an annual ROTA target. ROTA incentivises the productive value of the business and emphasises the need to
make efficient use of all operational assets. It covers the need to make a proper return both on any new investments that are made and
on the existing asset base.
For 2005-06 the ROTA target was 11.2% and the Company’s achievement was 13.7%, 22% above the target and above the stretch of
13.4%. This resulted in Company Awards of 37.5%. For 2006-07 the ROTA target was 4.2% with a stretch of 7.1%. A ROTA of 5.4% was
achieved but the Remuneration Committee exercised its discretion to cap this at the on-target level of 4.2%, resulting in a Company
Award of 25%.
For 2007-08 the following table against annual ROTA applied:
Royal Mail ROTA achievement
Percentage of Base Salary
2.1%
5.1%
25%
37.5%
The outturn achievement was 3.9%, resulting in a Company Award of 32.5%.
Bonus Awards
As described above, a Director may waive a maximum of one half of any annual bonus up to the on-target level and must waive three
quarters of any bonus earned above the on-target level. If a proportion of annual bonus is waived then a Bonus Award may be made
within the LTIP, not exceeding that value.
Multiplying Factor
The Multiplying Factor is dependent upon cumulative ROTA over 2005-06 to 2007-08.
The cumulative ROTA works as follows. Targets for the end of the third year are 15.9% at the threshold level, 17.4% at the on-target level
and 25.7% at the maximum. To ensure consistency of performance there are intermediate targets at March 2007 of 13.6% at the
threshold level, 15.1% at the on-target level and 20.3% at the maximum. As the on-target level of cumulative ROTA was exceeded at the
end of March 2007, the percentage multiplier at that position on the performance scale was applied to the awards made so far. The
cumulative ROTA for the preceding 2 years was 19.0% and gave a multiplier of 1.84. Across the whole of the three-year period, the
cumulative ROTA achieved was 22.6% and this gave a multiplier of 1.75, which was applied to Company and Bonus Awards for 2007-08.
Benefits
Benefits include the provision of a company car, health insurance, relocation costs, or the cash equivalent of any benefits not taken.
Pensions
The Group has a liability to pay pensions in respect of Directors’ services and, for some Executive Directors, makes contributions to
pension schemes for this purpose. The Company pays a cash supplement to Directors whose contributions to the Company scheme are
restricted by the scheme-specific earnings cap. The Company continues to apply the scheme-specific earnings cap, indexed by inflation
each year, as a constraint on the amount of salary that is pensionable through the Company scheme.
Following a review of its pension arrangements, the Company has introduced changes to its pension provision for all employees including
Executive Directors with effect from 1 April 2008. From 1 April 2008 the defined benefit pension plans have been closed to new members
and pension for future service accrues on a career salary basis. Furthermore from 1 April 2010 the normal retirement age under the
plans increase to age 65 and the earliest age for receipt of a reduced pension will be 55.
40
Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Fixed and performance-related elements of Executive Directors’ remuneration (excluding pensions)
For 2007-08, 33% of Directors’ potential annual earnings related to fixed elements whilst 67% related to annualised performance
elements, for the Group Chief Executive 30% was fixed and 70% was variable. The element of remuneration at risk to performance is that
available through the Long-Term Incentive Plan and the performance-related annual bonus.
Service contracts
The 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 as at 30 March 2008:
Date of contract
Expiry date of current service
contract
Unexpired term
(months)
Non Executive Chairman
Allan Leighton
Executive Directors
Adam Crozier
Alan Cook
Ian Duncan
Mark Higson
25 March 2008
25 March 2009
1 February 2003
1 March 2006
1 September 2006
5 November 2007
12
12
12
12
12
The Non Executive Directors do not have service contracts. The dates of the current Non Executive Director appointments are as follows:
Non Executive Directors
David Fish
Richard Handover
1 January 2003
1 January 2003
30 September 2008
30 September 2008
Baroness Margaret Prosser
1 November 2004
31 October 2010
Helen Weir
1 January 2006
31 December 2008
6
6
31
9
All Executive Directors have a contracted 12-month notice period from the Company; the Director must give six-months notice. The
compensation for loss of office is a payment of 12-months basic salary, which may be subject to mitigation. David Burden retired from
the Company with effect from 31 July 2007.
Non Executive Directors
The Company is committed for the full term of appointments for Non Executive Directors, including the Chairman. The fees paid to the
Non Executive Directors are determined by the Executive Directors and approved by the Secretary of State. Independent market surveys
are consulted in determining them. Fees comprise a basic fee for Board membership and, as appropriate, additional fees for the
membership or chairmanship of the Audit and Risk, Remuneration and Nomination Committees, and for the Senior Independent Director.
Details of the fees are given below.
Performance-related, annual bonuses outturn for 2007-08
The details of the bonus plan are given on page 40. Bonuses awarded for 2007-08 have suffered due to the period of industrial action,
although financial performance has been better than budget. The Remuneration Committee also disallowed any short-term financial
benefits from the delays in implementing planned projects that were a result of industrial action. In the case of Adam Crozier the bonus
awarded was 60.1% of the maximum. For Ian Duncan it was 58.9%, for Alan Cook 68.7% and for Mark Higson 61.5%. As the Company had
exceeded its financial target it was decided to award the non-executive Chairman a bonus of £180,000.
Ian Griffiths and Tony McCarthy were made no awards in respect of their part-year service during 2007-08.
Adam Crozier, Alan Cook and Ian Duncan were awarded £800 ColleagueShare stakeholder dividend for the year. Mark Higson was
awarded a pro-rata amount of £317.
41
Directors’ Remuneration Report (continued)
Royal Mail Holdings plc
Company Awards and Bonus Awards under the Long Term Incentive Plans
The Remuneration Committee policy is that a high proportion of total remuneration is at risk to performance.
Awards made under the 2005-06 to 2007-08 plan are not payable until June 2008, except in the case of leavers in good standing.
Awards for the second plan are payable in June 2010.
Company
and
Bonus
Awards
held at
26 March
2007
£000
Awards
paid
and
waived
in
2007-08
£000
Bonus
Awards in
respect of
2007-08
for
2005–08
plan
£000
Company
Awards in
respect of
2007-08
for
2005–08
plan
£000
Bonus
Awards in
respect of
2007-08
for
2007–10
plan
£000
Company
Awards in
respect of
2007-08
for
2007–10
plan
£000
Enhancement
of Awards for
2005-08 plan
from
application
of
multiplier
£000
Total
LTIP at
30 March
2008
£000
LTIP for
payment
in
2008-09
£000
LTIP for
payment
in
2010-11
£000
Executive
Adam Crozier
1,645
Alan Cook
Ian Duncan
Mark Higson
Tony McCarthy
David Burden
305
180
-
794
652
-
-
-
-
(794)2
(652)1
96
35
35
21
-
-
103
42
49
27
-
-
95
35
35
20
-
-
103
149
2,191
1,993
198
42
49
27
-
-
58
63
36
-
-
517
411
131
-
-
440
327
84
-
-
77
84
47
-
-
Ian Griffiths, David Burden and Tony McCarthy were made no awards in respect of their part-year service during 2007-08. Ian Griffiths
was made no LTIP award for service in 2006-07.
1 David Burden waived the Long Term Incentive Plan payment and the Company decided at its discretion to make a pension contribution payment for David Burden of
£652,277. This is of equal value to the payment waived and does not therefore represent any additional cost to the Company.
2
Tony McCarthy was paid his award during the year.
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.
Sir Michael Hodgkinson received additional fees of £15,625 (2007 £37,500) for his position as Chairman of Post Office Limited. The
annual fee for committee membership is £5,000, £10,000 for chairmanship and £12,500 in the case of the chairman of the Audit and
Risk Committee. The annual fee for the Senior Independent Director is £10,000.
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:
Directorship
Adam Crozier
Debenhams plc
Alan Cook
Ian Griffiths
Pensions
Financial Ombudsman Service
Ultra Electronics Holdings plc
2008
£000
45
20
35
2007
£000
40
-
34
The Group previously offered its most senior people membership of the Royal Mail Senior Executives Pension Plan (the Plan), which is
now closed to new members. Details of the Plan are set out in note 25 to the accounts. The Plan is a funded, Inland Revenue-registered
final salary occupational pension scheme. The Plan provides for a pension on a final salary basis for service up to 31 March 2008 and for
subsequent service on a career salary basis. The pension is payable from normal retirement age (currently age 60) and is subject to the
maximum pensionable service and the scheme-specific earnings cap. Pensions in payment are increased annually in line with Retail Prices
Index (RPI), subject in some cases to a cap of 5%. Pensions are 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 Plan is restricted by the earnings cap, pension provision is made by a combination of the
Company scheme and a cash pension supplement or its equivalent. Ian Duncan and Adam Crozier receive a cash supplement of 40% of
base pay above the earnings cap. Alan Cook and Mark Higson are not members of the Plan and receive a cash supplement of 40% of base
pay. The Company has made provision for retirement pension arrangements at a rate of 40% of base pay above the earnings cap for
David Burden, and this provision was used to buy an additional pension on his retirement from the Company. A reserve has been
established for the additional pension for Tony McCarthy to provide the total retirement pension, including his previous employer’s
pension scheme, of two-thirds of base pay at normal retirement age. During the year the provision for David Burden was released and
the total provision at the year-end for Tony McCarthy was £1m (2007 £1m).
42
Directors’ Remuneration Report (continued)
Royal Mail Holdings plc
The following table is 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.
The pension entitlements of the Directors at the year end were:
Age at
Year
end
Accumulated
accrued benefit
at 30 March 2008
£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
44
61
47
-
51
71
18
6
-
64
6
2
4
-
6
4
2
4
-
6
54
41
63
-
117
Executive Directors
Adam Crozier
David Burden 1
Ian Duncan
Ian Griffiths 2
Tony McCarthy 3
The following table 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.
Transfer value
at 25 March 2007
or at date of
appointment to
Board if later
£000
Age at
Year
end
Plus
transfers-in
received
£000
Sub total
£000
Transfer
value
at 30 March
2008
£000
Movement in
the period
less Directors’
contributions
£000
Executive
Directors
Adam Crozier
David Burden 1
Ian Duncan
Ian Griffiths 2
Tony McCarthy 3
44
61
47
-
51
796
335
28
74
1,068
-
-
-
-
-
796
335
28
74
1,156
396
109
-
1,068
1,442
354
58
74
-
365
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.
1 David Burden retired on 31 July 2007 and started drawing his pension
2 Ian Griffiths left the Board on 30 April 2007, elected to transfer his pension benefits before the year-end and no longer has any
accrued benefits under the plan
3 Tony McCarthy left the Board on 7 December 2007.
By Order of the Board
Jonathan Evans
Company Secretary
19 May 2008
43
Royal Mail Holdings plc
Statement of Directors’ responsibilities in relation to the Group financial statements
The Directors are responsible for preparing the Annual Report and the Group financial statements, in accordance with applicable United
Kingdom law and those International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The Directors are required to prepare Group financial statements for each financial year which present fairly the financial position of the
Group and the financial performance and cash flows of the Group for that period.
In preparing those Group financial statements the Directors are required to:
(cid:131) select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’
and then apply them consistently;
(cid:131) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
(cid:131) provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and conditions of the Group’s financial position and financial
performance; and
(cid:131) state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial
statements.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial
position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 1985. They are also
responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
44
Royal Mail Holdings plc
Independent Auditors’ 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 30 March 2008 which comprise the Group
income statement, Group statement of recognised income and expense, Group balance sheet, Group cash flow statement and the related
notes 1 to 29. 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 30 March 2008
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’ responsibilities 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 are 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. We also report to you whether, in our opinion, the
information given in the Directors’ Report is consistent with the Group financial statements. The information given in the Directors’ Report
includes that specific information presented in the Group Operating and Financial Review that is cross referred from the ‘Review of the
business and future developments’ section of the Directors’ Report.
In addition we report to you if, in our opinion 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 review whether the Corporate Governance statement reflects the Company’s compliance with the nine provisions of the 2006
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 and 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 judgements 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:
(cid:131) 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 30 March 2008 and of its profit for the year then ended;
(cid:131) the Group financial statements have been properly prepared in accordance with the Companies Act 1985; and
(cid:131) The information given in the Directors’ Report is consistent with the Group financial statements.
Ernst & Young LLP
Registered auditor
London
19 May 2008
45
Royal Mail Holdings plc
Group income statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
Continuing operations
Turnover
Social Network Payment
Revenue
Notes
2008
£m
9,238
150
9,388
2007
£m
9,104
75
9,179
People costs excluding ColleagueShare and restructuring costs
(6,209)
(6,145)
Royal Mail Group people:
Wages and salaries
Pensions
Social security
Subpostmasters
Temporary resource
Distribution and conveyance operating costs
Other operating costs
Share of post tax profit from joint ventures and associates
Operating profit before exceptional items
Operating exceptional items
Government grant income
ColleagueShare costs
Other restructuring costs
Operating loss
Profit on disposal of property group
Profit on disposal of property, plant and equipment
(Loss)/profit before financing and taxation
Finance costs
Finance income
Net pensions interest
(Loss)/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
46
5(a)
5(b)
5(c)
14
7
8
8
25(c)
9
(4,550)
(4,511)
(701)
(319)
(550)
(89)
(1,341)
(1,723)
47
162
(441)
313
(277)
(477)
(279)
-
58
(221)
(71)
84
131
(77)
212
135
135
-
(722)
(320)
(534)
(58)
(1,237)
(1,603)
39
233
(243)
-
-
(243)
(10)
74
44
108
(56)
62
199
313
(27)
286
286
-
Royal Mail Holdings plc
Group statement of recognised income and expense for the 53 weeks ended 30 March 2008 and 52 weeks
ended 25 March 2007
Notes
27
2008
£m
63
25/27
1,798
24/27
24/27
36
(3)
(1)
(18)
13
1,888
135
2,023
2,023
-
2007
£m
(2)
340
(9)
4
-
27
-
360
286
646
646
-
Translation differences on foreign currency net investments
Actuarial gains on defined benefit schemes
Gains/(losses) on cash flow hedges deferred into equity
(Gains)/losses on cash flow hedges released from equity to income
Gains on cash flow hedges released from equity to the carrying amount of non-financial assets
24/27
Taxation on items taken directly to equity
Gains on financial assets deferred into equity
Net income recognised directly in equity
Profit for the financial year from continuing operations
Total recognised income for the period
Attributable to:
Equity holder of the parent company
Minority interest
9/27
27
27
27
47
Group balance sheet at 30 March 2008 and 25 March 2007
Royal Mail Holdings plc
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Investments in joint ventures and associates
Financial assets – pension escrow investments
- derivatives
Other receivables
Deferred tax assets
Non-current assets held for sale
Current assets
Inventories
Trade and other receivables
Financial assets - investments
- derivatives
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Financial liabilities – interest bearing loans and borrowings
– obligations under finance lease and hire purchase contracts
– derivatives
Income tax payable
Provisions
Non-current liabilities
Financial liabilities - interest bearing loans and borrowings
- obligations under finance lease and hire purchase contracts
Provisions
Retirement benefit obligation – pension deficit
Other payables
Deferred tax liabilities
Total liabilities
Net liabilities
Equity
Share capital
Share premium
Retained earnings
Reserves
Equity attributable to equity holder of parent company
Minority interest
Total equity
Notes
10
11
12
14
24
24
9
15
16
17
24
24
18/24
21
19/24
19/24
19/24
20
19/24
19/24
20
25
22
9
26
27
27
27
27
2008
£m
1,671
173
67
136
1,070
8
1
608
3,734
1
33
1,114
21
24
1,427
2,619
6,354
2007
£m
1,619
143
64
114
1,000
-
4
403
3,347
7
26
1,031
17
-
1,196
2,270
5,624
(2,354)
(1,924)
(289)
(10)
(3)
(15)
(248)
(2,919)
(502)
(43)
(163)
(2,923)
(40)
(5)
(3,676)
(6,595)
(241)
-
430
(863)
189
(244)
3
(241)
(301)
-
(7)
(29)
(69)
(2,330)
(502)
(1)
(42)
(4,985)
(25)
(3)
(5,558)
(7,888)
(2,264)
-
430
(2,775)
78
(2,267)
3
(2,264)
The accounts on pages 46 to 96 were approved by the Board of Directors on 19 May 2008 and signed on its behalf by:
Adam Crozier
Ian Duncan
48
Royal Mail Holdings plc
Group cash flow statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
Notes
5
14
16
17
21
14
14
13
24
24
Cash flow from operating activities
Operating profit before exceptional items
Add back:
Depreciation and amortisation
Share of post tax profit from joint ventures and associates
Working capital and other non-cash movements:
(Increase)/decrease in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Decrease in client debtors
Increase in client creditors
Net decrease in retirement benefit obligation
Net increase in derivative (assets)/liabilities
(Decrease)/increase in non-exceptional provisions
Other movements
Receipt of Government grant
Cash payments in respect of operating exceptional items (see note (a) below):
Share in Success
Other
Cash inflow from operations
Income tax (paid)/recovered
Net cash inflow from operating activities
Cash flows from investing activities
Dividends received from joint ventures and associates
Finance income received
Proceeds from sale of property group
Proceeds from sale of property, plant and equipment
Purchase of property, plant and equipment
Investment in associate
Acquisition of businesses, net of cash acquired
Purchase of intangible assets
Payment of deferred consideration in respect of prior years’ acquisitions
Net purchase of financial assets investments (non-current)
Net movement in financial assets investments (current)
Net cash outflow from investing activities
Net cash inflow/(outflow) before financing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Finance costs paid
Payment of capital element of obligations under finance lease contracts
Cash received on sale and leasebacks
New loans
Repayment of borrowings
Dividend paid to minority interest
Net cash (outflow)/inflow from financing activities
Net increase in cash and cash equivalents
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
18/24
2008
£m
162
236
(47)
351
7
(7)
(52)
86
-
123
(133)
(4)
(6)
-
313
(188)
-
(188)
483
(33)
450
36
82
-
71
(263)
(10)
(5)
(67)
-
(57)
(4)
(217)
233
-
(57)
(3)
55
2
(21)
-
(24)
209
15
1,196
1,420
2007
£m
233
198
(39)
392
7
1
42
(49)
17
55
(64)
2
4
(1)
-
(282)
(90)
(192)
117
13
130
39
67
71
65
(244)
-
(17)
(65)
(3)
(995)
677
(405)
(275)
430
(55)
(1)
-
-
(63)
(1)
310
35
-
1,161
1,196
The £1,420m cash and cash equivalents balance is net of a £7m overdrawn bank balance relating to the General Logistics Systems
(GLS) subsidiary. This £7m is included in the Financial liabilities - interest bearing loans and borrowings balance of £289m in the
balance sheet.
