Royal Mail plc
Annual Report and Financial Statements
2013-14
Royal Mail plc
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Strategic report
Governance
Financial statements
Other information
Strategic report
Who we are
Financial and business performance highlights
Chairman’s statement
Chief Executive Officer’s review
Market overview
Our business model
Our strategy
Key performance indicators
UK Parcels, International & Letters (UKPIL)
General Logistics Systems (GLS)
Financial review
Business risks
Corporate responsibility
Governance
Our Board of Directors
Chief Executive’s Committee
Directors’ report
Corporate Governance report
Directors' remuneration report
Financial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of cash flows
Consolidated balance sheet
Consolidated statement of changes in equity
Notes to the consolidated financial statements
Significant accounting policies
Group five year summary (unaudited)
Statement of Directors’ responsibilities in respect of
the Group financial statements
Independent Auditor’s Report to the members of
Royal Mail plc
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126
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128
Royal Mail plc – parent Company financial statements 131
Other information
Shareholder information
Forward looking statements
136
137
01
Information key
Case studies
This icon is used throughout
the document to indicate
reporting against a key
performance indicator (KPI)
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Who we are
Royal Mail is the UK’s designated Universal Postal
Service Provider, supporting customers, businesses
and communities across the country. We are the only
company that has the capability to deliver a ‘one-
price-goes-anywhere’, six-days-a-week service on a
range of letters and parcels to more than 29 million
addresses across the UK. General Logistics Systems
(GLS), our European parcels business, operates one
of the largest ground-based, deferred parcel delivery
networks in Europe.
Under the Postal Services Act 2011 (the ‘Act’),
Ofcom is the regulator for postal services in
the UK. Ofcom’s primary regulatory duty for
postal services is to secure the provision of
the Universal Postal Service. Ofcom has
designated Royal Mail as the Universal Postal
Service Provider. Subject to the special
administration regime, and as set out in
the Act, this designation is not time-limited.
In October 2013, Royal Mail successfully
floated on the London Stock Exchange and
was subsequently admitted into the
FTSE 100. More than 700,000 members of
the public bought shares in Royal Mail. These
investors were joined by the overwhelming
majority of our people in the UK, who in total
received free a ten per cent stake in our
Company. In addition to our employees’ Free
Shares, approximately 15,000 Royal Mail
employees chose to purchase shares in the
Company through the Employee Priority Offer.
Through this, alignment has been created
between the interests of shareholders
and employees.
Our employees
We employ more than 162,0001 people
across our Group. UK Parcels, International &
Letters (UKPIL) employs approximately
148,000 people across the UK. GLS employs
approximately 14,000 people in a range of
frontline, operational and support roles.
Our transformation
Royal Mail is undertaking one of the biggest
industrial transformations in the UK in recent
history. The UK, like many other countries,
is experiencing an ongoing decline in letter
volumes. We are focused on leveraging
an increasing number of parcels, which in
turn is driven by the rise of e-retailing.
The parcels market is very competitive.
We need to be more flexible and efficient to
meet the needs of our customers. We are
employing our strong brand and are well
placed to introduce new products
and services in order to sustain the
Universal Service.
Our performance
Five year Group revenue (£m)
Reported2
52 weeks
2014
9,456
3
Adjusted
52 weeks
2013
9,146
4
Adjusted
52 weeks
2012
8,764
4
Adjusted
52 weeks
2011
8,415
Five year Group operating profit after transformation costs (£m)
Reported2
52 weeks
2014
430
3
Adjusted
52 weeks
2013
403
4
Adjusted
52 weeks
2012
152
Five year Group free cash inflow/(outflow) (£m)
Reported2
52 weeks
2014
398
3
Adjusted
52 weeks
2013
334
4
Adjusted
52 weeks
2012
154
4
Adjusted
52 weeks
2011
18
4
Adjusted
52 weeks
2011
(246)
Revenue by business and market (£m)
(Reported 52 weeks 2014)
Percentage of Group revenue by
market (Reported 52 weeks 2014)
Business
segment/
market
UKPIL
GLS
Other
Group
Letters
& other
mail
3,514
–
18
3,532
Parcels
3,162
1,651
–
4,813
Marketing
mail Total
1,111 7,787
– 1,651
18
–
1,111 9,456
Parcels
Letters & other mail
Marketing mail
Group
4
Adjusted
52 weeks
2010
8,547
4
Adjusted
52 weeks
2010
147
4
Adjusted
52 weeks
2010
(390)
51
37
12
100
1 Excluding UK partially owned subsidiaries.
2 Reported – prepared in accordance with International Financial Reporting Standards (IFRSs).
3 Adjusted – reported 2012-13 results adjusted to exclude the consolidation of Post Office Limited (POL) up to 1 April 2012 and the 53rd week’s additional revenue and costs. In
addition, £32 million POL separation costs, taken directly to equity in the Reported basis, were taken through the income statement in the Adjusted basis. See note 1 ‘Basis of
preparation’ for further details.
4 Adjusted – Royal Mail Group results prepared under IFRSs, excluding POL.
02
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Our operations and networks
The Group operates through: UK Parcels,
International & Letters and General
Logistics Systems.
UKPIL
GLS
c.148,000
Employees
c.14,000
Employees
39
European hubs
c.7005
Depots
c.18,000
Sub-contractor
vehicles
8
Regional Distribution Centres
40
Mail Centres
c.1,400
Delivery Offices
c.45,000
Vehicles
53
Parcelforce Worldwide
depots
UKPIL
UKPIL comprises Royal Mail’s core UK and
international parcels and letter delivery
businesses under the ‘Royal Mail’ and
‘Parcelforce Worldwide’ brands. Royal Mail’s
network is unparalleled in the UK in its scale
and scope. It supports the provision of services
for the collection, sorting and delivery of
parcels and letters by Royal Mail. This includes
those services Royal Mail provides as the UK’s
designated Universal Postal Service Provider.
Parcelforce Worldwide is a leading provider of
express parcel services.
See page 20 for further details of UKPIL’s
performance
GLS
GLS is the Group’s European parcels business.
It operates one of the largest ground-based,
deferred6 parcel delivery networks in Europe.
Across Europe, the GLS network covers
37 countries and nation states through a
combination of wholly-owned and partner
companies. As our gateway to Europe, GLS
is a strategically important part of
Royal Mail Group.
See page 22 for further details of GLS’
performance
Key
UKPIL
GLS
GLS Network Partners
5 GLS and partners.
6 The least time-sensitive type of delivery.
03
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Financial and business
performance highlights
Financial highlights
Group
Revenue (£m)1
Operating profit before transformation costs (£m)
Transformation costs (£m)
Operating profit after transformation costs (£m)
Operating profit margin after transformation costs (%)
– Like-for-like
– Reported
Profit before taxation (£m)
– Excluding specific items
– Reported
Notional earnings per share (pence)
– Excluding specific items
– Reported
EBITDA before transformation costs (£m)
Free cash flow (£m)
Net debt (£m)
Recommended final dividend per share (pence)
Business unit
Reported
52 weeks
2014
Adjusted
52 weeks
2013
9,456
671
(241)
430
4.2
4.5
363
1,666
26.3
127.7
942
398
(555)
13.3
9,146
598
(195)
403
4.4
4.4
304
283
21.0
52.5
915
334
(906)
Change
2%
(20bps)
Revenue and volume
• Group revenue increased by two per cent,
due to parcel revenue growth in both UKPIL
and GLS. Parcels are the largest contributor
to Group revenue, accounting for
51 per cent.
• UKPIL revenue was £7,787 million, up two
per cent. UKPIL parcel revenue increased
by seven per cent. As expected, parcel
volumes (1,068 million items) were flat
compared with 2012-13.
• UKPIL letter revenue (including marketing
mail) declined to £4,625 million, a two per
cent reduction. The four per cent decline in
addressed letter volumes for the full year
was at the better end of our forecast range
of four to six per cent per annum. Marketing
mail revenue, part of letter revenue, was
£1,111 million.
£64m
£351m
• GLS revenue was £1,651 million, up seven
per cent. Volumes increased six per cent,
with growth in both domestic and
international volumes.
(£m)
UK Parcels, International & Letters
(UKPIL)
General Logistics Systems (GLS)
Other businesses
Group
Revenue
Operating profit after
transformation costs
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
Reported
52 weeks
2014
Adjusted
52 weeks
2013
7,787
1,651
18
7,633
1,498
15
9,456
9,146
2%
7%
n/m
2%
309
108
13
430
294
101
8
403
Profit and margins
• Group operating profit before transformation
costs grew to £671 million.
• Transformation costs of £241 million for
the year include a provision of £104 million
in relation to the management reorganisation
programme, announced on 25 March 2014,
which will be implemented in 2014-15.
• Group operating profit after transformation
costs increased to £430 million. The
operating profit margin reduced from
4.4 per cent to 4.2 per cent, as a result
of the provision for the management
reorganisation programme.
• UKPIL generated operating profit after
transformation costs of £309 million. The
operating profit margin decreased from
3.9 per cent to 3.5 per cent, again as a
result of the provision for the management
reorganisation programme.
• GLS operating profit was £108 million.
The operating profit margin decreased
from 6.7 per cent to 6.5 per cent due to
the full year effect of further increases
in sub-contractor rates in Germany.
1 Throughout this document, growth/decline rates and margins are stated on a like-for-like basis, unless otherwise indicated. Like-for-like changes in revenue and costs and
like-for-like margins are calculated after adjusting for movements in foreign exchange in GLS’ revenue and costs, and working days in UKPIL revenue. For volumes, like-for-like
movements are adjusted for working days in UKPIL.
Revenue
Costs
The cumulative average translation rates for the full year ended 30 March 2014 were £1 = €1.185, compared with £1 = €1.226 for the year ended 31 March 2013.
Foreign exchange
52
48
Movement compared with prior year relating to:
Working days
36
N/A
Total
88
48
(£m)
04
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Regulation
• The Ofcom investigation into changes
to access2 pricing puts this commercial
response to changing market conditions
on hold.
• Based on our estimates of the impact of
TNT Post UK’s publicly-stated plans, direct
delivery could reduce Royal Mail revenue by
over £200 million in 2017-18. See pages 9
to 11 for more information.
• With our proposed access price changes
suspended and unfettered direct delivery
rollout, there is a reasonable prospect that
Ofcom’s indicative EBIT margin range of
between five and ten per cent for Royal
Mail’s reported business3 may never
sustainably be achieved.
• We are preparing a regulatory submission
calling on Ofcom to take action now and
carry out a full review of direct delivery.
Summary outlook
• We are facing increasing challenges in the
parcels and letters markets in the UK.
However, our key value drivers of single
digit revenue growth, margin expansion and
underlying free cash flow growth remain
the objectives for the Group for 2014-15.
• The Board’s intention remains to pursue a
progressive dividend policy, having regard
to the normalised earnings progression of
the Group.
• Profit before taxation (excluding specific
items) of £363 million reflects the trading
performance of the Group. Accounting
standards require us to include a one-time,
non-cash benefit of £1,350 million as a
result of the Pensions Reform in reported
profit before taxation and reported notional
earnings per share.
Notional earnings per share (EPS)
• Notional EPS excluding specific items was
26.3 pence.
Cash flow and balance sheet
• EBITDA before transformation costs
grew to £942 million, due to improved
trading performance.
• Net cash investment of £581 million
represents £617 million investment after
cash from asset disposals of £36 million.
• Free cash flow increased to £398 million.
This has driven a reduction in net debt to
£555 million.
Dividends
• As previously indicated, the Board has
recommended a final dividend of 13.3 pence
per share, subject to shareholder approval at
the Annual General Meeting, to be held on
24 July 2014.
Transformation and cost control
Collections, processing and delivery
productivity improved by 1.7 per cent (2013
1.7 per cent) as we reduced the number of
frontline hours at a faster rate than the
reduction in the level of workload.
See KPIs pages 18 to 19
• Eight Mail Centres closed this financial year,
taking the total number of Mail Centres
remaining to 40. We have completed or
commenced modernisation in 94 per cent
of our Delivery Offices.
• Tight cost control meant non-people costs
in UKPIL reduced by three per cent.
2 As the Universal Service provider, Royal Mail is required to provide access at Inward Mail Centres for final mile deliveries.
3 The reported business is a subset of UKPIL including network access, and excluding Parcelforce Worldwide and the Royal Mail Property unit. The reported business, as defined by
Ofcom, is the entity which provides the Universal Service and takes account of all the costs of both the regulated and unregulated products that depend on the core Universal
Service activities.
05
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Chairman’s statement
Last year was a year of major achievement for
Royal Mail, with a good financial and operational
performance, agreement in principle on a new
industrial relations framework with the CWU and
a successful flotation on the London Stock Exchange.
An important year
More than 700,000 members of the public
bought shares in Royal Mail: the largest single
extension of private share ownership in the
UK for some time. I would like to welcome all
of our new shareholders. I am delighted to say
they were joined by the overwhelming
majority of our employees in the UK, who in
total received free a ten per cent stake in our
Company. Approximately 15,000 employees
also chose to buy shares through the
Employee Priority Offer. We are pleased our
shares are so widely held, and that alignment
has been created between the interests of
shareholders and employees.
Transforming our business
Our strategy is delivering, as outlined by our
CEO in her Review on page 8. The initial phase
of Royal Mail’s comprehensive transformation
programme across our UK operations is
largely complete. The vast majority of letters
are now sorted and sequenced automatically.
We have introduced new, more flexible
delivery methods. We have increased
efficiency and can handle an increasing
number of parcels. We continue to have a
strong operational link to Post Office Limited
and they are our retail partner. GLS’ track
record of expertise and innovation provides a
framework for best practice behaviours across
the Group.
We have agreed a new industrial relations
framework with the Communication Workers’
Union (CWU). It will provide a new way of
working together, helping to provide industrial
stability as we seek to transform our business.
Royal Mail is changing. Expansion in
e-retailing in the UK and across Europe is
continuing apace, while addressed letter
volumes in the UK continue to decline. We are
increasingly a parcels delivery company. I am
confident that we will succeed in the
continuing transformation of our Company.
Our contribution to UK life
We are proud to be the designated provider of
the Universal Service. Our contribution to the
UK is significant. For the 2013-14 financial
year, the Centre for Economics and Business
Research estimated we made the seventh
largest contribution to the UK economy of all
UK corporations. We had a total economic
impact of more than £10.5 billion, made up of
direct and indirect contributions to the wider
economy. This equates to about 0.79 per cent
of UK GDP.
Royal Mail’s employees make a substantial
contribution to charitable organisations.
Royal Mail holds the Guinness World Record
for the number of charities supported through
payroll giving – over 975 charities. Royal Mail
employees have given an incredible
£50 million through the scheme since 1989.
They should be very proud.
We continue to support the British Postal
Museum and Archive (BPMA) in its
programme to upgrade and expand its role as
the curator and exhibitor of the UK’s postal
heritage. I previously reported on the support
we have provided to this programme through
funding and gifting its new exhibition centre,
Calthorpe House, due to open in 2016.
Through its fundraising campaign for
a new Postal Museum and Mail Rail project,
the BPMA has already secured £21.7 million
from a wide range of supporters, who
have provided a firm foundation to this
exciting project.
Donald Brydon, CBE
Chairman
We are reporting a
good financial and
operational
performance.
06
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Thank you
We announced in January 2014 that
Mark Higson has decided to stand down
as Managing Director, Operations and
Modernisation, at this year’s AGM. I would
like to take this opportunity to thank Mark
for his huge contribution to the initial phase
of our transformation programme.
In April 2014, after the reporting period, we
confirmed Jan Babiak’s resignation from the
Board. Jan has made a very valuable
contribution to Royal Mail during an important
time for our Company. The Board and I would
like to thank her for her support and counsel.
The flotation of Royal Mail was never a
foregone conclusion. It took much hard work
inside and outside Royal Mail to put the
Company in a position to access external
capital and ready itself for plc status. The
continued success of Royal Mail, including
the recent privatisation, is testament to the
significant contribution of Moya Greene
and her team.
I would like to thank all those involved
in facilitating our flotation. Most importantly,
I would like to thank all of our people for
contributing to Royal Mail’s success this year.
Donald Brydon, CBE
Chairman
6 June 2014
Safety
The safety of our employees is always our first
priority. The Board has overseen a continued
reduction in lost time accidents. We continue
to focus on initiatives to improve safety on the
road, as outlined in our Corporate
Responsibility section. The Anti-social
Behaviour, Crime and Policing Act 2014 was
passed on 13 March 2014. It is a significant
change to the law in relation to dangerous
dogs, introducing tougher sentences and
making dog owners liable for attacks on
private property in England and Wales. For
our part, if there is a risk from a dog, or any
other animal, we will suspend delivery until we
can deliver the mail safely. We will also be
seeking to ensure prosecution of the owners
of dogs in the most serious cases.
Our shareholders
We previously communicated our intention to
pay a dividend of £133 million in July 2014.
This amount is approximately two-thirds of
the notional full-year dividend of £200 million
that the Directors believe they would have
proposed if the Company had been listed
throughout this financial year. On the basis
of our performance, the Board and I are
delighted to announce that the Board has
recommended the payment of a final dividend
of 13.3 pence per share on 31 July 2014,
subject to approval by our shareholders at our
Annual General Meeting (AGM) on 24 July
2014.
Board Evaluation Process
The Board and I recognise the importance of
reviewing Board practices and performance
on a regular basis. A performance evaluation
of the Board, its Committees and individual
Directors takes place on an annual basis with
the support of the Company Secretary. This
year’s evaluation was completed during May
2013 and objectives were set for the Board
based on the outcomes of the evaluation.
Following privatisation, a more detailed
evaluation of the Board, involving the use of
an external board evaluator, will take place
during 2014. A performance evaluation of the
Audit & Risk Committee was conducted by the
Chairman of the Committee. The Committees
have also undertaken a review of their terms
of reference and updates have been made to
comply with best practice. More information
can be found in the Corporate Governance
section (pages 47 to 57).
07
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Chief Executive Officer’s review
I am pleased to report another good performance.
We have built a foundation for sustained, steady
performance against a backdrop of significant
structural and operational change.
The Group’s operating profit after
transformation costs increased to £430
million from £403 million. This was due to
parcel revenue growth more than offsetting
letter volume declines. Operating profit
margin declined from 4.4 to 4.2 per cent,
due to the provision for our management
reorganisation programme. Profit before
taxation excluding specific items increased
to £363 million and our notional earnings
per share was 26.3 pence. Free cash flow
increased to £398 million, primarily due to an
improved trading performance and reduced
investment spend.
UKPIL revenue was up two per cent at £7,787
million. Parcel revenue increased by seven per
cent to £3,162 million while volumes were
flat, mainly due to the impact of size-based
pricing on consumers and small and medium-
sized enterprises (SMEs) and the industrial
relations environment at the end of 2013. The
operating profit margin before transformation
costs increased, as costs grew at a slower rate
than revenue. However, the provision for the
management reorganisation programme
reduced the operating profit margin after
transformation costs, to 3.5 per cent.
GLS delivered revenue growth across all its
markets. Total revenue was £1,651 million
and operating profits were £108 million. The
operating profit margin was slightly lower
than last year at 6.5 per cent. Despite
increasing revenue in Germany, significant
competitor investment in capacity and
increasing sub-contractor rates put pressure
on margins. Revenue growth was driven by
a strong performance in Italy due to our
network of owned and franchised operations.
We are making progress with our turnaround
programme in France.
Our vision
Our vision is to be recognised as the best
delivery company in the UK and across
Europe.
We are the leading provider of postal and
delivery services in the UK. GLS operates one
of the largest ground-based, deferred parcel
delivery networks in Europe.
A clear strategy
Our strategy is based on three priorities:
1) being a successful parcels business;
2) managing the decline in letters
3) being customer focused
We are focused on delivering efficiency and
productivity improvements as our mail mix
changes. We must increase the pace at which
we deliver change – whether large or small –
if we are to succeed. Our strategy is also
underpinned by a focus on managing our
business successfully, which includes people,
customer and financial measures (see pages
16 to 17 for more information).
Parcels
Our parcels strategy: key points
• Getting the basics right: improving our
first time delivery rates through
initiatives like Delivery to Neighbour.
• Getting the technology right: including
making it easier for our customers to
access our networks and rolling out
FlexDelivery in GLS.
• Expanding and automating our networks:
detailed planning for parcels systems
upgrades and automation in the core
Royal Mail network; expanding the
geographic footprint of GLS through
organic growth and selective acquisitions.
UKPIL collects and delivers parcels and letters
predominantly through the Royal Mail core
network and Parcelforce Worldwide. We offer
deferred, express and courier services across
a number of segments. Over recent years,
e-retailing has driven parcel volume increases
in the UK. Competition is intense and capacity
is increasing. We are focused on maintaining
our leading position by becoming increasingly
flexible and efficient, and offering additional
service features and options. While our
volumes are driven largely by growth in
e-commerce, we do not benefit from growth
in all areas of e-retailing. For example, we do
not operate in all online segments and are
under-represented in some areas, such as
returns for clothing and shoes. We are now
focusing on faster growing market segments.
Moya Greene
Chief Executive Officer
Our vision is to be
recognised as the
best delivery
company in the UK
and across Europe.
08
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 We are increasing the proportion of items we
can carry cost-effectively on foot, enabled
by trolleys.
Our parcel customer base is large and diverse.
Around a quarter of our domestic parcel
revenue, excluding Parcelforce Worldwide,
is generated by large and medium-sized
companies, whilst approximately three
quarters is generated by consumers,
micro-SMEs and SMEs. Our single largest
parcel customer accounts for approximately
six per cent of UKPIL parcel revenue. Changes
to its minimum order for free delivery and the
expansion of its own delivery capabilities are
expected to reduce available volume. However,
we believe the breadth of our customer base
and our strategy of supporting SMEs to grow
through e-commerce means we are not as
exposed to the actions of our largest
customers as some of our competitors.
In April 2013, we introduced size-based
pricing for consumers and SMEs to ensure
that parcels are delivered through the most
appropriate UK network. This approach has
driven significant growth in revenue, while
parcel volumes were flat. Declines in
consumer volumes were greater than
expected. We recognised this quickly and
took action to fix it – expanding small parcels
dimensions in October 2013.
We are also making it easier for customers to
receive and return parcels. Royal Mail is to
pilot Sunday afternoon opening at around 100
of its delivery offices across the UK later this
summer. We will also trial Sunday parcel
deliveries later this summer to addresses
within the M25 motorway. Parcelforce
Worldwide will also launch a Sunday delivery
service in June for online shoppers through
participating e-retailers.
We have added tracking to all contract returns
services, so customers can check whether
items have gone back to the seller and the
seller can see when an item is coming.
Working with the Post Office, Royal Mail has
launched Local Collect – the UK’s largest click
and collect network. Receiving a parcel at
home is still the UK consumer’s preferred
method of delivery. If this is not convenient,
customers can choose one of around 10,500
participating post offices as a parcel collection
point. We have completed the expansion of
the capacity of Parcelforce Worldwide, with a
domestic hub opened in Chorley in 2013 and
eleven depots newly opened or upgraded
across the UK in the financial year.
Delivery companies are increasingly
technology companies, as they seek to provide
improved tracking and delivery solutions.
In 2011, UKPIL began a five year IT
transformation programme, one objective
of which was to support the delivery of our
parcels strategy. We completed the issue of
more than 74,000 handheld scanners to our
postmen and women in time for Christmas
2013. Looking forward, key areas of
investment will provide additional tracking
systems, including expanding barcoding and
SMS messaging.
GLS is a strategically important part of Royal
Mail Group. It provides geographical
diversification of our earnings. Its experience
and focus on parcel delivery means it is a core
component of Royal Mail’s vision of being
recognised as the best delivery company
in the UK and across Europe.
Business-to-business (B2B) parcel customers
form GLS’ core market, representing more
than 70 per cent of all parcel volumes it
delivered in the year. It is mainly active in the
deferred parcels segment – the least time-
sensitive type of delivery. 94 per cent of GLS’
revenue came from deferred parcels.
GLS continued its introduction and
enhancement of FlexDelivery. This is a
monitoring and tracking service that allows
customers to change the delivery time and
location of parcels. FlexDelivery is currently
available in ten markets, with plans to roll it
out to more countries. It is also available for
cross-border traffic in selected markets.
GLS operates through wholly-owned and
partner companies, in 37 countries and
nation states across Europe, with strategies
developed based on the dynamics of each local
market. However, every business focuses
on reliable quality with a strong customer
emphasis, optimising the use of technology
to provide the services and flexibility
customers expect.
Letters
Our letters strategy: key points
• Managing the structural decline in the
letters market by adding value to
customer mailings: rolling out Mailmark™
barcoding technology and promoting the
value of marketing mail.
• Calling on Ofcom to address the potential
threat to the economics of the Universal
Service created by the uncertainty
caused by its Competition Act
investigation, access pricing policy review
and the unfettered growth of direct
delivery competition.
• Leveraging the benefits of our
investments in letter automation by
increasing the number of letters sorted
into delivery order and optimising mail
handling techniques.
Our letters performance was at the better end
of our expectations. Revenue was down two
per cent. Addressed letter volumes declined by
four per cent during the year. The decline in
addressed letter volumes moderated in the
second half. This was due to strengthening
economic conditions, alongside one-off
impacts such as energy companies writing to
customers about price rises in October 2013,
and an increase in stamped mail volumes in
December 2013, including Christmas cards.
In March 2014, we began the rollout of
Mailmark™, which provides barcode
technology and online reporting for machine-
readable business, advertising and publishing
mail. Mailmark™ will deliver a number of
additional benefits for customers, including
timely reporting on performance and
predicted delivery times, and more accurate
and transparent billing.
Marketing mail revenue was £1,111 million.
Research has demonstrated that using
marketing mail in combination with other
media significantly increases communications
effectiveness. Our MarketReach business aims
to prove and promote the commercial value of
mail and enables customers to realise that
value within their own businesses. These
additional services complement the extensive
UK delivery network, which Royal Mail uses for
the distribution of customers’ marketing mail.
As we seek to win business, we are flexing our
services to provide what customers want.
During March 2014, we were awarded a
significant contract to collect and deliver
mail for 14 councils across London. This
collaborative agreement, where mail services
have been procured centrally in order to gain
efficiencies, is the first of its kind for Royal
Mail and the councils.
Regulation
We are proud to deliver the Universal Service.
But, the sustainability of the Universal Service
depends on Royal Mail being able to use
revenue from easy-to-serve urban areas
to cover the cost of a nationwide network
capable of serving all addresses at a
uniform price.
On 10 January 2014, we announced a
number of changes to Royal Mail’s access
contracts. The changes were intended to help
secure the provision of the Universal Service,
against the backdrop of a continuing decline in
letter volumes. Following a complaint by TNT
Post UK, Ofcom opened an investigation into
some of the access contract changes on
21 February 2014. The price changes subject
to Ofcom’s investigation are suspended
until the outcome of this investigation. On
9 April 2014, Ofcom confirmed that it would
09
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Chief Executive Officer’s review (continued)
use its powers under the Competition Act
1998 to investigate the complaint.
The planned changes to access contracts are
an important part of our commercial response
to changing market conditions, including the
expansion of direct delivery1 competition. We
believe TNT Post UK’s complaint is unfounded.
We believe the changes are fair, reasonable
and fully within the guidance provided by
Ofcom2. We are cooperating fully with Ofcom
to ensure the investigation is completed as
quickly as possible, so that our planned
changes can be put into effect.
On 9 April 2014, following the end of the
reporting period, Ofcom also announced a
policy review of the access conditions imposed
on Royal Mail in March 2012, and Ofcom’s
guidance on those conditions. Ofcom has
said it will complete this by the end of 2014.
We are proactively engaging with Ofcom on
this review.
TNT Post UK now has direct delivery
operations in much of London and in
Manchester and in Liverpool. It has stated its
intention to take its own direct delivery
service to a number of other cities, with the
aim of covering around 42 per cent of
addresses by 2017. TNT Post UK can
cherry-pick easy-to-serve urban areas;
delivering easy-to-handle post to homes less
frequently than Royal Mail and to no defined
quality standard. Royal Mail is required to
deliver six-days-a-week, overnight,
throughout the whole country, to stringent
quality standards and at a uniform, affordable
tariff. Moreover, we are also required to
deliver any items TNT Post UK does not
consider economic to deliver itself. If TNT
Post UK is successful in delivering its stated
objectives, this could threaten the
fundamental economics of the Universal
Service. Based on our estimates of the impact
of TNT Post UK’s publicly-stated plans, this
could reduce Royal Mail revenue by over
£200 million in 2017-183. At the same time,
our ability to reduce costs to offset this would
be limited by our obligations to deliver the
Universal Service.
Our analysis is that, without timely
intervention from the regulator, direct delivery
competition will have a serious impact on the
sustainability of the Universal Service. Ofcom
has stated that an EBIT margin range of
between five and ten per cent for Royal Mail’s
reported business is appropriate and
consistent with the need for Royal Mail to earn
a reasonable commercial rate of return4. With
our proposed access price changes remaining
suspended and unfettered direct delivery
rollout, there is a reasonable prospect that
this level of margin may never sustainably
be achieved.
We do not believe the current situation serves
the best interests of consumers. Ofcom has
acknowledged in a recent guidance document
its duty, powers and willingness to act to
protect the Universal Service if required5.
However, effective regulatory action could
take some time to implement. Meanwhile, the
Competition Act investigation and Ofcom’s
access policy review may create a significant
period of uncertainty in the UK postal market.
This uncertainty, combined with our Universal
Service commitments, means our ability to
respond commercially is constrained. At the
same time, direct delivery operators are
continuing to expand their operations. This is
why we are preparing a regulatory submission
calling on Ofcom to take action now and carry
out a full review of direct delivery. Such a
review would be in line with Ofcom’s primary
duty to secure the provision of the Universal
Service. It would also allow for full
A year of achievement
July 2013
Andy Murray’s historic Wimbledon win
celebrated with special stamps
Royal Mail and Post Office announce
launch of Local Collect, the UK’s
largest click and collect network
May 2013
April 2013
May 2013
June 2013
July 2013
August 2013
September 2013
£70 million
initiative announced to improve the value
of business mail through Mailmark™
barcode technology
July 2013
Pensions Reform confirmed following
consultation with Plan members
September 2013
1 Direct delivery refers to a situation where other postal operators convey mail from customer to recipient, entirely using their own delivery network and not Royal Mail.
2 Ofcom: ‘End-to-end competition in the postal sector: Final guidance on Ofcom’s approach to assessing the impact on the Universal Postal Service’ of 27 March 2013 and ‘Securing
the Universal Postal Service: Decision on the new regulatory framework’, Ofcom statement of 27 March 2012.
3 Based on: TNT Post UK’s stated ambition of 42.3 per cent delivery point coverage in 2017; expected addressed inland letter market volumes of approximately 11 billion items in
2017-18, using Royal Mail’s forecast range of a 4-6 per cent per annum decline in addressed letter market volumes; our estimate that TNT Post UK achieves a 20 per cent local market
share in areas where it operates in 2017-18; and an annual RPI increase in our Average Unit Revenue per Downstream Access item.
4 ‘Securing the Universal Postal Service: Decision on the new regulatory framework’, Ofcom statement of 27 March 2012, paragraph 5.47.
5 ‘Final guidance on Ofcom’s approach to assessing end-to-end competition’, Ofcom statement of 27 March 2013.
10
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 consideration of what regulatory interventions
may be necessary. At the same time, we are
raising the issue with HM Government and are
seeking a legislative amendment that would
require a review of direct delivery if Ofcom
does not initiate one in a timely manner.
Customers
We have a trusted brand. Our most recent
Corporate Image Report, conducted by Ipsos
MORI in November 2013, indicated that 71 per
cent of customers believe Royal Mail’s services
are good value for money.
Our own research indicates that our mean
business customer satisfaction score is 75.
This is an increase on 74 last year, and 70 in
2011-12.
See KPIs pages 18 to 19
It is strategically important that we maintain
this customer loyalty.
Our regulated Quality of Service specifications
are amongst the highest of any major
European country.
I am delighted to report that we exceeded our
regulatory targets for both First and Second
Class mail in 2013-14. 93.26 per cent of First
Class mail was delivered the following day
(2013 91.77 per cent), and 98.9 per cent of
Second Class mail was delivered within three
days of posting.
Neighbour initiative is a key focus as we seek
to improve the effectiveness of our delivery
operations and reduce redeliveries. Recent
Ofcom research found that 94 per cent of
customers were satisfied with this service.
See KPIs pages 18 to 19
We have delivered a significant improvement
on prior years against our internal composite
parcels measure8. We achieved a performance
of 95.1 per cent, meeting our target.
See KPIs pages 18 to 19
Overall, complaints were down six per cent on
last year (2013 489,9009; 2014 458,700).
Improving our performance in this important
area is a key strategic focus.
See KPIs pages 18 to 19
Four issues account for the majority of
complaints: redirection, misdeliveries,
redeliveries and ‘Something for You’ cards.
Our performance has improved for three of
these complaints, the exception being
‘Something for You’ cards. Our Delivery to
Transformation and cost control
Royal Mail is continuing to transform as we
seek to mitigate falling letter volumes and
manage increasing parcel volumes in an
increasingly competitive parcels market. As a
matter of course, we look to organise similar
tasks into single areas to avoid unnecessary
duplication. Since 2003, more than 50,000
people have left the UK business, with 12,000
leaving in the last four years. On 25 March
2014, we launched a consultation with our
unions on a proposal to achieve a net
reduction of 1,300 roles, mainly within our
managerial population. We recognise that this
change is tough on our people. But, we must
continuously improve our efficiency. This is a
key way to sustain the Universal Service and
secure good quality jobs for our people.
As we have said before, the initial phase of our
transformation is largely complete. Almost all
of our Delivery Offices have now commenced
or completed modernisation. We continue to
drive improvements in the network to be
Admission to trading on the London Stock
Exchange; £490 million of Free Shares in
Royal Mail allocated to approximately
150,000 employees
October 2013
New industrial relations framework
approved by CWU members
February 2014
October 2013
November 2013
December 2013
January 2014
February 2014
March 2014
December 2013
Winning designs from
children’s competition feature
on Christmas stamps
£2 million
fundraising target met, including matched
giving, for our Charity of the Year, Prostate
Cancer UK
March 2014
6 Not adjusted for force majeure.
7 This is not adjusted for force majeure. In 2012-13 the adjusted for force majeure result was 92.5 per cent, including external events such as snow, volcanic ash clouds and the 2012
London Olympics.
8 An internal measure for all retail parcel products in the Royal Mail core network.
9 This has been restated from 486,400 due to the addition of Door to Door complaints. These were previously tracked separately and have been integrated to improve oversight of
complaints across the business.
11
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Chief Executive Officer’s review (continued)
Outlook
Our key value drivers of single digit revenue
growth, margin expansion and underlying
free cash flow growth remain the objectives
for the Group for the 2014-15 financial year.
However, while we are satisfied with our
progress in 2013-14, we are facing increasing
challenges in the parcels and letters markets
in the UK.
We intend to pursue a progressive dividend
policy having regard to the normalised
earnings progression of the Group. As the
regulatory position on direct delivery becomes
clearer, the Board would expect to provide
more clarity on our dividend policy.
Royal Mail in the private sector
We must continue to deliver change at an
increasing pace to meet the challenges of the
changing mix of mail, the liberalised UK postal
market, intense parcel competition, and a
need to become more productive and efficient.
Royal Mail’s transformation is being delivered
whilst maintaining our high Quality of Service
levels. I would like to thank all my colleagues
for the fortitude and conscientiousness with
which they have embraced these changes.
I am confident that, with their continued
diligence and support, we will be able to make
ongoing progress in delivering our strategy.
Moya Greene
Chief Executive Officer
6 June 2014
more productive and effective. We are now
focusing on standardising processes and
embedding examples of best practice.
Relatively small changes, implemented across
our business, can deliver significant efficiency
benefits. We will be launching a nationwide
campaign to ensure Delivery to Neighbour is
deployed consistently where appropriate.
Improving our rate of first time delivery is a
key strategic focus across our operations.
Our expansion programme in Parcelforce
Worldwide is now complete. We are continuing
to plan for automation in the Royal Mail
core network.
The productivity improvement of 1.7 per cent
was disappointing. Whilst we reduced collections,
processing and delivery hours by 2.9 per cent,
the industrial relations environment meant
we were unable to extract more hours to
compensate for the impact on workload
associated with flat parcel volumes. Most of Royal
Mail’s non-people costs are subject to inflationary
pressures. This year we were particularly
successful in addressing this. Non-people costs
were down by three per cent in UKPIL.
Our people
Following our recent flotation, the
overwhelming majority of our UK employees
are also shareholders in our Company. Free
Shares gave our people a direct stake in the
Company and its future success. Each eligible
full-time employee who participated in the
Free Shares Offer now has 729 shares.
They, along with all shareholders, will receive
a final dividend in July 2014, subject to
shareholder approval.
In December 2013, we announced an
agreement in principle with the
Communication Workers’ Union (CWU).
This was approved by its members in
February 2014. The agreement is wide
ranging in its coverage and focused in its
support of the business. It represents a joint
commitment to radically improve industrial
relations and create a can-do culture in the
interests of customers, employees and the
Company. We are focused on bedding down
this agreement to ensure that we provide a
stable and unique platform for problem-
solving and for jointly moving the business
forward at a faster pace.
12
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Market overview
The parcel and letter markets are highly competitive. In parcels, Royal Mail faces
significant competition, in both the UK and Europe, from companies with established
delivery capabilities and new entrants. In letters, the current suspension of access
price changes and unfettered direct delivery are a threat to the fundamental
economics of the Universal Service.
UK parcels market
E-retail continues to drive growth in the UK
parcels market.
Parcels sent from business-to-business (B2B)
have long been a significant element of the
UK parcels industry. B2B currently
represents just over a third of overall UK
parcel volume1. We expect B2B volume
growth in the UK to be slightly above GDP
growth in 2014-15.
The engine for parcel volume growth is
business-to-consumer (B2C) through e-retail.
The UK has one of the most developed e-retail
markets in the world, with around ten per cent
of all retail sales conducted online. This is
estimated to rise to 13 per cent by 20172.
The UK has the highest e-retail expenditure
per capita in the world3.
B2C and C2X (consumer to all parties)
currently accounts for nearly two-thirds of UK
parcel volume1. We expect aggregated parcel
volumes within the B2C and C2X segments will
grow at approximately 4.5 to
5.5 per cent for 2014-15.
Customers and competition
We operate in a highly competitive market.
Customers increasingly demand a choice of
reliable and convenient delivery options,
with tracking information and easy returns.
There are many parcel carrier competitors
and they are getting stronger, with improved
service performance, greater convenience,
increased geographic coverage and leading
edge technology.
Parcel carriers who historically focused on B2B
parcels are increasingly focusing on B2C. While
home delivery remains the most attractive
fulfilment option, collection from a pick up point
is also growing in popularity – whether directly
from a retailer’s store (in-store click and collect)
or from a third party location such as a parcel
shop or locker bank (Pick Up/Drop Off or PUDO
points). Various market research studies
suggest that both forms of click and collect are
growing fast, albeit from a low base. We too
expect it to continue to grow. 96 per cent of
retailers that offer in-store click and collect do
not charge for the service, but delivery to PUDO
points often incurs an extra fee4. Disclosure
about the retail sales directly attributed to click
and collect is more limited, however. Royal Mail
has teamed up with Post Office Limited (POL) to
enable online purchases to be delivered to
around 10,500 post offices nationwide, the
largest PUDO network in the UK.
UK letters market
Market volume breakdown 2013-14
Type
Volume (bn)
Non-access (e.g. USO & Retail)
Access
Addressed inland
International
Total addressed
Unaddressed
5.6
7.1
12.7
0.6
13.3
3.1
Demand for letters has historically been
closely linked to GDP growth. This link still
exists, but is now offset by a structural
decline caused by the growth of email and the
internet as a form of communication.
Different types of letter are experiencing
different rates of decline. We continue to
expect a decline in addressed letter volumes of
four to six per cent per annum5.
Business letters are declining due to relatively
mature technologies such as online banking.
Businesses perceive cost savings from mail
reduction. However, a significant proportion
of the population would like a choice as to
how they receive household bills and
statements without a penalty. Royal Mail is a
funding partner of the Keep Me Posted
campaign, a coalition of over 56 charities,
trade unions, consumer groups and business
organisations, which aims to protect the
consumer’s right to choose, without penalty,
how they receive important financial
information and statements from their
service providers.
Direct mail in the UK is worth £2.1 billion
with direct mail itself accounting for
approximately 12 per cent of UK advertising
spend6. This reflects the value that it delivers
for businesses.
Following market liberalisation in 2004,
access mail competition for upstream7 letter
collection and processing is now mature.
The number of upstream letters handled by
competitors has been relatively stable since
2010-11.
European parcels market
The European parcels market is growing,
driven by the same e-retail trends as the
UK. This growth is uneven across the EU,
in particular due to different economic
performance and take-up of internet
shopping in different countries.
Competition
There are three key types of parcel carriers
operating in Europe. While historically they
may have focused on different market
segments, the dividing line between B2B and
B2C, and between express and deferred, has
become blurred in recent years.
• National posts. These carriers generally
offer strong domestic B2C and C2X parcel
offerings in their home countries. Some
also have a wider presence across Europe8.
• Integrators. There are several well-funded
multinational companies with varying
degrees of presence in each country. These
companies were historically focused on
providing premium B2B services.
• Local carriers. A number of these operators
are part of alliances which allow them to
offer a range of services across Europe.
The gradual trend towards consolidation
in the market has continued, with major
network operators acquiring smaller
businesses which fill geographic or service
gaps. This acquisition activity has recently
focused on targets specialising in e-retail
or consumer collections.
1 Royal Mail market estimates based on Triangle Management Services research.
2 Euromonitor Passport Data 2013. Retail values exclude sales tax, current prices.
3 BCG e-intensity index 2013.
4 Micros® Multi-channel Retail Delivery Report 2014.
5 Excluding election mail.
6 WARC (2013) including production costs.
7 Upstream refers to the collection of letters from a customer or collection point and
initial sortation. After this, sorted mail is delivered to Royal Mail ‘inward’ Mail Centres
for final mile delivery.
8 Opinium research, 2013.
13
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Our business model
Our business model aims to deliver shareholder value and support a
sustainable Universal Service. It demonstrates how we create value,
from revenue generation through to initiatives aligned with our
Customer, People and Financial KPIs. Our model provides growth
potential, sustained profitability and cash generation.
At the heart of our business model is a
focus on leveraging our core strengths.
They include:
• Our leading position in UK letters and
parcels;
• The Royal Mail brand;
• Our high quality of service; and
• The geographical and earnings
diversification provided by GLS.
No business model is without its challenges.
In our case, 49 per cent of our revenue –
letters – comes from a market that is in
structural decline. In the UK, the combination
of unfettered direct delivery, mandated access
and the continued structural decline in letters
is a threat to the fundamental economics of
the Universal Service. In parcels, more
competition, more capacity and the
e-substitution of smaller items, are an
ongoing reality.
We focus on tight cost control, including
people and non-people costs. We seek to
optimise our UK and international networks,
including the coverage provided by the Post
Office. Leveraging the benefits of our UK
modernisation is about driving up our
productivity, standardisation, pace and
flexibility. Transforming our IT architecture to
address legacy systems issues and partnering
with customers to provide more flexible
solutions for them is key to our model. So too
are postmen and women delivering first time,
consistently, to the door.
Networks and Customers
UKPIL
Royal Mail Core Network
Key products and services
USO letters and parcels
Stamped and meter mail
Airmail
Redirections
Special Delivery
Non USO letters and parcels
Royal Mail Tracked
Royal Mail 24/48
Business and Advertising Mail
International Business Tracked
and Signed
Network access mail
Parcelforce Worldwide
Key products and services
Domestic and International
express parcels
Domestic and International
deferred parcels
GLS
Customer points
115,000
Pillar Boxes
1,400
Delivery Offices
over 11,500
branches
Partnership with Post Offices
60,000
delivery routes
Customer points
53
Depots
over 11,500
branches
Partnership with Post Offices
Key products and services
Customer points
Deferred parcels
Express parcels
1 GLS and partners.
7001
Depots
14
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Customer
• Providing high quality service
everywhere in the UK and Europe
• Flexing our propositions –
products and services – to meet
the needs of the rapidly changing
e-retailing market
• Adding value to letters through
initiatives like Mailmark™ and to
parcels by barcoding more items
See our Customer KPIs, pages 18 to 19
People
• Working with our people and
unions to deliver a collaborative,
can-do culture as we transform
our business
• Becoming an even more
customer focused company in
the highly competitive markets in
which we operate
See our People KPIs, page 18
Customer
Investing
in our
business
Be recognised as the
best delivery
company in the UK
and across Europe
People
Generating
sustainable
shareholder
value
Financial
Financial
• Leveraging our ongoing transformation. Being
more productive and efficient in everything we do
• Tightly managing our people and non-people costs
• Investing to continue to transform the business,
particularly in IT and automation
See our Financial KPIs, page 19
15
Revenue
Revenue
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Our strategy
We have a clear vision to be recognised as the best delivery company in the UK and
across Europe. Our three-part strategy aims to deliver our vision by:
• Sustaining the continued provision of the Universal Service in the UK; and
• Generating sustainable shareholder value.
Strategic priorities
Parcels
Letters
Strategic priority 1
Being a successful parcels business. In the UK, we will continue to grow
account parcels and to maintain our strong position in the consumer, micro
SME and SME market segment, deliver significant IT upgrades, introduce
new products and maximise the proportion of UK traffic we can handle
profitably. In Europe, GLS will continue to expand and grow, and improve
its offering, for example, by increasing the number of B2C delivery options.