49
Royal Mail Holdings plc
(a) Cash flows relating to operating exceptional items charged to the income statement in current and prior years
The net cash outflows relating to the above were as follows:
Net cash outflow relating to:
Current year operating exceptional items
Prior years’ operating exceptional items
Total
2008
£m
121
67
188
2007
£m
114
168
282
The net cash outflow of £188m (2007 £282m) comprises £144m (2007 £118m) relating to cash utilised to settle exceptional provisions,
£4m (2007 £27m) relating to current year pension redundancy liabilities, £32m (2007 £47m) relating to prior year pension redundancy
liabilities, £8m (2007 £nil) in respect of other costs which were recorded within creditors and £nil (2007 £90m) 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 53 weeks ended 30 March 2008 were authorised for issue by the Board on 19 May 2008 and the
balance sheet was signed on the Board’s behalf by Adam Crozier and Ian Duncan.
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union and as they apply to the financial statements of the Group for the 53 weeks ended 30 March 2008. The principal accounting
policies adopted by the Group are set out in note 2.
2. Accounting policies
Basis of preparation and accounting
The Group comprises Royal Mail Holdings plc (the Company) – which is wholly owned by HM Government – and its subsidiaries. The Company
is incorporated in the United Kingdom under the Companies Act 1985 (the Act) and the accounts are produced in accordance with the Act and
applicable IFRSs.
The Group financial statements are presented in sterling and all values are rounded to the nearest £m except where otherwise indicated.
Royal Mail Group Ltd, a wholly owned subsidiary of the Company, 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 its licence. The
amount of such fines and compensation will be determined by the Regulator after further representations from Royal Mail Group Ltd and no
further information is being disclosed on the grounds that it can be expected to prejudice the outcome of that process.
Changes in accounting policy
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards
and interpretations did not have any effect on the financial performance or position of the Group in the current or prior periods. In certain
cases, they did however give rise to additional disclosures.
•
•
•
IFRS 7
Financial Instruments: Disclosures
IAS 1
Amendment – Presentation of Financial Statements: Capital Disclosures
IFRIC 9
Reassessment of Embedded Derivatives
IFRS 7 Financial Instruments: Disclosures
This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial
instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the
financial statements. While there has been no effect on the financial position or results, comparative information has been revised where
necessary.
IAS 1 Amendment – Presentation of Financial Statements: Capital Disclosures
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives,
policies and processes for managing capital. These new disclosures are shown in note 23.
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 9 states that the date to assess the existence of an embedded derivative is the date that an entity first becomes a party to the contract,
with reassessment only if there is a change to the contract that significantly modifies the cash flows. As the Group has no embedded derivative
requiring separation from the host contract, the interpretation has no impact on the financial position or performance of the Group.
Key sources of estimation uncertainty
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and
liabilities within the next financial year relate to the measurement of the defined benefit pension obligations, deferred tax and ColleagueShare
plan costs. Measurement of the defined benefit obligations requires certain assumptions to be made including on life expectancy, future
changes in salaries, inflation and a suitable discount rate. The size of these obligations, and therefore the pension deficit, is materially sensitive
to the assumptions adopted. The assumptions which have the most significant impact on the measurement of the defined benefit obligations
are the real discount rate and the mortality rates. A 0.1 percentage point change to the discount rate could change the liabilities by
approximately £450m. An additional one year on the life expectancy could increase liabilities by approximately £650m. The major assumptions
are disclosed in note 25. Assessment of the deferred tax asset requires an estimation of future profitability. Such estimation is inherently
uncertain in a market subject to various competitive pressures. Should estimates of future profitability change in future years, the amount of
deferred tax recognised will also change accordingly.
The calculation of the ColleagueShare costs and liabilities is reliant on a number of estimates. These include in particular forecasts for the
potential equity value of ColleagueShares, forecasts of joiners and leavers throughout the life of the plan and judgements on when participants
are likely to exercise their rights for the Company to redeem the ColleagueShares that they hold. The magnitude of the costs involved is
sensitive to these forecasts and assumptions.
51
Royal Mail Holdings plc
2. Accounting policies (continued)
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd made a loss in 2007-08, after bearing losses relating to stamped mail and carrying out its Universal Service Obligations.
In addition it has been facing 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. On 23 March 2007, a funding package totalling £1.2bn up
until 2016 was completed with Government.
The European Commission is continuing its investigation under the EC Treaty’s rules on State Aid into a series of funding measures taken by
the United Kingdom Government in its capacity as Shareholder in favour of Royal Mail between 2001 and 2007, including the funding
agreement completed on 23 March 2007. In its response to the EC in relation to this investigation the United Kingdom Government has stated
that it believes that the measures being investigated by the EC were concluded on commercial terms.
Post Office Limited
Post Office Limited had net liabilities as at 30 March 2008 and has operated at a loss during 2007-08 and prior years, primarily because of
supporting the loss-making rural network.
To become viable in the longer-term, new business areas continue to be developed and grown in order to replace the lost contribution from
traditional income sources, and significant cost reduction programmes continue to be implemented.
During the year, Post Office Limited has updated its five-year strategic plan and will proceed with the implementation of a number of radical
programmes which are designed to improve the profitability of the company. These programmes include:
•
•
•
•
the development of new business and drive for sales growth;
the restructuring of the network;
bringing the crown branch segment into profit; and
a programme of fundamental cost reduction.
The future financing of this Plan is underpinned by:
•
•
•
•
•
rural network funding of £150m received from Government during 2007-08;
a funding agreement with Government announced on 17 May 2007, which provided a further £313m, which was received on 31 July
2007 to compensate Post Office Limited for the other net costs of providing certain specified “services of general economic interest”;
a further equity injection of £77m received on 1 April 2008 and £75m on 15 April 2008;
the extension on 18 April 2008 of the existing working capital facility of £1.15bn to 2011 (at the balance sheet date this was to 2010);
and
State Aid approval has been received for the above funding and also for the provision of network subsidy payments of around £150m per
annum in each of the three financial years 2008-09 to 2010-11 for the purposes of meeting, up to a specified limit, the net costs of
maintaining certain loss-making parts of the network.
Whilst the Directors are satisfied with the progress that has been made it should be noted that the completion of the regeneration
programmes will take several years to achieve, as anticipated in the company’s five-year strategic plan. Accordingly there will be a need to gain
agreement with respect to the continuation of the network subsidy payment for the period beyond March 2011, as well as the replacement or
extension of the working capital facilities. These arrangements will need State Aid approval.
Notwithstanding these uncertainties, the Directors recognise that significant progress has been made in delivering its Plan and that the
Funding Agreement is now in place and, after careful consideration, continue to believe that Post Office Limited will be able to meet its
liabilities as they fall due in the foreseeable future. Accordingly, on that basis, the Directors consider that it is appropriate that these financial
statements are prepared on a going concern basis.
After analysis of the financial resources available and cash flow projections for the Group, including consideration of the financing
arrangements outlined above, the Directors consider that it is appropriate to prepare the financial statements on a going concern basis.
Basis of consolidation
The consolidated financial statements comprise the accounts of the Company and its subsidiary undertakings. The financial statements of the
major subsidiaries are prepared for the same reporting year as the 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 the Group ceases to hold control of a subsidiary, the consolidated financial statements include
the results for the part of the reporting year during which the Group held control.
Minority interests represent the portion of profit/loss, gains/losses and net assets relating to subsidiaries that are not attributable to members
of the Company. The minority interests balance is presented separately within equity in the consolidated balance sheet, separately from parent
shareholders’ equity.
52
Royal Mail Holdings plc
2. Accounting policies (continued)
Investments in joint ventures and associates
The Group’s investments in its joint ventures and associates 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 joint
ventures/associates, less any impairment in value. The income statement reflects the Group’s share of post tax profits from the joint ventures/
associates.
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
Revenue reported in the income statement comprises of Turnover and the Social Network Payment. Turnover principally relates to the
rendering of services:
Royal Mail
Account revenue is derived from specific contracts and recognised when the mail delivery is 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
Account revenue is derived from specific contracts and recognised when the delivery of an item is complete.
Post Office Limited
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.
The Social Network Payment is Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business, Enterprise and Regulatory Reform considers appropriate and which would otherwise not be
provided.
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, distribution
and conveyance costs, other operating costs and the Group’s post tax share of profits from joint ventures and associates. Operating exceptional
items are separately identified.
Operating exceptional items
Operating exceptional items are material items of income and expenditure arising from the operations of the business which, due to the nature
of the events giving rise to them, require separate presentation on the face of the income statement to allow a better understanding of
financial performance in the year, in comparison to prior years.
ColleagueShare plan
ColleagueShare is the name for the Group’s phantom share plan. The plan, introduced in 2007-08, is a five-year plan spanning the accounting
years from April 2007 to March 2012 and comprises both a phantom share scheme and a related stakeholder dividend worth up to £5,300
per person throughout the life of the plan. The ColleagueShares represent up to a total of 20% of the projected equity value of the Group.
Additionally Royal Mail plans to pay a stakeholder dividend dependent on the achievement of certain targets.
The costs of the plan are being charged to the income statement as an exceptional item throughout the life of the plan. Any long-term
liabilities arising in relation to the plan will be discounted at an appropriate high quality corporate bond rate. These discounts will be unwound
through the income statement during the life of the plan. The Group will redeem all ColleagueShares by 2012.
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 exceptional items for profit or loss on disposal of businesses and profit or loss on disposal of
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 at the date of acquisition is recognised in the balance sheet as goodwill and is not amortised.
53
Royal Mail Holdings plc
2. Accounting policies (continued)
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 such impairment reviews, goodwill is allocated to the relevant cash generating units.
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.
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 development costs that meet the criteria to be capitalised are initially recognised
at cost and are assessed to have either a finite or indefinite useful life. Those with a finite life are amortised over their useful life and those
with an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying
value may be impaired. An impairment loss 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.
Amortisation of intangible assets with finite lives is charged annually to the income statement. The useful lives of such intangible assets are in
the range of 1–6 years.
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
IFRSs. If these criteria are not met, then the costs are recognised in the income statement as they are incurred.
Property, plant and equipment
Property, plant and equipment 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 net book value 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 are:
Land and buildings:
Freehold land
Freehold buildings
Leasehold buildings
Plant and machinery
Motor vehicles and trailers
Fixtures and equipment
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
An individual property that the Group has identified as surplus is reclassified within ‘non-current assets held for sale’, a separate category on
the balance sheet, when a sale is highly probable. This has been determined to be when authority to market the property has been approved
and the property is vacant and therefore available for immediate sale and occupation by a third party. Such properties are expected to
generate economic cash flow primarily by sale of the asset rather than by operational activities, and are expected generally to be disposed of
within a year.
For a disposal group of properties or other assets and liabilities, the requirements of IFRS 5 ‘Non-current assets held for sale and discontinued
operations’ are applied to the specific circumstances of the disposal group.
Impairment reviews
Unless otherwise disclosed in these accounting policies, assets are reviewed for impairment if events or changes in circumstances indicate that
the carrying value may be impaired. The Group assesses at each reporting date whether such indications exist. Where appropriate, an
impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.
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 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 carried at the lower of cost and net realisable value after adjusting for obsolete or slow-moving stock. Cost includes all costs in
bringing each item to its present location and condition and comprises weighted average cost for supplies and materials and purchase cost for
merchandise.
54
Royal Mail Holdings plc
2. Accounting policies (continued)
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.
Financial instruments
Financial assets within the scope of IAS 39 ‘Financial Instruments: Recognition and Measurement’ are classified as; financial assets at fair value
through the income statement (held for trading); held to maturity investments, loans and receivables or available for sale financial assets as
appropriate. Financial liabilities within the scope of IAS 39 are classified as either financial liabilities at fair value through the income statement
or financial liabilities measured at amortised cost.
The Group determines the classification of its financial instruments at initial recognition and re-evaluates this designation at each financial year
end.
When financial instruments are recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial
instruments not at ‘fair value through the income statement’, any directly attributable transactional costs.
The subsequent measurement of financial instruments depends on their classification as follows:
Financial assets at fair value through the income statement (held for trading)
Financial assets are classified as held for trading if they are acquired for sale 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 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.
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, do not qualify as trading assets
and have not been designated as either ‘fair value through the income statement’ or available for sale. Such assets are 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, interest is taken to the income statement using the effective interest rate method and the 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.
Financial liabilities at fair value through the income statement (held for trading)
Derivatives liabilities are classified as held for trading unless they are designated as hedging instruments. They are carried in the balance sheet
at fair value with gains or losses recognised in the income statement.
Financial liabilities measured at amortised cost
All non-derivative financial liabilities are classified as financial liabilities measured at amortised cost. Non-derivative financial liabilities are
initially recognised at the fair value of the consideration received, less directly attributable issue costs. After initial recognition, non-derivative
financial liabilities 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.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash equivalents) with an original
maturity date of three months or less. In addition, the Group uses Money Market funds as a readily available source of cash, which are bought
and sold on a daily basis to meet the cash requirements of the business. These funds are also 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.
Cash equivalents are classified as loans and receivables financial instruments.
Financial assets – pension escrow investments
Financial assets – pension escrow investments comprise; short term deposits with banks; conventional gilt edged securities, index-linked gilt
edged securities and Treasury bills.
Short term deposits with banks (pension escrow investments) are classified as loans and receivables financial instruments.
Conventional gilt edged securities, index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity.