Strategic priority 2
Managing the decline in letters. We have launched Mailmark™, which
provides business customers with tracking information and significant
operational benefits for us. MarketReach promotes the value that physical
mail brings to advertising campaigns and maintains our marketing mail
volumes in the face of competition from digital channels. Unfettered direct
delivery competition is a threat to the Universal Service. We are asking
Ofcom to undertake a full review of direct delivery now.
Customer
Strategic priority 3
Being customer-focused. Customers have more and more choices. Our
strong brand means we are well positioned in our core markets. The
rollout of new delivery methods is now almost complete. Coupled with the
full deployment of handheld scanners, it is transforming how we deliver
parcels. Our focus on first time delivery gives our customers what they
want and drives greater operational efficiency. Important initiatives in this
respect include the launch of Local Collect, our click and collect solution
with the Post Office, and longer opening hours.
• Adding barcodes to UK parcels to improve customer information, and
operational efficiencies;
• Investing in technology: from making it easier for customers to access our
networks through to tracking and management information;
• Detailed planning for parcels systems upgrades and automation in the core
Royal Mail network;
• Rolling out FlexDelivery to more European markets, offering customers more
choice about how and when their parcels are delivered;
• Upgrading the core GLS operating system to ensure continued market-leading
IT capabilities; and
• Expanding the geographic footprint – depth and range – of GLS through
organic growth and selective acquisitions.
• Adding value to customer mailings through the rollout of initiatives like
Mailmark™;
• Promoting the value of advertising mail in customer retention and acquisition
– on its own and in combination with other media;
• Calling on Ofcom to address the potential threat to the economics of the
Universal Service created by uncertainty caused by its Competition Act
investigation, access pricing policy review and the unfettered growth of direct
delivery competition; and
• Leveraging benefits of our investments in letter automation by increasing
the number of letters sorted into delivery order and optimising mail
handling techniques.
• Improving our first time delivery rates, increasing use of Delivery
to Neighbour and Local Collect;
• Refreshing our enquiry offices and training our customer-facing colleagues
to improve customers’ experiences when collecting their parcels;
• Re-engineering our key customer journeys to remove sources of
dissatisfaction, reducing the time between account set up and first posting
for businesses; and
of issues.
• Driving down customer complaints with a focus on first time resolution
Key challenges
The markets – by category and geography – in
which we operate are changing quickly. E-retail is
driving growth in parcels. Royal Mail, Parcelforce
Worldwide and GLS are well positioned to benefit
from domestic and cross-border growth.
There is growing competition in parcels delivery.
In the UK, where Royal Mail is a market leader,
our competitors are improving their service
levels; some e-retailers are providing their own
delivery solutions. Market capacity has increased;
there is growing price pressure too. Consumers
and SMEs now have many choices, including
alternatives to the Post Office, our retail partner.
Disruptive technologies, long a feature of our
markets, are on the increase. Items traditionally
delivered physically as parcels (such as books,
CDs and DVDs) are in competition with
downloads and streaming. In letters,
e-substitution is a major structural factor
underpinning continued volume decline.
Combined with unfettered direct delivery and
mandated access, this threatens the fundamental
economics of the Universal Service in the UK.
Key priorities
Our strategy aims to maintain our market leading
positions and target new segments and channels
where we can grow. We also focus on being a
more efficient and flexible company. Our ongoing
transformation programme – one of the largest
of its kind in the UK – continues. Standardisation,
consistency in execution and tight cost control are
key. So too, is a greater focus on anticipating our
customers’ needs and responding flexibly to
them. Underpinning that focus is a major
emphasis on technology – renewing or replacing
legacy systems and investing in new IT
architecture, providing barcoding and tracking
for parcels, and greater connectivity with
our customers.
Our key strategic priorities are underpinned by a
focus on managing our business successfully,
through both financial and non-financial
initiatives. We aim to keep a tight grip on costs
and become more efficient. Embedding a more
collaborative culture will support the rollout of
standardised processes and consistent execution
across our operations. Further investment in our
people lays the foundation for even better
customer service and culture change.
Transforming our technology provides the
tracking capability to compete in an even more
competitive marketplace.
16
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Strategic priorities
Key initiatives
Parcels
Strategic priority 1
Being a successful parcels business. In the UK, we will continue to grow
account parcels and to maintain our strong position in the consumer, micro
SME and SME market segment, deliver significant IT upgrades, introduce
new products and maximise the proportion of UK traffic we can handle
profitably. In Europe, GLS will continue to expand and grow, and improve
its offering, for example, by increasing the number of B2C delivery options.
Letters
Strategic priority 2
Managing the decline in letters. We have launched Mailmark™, which
provides business customers with tracking information and significant
operational benefits for us. MarketReach promotes the value that physical
mail brings to advertising campaigns and maintains our marketing mail
volumes in the face of competition from digital channels. Unfettered direct
delivery competition is a threat to the Universal Service. We are asking
Ofcom to undertake a full review of direct delivery now.
Customer
Strategic priority 3
Being customer-focused. Customers have more and more choices. Our
strong brand means we are well positioned in our core markets. The
rollout of new delivery methods is now almost complete. Coupled with the
full deployment of handheld scanners, it is transforming how we deliver
parcels. Our focus on first time delivery gives our customers what they
want and drives greater operational efficiency. Important initiatives in this
respect include the launch of Local Collect, our click and collect solution
with the Post Office, and longer opening hours.
• Adding barcodes to UK parcels to improve customer information, and
operational efficiencies;
• Investing in technology: from making it easier for customers to access our
networks through to tracking and management information;
• Detailed planning for parcels systems upgrades and automation in the core
Royal Mail network;
• Rolling out FlexDelivery to more European markets, offering customers more
choice about how and when their parcels are delivered;
• Upgrading the core GLS operating system to ensure continued market-leading
IT capabilities; and
• Expanding the geographic footprint – depth and range – of GLS through
organic growth and selective acquisitions.
• Adding value to customer mailings through the rollout of initiatives like
Mailmark™;
• Promoting the value of advertising mail in customer retention and acquisition
– on its own and in combination with other media;
• Calling on Ofcom to address the potential threat to the economics of the
Universal Service created by uncertainty caused by its Competition Act
investigation, access pricing policy review and the unfettered growth of direct
delivery competition; and
• Leveraging benefits of our investments in letter automation by increasing
the number of letters sorted into delivery order and optimising mail
handling techniques.
• Improving our first time delivery rates, increasing use of Delivery
to Neighbour and Local Collect;
• Refreshing our enquiry offices and training our customer-facing colleagues
to improve customers’ experiences when collecting their parcels;
• Re-engineering our key customer journeys to remove sources of
dissatisfaction, reducing the time between account set up and first posting
for businesses; and
• Driving down customer complaints with a focus on first time resolution
of issues.
See pages 29 to 31 for more information about the links
between our strategic objectives and key business risks.
17
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Key performance indicators
Our KPIs are divided into People, Customer and Financial segments, as represented in our business model and our Corporate Balanced Scorecard.
Further details relating to the link between our KPIs and Executive Remuneration can be found in the Directors’ remuneration report on page 65.
To reflect the significant changes that took place during 2013-14, we have revised our KPIs. We have removed Second Class Quality of Service.
We have replaced Delivery Office modernisation and delivery hours reduction with a broader KPI on collection, processing and delivery
productivity. Finally, we have added a composite parcels quality of service measure, to reflect the increasing importance of parcels to our business.
KPI and strategic link(s)
Measured by
Key activities in the year
People
Safety
More information:
see Corporate responsibility,
page 35
Employee engagement
More information:
see Corporate responsibility,
page 33
Customer focus
More information:
see Corporate responsibility,
page 33
Customer
First Class Quality of Service
More information:
see CEO’s review, page 11
Customer satisfaction
More information:
see CEO’s review, page 11
Lost Time Accident Frequency
Rate: the number of work-related
accidents resulting in an absence
on the next day or shift per
100,000 hours worked.
We have delivered a very good safety performance in the year, further reducing the
amount of time lost to accidents and making Royal Mail a safer place to work. We
have established assessments for 93 per cent of delivery routes. We are continuing
to increase the identification and risk mitigation of significant risks on those routes,
so we take action where appropriate. Improving road safety is a key priority. A Head
of Health and Safety has been appointed in Parcelforce Worldwide to develop a
safety leadership culture. We also ran our annual Road Safety Week campaign in
November 2013, raising safety awareness through videos, posters, RMTV and
manager’s briefings. Topics ranged from seatbelts and stationary objects to driver
distractions and winter driving.
An annual survey by Ipsos MORI
measuring involvement, alignment
and loyalty of colleagues through
a number of questions, including:
what our people think about Royal
Mail, their understanding of our
strategy and their place in
achieving our strategic objectives.
Approximately 150,000 eligible UK employees were awarded Free Shares as part of
the privatisation. Approximately 15,000 employees bought shares in the Company at
the same time. We have agreed a new industrial relations framework with the CWU
and are developing and embedding a more collaborative, can-do culture. As part of our
‘town hall’ programme, members of our senior management team have addressed
thousands of colleagues at almost 60 meetings. An ongoing face-to-face
communications programme will ensure colleagues understand our strategy and their
role in delivering it.
An annual survey by Ipsos MORI
measuring how focused our
people are on delivering
improvements in customer
service.
Christmas is a key trading period for us. Planning began early to ensure we delivered
a high quality service for our customers – we did. We recruited 21,000 seasonal
workers to support our postmen and women. Ten parcel sort centres were opened to
manage increasing volumes over the period. We offered extended opening hours and
Sunday deliveries to improve our customers’ delivery and collection options. We are
completing our ‘Customer and You’ training for approximately 2,000 employees and
are deploying a new programme to refurbish enquiry offices.
An independent, audited measure
of Quality of Service for First
Class retail products, which may
be adjusted for force majeure1.
Our regulatory Quality of Service targets are amongst the highest of any major
European country. We delivered a strong performance at both the national and local
level. This included meeting or exceeding the minimum target of 91.5 per cent for
First Class delivery in 114 out of 118 post code areas. This improved performance
was achieved against a backdrop of one of the largest industrial transformation
programmes undertaken in the UK in recent history. Our programme to standardise
best practice and drive up first time delivery will support continued high Quality of
Service delivery.
Average business customer
satisfaction scores on a number
of issues, including price, service
quality and customer experience.
We maintained very good levels of customer satisfaction amongst our business
customers. A customer satisfaction questionnaire is completed by a sample of
business customers every month. During the year, we established a programme to
redesign key customer journeys, to improve the experience from posting to issue
resolution. We increased our emphasis in customer service centres to focus on the
first time resolution of issues for customers.
1 This accounts for the impact of factors which are beyond Royal Mail’s control, such as weather.
Strategic links key
This icon is used throughout
this document to indicate
reporting against a KPI
18
Being a successful parcels business
Managing the decline in letters
Being customer-focused
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 KPI and strategic link(s)
Measured by
Key activities in the year
Customer (continued)
Composite Parcels quality
of service
More information:
see CEO’s review, page 11
Customer complaints
More information:
see CEO’s review, page 11
Financial
An internal measure for all retail
parcel products in the Royal Mail
core network. Results are
presented as a proportion of items
which are delivered by their service
specification and combined into a
composite metric.
Number of complaints captured
by our Customer Service team.
Our composite parcels KPI looks at delivery performance for regulated and
non-regulated products across our entire portfolio. We saw very significant progress
in our performance this year. We provided handheld scanners for all delivery rounds,
providing significantly more management information and better customer service.
We are now seeking to improve first time delivery rates through standardisation of
best practice, especially for key initiatives like Delivery to Neighbour.
We achieved significant improvements in the level of customer complaints over the
year. We saw reductions in all major categories except ‘Something for You’ cards. We
completed the rollout of a new complaint resolution tool to enable Delivery Offices to
access complaints and are re-engineering how we handle undelivered parcels in
enquiry offices. We are establishing a major programme in Operations to identify
areas of best practice and standardise them across the network.
Group revenue
Group revenue.
Overall revenue growth was driven by increases in parcel revenue in both GLS and
UKPIL, offset by an expected decline in addressed letter volumes driven by
e-substitution. UKPIL parcel revenue growth was driven by size-based pricing and
growth in account parcel volumes and Parcelforce Worldwide. GLS also saw strong
revenue growth, driven by increased volumes.
More information:
see Financial review, page 23
Productivity for collection,
processing and delivery
More information:
see Financial and business
performance highlights,
page 5
Total UK costs
More information:
see Financial Review, page 23
Percentage change year-on-year
in the number of weighted items
per gross hour paid in Delivery
Units and Mail Centre Units
(delivery and processing including
regional logistics and collections).
This measure demonstrates whether the business is getting more or less productive
in collecting, processing and delivering letters and parcels across the UKPIL
network. It takes into account the change in volume and mix of letters and parcels,
with the latter having a materially different workload. Productivity has improved.
Continued progress includes the Mail Centre rationalisation and implementation of
new delivery methods. Our priority is standardisation, continued tight cost control
and leveraging the efficiency benefits offered by our ongoing transformation
programme.
Total costs for UK businesses
before transformation costs.
Total UK costs before transformation costs increased by one per cent. People costs
increased by four per cent, mainly due to the three per cent pay award, higher pension
charges and the move to a shorter working week. Non-people costs reduced by three
per cent largely due to cost management and procurement savings programmes.
Group operating profit
Group operating profit before
transformation costs.
Overall revenue growth for both UKPIL and GLS resulted in an increase in Group
operating profit before transformation costs.
More information:
see Financial Review, page 24
Free cash flow
Free cash flow.
Free cash flow has increased due to improved trading performance and lower
investment spend.
More information:
see Financial review, page 26
19
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information UK Parcels, International
& Letters (UKPIL)
Trading results
(£m)
Revenue1
– Letters & other mail
– Marketing mail
– Total letters
– Parcels
Operating profit after transformation costs
Operating profit margin after transformation costs
Volumes (m)
Royal Mail core network parcels
Parcelforce Worldwide
Total parcels
Addressed letters (including international)
Unaddressed letters
About UKPIL
UKPIL is the UK’s designated provider of the
Universal Service. Its network is unrivalled in
the UK in terms of size, coverage and
geographical reach. UKPIL comprises the core
UK and international parcel and letter delivery
businesses operated through the Royal Mail
core network and Parcelforce Worldwide. It
has a leading position in the overall UK parcel
market, with an estimated 382 per cent
revenue share.
UKPIL also carries out a number of letter-
related business activities, including marketing
mail consulting services. It is responsible
for the design and production of the UK’s
stamps and philatelic products. It also
processes international mail under
reciprocal arrangements with other
overseas postal administrations.
Royal Mail UK Parcels market share (revenue)3
2013
2012
2011
38%
36%
35%
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
7,787
3,514
1,111
4,625
3,162
309
3.5%
991
77
1,068
13,342
3,143
7,633
3,582
1,118
4,700
2,933
294
3.9%
994
70
1,064
13,869
3,258
2%
(2%)
(1%)
(2%)
7%
(40bps)
(1%)
8%
Flat
(4%)
(4%)
Trading performance
UKPIL revenue increased by two per cent to
£7,787 million. Parcel revenue increased by
seven per cent. UKPIL parcel volumes were
flat, mainly as a result of the impact of
size-based pricing in the consumer and SME
segments over the year. We saw growth in
account parcel volumes, despite some
customer reaction to the threat of industrial
action in the run up to Christmas. Parcelforce
Worldwide volumes grew strongly. Parcels
accounted for 41 per cent of UKPIL revenue
(2013 38 per cent).
Total letter revenue decreased by two per cent.
Addressed letter volume decline of four per
cent was at the better end of our forecast
range, benefiting from strengthening economic
conditions, energy company customer mailings
at the end of 2013 and increased stamped
mail volumes in December 2013, including
Christmas cards. Marketing mail revenue,
including unaddressed letters, was
£1,111 million, down one per cent, mainly due
to additional marketing activity in the build up
to London 2012 and the Diamond Jubilee in
the prior year.
We did not increase stamp prices in 2013.
However, there were changes to other
products, such as access mail. In March 2014,
we announced tariff changes across the
portfolio of products, including First and
Second Class stamps. We thought carefully
about the impact of all our tariff increases on
our customers and our own business. Our
stamp prices remain among the best value in
Europe. First and Second Class stamp prices
for letters up to 100 grams remain well below
the European average4.
Operating costs
Operating costs before transformation costs
increased by one per cent, below the rate of
revenue growth, to £7,237 million. A four per
cent increase in people costs was substantially
mitigated by a three per cent decline in
non-people costs.
One-off benefits in the first half of £42 million
in relation to a VAT credit and lower
depreciation and amortisation charge were
offset by a £44 million higher pension charge
(mainly due to the IAS 19 pension service
charge rate increasing from 18.2 per cent
to 20.3 per cent of pensionable pay).
People costs increased by four per cent, mainly
due to the three per cent pay award, higher
pension charge, and the move to a shorter
working week. Collections, processing and
delivery operations delivered a productivity
improvement of 1.7 per cent, below our two
to three per cent target. Whilst gross hours
reduced by 2.9 per cent, this was not sufficient
to compensate for the reduced workload
resulting from flat parcel volumes.
Non-people costs were down three per cent.
There continue to be increases in terminal dues
with overseas postal administrations
(distribution and conveyance costs) and IT
(infrastructure costs). However, our cost
management and procurement programmes
were particularly successful.
1 Stamped, metered and other prepaid revenue channels are subject to statistical sampling surveys to derive the revenue relating to parcels, marketing mail and letters. These
surveys are subject to continuous refinement, which may over time reallocate revenue between the products above, and which may occasionally lead to a consequent change to this
estimate.
2 Triangle estimates at December 2013 based on latest competitor data and market insight and Royal Mail 2013-14 financial year end revenue. Excludes international traffic.
3 Triangle Management Services estimates at December 2013 based on competitor financial reports, market insight and Royal Mail financial year end results.
4 European average is 63 pence for inland stamp prices up to 100 grams, First and Second Class combined.
20
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Transformation costs
Transformation costs increased to
£241 million, due to a provision for the
management reorganisation programme
of £104 million, mainly relating to voluntary
redundancy costs. The programme is
expected to generate annual cost savings
of approximately £50 million, of which
approximately £25 million is expected to
be realised in 2014-15.
Other voluntary redundancy costs were lower
than the prior year due to the timing of
announcements with respect to Mail Centre
closures, the majority of which were provided
for in 2012-13.
Project and property costs mainly relate
to Mail Centre closures and Delivery
Office revisions.
The £17 million business transformation
payments relate to the Business
Transformation 2010 Agreement, under which
colleagues receive payments of up to £1,000
based on specific milestones and specific
bonuses with respect to transforming the
network. Remaining payments of around
£10 million are expected to be made in
2014-15 as the Delivery Office modernisation
process is completed.
Operating profit after transformation costs
Operating profit after transformation costs
was £309 million, up £15 million on an
adjusted basis including the increased
transformation costs as a result of the
management reorganisation programme.
Operating profit margin after transformation
costs reduced to 3.5 per cent (2013 3.9
per cent).
Operating costs
(£m)
People costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating costs before transformation costs
Transformation costs
Operating costs after transformation costs
Transformation costs
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
(4,818)
(4,641)
(855)
(946)
(618)
(7,237)
(241)
(7,478)
(850)
(951)
(702)
(7,144)
(195)
(7,339)
4%
1%
(1%)
(12%)
1%
2%
(£m)
Voluntary redundancy – management reorganisation programme
Voluntary redundancy – other
Project and property costs (including £2m of management
reorganisation programme costs)
Business transformation payments
Total
Reported
52 weeks
2014
Adjusted5
52 weeks
2013
(102)
(14)
(108)
(17)
(241)
–
(78)
(95)
(22)
(195)
Case study
Christmas Stamp Competition
In Christmas 2013, for the first time in many
years, we gave children across the UK the
opportunity to design a Christmas stamp. We
received more than 240,000 entries. The two
winners – Molly Robson (aged seven) and Rosie
Hargreaves (aged ten) – were chosen by a panel
of judges led by His Royal Highness The Prince
of Wales. Their stamps went on sale on
5 November 2013.
We were delighted to see enthusiasm for our
Christmas stamps translate into higher volumes
of stamped mail in the Christmas period.
The Christmas stamps competition was also
linked to an educational programme, helping
students and teachers meet requirements of
the national curriculum. We ran five educational
stamps programmes linked to our special
stamps in 2013-14, delivering 13,450 packs
to schools across the UK. Almost 55,000
resources were downloaded online. 98 per cent
of schools who have taken part this year have
requested future programme packs, a great
result for pupils and the Company.
5 Transformation costs are the same on both a Reported and an Adjusted basis.
21
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Italy
Despite an unfavourable economic
environment, GLS Italy achieved strong
organic growth, which has led to a
strengthening of its market position.
Performance was further enhanced by the
acquisition of three franchise areas as well as
competitor disruption, leading to an overall
increase in revenue of 16 per cent. The GLS
network in Italy is partially wholly-owned,
with the rest of the operations covered by
franchisees. The franchise system remains
stable and represents a good platform for
future growth.
Other developed European markets
(includes Austria, Belgium, Netherlands,
Denmark, Ireland, Spain and Portugal)
Revenue increased across other developed
European markets which represent 21 per
cent (2013 21 per cent) of total GLS revenue.
Whilst all countries saw revenue growth, the
strongest was seen in Spain and Portugal.
Developing/emerging European markets
(includes Hungary, Slovenia, Slovakia,
Czech Republic, Romania, Poland
and Croatia)
Performance throughout the rest of Europe
has been strong, with a good increase in
revenue from developing/emerging European
markets. The largest growth was in Slovakia
and Czech Republic in addition to the new
business launched in Croatia in August 2013,
where we have been pleased with the progress.
General Logistics Systems
(GLS)
Trading results
Revenue (£m)
Operating profit (£m)
Revenue (€m)
Operating profit (€m)
Operating profit margin (%)
Volumes (m)
Operating costs
(£m)
People costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total operating costs
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
1,651
108
1,957
128
6.5
404
1,498
101
1,837
123
6.7
380
7%
4%
(20bps)
6%
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
(367)
(1,015)
(108)
(53)
(337)
(920)
(100)
(40)
(1,543)
(1,397)
5%
7%
4%
29%
7%
About GLS
GLS is one of the largest ground-based,
deferred parcel delivery companies in Europe.
Its reach across Europe spans 37 countries
and nation states through a combination
of wholly-owned and partner companies.
Germany, France and Italy, GLS’ main markets,
accounted for around 70 per cent of GLS’
revenue. Approximately 94 per cent of GLS’
revenue came from deferred parcels. The
remainder was split between logistics (four
per cent) and express parcels (two per cent).
Trading performance
GLS’ revenue was £1,651 million, with all
countries delivering year-on-year revenue
growth. Excluding the positive impact of
foreign exchange of £52 million, revenue
increased by seven per cent. Parcel volumes
increased by six per cent, with growth in both
domestic and international volumes.
Operating costs rose by seven per cent, driven
by the increase in distribution and conveyance
costs as a result of higher volumes and a full
year impact of increased sub-contractor rates
in Germany. Infrastructure costs increased,
largely due to a higher depreciation charge.
Other operating costs were higher due to a
non-recurring indirect taxation charge, higher
IT costs and restructuring costs in France.
Operating profit increased to £108 million,
representing a margin of 6.5 per cent (2013
6.7 per cent).
Germany
The competitive environment, coupled with
a challenging labour market, has had a
continued impact on the GLS Germany
business. GLS Germany saw revenue growth
of three per cent and remains the largest
market for GLS by revenue. The initiative
to consolidate sub-contractors to address
increasing costs was not sufficient to offset
further increases in costs caused by low
unemployment rates and high demand for
drivers, associated with increased competitor
capacity. As a result, margins remain
under pressure.
France
The turnaround programme in GLS France is
making progress. While loss-making overall,
performance for the year was slightly ahead of
the restructuring plan, with operating losses
reducing by €3 million to €27 million. The cost
reduction element of the turnaround has
progressed well during the year. Over the past
few years, GLS France has undertaken an
operational overhaul, changing from an
‘express’ delivery service provider to a
deferred delivery service provider. This
included the sale of its ‘In Night’ business,
an overnight courier service, in 2011-12.
GLS France will focus on improving quality,
achieving greater operational efficiency
and growing volumes from new and
existing customers.
22
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Financial review
Matthew Lester
Chief Finance Officer
Revenue
(£m)
UKPIL
– Letters
– Parcels
GLS
Other
Group
Group revenue increased by two per cent, due to parcel revenue growth in UKPIL and in GLS.
See KPIs pages 18 to 19
Parcel revenue accounted for 51 per cent of Group revenue (2013 48 per cent).
Group operating costs
(£m)
People costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating costs before transformation costs
Transformation costs
Group operating costs after transformation costs
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
4,625
3,162
1,651
18
9,456
4,700
2,933
1,498
15
9,146
(2%)
7%
7%
n/m
2%
Reported
52 weeks
2014
Adjusted
52 weeks
2013
Like-for-like
change
(5,282)
(1,869)
(1,051)
(583)
(8,785)
(241)
(9,026)
(5,077)
(1,771)
(1,047)
(653)
(8,548)
(195)
(8,743)
4%
4%
Flat
(11%)
2%
3%
The total UK costs before transformation costs increased by one per cent to £7,242 million (2013 £7,151 million).
See KPIs pages 18 to 19
Operating costs before transformation costs increased by two per cent. The business continues to exercise tight cost control, which particularly
benefited other operating costs. Operating costs also benefited from a one-off VAT credit of £35 million and lower year-on-year depreciation and
amortisation of £7 million, due to a different mix in depreciable assets. The VAT credit arose as a result of a change in regulation, which increased
the scope of products attracting VAT from April 2012, leading to an increased recovery rate. The one-off benefits were offset by a £45 million
higher pension charge (mainly due to the IAS 19 service charge rate increasing from 18.2 per cent to 20.3 per cent of pensionable pay).
23
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Financial review (continued)
People costs increased by four per cent, driven by an increase in UKPIL people costs. Tight cost control in non-people costs in UKPIL, which
reduced by three per cent, mitigated the impact of increased volumes in GLS and higher sub-contractor rates in GLS Germany in distribution
and conveyance costs. Infrastructure costs were flat, with lower property and depreciation and amortisation costs being offset by higher IT costs.
Other operating costs decreased by 11 per cent due to tight cost control, predominantly in UKPIL.
Operating profit before transformation costs
All the business segments generated increased operating profit before transformation costs, resulting in a Group operating profit before
transformation costs of £671 million (2013 £598 million), with the margin increasing by 20 basis points.
See KPIs pages 18 to 19
Operating profit after transformation costs
Transformation costs were £241 million (2013 £195 million) and are described in the UK Parcels, International & Letters (UKPIL) section of this report.
(£m)
UKPIL
GLS
Other
Group operating profit after transformation costs
Reported
52 weeks
2014
Adjusted
52 weeks
2013
309
108
13
430
294
101
8
403
The Group reported operating profit after transformation costs of £430 million (2013 £403 million), with UKPIL contributing around 72 per cent
(2013 73 per cent) to the Group total. The operating profit margin after transformation costs declined to 4.2 per cent (2013 4.4 per cent) due to
the recognition of a £104 million provision relating to the management reorganisation programme, which impacted margins by approximately one
percentage point.
Specific items
(£m)
Operating specific items:
Royal Mail Pension Plan amendment (non-cash)
Transaction–related costs
Employee Free Shares costs (non-cash)2
Business-related costs
Total operating specific items
Non-operating specific items:
Profit on disposal of property, plant and equipment
Profit on disposal of associate undertaking
Release of gains held in equity on disposal of pension escrow gilts
Net pension interest (non-cash)
Total specific items
Reported
52 weeks
2014
Adjusted1
52 weeks
2013
1,350
(28)
(94)
(15)
1,213
19
2
–
69
–
(10)
–
(67)
(77)
4
–
22
30
1,303
(21)
There were a number of specific items recognised during the year. The accounting impact of the Pensions Reform was to increase the accounting
pension surplus significantly, resulting in a one-time non-cash credit of £1,350 million. Specific items also arose in relation to transaction-related
costs of £28 million (2013 £10 million) and the charge associated with the Employee Free Shares Offer of £94 million. The Employee Free Shares
Offer charge represents the charge to the income statement relating to the issuing of Free Shares, which is calculated from the start of the period
when employees become eligible for the shares and is based on the mid-market closing price on the day of admission to the London Stock
Exchange. In 2014-15 the charge is expected to be around £170 million.
Business-related costs of £15 million (2013 £67 million) largely comprise £15 million historical employment costs, a £7 million release
(2013 £28 million charge) of the industrial diseases claims provision and £5 million of POL separation costs (2013 £20 million) relating to
facilities management. The prior year also included £20 million of asset impairments (mainly property).
1 The ‘Business-related costs’ and ‘Profit on disposal of property, plant and equipment’ specific items on an Adjusted basis are different than on a Reported basis due to the treatment
of the costs of POL separation (see Basis of preparation note in financial statements for further details).
2 Includes £3 million provision for National Insurance, which will be cash settled.
24
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Non-operating specific items comprise property disposal gains of £19 million (2013 £4 million) and £2 million from the sale of the Group’s
associate investment in G3 Worldwide Mail N.V. (Spring) and net pension interest.
Net pension interest is non-cash and is calculated by applying the discount rate at the beginning of the year for the schemes’ liabilities to the
net pension surplus. Due to the substantial change in the RMPP surplus resulting from the Pensions Reform, the net pension interest was
recalculated to £69 million (2013 £30 million) for the full year. The net pension interest for 2014-15 based on the discount rate for the schemes’
liabilities and net pension surplus is expected to be around £75 million.
Net finance costs (excluding specific items)
The net finance costs of £67 million (2013 £99 million) comprise finance costs of £71 million (2013 £104 million), offset by finance income of
£4 million (2013 £5 million). 2014-15 will see the full year benefit of refinancing our HM Government funding in 2013-14.
On 12 September 2013, the Group entered into new Syndicated bank loan facilities. On 15 October 2013, the date of the Company’s admission to
the London Stock Exchange, drawdowns of £600 million were made against these new facilities and used, along with £418 million of surplus cash,
to repay all existing HM Government debt and accrued interest and related costs of obtaining loan finance.
The net finance costs include £47 million (2013 £82 million) of interest relating to average loans and borrowings on HM Government facilities
of £973 million, up to the date of the repayment of these facilities (2013 £972 million), at an average interest rate of 8.8 per cent (2013
8.4 per cent). A further £3 million (2013 £nil) was payable on the new Syndicated bank loan facilities on an average borrowing volume of
£536 million since the Company’s listing, at an average interest rate of 1.4 per cent. The total blended interest rate on the new Syndicated bank
loan facilities is estimated to be 3.5 per cent (after including the effects of interest rate hedging, commitment and arrangement fees and allowing
for market expectation of rate rises over the life of the facilities). The other main elements of net finance costs comprise £10 million (2013
£13 million) finance lease interest and commitment and arrangement fees of £8 million (2013 £8 million).
The table below provides details of the new Syndicated bank loan facilities.
Syndicated bank loan facilities
Term Loan A
Term Loan B
Revolving loan facility C
Total
Average
balance since
flotation
2014
£m
162
300
74
536
Basis of
interest
rate at
30 March
2014 – LIBOR
plus
(%)
Average
interest
rate
2014
(%)
Facility
end date
Total facility
£m
1.5
1.4
1.3
1.4
1.00
0.90
0.85
2018
2016
2018
300
300
800
1,400
Drawn
balance at
30 March
2014
£m
300
300
–
600
Average loan
maturity
date
2018
2016
–
Taxation
The effective tax rate on the reported profit before taxation was 23 per cent, comprising the current tax charge of £37 million (2013 £38 million),
mainly in respect of GLS, and a deferred tax charge of £349 million (2013 £284 million credit), principally in relation to the Pensions Reform. The
UK current tax charge is minimal, primarily as a result of the statutory treatment of the HMRC-approved Employee Free Shares Offer as well as
utilisation of some brought forward tax reliefs, including losses and capital allowances. GLS’ current tax rate was 34 per cent reflecting higher
European corporation tax rates on profits and losses, primarily in France, for which no deferred taxation credit has been recognised. The deferred
tax charge is principally due to the effect of the Pensions Reform. The deferred tax credit in the prior year arose as a result of the recognition of
a deferred tax asset in respect of carried forward tax reliefs in the UK, including losses and capital allowances.
Excluding specific items, the Group tax charge was £97 million, representing an effective tax rate of 27 per cent.
Notional earnings per share (EPS)
Notional EPS, excluding specific items, was 26.3 pence (Reported 127.7 pence). The notional EPS is calculated using the profit from continuing
operations attributable to equity holders of the parent, both Reported and Excluding specific items, and assumes that the one billion ordinary
shares in issue at the date of the Company’s flotation had been in existence throughout the current reporting year. Going forward, EPS will be
calculated using the weighted average number of shares in issue over the relevant period.
Dividends
The Board is recommending a final dividend of 13.3 pence per share, payable on 31 July 2014 to shareholders whose names appear on the
register of members on 4 July 2014, subject to shareholder approval at the AGM on 24 July 2014.
25
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Financial review (continued)
Summary free cash flow
(£m)
EBITDA before transformation costs
Trading working capital movements
Difference between pension costs charged in operating profit and pension cash flows
Total investment
Other – taxation, net finance costs, dividend from associate undertaking
Underlying cash flow
One-off working capital movements
Cash cost of operating specific items
Proceeds from disposal of assets and associate undertaking (non-operating specific items)
Free cash flow
Reported
52 weeks
2014
3
Non-GAAP
53 weeks
2013
942
(57)
58
(617)
(69)
257
140
(35)
36
398
915
(60)
(3)
(665)
(81)
106
202
(26)
52
334
Free cash flow increased to £398 million (2013 £334 million) primarily due to trading performance and reduced investment spend.
See KPIs pages 18 to 19
EBITDA before transformation costs of £942 million (2013 £915 million) increased due to the improved trading performance explained above.
Trading working capital movements generated an outflow of £57 million (2013 £60 million outflow) due to a number of factors including the level
of VAT payments. Both years benefited from one-off working capital items. In 2013-14, there was a one-off benefit of £150 million in respect of
the March 2012 pension prepayment and £20 million relating to the buy forward of stamps partially offset by a £30 million unwinding of the prior
year buy forward. In 2012-13, working capital benefited from the buy forward of stamps of £87 million, an increase in the VAT creditor of
£75 million, due to an increase in the number of products that have become subject to the standard rate of VAT since April 2012, and the
unwinding of the pension prepayment of £40 million. In 2014-15, there will be a one-off benefit to working capital of approximately £45 million
due to the timing of payroll payments in respect of monthly paid staff.
Payments in respect of transformation operating expenditure of £201 million (2013 £230 million) comprised £111 million (2013 £100 million)
project and property costs, £71 million (2013 £75 million) voluntary redundancy payments and £19 million (2013 £55 million) business
transformation payments. Transformation capital expenditure was £83 million (2013 £177 million). Non-transformation capital expenditure
was £333 million (2013 £258 million) primarily in respect of GLS, Parcelforce Worldwide expansion and Mailmark™.
The level of investment in the year is the amount of cash EBITDA that needs to be re-invested back into the business to sustain its operations
and enable future growth. It comprises both operating expenditure (including voluntary redundancy payments) and capital expenditure, which is
currently running well ahead of depreciation. This investment is needed to transform the operations of the UK business to meet the changing mix
of traffic and to drive efficiencies in people costs. Net investment totalled £581 million in 2013-14, reflecting total investment of £617 million
offset by the re-investment of operating property and business disposals of £36 million.
Taxation and interest cash costs of £71 million (2013 £81 million) comprise £33 million (2013 £44 million) relating to net interest paid and
£38 million (2013 £37 million) relating to current taxation payments.
Cash inflows associated with operating property and business disposals were £36 million (2013 £52 million).
Net debt
Net debt decreased by £351 million to £555 million for the year ended 30 March 2014, mainly due to cash flow generated, offset by £45 million
of 2013-14 finance costs settled on early repayment of HM Government loans and the costs associated with obtaining new loan facilities. At the
date of listing, all principal and interest on HM Government loans were repaid and £600 million of Syndicated bank loans were drawndown.
Property
The Group’s property portfolio can be divided into two classes: surplus or soon-to-be-surplus sites with the potential for development
(‘development properties’); and ‘operational properties’, used for the Group’s day-to-day operations. The vast majority of the Group’s properties
are operational properties.
As set out in the Prospectus4, the Group has identified three potential development sites in London: Nine Elms; Mount Pleasant; and Paddington
(the ‘London Development Portfolio’). Depending on future changes to the configuration of the operational network, some other sites may have
the potential to become development properties, but none would be of similar scale to the London Development Portfolio.
Additionally, each year there will be lower value disposals arising from localised changes to the network. The proceeds from these disposals will be
re-invested to fund partially the modernisation of the Royal Mail Delivery Office network. With new external facilities now in place, we can seek to
3 Cash flows are the same on both a Reported and Adjusted basis. This non-GAAP presentation excludes the £820 million cash flows relating to POL on its transfer to Royal Mail
Holdings plc on 1 April 2012.
4 Prospectus in relation to the Initial Public Offering, dated 27 September 2013.
26
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 optimise the realisable value of any development properties as they become surplus, but we will adopt a flexible approach as to the manner in
which this is achieved.
Pensions Reform
On 26 September 2013, the Company agreed with the Royal Mail Pension Plan Trustee to implement the Pensions Reform with effect from
1 April 2014. Under this agreement, members’ pensionable pay will increase by RPI (up to a maximum of five per cent), regardless of whether
actual basic pay increases by more or less than this amount. This change is considered to be a ‘plan amendment’ which meets the IAS 19 definition
of a past service cost and accordingly a non-cash £1,350 million credit (specific item) has been recognised in the Group income statement.
Pension balance sheet amounts
The IAS 19 pension position at 30 March 2014 was a surplus of £1,723 million compared with a surplus of £825 million at 31 March 2013.
The increased surplus reflects the impact of the Pensions Reform of £1,350 million, partially offset by the impact on liabilities of a lower discount
rate. This discount rate is driven by the estimated real rate of return available on AA corporate bonds of similar duration to the schemes’ liabilities
(28 years).
Financial risks and related hedging
The Group is exposed to currency and commodity price risk. The Group operates hedging policies which are described in the notes to the financial
statements. The exposures are set out below, together with the impact on 2014-15 operating profit as a result of the changes in fuel costs/
exchange rates up to 30 March 2014, after the impact of the respective hedging programmes.
Impact on 2014-15 operating profit
Diesel and jet fuel
US$
Euro
5% increase in price/
weakening of
Sterling (before
hedging)
£m (loss)
No further change in
price/exchange rate
versus 2013-14
(after hedging)
£m gain
(4)
(3)
(10)
1
2
-
The currency exposure arises mainly from the Group’s trading with overseas postal operators, GLS profits and inter-company loans with GLS.
There is a significant degree of offset between these exposures and hedge programmes in place which will reduce the impact on 2014-15
operating profit. The residual, unhedged, exposure for 2014-15 is estimated to be £5 million in respect of Euro and £30 million US Dollars.
It is anticipated that there will be a £1 million favourable impact on profits arising from the change in effective (after hedging impact) diesel costs
from 50.2 pence per litre in 2013-14 to an anticipated 49.7 pence per litre in 2014-15. Without hedging, this variance would be £7 million
favourable (based upon closing fuel prices at 30 March 2014).
The Group’s exposure to fuel prices is shown below, together with the coverage provided by the hedges in place. The exposure represents the cost
of the underlying commodity and excludes fuel duty (approximately £100 million per annum). Diesel and jet fuel costs (including duty) for 2014-15
are expected to be £185 million (2013 £196 million).
2014-15 Exposure
Diesel
Jet
Total
Underlying
product incl.
irrecoverable
VAT
£m
Fuel duty
£m
Total
cost
£m
Underlying
product
hedged %
76
13
89
96
-
96
172
13
185
94
86
The Group manages its interest rate risk through a combination of fixed rate loans (fixed via interest rate swaps), fixed rate leasing, floating rate
loans and floating rate financial investments. At 30 March 2014, £492 million (89 per cent) of net debt of £555 million was at a long term (i.e.
more than one year) fixed rate to maturity. An increase of 100 basis points in interest rates during the year would have resulted in an increase to
profit of £1 million.
Counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength.
Letters of Credit
In 2000, Royal Mail entered into a lease arrangement whereby certain automation equipment was leased and the lease rentals concurrently
prepaid by Royal Mail into an investment fund. Following the general fall in credit ratings in the market, a Letter of Credit has been required to
provide, on behalf of Royal Mail, additional support to the lessor in the event of default by the investment fund holder. The current value of the
Letter of Credit is £37 million and it is currently not collateralised.
27
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Financial review (continued)
As a result of changes to insurance arrangements during the year, the Group is now required to provide Letters of Credit against the economically
self-insured elements of its insurance programme. As at 30 March 2014, £75 million of Letters of Credit were required and had been put in place
and are not currently collateralised.
The probability of any of the Letters of Credit being called upon is considered to be remote, and therefore no disclosures have been made in
relation to these Letters of Credit in the Group financial statements.
Outlook for 2014-15
We continue to expect to see overall volume growth in the UK parcel market in 2014-15, with the B2C/C2X segment growing at around 4.5 per
cent to 5.5 per cent and the B2B segment growing at slightly above GDP. However, we expect that the increased competitive activity in the market
will put pressure on pricing.
We continue to expect UK addressed letter market volumes to decline by four to six per cent per annum5. For 2014-15, we expect to be at the
better end of this range. The impact of upcoming European and local elections in May 2014 and forecast improvement in GDP will more than
offset the expected impact from the increased rollout of direct delivery competition in 2014-15.
GLS experienced good revenue growth in 2013-14, in part helped by competitor disruption in Italy that is not expected to be repeated in
2014-15. Therefore, the rate of GLS revenue growth in 2014-15 is expected to be slightly lower than in 2013-14. The profit improvement
resulting from the continued turnaround in France is expected to be offset by increased IT investment across the network.
We continue to focus on cost control. The management reorganisation programme announced in March 2014 is expected to deliver annualised
cost savings of £50 million, of which approximately £25 million will be realised in 2014-15. However, there is expected to be an increase in the
pension charge of £70-80 million, mainly driven by the increase in the IAS 19 pension service charge rate from 20.3 per cent to 23.6 per cent
as a result of market conditions. The expected increase is based on the current pensionable payroll and the final charge will be dependent on
the level and mix of pensionable pay in 2014-15. In addition, 2014-15 will not benefit from the one-off VAT credit of £35 million in 2013-14.
Depreciation and amortisation is expected to increase by around £20 million, reflecting continuing investment. These items will have an impact
on the year-on-year movements in operating costs, particularly in the first half of the year.
Excluding the one-off VAT credit and expected increase in the pension charge, we are targeting around a 50 basis point expansion in Group
operating profit margin before transformation costs for the full year.
Transformation costs are expected to be in the range of £120-140 million, largely depending on the level of voluntary redundancies.
We expect the cumulative net cash investment over 2013-14 and 2014-15 to remain at around £1.2 billion, as the reduced costs of
implementing certain projects in 2013-14 will help offset the cash costs of the management reorganisation programme in 2014-15.
Matthew Lester
Chief Finance Officer
6 June 2014
5 Excluding election mail.
28
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Business risks
The Corporate governance section describes in detail how the Group manages its risk from the Group Board level, its respective sub-Committees
and through the organisation. Further details can be found on pages 53 to 54.
The table below details the principal business risks, their current status and how the Group mitigates these risks.
Principal risk
Status
Mitigation
Changes in customer preferences
The letter and parcel markets are becoming
more competitive, customer behaviours are
constantly evolving and our competitors are
responding quickly to these changing demands:
Customer behaviour and Royal Mail’s
responsiveness to market: Changes in
customer behaviour, and changes to the
markets in which the Group sells its products
and services, could result in reduced demand
for the Group’s products and services and
impact our forecast rates of decline and growth
of letter and parcel volumes respectively.
There is a risk that our product offerings, and
the customer experience we provide, may not
adequately meet evolving customer needs or
that we are unable to innovate or adapt our
commercial and operational activities fast
enough to respond to changes in the market.
No change – as
volumes are
broadly consistent
with expectations.
Economic environment: Historically, there has
been a correlation between economic
conditions in the UK and Europe and the level of
letter and parcel volumes. There is a risk that
flat or adverse economic conditions could
impact our ability to stay profitable, either by
reducing letter and parcel volumes or by
encouraging customers to adopt cheaper
service options for sending letters and parcels.
No change – the
economic
environment is
improving in line
with expectations.
• We are piloting Sunday afternoon opening at around 100
Delivery Offices later this summer, when we will also trial
Sunday parcel deliveries to home addresses within the M25;
• Parcelforce Worldwide will also launch a Sunday delivery
service in June 2014 for online shoppers;
• We launched Mailmark™ barcode technology for our large
business mail customers. This increases our ability to track
addressed letters through our network for these customers;
• We continue to focus on our advertising mail offering, both
on its own and in combination with other media, to ensure
sustainable revenue streams through customer retention
and acquisition;
• We are working with the Keep Me Posted campaign to
protect the rights of consumers to choose, without penalty,
to receive communications such as bills and statements
by post;
• We continue to focus on meeting or exceeding our Quality
of Service targets, and internal performance targets (such
as composite parcel delivery performance);
• Through our continued transformation programme, we are
seeking to improve first time delivery rates. This includes
an emphasis on consistency and standardisation of key
initiatives like Delivery to Neighbour across our operations;
• We continue to invest in technology to improve our service.
In April 2013, we introduced our tracked returns service.
We have also introduced enhanced delivery information for
our Special Delivery and Tracked offerings and we have
introduced Local Collect, our own click and collect service,
in Post Offices; and
• We have extended our network operating hours for parcels
processing for some of our business customers.