55
Royal Mail Holdings plc
2. Accounting policies (continued)
Financial assets – other investments
Financial assets – other investments comprise; short term deposits (other investments) with Government, local government or banks with an
original maturity of three months or more and conventional gilt edged securities. Short term deposits are classified as loans and receivables
financial instruments. Conventional gilt edged securities are classified as available for sale financial instruments on the basis that they are
quoted investments that are not held for trading and may be disposed of prior to maturity.
Financial liabilities – interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost. Borrowing costs are recognised as an expense when
incurred.
Financial liabilities – obligations under finance lease and hire purchase contracts
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at amortised cost.
Borrowing costs are recognised as an expense when incurred.
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 highly probable forecasted transaction.
In relation to cash flow hedges to hedge the foreign exchange risk of firm commitments that meet the conditions for hedge accounting, the
portion of the gain or loss on the hedging instrument that is determined to relate to an effective hedge is recognised directly in equity and the
ineffective portion is recognised in the income statement.
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.
Fair value measurement of financial instruments
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.
Specifically, in the absence of quoted market prices derivatives are valued by using quoted forward prices for the underlying commodity/currency
and discounted using quoted interest rates (both as at the close of business on the balance sheet date).
For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market prices,
fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as at close of
business on the balance sheet date.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.
56
Royal Mail Holdings plc
2. Accounting policies (continued)
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:
(cid:131) initial recognition of goodwill;
(cid:131) 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
(cid:131) 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:
(cid:131) 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
(cid:131) 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.
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.
Current and deferred tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity. Otherwise
it is recognised in the income statement.
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 an appropriate pre-tax rate.
Pensions and other post-retirement benefits
The pension plans’ assets for the defined benefit schemes are measured at fair value. Liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet. Full actuarial
valuations are carried out at intervals not normally exceeding three years as determined by the Trustees and, with appropriate updates and
accounting adjustments at each balance sheet date, form the basis of the deficit disclosed. All members of defined benefit schemes are
contracted out of the earnings-related part of the State pension scheme.
For defined benefit schemes, the amounts charged to operating profit are the current service costs and any gains and losses arising from
settlements, curtailments and past service costs. The net difference between the interest costs and the expected return on plan assets is
recognised as net pensions interest in the income statement. 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 within people costs in the period to which the
contributions relate. Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits.
57
Royal Mail Holdings plc
2. Accounting policies (continued)
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 IFRSs, 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. Currently hedge accounting is not claimed for any monetary assets and liabilities. All differences are therefore
taken to the income statement, except 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 occurs, 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.
Contingent liabilities and financial guarantee contracts
Financial guarantee contracts are initially measured at fair value and subsequently at the higher of amounts under IAS 37 or the amounts
initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 ‘Revenue’.
Contingent liabilities are not disclosed if the possibility of losses occurring is considered to be remote.
Government grants
Government grants of a revenue nature are credited to the income statement and are shown separately to the expenditure to which they
relate.
Segment information
The Group’s primary reporting format is by business segments and its secondary format is by geographical segments. The business segments
are organised and managed separately according to the nature of the products and services provided, with each segment representing a
business unit that offers different products and serves largely different markets. The five business segments are:
Royal Mail: Delivers letters to all addresses in the United Kingdom. Royal Mail offers a number of products to both business and domestic
users.
Parcelforce Worldwide: The parcels business unit operating within the UK.
Post Office Limited: A limited company responsible for the network of Post Office branches offering a series of retail services.
General Logistics Systems: The European parcels business which, via its subsidiaries and partners, offers its services in 36 European states.
Other businesses: Includes PostCap Guernsey Limited and iRed Redefining Document Management Ltd, both wholly owned subsidiaries,
Romec Limited, and NDC 2000 Limited, both part owned subsidiaries, investments in the following associates – Quadrant Catering Limited,
Camelot Group plc and Camelot International Services Limited, and our Group Property unit. The Group Property unit includes Royal Mail
Estates Limited, a wholly owned subsidiary.
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective businesses.
The two geographical segments are UK operations and European operations. The latter consists of the GLS business segment. The former
includes the other four business segments plus Corporate, representing central shared services for the UK and the corporate centre. Corporate
is not a revenue or profit centre but incurs certain costs on behalf of the business segments, which are passed on, and manages certain assets
and liabilities of the Group.
58
Royal Mail Holdings plc
2. Accounting policies (continued)
Accounting standards and interpretations not applied
The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have issued
accounting standards and interpretations with an effective date for accounting periods beginning on or after the date of these financial
statements. Of these, the Group has not applied the following:
International Accounting Standards (IAS/IFRSs)
IFRS 2
IFRS 3
IFRS 8
IAS 1
IAS 23
IAS 27
IAS 32 & IAS 1
Amendment to IFRS 2 – Vesting Conditions and Cancellations
Business Combinations (revised January 2008)
Operating Segments
Presentation of Financial Statements (revised September 2007)
Borrowing Costs (revised March 2007)
Consolidated and Separate Financial Statements (revised January 2008)
Amendments to IAS 32 Financial Instruments: Presentation and IAS 1
Presentation of Financial Statements – Puttable Financial Instruments and
Obligations Arising on Liquidation
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 12
IFRIC 13
IFRIC 14
Service Concession Arrangements
Customer Loyalty Programmes
IAS 19 – The Limit on Defined Benefit Asset, Minimum Funding Requirements and
their interaction
Effective date
1 January 2009
1 July 2009
1 January 2009
1 January 2009
1 January 2009
1 July 2009
1 January 2009
1 January 2008
1 July 2008
1 January 2008
IFRS 2 Vesting Conditions and Cancellations
The amendment to IFRS 2 deals with vesting conditions and cancellations for shares. Although the Group operates the Colleagueshare
phantom share scheme (see policy note above) this does not constitute a share based payment arrangement under IFRS 2. Consequently the
Group has no share based payment arrangements, and therefore, this amendment will have no impact on the financial position or performance
of the Group.
IFRS 3 Business Combinations
The Group does not anticipate early adopting the revised IFRS 3 and so will apply it prospectively to all business combinations on or after
29 March 2010. Whilst it is not possible to estimate the outcome of adoption, the key features of the revised IFRS 3 include a
requirement for acquisition-related costs to be expensed and not included in the purchase price; and for contingent consideration to be
recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement and not as a change to
goodwill). The standard also changes the treatment of non-controlling interest (formerly minority interests) with an option to recognise
these at full fair value as at the acquisition date and a requirement for previously held non-controlling interests to be fair valued as at the
date control is obtained, with gains and losses recognised in the income statement.
IFRS 8 Operating Segments
This standard requires disclosure of information about the Group’s operating segments and replaces the requirement to determine primary
(business) and secondary (geographical) reporting segments. It is anticipated that the operating segments will be the same as the business
segments previously reported under IAS 14. It is expected that this new standard will be adopted with a commencement date of 30 March
2009 and will have no impact on the financial position or performance of the Group.
IAS 1 Presentation of Financial Statements
This revised standard sets overall requirements for the presentation of financial statements, guidelines for their structure and minimum
requirements for their content. It does not change the recognition, measurement or disclosure of specific transactions and other events
required by other IFRSs. Hence it is expected that this new standard, which will be adopted with a commencement date of 30 March 2009, will
have no impact on the financial position or performance of the Group.
IAS 23 Borrowing Costs
This standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an
asset that necessarily takes a substantial period of time to get ready for its intended use or sale. It is expected that this new standard will have
no impact on the financial position or performance of the Group although the standard will be adopted with a commencement date of 30
March 2009.
59
Royal Mail Holdings plc
2. Accounting policies (continued)
IAS 27 Consolidated and Separate Financial Statements
IAS 27 revised is effective for annual periods beginning on or after 1 July 2009, with earlier application only permitted when the revised IFRS 3 is
applied. The revised standard applies retrospectively with some exceptions. IAS 27 revised no longer restricts the allocation to minority interest of
losses incurred by a subsidiary to the amount of the non-controlling equity investment in the subsidiary. A partial disposal of equity interest in a
subsidiary that does not result in a loss of control will be accounted for as an equity transaction and will have no impact on goodwill nor will it
give rise to any gain or loss. Where there is loss of control of a subsidiary, any retained interest will have to be remeasured to fair value, which
will impact the gain or loss recognised on disposal. It is expected that retrospective application of this standard will have no impact on the
financial position or performance of the Group although the standard will be adopted with a commencement date of 29 March 2010.
IAS 32 & IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation
The amendments to IAS 32 & IAS 1 require that puttable financial instruments and instruments that impose an obligation to deliver to another
party a pro-rata share of net assets on liquidation are classified as equity provided that they have particular features and meet specific conditions.
It is expected that these amendments will be adopted with a commencement date of 30 March 2009 and will have no impact on the financial
position or performance of the Group.
IFRIC 12 Service Concession Arrangements
This interpretation applies to service concession operators and explains how to account for the obligations undertaken and rights received in
service concession arrangements. No members of the Group are operators in this regard and hence the interpretation will have no impact on
the Group.
IFRIC 13 Customer Loyalty Programmes
The Group has no schemes involving customer loyalty awards hence there will be no impact on the Group’s financial statements when this
IFRIC is adopted.
IFRIC 14 – IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction
This interpretation provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognised
as an asset under IAS 19 on Employee Benefits. It is expected that at present, this interpretation will have no impact on the financial position
or performance of the Group, as the Group has an absolute right to any assets left over after benefits have been secured.
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s primary
financial statements. Certain of the above standards will require amendment to disclosures in the period of initial application.
60
Royal Mail Holdings plc
3. Segment information
Analysis of segment revenue and segment result by class of business and geographic area
53 weeks to 30 March 2008
Segment revenue:
External revenue
Revenue between segments
Segment revenue
Segment result:
UK operations
Royal Mail
Parcelforce
Worldwide
£m
6,830
106
£m
379
4
Post
Office
Limited
£m
911
358
Other
businesses
Total
£m
£m
36
8,156
246
714
European
operations
General
Logistics
Systems
£m
1,232
-
Total
£m
9,388
714
6,936
383
1,269
282
8,870
1,232
10,102
77
48
114
Operating (loss)/profit before exceptional items
Less share of post tax profits from joint
ventures and associates
Operating exceptional items - Government grant
(3)
(1)
-
8
-
-
- other
(353)
(17)
(34)
(36)
313
(382)
(10)
(47)
-
313
(2)
(754)
Profit on disposal of property, plant and
equipment
Segment result
Share of post tax profits from joint ventures
and associates
Segment result after share of post tax profits
from joint ventures and associates
-
(357)
1
(356)
-
(9)
-
(9)
5
53
58
(134)
118
(382)
36
10
47
(98)
128
(335)
162
(47)
313
(754)
58
(268)
47
(221)
-
-
-
-
114
-
114
Not included in segment result after share of post tax profits from joint ventures and associates is net pensions interest of £131m (2007 £199m),
finance income of £84m (2007 £62m), finance costs of £71m (2007 £56m) and a taxation credit of £212m (2007 £27m charge), which when
added reconciles to the ‘profit for the financial year from continuing operations’ in the income statement of £135m (2007 £286m).
52 weeks to 25 March 2007
Segment revenue:
External revenue
Revenue between segments (restated)
Segment revenue
Segment result:
Operating profit/(loss) before exceptional
items
Less share of post tax profits from joint
ventures and associates
Operating exceptional items
Profit on disposal of business
Profit on disposal of property, plant and
equipment
Segment result
Share of post tax profits from joint ventures
and associates
Segment result after share of post tax profits
from joint ventures and associates
UK operations (restated)
Post
Office
Limited
Parcelforce
Worldwide
£m
337
5
£m
868
348
Other
businesses
£m
Total
£m
35
8,097
237
696
342
1,216
272
8,793
Royal Mail
£m
6,857
106
6,963
European
operations
General
Logistics
Systems
£m
1,082
-
1,082
(108)
83
118
115
(27)
(88)
-
15
(208)
(12)
(39)
-
(243)
74
74
29
174
44
(46)
27
12
39
(181)
186
(7)
-
-
-
-
115
-
115
136
-
(154)
-
-
(18)
-
(18)
7
-
(1)
-
-
6
-
6
61
Total
£m
9,179
696
9,875
233
(39)
(243)
74
44
69
39
108
Royal Mail Holdings plc
3. Segment information (continued)
The above analysis of revenue between segments for 2006-07 has been restated to include the impact of the operations of Royal Mail Estates
Limited (RMEsL), £94m and Romec Limited, £143m, within the ‘Other businesses’ segment. These amounts were previously classified as internal
recharges and hence did not form part of revenue between segments.
Operating profit before exceptional items for all UK operations has also been restated as if RMEsL had been operating in 2006-07 in the way it has
operated in 2007-08. The effect of this change has been to reduce the operating profit before exceptional items of Royal Mail by £58m and
Parcelforce Worldwide by £3m and to increase the operating loss before exceptional items of Post Office Limited by £9m. Consequently, the
operating profit before exceptional items of the Other businesses segment has increased by £70m. There has been no overall change to the Total
Segment result as a result of this restatement.
Analysis of net assets/(liabilities) by class of business and geographic area
At 30 March 2008
Assets
Liabilities
At 25 March 2007
Assets
Liabilities
UK operations
European
operations
Royal
Mail
Parcelforce
Worldwide
Post
Office
Limited
Other
businesses
Corporate*
Total
£m
£m
£m
1,521
101
1,203
£m
656
£m
£m
56
3,537
General
Logistics
Systems
£m
595
Total
unallocated
assets/
(liabilities)
Total
assets/
(liabilities)
£m
£m
2,222
6,354
(3,672)
(226)
(1,166)
(174)
(248)
(5,486)
(226)
(883)
(6,595)
£m
1,443
£m
82
£m
1,026
£m
661
£m
£m
61
3,273
£m
520
£m
£m
1,831
5,624
(5,222)
(337)
(913)
(179)
(194)
(6,845)
(198)
(845)
(7,888)
*In the context of the above table, Corporate, as defined in the accounting policies note, holds certain assets and liabilities that do not form part of
any business segment but which do form part of the UK geographic segment.
Assets include ‘Non-current assets held for sale’ of £1m (2007 £7m) relating to Other businesses.
Unallocated assets and liabilities comprise the following items:
Cash and cash equivalents – interest bearing
Financial assets – investments
Loans and borrowings
Obligations under finance leases and hire purchase contracts
Derivative financial asset/(liabilities)
Interest receivables/(payables)
Income tax payable
Deferred tax assets/(liabilities)
Total
2008
2007
Unallocated
assets
£m
Unallocated
liabilities
£m
Unallocated
assets
£m
Unallocated
liabilities
£m
489
1,091
-
-
32
2
-
608
2,222
-
-
(791)
(53)
(3)
(16)
(15)
(5)
(883)
411
1,017
-
-
-
-
-
403
1,831
-
-
(803)
(1)
(7)
(2)
(29)
(3)
(845)
62
Royal Mail Holdings plc
3. Segment information (continued)
Other segment information
At 30 March 2008
Additions
Property, plant and
equipment
Intangible assets
Non cash expenses
Depreciation and
amortisation
Impairment
UK operations
Royal Mail
Parcelforce
Worldwide
Post
Office
Limited
Other
businesses Corporate
Total
£m
£m
£m
£m
£m
£m
178
14
166
-
4
4
1
6
40
51
1
91
32
-
36
-
(6)
248
9
78
3
-
207
97
European
operations
General
Logistics
Systems
£m
36
1
29
-
Total
£m
284
79
236
97
Negative additions in the year within the Corporate segment are due to the transfer of expenditure (including amounts brought forward from
2006-07) to other segments, mainly Royal Mail, being higher than expenditure incurred by Corporate in 2007-08.
At 25 March 2007
Additions
Property, plant and
equipment
Intangible assets
Non cash expenses
Depreciation and
amortisation
Impairment
4. People information
(a) Headcount
£m
£m
£m
£m
£m
£m
£m
£m
154
21
142
14
4
3
-
-
8
35
1
50
34
-
28
-
12
6
212
65
1
-
172
64
52
-
26
-
264
65
198
64
The number of people employed, calculated on a headcount basis, were:
Period end employees
Average employees
2008
164,995
4,464
9,163
2,654
181,276
4,313
13,135
198,724
2007
167,640
4,176
9,990
2,961
184,767
4,592
12,137
201,496
Royal Mail
Parcelforce Worldwide
Post Office Limited
Corporate and Group Property
UK wholly owned subsidiaries
UK partially owned subsidiaries
General Logistics Systems
Group total
Number of subpostmasters at year end
(b) Directors’ emoluments
Directors’ emoluments
Amounts receivable under Long-Term Incentive Plans
Number of Directors accruing benefits under defined benefit schemes
2008
165,257
4,384
9,600
2,732
181,973
4,330
12,715
199,018
2008
10,768
2008
£000
3,666
1,120
4
2007
170,127
4,141
10,640
3,181
188,089
4,600
11,749
204,438
2007
11,494
2007
£000
4,164
3,113
5
The Directors’ Remuneration Report discloses full details of Directors’ emoluments and can be found on pages 37 to 43.
63
Royal Mail Holdings plc
5. Operating costs
Operating profit before exceptional items is stated after charging:
(a)
Pensions charge (note 25):
Cash
Non-cash
(b)
Distribution and conveyance operating costs:
Operating lease charges on vehicles
Other distribution and conveyance
(c)
Depreciation and amortisation:
Depreciation of owned property, plant and equipment
Depreciation of property, plant and equipment under finance lease and hire
purchase contracts
Total depreciation (note 10)
Amortisation of intangible assets (note 12)
Property, facilities and maintenance costs
Computers and telephones costs
Consultancy, marketing and legal fees
Operating lease charges on property, plant and equipment (excluding vehicles)
Foreign currency exchange (gains)/losses
Research and development expenditure
Regulatory body costs:
Postcomm
Postwatch
6. Auditors’ remuneration
Audit of statutory financial statements
Other fees to auditors:
Statutory audits for subsidiaries
Other services supplied pursuant to such legislation
Taxation services
Corporate finance services
Litigation services
Other services
Total
The Group paid an additional £185,000 in 2008, relating to the 2007 audit.
64
2008
£m
701
550
151
1,341
38
1,303
236
189
22
211
25
261
281
263
149
(3)
1
16
9
7
2008
£000
647
1,359
388
283
109
245
51
3,082
2007
£m
722
543
179
1,237
64
1,173
198
169
17
186
12
263
259
187
148
4
1
19
10
9
2007
£000
607
1,270
468
279
91
128
133
2,976
7. Operating exceptional items
Royal Mail Holdings plc
Government grant income
ColleagueShare costs - phantom share scheme
- stakeholder dividend
Other restructuring costs:
Provision for restructuring (note 20)
Other exceptional write-offs
Impairment of property, plant and equipment (note 10)
Impairment of intangible assets (note 12)
Impairment relating to associates (note 14)
Total operating exceptional items
£m
313
(277)
2008
£m
(116)
(161)
(363)
(17)
(40)
(57)
-
2007
£m
£m
-
-
-
-
(179)
-
(15)
(39)
(10)
(477)
(441)
(243)
(243)
The £313m (2007 £nil) relates to a Government grant received by the Group under the Industrial Development Act (IDA) 1982. This amount
was used during the year to compensate Post Office Limited for providing certain specified “services of general economic interest”.
The £116m (2007 £nil) phantom share scheme costs and £161m (2007 £nil) stakeholder dividend costs are the estimated costs relating to
the first year of the Company ColleagueShare plan. The stakeholder dividend will be paid to qualifying employees in 2008-09 whilst the costs
of the phantom share scheme are discounted and will be repurchased by the Group by 2012.
The provision of £479m in note 20 is shown as £363m in the above table after excluding the £116m ColleagueShare provision separately
identified.
The £363m (2007 £179m) restructuring charge is in respect of employee related redundancy costs of £165m (2007 £180m) resulting mainly
from operational efficiency initiatives in Royal Mail and organisational design review in Post Office Limited, £141m (2007 £nil) subpostmasters’
compensation paid through the Agency Network Change (ANC) programme, £43m (2007 £nil) exceptional charge for project fees for the WH
Smith and the ANC programmes, £10m (2007 £1m release) exceptional property charges and £4m other Group exceptional charges (2007
£nil).
Of the above impairments, £91m (2007 £50m) relates to Post Office Limited comprising £40m (2007 £15m) property, plant and equipment
and £51m (2007 £35m) intangible assets. The remaining £6m relates to Parcelforce Worldwide intangible assets. Due to ongoing losses, the
carrying values of asset purchases made by Post Office Limited during the year have been impaired to recoverable amount. There was no
impairment relating to associates in the current year. The prior year relates to the impairment of G3 Worldwide Mail N.V. (Spring) (2007
£10m).
Other exceptional write-offs of £17m (2007 £nil) include £9m in Post Office Limited relating to professional fees for the new Government
funding agreement and £8m for other restructuring exceptional items charged in the current year.
8. Net finance income (excluding net pensions interest)
Interest payable on financial liabilities carried at amortised cost
Finance costs
Interest received on available for sale financial assets
Interest received on held for trading financial assets
Interest received on loans and receivables financial assets
Finance income
Net finance income (excluding net pensions interest)
2008
£m
(71)
(71)
12
-
72
84
13
2007
£m
(56)
(56)
-
1
61
62
6
No gains/losses on available for sale financial assets were released from equity and recognised in the income statement for the year.
The finance costs of £71m (2007 £56m) include £1m (2007 £nil) in respect of finance charges payable under finance lease and hire purchase
contracts.
65
Royal Mail Holdings plc
9. Income tax
The major components of income tax (credit)/charge for the years ended 30 March 2008 and 25 March 2007 are:
Tax charged to the income statement
Current income tax:
Current UK income tax charge
Foreign tax
Adjustments in respect of current income tax of prior years
Deferred income tax:
Relating to origination and reversal of temporary differences
Effect of change in tax rate
Income tax (credit)/charge reported in the income statement
Tax charged to equity
Income tax related to items charged or credited directly to equity:
Deferred income tax charge related to actuarial gains on pension deficit
Effect of change in tax rate on deferred tax in equity
Current income tax relief for pension deficit recovery payment
Current income tax charge for fair value adjustments on fixed asset investments
Income tax charge/(credit) reported in equity
Total taxation losses/(gains) recognised
Current income tax charge
Deferred income tax (credit)
Total income tax credit reported
2008
£m
(22)
29
(3)
4
(246)
30
(212)
-
15
-
3
18
7
(201)
(194)
2007
£m
49
31
(4)
76
(49)
-
27
39
-
(66)
-
(27)
10
(10)
-
A reconciliation between tax expense and the product of accounting profit multiplied by the UK rate of Corporation Tax for the years
ended 30 March 2008 and 25 March 2007 is as follows:
Accounting (loss)/profit before tax from continuing operations
At UK standard rate of Corporation Tax of 30%
Overseas current tax rates
Tax overprovided in prior years
Non-taxable income
Non-deductible expenses
Associates’/joint ventures’ profit after tax charge included in Group pre-tax profit
Net decrease in tax charge resulting from recognition of deferred tax assets
Effect of change in tax rate on deferred tax
Profit from asset disposals eligible for relief
Other
Tax (credit)/charge in the income statement
Effective income tax rate
66
2008
£m
(77)
(23)
1
(3)
(94)
(4)
(14)
(97)
30
(4)
(4)
(212)
n/a
2007
£m
313
94
5
(4)
-
8
(12)
(23)
-
(37)
(4)
27
9%
Royal Mail Holdings plc
9. Income tax (continued)
Deferred tax relates to the following:
Liabilities
Accelerated capital allowances
Goodwill qualifying for tax allowances
Gross deferred tax liabilities
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
Balance sheet
Income statement
2008
£m
(3)
(2)
(5)
62
26
470
41
9
608
603
2007
£m
2008
£m
2007
£m
-
(2)
-
-
35
16
140
34
(7)
(9)
(1)
67
(4)
(4)
(3)
-
(3)
27
10
345
6
15
403
400
Consolidated income statement
216
49
The Group has unrecognised deferred tax assets of £338m (2007 £1,159m) relating to the retirement benefit obligation, £289m (2007
£272m) relating mainly to fixed asset temporary differences, and £189m (2007 £101m) 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 £16m (2007 £13m). The Group
has rolled over capital gains of £74m (2007 £86m); 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 30 March 2008, there was no recognised or unrecognised deferred income tax liability (2007 £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.
The Finance Act 2007 reduced the main rate of corporation tax to 28% with effect from 1 April 2008. The effect of this change on deferred tax
balances is included in these accounts and is detailed above. In his 2007 Budget the Chancellor of the Exchequer announced forthcoming
changes to the capital allowances regime which have subsequently been confirmed. In accordance with accounting standards the effects of
these capital allowances changes on deferred tax balances has not been reflected in these accounts due to the relevant legislation not having
been substantively enacted at the balance sheet date. It is expected that the phased abolition of industrial buildings allowances will reduce the
Group's unrecognised deferred tax assets by approximately £100m.
67
10. Property, plant and equipment
Land and buildings
Royal Mail Holdings plc
Cost
At 26 March 2007
Exchange movements
Reclassification
Additions
Acquisition of subsidiary
Disposals
Reclassification to non-current assets
held for sale (note 15)
At 30 March 2008
Depreciation and impairment
At 26 March 2007
Exchange movements
Reclassification
Depreciation (note 5)
Impairment (note 7)
Disposals
Reclassification to non-current assets
held for sale (note 15)
At 30 March 2008
Net book value
At 30 March 2008
At 26 March 2007
Freehold
£m
1,486
23
(15)
64
-
(18)
(2)
1,538
736
5
(1)
54
3
(16)
(1)
780
758
750
Long
leasehold
£m
258
1
-
10
-
(6)
Short
leasehold
£m
503
-
14
20
-
(7)
Plant and
machinery
£m
842
13
1
85
-
(13)
Motor
vehicles
£m
274
3
-
63
-
(18)
Fixtures and
equipment
£m
858
11
-
42
1
(24)
-
263
151
1
-
6
1
(5)
-
154
109
107
-
530
272
-
1
29
12
(6)
-
308
222
231
-
928
522
9
-
62
-
(13)
-
580
348
320
-
322
124
2
-
45
6
(16)
-
161
161
150
-
888
797
9
-
15
18
(24)
-
815
73
61
2008
Total
£m
4,221
51
-
284
1
(86)
(2)
4,469
2,602
26
-
211
40
(80)
(1)
2,798
1,671
1,619
Depreciation rates are disclosed within accounting policies (note 2). No depreciation is provided on freehold land, which represents £156m (2007
£151m) 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 £83m (2007 £37m) mainly relating to vehicles, plant and machinery. The net book value of the Group’s property, plant
and equipment includes £156m (2007 £112m) in respect of assets in the course of construction. The net book value of the Group’s land and
buildings includes £433m (2007 £429m) in respect of building fit-out.
Cost
At 27 March 2006
Exchange movements
Reclassification
Additions
Disposal of subsidiaries
Disposals
Reclassification to non-current assets
held for sale
At 25 March 2007
Depreciation and impairment
At 27 March 2006
Exchange movements
Reclassification
Depreciation (note 5)
Impairment (note 7)
Disposals
Reclassification to non-current assets
held for sale (note 15)
At 25 March 2007
Net book value
At 25 March 2007
At 27 March 2006
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures and
equipment
£m
494
-
5
12
-
(8)
-
503
246
-
-
28
6
(8)
-
272
231
248
794
(1)
(2)
52
1
(2)
-
842
471
(1)
(1)
55
-
(2)
-
522
320
323
230
-
-
75
-
(31)
-
274
113
-
-
39
1
(29)
-
124
150
117
811
-
2
50
-
(5)
-
858
782
(1)
1
13
7
(5)
-
797
61
29
1,490
(2)
(9)
72
-
(16)
(49)
1,486
723
-
-
45
1
(11)
(22)
736
750
767
260
-
4
3
-
(5)
(4)
258
150
-
-
6
-
(3)
(2)
151
107
110
68
2007
Total
£m
4,079
(3)
-
264
1
(67)
(53)
4,221
2,485
(2)
-
186
15
(58)
(24)
2,602
1,619
1,594
Royal Mail Holdings plc
11. Goodwill
Cost
At 26 March 2007 and 27 March 2006
Exchange movement
Acquisition of businesses (note 13)
At 30 March 2008 and 25 March 2007
Impairment
At 26 March 2007 and 27 March 2006
Exchange movement
At 30 March 2008 and 25 March 2007
Net book value
At 30 March 2008 and 25 March 2007
At 26 March 2007 and 27 March 2006
2008
£m
487
70
8
565
344
48
392
173
143
2007
£m
476
(1)
12
487
344
-
344
143
132
The carrying value of goodwill arising on business combinations of £173m (2007 £143m) at the balance sheet date includes £172m (2007
£142m) 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 £369m (2007 £322m) at year end (see note 3) and the operating profit
before exceptional items is £114m (2007 £115m) for the year (see note 3). The carrying value represents a multiple of 3.2 (2007 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 multiples referenced
would reduce the net realisable value to below the carrying value.
12. Intangible assets
Cost
2008
2007
Master
franchise
licences
£m
Customer
listings
£m
Software
licences
£m
Total
£m
Master
franchise
licences
£m
Customer
listings
£m
Software
licences
£m
At 26 March 2007 and 27 March 2006
19
15
107
141
Additions
Disposals
Acquisition of businesses (note 13)
Exchange differences
-
-
-
3
-
-
4
2
79
(3)
-
-
79
(3)
4
5
19
-
-
-
-
7
-
-
8
-
42
65
-
-
-
Total
£m
68
65
-
8
-
At 30 March 2008 and 25 March 2007
22
21
183
226
19
15
107
141
Amortisation and impairment
At 26 March 2007 and 27 March 2006
Impairment
Amortisation
Disposals
Exchange differences
12
-
4
-
2
6
-
4
-
1
59
57
17
(3)
-
77
57
25
(3)
3
At 30 March 2008 and 25 March 2007
18
11
130
159
Net book value
At 30 March 2008 and 25 March 2007
At 26 March 2007 and 27 March 2006
4
7
10
9
53
48
67
64
8
-
4
-
-
12
7
11
3
-
3
-
-
6
9
4
15
39
5
-
-
59
48
27
26
39
12
-
-
77
64
42
69
Royal Mail Holdings plc
12. Intangible assets (continued)
The intangible assets recognised in the Group’s balance sheet, none of which have been internally generated, have finite lives and are being
written down on a straight-line basis over their remaining economic lives as follows:
Intangible asset
Master franchise licences
Customer listings
Software licences
Remaining economic life in years
1 to 3
1 to 3
1 to 6
The amortisation charge of £25m (2007 £12m) relating to intangible assets is aggregated within ‘other operating costs’ within the income
statement and disclosed in note 5 to the accounts. Details of impairments are disclosed in note 7 to the accounts.
13. Business combinations
The acquisitions during the current or prior years are not material and therefore, the following disclosures are made on an aggregated basis.
The table below sets out the identifiable assets and liabilities that were acquired at their provisional fair values to the Group as at the date of
acquisition which, where relevant, are consistent with their book values immediately before the acquisition.
Trade and other receivables
Trade and other payables
Net working capital acquired
Property, plant and equipment
Cash and cash equivalents
Net assets acquired
Intangible assets recognised on acquisition
Goodwill recognised on acquisition
Total cost recognised
Gross consideration
Acquisition costs
Total costs
Less: deferred consideration
cash and cash equivalents acquired
Net cash outflow
Book value/
fair value
Total
2008
£m
Book value/
fair value
Total
2007
£m
-
(1)
(1)
1
-
-
4
8
12
12
-
12
(7)
-
5
9
(11)
(2)
1
2
1
8
12
21
20
1
21
(2)
(2)
17
On 1 October 2007 certain assets of a Milan Franchise Area business, Italy were acquired by the General Logistics Systems (GLS)
subsidiary. If this combination had taken place at the beginning of the financial year, Group revenue from continuing operations would
have been £9,392m. The profit of the acquired entity since its acquisition date and if it had been acquired at the beginning of the financial
year is not material in the context of the Group’s profit after tax.