• We have robust econometric models in place to provide
early warnings of changes to overall volumes and the
profile of letter and parcel volumes. We continually review
and upgrade these models to better anticipate the impact
of price rises and reflect the increasingly deregulated
market; and
• We continually review our cost base to ensure we are as
efficient as possible.
Link to
strategy
Managing the
decline in letters
Being a successful
parcels business
Being customer
focused
Managing the
business
successfully
29
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Link to
strategy
Managing the
business
successfully
Business risks (continued)
Principal risk
Status
Mitigation
Cost management and business transformation
Royal Mail must continuously become more
efficient and flexible in order to compete
effectively in the letter and parcel markets:
Cost management: The success of the
business strategy relies on effective control of
costs, and the delivery of efficiency and other
benefits from our transformation programme,
whilst maintaining Quality of Service, safety,
and employee engagement.
Employee awareness and engagement:
Lack of employee engagement in relation to
transformation and understanding of the need
for change could mean that we, or CWU, are
unable to execute the efficiency changes
enabled by the pay deal.
Retaining and attracting senior
management: Any failure by the Group to
retain or attract Directors and highly skilled
personnel could have a material adverse effect
on its ability to manage its costs and transform
the business.
No change – due to
effective
management of
non-people costs.
• The initial phase of our transformation programme, which
included the modernisation of all of our Delivery Offices, the
automation of letters sorting and a revision of all delivery
walks, is now largely complete; and
People costs
growth mitigated
by productivity
improvements.
Non-people costs
reduced due to
tight cost control.
Reduced risk – due
to the award of
Free Shares and
the new CWU
agreement.
Risk remains in
place.
• We track progress and outcomes of all transformational
revisions to operational practice on a weekly basis to
ensure completion to time and the sharing of good practice
and lessons learned. Quality of Service is a fundamental
consideration prior to any change.
• Our recent agreement with the CWU includes an Agenda
for Growth to deliver change at the right pace and to ensure
we are working together towards agreed goals.
• The Directors’ remuneration report sets out the Group’s
overarching approach to remuneration in its policy (pages
59 to 63). The policy sets out that the overall remuneration
package should be sufficiently competitive to attract, retain
and motivate executives with the commercial experience to
run a large, complex business in a highly challenging
context. There is a risk if it is not.
• We are actively progressing and monitoring the IT
transformation programme. This remains high risk due to
the significant scale and complexity of change, and the
ongoing requirement for effective management of the
transition.
IT transformation: Our current IT estate
requires significant investment and the IT
transformation programme is complex
and will take several years to complete.
No change – as the
programme is
progressing as
expected.
Failure to improve our IT systems or
successfully implement the IT transformation
programme would increase the risk of security
breaches and attacks, a material adverse effect
on the Group’s operations, and the risk that the
IT systems might not be able to support the
business plan.
Regulatory and legislative environment, including direct delivery
The business operates in a regulated
environment. Changes in legal and regulatory
requirements could impact our ability to meet
our targets and goals:
Direct delivery and the Universal Service:
In our liberalised postal market, other operators
are able to offer direct delivery services by
cherry picking easy-to-serve urban areas,
without having to adhere to the same high
delivery requirements and quality standards as
Royal Mail.
The combination of mandated access,
unfettered rollout of direct delivery and
structural decline in letters, poses a serious risk
to the economics of the USO in the UK.
30
Managing the
decline in letters
Increased risk
– due to unfettered
rollout of direct
delivery
competition and
Ofcom not bringing
forward a review
of the impact of
direct delivery on
the USO.
• We have proposed changes to our access contracts to help
secure the provision of the Universal Service. Certain of
these proposed changes are subject to a Competition Act
investigation by Ofcom. Under the terms of Royal Mail’s
access contracts, the price changes subject to the
investigation are suspended pending the outcome of that
investigation; and
• We are preparing a regulatory submission calling for Ofcom
to bring forward its full review of direct delivery
competition in the UK and how it will protect the Universal
Service from the serious risk this presents.
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Principal risk
Status
Mitigation
Link to
strategy
Any failure or delay by Ofcom in undertaking a
review of direct delivery in the future, or any
failure or delay in introducing appropriate
regulatory safeguards to protect the Universal
Postal Service, would be likely to undermine the
Group’s future ability to earn revenue
necessary to ensure the sustainable provision
of the USO.
VAT exemption: Mandated Network Access
services provided by Royal Mail are currently
exempt from Value Added Tax (VAT). This VAT
exemption is currently the subject of judicial
review proceedings. There is a risk that the VAT
exemption on access services could be lost as a
result of these proceedings, thus increasing the
cost to those customers who cannot reclaim VAT.
In this case, end-users that use such network
access services for distribution of their letters
may accelerate their adoption of e-substitution
or alternative means of communicating with
their customers or switch to competing third
party direct delivery services.
Employment legislation: Changes to laws and
regulations relating to employment (including
the interpretation and enforcement of those
laws and regulations) could, directly or
indirectly, increase the Group’s labour costs,
which, given the size of the Group’s workforce,
could have an adverse effect on the Group.
There is emerging European case law which
may provide new guidance in relation to the
interpretation of the Working Time Directive,
which subsequently would need to be
considered by the English courts in relation to
the implementation of that directive through
the Working Time Regulations 1998 and UK
employers’ compliance with it.
Industrial relations
There is extensive trade union recognition in
respect of our workforce in the UK:
Industrial action: There is a risk that one or
more material disagreements or disputes
between the Group and its trade unions could
result in widespread localised or national
industrial action.
Widespread localised or national industrial
action would cause material disruption to our
business in the UK and would be likely to result
in an immediate and potentially ongoing
significant loss of revenue for the Group.
Widespread localised or national industrial
action may cause Royal Mail to fail to meet the
Quality of Service targets prescribed by Ofcom,
leading to enforcement action and fines.
No change –
outcome of judicial
review
proceedings
pending.
• We consider that HM Revenue & Customs (HMRC) has
correctly implemented VAT legislation in compliance with
European law and we are continuing to support HMRC in
defending the claim.
Increased risk
– due to evolution
of case law.
• We have processes and controls to ensure that we pay all
of our people correctly. If the law is changed or elements
relevant to the particular circumstances of Royal Mail are
reinterpreted by English courts, then we will need to adapt
to these as appropriate.
Managing the
business
successfully
Managing the
business
successfully
Reduced risk – due
to the new CWU
agreement.
• We have reached an agreement with the CWU on an
Agenda for Growth, including a new legally binding
agreement, to promote industrial stability and provide
employee protections. The agreement represents a joint
aspiration to radically improve industrial relations and
create a can-do culture in the interests of customers,
employees and the Company; and
• We continue to engage with both Unite and the CWU at all
levels across the business, and there is constant visibility of
issues, action taken and potential risks.
31
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Corporate responsibility
Responsibility leader
Silver
distinction in the RobecoSAM
Sustainability Yearbook,
ranking us amongst global
Dow Jones Sustainability
Index Leaders
Our performance
Times Top 50
Employer for Women
Top 10
in BITC’s Corporate Responsibility
Index – the UK’s leading
benchmark for corporate
responsibility
85 per cent
of people in the UK think
Royal Mail is an important part
of local communities1
£50 million
donated to over 975 charities
since our Payroll Giving Scheme
was launched in 1989
3.5 per cent
reduction in UK carbon emissions
compared with 2012-13
1 Ipsos MORI Corporate Image Survey 2013.
32
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Royal Mail makes a major contribution to the UK’s social and economic infrastructure.
As the designated provider of the Universal Service, we play a vital role in connecting
millions of customers, businesses, organisations and communities – including those in
the most remote rural areas.
Our corporate responsibility strategy is an integral part of realising our core strategic
priorities. The objectives at the heart of our business and corporate responsibility
strategies are the same – to ensure a sound and sustainable Universal Service and
to generate sustainable shareholder value.
The links between our corporate responsibility aims and our core strategic priorities are shown
in the table below.
Corporate responsibility objective
Being a
successful
parcels
business
Managing
the decline
in letters
Being
customer
focused
Delivering economic and social benefit
to the communities we serve
Driving colleague advocacy of the Group
and its community role
Managing the environmental impacts of
our business and operations
Delivering our transformation responsibly
Communicating our management of corporate
responsibilities openly and transparently
3
3
3
3
3
3
3
3
3
3
3
3
We report progress against our corporate
responsibility objectives under the areas of
Customer; People; Community; Suppliers
and Environment.
Measuring our progress
We aim to be independently rated as one of
the most responsible companies in the UK.
Business in the Community’s Corporate
Responsibility Index is one good way of
measuring our performance. In the 2014
Index, Royal Mail was ranked one of the top
ten most responsible companies in the UK.
We achieved a Silver distinction in the
2013 RobecoSAM Corporate Sustainability
Yearbook, the assessment that forms
the foundation of the Dow Jones
Sustainability Index (DJSI). We rank
amongst the top four companies globally
in our industry: Transportation and
Transportation Infrastructure.
Our customers
Being customer focused is one of our strategic
objectives (see page 16). Every person and
business in the UK is a potential customer. As
the UK’s Universal Service provider, Royal Mail
can deliver to more than 29 million addresses,
across the UK, six-days-a-week, for a
uniform, affordable price.
In GLS, we are aiming to expand our customer
base in Europe as we seek to build our
presence in the growing B2C segment.
We have continued to progress in 2013-14 –
exceeding our regulatory Quality of Service
targets for First Class and Second Class mail,
and achieving a six per cent reduction in
customer complaints2. Maintaining this
performance and our customers’ trust
is a key strategic priority.
We seek feedback from both business and
consumer customers to help us to continually
improve our performance. Our business
customer satisfaction score and Quality of
Service standards are detailed in the CEO
review on page 11. As well as improved
performance in these areas, in our second full
year of gathering consumer customer
satisfaction scores, we have also seen a steady
increase from 68 in 2012-13 to 70 in 2013-14.
We measure our employees’ views on how
customer focused our products and services
really are. We use our annual Employee
Survey to gauge what they think about key
aspects of the customer experience. This year,
we achieved a customer focus score of 69
compared with 65 last year.
See KPIs pages 18 to 19
2 We also provide a detailed annual disclosure on customer complaints to our regulator, which is publicly available.
Our people
Employee engagement is one of the key
drivers in our business success. Our
Employee Survey helps us identify the areas
where we are doing well and those we need
to improve. This year, we achieved an
employee engagement score of 54, up from
50 in 2012-13.
See KPIs pages 18 to 19
As noted in our KPI table on page 18, we take
action to ensure we are continuously
improving employee engagement by:
• Keeping people informed of our business
strategy and their role in delivering it.
During the year, we conducted almost
60 Town Hall meetings, two Group Forums
(conferences for our most senior managers);
and our Operations and Modernisation
forum for approximately 4,000 operations
managers;
• Supporting managers in the creation and
implementation of local action plans, based
on feedback from the annual Employee
Survey; and
• Updating our employees through the Royal
Mail in-house newspaper ‘Courier’, Royal
Mail TV (RMTV) and our other digital and
printed communication channels. This
includes regular updates on our financial
results, business developments and
competitor activity.
GLS also undertakes targeted engagement
activities. For example in GLS Belgium, the
management team visits each depot at least
once a year to engage with employees; while
in GLS Poland, 360-degree feedback has
been used to inform development plans and
training requirements.
In December 2013, we agreed in principle a
ground-breaking new agreement on an
Agenda for Growth with our main union, the
CWU. It is about improving industrial relations,
creating a can-do culture and a joint
commitment to delivering business success.
33
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate responsibility (continued)
The agreement includes legally-binding terms
covering employee pay, protections and
industrial stability as well as a programme
of work to help deliver change at pace in
operations. The industrial stability framework
sets out a new approach to resolving
workplace issues.
In February 2014, over 94 per cent of CWU
members voted in favour of the proposed
Agenda for Growth. 57 per cent of eligible
members voted in the ballot.
Training and career development
Ensuring our people have the skills they
need to do the job is also fundamental to
the success of the business.
We make a significant investment in our
learning and development programmes. In
2013-14, almost 50,000 colleagues attended
instructor-led training in the UK, with 90,000
colleagues attending web-based training
sessions. Topics covered include: improving
the customer experience, safety, compliance
and management and leadership.
Examples from across GLS include the GLS Italy
Academy, where tailored training curricula were
developed in 2013-14 for different functions
and responsibilities. GLS Germany offers a
three-year bachelor degree programme in
logistics or information management.
Promoting diversity
Royal Mail employs a diverse mix of people
who reflect the communities in which we
work, and the customers we serve. We are
committed to being an equal opportunities
employer and we proactively seek to recruit
people from socially excluded groups. It is our
policy to provide opportunities for our
employees based on an individual’s
performance and skills, with no discrimination
against protected characteristics3.
We are a signatory to the Government’s
Think, Act, Report initiative. We work with
Business in the Community’s (BITC)
Opportunity Now and Race for Opportunity
programmes, which promote best practice
in equal opportunities.
In late 2013, we established a Diversity
Council to progress and monitor our diversity
performance. Chaired by the Company
Secretary, it includes the Chief Operating
Officer, Group HR Director, frontline
employees and representatives from the
CWU and Unite. The Council met for the
first time in March 2014. Its progress
will be regularly reviewed by the Chief
Executive’s Committee.
Our existing Gender Diversity Steering Group
will continue to support our gender strategy.
It will report to the Diversity Council. Since its
inception in 2010, the Steering Group has
developed policies and initiatives to attract
new talent and support female colleagues’
career progression. Through this work we
have achieved external recognition.
In 2013, we were named as one of BITC’s Top
10 Private Sector Organisations for Gender in
the UK. We also achieved a place in the Times
Top 50 Employers for Women in 2014.
At our Board and senior management grades,
we have relatively high gender diversity (see
table below). At Board level, 36 per cent of
members are female4. On average, FTSE 100
companies have 17.3 per cent female
representation on their boards5.
At senior management level, 26 per cent of
employees are female, compared to 15 per
cent in operational functions. We are
committed to improving the gender balance
across all areas of the business.
Royal Mail’s ethnic profile is representative of
the UK workforce6. Around ten per cent of our
employees declare themselves to be from
ethnic minority backgrounds. However, we
recognise we need to improve representation
of ethnic minorities amongst our
management population. Our newly-
established Diversity Council will seek to
address this.
As a Disability ‘Two Ticks’ employer, Royal
Mail welcomes job applications from
candidates with a disability or health
condition. We have reviewed our recruitment
processes to ensure a fair approach for
people with disabilities and we interview all
disabled applicants who meet the minimum
criteria for a role. Additionally, the case study
on page 37 provides insight into our
partnership with disability charity Remploy.
We make reasonable adjustments to the
workplace to support employees who become
disabled. We also provide training as
required, for example in assistive technology
and software.
We introduced deaf awareness training
workshops for hearing impaired employees,
their colleagues and managers. We also focus
on ensuring those with disabilities are not
discriminated against through the provision of
Gender distribution (number of people)
Female
Male
Female
UKPIL7
GLS
Male
Royal Mail plc Board4
Senior Management
Management
Administrative
Operational
4
694
1,715
1,700
7
1,789
6,950
1,341
36
243
2,739
2,354
19,011
115,274
1,924
6,515
3 Race, colour, ethnic or national origin, nationality, disability, marital or civil partner status, sexual orientation, pregnancy or maternity, age, religion or belief (including political opinion
in Northern Ireland), sex and gender reassignment.
4 Jan Babiak resigned from the Board with immediate effect on 29 April 2014. This statistic is inclusive of her being a Director during the year ended 30 March 2014.
5 The Female FTSE Board Report 2013, Cranfield University School of Management.
6 Labour market status by ethnic group, ONS, January 2014.
7 Includes Heritage Trustees not included in the people numbers on page 96. Total difference of 44 people.
34
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 anti-discrimination workshops. Approximately
six per cent of our employees have a disability8.
Safety
The safety and wellbeing of our workforce is
an enduring priority for us. Our safety goal is
to reduce the number of accidents to zero, a
commitment driven throughout the business
by a specific safety KPI in our Corporate
Balanced Scorecard.
Lost time accidents per
100,000 work hours
1.79
1.47
1.17
0.77
2011
2012
2013
2014
We continue to make progress driving down
accident rates. We achieved a Lost Time
Accident Frequency Rate9 of 0.77 in 2013-14
(compared with 1.17 in 2012-13).
See KPIs pages 18 to 19
We strive to improve our safety performance
in everything we do. It is with great regret
that we report four people died in connection
with our activities in the UK in the past year.
All fatalities were associated with road traffic
accidents with our vehicles. We liaise closely
with the relevant authorities and undertake
our own detailed investigations to establish
the root cause of each accident and, where
possible, to determine what lessons can be
learned. Findings are discussed at Board level
and communicated across the Group.
We continue to take actions to improve safety.
We have appointed a Head of Health and
Safety at Parcelforce Worldwide to develop
a safety leadership culture. We also ran our
annual Road Safety Week campaign in
November 2013, raising safety awareness
through videos, posters, RMTV and managers’
briefings. Topics ranged from seatbelts and
stationary objects to driver distractions and
winter driving.
Our communities
Our economic impact, as a major employer
and purchaser of goods and services, is
significant. The Centre for Economics and
Business Research Ltd (Cebr), commissioned
by Royal Mail, has carried out a complete
economic impact assessment of UKPIL. Cebr
found that we made the seventh largest
contribution to the UK economy of all UK
corporations. For the 2013-14 financial year,
our impact totalled £10.5 billion in terms of
value added, made up of direct and indirect
contributions to the wider UK economy.
This includes our contribution through
employment, procurement and taxation.
Our approach to tax is published on page 36.
Cebr research commissioned in 2013 also
found that we make a significant contribution
to social inclusion through the employment
and earnings we bring to some of the UK’s
poorer regions. We offer jobs where there are
generally fewer job opportunities. On average
across the UK, one in every 200 employees
works for Royal Mail.
Supporting good causes
In 2013-14, Royal Mail contributed
£9.8 million10 directly to charities, good
causes and schemes for disadvantaged
groups. We also supported £3.3 million of
colleague fundraising for charities and good
causes across the UK.
In early 2014, we celebrated reaching
25 years and £50 million in charitable
donations through our payroll giving scheme.
The generosity of our people has been
recognised by two National Payroll Giving
Excellence Awards and a Platinum Payroll
Giving Quality Mark Award.
We also met our target to raise £2 million
for our Charity of the Year, Prostate Cancer
UK. Royal Mail matched money raised by
colleagues, penny-for-penny. This will fund
at least 34 specialist prostate cancer nurses
in areas of need across the UK. During the
year, Royal Mail also provided £136,000 in
matched giving and grants schemes to
support employees’ fundraising for all other
charities and good causes.
GLS uses its services to support areas of
need across Europe. This has included:
delivering organic breakfast boxes to pupils in
Frankfurt; collecting Christmas presents for
refugee children in Austria; and collecting and
delivering aid supplies in Sassari, Italy,
following the devastation of Cyclone Cleopatra
in November 2013.
Our suppliers
In the UK we contribute around £2.5 billion
annually procuring goods and services from
over 6,300 suppliers.
We are committed to ensuring that our
suppliers maintain high standards of social,
ethical and environmental conduct. We expect
suppliers to adhere to our Responsible
Procurement Code of Conduct. Our Code
is based on the UN Global Compact’s ten
principles around good human rights, labour
and environmental practice, and anti-
corruption. In addition, we encourage them to
set objectives to improve their performance in
social, environmental and ethical issues. In
2013, we became the first company globally
to be awarded the Chartered Institute of
Purchasing & Supply’s platinum standard for
procurement and supply chain management.
8 Percentage of employees identifying themselves as having a disability in the 2014 Employee Survey.
9 The number of UKPIL employee, work related accidents resulting in an absence on a subsequent day or shift per 100,000 hours worked.
10 Includes our mandated commitments to Articles for the Blind and BPMA totalling £6.1 million.
35
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Corporate responsibility (continued)
Our Taxation Principles
Royal Mail makes a significant tax
contribution to public finances and we take
a fair and reasonable approach to tax.
•
•
•
Royal Mail’s head office is in the UK
and our parent Company is and will
remain a UK tax resident company.
Royal Mail will comply with applicable
tax rules, regulations and disclosure
requirements in all territories in which
we operate. We will not engage in
abusive tax arrangements.
Royal Mail will, where it is responsible
and appropriate to do so, take steps to
reduce our tax liabilities within the
laws of the countries in which Group
companies operate. We will claim
properly available allowances,
deductions, reliefs, incentives,
exemptions and credits where it is
beneficial to do so.
Our Environment Policy Statement
We commit to:
•
Comply with all relevant legislation,
regulations and other voluntary
commitments;
•
•
•
Prevent pollution incidents and
manage our environmental impacts
through an environmental
management system which aligns with
ISO14001;
Seek ways to continue to improve our
environmental performance through
clear measurement and management
of our impacts, investment in
technology and employee engagement.
This will be delivered in partnership
with World Class Mail, Royal Mail
Group’s comprehensive programme for
continual improvement;
Ensure our employees are fully
engaged with our programme of
activity and act in a responsible
manner; and
• Work with Government, industry
partners, environmental organisations
and others to learn, share and promote
environmental best practice and
innovation.
Our environment
We aim to minimise the environmental impact
of our business operations. Managing and
reducing our impact in a responsible manner
will help us save costs, compete more
effectively and deliver a good service to
our customers.
During the year, the Chief Executive’s
Committee reviewed our environment
strategy. We reconfirmed our targets for
carbon emissions and waste. We also
reconfirmed our main environmental focus
areas, namely climate, waste, water,
biodiversity and customers and suppliers.
We published a new group-wide Environment
Policy to strengthen our approach. Our Policy
Statement adjacent sets out our approach to
environmental issues in our operations. A full
version of the Policy can be accessed online at:
www.royalmailgroup.com/responsibility/policies
The table below sets out our Group Scope 1
and Scope 2 carbon dioxide equivalent (C02e)
emissions for 2013-14.
Our target is to achieve a 20 per cent reduction
in our UKPIL emissions (including Scopes 1, 2
and 3) by 2020-21, compared to a 2004–05
baseline. We achieved a 3.5 per cent reduction
in our UK carbon footprint in 2013-14,
generating around 705,200 tonnes compared
with 730,800 tonnes in 2012-1312. We are on
track to achieve our long-term target.
We diverted 71 per cent of waste from landfill
last year, achieving our 2014-15 target of
70 per cent one year ahead of schedule. We
did this by raising awareness amongst our
employees of the importance of separating
waste and by making recycling easy. We also
recorded a reduction of 6.5 per cent in our use
of water during the year. We have completed
water footprint assessments at our top
50 water consuming sites and will use the
resulting recommendations to further develop
our strategy and drive efficiencies.
In GLS, environmental management and
performance is driven through the ThinkGreen
initiative – an overview is provided in the case
study on page 37.
2013-14 C02e Emissions by Scope (‘000 tonnes)11,13
Scope 1
Scope 2
TOTAL
Tonnes CO2e per £1 million revenue
Total
473.1
149.7
622.8
65.9
UKPIL
457.6
132.6
590.2
GLS
15.5
17.1
32.6
11 Carbon dioxide equivalent emissions (CO2e) have been calculated in accordance with the UK Government’s Environmental Reporting Guidance (2013 version). Data has been
consolidated according to the ‘financial control’ approach. We have reported all material Scope 1 and Scope 2 emissions for which we consider ourselves responsible and exclude
immaterial sources such as fugitive emissions from air conditioning in owned vehicles.
12 CO2e emissions for 2012-13 have been restated from 746,500 tonnes, in accordance with revised Defra emission factors.
13 CO2e emissions have been assured by EY.
36
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Case study
Remploy and the First Shot
programme
Case study
GLS THINKGREEN
We have been a national partner of disability charity Remploy since
2008, working together to provide jobs and placements for people
with disabilities. During 2013-14, around 300 people with
disabilities started working at Royal Mail as a result of this
partnership. We are pleased to report that in April 2014, just after
year end, we reached a significant milestone; Royal Mail has now
provided employment to 2,000 people through the partnership. We
are one of only three organisations to have supported this number
of Remploy people into work.
Our Group HR Director is on the Board of Trustees of the Business
Disability Forum. Through this we became aware of, and took, the
opportunity to extend our Remploy partnership by committing to
support at least 40 people made redundant by the closure of
Remploy factories across the country. We have developed a
programme of placements, providing participants with the
opportunity to learn new skills in order to support them into new
roles. By the end of April 2014, more than 40 people had applied
to be a part of the scheme.
Human rights
We are committed to upholding human rights
both internally and externally to the business.
We commit to obeying the laws, rules and
regulations of every country in which we
operate. In addition, we respect and support
the United Nations Universal Declaration of
Human Rights and the International Labour
Organization Fundamental Conventions,
covering freedom of association, the abolition
of forced labour, equality and the elimination
of child labour. Our commitments and
expectations – both for ourselves and for our
suppliers – are set out in our Corporate
Responsibility Policy and our Responsible
Procurement Code of Conduct
(www.royalmailgroup.com/responsibility/
policies).
This Strategic report was approved by the
Board on 6 June 2014
Emily Pang
Company Secretary
In 2008, GLS launched its ThinkGreen environmental initiative to
coordinate and actively promote environmental activities. The
programme has three key aims: to use resources responsibly;
reduce emissions; and optimise waste management. Key initiatives
to help GLS achieve these objectives include: modernising the fleet
and buildings, optimising transport planning and implementing local
green measures. Initiatives range from tree planting in Hungary
to a carbon neutral shipping service in Germany.
A network of 25 environmental representatives helps integrate the
ThinkGreen vision and promote best practice across the Company.
They have supported the implementation of the ISO14001
environmental management system (EMS) across 17 countries.
ThinkGreen is also the driving force behind the rollout of GLS
eco-depots. Constructed using recyclable materials and making use
of heat pumps, rainwater harvesting and photovoltaic cells, the
eco-depots have reduced energy and water consumption, meaning
a reduced environmental impact as well as reduced business costs.
GLS opened three new eco-depots during 2013-14, at Habay and
Nivelles in Belgium and Steinabrückl in Austria. This brings the total
number of eco-depots in GLS to 15.
37
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Our Board of Directors
Donald Brydon, CBE
Chairman
Moya Greene
Chief Executive Officer
Orna Ni-Chionna
Senior Independent
Non-Executive Director
Matthew Lester
Chief Finance Officer
Mark Higson
Managing Director,
Operations and Modernisation
John Allan
Non-Executive Director
Jan Babiak*
Non-Executive Director
Nick Horler
Non-Executive Director
Cath Keers
Non-Executive Director
Paul Murray
Non-Executive Director
Les Owen
Non-Executive Director
Details of membership of the
various Board committees
can be found in the Corporate
governance section.
Board composition
Gender balance
Experience
Non-Executive Directors
64%
Executive Directors
27%
Chairman
9%
Male
64%
Female
36%
Public utilities, including
state-owned mail
delivery service 15%
Finance 24%
Logistics 15%
Accounting 23%
Retail and marketing 23%
* Jan Babiak resigned from the Board with immediate
effect on 29 April 2014. The above statistical analysis is
inclusive of her being a Director during the year ended
30 March 2014.
38
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Donald Brydon, CBE Chairman, age 69
Moya Greene Chief Executive Officer, age 60
Appointed to the Board1 6 September 2013
Appointed to the Board1 6 September 2013
Skills and experience Donald had a 20-year
career with Barclays Group, during which time
he was Chairman and Chief Executive of
BZW Investment Management and acting
Chief Executive of BZW, followed by 15 years
with the AXA Group, including holding the
posts of Chairman and Chief Executive of
AXA Investment Managers and Chairman
of AXA Framlington. He has since chaired
several FTSE 100 companies, in addition to
his experience of a wide range of domestic
and international industries.
External appointments (current and
former) Currently Chairman of The Sage
Group plc. He is Chair of the Medical Research
Council and Patron of the British Postal
Museum and Archive and was previously
Chairman of Smiths Group (retired
November 2013), the London Metal Exchange,
Amersham plc, Taylor Nelson Sofres plc, the
IFS School of Finance and EveryChild, an
international children’s charity. He is a former
Director of Allied Domecq plc, Scottish Power
plc and AXA UK plc.
Committee membership Chairman of the
Nomination Committee and a member of the
Remuneration Committee.
Matthew Lester Chief Finance Officer, age 50
Appointed to the Board1 6 September 2013
Skills and experience Matthew was
previously Group Finance Director of ICAP plc
for five years and has held a number of senior
finance roles at Diageo plc, including Group
Financial Controller and Group Treasurer.
External appointments (current and
former) Matthew is a Non-Executive Director
of Man Group plc and a main committee
member of the 100 Group of Finance
Directors, where he is Chairman of its
Investor Relations and Markets Committee.
Committee membership Member of the CEC
and the Pensions Committee.
Skills and experience Moya started her
career in public service in 1979 and held
various posts in a variety of departments,
culminating in the position of Assistant Deputy
Minister for Transport Canada. Her experience
in the financial sector includes Managing
Director, Infrastructure Finance, at TD
Securities Inc., and Senior Vice President, and
Chief Administration Officer, Retail Products,
at Canadian Imperial Bank of Commerce.
Her operating experience includes Senior
Vice President for operational effectiveness
at Bombardier. Moya became President
and Chief Executive Officer of Canada Post
Corporation in 2005. She has been Chief
Executive Officer of Royal Mail since 2010.
External appointments (current and
former) Currently Director of Tim Hortons in
Canada, Member of both Audit Committee and
Human Resources and Compensation
Committees at Tim Hortons Inc. Chairman of
the Remuneration Committee at Purolator Inc.
Formerly she was Vice-Chairman of Purolator
Courier Ltd, a Canadian express parcel
company.
Committee membership Chair of the
Chief Executive’s Committee (CEC).
Mark Higson Managing Director, Operations
and Modernisation, age 58
Appointed to the Board 20 September
2013. Mark will resign from the Board
following the 2014 Annual General Meeting.
Skills and experience Mark was previously
Divisional Chief Executive and Group
Operations Director of BPB plc. He has
also held senior positions at Courtaulds plc,
HJ Heinz and British Aerospace.
External appointments (current and
former) Currently President of the World
Class Manufacturing Association (WCMA)
and a member of the IPA Advisory Council.
Committee membership Member of
the CEC.
Orna Ni-Chionna Non-Executive Director,
age 58
Appointed to the Board 20 September 2013
Skills and experience Orna is a former
Partner at McKinsey & Company, where
she specialised in serving retail and
consumer clients.
External appointments (current and
former) Currently Chair of the Advisory
Board at Eden McCallum LLP, a Non-
Executive Director of Saga Plc and a Trustee
of the National Trust. Formerly Senior
Independent Director of HMV plc, Northern
Foods plc and BUPA, and a Non-Executive
Director of Bank of Ireland UK Holdings plc
and Bristol & West plc.
Committee membership Chair of the
Remuneration Committee, member of
the Audit & Risk Committee and the
Nomination Committee.
John Allan Non-Executive Director, age 65
Appointed to the Board 20 September 2013
Skills and experience John is currently
Chairman of Dixons Retail plc and Ship Midco
Limited (trading as WorldPay Limited). He is to
become a Non-Executive Director and
Chairman designate of Barratt Developments
plc from 1 August 2014 and will become
Chairman following Barratt Developments plc’s
AGM on 12 November 2014.
External appointments (current and
former) John is Chairman of the Board of
Trustees of the DHL UK Foundation and a
senior adviser to Alix Partners. He is a former
senior executive and corporate board
member of Deutsche Post World Net.
Previously, amongst other senior executive
roles, John was a CFO and corporate board
member of Deutsche Post DHL. He was CEO
of Exel plc, a supply chain logistics company.
John was also previously Chairman of Care
UK Health & Social Care Holdings Limited and
a Non-Executive Director of the Home Office
Supervisory Board. He has also been a
Non-Executive Director at PHS Group plc, ISS
A/S, National Grid plc, Wolseley plc, Hamleys
plc, 3i plc and Connell plc. His early career
was with Lever Brothers, Bristol-Myers
Company Ltd and Fine Fare Ltd.
Committee membership Member of the
Audit & Risk Committee.
1 The Director was appointed on 6 September 2013 to the Board of Royal Mail Limited, which changed its name to Royal Mail plc on 19 September 2013.
39
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Our Board of Directors (continued)
Jan Babiak Non-Executive Director, age 56
Appointed to the Board 20 September
2013. Jan resigned from the Board with
immediate effect on 29 April 2014.
Skills and experience Jan previously held
managing partner and executive board level
roles at EY.
External appointments (current and
former) Currently on the Board of Walgreens
and is Chair of its Audit Committee and a
member of its Finance Committee. She is also
a Board member of the Bank of Montreal,
a member of its Audit and Conduct Review
Committee and of the Risk Committee. She
has also been an independent board member
and Audit Committee Chair for Logica plc.
In addition, Jan is a Council Member on the
governing body of the Institute of Chartered
Accountants in England and Wales.
Committee membership Member of the
Nomination Committee, the Pensions
Committee and the Remuneration Committee.
Paul Murray Non-Executive Director, age 52
Appointed to the Board 20 September 2013
Skills and experience Paul has been
Chairman of the Audit & Risk Committee
since August 2009 and is Audit Committee
Chairman at Qinetiq plc. He was Group
Finance Director of Carlton Communications
plc and of LASMO plc.
External appointments (current and
former) Currently Non-Executive Director
of Independent Oil and Gas plc, Naked Energy
Ltd, Qinetiq Group plc and Ventive Ltd.
In addition, Paul is a Treasurer of Pilotlight.
Formerly Senior Independent Director of
Taylor Nelson Sofres plc and Non-Executive
Director of Thomson SA and of Tangent
Communications plc.
Committee membership Chairman of
the Audit & Risk Committee, member
of the Pensions Committee and the
Remuneration Committee.
Director
Donald Brydon, CBE
Moya Greene
Orna Ni-Chionna
Matthew Lester
Mark Higson
John Allan
Jan Babiak
Nick Horler
Cath Keers
Paul Murray
Les Owen
1 Appointed Chairman on 26 March 2009.
2 Appointed Senior Independent Director on 1 April 2011.
40
Nick Horler Non-Executive Director, age 55
Appointed to the Board 20 September 2013
Skills and experience Nick was previously
Chief Executive Officer of Scottish Power
and has held senior strategic roles in major
companies, both in the UK and abroad,
including being Managing Director Retail
and Board member of E.ON UK plc and
MD Powergen Energy Trading Limited.
External appointments (current and
former) Currently a Non-Executive Director
of The Go-Ahead Group plc (member of Audit,
Remuneration and Nomination Committees)
and a Non-Executive Director of Thames
Water Utilities Limited. Nick is also Chairman
of Alderney Renewable Energy Ltd and
Chairman of Meter Provida Ltd.
Committee membership Member of
the Audit & Risk Committee and the
Nomination Committee.
Cath Keers Non-Executive Director, age 49
Appointed to the Board 20 September 2013
Skills and experience Cath was previously
Customer Director and Marketing Director
of 02 UK and has held various marketing,
strategy and business development roles
at Next, Sky TV, Avon and Thorn EMI.
External appointments (current and
former) Currently a Non-Executive Director
of Telefónica Europe, Home Retail Group plc
and the insurance group Liverpool Victoria
Friendly Society Limited (LV=). Cath has
chaired the Remuneration and Nomination
Committee at LV= since May 2011 and has
chaired the Remuneration Committee at
Home Retail Group since July 2012.
Committee membership Member of
the Audit & Risk Committee and the
Nomination Committee.
Directors who left during the year
During the year no Directors have left the
Royal Mail plc Board or the Royal Mail Group
Limited Board (except those Directors
appointed to the Royal Mail plc Board on
20 September 2013 who left the Royal Mail
Group Limited Board on the same day).
Directors’ original appointment dates to
the Board of a Royal Mail parent company
The table below shows the dates that the
Directors were appointed to the Board of
Royal Mail Holdings plc, the parent Company
until 1 April 2012, and the Board of Royal Mail
Group Limited, the parent Company until
12 September 2013.
Les Owen Non-Executive Director, age 65
Appointed to the Board 20 September 2013
Skills and experience Les is a qualified
actuary with 35 years’ experience in the
financial services industry. From 2000 to 2006,
he was the Group Chief Executive Officer of
AXA Asia Pacific Holdings Limited. He was also
CEO of AXA Sun Life plc, a member of the
Global AXA Group Executive Board and
responsible for AXA’s Asian Life Insurance
and Wealth Management operations.
External appointments (current and
former) Currently Non-Executive Chairman
of Jelf Group plc and Non-Executive Director
of Computershare, CPP Group plc, Just
Retirement Group plc and of Discovery
Holdings, a South African listed health and life
insurer. He was previously a Non-Executive
Director of Post Office Limited.
Committee membership Chairman
of the Pensions Committee, member
of the Audit & Risk Committee and the
Remuneration Committee.
Royal Mail Holdings plc
27 January 20091
15 July 2010
1 June 20102
24 November 2010
5 November 2007
–
–
1 April 2010
1 June 2010
1 August 2009
27 January 2010
Royal Mail Group Limited
1 April 2012
1 April 2012
1 April 2012
1 April 2012
1 April 2012
14 January 2013
1 March 2013
1 April 2012
1 April 2012
1 April 2012
1 April 2012
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Chief Executive’s Committee
Moya Greene
Chief Executive Officer
Stephen Agar
Managing Director,
Consumer and Network Access
Rico Back
GLS, Chief Executive Officer
Catherine Doran
Chief Information Officer
Neil Harnby
General Counsel
Mark Higson
Managing Director,
Operations and Modernisation
Matthew Lester
Chief Finance Officer
Jon Millidge
Group HR Director
Mike Newnham
Chief Customer Officer
Shane O’Riordain
Managing Director,
Communications, Strategy,
Regulation and Pricing
Emily Pang
Company Secretary
Stuart Simpson
Deputy Chief Operations Officer
Sue Whalley
Chief Operations Officer
41
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Chief Executive’s Committee (continued)
The Group has a focused and committed management team which has driven the return of the Group to profitability and the successful
implementation of the transformation programme. Working closely with key stakeholders including HM Government, Ofcom, trade unions and
colleagues, the management team has successfully addressed a number of significant challenges faced by the Group, including enabling the
Company to gain access to external capital.
Moya Greene Chief Executive Officer
See ‘Our Board of Directors’ on page 39.
Stephen Agar Managing Director, Consumer
and Network Access
Current role Stephen was appointed
Managing Director, Consumer & Network
Access, commencing October 2011. As such,
Stephen is responsible for the regulated
letters business (both USO and Access).
Previous work history Stephen is a barrister
who started his career in the Government
Legal Service before moving to Racal
Electronics plc. He joined Royal Mail in 1991
and previous roles with Royal Mail include
Business Strategy Director, Regulatory Affairs
Director and MD, Royal Mail Wholesale.
Rico Back Chief Executive Officer, GLS
Current role Rico was appointed Chief
Executive Officer of GLS in October 1999.
Previous work history Rico was founding
manager of German Parcel in 1989, which
was acquired by the Group in 1999. He is a
member of the CEC and a member of the
Supervisory Board of Raben Group, a
haulage contractor.
Catherine Doran Chief Information Officer
Current role Catherine joined Royal Mail in
September 2011 as Chief Information Officer.
Neil Harnby General Counsel
Current role Neil was appointed General
Counsel in January 2012.
Mark Higson Managing Director, Operations
and Modernisation
See ‘Our Board of Directors’ on page 39.
She is a Non-Executive Director for Defra and
BQF. She is also a member of the CIO Board
for e-skills UK.
Previous work history Catherine joined
Royal Mail from Network Rail, where she
led the company-wide transformation
programme, aimed at achieving multi-billion
pound savings through technology and
process changes. Throughout her career,
she has held progressively responsible IT
leadership roles in a number of blue chip
companies – BT, NatWest, Capital One,
Logica and Altergo.
Matthew Lester Chief Finance Officer
See ‘Our Board of Directors’ on page 39.
Previous work history Previously, Neil was
General Counsel for the European and Middle
Eastern Division of GE Capital, the financial
services unit of the General Electric Company.
Before joining GE, Neil was a Partner at
Linklaters LLP. Neil has a BA Honours degree
in History and is a qualified solicitor. After
leaving university, Neil spent five years as
a commissioned officer in the British army.
Jon Millidge Group HR Director
Current role Jon was appointed Group HR
Director in February 2014. He is also
Chairman of National Design Consultancy Ltd
and a Pension Scheme Trustee of the Royal
Mail Defined Contribution Plan.
Previous work history Jon joined Royal Mail
in 1985 as a graduate and has worked across
all of the businesses of the Group, notably as
HR Director in Royal Mail Letters (2003 –
2004), Parcelforce Worldwide (2000 – 2003)
and Subscription Services (1997 – 1998) and
as General Manager in the Post Office (1999
– 2000). He was previously Company
Secretary from May 2010 to February 2014
and prior to that was the Acting Group HR
Director. Jon is a fellow of the Chartered
Institute of Management Accountants
and of The Chartered Institute of
Personnel Development.
Mike Newnham Chief Customer Officer
Current role Mike was appointed Chief
Customer Officer in March 2012.
Previous work history Previously, Mike led
the Consumer division of Orange in the UK for
two years. Prior to that, Mike held a number
of executive board positions at Orange,
including running the Consumer Sales and
Service operations and leading Orange’s B2B
business. Mike joined Orange as the UK CFO.
Before joining Orange, Mike was a director at
PricewaterhouseCoopers in the Telecoms,
Media and Technology practice. Mike has a BA
Honours degree in Management Science and
is a qualified Chartered Accountant.
42
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Shane O’Riordain Managing Director,
Communications, Strategy, Regulation and
Pricing.
Current role Shane was appointed Managing
Director, Communications in November 2010,
joining from Lloyds Banking Group. He has
subsequently assumed responsibility for
Strategy, Regulation and Pricing.
Previous work history Shane was previously
Group Corporate Affairs Director at a number
of FTSE 10 companies (Lloyds Banking Group
and HBOS), as well as at Halifax and Flemings.
In these roles, his responsibilities spanned
customer, business-to-business and City PR,
issues management, internal communications,
sponsorship, community investment, and
government relations at both UK and EU
levels. Previously, Shane was a diplomat in
the Irish Diplomatic Service, with postings
in Dublin, Belfast and Washington DC.
Shane has a degree in Public Administration,
Masters’ degrees in Business Administration
and Organisational Behaviour and is an
Associate of the Chartered Insurance Institute.
Emily Pang Company Secretary
Current role Emily was appointed as
Company Secretary in February 2014, in
addition to her current responsibilities. She
joined the Group as Chief of Staff for Royal
Mail Group in April 2011.
Previous work history Prior to joining Royal
Mail, Emily was at Canada Post where she
was Executive Chief of Staff, Office of the
President and CEO and the interim Lead
Executive for Human Resources. Prior to that
she worked at CIBC, a major Canadian bank.
Her experience there spanned Executive
Director, Business Management in the
wholesale business; Senior Director,
Investor and Financial Communications,
Communications and Public Affairs; as well
as positions in Finance and Taxation. Emily is
a Chartered Accountant and holds a Bachelor
of Commerce and an Executive MBA from the
joint York University/Northwestern University,
Kellogg-Schulich Program.
Stuart Simpson Deputy Chief Operations
Officer
Current role Stuart was appointed Deputy
Chief Operating Officer in January 2014. Prior
to this, he was running Operations for the
West Region of the UK and was the Finance
Director for UK Operations.
Previous work history Before joining the
Royal Mail in 2009, Stuart worked in the
automotive industry for 15 years with senior
roles in Finance and Strategy, the last ten
of which were based outside the UK. Roles
included the FD of SAAB AB and latterly the
FD for General Motors Global Family Car
Division. Stuart qualified as a Chartered
Accountant with Arthur Andersen.
Sue Whalley Chief Operations Officer
Current role Sue joined Royal Mail in 2006
and was appointed Chief Operations Officer in
January 2014. She is responsible for leading
the next phase of the transformation in
Operations, with specific focus on further
development of culture, safety, quality and
efficiency.
Previous work history Before joining Royal
Mail in September 2006, Sue worked at
McKinsey and Company for 17 years, the last
six of which were as a partner in their London
office. She was also co-leader of McKinsey’s
European Marketing and retail practices. She
has an MA from Cambridge University and an
MBA from Harvard Business School.
43
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Directors’ report
The Directors present their report together
with audited financial statements for the year
ended 30 March 2014.
Strategic report
To enable the assessment of how the
Directors have performed their duty to
promote the success of the Company, the
Companies Act 2006 requires the Directors to
set out in this report a fair review of the
business of the Group during the year, the
position of the Group at the end of the year
and a description of the principal risks and
uncertainties facing the Group.
Information fulfilling these requirements
can be found in the following sections of
the Strategic report and are incorporated
by reference.
Index
Business model
Strategy for delivering objectives
Results
Page
14-15
16-17
04-05
Financial assets and liabilities
104-106
Business risks
Corporate responsibility
Greenhouse gas emissions
Disabled employees
Our people
Going concern
29-31
32-37
36
34
33-35
78
Disclosure and Transparency Rules
The Strategic report and the Directors’ report
together include the management report
required by the Disclosure and Transparency
Rules (DTR4.1) of the UK Financial Conduct
Authority (Disclosure and Transparency Rules),
the Directors having consulted with the
management on such matters.
Corporate governance statement
The Disclosure and Transparency Rules
require certain information to be included
in a corporate governance statement in the
Directors’ report. Information that fulfils the
requirements of the corporate governance
statement can be found in the Corporate
Governance report on pages 47 to 57 and
is incorporated into this Directors’ report
by reference.
Disclaimer
The purpose of this Annual Report and
Financial Statements is to provide information
to the members of the Company. The Annual
Report and Financial Statements have been
prepared for, and only for, the members of the
Company, as a body, and no other persons.
The Company, its Directors and employees,
44
agents or advisers do not accept or assume
responsibility to any other person to whom
this document is shown or into whose hands
it may come and any such responsibility or
liability is expressly disclaimed.
The Annual Report and Financial Statements
contain certain forward-looking statements
with respect to the operations, performance
and financial condition of the Group. By their
nature, these statements involve uncertainty,
since future events and circumstances can
cause results and developments to differ
materially from those anticipated. The
forward-looking statements reflect knowledge
and information available at the date of
preparation of this Annual Report and
Financial Statements and the Company
undertakes no obligation to update these
forward-looking statements. Nothing in this
Annual Report and Financial Statements
should be construed as a profit forecast.
Dividends
The Directors recommend a final dividend
of 13.3 pence per Ordinary Share, payable
on 31 July 2014 to shareholders whose
names appear on the register of members
on 4 July 2014. This will amount to the total
dividend for the year.
Political donations
No political donations were made during the
year and the Company intends to continue
its policy of not making such donations for
the foreseeable future.
Future developments
Possible future developments are described in
Our strategy on pages 16 to 17 and Business
risks on pages 29 to 31 of the Strategic report.
Share capital
As at 30 March 2014, the Company’s issued
share capital comprised 1,000,000,000
Ordinary Shares of one penny each, as set
out in note 27 to the accounts on page 116.
Rights and obligations attaching
to shares
Voting
Subject to the provisions of the Company’s
Articles of Association (the ‘Articles’) and to
any special rights or restrictions as to voting
attached to any class of shares in the Company
(of which there are none), members will be
entitled to vote at a general meeting as follows:
• On a show of hands, every member present
in person has one vote and every proxy
present who has been duly appointed by
one or more members will have one vote,
except that a proxy has one vote for and
one vote against if the proxy has been duly
appointed by more than one member and
the proxy has been instructed by one or
more members to vote for and by one or
more other members to vote against.
For this purpose the Articles provide that,
where a proxy is given discretion as to how
to vote on a show of hands, this will be
treated as an instruction by the relevant
member to vote in the way that the proxy
decides to exercise that discretion; and
•
On a poll, every member has one vote per
share held by him, her or it and he, she or
it may vote in person or by one or more
proxies. Where he, she or it appoints more
than one proxy, the proxies appointed by
him, her or it taken together shall not have
more extensive voting rights than the
member could exercise in person.
In the case of joint holders of a share, the vote
of the senior who tenders a vote, whether in
person or by proxy, shall be accepted to the
exclusion of the votes of the other joint holders
and, for this purpose, seniority shall be
determined by the order in which the names
stand in the register in respect of the
joint holding.
No member shall be entitled to vote at any
general meeting or class meeting in respect of
any share held by him, her or it if any call or
other sum then payable by him, her or it in
respect of that share remains unpaid or if a
member has been served with a restriction
notice (as defined in the Articles) after failure
to provide the Company with information
concerning interests in those shares required
to be provided under the Companies Act
2006. Currently, all issued shares are
fully paid.
Voting instructions may be submitted
electronically at www.sharevote.co.uk by
following the online instructions.
Employees allocated Free Shares under the
Employee Free Shares Offer, which are held in
trust by the trustee of the Royal Mail Share
Incentive Plan, are entitled to exercise any
voting rights in respect of such Free Shares
by instructing the trustee how to vote on
their behalf.
Deadline for voting rights
Full details of the deadlines for exercising
voting rights in respect of the resolutions to be
considered at the Annual General Meeting to
be held on 24 July 2014 will be set out in the
Notice of Annual General Meeting (AGM).
Special rights
There are no persons holding securities that
carry special rights with regard to the control
of the Group.
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Initial Public Offering (the IPO), the Board was
authorised subject to certain limitations to
allot shares in the Company and to grant
rights to subscribe for or to convert any
security into shares i) up to an aggregate
nominal amount of £3,333,333 (less the
amount of any allotment made under ii) below)
and ii) up to an aggregate nominal amount of
£6,666,666 in connection with an offer by
way of a rights issue (less the amount of any
allotments made under i) above). Such
authorities apply until the end of the first
Annual General Meeting of the Company or
the close of business on 31 December 2014 if
earlier (the ‘Expiry Date’). The Directors will be
seeking a new authority for the Directors to
allot shares and to grant subscription and
conversion rights to ensure that the Directors
continue to have the flexibility to act in the
best interests of shareholders when
opportunities arise by issuing new shares or
granting such rights. There are no current
plans to issue new shares except in connection
with employee share plans. The Board was
also given authority to allot equity securities
for cash or to sell Ordinary Shares as treasury
shares for cash subject to certain limitations,
such authority to apply until the Expiry Date.
Purchase of own shares by the Company
By a resolution passed by the selling
shareholder on 25 September 2013, the
Board was authorised to purchase up to a
maximum number of 100,000,000 of its
Ordinary Shares pursuant to certain
limitations, such power to apply until the
Expiry Date. The Company did not repurchase
any of its Ordinary Shares during the year
ended 30 March 2014.
The Directors require express authorisation
from shareholders to purchase our own
shares. Accordingly, at the 2014 AGM, the
Directors will seek authority to make market
purchases of up to a maximum of ten per cent
of issued share capital. At the present time the
Group has no plans to exercise this authority.
Treasury Shares and Employee Benefit
Trust
As at 30 March 2014, the Company did not
hold shares in Treasury and there has been
no change to the number of shares held in
Treasury during the period under review.
In addition, the Company does not have
an Employee Benefit Trust in place.
Dividends and distribution
The Company may by ordinary resolution
from time to time declare dividends not
exceeding the amount recommended by the
Board. Subject to the Companies Act 2006,
the Board may pay interim dividends, and also
any fixed rate dividend, whenever the financial
position of the Company, in the opinion of the
Board, justifies its payment. If the Board acts
in good faith, it is not liable to holders of
shares with preferred or pari passu rights
for losses arising from the payment of
interim or fixed dividends on other shares.
All dividends shall be apportioned and paid
pro rata according to the amounts paid up
on the shares.
Dividend waivers
The trustee of the Royal Mail Share Incentive
Plan will not receive any dividends (other than
any special dividend declared by the Board) on
Free Shares which it has not been possible to
award to, or which have been forfeited by,
participants in the plan.
Transfer of shares
Subject to the Articles, any member may
transfer all or any of his or her certificated
shares by an instrument of transfer in any
usual form or in any other form which the
Board may approve. The instrument of
transfer must be signed by or on behalf of the
transferor and (in the case of a partly-paid
share) the transferee.
The transferor of a share is deemed to remain
the holder until the transferee’s name is
entered in the register.
The Board can decline to register any transfer
of any share which is not a fully paid share.
The Board may also decline to register a
transfer of a certificated share unless the
instrument of transfer:
(i) is duly stamped or certified or otherwise
shown to the satisfaction of the Board to
be exempt from stamp duty and is
accompanied by the relevant share
certificate and such other evidence of the
right to transfer as the Board may
reasonably require;
(ii) is in respect of only one class of share; and
(iii) if to joint transferees, is in favour of not
more than four such transferees.
Registration of a transfer of an uncertificated
share may be refused in the circumstances set
out in the uncertificated securities rules (as
defined in the Articles) and where, in the case
of a transfer to joint holders, the number of
joint holders to whom the uncertificated share
is to be transferred exceeds four.
Authority of the Directors to allot shares
By resolutions passed by the selling shareholder
on 25 September 2013 in preparation for the
Substantial shareholdings
As at 30 March 2014, the Company had been
notified, in accordance with the Disclosure and
Transparency Rules, of the following interests
in the Company’s Ordinary Share Capital:
Shareholder
Number of shares
% of voting
rights
Postal
Services
Holding
Company
Equiniti
Share Plan
Trustees
Limited
GIC Private
Limited
299,840,000
29.98%
84,437,195
8.44%
41,022,465
4.10%
The position has not changed as of
30 May 2014.
Amendment to the Company’s Articles
of Association
Any amendments to the Company’s Articles
may be made in accordance with the
provisions of the Companies Act 2006 by
way of special resolution.
Indemnity of Directors
To the extent permitted by the Companies
Acts, the Company may indemnify any
Director or former Director of the Company or
any associated company against any liability
and may purchase and maintain for any
Director or former Director of the Company
or any associated company insurance against
any liability.
Appointment and replacement
of Directors
Unless otherwise determined by ordinary
resolution of the Company, the Directors shall
be no fewer than two and no more than 15 in
number. As the UK Government was the
Company’s sole shareholder prior to
privatisation, the Secretary of State for
Business, Innovation and Skills appointed
the Chairman. All other Directors were
appointed by the Company with the
Secretary of State’s consent.
Following privatisation, Directors may be
appointed by the Company by ordinary
resolution or by the Board.
There is also an agreement in place with
Postal Services Holding Company Limited
(PSH) which grants PSH the right to nominate
one Non-Executive Director for appointment
to the Board for so long as PSH (together
with its associates) is entitled to exercise or
to control the exercise of ten per cent or more
45
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Going concern
These consolidated financial statements have
been prepared on a going concern basis. The
financial performance and position of the
Group, its cash flows and its approach to
capital management are set out in the
Financial review on pages 23 to 28. The
Board has reviewed the Group’s projections
for the next 12 months and the Directors have
a reasonable expectation that the Group has
adequate resources to continue in operational
existence for at least 12 months.
Audit information
The Directors confirm that, so far as they are
aware, there is no relevant audit information
(as defined in section 418 of the Companies
Act 2006) of which the auditor is unaware and
that each Director has taken all reasonable
steps to make themselves aware of any
relevant audit information and to establish
that the auditor is aware of that information.
This confirmation is given and should be
interpreted in accordance with the provisions
of section 418 of the Companies Act 2006.
By Order of the Board
Emily Pang
Company Secretary
6 June 2014
Royal Mail plc
100 Victoria Embankment
London
EC4Y OHQ
Company number 08680755
Change of control
The following agreements contain provisions
permitting exercise of termination or other
rights in the event of a change of control.
The Mails Distribution Agreement with Post
Office Limited provides for the supply of
certain services to the Group and allows for
a request for renegotiation of terms in the
event of a change of control of either party
where such change of control is likely to have
a material adverse effect on the party not
undergoing the change of control.
The Outsourcing Agreement with CSC
Computer Sciences Limited covers the
provision of a wide range of IT goods and
services and allows for termination of the
agreement by either party on a change of
control of the other in certain circumstances.
The agreement with Capgemini UK plc covers
services for the Group’s e-Business web
platform and allows the Group to terminate
the agreement on change of control
of Capgemini.
The Services Agreement with British
Telecommunications plc (BT) allows
BT to terminate the agreement on a
change of control of Royal Mail to one of
BT’s competitors.
The New Facilities Agreement with various
financial institutions provides the Group with
two term loan facilities and a revolving credit
facility for general corporate and working
capital purposes and repayment of previous
debt. The agreement contains provision on a
change of control of the Group for negotiation
of the continuation of the agreement or
cancellation by a lender.
Branches
As a global group our interests and activities
are held or operated through subsidiaries,
branches, joint arrangements or associates
which are established in, and subject
to the laws and regulations of, many
different jurisdictions.
Directors’ report (continued)
of the voting rights exercisable at a general
meeting of the Company.
In accordance with the Code, all Directors of
the Company, with the exception of Mark
Higson, are subject to election at this year’s
AGM and will be subject to annual re-election
going forward. Mark Higson will resign
from the Board following this year’s AGM.
A Director appointed by the Board or PSH
holds office only until the next AGM and is
then eligible for election by the shareholders.
The Company’s Articles provide that, at each
AGM, all those Directors who have been in
office at the time of the two preceding AGMs
and who did not retire at either of them, or
who have held office with the Company, other
than employment or executive office, for a
continuous period of nine years or more at the
date of the AGM, shall retire from office and
may offer themselves for re-appointment
by shareholders. The Board has, however,
decided to follow the Code as referred to
above so that all Directors are subject to
annual re-election.
In addition to any power of removal conferred
by the Companies Act, the Company may by
special resolution remove any Director before
the expiration of his or her period of office.
Directors and their interests
The Directors of the Company during the year
are given on pages 38 to 40. Details of the
interest of the Directors and, where applicable,
their Connected Persons in the Ordinary
Shares of the Company and of Long Term
Incentive Plan Awards over Ordinary Shares
of the Company are set out in the Directors’
remuneration report on pages 58 to 69.
There are procedures in place to deal with
any conflicts of interest and these have
operated effectively.
Powers of the Directors
The business of the Company will be managed
by the Board who may exercise all the powers
of the Company, subject to the provisions of
the Company’s Articles of Association, the
Companies Act 2006 and any ordinary
resolution of the Company.
Financial risk management
The Group’s financial risk management
objectives and policies and the main risks
arising from the Group’s financial assets and
liabilities are summarised in note 14 to the
accounts on page 99. See the financial risks
and related hedging contained on page 27 of
the Financial review in the Strategic report.
46
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Corporate Governance report
Donald Brydon, CBE
Chairman
Index
Chairman’s introduction
Audit & Risk Committee report
Nomination Committee report
Pensions Committee report
Directors’ remuneration report
Page
47
51
55
56
58
Good corporate governance involves ensuring that an
effective internal framework of systems and controls
is put in place which clearly defines authority and
accountability and promotes success whilst permitting
the management of risk to appropriate levels.
Chairman’s introduction
The following statement is intended to explain
our governance arrangements in the light
of the principles and provisions of the UK
Corporate Governance Code (the ‘Code’), as
published by the Financial Reporting Council
in September 2012, the Listing Rules and
Disclosure and Transparency Rules and to
provide insight into how the Royal Mail plc
Board (the ‘Board’) and its management run
the business for the benefit of shareholders.
The Board of the Company is committed to
ensuring that it provides effective leadership
and promotes uncompromising ethical
standards. One of the ways in which the
Board achieves this is by requiring that good
governance principles and practices are
adhered to throughout the Company. The
Board determined that the following is a
helpful summary of its role:
Good corporate governance is about helping
to run the Company well.
It involves ensuring that an effective internal
framework of systems and controls is put in
place which clearly defines authority and
accountability and promotes success whilst
permitting the management of risk to
appropriate levels. It involves the exercise
of judgement as to the definitions of success,
the appropriateness of risk and the levels of
delegation to the Executive. The exercise of
this judgement is the responsibility of the
Board and involves consideration of processes
and assumptions as well as outcomes.
It also involves the creation of a sensitive
interface for the views of shareholders and
other stakeholders to be given appropriate
consideration when reaching these judgements.
The Executive team is required to provide
such information to the Board as the Board
needs to enable it to exercise its judgement
over these matters.
There is a very fine distinction between the
approval of processes and their definition.
Wherever possible, it is the role of the Board
to approve process rather than initiate or
define it. Only exceptionally would the Board
intervene to initiate or define.
The Board also sets the tone for the Company.
The way in which it conducts itself, its attitude
to ethical matters, its definitions of success
and the assessment of appropriate risk, all
define the atmosphere within which the
Executive team works.
Good corporate governance is not about
adhering to codes of practice (although
adherence may constitute a part of the evidence
of good governance) but rather about the
exercise of a mindset to do what is right.
One of the challenges facing any Board is the
way in which the Non-Executive and the
Executive Directors interact. It is clear that
they each have the same legal responsibility
but it is generally unrealistic to expect
Executive Directors to speak individually with
the same freedom as the Non-Executive
Directors. Equally, Executive Directors who
just ‘toe the executive line’ in contradiction
of their own views may not be effectively
contributing to good governance. A well-
functioning Board needs to find the right
balance between hearing the collective
Executive view and being aware of the natural
internal tensions in an Executive team.
Notwithstanding the tensions created by many
external expectations, which may be wholly or
in part unrealistic, a successful Board should,
ideally, be composed of a group of respected,
experienced, like-minded but diverse people
who coalesce around a common purpose of
promoting the long-term success of the
Company, provide a unified vision of the
definitions of success and appropriate risk,
endeavour to support management (i.e. those
who honestly criticise at times but encourage
all the time) and who create confidence in all
stakeholders in the integrity of the business.
A Board meeting should feel like a meeting
at which everyone is participating to solve
problems together. Above all, all participants
should be able to say after a Board meeting
that value has been added as a result of the
meeting taking place. This added value will
come in many forms: challenge, advice, clarity,
imagination, support, sharing of problems,
or creating strategic intent. The list is
not exhaustive.
47
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate Governance
(continued)
Board membership is for 365 days of the year.
Board responsibilities do not start and end
with formal meetings. Board members, on the
Company’s and their own initiative, should
endeavour to engage outside meetings to
bring their experience to the assistance of
the Executive team wherever possible.
Above all there should be a sense of value
added from the engagement of the Board
members in all their interaction with the
Company, formal or otherwise.
To enhance its performance and effectiveness,
the Board sets itself explicit objectives, which
are separate from objectives set for the
Company and for the Chief Executive Officer,
following the outcome of the Board appraisal
process for the prior year. In relation to the
objectives for the year ended 30 March 2014,
the Board has regularly monitored its
performance against these and has found this
process adds value.
Prior to privatisation, the Royal Mail Group
Limited Board complied with the Code in so
far as it was appropriate to Royal Mail Group
as a company with a single shareholder, and
many of the corporate governance practices
and principles expected of a listed company
were already well-established within the
Group. On privatisation, the Board conducted
a full and comprehensive review of its
corporate governance arrangements to
ensure they were fit for purpose. Our
Company will no doubt face many challenges
as we begin a new chapter in its long history
but the above governance framework will
be an essential foundation for future
business success.
Donald Brydon, CBE
Chairman
1 51 per cent owned subsidiary.
48
Change in the structure of the Group
and preparation for plc status
Royal Mail plc is the holding company of the
Royal Mail Group. This follows the internal
group reorganisation to facilitate the Initial
Public Offering (the IPO) which took place in
September 2013. By this reorganisation a
new company, Royal Mail Limited, was
incorporated on 6 September 2013 with
Royal Mail Holdings plc as its immediate and
ultimate parent Company. Royal Mail Holdings
plc changed its name to Postal Services
Holding Company plc on 11 September 2013.
The Special Share in Royal Mail Group Limited
held by HM Government was redeemed on
12 September 2013. Subsequently on
12 September 2013, the entire issued share
capital of Royal Mail Group Limited was
transferred from Postal Services Holding
Company plc to Royal Mail Limited. The effect
of this reorganisation was to insert Royal Mail
Limited as the new immediate parent
Company between Postal Services Holding
Company plc and Royal Mail Group Limited.
Royal Mail Limited was subsequently
re-registered as Royal Mail plc on
19 September 2013. The resulting structure
is shown in the chart below.
Royal Mail plc
Royal Mail
Group Limited
Royal Mail
Investments
Limited
Royal Mail
Estates Limited
Romec1
Limited
General Logistics
Systems B.V.
In preparation for the IPO, it was recognised
that although the Company’s internal
governance processes were sound, additional
work was required to prepare the Company
for plc status. As a result, several work
programmes were put in place to ensure
that Royal Mail should be able to operate
effectively and compliantly as a listed company
immediately following the public offering and
subsequent trading. Work included putting
in place the necessary policies, procedures
and structures to meet the various
compliance requirements.
Board focus
The Boards of Royal Mail Group Limited and
Royal Mail plc (together the ‘Board’) have
focused on the following matters during
the year:
• The privatisation and initial public offering
(IPO);
• Industrial relations;
• Safety;
• Pensions Reform;
• Parcels strategy;
• Operations and modernisation;
• General Logistics Systems (GLS) – cost
restructuring and future markets; and
• Progress and future plans for improving
IT security.
Expected Board focus for the next year:
The Board has developed objectives as a
framework for its work in addition to business
as usual activities for the next 18 months and
expects that it will focus on increasing its
understanding of:
• Revenue growth;
• Continued productivity and efficiency
drivers;
• Use of new technologies in the Company’s
business;
• Views of key stakeholders including
shareholders, the regulator and major
channel partners; and
• The senior management talent pool.
Governance framework
The Board considers that the Company
complied with the full provisions of the Code
during the year. The Code is publicly available
at the website of the Financial Reporting
Council (www.frc.org.uk). This report explains
the key features of the governance framework
and how the Board applies the principles of
the Code. The location within the Annual
Report and Financial Statements of each of
the disclosures required in the Directors’
report is either disclosed separately or
indexed in the Directors’ report and is
therefore incorporated by reference.
The role of the Board
The Board is responsible for setting the
objectives and strategy for the Group and
for monitoring its performance and risk
management. The Board has adopted terms of
reference setting out its duties and obligations.
The Board 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. As noted above, it also
has developed objectives as a framework for
its work for the next 18 months and progress
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 in achieving these objectives is reviewed at
each Board meeting.
Code requiring the timely provision of
information to directors.
evaluated at least once a year and to act
on the results of such evaluations.
Board Committees
Certain responsibilities are delegated by the
Board to the Committees shown in the
diagram below. The details of these Board
Committees are outlined later in this report.
The Chairman of each of the Board
Committees reports to the Board on matters
discussed at Committee meetings and
highlights any significant issues requiring the
Board’s attention. Reports on the work of the
Audit & Risk Committee, Nomination
Committee and Pensions Committee during
the year are given on pages 51 to 57. The
work of the Remuneration Committee can be
found in the Directors’ remuneration report on
pages 58 to 69. Full terms of reference for
these Board Committees can be found on the
Company’s website, www.royalmailgroup.com.
Board
The Composition of the Board
At the end of the year, the Board of Royal Mail
plc comprised a Chairman, three Executive
Directors and seven Non-Executive Directors.
Prior to their appointment as Directors of the
Company, each of the Directors had been a
Director of Royal Mail Group Limited. The
biographies of each of the Directors, setting
out their current roles, commitments and
previous experience, are on pages 38 to 40.
The composition of the Board was
strengthened in anticipation of the IPO and no
further appointments were made in the past
year or external search agencies used.
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. There is also a clear
division of responsibilities between the
Chairman and the Chief Executive Officer.
Audit &
Risk
Committee
Remuner-
ation
Committee
Nomination
Committee
Pensions
Committee
The Chairman
The Chairman’s responsibilities include:
Chief
Executive’s
Committee
Board meetings
The Royal Mail Group Limited Board met
on four occasions during the period from
1 April 2013 to 19 September 2013. During
the period from 20 September 2013 to
30 March 2014, the Royal Mail plc Board met
on six occasions. For each scheduled meeting,
the Company Secretary, on behalf of the
Chairman, collates and circulates the papers
during the week prior to the meeting, to allow
sufficient time for the Directors to review the
information provided.
In addition to these meetings, the Board
Transaction Committee, formed to facilitate
preparations for the IPO, met on seven occasions.
Board information
The Board receives business and financial
performance reports at each Board meeting
as well as standing reports on Safety and
from the Company Secretary. In addition,
Directors have access to a Board information
archive containing background and supporting
documents for reference in performance of
their duties. The Directors receive regular
updates on developments in matters such as
corporate governance. This is how the
Company complies with the provisions of the
• Chairing meetings of the Board and general
meetings of the Company;
• Setting the Board’s agenda and ensuring
that adequate time is available for
discussion of all agenda items, in particular
strategic issues;
• Setting clear expectations concerning the
Company’s culture, values and behaviours;
• Ensuring the Board determines the nature
and extent of significant risks that the
Company is willing to embrace in
implementing its strategy;
• Ensuring the Board has effective decision-
making processes and applies sufficient
challenge to major proposals;
• Encouraging all Board members to engage
in Board and Committee meetings by
drawing on their skills, experience,
knowledge and, where appropriate,
independence;
• Developing productive working relationships
with the Chief Executive Officer and
Executive Directors and constructive
relations between Executive Directors and
Non-Executive Directors;
• Ensuring effective communication with
shareholders and other stakeholders and
that Directors are made aware of their
views; and
• Ensuring the performance of the Board,
its Committees and individual Directors is
The Chairman is Donald Brydon, who was
originally appointed as the Chairman of Royal
Mail Holdings plc on 26 March 2009. He was
then appointed as the Chairman of Royal Mail
Group Limited on 1 April 2012 and as the
Chairman of Royal Mail plc in September 2013.
While the Chairman was appointed by the
Secretary of State for Business, Innovation and
Skills, the Directors consider that he was
independent at the time of his appointment. The
Chairman retired from his role as the Chairman
of Smiths Group in November 2013. Details of
the Chairman’s other commitments are shown
on page 39.
Non-Executive Directors
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. The Board
reviewed and authorised the schedule of
Directors interests, including any potential
conflicts, in February 2014 and does so at
least annually. Each Non-Executive Director
plays an instrumental role in the decisions that
are made by the Board and its Committees.
They challenge management regarding the
performance of the Company with regard to
the Company’s goals and objectives. They also
monitor financial controls and the systems
of risk management.
The terms of appointment for the Non-
Executive Directors require the Non-Executive
Directors to devote a minimum of two days a
month to working for the Company. However,
during the year ending 30 March 2014, the
time commitments were much greater as
the Non-Executive Directors contributed to
the decision making process regarding
the privatisation.
The Non-Executive Directors and the
Chairman met on a number of occasions
during this period without the Executive
Directors being present. These meetings are
an important way to develop the working
relationships between the Non-Executive
Directors and to assess the performance
of management.
In accordance with the requirements of the
Code, the terms of appointment for the
Non-Executive Directors are available for
inspection at the Company’s registered office
during normal office hours and they will be
made available at the Annual General Meeting
for a period of 15 minutes prior to the
commencement of the meeting and also
during the meeting.
49
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate Governance
(continued)
The Non-Executive Directors were required to
declare their other significant commitments
prior to their appointment and the Board is
informed of any subsequent changes. The
Company has announced to the London Stock
Exchange any changes to their directorships
on the boards of other publicly quoted
companies since the Company’s privatisation.
The Senior Independent Director
The Code recommends that the Board should
appoint one of its independent Non-Executive
Directors to be the senior independent
director (the ‘Senior Independent Director’).
The Senior Independent Director is available
to meet with shareholders if they have
concerns that the normal channels of
Chairman, Chief Executive Officer or other
Executive Directors have failed to resolve or
for which such channels of communication
are inappropriate. The Senior Independent
Director is Orna Ni-Chionna. She has met with
the Non-Executive Directors and Executive
Directors during the year to assess the
performance of the Chairman.
Director induction and training
On appointment, all 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 and, following privatisation, a newly
appointed Director will be given the
opportunity to meet major shareholders.
Directors also receive training. In preparation
for privatisation, training sessions were held
for the Board to ensure that each Director
was aware of the requirements and additional
obligations for a director of a company with a
premium listing on the London Stock Exchange.
Directors’ support and the role of the
Company Secretary
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.
The Company Secretary ensures Board
procedures are followed and regularly
reviewed and is a source of advice to the
Chairman and the Board on implementation
of the Code.
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
the Group. The Board’s approach 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 pages 58 to 69 for details).
Performance evaluation of the Board
Performance evaluation of the Board, its
Committees and individual Directors takes
place on an annual basis with the support of
the Company Secretary. This year’s evaluation
was conducted by the Chairman via
questionnaires, with an opportunity to discuss
any issues arising. Among the matters
considered were adequacy of reporting, focus
on the right issues, performance of the
Committees and communication with the then
sole shareholder, the Secretary of State for
Business, Innovation and Skills. It was
completed during May 2013 and objectives
were set for the Board based on the outcomes
of the evaluation. The agenda of each Board
meeting is reviewed against the objectives and
this has driven the focus of the Board’s
discussion. As a result of the previous Board
review, two new Directors were recruited to
bring extra dimensions to the Board. A more
detailed evaluation of the Board, involving the
use of an external board evaluator, will take
place next year. A performance evaluation of
the Audit & Risk Committee and of the
Remuneration Committee was conducted in
each case by the Chair of the Committee.
Terms of reference for each of the Board,
Audit & Risk Committee, Remuneration
Committee, Nomination Committee and
Pension Committee were amended and
adopted by the Board in September 2013.
Relations with shareholders
Prior to privatisation, the Group engaged in
two-way communication with the sole
shareholder to discuss the Group’s strategy,
performance and policies. The Board received
feedback from the Directors who attended the
shareholder meetings. In addition, the
Chairman and Senior Independent Director
had ongoing contact with the shareholder
regarding preparation for privatisation
and remuneration.
In preparation for privatisation, the Chief
Executive Officer and Chief Finance Officer
held extensive meetings with potential
investors. Since privatisation, the Chairman
and Senior Independent Director have met
with major investors to gain their views on
Company policies, including the Remuneration
Policy outlined in the Directors’ remuneration
report on pages 58 to 69.
Internal control
The Board is responsible for maintaining a risk
management and internal control system and
for managing significant risks faced by the
Group. This is described in more detail in the
Audit & Risk Committee Report on pages
51 to 54.
Environmental social and
governance risks
The Board annually reviews the Company’s
Corporate Responsibility report, which is
published in order to demonstrate sustainability
to socially responsible investors. The report is
prepared in alignment with the reporting
framework of the Global Reporting Initiative and
the Company’s performance is assessed against
international sustainability indices. The
Company reports progress against corporate
responsibility objectives under five areas:
Customer, People, Community, Suppliers and
Environment. Further details can be found in
the Corporate responsibility report on pages 32
to 37. The Board identifies and assesses
significant risks, including those relating to
environmental, social and governance (‘ESG’)
matters, through the maintenance and review
of the Group Risk Profile which contains
significant current risks, including ESG risks,
which are identified at an early stage of
becoming known as part of the long-term
business perspective. Emerging risk
identification is conducted by experts in the
business and risk management is owned and
managed at the operational level supported
centrally. An independent effectiveness review
by an independent external auditor confirmed
good links between the strategy of the Company
and currently identified risks and that
appropriate importance is placed on risk
management by executives within the Group.
The Company maintains a range of policies and
procedures for managing business risks which
include ESG-related matters.
Chief Executive’s Committee and
Board Committees
The following Committees deal with specific
aspects of the Group’s governance. The details
of Committee membership shown are as at
30 March 2014.
Chief Executive’s Committee (CEC)
Chair
Moya Greene
Membership See pages 41 to 43
Role
The Committee is responsible
for all the key areas of
commercial activity within the
Group. The CEC meets twice
a month. The role of the CEC
is to manage the overall
framework of financial risk
and business controls to
meet regulatory and legal
requirements. The Committee
also assigns key accountabilities
for business performance.
50
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
was appointed to lead the audit in 2011. The
Committee nominated a ‘Tender Working
Team’ comprising the Chairman of the Audit &
Risk Committee, John Allan, Jan Babiak2 and
relevant experts from within the business.
The successful bidder will be informed during
2014 and be proposed for appointment at the
2015 AGM.
Paul Murray
Chairman, Audit & Risk Committee
Audit & Risk Committee report
Introduction from the Chairman
Committee membership
Chairman
Paul Murray
Dear Shareholder
The Committee has two main areas of
responsibility. The first is to review and
recommend to the Board all financial
statements and disclosures. The second is to
satisfy itself that internal controls and risk
management processes are working
effectively. The Committee gets independent
assurance from the Group’s Internal Audit &
Risk Management function as well as the
external auditor (EY) across a wide range of
issues in support of its oversight
responsibilities. Alongside myself, the
members of the Committee are all
independent Non-Executive Directors – Orna
Ni-Chionna, John Allan, Nick Horler,
Cath Keers and Les Owen.
This year, the Committee has continued to
work on improving its oversight of internal
controls and risk management processes and
systems. The Group invests significant
resource in Internal Audit capability, and
management acts quickly on relevant findings.
We reviewed 2013-14 interim and full year
results, as well as all financial and risk aspects
of documentation associated with the
privatisation of Royal Mail.
The Committee provided a challenging review
and approval process to the audit of the first
quarter results for 2013-14 which were
disclosed in the IPO Prospectus alongside the
full year results for 2012-13, 2011-12 and
2010-11. As part of this process, we also
assessed the results of the working capital
review and other private reports produced by
the Reporting Accountant, EY.
In January 2014, the Committee announced
that it would initiate a competitive audit tender
process in light of emerging best practice, new
requirements with respect to audit tenure and
the fact that the existing auditor, EY, had been
the incumbent since 1986 and we have not
undertaken a competitive tender process since
that date. The current external audit
engagement partner is Richard Wilson, who
2 Replaced by Les Owen with effect from 29 April 2014.
Membership
Non-Executive Directors
Orna Ni-Chionna, John Allan,
Nick Horler, Cath Keers and
Les Owen
Meetings of the Committee were also attended,
where relevant, by the Chairman of the Board,
Jan Babiak (the only Non-Executive Director
who was not a member of the Committee), the
Chief Executive Officer, the Chief Finance Officer,
other members of senior management and
representatives from the external auditor, EY.
The Board considers that a number of the
members of the Committee have recent and
relevant financial experience.
Audit Committee Terms of Reference
The full terms of reference for the Committee
can be found on our website
www.royalmailgroup.com/about-us/
management-committees/audit-and-risk-
committee
Meeting cycle and agenda items
The Committee uses a meeting tracker,
approved once a year, which provides a
framework for each meeting agenda.
During 2013-14 the Committee met nine
times:
• Two meetings specifically related to
the privatisation;
• One meeting related to the audit
re-tender; and
• One meeting related to a specific internal
audit report.
Of the five regular meetings:
• Two meetings mainly focused on the
interim financial statements and year-end
financial results; and
• Three meetings mainly focused on internal
audit and risk management.
However, all regular meetings do contain
elements of both financial reporting and
internal audit and risk management, with
reports from the Group Financial Controller
and the Director of Internal Audit & Risk
Management being standing items on
all agendas.
Reliance on external and
in-house experts
The Group’s actuary, Towers Watson Limited,
provides expert opinion and long-term
assumption advice with respect to pension
accounting and the assessment of other
long-term liabilities. The Committee has
concluded that Towers Watson Limited has
the necessary expertise and resources.
The Committee also relies on:
1. Advice and information provided by the
General Counsel with respect to specific
provisions and other contingent liabilities; and
2. An independent survey of households to
statistically calculate a distribution using a
95 per cent confidence limit which is used to
estimate the number/value of stamps that
have been bought but not used.
The external auditor had full access to these
experts and, using their own actuarial and
statistical experts, was able to provide further
assurance to the Committee on these matters.
The Committee is satisfied that the General
Counsel has, or has access to, the relevant
necessary expertise and resources and that
the company conducting the statistical
surveys also has the relevant necessary
expertise and resources.
51
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate Governance
(continued)
Key activity and sources of estimation, uncertainty and critical accounting judgements
The main areas of focus for the Committee during the year were:
Matter considered
What the Committee did
Advance customer payments
(£322 million, see note 26 on page 116)
The Group estimates the amounts of stamp and meter credits that
have been sold but not used prior to the year end.
Although the relevant survey and extrapolation is conducted by an
independent company, the level at which a stamp holding is considered
to be abnormal, and therefore excluded from the estimate, is a
judgement made by management. This judgement impacts revenue,
profit and net assets.
The Committee reviews and challenges the methodology and outcomes
from the statistical survey at the interim and year end and the
judgement made by management, and compares these to the deferred
income recognised by management at each reporting period to ensure
a consistent application.
Separately, the auditor uses its own experts to review the statistical
processes and challenge the judgemental assumption.
Royal Mail Defined Benefit Pension Surplus
(£1,723 million, see balance sheet and note 8 on page 88)
The valuation of the pension liabilities relies on the estimation of
long-term assumptions such as RPI/CPI/future salary growth and
mortality. Small movements in these assumptions can lead to material
impacts on the balance sheet.
The Committee relies on the benchmarking of the key long-term
assumptions and the calculations provided by the Group’s actuary,
Towers Watson Limited. All of these assumptions are disclosed in
note 8 to the financial statements. The Committee also relies on the
work and recommendations of the Board Pensions Committee (see
Report on page 56).
Royal Mail Pension Plan Amendment Credit
(£1,350 million, see income statement and note 4 on page 81)
This credit to the income statement in 2013-14 arose when the
Trustee agreed to cap future salary growth to RPI, meaning that the
long-term salary growth assumption reduced from RPI+1% to RPI.
The auditor uses its own independent actuarial experts to confirm that
these assumptions are reasonable and appropriate.
The Committee reviewed the pension benefit reform proposed by the
Trustee and its subsequent disclosure in both the Prospectus and the
Interim Financial Report.
The Committee also received confirmation from both Towers Watson
Limited and the auditor that the new assumption was appropriate
based on the Pensions Reform agreed with the Trustee.
Industrial diseases claims provision
(£62 million, see note 20 on page 111)
The Group is liable for claims brought by employees (past and current)
and by individuals who were employed in the General Post Office
Telecommunications division and whose employment ceased prior to
October 1981. The provision covers the estimate of claims that could
be received over the next 25-40 years. Changes to the provision will
also impact the income statement.
The Committee receives estimates of the gross provision (total
expected cash outflow, undiscounted) calculated by the Group’s
actuary, Towers Watson Limited, and compares this to the provision
recorded at previous reporting dates and to recent cash settlements
confirmed by the General Counsel.
The discount factor used by management is validated against
applicable bond rates.
Contingent liabilities not recognised in the balance sheet
The Group has a number of contingent liabilities which it considers
‘remote’ or ‘possible’ and which are therefore not provided for. The
likelihood of these liabilities materialising is a matter of judgement and,
if it was considered ‘more likely than not’ that they would crystallise in
the future, then a provision would be raised which would impact the
income statement and balance sheet.
The Committee receives a paper at the November and May meetings
on each unprovided contingent liability, with an assessment from
management of the probability of it crystallising in the future.
The Committee reviews each of these papers by comparing their status
to prior reporting periods and by receiving an overview from
management at the Committee.
The auditor is also asked to provide comments on the assessment
of probability and the appropriateness of the accounting.
The Committee concluded that all of these contingent liabilities should
remain unprovided based on the risk assessment provided by
management.
52
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Matter considered
What the Committee did
Specific items – disclosure
(see note 4 on page 81)
The income statement follows a columnar approach and in 2013-14
the Company has introduced a classification for certain items of income
and expenditure termed ‘specific items’, which replaces the previous
‘exceptional items’ classification, as further highlighted on page 77.
Privatisation
The privatisation of Royal Mail required the Company to produce a
full set of financial statements for the quarter ending 30 June 2013.
These financial statements required a full audit and were included
in the Prospectus along with historical financial information from
2010-11 onwards.
The Chairman of the Committee discussed this disclosure with the
external auditor and management in advance of the interim close,
and this matter was fully covered at the November meeting, with
management providing an explanation as to why each item has been
disclosed as ‘specific’. The Committee concurred with management’s
view that the column ‘excluding specific items’ better presents the
trading results of the Group and recognised the need to disclose this,
given Royal Mail is now listed.
The first quarter results for 2013-14 were reviewed and approved by
the Committee following presentations from management and the
auditor. The same degree of challenge and scrutiny was applied as for
the year end audited results.
The Committee also received and reviewed a number of private
reports from EY, the Reporting Accountant, including a working
capital report, a financial position and prospects report and a long
form report.
The Prospectus risk factors were also presented by the General
Counsel to the Committee for review and approval and the Committee
ensured these factors were complete by receiving a specific report
from the Director of Internal Audit & Risk Management.
Audit Committee effectiveness
The Committee has a framework to assess
both Audit Committee and external auditor
effectiveness, using a combination of surveys
of members, private meetings with the
auditor, specific reports from the auditor
and executive management, and relevant
external benchmarking, to conclude that the
Committee and the external audit process
remains effective.
External auditor effectiveness
During the year, the Committee has reviewed
the planning methodology and proposed audit
approach presented by the external auditor,
and the Chairman of the Committee attended
an audit planning event. Furthermore, the
Committee reviewed and approved the
respective engagement letters for the
statutory and regulatory audits.
After taking all of the above into consideration,
the Committee concluded that the audit team,
and EY as a firm, had demonstrated that they
had the appropriate qualifications, resources
and expertise and that the audit process
was effective.
Non-audit work provided by the auditor
and independence
The Committee agrees fees in respect of
non-audit services provided by the external
auditor to ensure that the provision of
non-audit services does not impair the
external auditor’s independence and
objectivity. Generally, non-audit work is only
granted to the auditor if there is a genuine
efficiency in doing so, and for 2013-14, the
total fees for non-audit services (excluding the
Reporting Accountant work with respect to
the privatisation) were £0.4 million.
At the end of the first quarter, first half and
year end statutory audits, the Committee
receives a report from EY which covers
significant issues identified and discussed
during the audit visits. This report is compared
to the matters that management have
identified, to ensure consistency.
A further £4.0 million fees were paid relating
to EY’s role as Reporting Accountant with
respect to the privatisation. The Committee
received a special report and presentation
from EY which provided specific assurance
that the audit remained independent with
respect to the reporting accountant role.
The Committee has carried out an
assessment of the auditor using surveys and
direct feedback from Committee members
and management and private meetings with
the auditor.
Risk management and internal control
overview
The Board believes that effective risk
management and a sound control
environment are fundamental to the Group.
The UK Corporate Governance Code requires
the Board to maintain sound risk
management and internal control systems
and to review their effectiveness at least
annually and to report on this review to
shareholders. A sound system of internal
control depends on a thorough and regular
evaluation of the nature and extent to which
the Group is exposed to risk.
The Group’s risk management and internal
control system is designed to manage rather
than eliminate the risk of failure as taking on
risk is inherent in undertaking the commercial
activities of the Group.
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 UK Corporate
Governance Code, including financial,
operational and compliance risks, and risks to
reputation. The process has been in place
throughout the year and up to the date of
approval of these financial statements.
53
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate Governance
(continued)
Risk management and internal control
framework
The Group-wide risk management framework
includes risk governance, risk identification,
measurement and management, and risk
reporting and sets out the ‘top-down’ and
‘bottom-up’ approach to risk identification for
the Group. During the year the business has:
• Reviewed and refreshed its Risk
Management Framework, Risk
Management Policy and Risk Management
Guide; cascaded the Risk Management
Mandatory Standards to business units
and functions; received self-assessment
validations from the prioritised units and
functions on compliance with the standards;
and provided independent assurance on
these submissions;
• Conducted sensitivity analysis and financial
stress-testing on Group Risks using a
model developed by independent economic
consultants;
• Further enhanced our emerging risk
identification process through regular
structured dialogue with subject matter
experts across the business; and
• For a sample of risks on the Group Risk
Profile, arranged for Executives to attend
the Committee to explain their respective
risk and how it is being managed.
The Group’s approach to control is based on
the underlying principle of line management
accountability for internal control and for
risk management.
The Group recognises and uses the principle
of the ‘Three Lines of Defence’:
First Line comprises primary controls
over the risks to the business, located
in the day-to-day operation, and includes
established management organisation,
policies and documentation, budgets,
and performance management.
Second Line comprises internal monitoring
and oversight including regular reviews,
self-assessments, and annual sign-offs
by Finance Directors.
Third Line comprises independent
assessments by the Internal Audit & Risk
Management (IA & RM) function and others
(including external audit).
54
3. Effectiveness of Internal Audit
The Chartered Institute of Internal Auditors
International Standards and general good
practice requires an external assessment
of Internal Audit activity to be conducted
at least once every five years by a qualified,
independent reviewer from outside the
organisation. During the year the Committee
engaged Deloitte to provide an assessment of
the effectiveness of IA & RM in line with these
standards. Deloitte were also engaged to
provide an assessment of Risk Management
against current accepted practice. The review
concluded that the internal audit activity and
risk management framework were fit for
purpose and of high quality.
4. External audit activity
External audits and reviews take place during
the year to provide management, the Board
and the regulator with assurance on specific
matters. Activity includes:
• The external auditor performs a statutory
year end audit;
• The external auditor performs an audit of
the regulatory accounts as part of Universal
Service Provider (USP) accounting
requirements;
• The externally measured end-to-end
Quality of Service is audited by an
independent accounting firm (appointed by
Ofcom) as part of Royal Mail’s Designated
Universal Service Provider condition
requirements; and
• The Universal Service Obligation (USO) daily
collections and deliveries performance
reporting and methodology is assured by an
independent accounting firm (appointed by
Royal Mail) as part of Royal Mail’s
designated Universal Service.
Whistleblowing
Arrangements are in place to enable
employees to raise concerns in confidence and
to ensure independent investigation of such
matters. During the year IA & RM reported to
the Committee on the number of notifications
and the usual time taken to process them
through the Employee Disclosure Committee
(EDC). IA & RM provides the EDC with
learnings and clarifications as a result
of processing such cases.
Assessing the effectiveness of the system
of risk management and internal control
In addition to the specific constitution,
meetings, reliance on experts, and focus areas
highlighted above, the Committee uses a
number of mechanisms to help it to arrive
at its conclusion on the effectiveness of the
system of risk management and internal
control in the business. These include:
1. Risk governance
The Board has delegated responsibility for
specific review of risk and control processes
to the Committee and the Committee in turn
is supported by the Risk Management
Committee (RMC), to help discharge its duties.
The RMC meets to promote and support the
establishment, communication and embedding
of risk management throughout the Group
and to ensure that risks that are significant
at Group level are being effectively managed.
2. Assurance from Internal Audit
IA & RM provides independent assurance to
executive management and the Board on the
effectiveness of the internal control system
and elements of the Risk Management
Process, including compliance with the Risk
Management Mandatory Standards, and
validation of mitigation plans for Group Risks.
IA & RM establishes and agrees with the
Committee an annual plan of assignments and
activities based on discussions with the Board
and management, and also taking into
account known issues in the business; areas
of known importance to the delivery of the
business plan; areas subject to strong or
emerging regulation or legislation; and known
issues in the industry.
The Internal Audit work programme, focused
towards the key business priorities for
2013-14, included:
• A review of the Transaction Programme:
including PLC Readiness;
• Business Transformation reviews including
Parcels Strategy and Delivery
Modernisation;
• Major business process reviews including
Fuel Management, Order to Cash and
Christmas Planning;
• Continued rolling programme of review of
the basic business controls and validation
reviews related to the management of
individual risks on the Group Risk Profile;
and
• Conformance of key units/functions to
defined Risk Management Mandatory
Standards.