The goodwill arising on this acquisition represents the strategic benefit of securing control of operations in one of the major industrialised
areas of Italy, and thereby significantly increasing GLS's presence in this market.
The prior year acquisitions relate to the purchase by GLS of 100% of the voting shares of ABX Belgium Distribution, a parcels and general
cargo business based in Belgium, on 31 December 2006, and certain assets of three franchisee businesses in Italy (not material in
aggregate).
70
Royal Mail Holdings plc
14. Investments in joint ventures and associates
Joint ventures
During 2007–08 and 2006-07, the Group’s only joint venture investment was a 50% interest in First Rate Exchange Services Holdings
Limited, whose principal activity is the provision of Bureau de Change.
Associates
Details of the Group’s 2007-08 and 2006-07 associate investments are provided in note 29. The reporting dates for these investments is
31 March 2008 except for Quadrant Catering Limited (30 September 2007) and G3 Worldwide Mail N.V. (Spring) (31 December 2007).
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mail N.V. (Spring), from their reporting date to 30 March 2008 (and
25 March 2007 for the prior year), have been included to ensure that the reported share of profits of associates aligns with the Group’s
financial year. There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends,
repayment of loans or advances.
Joint ventures
Share of net assets
Goodwill
Net investments
Associates
Share of net assets
Goodwill
Net investments
Total net investments in joint
ventures/associates
Joint ventures
Share of net assets
Goodwill
Net investments
Associates
Share of net assets
Goodwill
Net investments
Total net investments in joint
ventures/associates
At 26
March
2007
£m
Share of post
tax pre
dividend
profit
£m
Investment
in associates
£m
Dividend
£m
Exchange
differences
£m
58
1
59
46
9
55
114
34
-
34
13
-
13
47
-
-
-
10
-
10
10
(24)
-
(24)
(12)
-
(12)
(36)
-
-
-
1
-
1
1
At 27
March
2006
£m
Impairment
(note 7)
£m
Share of post
tax pre dividend
profit
£m
Dividend
£m
At 30
March
2008
£m
68
1
69
58
9
67
136
At 25
March
2007
£m
58
1
59
46
9
55
30
-
30
9
-
9
(23)
-
(23)
(16)
-
(16)
39
(39)
114
-
-
-
(3)
(7)
(10)
(10)
51
1
52
56
16
72
124
71
14. Investments in joint ventures and associates (continued)
Royal Mail Holdings plc
Share of assets and liabilities:
Current assets
Non-current assets
Share of gross assets
Current liabilities
Non-current liabilities
Share of gross liabilities
Share of net assets
Share of revenue and profit:
Revenue
Profit after tax
2008
Joint
ventures
£m
Associates
£m
Total
£m
252
49
301
113
47
160
(101)
(174)
(1)
(1)
(102)
(175)
58
126
139
2
141
(73)
-
(73)
68
2007
Joint
ventures
£m
Associates
£m
128
2
130
(72)
-
(72)
58
102
39
141
(91)
(4)
(95)
46
Total
£m
230
41
271
(163)
(4)
(167)
104
68
34
1,095
1,163
13
47
60
30
1,084
1,144
9
39
15. Non-current assets held for sale
Net book amount
At 26 March 2007
Reclassification from property, plant and equipment
Disposals
At 30 March 2008
Net book amount
At 27 March 2006
Reclassification from property, plant and equipment
Disposals
At 25 March 2007
Assets
Freehold
£m
Long
leasehold
£m
7
1
(7)
1
-
-
-
-
Disposal group
Assets
Freehold
£m
Long
leasehold
£m
Freehold
£m
Long
leasehold
£m
-
19
(19)
-
-
2
(2)
-
11
8
(12)
7
-
-
-
-
Total
£m
7
1
(7)
1
Total
£m
11
29
(33)
7
The expected disposal of these properties is as a result of the rationalisation of the portfolio.
Non-current assets held for sale are reported in the relevant business segment. Further details are provided in note 3.
During the year a gain of £11m (2007 £13m) was recognised in the income statement in relation to the disposal of assets held for sale.
72
Royal Mail Holdings plc
16. Inventories
Supplies and materials (uniforms, fuel, printing and stationery, mailbags,
engineering spares)
Merchandise (Post Office Limited retail and lottery products)
Total
2008
£m
23
10
33
2007
£m
16
10
26
During the year £3m (2007 £3m) of inventory items were written off. Engineering spares items are included net of a provision for
impairment of £2m (2007 £nil). The cost of inventories recognised as an expense in the income statement is £49m (2007 £41m).
17. Current trade and other receivables
Trade receivables
Prepayments and accrued income
Sub total
Client debtors
Interest
Income tax receivable
Total
Movements in the provision for bad and doubtful debts were as follows:
At 26 March 2007 and 27 March 2006
Exchange adjustment
Receivables provided for during the year
Release of provision
Acquisition through business combinations
Utilisation of provision
At 30 March 2008 and 25 March 2007
The amount of trade receivables that were past due but not impaired is as follows:
Past due not more than one month
Past due more than one month and not more than two months
Past due more than two months
Total past due but not impaired
Provided for or not yet overdue
Provision for bad and doubtful debts
Total trade receivables
2008
£m
859
191
1,050
61
2
1
1,114
2008
£m
36
(1)
20
(6)
-
(16)
33
2008
£m
78
12
16
106
786
(33)
859
2007
£m
818
152
970
61
-
-
1,031
2007
£m
34
-
16
(7)
1
(8)
36
2007
£m
55
15
27
97
757
(36)
818
73
Royal Mail Holdings plc
18. Cash and cash equivalents
Cash in the Post Office Limited network
Other cash in hand
Cash at bank
Total cash at bank, in hand or in Post Office Limited network
Cash equivalent investments: Short-term deposits
Total
2008
£m
933
5
138
1,076
351
1,427
2007
£m
768
17
45
830
366
1,196
Other than cash in the Post Office Limited network and in hand of £938m (2007 £785m), the cash and cash equivalent balances of £489m
(2007 £411m) are interest bearing. Cash at bank of £138m (2007 £45m) earns interest at either floating or short-term fixed rates based
upon bank deposit rates. Short-term deposits of £351m (2007 £366m) 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 and cash equivalent investments is not materially different from the carrying value of £1,427m (2007 £1,196m).
The £1,427m total cash and cash equivalents does not include a £7m (2007 £nil) overdrawn bank balance relating to the General Logistics
Systems (GLS) subsidiary. This £7m is included in the Financial liabilities – interest bearing loans and borrowings balance of £289m in the
balance sheet.
74
2008
Total
£m
302
545
11
27
507
847
2007
Total
£m
308
503
1
1
501
811
19. Financial liabilities
Royal Mail Holdings plc
Amounts falling due in:
One year or less or on demand (current)
More than one year (non-current)
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
Loans
and
borrowings
£m
Finance
lease/hire
purchase
contracts
£m
Derivative
liabilities
£m
289
502
-
2
500
791
10
43
11
25
7
53
3
-
-
-
-
3
Included within the £289m loans and borrowings is an overdrawn bank balance of £7m (2007 £nil).
Amounts falling due in:
One year or less or on demand (current)
More than one year (non-current)
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
Analysis of loans and committed facilities
*BERR loans to Royal Mail Group Ltd
*BERR loans to Post Office Limited
Committed facilities
Miscellaneous loans and borrowings in subsidiaries
Total
Loans
and
borrowings
£m
Finance
lease/hire
purchase
contracts
£m
Derivative
liabilities
£m
301
502
-
1
501
803
-
1
1
-
-
1
7
-
-
-
-
7
Loans
and
borrowings
£m
Further
committed
facility
£m
500
280
780
11
791
1,200
870
2,070
-
2,070
Total
facility
£m
1,700
1,150
2,850
11
2,861
2008
Average
maturity
date
of loan
drawn down
Year
Average
interest rate
of loan
drawn down
%
5.8
5.6
2023
2008
4.5
2009
* The Department for Business Enterprise and Regulatory Reform (BERR) was formerly known as the Department for Trade and Industry
(DTI).
75
19. Financial liabilities (continued)
Royal Mail Holdings plc
Loans
and
borrowings
£m
Further
committed
facility
£m
BERR loans to Royal Mail Group Ltd
BERR loans to Post Office Limited
Committed facilities
Miscellaneous bank loans in overseas subsidiaries
Total
500
300
800
3
803
1,200
850
2,050
Average
Interest rate of
loan
drawn down
%
2007
Average maturity
date
of loan
drawn down
Year
5.8
5.7
2023
2007
Total
facility
£m
1,700
1,150
2,850
-
3
4.8
2010
2,050
2,853
The miscellaneous loans and borrowings in 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 the leased assets. These are repayable
in variable and fixed amounts over their maturity periods. The average interest rate is 6% (2007 5%). The average maturity date is within
two to three years (2007 – within one to two years).
The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date, expire 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
The following securities apply to the Group’s committed facilities:
2008
2007
2008
£m
-
-
2,070
2,070
2007
£m
-
-
2,050
2,050
Royal Mail Group Ltd
drawn down loans
£m
500
£m
500 Fixed charges over Royal Mail Group Ltd’s loans to General Logistics Systems B.V., Royal Mail Group
Security
Ltd’s loans to subsidiaries of General Logistics Systems B.V. and Royal Mail Investments Limited’s
shares in General Logistics Systems B.V. Floating charge over non regulated assets of Royal Mail
Group Ltd
Royal Mail Group Ltd
senior debt facility
900
900 Fixed charges over Royal Mail Holdings plc’s shares in Royal Mail Group Ltd and Royal Mail Group
Ltd’s shares in Royal Mail Estates Limited. Floating charges over all assets of Royal Mail Holdings
plc, Royal Mail Group Ltd and Royal Mail Estates Limited
Royal Mail Group Ltd
Shareholder loan
facility
Post Office Limited
facility
300
300 None
1,700
1,700
1,150
1,150 Floating charge over all assets of Post Office Limited and a negative pledge over cash and near cash
items*
Total
2,850
2,850
* The negative pledge is an agreement not to grant security over these assets or to set up a vehicle that has the same effect.
The Post Office Limited facility of £1,150m is restricted to funding the cash and near cash items held within the Post Office Limited network.
As at 30 March 2008, the balance of this cash was £933m (2007 £768m) as shown in note 18.
The BERR loans to Post Office Limited under the facility are short dated on a programme of liquidity management and mature on average 1
day after the year end (2007 16 days). On maturity it is expected that further loans will be drawn down under this facility, which expires in
2011. At the balance sheet date this was to 2010 and extended on 18 April 2008 to 2011.
The security in place in the previous year was as disclosed above.
The BERR loans to Royal Mail Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default
under the loan agreements. These events of default include non-payment, insolvency and breach of covenant relating to interest and total
indebtedness. It is not anticipated that the Company is at risk of breaching any of these obligations.
76
Royal Mail Holdings plc
20. Provisions for liabilities and charges
Current
provisions
£m
Non-current
provisions
£m
Held for
sale
provisions
£m
At 26 March 2007
Reclassification to Mails and Parcels
Charged in operating exceptional items
Charged in other operating costs
Reclassification to current provisions
Utilised non-cash
Utilised cash
At 30 March 2008
69
-
347
1
8
(29)
(148)
248
42
-
132
(2)
(8)
-
(1)
163
-
-
-
-
-
-
-
-
Current
provisions
£m
Non-current
provisions
£m
Held for
sale
provisions
£m
At 27 March 2006
Reclassification to Mails and Parcels
Charged in operating exceptional items
Charged in other operating costs
Reclassification to non-current
provisions
Reclassification to held for sale
provisions
Utilised non-cash
Utilised cash
Disposal of property group
At 25 March 2007
58
-
179
4
(4)
-
(41)
(127)
-
69
-
-
-
-
-
25
-
53
-
-
10
4
(25)
-
-
-
(1)
(128)
(24)
(24)
42
-
111
Total
£m
111
-
479
(1)
-
(29)
(149)
411
Total
£m
111
-
179
14
-
-
(41)
Mails
and
Parcels
£m
Counter
Services
£m
106
(1)
218
(3)
-
(19)
(83)
218
5
1
261
2
-
(10)
(66)
193
Mails
and
Parcels
£m
Counter
Services
£m
109
1
141
11
-
-
(29)
(103)
(24)
106
2
(1)
38
3
-
-
(12)
(25)
-
5
Total
£m
111
-
479
(1)
-
(29)
(149)
411
Total
£m
111
-
179
14
-
-
(41)
(128)
(24)
111
The Mails and Parcels provision includes amounts relating to ColleagueShare £105m (2007 £nil), onerous property contracts £15m (2007
£27m) and decommissioning costs, £7m (2007 £9m) with the balance of £91m (2007 £70m) principally relating to redundancy. The Mails and
Parcels provision in the main is expected to be utilised in 2008-09 with the remaining amounts expected to be utilised over the next two to three
years, except for £105m (2007 £nil) relating to ColleagueShare, expected to be utilised within 5 years and £2m relating to onerous property
contracts expected to be utilised over a period longer than 3 years. The timing of cash flows for such provisions are by their nature uncertain and
dependent upon the outcome of related events.
Counter Services provisions include amounts in respect of Agency Network change £127m (2007 £nil), a programme to close 2,500 agency
branches agreed with Government to be completed during 2008-09, the WH Smith project £22m (2007 £nil), a programme to transfer 70
branches to WH Smith, the organisational design review and other redundancy £14m (2007 £1m), onerous property contracts £19m (2007
£4m) and ColleagueShare £11m (2007 £nil). These provisions are expected to be utilised in 2008-09 with the exception of ColleagueShare,
expected to be utilised within 5 years and certain property provisions that are expected to be utilised over a period longer than 3 years.
Details of amounts charged as operating exceptional items are contained in note 7. The amounts released in other operating costs relate to
onerous property contracts and decommissioning costs. The change in the carrying value of the discounted element of the provision balance due
to the passage of time is not material. Non-cash utilised amounts principally relate to transfers from provisions to current payables for amounts
due to the pension scheme for redundancies with early retirement. Of the current payables recognised in this way during the year, £22m (2007
£27m) had been cash settled by the balance sheet date.
The cash utilised of £149m (2007 £128m) includes £144m (2007 £118m) of spend relating to exceptional rationalisation and £5m (2007
£10m) relating to other operating costs. Total cash spend in the year relating to exceptional rationalisation is shown in the cash flow statement.
77
Royal Mail Holdings plc
21. Current trade and other payables
Trade payables and accruals
Advance customer payments
Social security
Sub total
Deferred consideration on business combinations
Client creditors
Amounts due to pension schemes relating to redundancies
Interest
Capital creditors
ColleagueShare accrual
Total
2008
£m
1,251
274
122
1,647
5
426
7
16
92
161
2,354
2007
£m
1,178
264
89
1,531
3
303
14
2
71
-
1,924
The Group, through Post Office Limited, receives and disburses cash on behalf of Government agencies and other clients to customers through
its Post Office branch network. Amounts owed to these parties are separately shown as client creditors above. The level of cash held and the
related creditors can vary significantly at each balance sheet date.
The change in the carrying value of the discounted element of the payable balance due to the passage of time is not material.
22. Non-current other payables
Deferred consideration
Capital creditors
Other payables
Total
2008
£m
4
12
24
40
2007
£m
1
-
24
25
23. 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 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 BERR loans to Royal Mail Group Ltd of £500m (2007 £500m) are at a fixed interest rate to maturity with an average maturity date of
2023 (2007 – average date of 2023). The BERR loans to Post Office Limited of £280m (2007 £300m) are at short-dated fixed interest rates –
average maturity 1 day (2007 average 16 days). The total interest bearing financial assets of the group (excluding the pension escrow
investments) of £510m (2007 £428m) are at short-dated fixed or variable interest rates with average maturity 12 days (2007 average 15
days). 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.
The following table demonstrates the sensitivity to reasonably possible changes in interest rates, with all other variables held constant, of the
Group’s profit before taxation and equity based upon the financial instruments held at the balance sheet date.
The effect from available for sale (whether floating or fixed rate) financial assets is calculated as the change in fair value at the balance sheet
date and impacts equity.