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 • To identify, and nominate for the approval of
the Board, candidates to fill Board vacancies
as and when they arise;
• To evaluate, before any appointment is made
by the Board, the balance of skills, knowledge,
experience and diversity on the Board and in
the light of this evaluation consider, where
appropriate, preparing a description of the
role and capabilities required for a particular
appointment. In identifying suitable
candidates, the Committee may use open
advertising or the services of external advisers
to facilitate the search;
• For the appointment of a Chairman, to
prepare a job description including the time
commitment expected. A proposed Chairman’s
other significant commitments should be
disclosed to the Board before appointment
and any changes to the Chairman’s
commitments should be reported to the
Board as they arise;
• To review annually the time required from
Non-Executive Directors to fulfil their duties;
• To make recommendations to the Board on:
– formulating succession plans for both
Executive Directors and Non-Executive
Directors and in particular for the key roles
of the Chairman and Chief Executive Officer;
– suitable candidates for the role of Senior
Independent Director;
– membership of the Board Committees in
consultation with the Chairs of those
Committees;
– the reappointment of any Non-Executive
Director at the conclusion of their specified
term of office having given due regard to
their performance and ability to continue
to contribute to the Board; and
– the re-election of Directors by shareholders
under the re-election provisions of the Code
or the retirement by rotation provisions in
the Company’s Articles of Association, having
due regard to their performance and ability to
continue to contribute to the Board and the
need for progressive refreshing of the Board.
• To review the succession management
process within the Company for the top
120 senior management positions.
The full Terms of Reference for the
Committee can be found on our website
www.royalmailgroup.com
Key areas of focus during the year
Matters the Committee considered during the
year include:
• Accepting the resignation of Mark Higson from
the Board, which will be effective from the
closing of the Annual General Meeting;
• Assessing the composition of the Board
following the resignation of Mark Higson;
• Approving changes to the roles of certain
members of senior management including
recommending for approval the change of
Company Secretary and the appointment
of a new member of the CEC;
• Considering future experience, skills and
capabilities required on the Board; and
• Reviewing the Board’s policy on diversity
as outlined below.
Board diversity policy
Diversity, including professional, international
and ethnic diversity, is a key factor when
assessing the Board’s composition to ensure that
there is the correct balance of skills, experience
and expertise amongst Non-Executive Directors,
in order to lead decision-making and assess the
performance and strategy of the Company.
The Board has adopted a Board Diversity Policy
to ensure transparency and diversity in making
appointments to the Board on the
recommendation of the Committee. This policy
expresses the commitment to principles of
non-discrimination on grounds of race, colour
or ethnic origin, disability, sex, age, religion or
belief and to promotion of fair participation and
equality of opportunity for all. The Board
assesses whether it is compliant with that
policy through its Board effectiveness review.
The Board has also adopted within such policy
a process for Board appointments (including
procedures for appointing a new Chairman)
where an appointment becomes necessary
following a resignation or additional
characteristics are identified as necessary
during the Board effectiveness review.
The gender balance of the Board is also taken
into consideration when recruiting a new
Non-Executive Director. This is reflected by
the current composition of the Board. We are
one of the few companies in the FTSE 100 that
has a female Chief Executive Officer and, at
30 March 2014, three of the eight Non-Executive
Directors (37.5 per cent), including the Senior
Independent Director (and also Jan Babiak), were
also female. The Committee does not feel that it
is appropriate to set a quota regarding the
number of women on the Board but will look to
maintain a strong representation of women on
the Board.
Directors’ re-election
The Committee considers the performance of
each individual Director and whether he or she
continues to be effective and can demonstrate
commitment to the role and whether they should
be proposed for election at the Annual General
Meeting. Biographical details of each of the
Directors, together with details of their skills and
experience, may be found on pages 39 to 40.
Following a performance evaluation of each
Director and the Board as a whole, all Directors
are considered by the Board to be fully effective.
55
Nomination Committee report
Introduction from the Chairman
Dear Shareholder
Although the 2013-14 financial year saw a
significant change in the ownership of the
Company, it has been a stable year for Board
membership with no changes to the Executive
Directors and Non-Executive Directors. Following
the Annual General Meeting on 24 July 2014,
Mark Higson will resign from the Board. Jan
Babiak resigned from the Board in April 2014.
The Committee has continued to evaluate the
balance of skills, knowledge and experience of
the Board and its diversity, and is committed to
the progressive renewal of Board membership
through orderly succession. Succession plans for
the Non-Executive Directors and Executive
Directors were kept under review during the
year. The Committee also approved the changes
to the membership of the CEC.
The following report outlines the membership of
the Committee, its role, the key areas of focus
during the year and the Committee’s policy on
Board diversity.
Donald Brydon
Chairman of the Nomination Committee
Committee membership
Chair
Donald Brydon
Membership
Non-Executive Directors
Jan Babiak1, Nick Horler, Cath
Keers and Orna Ni-Chionna.
Meetings of the Committee were also attended
where relevant, by the Company Secretary and
Chief of Staff.
Role of the Committee
A summary of the responsibilities of the
Committee in connection with appointments to
the Royal Mail plc Board and senior management
positions is shown below:
• To regularly review the structure, size and
composition of the Board and to evaluate the
balance of skills, knowledge, experience and
diversity on the Board to inform the capabilities
required for a particular appointment;
• To give full consideration to succession planning
for Directors and senior management;
1 Resigned 29 April 2014.
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Corporate Governance
(continued)
Pensions Committee report
Introduction from the Chairman
56
Dear Shareholder
This is the first report of the reconstituted
Pensions Committee following the change in
membership in September 2013 from a blend
of Board Directors and senior management
to a membership solely made up of Board
Directors, the majority of whom are Non-
Executive Directors. This reconstitution was
in preparation for privatisation and to fully
comply with the Code.
The responsibilities delegated to the
Committee by the Board include the review
and approval of objectives in relation to the
Royal Mail pension schemes, monitoring
performance of these schemes, considering
recommendations and reports from
management in relation to policy and strategy
concerning pensions and investment matters
that are significant to the Group, and, where
appropriate, making recommendations to the
Audit & Risk Committee and the Group Board.
It reports and makes recommendations to the
Board (and to Royal Mail Group Limited as
principal employer of the Group’s pensions
schemes) on:
• Matters which it reasonably considers are
of strategic importance to the Group;
• Matters involving a financial impact of over
£100 million;
• Strategic changes to benefits that require
rule changes or changes to the pension
scheme Trust Deeds other than those
required for changes in legislation; and
• Material matters in relation to the accounting
for the Group’s pensions obligations.
Further details of the Committee’s role, its
membership and the key areas of focus during
the year are set out below.
The Committee is supported by the Pensions
Policy Committee, whose members are the
Chief Finance Officer, the Company Secretary,
the Group HR Director and representatives
from the Communications Workers Union and
Unite/CMA.
Les Owen
Chairman of the Pensions Committee
Committee membership
Chair
Les Owen
Membership
Non-Executive Directors
Jan Babiak1 and Paul Murray;
Executive Director
Matthew Lester
The meetings of the Committee have also
been attended on invitation by the Chairman
of the Board, the Company Secretary, the
Deputy Group Chief Finance Officer, the Head
of Pensions Strategy and representatives
from the Company’s pensions advisers,
Towers Watson Limited and the auditor, EY.
Role of the Committee
Further to the responsibilities outlined in the
Committee Chairman’s statement, the role of
the Committee also includes:
• Reviewing annual reports from
management on the Royal Mail pension
schemes’ goals and objectives, financial
position, investment performance, and
economic conditions;
• Reviewing recommendations from the
Pensions Policy Committee and approving
assumptions relating to valuations and the
Statement of Investment Principles;
• Approving, in accordance with the pension
schemes’ Rules, the appointment,
reappointment, removal, period of
appointment and remuneration of the Chair
of Trustees. This approval will be given on
behalf of the Board following consultation
with the Chair and on the recommendation
of management; and
• Reviewing major policy, regulatory,
legislative, accounting reporting, industrial
relations and Governmental issues
impacting the pension schemes as from
time to time is necessary, at the request
of the Board, management or any member
of the Pensions Committee, and making
decisions, recommendations or reporting
to the Board accordingly.
The full Terms of Reference for the
Committee can be found on our website
www.royalmailgroup.com
Key areas of focus during the year
Matters the Committee considered during the
year include:
• Scheme funding;
• Investment strategy and risk management;
• Recommendations for Scheme reform; and
• Pensions Accounting and treatment of
reform.
1 Resigned 29 April 2014.
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Board and Committee Attendances
During the year, the Directors attended the following number of meetings of the Board and its
main Committees.
Board
2
Audit & Risk
Nomination
Pensions Remuneration
3
Total number of meetings
Chairman
Donald Brydon
Executive Directors
Moya Greene
Mark Higson
Matthew Lester
Non-Executive Directors
John Allan4
Jan Babiak
Nick Horler
Cath Keers5
Paul Murray
Orna Ni-Chionna
Les Owen6
10
10/10
10/10
10/10
10/10
9/10
10/10
10/10
9/10
10/10
10/10
10/10
9
-
-
-
-
7/9
-
9/9
8/9
9/9
9/9
5/9
2
2/2
-
-
-
-
2/2
2/2
2/2
-
2/2
-
2
-
-
-
2/2
-
2/2
-
-
2/2
-
2/2
6
6/6
-
-
-
-
6/6
-
-
6/6
6/6
5/6
2 Includes Board meetings of Royal Mail Group Limited and Royal Mail plc.
3 From 10 September 2013.
4 John Allan was unable to attend the Board meeting on 18 April 2013 and the Audit & Risk Committee meetings on
17 May and 23 July 2013 due to prior engagements.
5 Cath Keers was unable to attend the Board meeting on 18 April 2013 and the Audit & Risk Committee meeting on
14 August 2014 due to prior engagements.
6 Les Owen was unable to attend the Audit & Risk Committee meetings on 14 August, 6 September,
12 November 2013 and 17 January 2014 and the Remuneration Committee meeting on 17 January 2014 due to
prior engagements.
Remuneration Committee
Committee membership
Chair
Orna Ni-Chionna
Membership
Chairman
Donald Brydon
Non-Executive Directors
Jan Babiak1, Paul Murray
and Les Owen
Meetings of the Committee were also
attended, where relevant, by the Chief
Executive Officer, Group HR Director,
Company Secretary, other members of senior
management and representatives from the
executive remuneration consultants, New
Bridge Street.
No individual was present when matters
regarding their own remuneration
were discussed.
1 Resigned 29 April 2014.
Role of the Committee
• To determine and recommend for the
Board’s approval the framework for the
remuneration of the senior executives
of the Group;
• To determine the individual remuneration
arrangements for the Chair, the Executive
Directors and the Company Secretary; and
• To agree the targets for any performance-
related incentive schemes applicable to
senior executives.
The full Terms of Reference for the
Committee can be found on our website
www.royalmailgroup.com
Key areas of focus during the year
Details of the work carried out by the
Remuneration Committee and the decisions
made are outlined in the Directors’
remuneration report on pages 58 to 69.
Orna Ni-Chionna
Chair of the Remuneration Committee.
Other Committees
Risk Management Committee
The Risk Management Committee supports
the Audit & Risk Committee and meets to
promote and support the establishment,
communication and embedding of risk
management throughout the business.
Disclosure Committee
The role of the Disclosure Committee is to
assist the Executive Directors in fulfilling their
responsibility for oversight of the accuracy and
timeliness of the disclosures made by the
Company in relation to its financial and other
reporting. The Committee meets on a regular
basis during the reporting process and is
chaired by the Chief Executive Officer.
57
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Directors’ remuneration report
Dear Shareholder,
2013-14 was a banner year for Royal Mail. We delivered
revenue and operating profit growth across all of
our businesses and generated strong free cash flow;
we continued to reshape our business to drive
operational efficiencies so we can compete effectively
in the rapidly changing parcel and letter marketplaces;
and we began life as a listed company.
This context of a good performance, our
continued transformation and the transition
from public to private ownership, set the
agenda for much of the Remuneration
Committee’s work during the year.
Remuneration for 2013-14
Our Company’s continued good performance
resulted in pay outs on both our annual
bonus and our Long Term Incentive Plan
(LTIP), in accordance with our remuneration
policy. This policy aims to reward strong
performance, which generates sustainable
returns for our shareholders.
Annual bonus
Our performance in 2013-14 resulted in the
achievement of a high score against the
financial, people and customer targets in our
Corporate Balanced Scorecard, which make
up 80 per cent of the potential annual bonus.
Performance against personal objectives,
which are set by the Committee and represent
20 per cent of the potential bonus, was
also high.
This resulted in a bonus of 77 per cent of
salary for our CEO, Moya Greene; 77 per cent
of salary for our CFO, Matthew Lester; and
57 per cent of salary for our Managing
Director, Operations and Modernisation,
Mark Higson. More details about the annual
bonus targets and performance against
specific KPIs are given on page 65.
LTIP
During 2013-14, the Company exceeded the
challenging performance targets that were set
in 2011 for Operating Profits and Return on
Total Assets as part of the LTIP. As a result,
the LTIP that was awarded in 2011 vested in
full for each of the three Executive Directors.
The Committee had no reason to use its
discretion to reduce it. More details of the
LTIP payout can be found on page 66.
Remuneration policy for 2014-15
Following our flotation, and in line with the
vast majority of other listed companies, we
are now able to pay our Executive Directors
partially in shares, aligning their interests
more closely with shareholders. At the time
of our flotation, the 2013 LTIP grant was
converted into a share-based award.
Subsequent LTIP grants will also be share-
based. We will also require our senior
management to retain a proportion of their
share-based incentives so they build up an
appropriate individual stake in our Company.
As we have set out elsewhere in this report,
our business faces many significant
challenges. The impact of the structural
decline in letters is being exacerbated by a
number of regulatory issues, including the
unfettered rollout of direct delivery
competition in the UK. Competition in the
UK parcels market is growing rapidly, with
capacity increases in addition to a potential
reduction in our addressable market due to
increasing e-substitution and alternative
fulfilment options. This will put pressure
on pricing.
Responding to these challenges requires the
continued transformation of almost
everything the Company does. The roles of
our senior executives are demanding and
complex as a result of these significant
challenges. Our move to being a listed
company has also added complexity to some
aspects of their roles.
Despite this, the Committee decided after
much deliberation not to make any changes to
the remuneration policy, which was approved
by HM Government when I became Chair of
the Remuneration Committee in 2011. We
also decided to make no change of any sort
to the potential remuneration of our Chief
Executive, Moya Greene. In making that
decision, we took account of her views and
wishes. This means that her salary has
remained the same each year since she joined
our Company in July 2010 and her annual
bonus and LTIP potential have remained the
same since the current policy was introduced
in 2011.
Our shareholders
Until October 2013, Royal Mail was wholly
owned by HM Government. The major
elements of executive remuneration, including
the annual bonus and LTIP structure and
opportunity, were subject to approval from
Orna Ni-Chionna
Chair, Remuneration Committee
58
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 the Secretary of State for Business, Innovation
and Skills.
This changed with our listing on the London
Stock Exchange. Approximately 150,000 of
our UK employees were given 10 per cent of
their Company through HM Government’s
Free Shares Offer. As at the time of writing,
HM Government had a stake of approximately
30 per cent in our Company. The remaining
60 per cent of our Company is owned by a
wide range of institutional investors and
hundreds of thousands of retail investors.
Private ownership has created the opportunity
and need for dialogue with a broader range of
shareholders. This dialogue is only just
beginning, and conversations to date have
been constructive. The Committee’s challenge
in the coming years is to reflect the diverging
views of all our shareholders in a coherent and
appropriately-pitched remuneration policy.
The Committee recognises that executive
remuneration remains a sensitive issue in our
society. However, it is also aware that our
Executive Directors’ potential remuneration is
significantly lower than that of the leaders of
comparable large and complex companies in
the UK.
As Royal Mail changes over the next few
years, so too will our remuneration policies
and practices. We will continue to work hard,
in consultation with our shareholders, to find
an appropriate formula that takes into account
the Company’s unique situation and
appropriately rewards the creation of
sustainable shareholder value.
Directors’ remuneration report 2013-14
The remainder of this remuneration report
has been written in accordance with the new
regulations that came into force earlier this
year. It consists of our Policy Report, which
describes our guiding principles and
philosophy; and our Annual Report on
Remuneration, which describes how the policy
was implemented over the past year.
I hope that you will feel able to support both
the Policy Report and the Annual Report on
Remuneration. I look forward to continued
dialogue with you over the coming years.
Orna Ni-Chionna
Chair of the Remuneration Committee
Policy Report
This Policy Report (pages 59 to 63) will be put
to a binding shareholder vote at the AGM on
24 July 2014. It will take effect from that date,
subject to approval by shareholders.
Summary of our policy and what it aims
to achieve
The Remuneration Committee determines, on
behalf of the Board, the Company’s policy on
the remuneration of senior executives and the
Executive Directors.
The Company’s policy on Executive Directors’
remuneration is that:
• There is no reward for failure;
• A significant proportion of the remuneration
package should be dependent on the
achievement of demanding performance
targets – both short and long term;
• Incentives should be designed so that they
align the interests of senior executives,
customers and shareholders;
• Variable reward should be structured so as
to achieve a balance between short term
and long term incentive programmes;
• The overall remuneration package should be
sufficiently competitive to attract, retain and
motivate executives with the commercial
experience to run a large, complex business
in a highly challenging context; and
• We pay attention to the social sensitivities
around executive remuneration.
Components of current pay for executive
directors
The Executive Directors receive two elements
of pay – fixed and variable. Fixed pay
comprises salary, benefits and pension
contributions, or cash in lieu of pension.
Variable pay comprises an annual bonus
(also known as the short term incentive plan
or ‘STIP’) which pays out only if challenging
short term objectives are achieved, and an
award made under the LTIP which vests
(pays out) only if three year performance
targets are achieved.
Variable pay is designed to pay out only if the
performance targets are achieved or
exceeded. The Committee sets these targets
in advance and aims to ensure that they are
only achievable if the Company performs
strongly. Variable pay is also subject to
clawback in certain circumstances
(see pages 60 to 61).
The chart below shows the potential pay that
could be received at different levels of
performance based on the policy as it will be
applied in 2014-15.
2,000
1,750
1,500
1,250
1,000
750
500
250
0
)
0
0
0
£
(
£1,713
£1,374
29%
25%
22%
29%
£727
£1,550
£1,241
29%
26%
22%
29%
£651
100%
53%
42%
100%
52%
42%
Fixed pay
Strong
Exceptional
Fixed pay
Strong
Exceptional
Chief Executive Officer (Moya Greene)
Chief Finance Officer (Matthew Lester)
Fixed pay only
Annual bonus (STIP)
Long term incentive plan (LTIP)
Fixed pay comprises base salary + benefits + pension. Annual bonus relates to the bonus that could be earned in relation
to performance in 2014-15. The LTIP relates to the awards that could be received based on performance over the three
years to 2016-17. Strong performance assumes an annual bonus of 60 per cent of salary and an LTIP award of
70 per cent of salary. Exceptional performance assumes an annual bonus award of 100 per cent of salary and an LTIP
award of 98 per cent of salary. The LTIP award is payable in shares, no assumptions have been made as to future share
price movements.
59
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Directors’ remuneration report
(continued)
Policy table: description of elements of our policy
This table sets out the key elements of the remuneration policy for the Executive Directors.
Element of
remuneration
Purpose and link
to strategy
Operation
Maximum opportunity
Salary
Recruit and retain
executives with the skills
and experience to run a
large, complex company in
a challenging context.
Salaries are paid
monthly.
Benefits
To provide an appropriate
and cost effective benefits
package.
Pension
To provide appropriate
levels of retirement
benefit.
Annual bonus
Reward annual
performance against a
Corporate Balanced
Scorecard which is aligned
to the strategy of the
Group, through the
achievement of financial
and non-financial targets.
The same Scorecard
determines annual bonus
awards for all Royal Mail
managers.
Benefits provided are
the provision of a
company car and health
insurance, or the cash
equivalent of any
benefits not taken.
Under her contract,
Moya Greene is entitled
to two return flights to
Canada each year,
financial advice and use
of a driver for
business-related travel.
The type and level of
benefits provided may
be subject to minor
amendment from time
to time as appropriate.
Company contribution
to a defined contribution
pension scheme and/or
a cash supplement (in
lieu of pension).
Payable annually in
cash, subject to the
achievement of
stretching performance
targets.
A clawback mechanism
applies to the annual
bonus within three
years of the award
being made and in the
event of financial
misstatement, an error
in calculation or gross
misconduct on the part
of the executive.
Performance
measures
None
Supporting information*
No change in policy from the
prior year.
Moya Greene’s current salary
is £498,000 and remains
unchanged since her
appointment to the Company
in 2010.
Matthew Lester’s salary will
increase by six per cent to
£454,065 from 1 April 2014.
This increase is consistent with
the salary increase given to our
frontline employees for 2013
and 2014. Prior to this
increase, Matthew Lester’s
salary had not changed since
his appointment to the
Company in November 2010.
Over this period, our frontline
employees have received an
average increase of
11 per cent.
None
No change in policy from
prior year.
The salary levels for the
Executive Directors are
normally reviewed annually.
When considering salary levels
and whether any increase
should be offered, the
Committee takes into account a
variety of factors such as: the
performance of the Company,
the performance and
experience of the individual, any
changes in role or responsibility,
assessment against relevant
comparator groups, internal
relativities and the level of
increase being offered to our
frontline employees.
The Committee will consider
the factors outlined above to
determine the maximum
amount that would be paid in
base salary for an Executive
Director.
The cost of the benefit provision
varies from year-to-year and
there is no prescribed
maximum limit. The Committee
monitors annually the overall
cost of the benefits provided to
ensure that it remains
appropriate.
No change in policy from
prior year.
No change in policy from
prior year.
£200,000 per annum cash
allowance for the CEO and a
40 per cent of salary cash
allowance for the CFO.
None
The award level payable for
strong performance is 60 per
cent of salary. If the minimum
performance hurdles are not
achieved, then no bonus is
payable.
The maximum award level
payable for exceptional
performance is 100 per cent
of salary.
80 per cent of the bonus
opportunity is based on
financial, people and
customer targets, as set
out in the Corporate
Balanced Scorecard and
reviewed annually.
20 per cent of the
opportunity is based on the
achievement of challenging
personal objectives.
A minimum level of
operating profit must be
achieved before any
Executive Director becomes
eligible for any payment.
The performance targets
are measured over
12 months.
* This column does not form part of the binding policy. It has been included to provide additional contextual information for the reader.
60
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Element of
remuneration
Purpose and link
to strategy
Operation
Maximum opportunity
Performance
measures
Long Term
Incentive Plan
Reward the delivery of
sustained long term,
financial and operational
performance.
Align the structure of
awards received by
Executive Directors with
the drivers of shareholder
returns.
All employee
share plans
To increase alignment
between the interests of
Executive Directors and
shareholders.
Awards granted in
shares and released
after three years
subject to performance
measured in the third
year of a three year
period and continued
employment.
The value of dividends
paid on long term
incentive awards will be
rolled up and paid on
vesting.
A clawback mechanism
applies within three
years of vesting in the
event of financial
misstatement, an error
in calculating the level
of vesting or gross
misconduct on the part
of the executive.
Participation in the
Company’s all employee
share plans (HMRC
approved share plans).
The Executive Directors
are eligible to
participate on the same
terms as other eligible
employees.
Supporting information*
As announced in the
Prospectus in September 2013,
the cash LTIP is replaced
with share-based awards
and we have changed the
performance conditions used
for future awards. No change
to award levels.
Any significant change in the
weighting or choice of
performance metrics for future
awards would be subject to
prior consultation with our
major shareholders.
The award level payable for
strong performance is 70 per
cent of salary.
For the awards to be
granted in 2014 the
measures will be:
The maximum award level for
exceptional performance is
98 per cent of salary.
- earnings per share
(50 per cent).
- growth in operating
profit margin before
transformation costs
(35 per cent).
- relative total shareholder
return (TSR) (15 per cent).
The performance targets
are measured over three
years.
Further details on the
performance targets for the
2014 awards are set out on
page 69.
Different performance
measures and/or
weightings may be used for
future awards as
appropriate to reflect the
business strategy at
that time.
Subject to HMRC approved
limits.
None
Introduced on IPO.
* This column does not form part of the binding policy. It has been included to provide additional contextual information for the reader.
Unvested Incentive Arrangements
The Executive Directors have outstanding unvested LTIP awards relating to grants made in 2012 and 2013. As set out in the Prospectus, the
2013 awards were converted into shares shortly after the IPO (they were converted using a share price of 529.14 pence, which resulted in a
smaller number of shares than would have been achieved had the IPO price of 330 pence been used). The 2012 award is cash based. No further
awards will be made under this plan, but the outstanding awards may pay out, subject to meeting the performance targets. The 2012 award
vests based on performance to 31 March 2015 and the 2013 award based on performance to 31 March 2016. Details of the performance
conditions applying to the 2012 and 2013 LTIP awards are set out on page 66.
61
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Directors’ remuneration report
(continued)
Questions and answers: Influences on our policy and how it works in specific situations
How are shareholder views taken
into account when deciding
remuneration policy?
The Committee Chair met and corresponded
with several of the Company’s major
shareholders over the past few months to
understand their views on executive pay and
on the policy currently in place at Royal Mail.
The remuneration policy is being put to all
shareholders for approval at the AGM. The
Committee will listen carefully to the views
of shareholders expressed at the AGM and at
other times during the year.
Do you take the pay of other employees
into account when deciding the
remuneration policy?
We do. We try to maintain a consistent
approach throughout the Group, with
pay appropriately set for different levels
of employee:
• The proposed increase to the CFO’s salary
reflects the basic salary increase received
by frontline employees from 2013 to 2014.
Prior to this increase, the CFO’s salary had
not changed since it was set on his
appointment in 2010. Over the same
period, the average salary received by
frontline employees increased by
11 per cent;
• The Corporate Balanced Scorecard
determines annual bonus awards for all
employees at manager grade and above;
• All Royal Mail’s senior managers participate
in the LTIP; and
• The Executive Directors have a greater
proportion of their remuneration package
based on variable (performance related)
pay than other employees.
Discussions about the Group’s overall
approach to remuneration take place with
union representatives as part of the annual
pay review. To date there has been no formal
consultation with employees in determining
the policy. However, over 96 per cent of
our employees are shareholders in the
Company (having received shares on IPO)
and are able to vote on this policy along with
other shareholders.
Are the Executive Directors required
to hold shares in the Company?
Executive Directors are expected to build up
a shareholding equivalent to 100 per cent of
their salary. They are expected to keep any
shares they already own and 50 per cent of
any shares released under the LTIP (after
selling sufficient shares to meet any
associated tax obligation) until this is achieved.
We recognise that this may take some time.
What changes can the Remuneration
Committee make to the annual bonus
and LTIP?
The Committee will operate the annual bonus
and LTIP according to the plan rules. Once the
remuneration policy is approved by our
shareholders, our ability to make changes is
limited. The maximum award levels cannot be
increased without prior shareholder approval.
However, the Committee can make certain
changes, such as the timing of grant and pay
out, the treatment of leavers, the structure
of awards under the LTIP, retrospective
adjustment of share award grants (e.g. for
a rights issue, a corporate restructuring or
for special dividends) and, in exceptional
circumstances, the discretion to adjust
previously set targets. This would only happen
if we believe that changing circumstances
mean that the awards, as agreed, are unable
to meet their original purpose.
What would happen if a new Executive
Director was appointed?
If we appointed a new Executive Director to
Royal Mail:
• We would set the remuneration package
in line with the approved policy at the time
of appointment;
• In setting the salary level for a new
Executive Director, the Committee would
take into account the skills and experience
of the individual, his or her current
remuneration package, the market rate for
the role, and the importance of securing the
best candidate;
• The annual bonus opportunity would not
exceed 100 per cent of salary and the LTIP
opportunity would not exceed 98 per cent
of salary. Participation in the annual bonus
would normally be pro-rated for the year of
joining (i.e. reduced to reflect the proportion
of the performance period worked); and
• The Committee may also make additional
awards to take account of deferred pay or
benefit arrangements forfeited on leaving
a previous employer. We would take into
account whether forfeited awards were to
be paid in cash or shares; when they would
have been received; and the likelihood of
meeting any existing performance
conditions. Other payments may be made
in relation to relocation expenses and other
incidental expenses as appropriate.
In the case of an internal appointment,
any outstanding LTIP or annual bonus
awards would be allowed to pay out,
according to the terms under which they
were originally granted.
What are the Executive Directors’ terms
of employment?
The Executive Directors are employed under
service contracts. The dates of these
contracts are:
Date of
Contract
Unexpired
Term
(months)
Moya
Greene
15 July 2010
Matthew
Lester
24 November
2010
Mark Higson
5 November
2007
12
12
n/a
The contracts have an indefinite term that
may be terminated by either party on written
notice. For new hires, this notice period would
be set at 12 months or less. Copies of the
Executive Directors’ service contracts are
available for inspection at the Company’s AGM.
What happens if their conduct is
inappropriate?
The Executive Directors can be dismissed
immediately without notice if they are deemed
to be guilty of gross misconduct or for any
other material breach of the obligations under
their employment contract. In other cases, the
Company may dismiss the Executive Directors
with a payment in lieu of notice, suspend the
Executive Director or put them on a period of
garden leave during which they will be entitled
to salary, benefits and pension.
What payments will an Executive Director
receive when they leave the Group?
Like any other Company, we would make the
payments necessary to meet any contractual
or other legal obligations.
Moya Greene’s contract dates from her
appointment to the Company in 2010. As
disclosed in the Prospectus, her contract may
be terminated immediately by the Company.
Unless the Company terminates the contract
due to gross misconduct or a material breach
of the obligations under the service contract,
it would be required to make a payment
equalling 12 months’ base salary and an
annual bonus referable to the 12 month
period in which the termination occurs.
The assessment of the annual bonus award
would be made in line with normal practice for
determining bonuses.
Under Matthew Lester’s service contract and
the policy for future hires, the Company may
terminate the contract by making a payment
in lieu of any unexpired notice period.
62
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
The payment in lieu of notice is limited to
a maximum of 12 months’ base salary.
Payment in lieu of accrued holiday, incidental
expenses and outplacement services may be
paid/provided for as appropriate. Outstanding
awards under any all employee share plan
would vest in accordance of the rules of the
plan as approved by HMRC. Any statutory
entitlements or sums to settle or compromise
claims in connection with a termination
(including, at the discretion of the Committee,
reimbursement for legal advice) would be paid
as the Committee considers necessary.
The Company has an explicit policy on
mitigation. Future service contracts will
include express provisions for the use of
monthly phased payments, a requirement
for the departing executive to seek to mitigate
any loss and a reduction in amounts paid
if the executive obtains alternative
paid employment.
What happens to annual bonus and LTIP
awards when an Executive Director leaves?
Outstanding incentive awards usually lapse
when an employee leaves the Company.
However, in certain circumstances, including
death, ill-health, disability and termination of
employment (other than for gross misconduct
or material breach of the obligations under an
employment contract) awards could pay out
on the normal date if performance conditions
have been met. The size of the award would
be pro-rated. The Committee may decide on
an earlier pay out in exceptional
circumstances. It can also decide not to apply
pro-rating for LTIP awards if it considers
it appropriate.
What happens if there is a change in the
control of the Company?
The treatment of share awards on a change of
control under the annual bonus and new LTIP
is the same as that set out in the previous
paragraph, except that the performance-
testing period will automatically end on the
date of the change in control. Under the old
LTIP, awards granted more than 12 months
prior to a change in control would not be
pro-rated. Awards granted less than
12 months prior to a change in control would
typically be pro-rated, unless the Committee
decides otherwise.
Are the Executive Directors allowed
to hold external appointments?
The Board may allow Executive Directors
to accept external appointments (e.g. a
Non-Executive Director position in another
company), provided the time and commitment
are not excessive. The Directors are permitted
to retain any fees that they receive from
such appointments.
Our policy for Non-Executive Directors and the Chairman
We aim to set fee levels to attract and retain a Chairman and Non-Executive Directors with the
right skills and experience.
What is the fee policy for the Chairman and Non-Executive Directors?
Purpose and link to
strategy
To enable the Group to
attract and retain a
Chairman and
Non-Executive Directors
with appropriate skills and
experience.
Operation
Maximum opportunity
Performance targets
Not applicable
The Chairman and
Non-Executive Directors
receive a fixed fee. Fees
are set taking into account
the time commitment and
responsibilities of the role
and to reflect the
experience and expertise
required.
The fees for the Chairman
are set by the
Remuneration Committee
(with the Chairman
excluded from the
process). The fees for the
Non-Executive Directors
are set by the Executive
Directors in consultation
with the Chairman.
Fees are subject to
maximum aggregate
limits as set out in the
Company’s Articles of
Association (currently
£1 million).
Details of the current fees
for the Chairman and
Non-Executive Directors
are set out in the Annual
Report on Remuneration
on page 69.
The fees are reviewed
periodically and may be
increased as appropriate
to take into account
changes in time
commitment and general
market rates.
What are the terms of appointment for
the Chairman and Non-Executive
Directors?
The Non-Executive Directors (including the
Chairman) are appointed by rolling letters of
appointment. Each of the Non-Executive
Directors is entitled to receive a fee from
the Company, paid monthly. This fee covers
their role as a Non-Executive Director or
Chairman and all other Board duties (including
Committee memberships and Chairs).
In addition, the Chairman and Non-Executive
Directors are entitled to be reimbursed for
all reasonable travelling, hotel and other
expenses incurred in the performance of the
Non-Executive Director’s duties.
The Non-Executive Directors are appointed
for up to three years, subject to annual review
and re-election. One month’s notice is
required by either party (four months’ notice
in the case of the Chairman). However, the
appointment of a Non-Executive Director will
end immediately, if they commit a material
breach of their obligations under the
appointment letter or fail to be re-elected at
the AGM, in which case they will be paid
accrued fees and expenses only.
The dates of the Chairman’s and Non-
Executive Directors’ letters of appointment
are set out in the table below.
What would happen if a new Non-
Executive Director joined Royal Mail?
Fees for a new Chairman or Non-Executive
Director would be set in accordance with the
existing fee policy.
Date of Contract
Unexpired Term
(months)1
20 September 2013
Resigned 29 April 2014
Donald Brydon
20 September 2013
John Allan
Jan Babiak
Nick Horler
Cath Keers
20 September 2013
20 September 2013
20 September 2013
Paul Murray
20 September 2013
Orna Ni-Chionna
20 September 2013
Les Owen
20 September 2013
36
36
36
36
36
36
36
1 All the Non-Executive Directors (including the Chairman) were appointed in 2013 for an initial term commencing on 20 September 2013 until the conclusion of the 2016 AGM
approximately three years later.
63
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Directors’ remuneration report
(continued)
Annual Report on Remuneration
This part of the Directors’ remuneration report sets out how the remuneration policy has been applied for 2013-14. Detailed information about the
Directors’ remuneration, set out below and on pages 64, 66 and 67 has been audited by the Company’s independent auditors, EY.
What did the Directors earn for the 2013-14 financial year? (Audited)
The table below sets out the remuneration received by the Directors for 2013-14 (or for performance periods ending in 2013-14 in respect
of long term incentives) and, for the purposes of comparison, for 2012-13.
The disclosure of remuneration for 2013-14 relates to the remuneration received both as Directors of Royal Mail Group Ltd up until
20 September 2013 and as Directors of Royal Mail plc from 20 September 2013 (6 September 2013 for Donald Brydon, Moya Greene
and Matthew Lester). Royal Mail plc was created as a new entity for the purposes of facilitating the privatisation.
£’000
Salary/Fees
Benefits2
Pension3
Short Term
Incentive Plan
Long Term
Incentive Plan4
Other5
Total
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Chairman
Donald Brydon
Executive Directors
Moya Greene
Mark Higson
Matthew Lester
200
200
498
428
428
498
428
428
Non-Executive Directors
John Allan6
Jan Babiak7
Nick Horler
Cath Keers
Paul Murray
Orna Ni-Chionna
Les Owen
40
40
40
40
50
60
40
8
3
40
40
50
60
40
–
29
15
15
-
-
-
-
-
-
-
–
–
–
–
–
–
–
–
377
15
15
200
171
171
200
171
171
385
245
328
399
245
344
488
420
419
488
420
419
(250)
-
-
–
–
–
–
–
–
–
-
-
-
-
-
-
-
–
–
–
–
–
–
–
-
-
-
-
-
-
-
–
–
–
–
–
–
–
-
-
-
-
-
-
-
–
–
–
–
–
–
–
-
-
-
-
-
-
-
–
–
–
–
–
–
–
–
–
–
–
200
200
1,350
1,279
1,361
1,962
1,279
1,377
40
40
40
40
50
60
40
8
3
40
40
50
60
40
Total8
1,864 1,7959
59
407
542
542
958
988 1,327 1,327
(250)
– 4,500 5,0599
2 Benefits include medical insurance and car allowance. The figure for Moya Greene also includes return flights to Canada.
3 Employer pension contributions to the Royal Mail Defined Contribution Plan, and allowances in lieu of employer contributions.
4 The current year figure relates to the 2011 LTIP award. The prior year figure relates to the 2010 LTIP award, which was based on performance to 31 March 2013. The 2010 LTIP
award was subject to an additional deferral period.
5 Relates to a relocation payment made to Moya Greene. As previously disclosed, Moya Greene voluntarily offered to return the amount she received from this assistance. It was
confirmed in Royal Mail’s Prospectus (September 2013) that Royal Mail has received payment for the after tax amount and an additional amount representing an independent
professional estimate of the unrealised gain associated with the assistance received.
6 John Allan joined the Board on 14 January 2013.
7 Jan Babiak joined the Board on 1 March 2013. She stood down from the Board on 29 April 2014, after the reporting period.
8 Amounts attributable directly to Royal Mail plc for 2014 can be calculated by time apportioning the 2014 figures from 6 or 20 September 2013 until 31 March 2014 (2013: £nil).
9 This figure excludes £17,000 of fees paid to David Currie, a former Director of Royal Mail Holdings.
64
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 How was the pay in the above table linked to performance in 2013-14?
A) Annual bonus
Annual bonus performance is measured over a single financial year against a range of financial and non-financial targets, as set out in the
Corporate Balanced Scorecard; and against personal objectives. The maximum bonus opportunity for the CEO and CFO was 100 per cent of
salary and the maximum bonus opportunity for the Managing Director, Operations and Modernisation was 80 per cent of salary. The table
below contains a summary of the corporate metrics under the Corporate Balanced Scorecard, which are used to determine 80 per cent of the
bonus award.
Corporate Balanced Scorecard 2013-14
Weighting
Financial (45%)
5%
10%
10%
10%
10%
Total UK costs (£m)
Group operating profit (£m)10
Free Cash Flow (£m)
Target
7,418
696
357
Actual
7,242
670
398
Achievement
Stretch
Above Threshold
Stretch
Group revenue (£m)11
9,601
9,436
Above Threshold
Collections, processing and
delivery productivity (%)
2.5
1.7
Threshold
Customer (30%)
10%
First Class Quality of Service (%)
93.0
93.3
Between Target
and Stretch
Mean business customer
satisfaction
Customer complaints (’000)
Composite parcels quality
of service (%)
Safety lost time accident
frequency rate
Employee engagement
Customer focus
10%
5%
5%
10%
10%
5%
100%
75
509.9
95.1
1.05
51
66
75
458.7
95.1
0.77
54
69
Target
Stretch
Target
Stretch
Stretch
Stretch
People (25%)
Total
Payable out of a
maximum of 80%
4.0%
4.3%
8.0%
2.7%
2.4%
6.7%
4.8%
4.0%
2.4%
8.0%
8.0%
4.0%
59.4%
A minimum level of operating profit before transformation costs and
other exceptional items must be achieved before an Executive Director
becomes eligible for a payment. For the year in question this minimum
profit level was £596 million: actual profit achieved was £670 million10.
other Executive Directors included specific targets relating to capital
spend, project rollout, cost control and people measures. Performance
against these objectives was reviewed by the Committee and the
resulting aggregate annual bonus awards for 2013-14 were as follows:
20 per cent of the annual bonus is based on specific personal targets,
which are set at the start of the year and are based on each Executive
Director’s area of responsibility. Personal targets for the CEO included
specific objectives relating to performance of GLS, IT, investor relations
and the commercial relationship with the Post Office. Objectives for the
• Moya Greene: £385,452, 77 per cent of salary
• Matthew Lester: £327,720, 77 per cent of salary
• Mark Higson: £244,616, 57 per cent of salary
10 Group operating profit before transformation costs and adjusted for foreign exchange.
11 Group revenue adjusted for foreign exchange.
65
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Directors’ remuneration report
(continued)
B) Long term incentive plan (LTIP)
The 2011 LTIP award was a cash-based
award, based on performance in the third
year of a three year period to 31 March 2014.
It was subject to two performance conditions.
The primary measure was operating profit
before transformation costs:
Operating profit before transformation
costs, performance assessed in the final
year of the performance period
Proportion of target award vesting
Less than 70 per cent of target
0 per cent
70 per cent to 80 per cent of target
80 per cent to 100 per cent of target
100 per cent of 120 per cent of target
More than 120 per cent of target
0 per cent to 80 per cent vesting
(straight-line sliding scale)
80 per cent to 100 per cent vesting
(straight-line sliding scale)
100 per cent to 140 per cent vesting
(straight-line sliding scale)
140 per cent vesting
(i.e. maximum 98 per cent of salary)
The secondary measure was a downwards only adjustment, based on return on total assets (ROTA) targets. If ROTA was greater than 90 per cent
of target, there was no adjustment. If ROTA was between 75 per cent of target and 90 per cent of target there was a 50 per cent reduction in the
level of pay out. If ROTA was less than 75 per cent of target, then there was no pay out.
The operating profit before transformation target was £528 million and the ROTA target was 17.0 per cent. Actual operating profit before
transformation for 2013-14 was £670 million12 and ROTA was 24.3 per cent. Accordingly, the total percentage of LTIP awards for 2013-14
vesting was 140 per cent (equivalent to 98 per cent of salary).
This resulted in the following cash awards to the Executive Directors: Moya Greene, £488,040; Matthew Lester, £419,440;
Mark Higson, £419,832.
What previous LTIP awards remain outstanding at the year end? (Audited)
The table below sets out details of the LTIP awards that were granted during the year and remain outstanding at the year end.
Year
2012
2013
2012
2013
2012
2013
Type
LTIP
LTIP
LTIP
LTIP
LTIP
LTIP
Maximum
value of award
at grant
(% salary)
Maximum
value of award
at grant
(£’000)
% vesting at
minimum
performance
Final year of
performance
period
Number of
shares
98%
98%
98%
98%
98%
98%
488
488
420
420
419
419
0%
0%
0%
0%
0%
0%
2014-15
2015-16
2014-15
2015-16
2014-15
2015-16
–
65,880
–
56,673
–
56,620
Notes
–
(a)
(b)
(a),(b)
–
(a)
Moya Greene
Mark Higson
Matthew Lester
(a) As disclosed in the Prospectus, 2013 LTIP awards were converted into conditional rights to acquire Ordinary Shares on 19 December 2013. The conversion was made at the
Volume Weighted Average Price of the Ordinary Shares of the Company traded between the eighth and fourteenth days following Admission on 15 October 2013 (529.14p).
(b) As detailed on page 39, Mark Higson will be standing down from the Board on 24 July 2014. As Mark is a good leaver, as defined in the LTIP rules, his outstanding awards will not
lapse when he leaves the Company. They will vest on the normal date, subject to performance. The award will be reduced pro-rata, to reflect the proportion of the performance
period when Mark was in role.
The 2012 and 2013 LTIP awards are subject to the same performance measures and sliding scale of targets as the 2011 award. The precise
operating profit and ROTA figures are deemed to be commercially sensitive. However, full details of the targets and performance achieved against
them will be disclosed on release of the award.
Have any payments been made to past Directors in the year? (Audited)
No payments have been made to past Directors of Royal Mail plc during the year.
What about payments for Loss of Office? (Audited)
No payments were made in respect of loss of office during the year.
12 Group operating profit before transformation costs and adjusted for foreign exchange.
66
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Is there a shareholding guideline for
Executive Directors and what are their
current shareholdings? (Audited)
A shareholding guideline has been introduced
for the Executive Directors and is set out on
page 62. The table opposite sets out details
of the shareholdings of the Executive and
Non-Executive Directors as at 31 March 2014.
On 9 April a further 116 shares were provided
to the Executive Directors, in respect of the
final distribution of shares to all qualifying
employees as part of the flotation.
Interests
in Shares
(as % of
Salary)13
Interests
in Shares14
Maximum
Scheme
Interests
Unvested15
Total
Potential
Interests
Total
Potential
Interests (as
% of Salary)
Chairman
Donald Brydon
Executive Directors
Moya Greene
Mark Higson
Matthew Lester
Non-Executive Directors
John Allan
Jan Babiak
Nick Horler
Cath Keers
Paul Murray
Orna Ni-Chionna
Les Owen
3,030
3,643
3,643
3,643
3,030
3,030
3,030
3,030
3,030
3,030
3,030
–
4%
5%
5%
–
–
–
–
–
–
–
–
65,880
56,673
56,620
69,523
60,316
60,263
–
–
–
–
–
–
–
–
–
–
–
–
–
–
79
79
79
–
–
–
–
–
–
–
How does TSR compare to that of other
similar companies?
This graph shows the cumulative Total
Shareholder Return of the Group since IPO
relative to the FTSE 100 Index. The FTSE
100 Index has been chosen for comparison as
the Company is a constituent of the Index and
it provides a benchmark of the performance
of other large UK listed companies.
200
180
160
140
120
100
80
60
)
d
e
s
a
b
e
R
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
10-Oct-13
31-Mar-14
This graph shows the value, by 31 March 2014, of £100 invested in Royal Mail on 10 October 2013,
compared with the value of £100 invested in the FTSE 100 Index.