78
Royal Mail Holdings plc
23 Financial risk management objectives and policies (continued)
The effect from other floating rate financial instruments is calculated as the balance of the instruments multiplied by the change in interest
rates and impacts profit before taxation.
There is no effect on either profit before taxation or equity from other financial instruments.
2008
2007
Effect on
profit
before
taxation
gains/(losses)
£m
Effect on
equity
gains/(losses)
£m
Effect on
profit
before
taxation
gains/(losses)
£m
Effect on
equity
gains/(losses)
£m
Effect on of an increase in GBP interest rates of 100 basis points (1%)
Effect on of a decrease in GBP interest rates of 100 basis points (1%)
4
(4)
(52)
72
11
(11)
-
-
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, the balances held to operate the Bureau de Change services within Post Office Limited and various purchase contracts
denominated in foreign currency. These risks are mitigated by hedging 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. 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 of currencies
comprising of US Dollar (US$), Japanese Yen, Sterling and euro. Group Treasury operates a rolling 18-month hedge programme, which is
subsequently reviewed on a quarterly basis. There has been no external SDR hedge in place throughout the financial year 2007-08 due to
there being no material net exposure.
For the Bureau de Change business, balances of major currency holdings are hedged along with minor currencies showing a closely correlated
movement.
The Group’s obligations to settle conveyance charges in US$ and euro has been hedged (US$ to April 2011, euro to April 2008).
The Group has four active hedge programmes covering obligations to settle euro invoices on automation projects.
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries.
The following table demonstrates the sensitivity to reasonably possible changes in exchange rates, with all other variables held constant, of the
Group’s profit before taxation and equity based upon the financial instruments held at the balance sheet date.
The effect from financial instruments owned by GLS denominated in foreign currency and held at amortised cost in the balance sheet is
calculated as the balance of the instruments multiplied by the change in exchange rates and impacts equity.
The effect from other financial instruments denominated in foreign currency and held at amortised cost in the balance sheet is calculated as
the balance of the instruments multiplied by the change in exchange rates and impacts profit.
The effect from derivative assets and liabilities is calculated as the change in fair value at the balance sheet date and impacts equity (for
derivatives within an effective hedging relationship) or profit before taxation for ineffective hedges and derivatives not designated in hedging
relationships.
There is no effect on either profit before taxation or equity from other financial instruments.
2008
2007
Effect on
profit
before
taxation
gains/(losses)
£m
Effect on
equity
gains/(losses)
£m
Effect on
profit
before
taxation
gains/(losses)
£m
Effect on of an increase in USD/GBP exchange rates of 20 cents
Effect on of a decrease in USD/GBP exchange rates of 20 cents
Effect on of an increase in GBP/euro exchange rates of 10 pence
Effect on of a decrease in GBP/euro exchange rates of 10 pence
(2)
2
(1)
1
(12)
15
34
(34)
(1)
1
1
-
Effect on
equity
gains/(losses)
£m
(4)
5
14
(17)
79
Royal Mail Holdings plc
23 Financial risk management objectives and policies (continued)
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 140 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 uses over-the-counter derivative
products (in both US$ commodity price and US$/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.
The following table demonstrates the sensitivity to reasonably possible changes in commodity prices, with all other variables held constant, of
the Group’s profit before taxation and equity based upon the financial instruments held at the balance sheet date.
The effect from derivative assets and liabilities is calculated as the change in fair value at the balance sheet date and impacts equity (for
derivatives within an effective hedging relationship) or profit before taxation for ineffective hedges and derivatives not desginated in hedging
relationships.
There is no effect on either profit before taxation or equity from other financial instruments.
Effect on of an increase in Diesel fuel prices of 10 US cents per litre
Effect on of a decrease in Diesel fuel prices of 10 US cents per litre
Effect on of an increase in Jet fuel prices of 10 US cents per litre
Effect on of a decrease in Jet fuel prices of 10 US cents per litre
2008
2007
Effect on
profit
before
taxation
gains/(losses)
£m
-
-
1
(1)
Effect on
equity
gains/(losses)
£m
5
(5)
-
-
Effect on
profit
before
taxation
gains/(losses)
£m
-
-
2
(2)
Effect on
equity
gains/(losses)
£m
9
(9)
-
-
Credit risk
Royal Mail operates a Credit Policy, which provides a fair and equitable arrangement for all its account customers. The level of credit granted is
based on a customer’s risk profile assessed by an independent credit referencing agent. 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 sets and monitors credit limits, and takes 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 around 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 invests/trades only with high quality financial institutions. 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, apart from a £0.2bn exposure to the Royal Bank of Scotland as a result
of the establishment of the two pension escrow accounts. This exposure is expected to be short-term, pending the implementation of a longer
term investment strategy for the accounts.
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.
The unused facilities for Royal Mail Group Ltd of £1,200m expire between 2014 and 2016 (2007 £1,200m expiring between 2014 and 2016).
The unused facility for Post Office Limited of £870m (2007 £850m) expires in 2011. Additionally, the Group has £300m (2007 £300m) of
uncommitted lines of credit which are reviewed annually.
Capital management
Royal Mail Holdings plc is a public limited company which is not traded and regards its capital as share capital, share premium, retained
earnings and debt provided by the UK Government. The sole shareholder and the provider of the majority of debt to the Group is the UK
Government. The management of capital is closely linked to the Group’s relationship with its Shareholder. The Group maintains its liquidity
requirements by the management of its internal funds and by the drawing down of equity and debt from its Shareholder as well as drawing on
limited external debt facilities. The Group’s debt to equity ratio is determined by its Shareholder.
Financial assets – pension escrow investments
On 23 March 2007, Royal Mail Holdings plc and Royal Mail Group Ltd established £1bn of investments in escrow. These investments are held
as security to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006. At 30 March 2008, Royal Mail
Holdings plc had £909m of investments in the pension escrow and Royal Mail Group Ltd had £161m. Charges over these assets have been
registered. Further details on the Royal Mail Pension Plan, including the latest full actuarial valuation, are contained in note 25.
80
Royal Mail Holdings plc
24. Financial instruments
Carrying amounts and fair values
Set out below is a summary by category of the carrying amounts of all the Group’s financial instruments. Trade debtors, creditors,
prepayments, accruals and client creditors 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 also excluded. Fair values have been calculated using current market prices (forward
exchange rates/commodity prices) and discounted using appropriate discount rates. There are no material differences between the fair value
(transaction price) of all financial instruments at initial recognition and the fair value calculated using these valuation techniques. The only
financial instrument where the carrying amount at year end is different to the fair value is the ‘BERR loans to Royal Mail Group Ltd’. At the
year end the respective fair value is £507m (2007 £494m).
The tables below also set out the carrying amount of the currency of the Group’s financial instruments:
Financial assets
Classification
Cash at bank, in hand or in Post Office Limited network
Cash equivalent investments
- Money market funds
Loans and receivables
- Short-term deposits – Government/local government
Loans and receivables
- Short-term deposits – bank
Loans and receivables
Cash equivalent investment
Cash and cash equivalents
Financial assets – investments (current)
- Short-term deposits – bank
Loans and receivables
- Short-term deposits – Government/local government
Loans and receivables
Financial assets – investments (current)
Financial assets – pension escrow investments (non-
current)
- Short-term deposits – bank
Loans and receivables
- Treasury bills
- Gilt edged securities (conventional)
- Gilt edged securities (index linked)
Financial assets – pension escrow investments (non-
current)
Available for sale
Available for sale
Available for sale
Derivative assets – (current)
- (non-current)
Total
Financial liabilities
BERR loans to Post Office Limited
Miscellaneous loans in subsidiaries (current)
Financial liabilities – loans and borrowings (current)
Obligations under finance leases and hire purchase
contracts (current)
BERR loans to Royal Mail Group Ltd
Miscellaneous loans in subsidiaries (non-current)
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Financial liabilities – loans and borrowings (non-current)
Obligations under finance leases and hire purchase contracts
(non-current)
Amortised cost
Derivative liabilities
Total
Sterling
£m
847
US$
£m
15
euro
£m
189
Other
£m
2008
Total
£m
25
1,076
88
122
141
351
-
-
-
-
-
-
-
-
-
-
-
-
88
122
141
351
1,198
15
189
25
1,427
20
1
21
187
640
32
211
1,070
-
-
2,289
(280)
(2)
(282)
(9)
(500)
-
(500)
(43)
-
(834)
-
-
-
-
-
-
-
-
14
3
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
5
-
-
-
-
-
-
-
-
-
-
20
1
21
187
640
32
211
1,070
24
8
204
25
2,550
-
(7)
(7)
(1)
-
(2)
(2)
-
(3)
(13)
-
-
-
-
-
-
-
-
-
-
(280)
(9)
(289)
(10)
(500)
(2)
(502)
(43)
(3)
(847)
Net total financial assets
1,455
32
191
25
1,703
81
24. Financial instruments (continued)
Royal Mail Holdings plc
Financial assets
Classification
Cash at bank, in hand or in Post Office Limited network
Cash equivalent investments:
- Money market funds
Loans and receivables
- Short-term deposits – Government/local government
Loans and receivables
- Short-term deposits – bank
Loans and receivables
Cash equivalent investment
Cash and cash equivalents
Financial assets – investments (current)
Sterling
£m
680
US$
£m
17
euro
£m
109
Other
£m
24
79
285
2
366
-
-
-
-
-
-
-
-
-
-
-
-
2007
Total
£m
830
79
285
2
366
1,046
17
109
24
1,196
- Short-term deposits – bank
Loans and receivables
- Short-term deposits – Government/local government
Loans and receivables
- Gilt edged securities (conventional)
Available for sale
Financial assets – investments (current)
Financial assets – pension escrow investments (non-
current)
13
1
3
17
- Short-term deposits – bank
Loans and receivables
1,000
Financial assets – pension escrow investments (non-
current)
Total
Financial liabilities
BERR loans to Post Office Limited
Amortised cost
Miscellaneous bank loans in overseas subsidiaries (current) Amortised cost
Financial liabilities – loans (current)
BERR loans to Royal Mail Group Ltd
Miscellaneous bank loans in overseas subsidiaries (non-
current)
Amortised cost
Amortised cost
Financial liabilities – loans (non-current)
Obligations under finance leases and hire purchase contracts
(non-current)
Amortised cost
Derivative liabilities
Total
1,000
2,063
(300)
-
(300)
(500)
-
(500)
-
-
(800)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17
109
24
-
-
-
-
-
-
-
(7)
(7)
-
(1)
(1)
-
(2)
(2)
(1)
-
(4)
-
-
-
-
-
-
-
-
-
13
1
3
17
1,000
1,000
2,213
(300)
(1)
(301)
(500)
(2)
(502)
(1)
(7)
(811)
Net total financial assets
1,263
10
105
24
1,402
There are no financial assets or liabilities designated at fair value through the income statement on initial recognition.
Derivative assets £24m current, £8m non-current (2007 £nil) and liabilities £3m (2007 £7m) are valued at fair value. Effective changes in
the fair value of derivatives, which are part of a designated cash flow hedge under IAS 39, are deferred into equity. All other changes in
derivative fair value are taken straight to the income statement.
None of the financial assets listed above are either past due or considered to be impaired.
The movements in pension escrow investments of £70m consists of £57m interest on the investments and £13m movement in fair value
deferred into the Financial Assets Reserve.
82
Royal Mail Holdings plc
24. Financial instruments (continued)
Interest rate risk
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.
The table below sets out the carrying amount by maturity of the Group’s financial instruments that are exposed to interest rate risk. The
pension escrow investments mature between 8 days and 48 years but have been disclosed as maturing in greater than 5 years as the
investments have been provided as security to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006.
Average
effective
interest rate
%
Within
1 year
£m
1-2
years
£m
2-5
years
£m
More than
5 years
£m
Financial year ended 30 March 2008
Fixed rate
Cash at bank
Cash equivalent investments:
- Short-term deposits – Government/local
government
- Short-term deposits – bank
Financial assets – investments (current)
- Short-term deposits – bank
- Short-term deposits – Government/local
government
Financial assets – pension escrow investments
(non-current)
- Gilt edged securities (conventional)
BERR loans to Post Office Limited
BERR loans to Royal Mail Group Ltd
Obligations under finance lease and hire
purchase contracts
Miscellaneous loans in subsidiaries
Total
Floating rate
Cash at bank
Cash equivalent investments:
- Money market funds
- Short-term deposits – bank
Financial assets – pension escrow investments
(non-current)
- Short-term deposits – bank
- Treasury bills
- Gilt edged securities (index linked)
Miscellaneous loans in subsidiaries
Total
Non-interest bearing
Cash in hand or in Post Office Limited network
Derivative assets
Derivative liabilities
Total
7.3
4
5.2
5.0
5.8
7.7
4.8
5.6
5.8
5.8
5.8
122
41
20
1
-
(280)
-
(10)
(2)
(104)
3.7
134
5.4
5.4
5.2
5.1
3.7
3.9
88
100
-
-
-
(7)
315
938
24
(3)
959
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(11)
-
(11)
(25)
(1)
(26)
-
-
-
-
-
-
-
-
-
4
-
4
-
-
-
-
-
-
(1)
(1)
-
4
-
4
Total
£m
4
122
41
20
1
32
(280)
(500)
(53)
(3)
-
-
-
-
-
32
-
(500)
(7)
-
(475)
(616)
-
-
-
187
640
211
-
134
88
100
187
640
211
(8)
1,038
1,352
-
-
-
-
938
32
(3)
967
Net total financial assets/(liabilities)
1,170
(7)
(23)
563
1,703
83
Royal Mail Holdings plc
24. Financial instruments (continued)
Financial year ended 25 March 2007
Fixed rate
Cash at bank
Cash equivalent investments:
- Short-term deposits – Government/local
government
- Short-term deposits – bank
Financial assets – investments (current)
- Short-term deposits – bank
- Short-term deposits – Government/local
government
- Gilt edged securities (conventional)
BERR loans to Post Office Limited
BERR loans to Royal Mail Group Ltd
Total
Floating rate
Cash at bank
Cash equivalent investments:
- Money market funds
Financial assets – pension escrow investments
(non-current):
- Short-term deposits – bank
Miscellaneous bank loans in overseas
subsidiaries
Obligations under finance leases and hire
purchase contracts
Total
Non-interest bearing
Cash in hand or in Post Office Limited network
Derivative liabilities
Total
Average
effective
interest rate
%
3.8
5.2
5.2
5.3
7.7
5.4
5.7
5.8
2.9
5.2
5.2
4.8
5.3
Within
1 year
£m
21
285
2
13
1
3
(300)
-
25
24
79
-
(1)
-
102
785
(7)
778
1-2
years
£m
2-5
years
£m
More than
5 years
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
-
(1)
-
-
-
Total
£m
21
285
2
13
1
3
(300)
(500)
(475)
24
79
-
-
-
-
-
-
-
(500)
(500)
-
-
1,000
1,000
(1)
-
999
-
-
-
(3)
(1)
1,099
785
(7)
778
Net total financial assets/(liabilities)
905
(1)
(1)
499
1,402
The money market funds have been reclassified as floating rate.
84
Royal Mail Holdings plc
24. Financial instruments (continued)
Contractual maturity analysis for gross financial liabilities
The table below sets out the gross (undiscounted) contractual cash flows of the Group’s financial liabilities. For overdrafts, loans and finance
leases/hire purchase contracts, these cash flows represent the undiscounted total amounts payable including interest. For derivatives which are
settled gross, these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow. For derivatives
which are settled net, these cash flows represent the undiscounted forecast outflow.
Gross
loans and
borrowings
commitments
£m
Gross finance
lease/hire
purchase
instalments
£m
Gross
payments on
derivatives
settled gross
£m
Amounts falling due in:
One year or less or on demand (current)
More than one year (non-current)
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
317
919
30
89
800
1,236
12
51
13
29
9
63
Gross
loan
commitments
£m
Gross finance
lease/hire
purchase
instalments
£m
Gross
payments on
derivatives
settled gross
£m
Net liabilities
on derivatives
settled net
£m
Amounts falling due in:
One year or less or on demand (current)
More than one year (non-current)
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
Hedging Activities
330
947
29
88
830
1,277
-
1
1
-
-
1
119
58
58
-
-
177
The Group had the following designated cash flow hedge programmes during the current and previous financial 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$/GBP exchange rates for forecast diesel fuel purchases.
ii) The air conveyance hedge programme uses US$ 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) Four capital programmes using euro forward currency purchase contracts to hedge the exposure arising from GBP/euro exchange rates for
contracted capital expenditure on automation projects.
85
290
1,589
2008
Total
£m
520
1,069
96
164
809
2007
Total
£m
454
1,006
88
88
830
191
99
53
46
-
5
-
-
-
-
5
1,460
Royal Mail Holdings plc
24. Financial instruments (continued)
The following table shows the movements on the hedging reserve for each of these hedge programmes:
2008
Diesel fuel
Air Conveyance
Capital programmes
Total
2007
Diesel fuel
Air conveyance
Total
Gains/(losses) deferred
into equity
during year
£m
(Gains)/losses released from
equity to income during year
£m
(Gains)/losses released from equity to
the carrying value of non-financial
assets during year
£m
19
1
16
36
(8)
(1)
(9)
(3)
-
-
(3)
3
1
4
-
-
(1)
(1)
-
-
-
The £3m gains released from equity to income during year (2007 losses of £4m) are included within the distribution and conveyance operating
costs in the income statement.
There is no material ineffectiveness recognised in the income statement relating to cash flow hedges.
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 through the depreciation charge over the life of the asset being hedged.
The following table shows the derivatives outstanding at the year end:
Commodity/
currency
Nominal
amount
Maturity date
Average
contracted
commodity price/
exchange rate
Derivative
asset
non-current
fair value
£m
Derivative asset
- current
fair value
£m
Derivative
liability
fair value
£m
Diesel fuel 79k tonnes Apr 08-Jan 09
US$684/tonne
US $
US $
euro
$182m Apr 08-Apr 11
$69m Apr 08-Apr 11
€0.3m
Apr 08
US$1.96/£
US$1.97/£
£0.69/€
euro
€214m Apr 08-Apr 11
£0.73/€
Diesel fuel 149k tonnes
Apr 07-Oct 08
US$644/tonnes
US$
US$
euro
$96m
Apr 07-Oct 08
$3m
€1m
Apr 07
Apr 07
US$1.88/£
US$1.77/£
£0.70/€
euro
€102m May 07-Feb 09
£0.69/€
-
2
1
-
5
8
-
8
-
-
-
-
-
-
-
-
12
-
-
-
10
22
2
24
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3)
(3)
(3)
(2)
-
-
-
(5)
(2)
(7)
2008
Diesel fuel
Diesel fuel
Air conveyance
Air conveyance
Capital
programmes
Cash flow hedges
Other derivatives
Total
2007
Diesel fuel
Diesel fuel
Air conveyance
Air conveyance
Capital
programmes
Cash flow hedges
Other derivatives
Total
Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures, which are not designated as
hedges under IAS 39 (including the hedge of jet fuel costs arising from the purchasing of air freight services and the hedge of the Bureau de
Change currency holdings within Post Office Limited).
86
Royal Mail Holdings plc
24. Financial instruments (continued)
The Group had outstanding forward transactions to hedge foreign currency and fuel purchases as follows:
Maturing within one year
euro
US Dollars
Australian Dollars
Fuel (US Dollars)
Maturing after one year
euro
US Dollars
Fuel (US Dollars)
In currency (millions)
Sterling equivalents (millions)
2008
2007
2008
2007
210
142
9
65
101
182
-
110
133
4
94
84
25
25
153
72
4
33
76
92
-
74
71
2
51
58
13
13
The Group’s fuel hedges, which fix the GBP cost of purchasing fuel, consist of two elements which may be hedged jointly or separately:
•
•
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. The commodity forward transactions are shown under the heading Fuel (US Dollars) -
$65m (2007 $94m) maturing within one year and $nil (2007 $25m) maturing after one year. The related currency forward transactions are
contained within the total of US Dollars – $142m (2007 $133m) maturing within one year and $182m (2007 $25m) maturing after one year.
25. Employee benefits – pensions
The Group operates pension schemes as detailed below.
Scheme
Royal Mail Pension Plan (RMPP)
Eligibility
UK employees
Royal Mail Senior Executive Pension Plan (RMSEPP)
UK senior executives
Type
Defined benefit
Defined benefit
Royal Mail Retirement Savings Plan (RMRSP)
UK employees
Defined contribution
Various other small-scale schemes operated by overseas
subsidiaries
Defined Contribution
Overseas subsidiary employees
Defined contribution
A charge for the defined contribution schemes of £2m (2007 £2m) was recognised in operating profit before exceptional items within the
income statement. The Company contributions to these schemes was £2m (2007 £2m).
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 have been carried out as at 31 March 2006 using the projected unit method. For RMPP, this valuation has been
concluded at £3.4bn deficit. For RMSEPP, the valuation has been concluded at £43m deficit. A series of changes began to take effect on 1
April 2008 and are summarised in the Chairman and Chief Executive’s Statement.
Payment of £548m (2007 £541m) was made during the year in respect of regular future service contributions, with £542m (2007 £538m)
relating to RMPP. The regular future service contributions for RMPP, expressed as a percentage of pensionable pay, has remained at 20.0%,
effective from the beginning of the previous year. This rate is not expected to change materially during 2008-09. For RMSEPP, these
contributions have been at 48.2% (2007 20.9%).
Payment of £284m (2007 £243m) was made during the year to fund the deficit in the schemes, with £276m (2007 £241m) relating to
RMPP. Deficit recovery payments are planned for RMPP over the 17 years from the date of the latest full actuarial valuation. These
payments will be made before each 31 March, and may therefore span across the Group’s year end (the last Sunday in March). Over the 16
years from 31 March 2007, planned deficit payments are £260m per annum, increasing in line with RPI (base year is 2006-07). For
RMSEPP, deficit recovery payments will be £5m per annum from 1 April 2007 to 31 December 2015.
A current liability of £7m (2007 £14m) has been recognised for payments to the pension schemes relating to redundancy (see note 21).
During the year, payments of £36m (2007 £74m) relating to redundancy were made.
On 23 March 2007, the Group established £1bn of investments in escrow as security to the Royal Mail Pension Plan in support of the 17
year deficit recovery period.
87
Royal Mail Holdings plc
25. Employee benefits – pensions (continued)
The following disclosures relate to the gains/losses and deficit in the schemes recognised for the RMPP and RMSEPP defined benefit plans in
the financial statements of the Group:
a) Major assumptions
The size of the pension deficit, which is large in the context of the Group and its finances, 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:
Rate of increase in salaries
Rate of increase in pensions and deferred pensions
Discount rate
Inflation assumption
Expected average rate of return on assets
At 30 March 2008
% pa
4.6
3.6
6.5
3.6
6.8
At 25 March 2007
% pa
4.1
3.1
5.3
3.1
7.0
The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on assets which is
computed for the combined assets of the plans. The expected average rate of return on assets is a weighted average of the long-term
expected rate of return of each principal asset class (see section b). The expected average rate of return is computed at each balance sheet
date based on the market values and long-term rate of return of each principal asset class as at that date.
Mortality
The mortality assumptions for the larger scheme are based on the 1992 series mortality tables allowing for ‘medium cohort’ projections of
future improvements. These are detailed below:
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
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were:
At 30 March 2008
2008
26 years
29 years
28 years
31 years
2007
26 years
29 years
28 years
30 years
Market value
Long-term expected rate of return
Equities
Bonds
Property
Other assets
Fair value of plans’ assets
Present value of plans’ liabilities
Deficit in schemes
2008
£m
11,090
10,064
2,565
204
23,923
(26,846)
(2,923)
2007
£m
15,372
5,693
2,484
29
23,578
(28,563)
(4,985)
2008
% pa
8.3
5.2
6.7
4.6
2007
% pa
8.0
4.6
6.2
4.1
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded.
Certain of the above investments relate to properties occupied by the Group, but the contribution of these properties to the fair value of plans’
assets is not material. The pension plans have not invested in any other assets used by the Group or in the Group’s own financial instruments.
88
Royal Mail Holdings plc
25. 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:
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional
items:
Current service cost
Past service cost
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision for restructuring charge – note 7)
Total charge to operating profit
Analysis of amounts charged/(credited) to financing:
Interest on plans’ liabilities
Expected return on plans’ assets
Total net credit to financing
Net 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
Actuarial (losses)/gains on assets (all experience adjustments)
Experience adjustments on liabilities
Effects of changes in actuarial assumption on liabilities
Actuarial gains on liabilities
Total actuarial gains recognised in SORIE before deduction for tax
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
Past service cost
Curtailment costs*
Finance cost
Employee contributions
Actuarial gain (recognised in SORIE)
Benefits paid
2008
£m
699
-
699
42
741
1,509
(1,640)
(131)
610
313
(1,640)
(1,327)
(169)
3,294
3,125
1,798
2008
£m
(28,563)
(699)
-
(29)
(1,509)
(164)
3,125
993
2007
£m
704
16
720
51
771
1,342
(1,541)
(199)
572
1,713
(1,541)
172
(122)
290
168
340
2007
£m
(27,435)
(704)
(16)
(41)
(1,342)
(162)
168
969
(28,563)
Plans’ liabilities at end of period
*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 during the accounting period. Such payments may occur in an accounting
period subsequent to the recognition of costs in the income statement.
(26,846)
89
Royal Mail Holdings plc
25. Employee benefits – pensions (continued)
Changes in the fair value of the plans’ assets are analysed as follows:
Plans’ assets at beginning of period
Company contributions paid
Movement in company contributions accrued
Company contributions prepaid for 2008-09
Employee contributions
Finance income
Actuarial (loss)/gain (recognised in SORIE)
Benefits paid
Plans’ assets at end of period
2008
£m
23,578
918
(7)
(50)
164
1,640
(1,327)
(993)
23,923
2007
£m
21,847
858
(33)
-
162
1,541
172
(969)
23,578
e) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of recognised
income and expense is £890m gain (2007 £908m loss). 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 between inception of the pension schemes and transition to IFRSs.
2008
£m
23,923
(26,846)
(2,923)
2008
£m
(1,327)
(169)
2007
£m
23,578
(28,563)
(4,985)
2007
£m
172
(122)
2006
£m
21,847
(27,435)
(5,588)
2006
£m
3,421
(161)
2004
£m
15,200
(19,594)
(4,394)
2005
£m
17,357
(21,315)
(3,958)
2005
£m
1,043
(302)
Fair value of assets
Present value of liabilities
Deficit in schemes
Experience adjustment on assets
Experience adjustment on liabilities
26. Share capital
Authorised
Ordinary shares of £1 each
Special Rights Redeemable Preference Share (Special Share) of £1 each
Total
Issued and called up
Ordinary shares of £1 each
Special Rights Redeemable Preference Share (Special Share) of £1 each
Total
2008
£
100,000
1
100,001
2008
£
50,005
1
50,006
2007
£
100,000
1
100,001
2007
£
50,005
1
50,006
The Special Share can be redeemed at any time by its holder (the Secretary of State for Business, Enterprise and Regulatory Reform),
subject to such redemption being compliant with the Companies Act 1985. The Company cannot redeem the Special Share without the
prior consent of its holder. No premium is payable on redemption.
On distribution in a winding up of the Company, the holder of the Special Share is entitled to repayment of the capital paid up on the
Special Share in priority to any repayment of capital to any other member. The Special Share does not carry any rights to vote.
Under section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 1985, certain shares issued shall be treated
as if their nominal value had been fully paid up.
Under sections 72 and 74 of the Postal Services Act 2000, the Secretary of State for Business, Enterprise and Regulatory Reform may
issue directions to the Company which, depending on the direction issued could result in the recognition of a distribution.
90
Royal Mail Holdings plc
At 26 March 2007
430
(2,775)
(5)
47
(2,267)
Foreign
Currency
Translation
Reserve
£m
Hedging
Reserve
£m
Other
Reserves
£m
Equity
holder
of the
parent
£m
Minority
interest
£m
27. Total equity
Share
premium
£m
Retained
earnings
£m
Financial
Assets
Reserve
£m
Profit for the period
Translation differences
Actuarial gains on defined benefit
schemes
Gain on cash flow hedges deferred
into equity
Gain on cash flow hedges released
from equity to income
Gain released from equity to the
initial carrying value of fixed assets
Gains deferred into reserves
Taxation on items taken directly to
equity
Recognised income for the
period
Allocation to Rural Network Reserve
Transfer from Rural Network
Reserve
Transfer of interest income to Rural
Network Reserve
-
-
-
-
-
-
-
13
-
-
135
-
-
1,798
-
-
-
-
-
-
-
-
-
-
-
-
-
(15)
(3)
1,918
10
(150)
150
(6)
-
-
-
6
-
63
-
-
-
-
-
-
-
-
-
36
(3)
(1)
-
-
63
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
135
63
1,798
36
(3)
(1)
13
(18)
2,023
-
-
-
Total
equity
£m
(2,264)
135
63
1,798
36
(3)
(1)
13
(18)
2,023
-
-
-
(241)
3
-
-
-
-
-
-
-
-
-
-
-
-
3
At 30 March 2008
430
(863)
10
69
27
47
(244)
Rural
Network
Reserve
£m
30
-
-
-
-
-
-
-
-
-
150
(150)
6
36
91
27. Total equity (continued)
Royal Mail Holdings plc
Share
premium
£m
Retained
earnings
£m
Mails
Contribution
Reserve
£m
POL
Contribution
Reserve
£m
Holdings
Escrow
Reserve
£m
Mails
Reserve
£m
Rural
Network
Reserve
£m
POL
Funding
Reserve
£m
Foreign
Currency
Translation
Reserve
£m
Hedging
Reserve
£m
Other
Reserves
£m
Equity
holder
of the
parent
£m
Minority
interest
£m
Total
equity
£m
At 27 March 2006
Profit for the period
Translation differences
Actuarial gains on defined benefit
schemes
Loss on cash flow hedges deferred
into equity
Loss on cash flow hedges released
from equity to income
Taxation on items taken directly to
equity
-
-
-
-
-
-
-
(4,270)
286
-
340
-
-
27
Recognised income/(expense) for
the period
-
653
Transfer from Mails Reserve to
Rural Network Reserve
Allocation to Rural Network Reserve
Transfer from Rural Network
Reserve
Transfer of interest income to Rural
Network Reserve
-
-
-
-
Issue of ordinary shares (1)
145
-
(75)
150
(2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Allocation to Mails Contribution
Reserve
Transfer from Mails Contribution
Reserve
-
-
(145)
145
145
(145)
Issue of ordinary shares (2)
231
-
Allocation to POL Contribution
Reserve
Transfer from POL Contribution
Reserve to POL Funding Reserve
Transfer of interest income to POL
Funding Reserve
Transfer from POL Funding Reserve
Transfer of interest income to Mails
Reserve
Distribution of Mails Reserve
Allocation to Holdings Escrow
Reserve
-
-
-
-
-
-
-
(231)
-
(2)
233
(34)
795
(795)
Issue of ordinary shares (3)
54
-
Allocation to Holdings Escrow
Reserve
Transfer of interest income to
Holdings Escrow Reserve
Transfer from Holdings Escrow
Reserve
Transfer of unrealised gain
Dividend paid to minority interest
-
-
-
-
-
(54)
(1)
850
8
-
At 25 March 2007
430
(2,775)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
836
28
-
-
-
-
-
-
-
(75)
-
-
-
-
-
-
-
-
-
-
-
34
(795)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
75
75
(150)
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
231
2
(233)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
231
(231)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
795
-
54
1
(850)
-
-
-
92
8
-
(2)
-
-
-
-
-
-
-
-
(9)
4
-
55
(3,343)
-
-
-
-
-
-
286
(2)
340
(9)
4
27
(2)
(5)
-
646
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8)
-
-
-
-
-
145
-
-
231
-
-
-
-
-
-
-
54
-
-
-
-
-
4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,339)
286
(2)
340
(9)
4
27
646
-
-
-
-
145
-
-
231
-
-
-
-
-
-
-
54
-
-
-
-
(1)
(1)
6
(5)
47
(2,267)
3
(2,264)
Royal Mail Holdings plc
27. Total equity (continued)
Rural Network Reserve
The Rural Network Reserve was created by Post Office Limited, following directions issued by the Secretary of State under section 72 of the
Postal Services Act 2000 (the Act). The amounts allocated to this Reserve are to be applied as if they were profits available for distribution. The
purposes for which the Rural Network Reserve may be utilised are stated in the directions issued, and principally relate to the maintenance of
a rural network of post offices. A total of £594m has been used from this Reserve towards the maintenance of a rural network between March
2003 and the beginning of the 2007-08 financial year.