Royal Mail plc
FTSE 100 Index
Source: Datastream (Thomson Reuters)
How much does Royal Mail spend on pay?
The following table shows the Group’s people
costs relative to dividends, revenue and EBIT.
m
£
’
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2013-14
2012-13
2013-14
2012-13
2013-14
2012-13
2013-14
2012-13
Revenue
People Costs
EBIT (excluding specific items)
Recommended Dividends
13 Includes interests in Ordinary Shares of persons connected with the relevant Director.
14 Valued using the share price on 31 March 2014 of £5.63.
15 Relates to the 2013 LTIP award which was converted into shares on 19 December 2013.
67
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Directors’ remuneration report
(continued)
How does the change in the Chief Executive’s pay compare to that for Royal Mail employees?
The table below shows the percentage change in the Chief Executive’s salary, benefits and annual bonus between 2012-13 and 2013-14,
compared to that for the average employee of the Group.
Salary
Benefits
STIP
Chief Executive
Moya Greene (£)
2013-14
498,000
29,000
385,000
2012-13
498,000
377,000
399,000
% Change
0%
(77%)
(4%)
Average Employee (£)16
2013-14
26,405
117
514
2012-13
25,804
115
479
% Change
2.3%
1.7%
7%
What has the pay for the Chief Executive Officer been over the last four years?
The total remuneration figure for the Chief Executive Officer over the last four years is shown in the table below. The annual bonus payout and
LTIP vesting level as a percentage of the maximum opportunity is also shown.
Remuneration of the
Chief Executive Officer
Total remuneration (£’000)
STIP award as % maximum
LTIP award as % maximum
Moya Greene
2010-1117
2011-12
2012-13
2013-14
778
41%
–
1,107
74%
–
1,962
80%
100%
1,350
77%
100%
Consultant’s Code of Conduct and reports
directly to the Chair of the Committee.
The Committee Chair meets regularly with
its advisors without management present
and the Committee is satisfied that the
advice that it receives from NBS is objective
and independent.
Do the Executive Directors receive
fees from external appointments?
The Executive Directors are entitled to
receive fees from external appointments.
Moya Greene is a Director at Tim Hortons Inc
and received fees of £82,433 (sterling
equivalent) for the last reported financial year.
Matthew Lester is a Non-Executive Director at
Man Group plc and received fees of £95,000
for the last reported financial year.
Who were the members of the
Remuneration Committee in the year?
The members of the Committee during the
last financial year were: Orna Ni-Chionna
(Chair); Donald Brydon; Jan Babiak;
Paul Murray; and Les Owen.
All of these were independent Non-Executive
Directors, as defined under the UK Corporate
Governance Code, with the exception of the
Company Chairman, who was independent
on his appointment. Details of the number
of meetings held during the year and the
attendance of the members are provided
on page 57.
What advice did the Committee receive?
The Committee takes information and advice
from inside and outside the Group. Internal
support was provided by the Group
HR Director (supported by other members of
the HR department as appropriate) and the
Company Secretary. The Chief Executive was
invited to attend meetings where appropriate.
No individual was present when matters
relating to their own remuneration
were discussed.
Following a competitive tender process,
New Bridge Street (NBS) was appointed by
the Committee in 2011 to act as its
independent adviser. NBS is a trading name of
Aon Hewitt Limited, which is a subsidiary of
Aon plc. Fees are normally charged on a time
spent basis, with estimates provided in
advance for particular projects. The total fees
paid to NBS in respect of its services to the
Committee during the year were £100,277
plus VAT. NBS also provided advice to the
Company during the year in relation to the
implementation of the all employee share
schemes and long term incentive plan and on
remuneration arrangements within GLS. NBS
is a signatory to the Remuneration
16 Average of all employees.
17 Moya Greene joined in July 2010.
68
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 How will the Directors’ remuneration policy be applied in practice?
This section sets out how the remuneration policy is currently being applied.
Cash salary
The current salary for Moya Greene is £498,000. This is unchanged since her appointment to the
Company in July 2010.
Subject to approval of the Policy Report at the AGM, Matthew Lester’s salary will increase by
six per cent to £454,065. This increase will take effect from the start of the financial year
(31 March 2014). This is the first increase since he joined the Company in November 2010.
Pension and benefits
As set out in the policy table
Annual bonus
LTIP – long term performance share awards
The annual bonus opportunity for strong and exceptional performance is unchanged at 60 and
100 per cent of salary respectively. The forward looking targets are deemed to be commercially
sensitive but they will be disclosed retrospectively in next year’s remuneration report.
The first grant of awards under the 2014 LTIP will be made in July 2014, subject to shareholder
approval. Performance metrics will be: earnings per share (50 per cent); growth in operating
profit margin (35 per cent) and relative total shareholder return (TSR) (15 per cent).
A sliding scale of challenging adjusted EPS targets will be set. 12.5 per cent of the total award will
vest at the threshold EPS target and 50 per cent of the total award will vest at the exceptional
EPS target. The EPS range for the 2014 awards is still being finalised and will be released in a
public announcement in advance of the AGM.
The targets set for the operating profit margin before transformation costs performance
condition are considered by the Board to be commercially sensitive. However, they will be
disclosed retrospectively at the end of the performance period. A sliding scale of targets has been
set with 8.75 per cent of the total award vesting at the threshold margin increasing to 35 per cent
of the total award vesting for achievement of the exceptional margin.
The relative TSR performance target will compare the Company’s TSR against other companies in
the FTSE 100 index (excluding mining and financial companies). If Royal Mail’s TSR performance
is ranked at the middle of the group, 7.5 per cent of the total award will vest, increasing to full
vesting (15 per cent of the total award) if performance is in the top quartile of FTSE 100 companies.
Chairman & Non-Executive Director fees
The fee for the Chairman and fee policy for the Non-Executive Directors have been reviewed and
the fees for 2014-15 are set out below:
Mark Higson
Chairman - £210,000
Base Board fee - £45,000
Additional fees for Chairing the Audit or Remuneration Committee - £15,000
Additional fees for Chairing the Pensions Committee - £10,000
Additional fee for the role of Senior Independent Director – £10,000
As announced on 13 January 2014, Mark Higson will be standing down from the Board and will
cease employment with the Company on 24 July 2014. He continues to receive salary, benefits
and pension up until the date of his departure 24 July, when he will receive a payment in lieu
of the remainder of his notice period (just over eight months), limited to base salary only. Mark
will be eligible for a pro-rata bonus for 2014-15, which will be paid (subject to performance) in
June 2015. As he is a good leaver as defined in the LTIP rules, outstanding LTIP awards will pay
out, subject to performance and pro-rating, on the normal dates. He will be eligible to benefit
from outplacement services paid for by the Company and the Company will reimburse legal costs.
Approved by the Board on 6 June and signed by
Orna Ni-Chionna
Chair, Remuneration Committee
69
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Consolidated financial statements
Consolidated income statement1
Consolidated statement of comprehensive income2
Consolidated statement of cash flows2
Consolidated balance sheet3
Consolidated statement of changes in equity2
Core notes to the consolidated financial statements
1. Basis of preparation
2. Segment information
3. Transformation costs
4. Specific items before taxation
5. Net finance costs and net debt
6. Taxation
7. Cash flow
8. Employee benefits − pensions
9. Notional earnings per share
10. Organisation structure and share capital changes
11. Share-based payment
Other notes – income statement
12. People information
13. Operating costs
Other notes – financial assets, financial liabilities and hedging programmes
14. Financial assets and liabilities − summary and management of financial risk
15. Cash and cash equivalents
16. Loans and borrowings
17. Financial liabilities – net and gross maturity analysis
18. Financial assets and liabilities − additional analysis
19. Hedging programmes
Other notes – balance sheet
20. Provisions
21. Property, plant and equipment
22. Goodwill
23. Intangible assets
24. Investments in associates
25. Current trade and other receivables
26. Current trade and other payables
27. Issued share capital and reserves
28. Commitments
29. Related party information
Significant accounting policies
Group five year summary (unaudited)
Statement of Directors’ responsibilities in respect of the Group financial statements
Independent Auditor’s Report to the members of Royal Mail plc
1 For the 52 weeks ended 30 March 2014, 52 weeks ended 24 March 2013 and 53 weeks ended 31 March 2013.
2 For the 52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013.
3 At 30 March 2014 and 31 March 2013.
70
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Consolidated income statement
For the 52 weeks ended 30 March 2014, 52 weeks ended 24 March 2013
and 53 weeks ended 31 March 2013
52 weeks ended 30 March 2014
52 weeks ended 24 March 2013
Notes
Reported1
£m
Specific
items2
£m
Excluding
specific
items
£m
Adjusted3
(unaudited)
£m
Specific
items2
(unaudited)
£m
Excluding
specific
items
(unaudited)
£m
Continuing operations
Revenue
Operating costs
People costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items:
Royal Mail Pension Plan amendment
Transaction-related costs
Employee Free Shares costs
Business-related costs
Operating profit/(loss)
Non-operating specific items:
Profit on disposal of property, plant and equipment
Profit on disposal of associate undertaking
Earnings before interest and taxation
Finance costs
Finance income
Net pension interest (non-operating specific item)
Profit/(loss) from continuing operations before taxation
Taxation (charge)/credit
Profit for the period from continuing operations
Discontinued operations:
Profit after taxation for the period from Post Office Limited
Profit for the period
Profit for the period attributable to:
Equity holders of the parent Company
Non-controlling interests
2/3
12
3
4
4
4
4
4
4
5
5
4/8(c)
6
9,456
(8,785)
(5,282)
(1,869)
(1,051)
(583)
671
(241)
430
1,350
(28)
(94)
(15)
1,643
19
2
1,664
(71)
4
69
1,666
(386)
1,280
–
1,280
–
–
–
–
–
–
–
–
–
9,456
(8,785)
(5,282)
(1,869)
(1,051)
(583)
671
(241)
430
1,350
(28)
(94)
(15)
1,213
19
2
1,234
–
–
69
1,303
(289)
1,014
–
1,014
–
–
–
–
430
–
–
430
(71)
4
–
363
(97)
266
–
266
263
3
9,146
(8,548)
(5,077)
(1,771)
(1,047)
(653)
598
(195)
403
–
(10)
–
(67)
326
4
–
330
(104)
27
30
283
246
529
–
529
525
4
–
–
–
–
–
–
–
–
–
(10)
–
(67)
(77)
4
–
(73)
–
22
30
(21)
336
315
–
315
315
–
9,146
(8,548)
(5,077)
(1,771)
(1,047)
(653)
598
(195)
403
–
–
–
–
403
–
–
403
(104)
5
–
304
(90)
214
–
214
210
4
1,277
3
1,014
–
9
Notional earnings per share:
Basic and diluted – continuing operations
Basic and diluted – total Group
59.4p
59.6p
Reported – prepared in accordance with International Financial Reporting Standards (IFRSs), requiring Post Office Limited (POL) to be consolidated up until its transfer to Royal
Mail Holdings plc on 1 April 2012.
Specific items – see note 1 ‘Basis of preparation’.
Adjusted – Reported 2012-13 results adjusted to exclude the consolidation of POL up to 1 April 2012 and the 53rd week’s additional revenue and costs. In addition, £32 million
of POL separation costs taken to equity in the Reported basis are taken through the income statement in the Adjusted basis. See note 1 ‘Basis of preparation’.
101.4p
101.4p
127.7p
127.7p
21.0p
21.0p
26.3p
26.3p
31.5p
31.5p
52.5p
52.5p
1
2
3
53 weeks
ended
31 March
2013
Reported1
£m
9,279
(8,644)
(5,147)
(1,785)
(1,052)
(660)
635
(195)
440
–
(10)
–
(47)
383
16
–
399
(104)
27
30
352
246
598
2
600
596
4
71
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Consolidated statement of
comprehensive income
For the 52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013
Profit for the period from continuing operations
Other comprehensive (expense)/income for the period:
Items that will not be subsequently reclassified to profit or loss:
Amounts relating to pensions accounting
IFRIC 14 adjustment relating to pension surplus
Remeasurements – defined benefit schemes’ assets/liabilities
Taxation on above items
Items that may be subsequently reclassified to profit or loss:
Foreign exchange translation differences
Designated cash flow hedges
Losses on cash flow hedges deferred into equity
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
Taxation on above items
Release of gains held in equity on disposal of pension escrow gilts
Total comprehensive income for the period
Total comprehensive income for the period attributable to:
Equity holders of the parent Company
Non-controlling interests
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
1,280
598
Notes
8
8(c)
6
6
5
(344)
(8)
(453)
117
(12)
(19)
(24)
4
–
1
–
905
902
3
(439)
(5)
(246)
(188)
(5)
2
(1)
2
(1)
2
(22)
134
130
4
72
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Consolidated statement of cash flows
For the 52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013
The consolidated statement of cash flows for the 52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013 has been prepared
on a Reported basis in accordance with IFRSs. The comparative information for 2012-13 is also presented on a non-GAAP basis, which
excludes the Group’s former POL subsidiary. The only difference between the Reported and non-GAAP presentation is the £820 million
cash which belonged to POL, transferred to Royal Mail Holdings plc (subsequently renamed Postal Services Holding Company Limited) on
1 April 2012.
Cash flow from operating activities
Operating profit before transformation costs
Adjustment for:
Depreciation
Amortisation
Share of post-tax profit from associates
EBITDA before transformation costs
Working capital movements
Decrease in inventories
Decrease in receivables
Increase in payables
Net increase in derivative assets
Decrease in provisions
Difference between pension costs charged in operating profit and pension cash flows
Cash cost of transformation operating expenditure1
Cash cost of operating specific items
Cash inflow from operations
Income taxation paid
Net cash inflow from operating activities
Cash flows from investing activities:
Dividend received from associate undertaking
Finance income received
Proceeds from sale of property, plant and equipment (non-operating specific item)
Proceeds from sale of associate undertaking (non-operating specific item)
Purchase of property, plant and equipment1
Transformation investment – capital expenditure
Non-transformation investment – capital expenditure
Acquisition of business1
Purchase of intangible assets (software)1
Payment of deferred consideration in respect of prior years’ acquisitions1
Net outflow from transfer of Post Office Limited to Royal Mail Holdings plc
Net sale of financial assets investments (non-current)
Net sale of financial assets investments (current)
Net cash outflow from investing activities
Net cash inflow/(outflow) before financing activities
Cash flows from financing activities:
Finance costs paid on refinancing of loan facilities
Other finance costs paid
Payment of capital element of obligations under finance lease contracts
Cash received on sale and leasebacks
New loans
Repayment of borrowings
Net cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of foreign currency 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
1
Items included in total investment – see note 7.
52 weeks
2014
Reported
£m
53 weeks
2013
Non-GAAP
£m
53 weeks
2013
Reported
£m
Notes
671
635
635
21
23
24
24
15
241
33
(3)
942
83
2
81
19
(2)
(17)
58
(201)
(35)
847
(38)
809
2
4
33
3
(341)
(83)
(258)
(2)
(69)
(4)
–
–
–
(374)
435
(45)
(37)
(73)
109
600
(973)
(419)
16
(1)
351
366
238
43
(1)
915
142
8
25
136
(15)
(12)
(3)
(230)
(26)
798
(37)
761
–
5
52
–
(388)
(177)
(211)
(3)
(41)
(3)
–
129
30
(219)
542
–
(49)
(74)
58
–
(600)
(665)
(123)
1
473
351
238
43
(1)
915
142
8
25
136
(15)
(12)
(3)
(230)
(26)
798
(37)
761
–
5
52
–
(388)
(177)
(211)
(3)
(41)
(3)
(820)
129
30
(1,039)
(278)
–
(49)
(74)
58
–
(600)
(665)
(943)
1
1,293
351
73
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Consolidated balance sheet
At 30 March 2014 and 31 March 2013
Non-current assets
Property, plant and equipment
Leasehold land payment
Goodwill (mainly investment in GLS)
Intangible assets (mainly software)
Investments in associates
Financial assets − pension escrow investments
− derivatives
Retirement benefit asset – net of IFRIC 14 adjustment
Other receivables
Deferred taxation assets
Non-current assets held for sale
Current assets
Inventories
Trade and other receivables
Financial assets − derivatives
− short-term deposits
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Financial liabilities – obligations under finance leases
– derivatives
Income taxation payable
Provisions
Non-current liabilities
Financial liabilities − interest bearing loans and borrowings
− obligations under finance leases
− derivatives
Provisions
Other payables
Deferred taxation liabilities
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Other reserves
Equity attributable to parent Company
Non-controlling interests
Total equity
Notes
21
22
23
24
14/18
14/18
8
6
25
14/18
14/18
14/15/18
26
14/17/18
14/17/18
20
14/16/17/18
14/17/18
14/17/18
20
6
27
At 30
March
2014
Reported
£m
At 31
March
2013
Reported
£m
1,989
3
197
195
4
20
3
1,723
13
9
4,156
3
22
926
2
1
366
1,317
5,476
(1,652)
(87)
(12)
(14)
(173)
(1,938)
(600)
(255)
(5)
(95)
(31)
(151)
(1,137)
(3,075)
2,401
10
2,332
52
2,394
7
2,401
1,916
3
196
139
3
20
3
825
8
112
3,225
2
24
1,004
9
1
351
1,389
4,616
(1,611)
(79)
(2)
(14)
(119)
(1,825)
(973)
(226)
(1)
(127)
(36)
(23)
(1,386)
(3,211)
1,405
–
1,318
83
1,401
4
1,405
The financial statements were approved and authorised for issue by the Board of Directors on 6 June 2014 and were signed on its behalf by:
Moya Greene
Chief Executive Officer
Matthew Lester
Chief Finance Officer
74
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Consolidated statement of changes in equity
For the 52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013
Reported at 26 March 2012
Profit for the period from
continuing operations
Other comprehensive income/(expense)
for the period
Capital reduction
Pension deficit transfer to HM
Government on 1 April 2012
(note 8(c))
Loss on transfer of subsidiary to parent
Company (discontinued operation)
Reported at 31 March 2013
Profit for the period from
continuing operations
Other comprehensive expense for
the period
Share capital issue (note 10)
Employee Free Shares
issue1 (note 11)
Reported at 30 March 2014
Share
premium
£m
3,784
–
–
(3,784)
–
–
–
–
–
–
–
–
Share
capital
Retained
earnings
£m
£m
–
–
–
–
–
–
–
–
10
–
10
(6,442)
594
(439)
3,784
4,012
(191)
1,318
1,277
(344)
(10)
91
2,332
Financial
assets
reserve
Foreign
currency
translation
reserve
Hedging
reserve
Other
reserves
£m
22
–
(22)
–
–
–
–
–
–
–
–
–
£m
78
–
(5)
–
–
–
73
–
(12)
–
–
61
£m
8
–
2
–
–
–
10
–
(19)
–
–
(9)
£m
47
–
–
–
–
(47)
–
–
–
–
–
–
1 Excludes £3 million National Insurance, charged to the income statement, included in provisions on the balance sheet.
A description of the reserves in the above table is included in note 27.
Equity
holders of
the parent
Non-
controlling
interests
£m
£m
(2,503)
594
(464)
–
4,012
(238)
1,401
1,277
(375)
–
91
2,394
–
4
–
–
–
–
4
3
–
–
–
7
Total
equity
£m
(2,503)
598
(464)
–
4,012
(238)
1,405
1,280
(375)
–
91
2,401
75
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Notes to the consolidated
financial statements
Core notes to the consolidated financial statements
The notes in this section are considered by the Board to be particularly important to a reader of the financial statements.
1. Basis of preparation
2. Segment information
3. Transformation costs
4. Specific items before taxation
5. Net finance costs and net debt
6. Taxation
7. Cash flow
8. Employee benefits – pensions
9. Notional earnings per share
10. Organisation structure and share capital changes
11. Share-based payment
76
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 1. Basis of preparation
This note explains how these Royal Mail plc Group (‘the Group’) consolidated financial statements have been prepared, including details of the
incorporation of Royal Mail plc (‘the Company’), specific items, the adjustment to the comparative year relating to the transfer of Post Office
Limited (POL) to Royal Mail Holdings plc on 1 April 2012, and the adjustment for the 53rd week in 2012-13.
Authorisation of financial statements and statement of compliance with IFRSs
The consolidated financial statements for the 52 weeks ended 30 March 2014 were authorised for issue by the Board on 6 June 2014 and the
balance sheet (as at 30 March 2014) was signed on behalf of the Directors by Moya Greene and Matthew Lester.
The consolidated 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 52 weeks ended 30 March 2014 (2013 53 weeks ended
31 March 2013).
Basis of preparation and accounting
The incorporation of Royal Mail Limited on 6 September 2013, subsequently re-registered as Royal Mail plc (‘the Company’) on 19 September 2013,
has resulted in the Company becoming the immediate and ultimate parent of Royal Mail Group Limited (see note 10 for further details). The
consolidated financial statements are therefore presented for Royal Mail plc and its subsidiaries, whereas the 2012-13 Annual Report and Special
Purpose Financial Statements (Annual Report) and Prospectus in relation to the Initial Public Offering of Royal Mail plc, dated 27 September 2013
(‘the Prospectus’) were in respect of consolidated Royal Mail Group Limited. Accordingly, all references to the 2012-13 Annual Report and
Prospectus in this document relate to the consolidated Royal Mail Group Limited entity.
The Company is incorporated in the United Kingdom (UK) and the financial statements are produced in accordance with the Companies Act 2006
and applicable IFRSs. The UK is the Company’s country of domicile.
The Group consolidated financial statements are presented in Sterling, as that is the currency of the primary economic environment in which the
Group operates, and all values are rounded to the nearest whole million except where otherwise indicated. The consolidated financial statements
have been prepared on an historic cost basis, except for pension assets and derivative financial instruments, which have been measured at
fair value.
The results of POL have been consolidated and disclosed as a ‘discontinued operation’ in the income statement for the period 26 March 2012 up
to 1 April 2012, at which point POL was transferred to Royal Mail Holdings plc (subsequently renamed Postal Services Holding Company Limited).
Presentation of results
The Group’s significant accounting policies can be found after the notes to these Group financial statements.
The consolidated financial statements have been prepared in accordance with IFRSs (i.e. on a Reported basis). The income statement and cash
flow statement also include non-GAAP adjustments in respect of the following:
Specific items
The Group previously disclosed items that in management’s judgement needed to be shown separately by virtue of their nature as ‘exceptional
items’. There are, however, other items of income/expense, after ‘operating profit after transformation costs’ that management now discloses
separately, which do not ordinarily meet the definition of ‘exceptional items’ (e.g. finance income on the sale of pension escrow gilts, net pension
interest and elements of taxation). The Group has decided, therefore, not to continue using the ‘exceptional items’ definition and instead to refer
to such items of income/expense as ‘specific items’.
This new definition has been introduced on the basis that the financial results excluding these specific items are consistent with how financial and
operational performance is measured by management in providing a meaningful analysis of the Group’s trading results and cash flows. These
specific items may not be comparable with similarly-termed measures used by other companies.
Items which are classified as specific are: RMPP (Royal Mail (RM) section – see note 8) amendment credit, transaction-related costs, Employee
Free Shares costs, certain costs not associated with the transformation of the operational network, historical employment costs, potential
industrial diseases claims costs, certain property impairments, all profits from disposals of property and associate undertakings, net pension
interest, the gain created on the sale of pension escrow investments, plus the related taxation effects of these items. Taxation specific items
include the impact of the pension transfer pursuant to the Postal Services Act 2011 and the impact of changes in taxation law.
Impact of 53rd week in 2013
The 2012-13 comparative year was a 53 week year and, to provide meaningful comparisons of revenues and costs, the income statement also
includes comparative results on an Adjusted 52 week basis. The adjustment eliminates the 53rd week’s revenue and incremental operating costs
associated with that revenue.
GLS reports results for a 52 week year ending 31 March. No adjustment has therefore been made for GLS.
Transfer of Post Office Limited (POL)
The 2012-13 comparative Reported results in these financial statements relate to the 53 week year ended 31 March 2013 and include the
full consolidated results of the Group, including the Group’s former subsidiary, POL, for the period 26 March 2012 to 31 March 2012. POL
was subsequently transferred to Royal Mail Holdings plc on 1 April 2012.
77
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 1. Basis of preparation (continued)
The 2012-13 comparative Adjusted results in the income statement exclude POL, and are consistent with those presented in the Prospectus,
with an adjustment to eliminate the 53rd week’s revenue and costs (£37 million profit impact – see above and page F66 in the Prospectus). In
excluding POL from these comparative results, costs incurred by the Group relating to the transfer of POL (£20 million IT separation costs and
£12 million loss on transfer of properties) were deemed, for the purpose of providing Royal Mail Group excluding POL financial information, to be
external, third party costs and were taken directly to the income statement.
On a Reported basis, these £32 million costs of POL separation have been treated, as required by IFRSs, as transactions with the parent (at the
time Royal Mail Holdings plc) and taken directly through equity (included in ‘Loss on transfer of subsidiary to parent Company (discontinued
operation)’ in the Consolidated statement of changes in equity), not through the income statement. Consequently, the Reported ‘profit for the
period from continuing operations’ is £32 million higher than that in the Adjusted results, in addition to the £37 million higher profit impact of the
53rd week as explained above.
The comparative information in the consolidated statement of cash flows also includes non-GAAP disclosures which exclude the cash position of
POL up to the date of its transfer to Royal Mail Holdings plc. The Directors believe that this presentation provides meaningful comparisons of cash
flows and is consistent with how the cash flow statement was presented in the 2012-13 Annual Report and the Prospectus.
Other than the ‘discontinued operation’ disclosure in the income statement and the Reported cash flows in the cash flow statement, on the basis
of materiality, no other disclosures (e.g. segment reporting) in respect of POL have been made in these financial statements, for the period that
it was still part of the Group.
Merger transaction of Royal Mail plc and Royal Mail Group Limited
As part of the Group reorganisation prior to the Initial Public Offering of shares, the Company acquired the entire share capital of Royal Mail Group
Limited through issuance of its shares to the then parent Company, Royal Mail Holdings plc (subsequently renamed Postal Services Holding
Company Limited). As there were no changes to the shareholder group at the time of this transaction and Royal Mail plc is not a business, this
transaction did not classify as a business combination as defined under IFRS 3 ‘Business Combinations’. The consolidated financial statements
of Royal Mail plc have therefore been prepared as a continuation of the existing Group.
Going concern
The Group’s business activities, strategy and performance are outlined on pages 2 to 37.
In assessing the going concern status of the Group, the Directors are required to look forward by a minimum of 12 months from the end of the
reporting year, 30 March 2014, to ensure that there is sufficient headroom (determined by available cash and cash equivalents plus available
unrestricted unused committed facilities) to enable the Group to pay its creditors as they fall due.
Notes 5 and 16 of these financial statements provide details of the Group’s current loan structure and level of borrowings at 30 March 2014.
The Group also has finance lease obligations of £342 million at 30 March 2014 as shown in note 28 to the financial statements.
Letters of Credit of £112 million have been provided by the Group in support of certain leasing and insurance obligations. However, as these are
currently uncollateralised, they are not included as part of reported net debt. Further details are provided in the Financial review on page 27.
The Directors have undertaken a review of, and expect to continue to review, the Group’s cash headroom over a longer timeframe than the
minimum requirement, under various downside scenarios.
The Directors have concluded from their review that, under the various downside scenarios, sufficient cash headroom exists for the foreseeable
future and, accordingly, the consolidated financial statements have been prepared on a going concern basis.
2. Segment information
The Group’s revenue, certain costs and profit before financing and taxation are segmented in this note, aligned with how the business is
managed.
Business unit
UK Parcels, International & Letters (UKPIL)
UK operations
General Logistics Systems (GLS)
Other European operations
Other
UK operations
78
Main statutory entities
Royal Mail Group Limited
Royal Mail Estates Limited
Royal Mail Investments Limited
GLS Germany GmbH & Co. OHG
GLS Italy S.p.A.
GLS France S.A.S.
Romec Limited (51% owned subsidiary)
NDC 2000 Limited (51% owned subsidiary)
Quadrant Catering Ltd (51% owned associate)
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 2. Segment information (continued)
The Group is structured on a geographic business unit basis and these business units report into the Chief Executive’s Committee and the Royal
Mail plc Board. Each of these units has discrete revenue, costs, profit, cash flows, assets and people. Therefore, full and complete financial
information is prepared and reviewed on a regular basis and compared with both historical and budget/forecast information as part of a rigorous
performance management process.
In addition to providing segmental disclosures for profit after taxation, consistent with the requirements of accounting standards and how the
Group is managed, the information below also includes details of free cash flow and EBITDA before transformation costs.
The majority of inter-segment revenue relates to the provision of facilities management and catering services to UKPIL. Trading between UKPIL
and GLS is not material.
Transfer prices between the segments are set on a basis of charges reached through commercial negotiation with the respective business units
that form part of the segments.
Reported 52 weeks ended 30 March 2014
Continuing operations
External revenue
Inter-segment revenue
Total segment revenue
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items:
Royal Mail Pension Plan amendment
Transaction-related costs
Employee Free Shares costs
Business-related costs
Operating profit
Non-operating specific items:
Profit on disposal of property, plant and equipment
Profit on disposal of associate undertaking
Earnings before interest and taxation
Net finance costs
Net pension interest (non-operating specific item)
Profit before taxation
Taxation – specific items
– other
Profit for the period after taxation
EBITDA before transformation costs
Free cash flow2
1 Trading between GLS and UKPIL is not material.
2 Free cash flow is a non-GAAP measure used by management.
UK operations
UKPIL
£m
7,787
–
7,787
550
(241)
309
1,350
(24)
(94)
(15)
1,526
19
2
1,547
Other
£m
18
176
194
13
–
13
–
–
–
–
13
–
–
13
not reported
at this level
10
791
not reported
at this level
Total
£m
7,805
176
7,981
563
(241)
322
1,350
(24)
(94)
(15)
1,539
19
2
1,560
(70)
69
1,559
(289)
(56)
1,214
801
338
Other
European
operations
GLS
£m
1,651
–1
1,651
108
–
108
–
(4)
–
–
104
–
–
104
3
–
107
–
(41)
66
141
60
Total
£m
9,456
176
9,632
671
(241)
430
1,350
(28)
(94)
(15)
1,643
19
2
1,664
(67)
69
1,666
(289)
(97)
1,280
942
398
79
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
2. Segment information (continued)
Reported 53 weeks ended 31 March 2013
Continuing operations
External revenue
Inter-segment revenue
Total segment revenue
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items:
Transaction-related costs
Business-related costs
Operating profit
Non-operating specific items:
Profit on disposal of property, plant and equipment
Earnings before interest and taxation
Net finance costs
Net pension interest (non-operating specific item)
Profit before taxation
Taxation – specific items
– other
Profit for the period after taxation
EBITDA before transformation costs
Free cash flow2
1 Trading between GLS and UKPIL is not material.
2 Free cash flow is a non-GAAP measure used by management.
The following amounts are included within operating profit before transformation costs:
Reported 52 weeks ended 30 March 2014
Depreciation
Amortisation of intangible assets (mainly software)
Share of post-tax profit from associates
Reported 53 weeks ended 31 March 2013
Depreciation
Amortisation of intangible assets (mainly software)
Share of post-tax profit from associates
80
UK operations
UKPIL
£m
7,766
–
7,766
526
(195)
331
(10)
(47)
274
16
290
Other
£m
15
148
163
8
–
8
–
–
8
–
8
not reported
at this level
8
775
not reported
at this level
Other
European
operations
GLS
£m
1,498
−1
1,498
101
–
101
–
–
101
–
101
5
–
106
–
(33)
73
132
25
Total
£m
7,781
148
7,929
534
(195)
339
(10)
(47)
282
16
298
(82)
30
246
336
(57)
525
783
309
Total
£m
9,279
148
9,427
635
(195)
440
(10)
(47)
383
16
399
(77)
30
352
336
(90)
598
915
334
UK operations
UKPIL
£m
(212)
(29)
–
Other
£m
–
–
3
Total
£m
(212)
(29)
3
Other
European
operations
GLS
£m
(29)
(4)
–
Total
£m
(241)
(33)
3
UK operations
UKPIL
£m
(210)
(39)
–
Other
£m
(1)
−
1
Other
European
operations
GLS
£m
(27)
(4)
–
Total
£m
(211)
(39)
1
Total
£m
(238)
(43)
1
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
3. Transformation costs
Transformation costs are included within the cost base and profit that management monitors to assess financial and trading performance.
These costs relate directly to the transformation programme that has spanned several years and therefore warrant separate disclosure as
shown below.
Voluntary redundancy – management reorganisation programme
Voluntary redundancy – other
Project and property costs (including £2m of management reorganisation programme costs)
Business transformation payments
Total transformation costs
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(102)
(14)
(108)
(17)
(241)
–
(78)
(95)
(22)
(195)
The £17 million business transformation payments represent payments linked to the achievement of key milestones in transforming the network,
as part of the Business Transformation Agreement 2010.
4. Specific items before taxation
These are costs which fall outside the Group’s normal trading activity and which in management’s view need to be disclosed separately to
provide greater visibility of the trading results of the business. This note also includes Adjusted (non-GAAP) comparative information which
includes the costs of POL separation (see note 1 for further details).
Operating specific items:
Royal Mail Pension Plan amendment
Transaction-related costs
Employee Free Shares costs
Business-related costs
Potential industrial diseases claims
Impairments
Other
Total operating specific items
Non-operating specific items:
Profit on disposal of property, plant and equipment
Profit on disposal of associate undertaking
Finance income-release of gains held in equity on disposal of RMPP (RM section) escrow investments
Net pension interest
Total non-operating specific items
Total specific items before taxation
52 weeks
2014
Reported
£m
52 weeks
2013
Adjusted
£m
53 weeks
2013
Reported
£m
1,350
(28)
(94)
(15)
7
–
(22)
1,213
19
2
–
69
90
1,303
–
(10)
–
(67)
(28)
(20)
(19)
(77)
4
–
22
30
56
(21)
–
(10)
–
(47)
(28)
(20)
1
(57)
16
–
22
30
68
11
Other operating specific items of £22 million (2013 Adjusted £19 million) mainly comprise historical employment costs of £15 million (2013
Adjusted £nil) and £5 million POL separation costs (2013 Adjusted £20 million) relating to facilities management.
Taxation effect of above items
Taxation specific items
Impact of change in taxation law1
Impact of Postal Services Act 20112
52 weeks
2014
Reported
£m
52 weeks
2013
Adjusted
£m
53 weeks
2013
Reported
£m
(301)
12
12
–
(7)
343
–
343
(7)
343
–
343
Total
1 A taxation credit was recognised for the remeasurement of deferred taxation balances as a result of the change in UK statutory corporation taxation rates.
2 The taxation credit shown in specific items for 2012-13 reflects the benefit of UK taxation attributes (including prior year taxation losses and deferred capital allowances) not
previously recognised as deferred taxation assets. Deferred taxation assets are recognised only to the extent that the Group is expected to have future taxable profits and
therefore obtain a real taxation saving from future taxation deductions. Following the Postal Services Act 2011 and the transfer of almost all of the RMPP’s historic pension
liabilities and pension assets, expectations of future profitability increased and it became appropriate to recognise a net deferred taxation asset in the UK. In addition to this one-off
material deferred taxation credit, the Group also reported a one-off benefit from the utilisation of prior year taxation losses in 2012-13.
(289)
336
336
81
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 5. Net finance costs and net debt
This note provides details of:
• Interest payable on loans and finance lease obligations and interest received from investments and loans. This analysis excludes net
pension interest which is a non-cash item and is derived to comply with the requirements of the relevant accounting standard IAS 19; and
• Net debt − a non-GAAP measure which shows the Group’s overall debt position, by netting the value of financial liabilities (excluding
derivatives) against its cash and other liquid assets. The balance sheet shows these items gross within the different categories of assets
and liabilities.
Net finance costs
Unwinding of discount relating to industrial diseases claims provision
Interest payable on financial liabilities
HM Government facilities:
Loans and borrowings
Unused facility fees
Other facility fees
Syndicated bank loan facility:
Loans and borrowings
Unused facility fees
Other facility fees
Finance leases
Finance costs
Release of gains held in equity on disposal of pension escrow gilts – specific item
Interest receivable on other financial assets
Finance income
Net finance costs
Net debt
Obligations under finance leases
Interest-bearing loans and borrowings
Obligations under finance leases
Cash and cash equivalents and other financial assets:
Cash at bank and in hand
Cash equivalent investments (short-term bank and local authority deposits/money market
fund investments) and other financial assets
Pension escrow investments (RMSEPP)
Total net debt
Balance sheet category
Current liabilities
Non-current liabilities
Non-current liabilities
Current assets
Current assets
Non-current assets
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(3)
(68)
(47)
(2)
(3)
(3)
(1)
(2)
(10)
(71)
–
4
4
(67)
(1)
(103)
(82)
(5)
(3)
–
–
–
(13)
(104)
22
5
27
(77)
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
(87)
(600)
(255)
(942)
51
316
20
(555)
(79)
(973)
(226)
(1,278)
136
216
20
(906)
82
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 5. Net finance costs and net debt (continued)
Excluding the balances relating to POL, transferred to Royal Mail Holdings plc on 1 April 2012, net debt has decreased by £351 million during the
year ended 30 March 2014 and by £280 million during the year ended 31 March 2013 as shown below.
Net debt brought forward at 1 April 2013 and 26 March 2012
Adjustment for transfer of POL to Royal Mail Holdings plc on 1 April 2012
Net debt brought forward excluding the POL subsidiary
Free cash flow
Finance costs paid on refinancing of loan facilities
Increase in loans and borrowings (roll-up interest on 12.0 per cent facility)
Increase in new finance lease obligations (non-cash)
Foreign currency exchange impact on cash and cash equivalents
Net debt carried forward at 30 March 2014 and 31 March 2013
2014
Reported
£m
2013
Reported
£m
(906)
–
(906)
398
(45)
–
(1)
(1)
(555)
(753)
(433)
(1,186)
334
–
(51)
(4)
1
(906)
At the date of the Company’s listing on the London Stock Exchange, £973 million of HM Government loans were repaid and £600 million of
Syndicated bank loans were drawn down. Below is a summary of loans and borrowings at the year end, the respective average interest rates,
and facilities available.
Syndicated bank loan facilities
Term Loan A
Term Loan B
Revolving credit facilities
Total
At 31 March 2014 Reported
Loans and
borrowings
£m
300
300
–
600
Further
committed
facility
£m
–
–
800
800
Total
facility
£m
300
300
800
1,400
Average
interest
rate of
loan
drawn
down
%
Basis of
interest
rate at
30 March
2014
– LIBOR
plus
%
Average
maturity
date of
loan drawn
down
year
Average
maturity
date of
loan
facility
year
1.5
1.4
–
1.4
1.00
0.90
0.85
2018
2016
–
2017
2018
2016
2018
2018
The Group’s blended interest rate on loans and finance leases over the next five years is forecast to be as follows:
Current average interest rate on drawn down loans (see table above)
Cost of fixing interest rates on £150 million of Term Loan A
Market expectation of interest rate rises over the next five years on remaining loans
Add arrangement and commitment fees
Forecast blended interest rate on loans and finance leases over the next five years
Interest
rate %
1.4
0.3
0.9
2.6
0.9
3.5
Interest rates on £150 million of Term Loan A have been fixed over the life of the loan facility by entering into interest rate swaps as part of the
Group’s interest rate hedge programme.
As finance leases are currently at a similar interest rate to loans, the impact of finance leases on the blended interest rate is not material.
Under the previous HM Government facilities, the equivalent blended interest rate was 8.8 per cent.
83
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 6. Taxation
This note provides details about current taxation charges/(credits) on profit and deferred taxation charges/(credits) relating to the impact
of past events on expected future taxation. The note also provides the taxation impact of specific items.
Taxation (charged)/credited in the income statement
Current income taxation:
Current UK income taxation charge
Foreign taxation
Current income taxation charge
Amounts (under)/over provided in earlier years
Total current income taxation charge
Deferred income taxation:
Effect of change in taxation rates
Relating to origination and reversal of temporary differences
Amounts over provided in previous years
Taxation (charge)/credit in the consolidated income statement
Taxation on non-GAAP, specific items:
Taxation (charge)/credit relating to specific items
Taxation relating to items charged or credited to other comprehensive income
Deferred taxation
Actuarial gains/(losses) on defined benefit pension schemes
Net gains on revaluation of cash flow hedges
Total credit/(charge) in the consolidated statement of other comprehensive income
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(1)
(34)
(35)
(2)
(37)
12
(368)
7
(386)
(11)
(28)
(39)
1
(38)
–
284
–
246
(289)
336
117
1
118
(188)
2
(186)
Reconciliation of the total taxation (charge)/credit
Reconciliations between the taxation (charge)/credit and the product of accounting profit multiplied by the UK rate of corporation taxation for the
52 weeks ended 30 March 2014 and 53 weeks ended 31 March 2013 are as follows:
Profit before taxation
At UK standard rate of corporation taxation of 23% (2013 24%)
Effect of higher taxes on overseas earnings
Taxation over provided in prior years
Non-taxable income
Non-deductible expenses
Associate’s profit after taxation charge included in Group pre-taxation profit
Net (increase)/decrease in taxation charge resulting from (derecognition)/recognition of deferred taxation assets
Effect of change in taxation rates
Taxation (charge)/credit in the income statement
52 weeks
2014
Reported
£m
1,666
(383)
(2)
5
–
(10)
1
(9)
12
(386)
53 weeks
2013
Reported
£m
352
(84)
(1)
1
9
(11)
–
332
–
246
84
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 6. Taxation (continued)
Deferred taxation
Deferred taxation by balance sheet category
Liabilities
Accelerated capital allowances
Pensions temporary differences
Employee Free Shares Offer
Goodwill qualifying for taxation allowances
Deferred taxation liabilities
Assets
Deferred capital allowances
Provisions and other
Losses available for offset against future taxable income
Hedging derivatives temporary differences
Deferred taxation assets
Net deferred taxation (liability)/asset (see below)
Consolidated income statement
Deferred taxation – balance sheet presentation
Liabilities
GLS group
Net UK position
Deferred taxation liabilities
Assets
GLS group
Net UK position
Deferred taxation assets
Net deferred taxation (liability)/asset
Balance sheet
Income statement
At 30 March
2014
Reported
£m
At 31 March
2013
Reported £m
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(1)
(339)
(65)
(28)
(433)
169
30
90
2
291
(142)
–
(222)
–
(23)
(245)
244
37
51
2
334
89
–
(235)
(65)
(5)
(76)
(8)
40
–
1
(34)
–
(6)
244
33
46
−
(349)
284
Balance sheet
At 30 March
2014
Reported
£m
At 31 March
2013
Reported £m
(30)
(121)
(151)
9
–
9
(142)
(23)
–
(23)
7
105
112
89
Effective taxation
The effective taxation rate on reported profit for the Group is 23 per cent.
GLS pays taxation in a number of territories, with the majority of its profits in the period to 30 March 2014 earned in territories where the
taxation rate is above the UK statutory taxation rate. Certain subsidiaries, notably GLS France, are not at this stage able to recognise taxation
credits on losses made during the period and this contributes to GLS having a higher effective taxation rate for the period than the UK business.
Current taxation
Substantially all of the current taxation due for the Group for the period is in respect of GLS.
UK taxable profits in 2013-14 are almost fully covered by a combination of brought forward losses, capital allowance claims and a statutory
deduction in respect of shares allocated to employees under the HM Revenue & Customs (HMRC)-approved Employee Free Shares Offer.
Owing to the above items and the RMPP (RM section) amendment credit, which does not give rise to a current taxation charge, the current
taxation rate for the Group is two per cent.
85
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 6. Taxation (continued)
Deferred taxation
The UK deferred taxation liability is a net amount comprising a number of taxation assets and liabilities which will reverse in future periods. The
UK position has changed from a net deferred taxation asset at 31 March 2013 to a net deferred taxation liability at 30 March 2014, primarily due
to the effects of the Pensions Reform in the year. The pension surplus created as a result of the Pensions Reform gives rise to a deferred taxation
liability that is expected to reverse over a much longer period than the other deferred taxation assets and liabilities. The RMPP (RM section)
amendment credit of £1,350 million, included in profit before taxation, generates the majority of the deferred taxation charge in the income
statement, whilst the decrease in the pension surplus due to actuarial revaluation gives rise to a deferred taxation credit of £117 million in the
consolidated statement of comprehensive income.
A new UK deferred taxation liability arises in 2013-14 in relation to the HMRC-approved Employee Free Shares Offer. As an HMRC-approved
share incentive plan, a full taxation deduction is given for the value of the shares in the period in which they are first allocated to employees,
whereas the accounting charge accrues over the life of the scheme. To the extent that the taxation deduction exceeds UK taxable profits in the
period, the taxation losses carried forward are increased.
The deferred taxation balances within GLS arise in various jurisdictions, with reversal at varying times and rates and so balances in different
jurisdictions are not offset against one another.
Under the Postal Services Act 2011, UK trading losses which arose due to employer’s pension contributions paid which were unused at
31 March 2013 are extinguished. Losses and deferred taxation assets carried forward are stated above, net of the extinguished amount.
At 30 March 2014, the Group had unrecognised deferred taxation assets of £63 million (2013 £66 million) comprising £63 million (2013 £54 million)
relating to taxation losses, mainly in GLS, that are available for offset and £nil (2013 £12 million) relating to other temporary differences.
The Group has capital losses carried forward, the taxation effect of which is £5 million (2013 £4 million) and temporary differences relating to
capital losses of £61 million (2013 £73 million). The Group has rolled over capital gains of £43 million (2013 £53 million); no taxation liability
would be expected to crystallise should the assets into which the gains have been rolled be sold at their residual value, as it is anticipated that
a capital loss would arise.