Following an order issued by the Secretary of State under section 103 of the Act, Post Office Limited received £150m during the period (2007
£75m). This subsidy has been accounted for as a Government grant and recorded within Revenue as the Social Network Payment (see note 2).
Under the terms of an agreement, Post Office Limited immediately allocated £150m to the Rural Network Reserve on receipt of the Social
Network Payment. During the period £150m (2007 £150m) of the Rural Network Reserve was applied towards the maintenance of a rural
network of Post Offices.
Interest
The transfer of interest relates to income recorded in the income statement, which has been earned on the assets that support the Rural
Network Reserve.
Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.
Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve is used to record the gains and losses arising from 29 March 2004 on translation of assets and
liabilities of subsidiaries denominated in currencies other than the reporting currency.
Hedging Reserve
The Hedging Reserve is used to record gains and losses arising from cash flow hedges since 28 March 2005.
Other Reserves
Other Reserves of £47m (2007 £47m) comprise £2m (2007 £2m) unrealised gain on First Rate Exchange Services Holdings Limited, a joint
venture transaction, and £45m (2007 £45m) relating to unrealised gains on Midasgrange Limited, an associate company. There were no
transfers between this Reserve and retained earnings during the year (2007 £8m).
93
Royal Mail Holdings plc
28. Commitments
Operating lease commitments
The Group is committed to the following future minimum lease payments under non-cancellable operating leases as at 30 March 2008:
Land and Buildings
2007
£m
2008
£m
Vehicles
and equipment
2008
£m
2007
£m
Within one year
Between one and five years
Beyond five years
129
417
640
120
366
679
Total
1,186
1,165
27
29
3
59
36
42
-
78
IT equipment
2008
£m
2007
£m
27
53
-
80
15
52
12
79
Total
2008
£m
183
499
643
2007
£m
171
460
691
1,325
1,322
Existing property leases have an average term of 15 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 have an average term remaining of 1 year. There are two IT contracts, one expiring within a year and one with a
term of 10 years with 5 years remaining at the balance sheet date.
Finance lease and hire purchase commitments
2008
Present value
of minimum
lease payments
Minimum
payments
£m
12
43
8
63
(10)
53
£m
10
36
7
53
-
53
2007
Present value
of minimum
lease payments
£m
-
1
-
1
-
1
Minimum
payments
£m
-
1
-
1
-
1
Within one year
Between one and five years
Beyond five years
Total minimum lease payments
Less amounts representing finance charges
Present value of minimum lease payments
The Group has finance lease contracts for vehicles, property and equipment. The leases have no terms of renewal, purchase options or
escalation clauses and there are no restrictions concerning dividends, borrowings or additional leases. Vehicle leases have a term of between 2
and 5 years, depending on the class of vehicle, with the average term being 3 years. The property lease is for a 15 year term and the
equipment for an average of 7 years.
Capital commitments
The Group has commitments of £222m at 30 March 2008 (25 March 2007 £110m), which are contracted for but not provided in the
accounts.
29. Related party transactions
The ultimate parent (the Company) and principal subsidiaries
Royal Mail Holdings plc is the ultimate parent company of the Group. The consolidated financial statements include the financial statements
of Royal Mail Holdings plc and the principal subsidiaries listed in the following table:
Company
Country of incorporation
% equity interest
2008
2007
Royal Mail Group Ltd
Post Office Limited
Royal Mail Investments Limited
General Logistics Systems B.V.
Royal Mail Estates Limited
Romec Limited
iRed Redefining Document Management Ltd
United Kingdom
United Kingdom
United Kingdom
Netherlands
United Kingdom
United Kingdom
United Kingdom
94
100
100
100
100
100
51
100
100
100
100
100
100
51
n/a
Royal Mail Holdings plc
29. Related party transactions (continued)
Royal Mail Estates Limited, a wholly owned subsidiary, was formed during the 2006-07 financial year. The security on the Royal Mail Group
Ltd senior debt facility includes a fixed charge over shares in Royal Mail Estates Limited and a floating charge over all the assets of Royal Mail
Estates Limited (see note 19). Further to the transfer of most of the property assets of Royal Mail Group Ltd to Royal Mail Estates Limited in
2006-07, the remaining property assets in scope were transferred during the current financial year.
iRed Redefining Document Management Ltd was formed during the year to source, produce, procure and deliver all printed material being
created by the Group.
Joint venture
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.
Associates
The following companies are the principal associates of the Group:
Company
Quadrant Catering Limited
Camelot Group plc
G3 Worldwide Mail N.V. (Spring)
Midasgrange Limited
Country of incorporation
% Ownership
United Kingdom
United Kingdom
Netherlands
United Kingdom
2008
51
20
24.5
50
2007
51
20
24.5
50
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.
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. The
transactions entered into and the balances outstanding at the financial year end were as follows:
Sales/recharges to
related party
2007
£m
2008
£m
Purchases from
related party
2007
£m
2008
£m
Amounts
owed from related
party including
outstanding loans
2007
2008
£m
£m
Amounts
owed to related
party including
outstanding loans
2007
£m
2008
£m
Royal Mail Pension Plan
Quadrant Catering Limited
Camelot Group plc
G3 Worldwide Mail N.V. (Spring)
Midasgrange Limited
First Rate Exchange Services
Holdings Limited Group (restated)
9
-
47
1
14
29
9
-
48
1
9
26
-
40
-
9
-
-
43
-
12
-
145
131
-
-
1
10
10
2
-
-
1
13
8
3
-
9
-
1
-
1
-
5
-
2
-
2
The 2006-07 purchases from First Rate Exchange Services Holdings Limited Group have been restated to include the margin charged by the
related party to Post Office Limited on foreign currency used in the Bureau de Change operation.
The companies listed above are joint ventures and associates of the Group with the exception of Royal Mail Pension Plan.
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.
The Group trades with numerous Government bodies on an arm’s length basis. Transactions with these entities are not disclosed owing to the
significant volume of transactions that are conducted.
Separately:
•
•
•
the Group has certain loan facilities with Government (see note 19);
the Group has received the Social Network Payment from Government (see notes 2 and 27); and
the Group has received a Government grant (see notes 2 and 7).
95
Royal Mail Holdings plc
29. 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 management
2008
£000
3,166
851
500
1,120
5,637
2007
£000
4,164
707
-
3,113
7,984
Key management comprises Executive and Non Executive Directors of the Royal Mail Holdings plc Board.
HM Government is the Company’s sole Shareholder and, accordingly, the Directors have no interest in the shares of the Company.
Transactions with other related parties
John Neill, a Non Executive Director of the Company until he left on 31 August 2007, is Group Chief Executive and Deputy Chairman of Unipart
Group, which during 2006-07 had a contract for the supply of operational support services and expertise with Royal Mail for improvements to
mail centres. The work programme was successfully completed during 2006-07 with a payment made of £1.4m. John Neill took no part in the
decision to appoint Unipart Group.
Bob Wigley, a Non Executive Director of the Company until his resignation on 31 October 2006, is Chairman of Merrill Lynch’s Europe, Middle
East and Africa Business. The Royal Mail Pension Plan, not the Group, had a commercial relationship with Merrill Lynch Investment
Management for two UK equity portfolio mandates to the value of £970m for the 7 months up to 31 October 2006. Bob Wigley was not a
Trustee of the Royal Mail Pension Plan whilst he was a Non Executive Director of the Company.
96
Group five-year summary (unaudited)
Royal Mail Holdings plc
Income statement
Revenue
Profit from operations
Pensions charge in respect of pensions deficit under SSAP 24
Operating profit before exceptional items
Operating exceptional items
Operating (loss)/profit
Non-operating exceptional items
(Loss)/profit before interest
Finance income and costs, including net pensions interest
(Loss)/profit before tax
Taxation
Profit after tax
Cash flow statement
Net increase/(decrease) in cash
Net (decrease)/increase in cash equivalents
Net increase/(decrease) in cash and cash equivalents
Balance sheet
Goodwill and intangible assets
Property, plant and equipment
Other non-current assets, including those classified as held for sale
Net current (liabilities)/assets
Non-current liabilities
Net liabilities
Prepared or restated under:
IFRS
2007
£m
2006
£m
2005
£m
UK GAAP
2004
£m
9,179
9,056
8,956
8,633
-
-
233
(243)
(10)
118
108
205
313
(27)
286
-
-
-
-
355
302
(210)
(277)
145
67
212
100
312
83
395
25
67
92
75
167
(16)
151
2007
£m
2006
£m
2005
£m
1
34
35
(61)
(159)
(118)
(179)
134
(25)
Prepared or restated under IFRS:
2007
£m
207
1,619
1,528
2006
£m
2005
£m
174
152
1,594
1,591
539
535
486
298
220
(132)
88
(64)
24
64
88
17
105
(98)
7
2004
£m
(11)
n/a
n/a
2004
£m
123
1,550
152
212
2008
£m
9,388
-
-
162
(441)
(279)
58
(221)
144
(77)
212
135
2008
£m
224
(15)
209
2008
£m
240
1,671
1,824
(300)
(60)
(3,676)
(5,558)
(6,181)
(4,565)
(5,016)
(241)
(2,264)
(3,339)
(2,038)
(2,979)
Paragraph 37 of International Financial Reporting Standard 1 – First time adoption of IFRSs, 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
IFRSs. Quantification of those adjustments is not required. The main adjustments to the Group accounts on the adoption of IFRSs 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;
an annual leave 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.
97
Parent Company accounts
Royal Mail Holdings plc
Statement of Directors’ responsibilities in relation to the parent Company financial statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to
prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Company
and of the profit or loss of the Company for that period. In preparing those financial statements, the Directors are required to:
•
select suitable accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent;
•
•
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in
the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy, at any time, the financial position
of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
98
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 30 March 2008 which comprise the
balance sheet and the related notes 1 to 9. 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 30 March 2008.
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’ responsibilities for preparing the Annual Report and the parent Company financial statements in accordance with applicable
United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are 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 whether, in our opinion, the information in the Directors’ Report is consistent with the
financial statements.
In addition we report to you if, in our opinion, 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 and 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 judgements
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 30 March 2008;
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; and
the information given in the Directors’ Report is consistent with the parent Company financial statements.
Ernst & Young LLP
Registered auditor
London
19 May 2008
99
Royal Mail Holdings plc
Parent Company balance sheet
at 30 March 2008 and 27 March 2007
Fixed assets
Investments in subsidiaries
Investments in pension escrow
Total net assets
Capital and reserves
Share capital
Share premium
Reserves
Profit and loss account
Shareholder’s funds
Notes
4
5
7
8
8
8
2008
£m
3,784
909
4,693
-
430
11
4,252
4,693
2007
£m
3,784
850
4,634
-
430
-
4,204
4,634
The accounts on pages 100 to 102 were approved by the Board of Directors on 19 May 2008 and signed on its behalf by:
Adam Crozier
Ian Duncan
100
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 53 weeks ended 30 March
2008 (52 weeks ended 25 March 2007).
Basis of preparation
The parent Company’s financial statements were authorised for issue by the Board on 19 May 2008.
The accounts on pages 100 to 102 have been prepared in accordance with applicable UK Accounting Standards and law, including the
requirements of the Companies Act 1985. Unless otherwise stated in the accounting policies below, the accounts have been prepared
under the historic cost accounting convention.
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 8 to the accounts.
The Company has taken advantage of paragraph 2D of FRS 29 (IFRS 7) Financial Instruments: Disclosures and has not disclosed
information required by that standard, as the Group’s consolidated financial statements in which the Company is included provide
equivalent disclosures for the Group under IFRS 7.
No new UK Accounting Standards, which affect the presentation of these accounts, have been issued.
Impairment reviews
Unless otherwise disclosed in these accounting policies, fixed assets are reviewed for impairment if events or changes in circumstances
indicate that the carrying value may be impaired. The Company assesses at each reporting date whether such indications exist. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash
generating unit) exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.
Investments in subsidiaries
Investments in subsidiaries within the Company’s accounts are stated at cost less any accumulated impairment losses. The opening and
closing carrying value relates solely to the Company’s investment in Royal Mail Group Ltd, a 100% subsidiary of the Company. Royal
Mail Group Ltd is the only direct shareholding held by the Company.
Investments in pension escrow
Investments in pension escrow are financial assets within the scope of FRS 26 ‘Financial Instruments: Recognition and Measurement’.
The investments are a combination of short-term deposits and long-term investments which mature between 8 days and 48 years but
have been included within fixed assets as the investments have been provided as security to the Royal Mail Pension Plan in support of
the 17 year deficit recovery period from March 2006.
The investments comprise short-term deposits with a bank, Treasury bills and gilt edged securities.
The bank deposits are non-derivative assets that are neither held for trading nor quoted in an active market and therefore classified as
‘loans and receivables’ for measurement purposes under FRS 26 (Financial Instruments: Recognition and Measurement). The
investments are initially recognised at fair value, being the amount deposited. The investments accrue interest, thereby increasing the
carrying value of the investments. This interest is included in the reported profit/(loss) for the year. The investments are derecognised
when they mature.
Treasury bills, index-linked gilt edged securities and conventional gilt edged securities are classified as available for sale financial
instruments on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity. The
investments are initially recognised at fair value, being the purchase price. After initial recognition, interest is included in the reported
profit/(loss) for the year, using the effective interest rate method and the assets are measured at fair value with gains or losses being
recognised in the Financial Assets Reserve until the investment is derecognised.
Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses occurring is considered to be remote.
2. Directors’ emoluments
The Directors of the Company are not paid fees by the Company for their services as Directors of the Company. The Directors of the
Company are paid fees by other companies of the Group. These emoluments are disclosed 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.
101
Royal Mail Holdings plc
4. Investments in subsidiaries
At 26 March 2007 and 27 March 2006
Additions
Impairment
Cost
£m
Impairment
£m
4,160
(376)
-
-
-
-
2008
£m
3,784
-
-
At 30 March 2008 and 25 March 2007
4,160
(376)
3,784
5. Investments in pension escrow
Short-term deposits – bank
Treasury bills
Gilt edged securities (index linked)
Gilt edged securities (conventional)
Investments in pension escrow
6. Profit and loss account
Average
effective
rate
%
5.2
5.1
3.7
4.8
Average
effective
rate
%
5.2
-
-
-
2008
£m
159
543
180
27
909
2007
£m
3,784
376
(376)
3,784
2007
£m
850
-
-
-
850
The Company is a non-trading company. The profit for the period relates to income from the investments in pension escrow.
7. Share capital
Details of the share capital are disclosed in the Group accounts in note 26.
8. Shareholder’s funds
At 26 March 2007
Profit for the year
Issue of shares
Gains on financial asset investments
At 30 March 2008
Financial Assets Reserve
Share
premium
£m
Profit and
loss
account
£m
Financial
Assets
Reserve
£m
430
4,204
-
-
-
48
-
-
430
4,252
-
-
-
11
11
2008
Total
£m
4,634
48
-
11
2007
Total
£m
3,784
420
430
-
4,693
4,634
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.
9. Charges
Details of charges registered over the assets of the Company are contained in the Group accounts in notes 19 and 24.
102
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 Ltd. Post Office and the Post Office symbol are registered trademarks of Post Office Limited. Report and Accounts
2008 © Royal Mail Group Ltd 2008. 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
Consumer Body
Postwatch
28 Grosvenor Gardens
LONDON
SW1W 0TT
Regulator (Postcomm)
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE1 7DB
103