In the 2012 Autumn Statement, the Chancellor of the Exchequer announced that the main rate of corporation taxation would be 21 per cent
for the year commencing 1 April 2014 and in the March 2013 Budget, he announced that the rate would be further reduced to 20 per cent with
effect from 1 April 2015. Both of these rate changes were included in the Finance Act 2013, which was substantively enacted on 2 July 2013. In
accordance with accounting standards, the effect of these rate reductions on deferred tax balances has been reflected in these accounts. A net
UK deferred taxation liability is recognised and measured at the future rates, dependent on when temporary differences are expected to reverse.
Non-GAAP analysis of taxation (charge)/credit (unaudited)
Below, we present current and deferred taxation between the reported, specific and excluding specific items columns on a 52 week basis only.
The break out of taxation between current and deferred taxation between the specific and excluding specific items columns requires estimation
and assumptions and is non-GAAP information. Management believes that this provides additional information on movements relating to one-off
items and the movements relating to the trading results (which the excluding specific items column represents).
Profit before taxation
Current taxation
Deferred taxation
Profit for the period
52 weeks 2014
52 weeks 2013
Reported
£m
1,666
(37)
(349)
1,280
Specific
items
£m
Excluding
specific items
£m
Adjusted
(unaudited)
£m
1,303
12
(301)
1,014
363
(49)
(48)
266
283
(38)
284
529
Specific
items
(unaudited)
£m
Excluding
specific items
(unaudited)
£m
(21)
-
336
315
304
(38)
(52)
214
The taxation credit shown in the specific items column for 2012-13 reflects the benefit of UK taxation attributes (including prior year taxation
losses and deferred capital allowances) not previously recognised as deferred taxation assets. Deferred taxation assets are recognised only to the
extent that the Group is expected to have future taxable profits and therefore obtain a real taxation saving from future taxation deductions.
Following the Postal Services Act 2011 and the transfer of the historic pension deficit, expectations of future profitability increased and it became
appropriate to recognise a net deferred taxation asset in the UK. In addition to this one-off material deferred taxation credit, the Group also
reported a one-off benefit from the utilisation of prior year taxation losses in 2012-13.
In 2013-14, the current and deferred taxation amounts shown in the excluding specific items column are based on an assumption of what the
taxation charge and allocation would have been, excluding the taxation impact of specific items. For example, excluding the taxation consequences
of the specific items in 2013-14, we would have utilised brought forward losses against taxable profits arising, to the extent available.
86
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
7. Cash flow
The Company uses free cash flow to monitor and manage its cash performance. This measure eliminates inflows/outflows between net debt
items (see note 5) and includes finance cash costs paid. This note provides a reconciliation of ‘net cash inflow/(outflow) before financing
activities’ in the consolidated statement of cash flows to ‘free cash inflow/(outflow)’ which is a non-GAAP measure.
This note also includes non-GAAP information for the 2012-13 comparative year (the only difference between this and the Reported
information being the exclusion of the £820 million POL cash balance on its transfer to Royal Mail Holdings plc – see note 1 Basis of preparation
for further details) and non-GAAP information relating to specific items.
EBITDA before transformation costs (see consolidated statement of cash flows)
Trading working capital movements
Difference between pension costs charged in operating profit and pension cash flows
Total Group ongoing pension costs in the income statement
Total Group cash flows relating to ongoing pension costs
Deficit correction payments
Total investment1
Business transformation payments
Voluntary redundancy
One-off project and property costs
Transformation investment – operating expenditure
Transformation investment – capital expenditure
Total transformation investment
Non-transformation investment – capital expenditure
Taxation paid
Net finance costs paid (excluding finance costs paid on refinancing of loan facilities)
Dividend received from associate undertaking
Underlying cash inflow
Transfer of POL (discontinued operation) to Royal Mail Holdings plc
One-off working capital movements
Cash cost of operating specific items
Proceeds from disposal of property, plant and equipment and associate undertaking (non-operating specific items)
Free cash inflow/(outflow)
1
Total investment is represented by several different line items in the consolidated statement of cash flows.
52 weeks
2014
Reported
£m
53 weeks
2013
Non-GAAP
£m
53 weeks
2013
Reported
£m
942
(57)
58
479
(411)
(10)
(617)
(19)
(71)
(111)
(201)
(83)
(284)
(333)
(38)
(33)
2
257
–
140
(35)
36
398
915
(60)
(3)
434
(409)
(28)
(665)
(55)
(75)
(100)
(230)
(177)
(407)
(258)
(37)
(44)
–
106
–
202
(26)
52
334
915
(60)
(3)
434
(409)
(28)
(665)
(55)
(75)
(100)
(230)
(177)
(407)
(258)
(37)
(44)
–
106
(820)
202
(26)
52
(486)
87
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
7. Cash flow (continued)
Working capital movements
One-off working capital movements:
Buy forward of stamps
Unwinding of prior year buy forward of stamps
Impact of applying VAT to postal products in 2012-13
Unwinding of pension prepayment made in March 2012
Total one-off working capital movements
Trading working capital movements
Total working capital movements
52 weeks
2014
Reported
£m
53 weeks
2013
Non-GAAP
£m
53 weeks
2013
Reported
£m
20
(30)
–
150
140
(57)
83
87
–
75
40
202
(60)
142
87
–
75
40
202
(60)
142
Free cash flow reconciliation
The following analysis provides a reconciliation of ‘net cash inflow/(outflow) before financing activities’ in the consolidated statement of cash flows
and free cash inflow/(outflow).
Net cash inflow/(outflow) before financing activities
Net sale of gilts and Treasury bills (financial asset investments – non-current)
Net sale of bank deposits (financial asset investments – current)
Other finance costs paid
Free cash inflow/(outflow)
8. Employee benefits – pensions
52 weeks
2014
Reported
£m
53 weeks
2013
Non-GAAP
£m
53 weeks
2013
Reported
£m
435
–
–
(37)
398
542
(129)
(30)
(49)
334
(278)
(129)
(30)
(49)
(486)
At 30 March 2014, a pension asset of £1,723 million has been recognised compared with £825 million at 31 March 2013. This increase
mainly reflects the impact of the Pensions Reform as explained further in this note.
Summary pension information
Pension costs:
Ongoing:
UK defined benefit scheme (income statement rates1 20.3%, 18.2%)
UK defined contribution scheme
Total UK ongoing pension costs
Total GLS defined contribution type scheme costs
Total Group ongoing pension costs
Difference between ongoing income statement charge and cash flows (cash flow rates2 17.1% for both years)
Total Group pension cash outflows relating to ongoing pension costs
UK pension schemes – active membership:
UK defined benefit scheme
UK defined contribution scheme
Total
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(448)
(25)
(473)
(6)
(479)
68
(411)
(412)
(17)
(429)
(5)
(434)
25
(409)
At 30 March
2014
’000
At 31 March
2013
’000
106
36
142
112
33
145
1
2
This service cost is charged to the income statement. It represents the cost (as a percentage of pensionable payroll) of the increase over the year in the defined benefit obligation
due to members earning one more year of pension benefits. It is calculated in accordance with IAS 19 and is based on market yields (high quality corporate bonds and inflation) at
the beginning of the Company’s reporting year.
This is the employer contribution rate which forms part of the payroll expense and is paid into the Royal Mail Pension Plan (RMPP) (RM section). The contribution rate is set
following each actuarial funding valuation, usually every three years. These actuarial valuations are required to be carried out on assumptions determined by the Trustee and
agreed by Royal Mail.
88
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 8. Employee benefits – pensions (continued)
UK Defined Contribution Scheme
The Group operates the Royal Mail Defined Contribution Plan, which was launched in April 2009 and is open to employees who joined the
Company from 31 March 2008 following closure of the Royal Mail Pension Plan (RMPP) to new members.
UK Defined Benefit schemes
Royal Mail Group Limited had one of the largest defined benefit pension schemes in the UK (based on membership and assets), called the RMPP.
On 1 April 2012 (one week into the 2012-13 reporting year) – after the granting of State Aid approval by the European Commission to HM
Government on 21 March 2012 – almost all of the historic pension liabilities and pension assets of RMPP, built up until 31 March 2012, were
transferred to a new HM Government pension scheme, the Royal Mail Statutory Pension Scheme (RMSPS).
On this date, RMPP was also sectionalised, with Royal Mail Group Limited and POL each responsible for their own sections from
1 April 2012 onwards.
The transfer left the Royal Mail section of the RMPP (RM section) fully funded on an actuarial basis. This means that, using long-term actuarial
assumptions agreed at that date, it was predicted the Company would have to make no further cash deficit correction payments.
Royal Mail Pension Plan (RMPP)
The RMPP (RM section) is funded by the payment of contributions to separate trustee administered funds. RMPP (RM section) includes sections A,
B and C, each with different terms and conditions:
Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
Section B is for members (or beneficiaries of members) who joined on or after 1 December 1971 and before 1 April 1987 or for members
of Section A who chose to receive Section B benefits; and
Section C is for members (or beneficiaries of members) who joined on or after 1 April 1987 and before 1 April 2008.
Benefits provided are based on career salary blocks for years’ service, revalued annually.
Following conclusion of the March 2012 actuarial valuation, the regular future service contribution rate for RMPP (RM section), expressed as a
percentage of pensionable pay, remained at 17.1 per cent (2013 17.1 per cent). Following the State Aid clearance granted on 21 March 2012, and
the subsequent transfer of almost all of the RMPP assets and liabilities to HM Government on 1 April 2012, no RMPP (RM section) cash deficit
correction payment was made during the year. The Group expects to contribute around £400 million to the RMPP (RM section) in respect of
normal cash service costs in 2014-15.
Royal Mail Senior Executives Pension Plan (RMSEPP)
The Group also contributes to a smaller defined benefit scheme for executives, Royal Mail Senior Executives Pension Plan (RMSEPP) – which
closed in December 2012 to future accrual. The 2012-13 contributions were made at 35.9 per cent until 31 December 2012. The Company and
the Trustee have reached agreement over the March 2012 actuarial valuation. As the plan is closed to future accrual, there will be no regular
future service contributions. The Company is required to continue to make deficit correction payments of £10 million per annum until at least the
date on which the 2018 valuation is completed (no later than 30 September 2018) as part of a funding agreement with the Trustee. Deficit
correction payments in 2013-14 were £10 million (2013 £28 million including a special one-off payment of £19 million).
On 25 March 2013, the Group placed £20 million into a money market fund investment established to provide security to RMSEPP, as part of a
funding agreement with the RMSEPP Trustee. This is treated as an investment in the Group’s balance sheet.
A liability of £1 million (2013 £1 million) has been recognised for future payment of pension benefits to a past Director.
Pensions Reform
In June 2013, the Company began a consultation with RMPP (RM section) members on a proposal to ensure the RMPP (RM section) could remain
open to future accrual, subject to certain conditions, at least until the conclusion of the next periodic review in March 2018. Subsequently, on
26 September 2013, the Company agreed with the RMPP Trustee to implement a Pensions Reform with effect from 1 April 2014.
Under the Pensions Reform, basic pay elements of members’ pensionable pay (after subtraction of the Lower Earnings Deduction for Section C
members) will increase by RPI (up to five per cent) each year regardless of whether employees’ actual basic pay increases by more or less, subject
to potential additional increases to take account of certain increments or progressions within pay groups.
The agreed changes due to the Pensions Reform are considered to be a ‘plan amendment’ which meets the IAS 19 definition of a past service
cost, and as such £1,350 million has been recognised in the income statement of the Group for the year ended 30 March 2014.
89
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 8. Employee benefits – pensions (continued)
Accounting and actuarial surplus/(deficit) position (RMPP (RM section) and RMSEPP)
Fair value of schemes’ assets (see (b) below)
Present value of schemes’ liabilities
Surplus/(deficit) in schemes’ (pre IFRIC 14)
IFRIC 14 adjustment
Surplus/(deficit)
Accounting (IAS 19)
Actuarial/cash funding
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
At 31 March
2014
Reported
£m
3,833
(2,097)
1,736
(13)
1,723
3,343
(2,513)
830
(5)
825
3,873
(2,451)
1,422
n/a
1,422
At 31 March
2013
Reported
£m
3,343
(3,505)
(162)
n/a
(162)
There is no element of the present value of the schemes’ liabilities above that arises from schemes that are wholly unfunded.
The surplus in RMSEPP is assumed to be available as a refund as per IFRIC 14 and, as such, is shown net of withholding taxation.
The surplus in RMPP (RM section) is assumed to be recoverable as a reduction to future employer contributions. Therefore, no IFRIC 14
adjustment is required. The Directors do not believe that the current excess of pension scheme assets over the liabilities on an accounting basis
will result in an excess of pension assets on a funding basis. However, the Directors are required to account for the pension scheme based on their
legal right to benefit from a surplus, using long-term actuarial assumptions current at the reporting date, as required by IFRSs.
The actuarial/cash funding surplus of £1,422 million (2013 deficit of £162 million) allows the RMPP (RM section) to remain open for the benefit
of the members at least until March 2018, subject to certain conditions (as part of the Pensions Reform agreement), without requiring either the
Company or individuals to make unaffordable increases to their cash contributions.
The following disclosures relate to the major assumptions, sensitivities, gains/losses and surplus/deficit in the RMPP (RM section) and RMSEPP
defined benefit schemes.
IAS 19 Accounting
a) Major long-term assumptions – RMPP (RM section) and RMSEPP
The major assumptions used to calculate the accounting position of the pension schemes were as follows:
Retail Price Index (RPI)
Consumer Price Index (CPI)
Discount rate
– nominal
– real (nominal less RPI)3
Rate of increase in pensionable salaries4
Rate of increase for deferred pensions – RMSEPP members transferred from Section A or B of RMPP5
Rate of increase for deferred pensions – all other members
Rate of pension increases – RMPP (RM section) Sections A/B
Rate of pension increases – RMPP (RM section) Section C4
Rate of pension increases – RMSEPP members transferred from Section A or B of RMPP5
Rate of pension increases – RMSEPP all other members4
Life expectancy from age 60 – for a current 40/60 year old male RMPP (RM section) member
Life expectancy from age 60 – for a current 40/60 year old female RMPP (RM section) member
At 30 March
2014
Reported
% p.a.
3.4
2.4
At 31 March
2013
Reported
% p.a.
3.3
2.3
4.5
1.1
RPI-0.1%
CPI
CPI
CPI
RPI-0.1%
CPI
RPI-0.1%
29/27 years
32/30 years
4.8
1.5
RPI + 1%
RPI
CPI
CPI
RPI-0.1%
RPI
RPI-0.1%
29/26 years
32/29 years
3 The real discount rate used reflects the long duration of the RMPP (RM section) scheme of around 28 years.
4
The rate of increase in salaries, and the rate of pension increase for Section C members (who joined RMPP on or after April 1987) and RMSEPP ‘all other members’, is capped at
five per cent which results in the average long-term pension increase assumption being 10 basis points lower than the RPI long-term assumption.
5 This rate of increase is set by reference to CPI, following a High Court ruling on 11 June 2013.
Mortality
The mortality assumptions for RMPP (RM section) are based on the latest Self Administered Pension Scheme (SAPS) S1 mortality tables with
appropriate scaling factors (106 per cent for male pensioners and 101 per cent for female pensioners). Future improvements are based on the
CMI 2012 core projections with a long-term trend of 1.25 per cent per annum.
90
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 8. Employee benefits – pensions (continued)
Sensitivity analysis for RMPP (RM section) liabilities
The RMPP (RM section) liabilities are sensitive to changes in key assumptions. The potential impact of the largest sensitivities on the RMPP
(RM section) liabilities is shown in the table below.
Key assumption change
Additional one year of life expectancy
Increase in inflation rate (both RPI and CPI simultaneously) of 0.1% p.a.
Decrease in discount rate of 0.1% p.a.
Increase in CPI assumption (assuming RPI kept constant) of 0.1% p.a.
Potential
increase in
liabilities
£m
50
50
50
15
This sensitivity analysis has been determined based on a method that assesses the impact on the defined benefit obligation, resulting from
reasonable changes in key assumptions occurring at the end of the reporting year. Changes opposite to those in the table (e.g. an increase in
discount rate) would have the opposite effect on liabilities.
The average duration of the RMPP (RM section) obligation is 28 years (2013 28 years).
b) Schemes’ assets – RMPP (RM section) and RMSEPP
Equities
UK
Overseas
Bonds
Fixed interest – UK
Index linked
– Overseas
– UK
– Overseas
Pooled investments
Managed funds
Unit Trusts
Property (UK)
Cash and cash equivalents
Other
Derivatives
Total schemes’ assets
At 30 March 2014
At 31 March 20136
Quoted
£m
Unquoted
£m
Total
£m
Quoted
£m
Unquoted
£m
Total
£m
28
321
101
371
156
–
303
1,864
250
345
5
(1)
3,743
82
–
8
–
–
–
–
–
–
–
–
–
90
110
321
109
371
156
–
303
1,864
250
345
5
(1)
3,833
80
371
75
270
287
3
80
1,298
218
553
20
–
3,255
88
–
–
–
–
–
–
–
–
–
–
–
88
168
371
75
270
287
3
80
1,298
218
553
20
–
3,343
6 The categorisation of the schemes’ assets at 31 March 2013 has been restated as a result of IAS 19 ‘Employee Benefits’ (revised).
There were no open equity derivatives within this portfolio at 30 March 2014 (at 31 March 2013 £nil). Included within the pension assets are
£2.0 billion (2013 £1.4 billion) of HM Government Bonds. The schemes’ assets do not include property occupied by the Group, the Group’s own
shares, or assets used by the Group.
Risk exposure and investment strategy
The investment strategy of the RMPP Trustee aims to safeguard the assets of the scheme and to provide, together with contributions, the
financial resource from which benefits are paid. Investment is inevitably exposed to risks. The investment risks inherent in the investment
markets are partially mitigated by pursuing a widely diversified approach across asset classes and investment managers. The RMPP (RM section)
uses derivatives (such as swaps and futures) to reduce risks whilst maintaining expected investment returns. The RMPP Trustee recognises that
there is a natural conflict between improving the potential for positive return and limiting the potential for poor return. The RMPP Trustee has
specified objectives for the investment policy that balance these requirements.
The RMPP Trustee has elected to use interest rate and inflation rate swaps (‘derivatives’) to deliver the investment strategy whilst managing risk.
These derivatives are recorded at market value within the table above and are commonly used by pension funds. The interest rate and inflation
rate swaps are used to hedge the exposure to movements in interest rates and inflation (which are key long-term assumptions used to estimate
future pension liabilities). The economic exposure of these swaps (full exposure to the relevant asset class incurred by entering into a derivative
contract) held in a specific managed portfolio for this purpose at 30 March 2014 is £3.8 billion (March 2013 £1.5 billion).
The spread of investments continues to balance security and growth in order to pay the RMPP (RM section) benefits when they become due.
91
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
8. Employee benefits – pensions (continued)
c) Movement in schemes’ assets, liabilities and net position – RMPP (RM section) and RMSEPP
Changes in the present value of the defined benefit pension liabilities, fair value of the schemes’ assets and the net defined benefit asset/
(obligation) are analysed as follows:
Opening net retirement benefit surplus/(deficit) – pre IFRIC 14 adjustment
Amounts included in the income statement:
Ongoing UK defined benefit pension scheme costs (included in people costs, see note 12)
Royal Mail Pension Plan amendment
Pension interest income/(cost)7
Total included in profit from continuing operations before taxation
Amounts included in other comprehensive income – remeasurement
gains/(losses):
Actuarial gain/(loss) arising from:
Demographic assumptions
Financial assumptions
Experience adjustment
Return on schemes’ assets (excluding interest income)8
Total actuarial (losses)/gains on defined benefit schemes
Amounts taken directly to equity:
Transfer of historic pension deficit to HM Government
Transfer of Post Office Limited subsidiary to parent
Total included in the statement of changes in equity
Other:
Employer contributions
Employee contributions
Benefits paid
Curtailment costs
Movement in pension-related accruals
Total other movements
Closing net retirement benefit surplus/(deficit) – pre IFRIC 14 adjustment
7
Defined benefit asset Defined benefit liability
Net defined benefit
asset/(liability)
At
30 March
2014
Reported
£m
At
31 March
2013
Reported
£m
At
30 March
2014
Reported
£m
At
31 March
2013
Reported
£m
At
30 March
2014
Reported
£m
At
31 March
2013
Reported
£m
3,343
30,745
(2,513)
(33,667)
830
(2,922)
–
–
172
172
–
–
–
(203)
(203)
–
–
159
159
–
–
–
518
518
(448)
1,350
(103)
799
4
(256)
2
–
(250)
(412)
–
(129)
(541)
–
(865)
101
–
(764)
–
–
–
(28,438)
(193)
(28,631)
–
–
–
32,450
145
32,595
407
136
(25)
–
3
521
3,833
435
136
(17)
–
(2)
552
3,343
–
(136)
25
(20)
(2)
(133)
(2,097)
–
(136)
17
(17)
–
(136)
(2,513)
(448)
1,350
69
971
4
(256)
2
(203)
(453)
–
–
–
407
–
–
(20)
1
388
1,736
(412)
–
30
(382)
–
(865)
101
518
(246)
4,012
(48)
3,964
435
–
–
(17)
(2)
416
830
The pension interest income is the result of applying the schemes’ discount rate at 31 March 2013 to the schemes’ assets at that date. Similarly, the pension interest cost results
from applying the schemes’ discount rate as at 31 March 2013 to the schemes’ liabilities at that date. The pension interest for the position at 31 March 2013 has been restated for
the effect of IAS 19 ‘Employee Benefits’ (revised) – see ‘Significant accounting policies’ section.
Includes asset returns, movements on pension prepayments and changes to brought forward estimates.
8
In addition to the above items which affect the defined benefit asset, additional curtailment costs of £34 million (2013 £11 million) were
recognised in the income statement on a consistent basis with the associated redundancy costs. Estimates of both are included in any redundancy
provision raised.
92
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
9. Notional earnings per share
This note explains the calculation of the Group’s earnings per share. The calculation for both reporting years is based on the 1,000,000,000
shares that were issued in September 2013 and which were subsequently listed on the London Stock Exchange in October 2013. It is
therefore deemed to be ‘notional’ earnings per share as the shares were not in existence for the whole of the reporting years. The note
also includes non-GAAP information relating to specific items.
Profit from continuing operations attributable to equity holders of the parent (£m)
Number of shares (million)
Basic and diluted notional earnings per share (pence)3
52 weeks 2014
52 weeks 2013
53 weeks 2013
Reported1
1,277
1,000
127.7
Excluding
specific
items
263
1,000
26.3
Adjusted2
(unaudited)
525
1,000
52.5
Excluding
specific
items
(unaudited)
210
1,000
21.0
Reported1
594
1,000
59.4
1 Prepared in accordance with IFRSs.
2 Prepared in accordance with IFRSs, except for the non-consolidation of POL, and excluding the impact of the 53rd week in 2013.
3 The basic and diluted notional earnings per share have been calculated based on the one billion shares in issue at 30 March 2014, being in existence for the entirety of both
reporting years.
In future reporting periods, earnings per share will be calculated using the weighted average number of shares in issue over the relevant period.
10. Organisation structure and share capital changes
This note explains the incorporation of Royal Mail plc and the subsequent changes in share capital following the Company’s listing on the
London Stock Exchange on 15 October 2013.
A new company, Royal Mail Limited, was incorporated on 6 September 2013 with share capital of 100 Ordinary Shares of £1.50 each (total £150)
issued to Royal Mail Holdings plc. Royal Mail Holdings plc was renamed Postal Services Holding Company plc on 11 September 2013 (and was
subsequently renamed Postal Services Holding Company Limited (‘PSH’) on 12 December 2013). On 12 September 2013, the special share in
Royal Mail Group Limited, held by HM Government, was redeemed at par value of £1.
Subsequently, also on 12 September 2013, share capital of 999,999,900 Ordinary Shares of £1.50 each (total £1,499,999,850) was issued by
Royal Mail Limited to PSH in consideration for the transfer from PSH of the entire issued share capital of Royal Mail Group Limited
(50,001 £1.00 shares).
Following this transfer, and therefore as at 12 September 2013, the issued share capital of Royal Mail Limited comprised 1,000,000,000 Ordinary
Shares of £1.50 each (total £1,500,000,000).
On 17 September 2013, Royal Mail Limited approved a reduction of capital by way of solvency statement to cancel £1.49 from each issued
Ordinary Share of £1.50. This reduction of capital was registered on 18 September 2013, and reduced share capital from £1,500 million to
£10 million and increased distributable reserves by £1,490 million.
Following this reduction, and therefore as at 18 September 2013, the issued share capital of Royal Mail Limited comprised 1,000,000,000
Ordinary Shares of £0.01 each (total £10,000,000). On 19 September 2013, Royal Mail Limited was re-registered as Royal Mail plc. Royal Mail
plc subsequently listed on the premium segment of the official list and the main market of the London Stock Exchange on 15 October 2013.
11. Share-based payment
This note provides details about the Free Shares allocated to employees, including the associated accounting charge to the Group’s income
statement under IFRS 2, and the number of shares held in the Share Incentive Plan (SIP) at the end of the reporting year. Details of shares
awarded under the Long Term Incentive Plan (LTIP) are also included.
Employee Free Shares
Ordinary Shares representing ten per cent of the value of the Company were granted free of charge to eligible employees on 15 October 2013,
the date of the Initial Public Offering. These Free Shares are held on behalf of employees in an HM Revenue and Customs (HMRC)-approved SIP
administered by Equiniti Share Plan Trustees Limited (Equiniti), and it was expected that each eligible full-time employee would receive a total of
725 free shares at the date of the Initial Public Offering. However, under HMRC rules at the time of flotation, employees can only be given a
maximum of £3,000 worth of free shares in any taxation year.
93
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
11. Share-based payment (continued)
Employee Free Shares (continued)
The initial market value of the award was measured at the closing mid-price of the Company’s shares on 15 October 2013 (489 pence per share).
This valued an eligible full-time employee’s award at £3,545.25, in excess of the £3,000 maximum. Accordingly, 613 shares were awarded to each
eligible full-time employee as their 2013 SIP allocation. The Company allocated a further 116 shares (729 in total – see below) to eligible full-time
employees on 9 April 2014 as a 2014 SIP allocation, subject to them remaining employees of Royal Mail Group Limited.
The 729 total shares awarded to eligible full-time employees comprises the 725 initial, expected allocation of shares and an additional four shares
resulting from the reallocation of shares forfeited by certain employees who left the Group.
Part-time eligible employees have been allocated a pro-rata number of shares.
All allocated shares will be equity-settled.
The fair value of the award of Free Shares is £490 million, which will be charged to the income statement on a straight line basis, adjusted for
‘good leavers’, over the period of vesting (three years for the 2013 SIP and four years for the 2014 SIP, in each case from the award date).
A charge to the Group income statement of £94 million (including £3 million National Insurance) has been made for the year ended
30 March 2014 for both SIP allocations as they were granted as one award.
The Free Shares are held in a Trust funded by Royal Mail and may only be distributed to, or for the benefit of, eligible employees. The Trust is under
the control of the Company and is operating for its benefit. At March 2014 the Trust has been included in these consolidated financial statements.
A reconciliation of the Ordinary Shares held in the SIP at 30 March 2014 is shown below.
Initial shares award on 15 October 2013
Shares transferred out of SIP – ‘good leavers’
Remaining shares to be allocated
Total shares remaining in SIP at 30 March 2014
Number of
shares
84,415,327
(809,247)
15,744,673
99,350,753
Award of shares under the Long Term Incentive Plan (LTIP)
As a result of the flotation in October 2013, and as permitted under the rules of the LTIP, the award granted to the Executive Directors and Senior
Leadership Population in 2013 was converted from a cash award into an award of a total of around 2.2 million shares, based on a volume
weighted average price of 529.14 pence. These shares are not part of the SIP explained above and will be acquired separately by the Company
from the market. The performance conditions applying to this award will be measured in 2015-16.
The award will be accounted for as cash-settled, in accordance with the requirements of IFRS 2 ‘Share-based payment’.
94
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Other notes – income statement
The notes in this section provide details of people costs and numbers and other operating costs (e.g. pensions, depreciation and
amortisation and operating lease charges).
12. People information
13. Operating costs
95
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 12. People information
Of the total Group operating costs, 60 per cent (2013 60 per cent) relate to our people. This note provides a breakdown of our people
costs and numbers.
People costs (for continuing operations):
Wages and salaries
UK based
GLS
Pensions
Defined benefit UK
Defined contribution UK
GLS
Social security
UK based
GLS
Group total
Defined benefit pension rate:
Income statement
Cash flow
Defined contribution pension average rate:
Income statement and cash flow1
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(4,426)
(4,120)
(306)
(479)
(448)
(25)
(6)
(377)
(322)
(55)
(4,354)
(4,072)
(282)
(434)
(412)
(17)
(5)
(359)
(309)
(50)
(5,282)
(5,147)
20.3%
17.1%
18.2%
17.1%
4%
4%
1
Employer contribution rates are one per cent for employees in the entry level category and five per cent to seven per cent for those in the standard level category, depending on the
employees’ selected contribution rate.
People numbers (for continuing operations):
The number of people employed during the period, on a headcount basis, was as follows:
UKPIL
GLS
UK partially owned subsidiaries
Group total
Directors’ emoluments:
Directors’ emoluments2
Amounts earned under Long Term Incentive Plans (LTIP)3
Number of Directors accruing benefits under defined benefit schemes
These amounts include any cash supplements received in lieu of pension.
2
3 The 2014 LTIP amount consists of £1,327,000 for each of the 2010 and 2011 LTIP awards that vested at 30 March 2014.
Period end
Average employees
52 weeks
2014
53 weeks
2013
52 weeks
2014
53 weeks
2013
148,441
13,811
3,999
166,251
149,940
13,646
4,030
167,616
149,172
13,592
4,049
166,813
149,710
13,569
4,013
167,292
52 weeks
2014
Reported
£000
(3,173)
(2,654)
53 weeks
2013
Reported
£000
(3,753)
–
–
–
96
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
13. Operating costs
Below is an analysis of operating costs in the income statement that because of their materiality or nature require separate disclosure
under IFRSs.
Operating profit from continuing operations, before transformation costs, is stated after charging the following operating costs:
Ongoing pension costs (note 8) (included in ‘people costs’)
Post Office Limited charges (included in ‘other operating costs’)
Depreciation and amortisation (included in ‘infrastructure costs’)
Depreciation of property, plant and equipment (note 21)
Amortisation of intangible assets (mainly software – note 23)
Charges from overseas postal administrations (included in ‘distribution and conveyance costs’)
Costs of inventories expensed
Fuel stock (included in ‘distribution and conveyance costs’)
Other inventory (included in ‘other operating costs’)
Operating lease charges
Property, plant and equipment (included in ‘other operating costs’)
Vehicles (included in ‘distribution and conveyance costs’)
Research and development expenditure during the year amounted to £nil (2013 £nil).
The following disclosure is relevant in understanding the extent of costs in relation to the regulation of the Group.
Regulatory body costs
Ofcom
Consumer Futures
Total
Disclosure of statutory audit costs is a requirement of the Companies Act 2006.
Auditor’s fees
Audit of statutory financial statements
Other fees to auditor:
Statutory audits for subsidiaries
Other services (including regulatory audits)
Transaction-related support services
Taxation services
Total
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(479)
(358)
(274)
(241)
(33)
(322)
(177)
(130)
(47)
(158)
(146)
(12)
(434)
(371)
(281)
(238)
(43)
(313)
(184)
(132)
(52)
(153)
(141)
(12)
52 weeks
2014
Reported
£m
53 weeks
2013
Reported
£m
(4)
(3)
(7)
(5)
(3)
(8)
52 weeks
2014
Reported
£000
53 weeks
2013
Reported
£000
(402)
(402)
(1,423)
(257)
(4,025)
(178)
(6,285)
(1,566)
(208)
–
(228)
(2,404)
The Group paid £90,000 additional amounts in 2013-14 in respect of the 2012-13 audit (£80,850 in 2012-13 in respect of the 2011-12 audit).
97
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Other notes – financial assets, financial liabilities and hedging programmes
The notes in this section explain how the Group is financed, including details of associated risks, interest rates, additional loan facilities
available and hedging programmes in place to mitigate volatility in commodity prices and foreign currency exchange rates.
14. Financial assets and liabilities – summary and management of financial risk
15. Cash and cash equivalents
16. Loans and borrowings
17. Financial liabilities – net and gross maturity analysis
18. Financial assets and liabilities – additional analysis
19. Hedging programmes
98
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
14. Financial assets and liabilities – summary and management of financial risk
Below is a summary of financial assets (e.g. cash, investments and deposits) and liabilities (e.g. loans and finance lease obligations) and
details of how the various risks associated with these assets and liabilities are managed. Subsequent notes in this section provide more
detailed disclosures on specific financial assets and liabilities.
The Group’s financial assets and liabilities are shown in the table below.
RMSEPP Pension escrow investments
Cash and cash equivalents
Other bank and local authority deposits
Derivative assets
Total financial assets
Syndicated bank loans
HM Government loans
Total loans and borrowings
Finance leases obligations
Derivative liabilities
Total financial liabilities
At 30 March 2014
Reported
At 31 March 2013
Reported
Non-
current
£m
Current
£m
20
–
–
3
23
(600)
–
(600)
(255)
(5)
(860)
–
366
1
2
369
–
–
–
(87)
(12)
(99)
Total
£m
20
366
1
5
392
(600)
–
(600)
(342)
(17)
(959)
Non-
current
£m
20
–
–
3
23
–
(973)
(973)
(226)
(1)
(1,200)
Current
£m
–
351
1
9
361
–
–
–
(79)
(2)
(81)
Total
£m
20
351
1
12
384
–
(973)
(973)
(305)
(3)
(1,281)
Financial assets and liabilities − financial risk management objectives and policies
The Group’s principal financial assets and liabilities comprise short-term deposits, money market liquidity investments, loans, finance leases 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 receivables and trade payables, which arise directly from operations and are not disclosed
further in this section.
The Group enters into derivative transactions, which create derivative assets and liabilities; principally commodity price swaps, interest rate swaps
and forward currency contracts. Their purpose is to manage the commodity, interest rate and currency risks arising from the Group’s operations
and finances.
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 assets and liabilities are interest rate risk, liquidity risk, foreign currency risk, commodity price
and credit risk. The Board reviews and agrees policies for managing these risks, each of which is summarised below.
Interest rate risk
The Group’s exposure to market risk for changes in interest rates arises from the Group’s loans, leases and interest bearing financial assets. The
drawn HM Government loans were at a fixed rate from the dates they were originally drawn until they were repaid at the Company’s listing date.
The drawings under the Syndicated bank loan facilities are £600 million (2013 £nil) but interest rates on £150 million of Term Loan A have been
fixed over the life of the loan facility by entering into interest rate swaps. The combined average maturity date is 2017 (2013 the drawn HM
Government loans had an average maturity date of 2019). The finance lease obligations of £342 million are all at a fixed rate (2013 £305 million,
all at fixed rate). The total interest bearing financial assets of the Group (excluding the non-current investments) of £395 million (2013
£336 million), which consist of the fixed and floating rate cash and cash equivalent investments, plus the current financial asset investments,
are at short-dated fixed or variable interest rates with average maturity three days (2013 average maturity nine 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 floating rate financial instruments, combined with
external hedging of interest rate risk, as appropriate, to keep a high percentage of its net debt fixed.
Foreign currency transaction risk
The Group is exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and delivering foreign
origin mail in the UK, and various purchase contracts denominated in foreign currency (all of these exposures are in UKPIL). GLS’ reporting
currency is the Euro and most of its revenues and profits are Euro based. There is some exposure to non-Euro currencies, principally in emerging
European markets.
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 £1 million and hedging is normally confined to 80 per cent of the forecast exposure where forecast cash flows are highly probable.
99
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
14. Financial assets and liabilities – summary and management of financial risk
(continued)
Foreign currency risk translational risk
The Group’s functional currency is the pound Sterling. GLS’ functional currency is the Euro. GLS Euro profits are converted at the average
exchange rate for the year, which can result in reported growth or decline which does not relate to underlying performance. GLS’ balance sheet
is converted at year end rates, and movements related to foreign currency translation are taken to equity.
UKPIL’s obligation to settle with overseas postal operators is denominated in Special Drawing Rights (SDRs) – a basket of currencies comprised
of US Dollar, Japanese Yen, Sterling and Euro. Group Treasury operates a rolling 18-month hedge programme, which is subsequently reviewed
on a quarterly basis.
UKPIL’s obligations to settle conveyance charges in US Dollar have been hedged to April 2015.
UKPIL has two hedge programmes (one of which was completed during the reporting year) 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 (mainly GLS). However, it does hedge
the transactional exposure created by inter-company loans with these subsidiaries and uses the translational exposure arising from GLS Euro
profits to offset with other transactional exposures.
Commodity price risk
UKPIL is exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 130 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 Dollar commodity price and US Dollar/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 and using over-the-counter derivative products.
As the GLS business model works using subcontractors, responsible for purchasing their own fuel, GLS has no direct exposure to diesel costs. The
only other significant commodity exposure within GLS is power, which is fragmented across its European bases. In view of the other highly hedged
positions in Royal Mail, the Group takes the view that the unhedged exposure arising from the commodities in GLS does not add significant risk to
the Group.
Credit risk
UKPIL considers that a fair and equitable credit policy is in operation 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 UKPIL 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.
UKPIL has a dedicated credit management team, which sets and monitors credit limits, and takes corrective action as and when appropriate. The
level of bad debt incurred for the whole Group is 0.1 per cent (2013 0.1 per cent) of turnover.
With respect to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalent investments, 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.
GLS operates a decentralised credit management model whereby each country is responsible for managing the credit risk associated with their
customers. Where appropriate, external credit checks are performed for new and existing customers, taking into account the customer profile,
expected volume of business and consequent risk to the Company.
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 and term deposits with approved counterparties. Borrowing facilities are regularly reviewed to ensure continuity of funding.
The unused facilities for the Group of £800 million expire in 2018 (2013 £900 million expiring in 2014).
Capital management
The Group aims to maintain debt and equity levels consistent with an investment grade credit profile. The Group intends to pursue a progressive
dividend policy having regard to the normalised earnings progression of the Group.
Sensitivity
As a result of the mix of fixed and variable rate financial instruments and the currency and commodity hedge programmes in place, the Group
has no material exposure to operating profit risk from interest rate risk, exchange rate risk or commodity price risk (2013 £nil). The Group has an
exposure to the exchange rate risk on translating the GLS net assets into Sterling on consolidation. The impact of a five per cent strengthening of
Sterling would have been to reduce the Group net assets by £34 million (2013 £31 million).
100
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
15. Cash and cash equivalents
This note summarises the cash and cash equivalents balances held by the Group.
Cash and cash equivalents at 30 March 2014 and at 31 March 2013 are as follows:
Cash at bank and in hand
Cash equivalent investments: Short-term bank and local authority deposits and money market fund investments
Total cash and cash equivalents
At 30 March
2014
Reported
£m
At 31 March
2013
Reported £m
51
315
366
136
215
351
Cash and cash equivalents comprise amounts held physically in cash, bank balances available on demand and deposits for three months or less,
dependent on the immediate cash requirements of the Group. Where interest is earned, this is either at floating or short-term fixed rates based
upon bank deposit rates.
16. Loans and borrowings
Details of loans and borrowings, including interest rates, additional loan facilities available and any security provided against the loans,
are provided below.
On 12 September 2013, the Group entered into new Syndicated bank loan facilities. On the date of the Company’s listing on the London Stock
Exchange, 15 October 2013, drawdowns of £600 million were made against these new facilities and used along with £418 million of surplus cash
to repay all existing HM Government debt (£973 million) and accrued interest.
Below is a summary of loans and borrowings at the year end, the average interest rate, facility availability and security granted.
Syndicated bank loan facilities
Term Loan A
Term Loan B
Revolving credit facilities
Total
HM Government facilities
At 30 March 2014
Reported
Loans and
borrowings
£m
300
300
–
600
Further
committed
facility
Total facility
Average
interest rate
of loan
drawn down
£m
–
–
800
800
£m
300
300
800
1,400
%
1.5
1.4
–
1.4
Basis of
interest rate
chargeable
at 30 March
2014
– LIBOR plus
Average
maturity
date of loan
drawn down
%
1.00
0.90
0.85
year
2018
2016
–
2017
Average
maturity
date of loan
facility
year
2018
2016
2018
2018
At 31 March 2013
Reported
Loans and
borrowings
£m
Further
committed
facility
£m
Total facility
£m
973
900
1,873
Average
interest rate
of loan drawn
down
%
8.8
Average
maturity date
of loan drawn
down
year
2019
The Group’s blended interest rate on loans and finance leases over the next five years is forecast to be 3.5 per cent, as shown in note 5.
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
At 30 March
2014
Reported
£m
At 31 March
2014
Reported £m
–
–
800
800
900
–
–
900
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Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 16. Loans and borrowings (continued)
There is no security in place under the new Syndicated bank loan facilities.
The following securities applied to the HM Government facilities at 31 March 2013:
Royal Mail Group Limited senior
debt facility
Royal Mail Group Limited
shareholder loan facility
Royal Mail Group Limited other
drawn down loans
Total
2013
Facility
£m
900
2013
Facility end
date
2014
Security
Fixed charges over Royal Mail Holdings plc’s shares in Royal Mail Group Limited and Royal Mail
Group Limited’s shares in Royal Mail Estates Limited. Floating charges over all assets of Royal
Mail Holdings plc, Royal Mail Group Limited and Royal Mail Estates Limited.
473
500
1,873
2016 None.
2021-25
Fixed charges over any Royal Mail Group Limited loans to General Logistics Systems B.V., any
Royal Mail Group Limited 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 Limited.
The Syndicated bank loans 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, net debt and EBITDA. It is not anticipated that the Group is at
risk of breaching any of these obligations.
17. Financial liabilities – net and gross maturity analysis
This note focuses on loans and borrowings, finance leases and derivatives and provides further details of when amounts fall due, both for
principal and for total (i.e. including interest) contractual payments.
Below is a summary of when all the financial liabilities fall due.
At 30 March 2014
Reported
Loans and
borrowings
£m
Finance
leases
£m
Derivative
liabilities
£m
Total
£m
–
600
–
600
–
600
87
255
76
151
28
342
12
5
5
–
–
17
At 31 March 2013
Reported
Loans and
borrowings
£m
Finance
leases
£m
Derivative
liabilities
£m
–
973
–
473
500
973
79
226
56
139
31
305
2
1
1
−
−
3
99
860
81
751
28
959
Total
£m
81
1,200
57
612
531
1,281
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
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
102
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 17. Financial liabilities – net and gross maturity analysis (continued)
Obligations under finance leases are either unsecured or secured on the leased assets. The average interest rate is 3.4 per cent (2013 3.7 per
cent). The average maturity date is more than five years (2013 more than five years).
The tables below set out the gross (undiscounted) contractual cash flows of the Group’s financial liabilities. For overdrafts, loans and finance lease
contracts, these cash flows represent the undiscounted total amounts payable including interest. For derivatives that are settled gross, these cash
flows represent the undiscounted gross payment due and do not reflect the accompanying inflow. For derivatives that are settled net, these cash
flows represent the undiscounted forecast outflow.
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
Less interest
Net total
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
Less interest
Net total
At 30 March 2014
Reported
Gross
loans and
borrowings
commitments
£m
Gross
finance lease
instalments
£m
Gross
payments on
derivatives
settled gross
£m
Sub-total
£m
9
642
13
629
–
651
(51)
600
94
356
82
161
113
450
(108)
342
103
998
95
790
113
1,101
(159)
942
188
–
–
–
–
188
n/a
n/a
Gross
payments on
derivatives
settled net
£m
11
5
5
–
–
16
n/a
n/a
Gross loans and
borrowings
commitments
£m
29
1,435
29
752
654
1,464
(491)
973
Gross finance
lease
instalments
£m
87
330
61
147
122
417
(112)
305
At 31 March 2013
Reported
Gross payments
on derivatives
settled gross
£m
Gross payments
on derivatives
settled net
£m
Sub-total
£m
116
1,765
90
899
776
1,881
(603)
1,278
120
2
2
–
–
122
n/a
n/a
2
1
1
–
–
3
n/a
n/a
Total
£m
302
1,003
100
790
113
1,305
n/a
n/a
Total
£m
238
1,768
93
899
776
2,006
n/a
n/a
103
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 18. Financial assets and liabilities – additional analysis
This note provides an analysis of the pound Sterling carrying values of the financial assets and liabilities held in various foreign currencies,
along with details of interest rates, interest rate risk and maturity timescales.
Table 1 shows all the financial assets and liabilities in detail and on a net basis. Table 2 shows the net amount by currency. Table 3 shows the
respective assets/liabilities by whether they are fixed, floating or non-interest bearing. Table 4 shows the effective interest rate and maturity
analysed as fixed rate, floating rate and non-interest bearing.
Carrying amounts and fair values
Trade receivables, payables, prepayments, accruals and client payables have been omitted from this analysis on the basis that carrying value is a
reasonable approximation of 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 fair value of the HM Government loans (non-current) is £nil at 30 March 2014 (2013 HM Government loans £1,165 million). The
fair value of total ‘Obligations under finance leases’ is £341 million (2013 £308 million). For all other financial instruments fair value is equal to the
carrying amount. The tables below also set out the carrying amount of the currency of the Group’s financial instruments:
The following tables show the currency, classification, maturity and effective interest rate of the Group’s financial assets and liabilities.
Table 1
Financial assets
Cash at bank, in hand
Cash equivalent investments
Money market funds
Short-term deposits – local government
Short-term deposits – bank
Cash and cash equivalents
Financial assets – investments (current) – local government deposit
Financial assets – pension escrow investments (non-current) – RMSEPP pension escrow –
Money market funds
Derivative assets – current
Derivative assets – non-current
Total financial assets
Financial liabilities
Obligations under finance leases (current)
Financial liabilities – loans and borrowings (non-current)
Syndicated bank loans
HM Government loans
Obligations under finance leases (non-current)
Derivative liabilities – current
Derivative liabilities – non-current
Total financial liabilities
Net total financial liabilities
Level
Classification
At 30 March
2014
Reported
£m
At 31 March
2013
Reported £m
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
2
2
2
2
Amortised cost
Amortised cost
Amortised cost
Amortised cost
51
315
255
–
60
366
1
20
2
3
392
(87)
(600)
(600)
–
(255)
(12)
(5)
(959)
(567)
136
215
88
7
120
351
1
20
9
3
384
(79)
(973)
–
(973)
(226)
(2)
(1)
(1,281)
(897)
There are no financial assets or liabilities designated at fair value through the income statement on initial recognition.
104
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
18. Financial assets and liabilities – additional analysis (continued)
The ‘Level’ classification in the above table is described in the ‘Fair value measurement of financial instruments’ accounting policy.
Derivative assets £2 million current, £3 million non-current (2013 £9 million current, £3 million non-current) and liabilities £12 million current,
£5 million non-current (2013 £2 million current, £1 million non-current) 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 is either past due or considered to be impaired. The net total financial assets are held in various different
currencies as summarised in the table below. The majority of the non-Sterling financial assets are held within cash at bank, in hand.
Table 2
Net total financial assets/(liabilities) at 30 March 2014 Reported
Net total financial assets/(liabilities) at 31 March 2013 Reported
Sterling
£m
(638)
(1,005)
US$
£m
(4)
5
Euro
£m
Other
£m
57
66
18
37
Total
£m
(567)
(897)
Interest rate risk
Interest on financial instruments classified as floating rate is re-priced at intervals of less than one year. Interest on financial instruments
classified as fixed rate (including £150 million of the Syndicated bank loans that have been fixed by entering into interest rate swaps) is fixed until
the maturity of the instrument. The rate in table 4 (below) for the fixed £150 million of Syndicated bank loans is shown inclusive of the interest
rate swap rate to show the total rate of interest payable.
The tables below set out the carrying amount by maturity of the Group’s financial instruments that are exposed to interest rate risk. The pension
escrow investment of £20 million at 30 March 2014 represents a money market fund investment established to provide security to the Royal Mail
Senior Executives Pension Plan (RMSEPP) in support of a deficit recovery plan agreed with the Trustee in June 2013. The next scheduled review
point in the agreement is 30 September 2018 and therefore the investment is disclosed as maturing in two to five years.
Table 3
Cash
Cash equivalent investments
Financial asset investments (current)
RMSEPP pension escrow investments
Derivative – assets
– liabilities
Syndicated bank loans
Obligations under finance leases
Net total financial liabilities
Table 3
Cash
Cash equivalent investments
Financial asset investments (current)
RMSEPP pension escrow investments
Derivative – assets
– liabilities
HM Government loans
Obligations under finance leases
Net total financial (liabilities)/assets
At 30 March 2014
Reported
Fixed
rate
£m
Floating
rate
£m
Non-
interest
bearing
£m
17
60
1
–
–
–
(150)
(342)
(414)
62
255
–
20
–
–
(450)
–
(113)
(28)
–
–
–
5
(17)
–
–
(40)
At 31 March 2013
Reported
Fixed rate
£m
Floating
rate
£m
Non-
interest
bearing
£m
18
127
1
–
–
–
(973)
(305)
(1,132)
102
88
–
20
–
–
–
–
210
16
–
–
–
12
(3)
–
–
25
Total
£m
51
315
1
20
5
(17)
(600)
(342)
(567)
Total
£m
136
215
1
20
12
(3)
(973)
(305)
(897)
105
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
18. Financial assets and liabilities – additional analysis (continued)
Table 4
Fixed rate
Cash at bank
Cash equivalent investments – short-term deposits – bank
Financial assets – investments (current) – local government deposit
Financial liabilities:
Syndicated bank loans
Obligations under finance leases
Total
Floating rate
Cash at bank
Cash equivalent investments – Money market funds
Financial assets – pension escrow investments (non-current):
RMSEPP pension escrow – Money market funds
Financial liabilities:
Syndicated bank loans
Total
Non-interest bearing
Cash at bank or in hand
Derivative assets
Derivative liabilities
Total
Net total financial assets/(liabilities)
Table 4
Fixed rate
Cash at bank
Cash equivalent investments – short-term deposits – bank:
Short-term deposits – HM Government/local government
Financial assets – investments (current):
Short-term deposits – HM Government/local government
Financial liabilities:
HM Government loans
Obligations under finance leases
Total
Floating rate
Cash at bank
Cash equivalent investments – Money market funds
Financial assets – pension escrow investments (non-current):
RMSEPP pension escrow – Money market funds
Total
Non-interest bearing
Cash at bank or in hand
Derivative assets
Derivative liabilities
Total
Net total financial assets/(liabilities)
106
Total
£m
17
60
1
(150)
(342)
(414)
62
255
20
(450)
(113)
(28)
5
(17)
(40)
567
Total
£m
18
120
7
1
At 30 March 2014 Reported
Average
effective
interest
rate
%
Within
1 year
£m
1-2 years
£m
2-5 years
£m
More than
5 years
£m
1.0
0.4
7.7
2.5
3.4
0.4
0.4
0.4
1.4
17
60
1
–
(87)
(9)
62
255
–
–
317
(28)
2
(12)
(38)
270
–
–
–
–
(76)
(76)
–
–
–
–
–
–
–
(5)
(5)
(81)
–
–
–
(150)
(151)
(301)
–
–
20
(450)
(430)
–
3
–
3
(728)
–
–
–
–
(28)
(28)
–
–
–
–
–
–
–
–
–
(28)
At 31 March 2013 Reported
Average
effective
interest
rate
%
Within
1 year
£m
1-2 years
2-5 years
£m
£m
More than
5 years
£m
3.2
0.4
0.4
7.7
8.8
3.6
0.6
0.4
0.3
18
120
7
1
–
(79)
67
102
88
–
190
16
9
(2)
23
280
–
–
–
–
–
(56)
(56)
–
–
–
–
–
3
(1)
2
(54)
–
–
–
–
–
–
–
–
(473)
(139)
(612)
(500)
(31)
(531)
(973)
(305)
(1,132)
–
–
–
–
–
–
–
–
(612)
–
–
20
20
–
–
–
–
(511)
102
88
20
210
16
12
(3)
25
(897)
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 19. Hedging programmes
Information regarding the various hedging programmes in place to mitigate volatility in commodity prices and foreign currency exchange rates
is provided below.
The hedging programmes use a number of financial derivative products to manage volatility in commodity prices, interest rates and foreign
exchange. If these hedges are ‘in the money’, i.e. hedged rates are better than the current market rate, then a derivative asset is recognised,
and if they are ‘out of the money’ a derivative liability is recognised. Full disclosures are provided in this note even though the balance sheet
amounts are not material in the context of the Group’s total assets and liabilities.
The purpose of the Group’s hedging programmes is to mitigate volatility in commodity prices, interest rates and foreign exchange rates thereby
providing certainty for planning. There are no significant concentrations of credit risk. Accounting rules require the Company to choose whether
to designate cash flow hedge programmes or not (subject to various tests). The impact of not designating a cash flow hedge programme is that
all gains or losses on the derivatives in the programme have to be taken immediately to the income statement and cannot be deferred into equity.
The Group had the following designated cash flow hedge programmes during the current and previous reporting years:
Hedging activities
i)
The diesel fuel hedge programme uses forward commodity price swaps in US Dollar or Sterling and forward currency purchase
contracts to hedge the exposure arising from commodity price and US Dollar/Sterling exchange rates for forecast diesel fuel purchases.
ii) The jet fuel hedge programme uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and US Dollar/Sterling exchange rates for forecast jet fuel usage.
iii) The air conveyance hedge programme uses US Dollar forward currency purchase contracts to hedge the exposure arising from US
Dollar/Sterling exchange rates for forecast air conveyance purchases.
iv) Two capital programmes (one of which completed during 2013-14) use Euro forward currency purchase contracts to hedge the
exposure arising from Sterling/Euro exchange rates for contracted capital expenditure on automation projects.
v) The electricity hedge programme uses forward commodity price swaps to hedge the exposure arising from electricity prices.
vi) The gas hedge programme uses forward commodity price swaps to hedge the exposure arising from gas prices.
vii) The interest rate hedge programme uses interest rate swap contracts to hedge the exposure arising from interest rates on borrowings
under the Syndicated bank loan facilities
viii) The UKPIL overseas postal operations hedge programme uses US Dollar and Japanese Yen forward currency purchase contracts to
hedge the exposure arising from the US Dollar/Sterling and Japanese Yen/Sterling exchange rates elements of the forecast future net
purchases of delivery services in SDRs from overseas postal operators. This hedge programme covers the exposure up until the
purchases are incurred and recognised on the balance sheet.
The Group had undesignated cash flow hedge programmes for the transactional exposure created by inter-company loans with GLS and the
exposure of UKPIL to overseas postal operator liabilities for the period after the purchases have been incurred and recognised on the balance
sheet until the time when they are settled. The derivative balances of these programmes are not material.
Commodity price hedging
The Group’s normal operating activities result in the consumption of fuel (both diesel and jet), electricity and gas. The prices of these commodities
can be volatile so the Group enters into price swap contracts to lock future purchases (at an agreed volume) into a known price. For diesel fuel and
jet fuel these price swaps are sometimes entered into on the US Dollar price for the commodity (based upon available market prices), in which
case the Group uses forward foreign currency contracts to lock into a combined Sterling price for the commodity.
The following table shows the commodity, risk and the percentage of the expected consumption hedged. The Group hedges the cost of the
underlying commodity and any irrecoverable VAT that is incurred on this cost. It does not hedge any fuel duty. The exposures shown in the
following table exclude the costs of fuel duty and are based upon the hedges in place combined with market prices at the balance sheet date for
the unhedged amounts. Fuel duty (and the associated VAT) adds an additional cost of c.£100 million to diesel costs each reporting year. Total fuel
costs for 2014-15 are estimated to be £185 million.
Commodity
Diesel fuel
Jet fuel
Electricity
Gas
Risk
US$ price and $/£ exchange rate movements
US$ price and $/£ exchange rate movements
£ price movement
£ price movement
Exposure (excluding fuel duty) and expected consumption hedged 2014
52 weeks 2015
52 weeks 2016
52 weeks 2017
Exposure
Exposure
Exposure
£m % hedged
£m % hedged
£m % hedged
76
13
17
15
94%
86%
83%
75%
74
12
18
15
81%
82%
65%
66%
71
11
17
14
9%
–
7%
–
107
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
19. Hedging programmes (continued)
Commodity
Diesel fuel
Jet fuel
Electricity
Gas
Risk
US$ price and $/£ exchange rate movements
US$ price and $/£ exchange rate movements
£ price movement
£ price movement
Exposure (excluding fuel duty) and expected consumption hedged 2013
52 weeks 2014
52 weeks 2015
52 weeks 2016
Exposure
£m
% hedged
Exposure
£m
% hedged
Exposure
£m
% hedged
80
16
18
14
93%
92%
83%
81%
82
16
18
14
79%
–
54%
56%
83
16
19
14
8%
–
6%
7%
Foreign currency hedging for non-commodity items
As highlighted in note 14, the Group, where possible, nets exposure to foreign currency internally. The remaining net exposure is hedged with
external forward foreign currency contracts. For existing currency liabilities, the underlying exposures (e.g. the foreign postal administration
liabilities) and the derivatives are both revalued to current market prices at the balance sheet date, meaning that no net gains or losses arise in
the income statement. For forecast future currency exposures, the derivatives are revalued at the balance sheet date and effective movements
in value are deferred into equity until the hedged transaction occurs.
The following table shows for each hedge programme, the risk and the percentage hedged of the next 12 months’ exposure:
Hedge programme
Risk
Air conveyance
Capital programmes
Overseas postal operator
GLS inter-company loan
US$/£ exchange rate movements
€/£ exchange rate movements
SDR/£ exchange rate movements
€/£ exchange rate movements
Percentage of next 12
months’ exposure that has
been hedged
At 30 March
2014
Reported
At 31 March
2013
Reported
94%
100%
59%
100%
92%
95%
17%
100%
The next 12 months’ exposure is calculated as the combination of the cost of settling liabilities during the next 12 months and the cost of revaluing
unsettled liabilities at the end of 12 months.
As highlighted in note 14, the Company does not hedge the translational exposure created by the net assets of its overseas subsidiaries, mainly GLS.
Derivative values
At any point in time, the derivatives in these cash flow hedge programmes are either ‘in the money’ which means the hedged rates are better than
current market rates or ‘out of the money’ which means the hedged rates are worse than current market rates. The gains (‘in the money’) and
losses (‘out of the money’) as at the balance sheet date are deferred into equity (where the hedge is effective) and an associated financial asset or
financial liability is created in the balance sheet. The financial asset/liability is released when the derivative matures. The amounts deferred into
equity are released when the hedged transaction occurs. The following tables show the derivative contracts entered into at 30 March 2014 and
31 March 2013 and the associated derivative assets and liabilities.
108
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 19. Hedging programmes (continued)
Commodity/
currency
Diesel fuel
US$
Diesel fuel
Jet fuel
Jet fuel
US$
Euro
Electricity
Gas
US$
JPY
GBP
Commodity/
currency
Diesel fuel
US$
Diesel fuel
Jet fuel
Jet fuel
US$
Euro
Electricity
Gas
At 30 March 2014 Reported
Diesel fuel
Diesel fuel
Diesel fuel
Jet fuel
Jet fuel
Air conveyance
Capital programmes
Electricity
Gas
Overseas postal operators
Overseas postal operators
Interest rate swaps
Cash flow hedges
Other derivatives
Total
At 31 March 2013 Reported
Diesel fuel
Diesel fuel
Diesel fuel
Jet fuel
Jet fuel
Air conveyance
Capital programmes
Electricity
Gas
Cash flow hedges
Other derivatives
Total
Nominal amount
Maturity date
Average contracted
commodity price/
exchange rate/
interest rate
Derivative
asset
non-
current
fair value
£m
Derivative
asset
current
fair value
£m
Derivative
liability
non-
current
fair value
£m
Derivative
liability
current
fair value
£m
215m litres
$188m
80m litres
44m litres
$33m
$7m
€0.2m
528k MWH
33m therms
$43m
780m JPY
£150m
Apr 14 – Apr 16
Apr 14 – Jan 17
Apr 14 – Oct 16
Apr 14 – Mar 16
Apr 14 – Mar 16
Apr 14 – Apr 15
Oct 14
Apr 14 – Oct 16
Apr 14 – Apr 16
Apr 14
Apr 14
Apr 14 – Sep 18
US$ 0.77/litre
US$1.58/£
£0.5/litre
US$ 0.76/litre
US$1.55/£
US$1.59/£
£0.8/€
£55/MWH
£0.70/therm
US$1.66/£
JPY172/£
1.5% vs 1 month LIBOR
Nominal amount
Maturity date
Average contracted
commodity price/
exchange rate
215m litres
$169m
93m litres
20m litres
$17m
$29m
€4m
535k MWH
33m therms
Apr 13 – Apr 15
Apr 13 – Apr 15
Apr 13 – Oct 15
Apr 13 – Dec 13
Apr 13 – Dec 13
Apr 13 – May 14
Jun 13 – Oct 14
Apr 13 – Oct 15
Apr 13 – Oct 15
US$ 0.79/litre
US$1.56/£
£0.5/litre
US$ 0.81/litre
US$1.56/£
US$1.60/£
£0.82/€
£55/MWH
£0.70/therm
–
–
–
–
–
–
–
–
–
–
–
3
3
–
3
1
–
–
–
–
–
–
–
–
–
–
–
1
1
2
(1)
–
(3)
–
–
–
–
–
(1)
–
–
–
(5)
–
(5)
(1)
(1)
(3)
–
(1)
–
–
(2)
(2)
–
–
(2)
(12)
–
(12)
Derivative
asset
non-
current
fair value
£m
Derivative
asset
current
fair value
£m
Derivative
liability
non-
current
fair value
£m
Derivative
liability
current
fair value
£m
–
1
2
–
–
–
–
–
–
3
–
3
3
2
–
–
–
1
–
1
1
8
1
9
(1)
–
–
–
–
–
–
–
–
(1)
–
(1)
(1)
–
–
–
–
–
–
(1)
–
(2)
–
(2)
Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures, which are not designated under IAS
39 (including the hedge of the trading balance with overseas postal operators and the hedge of inter-company loans with overseas subsidiaries).
There are timing differences between the maturity of the derivatives and the maturity of the underlying hedged transaction. For example, diesel
derivatives that hedge the exposure to purchasing fuel in March 2013 mature in April 2013. Hence at 31 March 2013, the balance sheet includes
the market value of these derivatives but the cumulative gains and losses on these derivatives have been released from the hedge reserve to the
income statement to match the exposure to purchasing fuel in March 2013. Therefore there are differences between derivative balances (shown
above) and the balance on the hedging reserve.
109
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Other notes – balance sheet
The notes in this section provide additional information regarding certain assets and liabilities on the Group balance sheet, most notably
provisions – mainly in relation to transformation costs, and fixed and intangible assets and goodwill.
20. Provisions
21. Property, plant and equipment
22. Goodwill
23. Intangible assets
24. Investments in associates
25. Current trade and other receivables
26. Current trade and other payables
27. Issued share capital and reserves
28. Commitments
29. Related party information
110
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 20. Provisions
A summary of the provisions that have been made in the accounts, including in relation to transformation costs, is shown below.
Reported at 1 April 2013
Arising during the period:
− charged in transformation costs and operating specific items
− charged in other operating costs
Unused amounts reversed
Utilised in the period
Discount rate adjustment
Reported at 30 March 2014
Disclosed as:
Current at 30 March 2014
Non-current at 30 March 2014
Current at 31 March 2013
Non-current at 31 March 2013
Transformation costs
Management
reorganisation
programme
£m
–
(102)
–
–
–
–
(102)
(102)
–
(102)
–
–
–
Other
£m
(105)
(14)
–
2
83
–
(34)
(24)
(10)
(34)
(69)
(36)
(105)
Specific
items
£m
Other
£m
(87)
(7)
–
7
3
(3)
(87)
(19)
(68)
(87)
(18)
(69)
(87)
(54)
–
(19)
10
18
–
(45)
(28)
(17)
(45)
(32)
(22)
(54)
Total
£m
(246)
(123)
(19)
19
104
(3)
(268)
(173)
(95)
(268)
(119)
(127)
(246)
Transformation provisions (charged as transformation costs)
Transformation cost provisions of £136 million (2013 £105 million) principally comprise redundancy schemes of £134 million (2013 £92 million),
including £102 million charged in respect of the management reorganisation programme. A further £2 million (2013 £13 million) relates to
onerous property contracts associated with restructuring. Current transformation provisions of £126 million are expected to be utilised in 2014-15,
with the remainder within two to three years.
Specific items
The specific items provisions of £87 million at 30 March 2014 (2013 £87 million) include £62 million (2013 £67 million) for potential industrial
diseases claims relating to both current and former employees of the Group.
Royal Mail Group’s liability in respect of former employees arose in 2010 as a result of a Court of Appeal judgement that held the Group liable for
diseases claims brought by individuals who were employed in the General Post Office telecommunications division and whose employment ceased
prior to October 1981. Consequently, a provision was first recognised in 2010-11.
The Group has derived its current provision by using estimates and ranges calculated by its actuary, which are based on current experience of
claims, and an assessment of potential future claims, the majority of which are expected to be received over the next 25 to 30 years. The Group
has a rigorous process of ensuring that only valid claims are accepted. £3 million of this provision is expected to be utilised in 2014-15.
The remaining £25 million (2013 £20 million) mainly relates to IT systems costs associated with Post Office Limited separation, of which
£12 million is expected to be utilised in 2014-15, with the remainder expected to be utilised in the following year. An additional £7 million is in
respect of a German property tax liability of £4 million, expected to be utilised in 2014-15, and employer’s National Insurance associated with the
award of Employee Free Shares of £3 million, expected to be utilised within three to five years.
Other provisions (charged as operating costs)
‘Other’ provisions of £45 million (2013 £54 million) mainly comprise onerous lease obligations, decommissioning costs and estimated exposures
resulting from legal claims incurred in the normal course of business. The majority of ‘Other’ provision amounts are expected to be utilised in
2014-15, with £3 million onerous lease obligations and decommissioning costs expected to be utilised within two to three years, £2 million within
three to five years and a further £12 million over a period greater than five years.
111
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
21. Property, plant and equipment
Below are details of the Group’s property, equipment and vehicles, which are recorded at their historic cost (what we paid for them) less
accumulated depreciation (reflecting their usage within the business over their useful life – from 3 to 50 years).
Cost
Reported at 1 April 2013
Exchange rate movements
Reclassification
Additions
Disposals
Reclassification to non-current assets held for sale
Reported at 30 March 2014
Depreciation and impairment
Reported at 1 April 2013
Exchange rate movements
Reclassification
Depreciation (see note 13)
Disposals
Reclassification to non-current assets held for sale
Reported at 30 March 2014
Net book value
Reported at 30 March 2014
Reported at 1 April 2013
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures
and
equipment
£m
1,622
(5)
(26)
121
(40)
(23)
1,649
835
(2)
(1)
45
(34)
(18)
825
824
787
262
–
1
3
(1)
–
265
162
–
–
6
(1)
–
167
98
100
650
–
22
39
(19)
–
692
432
–
1
45
(15)
–
463
229
218
1,187
(2)
–
22
(23)
–
1,184
718
(1)
–
68
(23)
–
762
422
469
538
(1)
–
117
(45)
–
609
289
–
–
48
(41)
–
296
313
249
362
(2)
3
36
(20)
–
379
269
(2)
–
29
(20)
–
276
103
93
Total
£m
4,621
(10)
–
338
(148)
(23)
4,778
2,705
(5)
–
241
(134)
(18)
2,789
1,989
1,916
Depreciation rates are disclosed within accounting policies. No depreciation is provided on freehold land, which represents £210 million (2013
£196 million) of the total cost of properties. The net book value of the Group’s property, plant and equipment held under finance leases amounts to
£382 million (2013 £378 million) comprising £227 million (2013 £208 million) vehicles, £132 million (2013 £146 million) plant and machinery
and £23 million (2013 £24 million) land and buildings. The net book value of the Group’s property, plant and equipment includes £116 million
(2013 £206 million) in respect of assets in the course of construction. The net book value of the Group’s land and buildings includes £424 million
(2013 £382 million) in respect of building fit-out.
The £338 million (2013 £392 million) additions include borrowing costs capitalised in relation to specific qualifying assets of £nil (2013 £nil).
112
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
21. Property, plant and equipment (continued)
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures
and
equipment
£m
1,598
(70)
4
(29)
176
(33)
(22)
(2)
1,622
869
(68)
1
–
40
21
(16)
(11)
(1)
835
787
729
276
(17)
–
1
4
(2)
–
–
262
173
(16)
–
–
6
–
(1)
–
–
162
100
103
747
(114)
–
27
19
(29)
–
–
650
517
(114)
–
(1)
46
–
(16)
–
–
432
218
230
1,228
(4)
2
1
47
(87)
–
–
1,187
739
(4)
2
–
68
–
(87)
–
–
718
469
489
482
(34)
1
–
110
(21)
–
–
538
296
(34)
–
1
46
–
(20)
–
–
289
249
186
1,037
(709)
2
–
36
(4)
–
–
362
949
(709)
1
–
32
–
(4)
–
–
269
93
88
Total
£m
5,368
(948)
9
–
392
(176)
(22)
(2)
4,621
3,543
(945)
4
–
238
21
(144)
(11)
(1)
2,705
1,916
1,825
Cost
Reported at 26 March 2012
Transfer of Post Office Limited on 1 April 2012
Exchange rate movements
Reclassification
Additions
Disposals
Legal entity transfer to Post Office Limited during the year
Reclassification to non-current assets held for sale
Reported at 31 March 2013
Depreciation and impairment
Reported at 26 March 2012
Transfer of Post Office Limited on 1 April 2012
Exchange rate movements
Reclassification
Depreciation
Impairment (see note 4)
Disposals
Legal entity transfer to Post Office Limited during the year
Reclassification to non-current assets held for sale
Reported at 31 March 2013
Net book value
Reported at 31 March 2013
Reported at 26 March 2012
22. Goodwill
This note provides details of the goodwill at the start and end of the reporting year, most of which relates to the Group’s acquisition of its
overseas subsidiary, General Logistics Systems (GLS).
Cost
Reported at 1 April 2013 and 26 March 2012
Exchange rate movements
Acquisition of businesses
Disposal of business
Reported at 30 March 2014 and 31 March 2013
Impairment
Reported at 1 April 2013 and 26 March 2012
Exchange rate movements
Disposal of business
Reported at 30 March 2014 and 31 March 2013
Net book value
Reported at 30 March 2014 and 31 March 2013
Reported at 1 April 2013 and 26 March 2012
2014
£m
2013
£m
611
(9)
4
(37)
569
415
(6)
(37)
372
197
196
599
8
4
–
611
410
5
–
415
196
189
The carrying value of goodwill arising on business combinations of £197 million (2013 £196 million) at the balance sheet date includes £195 million
(2013 £194 million) relating to the General Logistics Systems (GLS) business segment. In line with the Group’s accounting policy (see accounting
policies), 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 £492 million (2013 £487 million) at 30 March 2014 and
the operating profit before transformation costs items is £108 million (2013 £101 million) for the period (note 2).
113
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 22. Goodwill (continued)
The disposal of business relates to the sale of G3 Worldwide Mail N.V. (Spring), an associate company, on 2 April 2013.
The carrying value of GLS (£492 million) represents a multiple of 4.6 (2013 4.8) of operating profit before transformation costs. The net realisable
value of GLS, for the purposes of the impairment review (i.e. the ‘fair value less costs of disposal’), has been assessed with reference to earnings
multiples for quoted entities in a similar sector of 6.6. On this basis, the net realisable value has been assessed to be in excess of the carrying
value. The earnings multiples referenced would need to reduce by more than 47 per cent to 3.5 to reduce the net realisable value to below the
carrying value.
23. Intangible assets
Intangible assets, mainly software, are recorded in much the same way as our physical assets such as property and vehicles, but with
shorter useful lives over which they are amortised (three to six years).
Cost
Reported at 1 April 2013 and 26 March 2012
Transfer of Post Office Limited on 1 April 2012
Additions
Disposals
Acquisition of business
Exchange rate movements
Reported at 30 March 2014 and 31 March 2013
Amortisation and impairment
Reported at 1 April 2013 and 26 March 2012
Transfer of Post Office Limited on 1 April 2012
Impairment (note 4)
Amortisation (note 13)
Disposals
Exchange rate movements
Reported at 30 March 2014 and 31 March 2013
Net book value
Reported at 30 March 2014 and 31 March 2013
Reported at 1 April 2013 and 26 March 2012
2014
2013
Master
franchise
licences
£m
Customer
listings
£m
Software
£m
Total
£m
Master
franchise
licences
£m
Customer
listings
£m
Software
£m
Total
£m
23
–
–
–
–
–
23
23
–
–
–
–
–
23
–
–
32
–
–
–
1
(1)
32
28
–
–
1
–
(1)
28
4
4
287
–
88
(5)
–
–
370
152
–
–
32
(5)
–
179
191
135
342
–
88
(5)
1
(1)
425
203
–
–
33
(5)
(1)
230
195
139
23
–
–
–
–
–
23
23
–
–
–
–
–
23
–
–
30
–
–
–
2
–
32
26
–
–
2
–
–
28
4
4
431
(183)
44
(5)
–
–
287
300
(183)
(1)
41
(5)
–
152
135
131
484
(183)
44
(5)
2
–
342
349
(183)
(1)
43
(5)
–
203
139
135
The intangible assets outlined above, none of which has been internally generated, have finite lives and are being written down on a straight-
line basis.
24. Investments in associates
This note provides details of the Group’s associate companies, including the Group’s share of the revenue, profit and net assets of
these entities.
In early March 2013 it was announced that G3 Worldwide Mail N.V. (Spring), one of only two associate companies of the Group, was to be sold
and, accordingly, the Group’s investment in the company (£1 million) was held within the ‘non-current assets held for sale’ category on the Group
balance sheet at 31 March 2013. The Group’s investment in the company, held by Royal Mail Investments Limited, was subsequently sold on
2 April 2013. The Group’s share of the company’s revenue and profits for the period up to 2 April 2013 was not material and the Group’s share
of the net assets of the company at that date was £1 million.
Quadrant Catering Limited (‘Quadrant’), the Group’s sole remaining 51% owned associate company, has a reporting date as the last day of
September each year. Accordingly, to ensure that the reported share of the profit of this company aligns with the Group’s reporting year ended
30 March 2014 (2013 period ended 31 March 2013), the cumulative profit figure for this period is taken from the company’s management
reporting systems, although this includes an estimated profit figure for the month of March.
The majority of Board membership and voting power in Quadrant, a company incorporated in the United Kingdom, providing catering services for
the UK businesses, is held by the other investor company, hence it is not a subsidiary. The Group’s investment in Quadrant is held by Royal Mail
Group Limited. There are no significant restrictions on the ability of Quadrant Catering Limited to transfer funds to the Group in the form of cash
dividends, repayment of loans or advances.
114
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 24. Investments in associates (continued)
The Group’s share of Quadrant’s revenue for the reporting year was £19 million (2013 £22 million) and its share of Quadrant’s profit after tax was
£3 million (2013 £1 million). The Group’s share of the net assets of Quadrant at 30 March 2014 was £4 million (at 31 March 2013, £3 million).
During the reporting year the Group received a £2 million dividend (2013 £nil) from Quadrant.
25. Current trade and other receivables
The following details relate to amounts owed to the Group by third parties (including Post Office Limited) and also the level of bad and
doubtful debts that the Company has provided for in the financial statements.
Trade receivables
Prepayments and accrued income
Income tax receivable
Total
Movements in the provision for bad and doubtful debts were as follows:
At 1 April 2013 and 26 March 2012
Transfer of Post Office Limited
Receivables provided for during the period
Release of provision
Utilisation of provision
At 30 March 2014 and 31 March 2013
The amount of trade receivables that were past due but not impaired are shown below.
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
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
809
111
6
926
758
241
5
1,004
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
(30)
–
(8)
4
7
(27)
(40)
5
(11)
10
6
(30)
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
61
8
14
83
753
(27)
809
93
8
29
130
658
(30)
758
115
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 26. Current trade and other payables
The following details relate to amounts owed by the Group to third parties (including Post Office Limited).
Trade payables and accruals
Advance customer payments (mainly for stamps held, not yet used by customers)
Social security
Capital expenditure payables
Other
Total
The fair value of trade and other payables is not materially different from the carrying value.
27. Issued share capital and reserves
Authorised share capital
1,000,000,000 Ordinary Shares of £0.01 each
Total
Issued and fully paid share capital
1,000,000,000 Ordinary Shares of £0.01 each
Total
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
(1,156)
(322)
(104)
(60)
(10)
(1,652)
(1,076)
(375)
(102)
(48)
(10)
(1,611)
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
10
10
–
–
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
10
10
–
–
For EPS purposes the 1,000,000,000 Ordinary Shares are deemed to have been authorised and in issue for the entirety of both reporting years
(see notes 9 and 10 for further details).
Reserves included in the consolidated statement of changes in equity
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
These reserves related to Post Office Limited (POL) associate and joint venture investments and were therefore included in the loss on the
transfer of POL to Royal Mail Holdings plc on 1 April 2012, taken through equity in the comparative year 2012-13.
Share premium account
This account, established as part of the dissolution of The Post Office Corporation in 2001-02, was subject to a capital reduction on
27 June 2012. The capital reduction was approved by a special resolution of Royal Mail Group Limited, supported by a solvency statement made
by its Directors pursuant to section 642 of the Companies Act 2006.
116
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 28. Commitments
The information below includes details of committed future rental payments for the use of assets which the Group does not legally own,
and are either not recognised on the Group’s balance sheet (operating leases) or are recognised on the Group’s balance sheet (finance
leases) on the basis that the risks and rewards incidental to ownership of the finance leased assets lie with Royal Mail plc Group.
Operating lease commitments
The Group is committed to the following future minimum lease payments under non-cancellable operating leases:
Within one year
Between one and five years
Beyond five years
Total
Land and buildings
Vehicles and equipment
IT equipment
Total
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
At 30 March
2014
Reported
£m
At 31 March
2013
Reported
£m
(115)
(373)
(470)
(958)
(125)
(391)
(507)
(1,023)
(12)
(12)
(8)
(32)
(13)
(14)
–
(27)
(9)
(10)
–
(19)
(8)
(17)
–
(25)
(136)
(395)
(478)
(146)
(422)
(507)
(1,009)
(1,075)
Existing leases for UK land and buildings have an average term of 16 years and lease renewals are agreed with the lessor as appropriate. Existing
land and buildings leased overseas by the GLS subsidiary have an average lease term of eight years. Vehicle leases generally have a term of
between one and seven years, depending on the asset class, with the average term being two years – the existing leases have an average term
remaining of one year. The majority of the IT commitments relate to 10-year contracts, with an average term remaining of three years.
Finance lease commitments
Within one year
Between one and five years
Beyond five years
Total minimum lease payments
Less future finance charges
Total finance lease obligations
At 30 March 2014
Reported
At 31 March 2013
Reported
Minimum
lease
payments
£m
(94)
(243)
(113)
(450)
108
(342)
Present value
of minimum
lease
payments
£m
(87)
(227)
(28)
(342)
–
(342)
Minimum
lease
payments
£m
(87)
(208)
(122)
(417)
112
(305)
Present value
of minimum
lease
payments
£m
(79)
(195)
(31)
(305)
–
(305)
The Group has finance lease contracts for vehicles, land and buildings and plant and equipment. The leases have no terms of renewal, purchase
options, escalation clauses or restrictions concerning dividends, borrowings or additional leases. Vehicle leases have a term of between one and
seven years, depending on the class of vehicle, with the average term being four years. Property leases have a term of between 10 and 104 years
with the average term being 46 years. The terms of the plant and equipment leases range from five to eight years with the average being
five years.
Capital commitments
The Group has commitments of £35 million at 30 March 2014 (31 March 2013 £42 million), which are contracted for but not provided for in the
financial statements.
117
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 29. Related party information
This note provides details of amounts owed to and from related parties, which include the Royal Mail Pension Plan (RMPP), the Group’s
associate companies, and payments to key management personnel. Details of the Group’s principal subsidiaries and associates are also
provided.
Related party transactions
During the reporting 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 plans by Royal Mail Pension Trustees Limited of £6 million
(2013 £5 million) and services charged to the Group by its associate company, Quadrant Catering Limited (Quadrant) of £22 million (2013
£26 million). Amounts owed by the Group to Quadrant at 30 March 2014 were £2 million (at 31 March 2013 £1 million owed by Quadrant to
the Group).
The Group also trades with numerous HM Government bodies on an arm’s length basis. HM Government has retained a c.30 per cent stake in
Royal Mail plc on the Company’s stock market flotation. HM Government still owns 100 per cent of Post Office Limited through its Postal Services
Holding Company Limited entity. Transactions with HM Government entities, including Post Office Limited, are not disclosed owing to the
significant volume of transactions that are conducted.
The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured, interest
free and settlement is made by cash.
Key management compensation
Short-term employee benefits
Post-employment benefits
Other long-term benefits1
Total compensation earned by key management
52 weeks
2014
Reported
£000
53 weeks
2013
Reported
£000
(3,173)
–
(2,654)
(5,827)
(3,753)
–
–
(3,753)
1 The 2014 other long-term benefits amount consists of £1,327,000 for each of the 2010 and 2011 LTIP awards that vested at 30 March 2014.
Key management comprises Executive and Non-Executive Directors of Royal Mail plc at 30 March 2014.
The ultimate parent and principal subsidiaries
Royal Mail plc is the ultimate parent Company of the Group. The consolidated financial statements include the financial results of Royal Mail Group
Limited and the other principal subsidiaries listed below:
Company
General Logistics Systems B.V.
Royal Mail Estates Limited
Royal Mail Investments Limited
Romec Limited
Associates
Company
Quadrant Catering Limited
G3 Worldwide Mail N.V. (Spring)
Principal activities
Country of incorporation
Parcel services holding company Netherlands
Property holdings
Holding company
Facilities management
United Kingdom
United Kingdom
United Kingdom
Principal activities
Catering services
Mail services
Country of incorporation
United Kingdom
Netherlands
% equity
interest
2014
% equity
interest
2013
100
100
100
51
100
100
100
51
%
ownership
2014
%
ownership
2013
51
32.45
51
32.45
The majority of Board membership and voting power in Quadrant Catering Limited is held by the other investor company, hence it is not
a subsidiary.
The investment in Quadrant Catering Limited is held by Royal Mail Group Limited, the investment in G3 Worldwide Mail N.V. (Spring) was held by
Royal Mail Investments Limited until its disposal on 2 April 2013.
The Company has taken advantage of the exemption under section 410 of the Companies Act 2006, a schedule of interests in all undertakings
will be filed with the Annual Return.
118
Notes to the consolidated financial statements (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Significant accounting policies
Basis of consolidation
The consolidated financial statements comprise the financial statements 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 intra-Group balances and transactions, including unrealised profits arising from intra-Group transactions, have been eliminated in full. Transfer
prices between business segments are set on a basis of charges reached through 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.
Non-controlling interests represents the portion of profit/loss, gains/losses and net assets relating to subsidiaries that are not attributable to
members of the Company. The non-controlling interest balance is presented within equity in the consolidated balance sheet, separately from
parent shareholders’ equity.
Changes in accounting policy and disclosures
The accounting policies applied in the preparation of these financial statements are consistent with those in the Annual Report for the year ended
31 March 2013, except for the adoption of amended/revised and new accounting standards with effect from 1 April 2013 and new accounting
policies relating to ‘Merger accounting’, ‘Share-based payments’ and ‘Earnings per share’ as detailed below:
IAS 1 ‘Presentation of Items of Other Comprehensive Income’ (amended)
This amendment relates only to disclosure and requires the Group to present items in other comprehensive income (OCI) based on whether they
can potentially be subsequently classified to profit or loss. Taxation associated with items presented before taxation must also be shown
separately in OCI, depending on whether or not they can potentially be subsequently reclassified to profit or loss.
IAS 19 ‘Employee Benefits’ (revised)
The key impact of this revision has been to replace the separate assumptions for expected return on schemes’ assets and discounting of schemes’
liabilities, and replace them with one single discount rate for the net surplus or deficit. This net interest income/cost is measured based on the
schemes’ discount rate. Asset returns greater or less than the accounting discount rate are recognised in the Statement of Comprehensive Income
(SOCI). The effect of this change has been to recognise a net pension interest credit of £30 million for the year ended 31 March 2013, compared
with the £34 million recognised previously in the 2012-13 Annual Report.
IFRS 13 ‘Fair Value Measurement’
This new standard applies to existing IFRSs that require or permit fair value measurements or disclosures. This standard requires additional
disclosures but has no impact on the financial performance or position of the Group.
Annual Improvements to IFRSs 2009 – 2011 Cycle
These improvements clarify the requirements of IFRSs and eliminate inconsistencies within and between standards. The only impact on the Group
of these improvements will be when the Group makes distributions to holders of equity instruments and the recognition of income tax relating to
the distribution and associated transaction costs will be accounted for in accordance with IAS 12 ‘Income Taxes’ and not IAS 32 ‘Financial
Instruments: Presentation’.
Merger transaction of Royal Mail plc and Royal Mail Group Limited
As part of the Group reorganisation prior to the Initial Public Offering, Royal Mail plc acquired the entire share capital of Royal Mail Group Limited
through issuance of its shares to the then parent Company, Royal Mail Holdings plc (subsequently renamed Postal Services Holding Company plc
on 11 September 2013). As there were no changes to the shareholder group at the time of this transaction and Royal Mail plc is not a business,
this transaction did not classify as a business combination as defined under IFRS 3 ‘Business Combinations’. The consolidated financial statements
of Royal Mail plc have therefore been prepared as a continuation of the existing Group.
Share-based payment (equity-settled transactions)
The cost of equity-settled transactions with employees is measured by reference to the fair value of equity instruments at the date on which they
are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully
entitled to the award.
No expense is recognised for awards that do not ultimately vest. At each balance sheet date before vesting, the cumulative expense is calculated,
representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of service
conditions and of the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous balance
sheet date is recognised in the income statement, with a corresponding entry in equity.
Earnings per share (EPS)
Basic earnings per share (EPS) from continuing operations is calculated by dividing the profit or loss from continuing operations (adjusted for
non-controlling interests’ share of profit) by the weighted average number of Ordinary Shares. The Group EPS is calculated in the same way
except that it also includes profit or loss from discontinued operations.
Diluted EPS is only relevant if the Group has potential ordinary shares e.g. financial liabilities or equity instruments, including preference shares
that are convertible into Ordinary Shares, options (including employee share options) and shares that would be issued in satisfaction of certain
conditions that result from contractual arrangements.
119
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Key sources of estimation, uncertainty and critical accounting judgements
Pensions
The value of the pension plan liabilities is determined by long-term actuarial assumptions which include inflation rates and mortality rates.
Differences arising from actual experience or future changes in assumptions will be reflected in the Group’s consolidated statement of
comprehensive income. The Group exercises its judgement in determining the assumptions to be adopted, after discussion with its actuary.
Deferred revenue
The Group recognises advance customer payments on its balance sheet (see note 26) relating to stamps and meter credits purchased by
customers but not used at the balance sheet date. The valuation of this deferred revenue is based on a number of different estimation and
sampling methods using external specialist resource as appropriate, the results of which are reviewed by management in order to make a
judgement of the carrying amount of the accrual. The total accrual is held within current trade and other payables but a portion (which cannot
be measured) will relate to stamps and meter credits used one year or more after the balance sheet date.
Deferred taxation
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 carrying values of the deferred tax assets and liabilities are included within note 6.
Provisions
Due to the nature of provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future.
Restructuring provisions, including for redundancy and property costs, are derived based upon the most recent business plan for direct
expenditure where plans are sufficiently detailed and appropriate communication to those affected has been undertaken. This includes the
expected number of employees impacted, rate of compensation per employee, rental costs and expected period of properties remaining vacant
and dilapidation costs. The industrial diseases claims provision is based on the best information available as at the year end, including independent
expert advice.
Revenue
Revenue reported in the income statement is net of value added tax and comprises turnover which principally relates to the rendering of services
as follows:
UK Parcels, International & Letters
Account revenue is derived from specific contracts and recognised when the delivery of an item 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.
General Logistics Systems
Revenue is derived from specific contracts and is recognised at the time of delivery.
Distribution and conveyance costs
Distribution and conveyance costs relate to non-people costs incurred in transporting and delivering mail. These include conveyance by rail, road,
sea and air, together with costs incurred by international mail carriers and Parcelforce Worldwide delivery operators and GLS. These costs are
disclosed separately on the face of the income statement.
Specific items
The Group previously disclosed items that in management’s judgement needed to be shown separately by virtue of their size, nature or incidence
as ‘exceptional items’. There are, however, other items of income/expense, that management now discloses separately, which do not ordinarily
meet the definition of ‘exceptional items’ (e.g. finance income on the sale of pension escrow gilts, pension interest and elements of taxation). The
Group decided, therefore, not to continue using the ‘exceptional items’ definition and, instead, to refer to items of income/expense that are
considered as requiring separate disclosure as ‘specific items’.
This new definition has been introduced on the basis that the financial results excluding these specific items are consistent with how financial
and operational performance is measured by management in providing a meaningful analysis of the Group’s trading results and cash flows.
These specific items may not be comparable to similarly termed measures used by other companies.
Employee shares scheme
The Group operates an equity settled, share-based compensation plan under which the Group receives services from employees as consideration
for equity instruments (shares) of the Company. The fair value of the employee services received in exchange for the grant of the shares is
recognised as an expense in the income statement, with a corresponding credit entry in equity, as per the requirements of IFRS 2 ‘Share-based
Payment’. The total amount expensed is determined by reference to the fair value of the shares granted.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied.
The social security contributions payable in connection with the grant of shares is considered an integral part of the grant itself, and the charge
is treated as a cash-settled transaction.
120
Significant accounting policies (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Operating profit
Operating profit is the profit arising from the normal, recurring operations of the business and after charging operating specific items defined
above. It excludes the non-operating specific 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 reporting year, in comparison to prior years.
Income taxation and deferred taxation
The charge for current taxation is based on the results for the reporting 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 income taxation assets and liabilities are recognised for all taxable and deductible temporary differences and unused taxation assets and
losses except:
• Initial recognition of goodwill;
• The initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit and loss;
• Taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the
reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future; and
• Deferred taxation assets are recognised only to the extent that it is probable that taxable profit will be available against which they can
be utilised.
The carrying amount of deferred taxation assets is reviewed at each balance sheet date and increased or reduced to the extent that it is probable
that sufficient taxable profit will be available to allow them to be utilised.
Deferred taxation assets and liabilities are measured at the taxation rates that are expected to apply to the period when the taxation asset is
realised or the liability is settled, based on tax rates (and tax laws) that have been substantively enacted at the balance sheet date. Deferred tax
balances are not discounted.
Current and deferred taxation 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.
Segment information
The Group’s operating segments are organised and managed separately according to the nature of the products and services provided, with each
segment representing a business unit that offers different products and serves largely different markets. Management monitors the operating
results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment
performance is evaluated based on EBITDA before transformation costs.
There is no aggregation of operating segments. The operating units that make up the three operating segments are detailed in note 2.
The operating segments comprise operations in both the UK and other parts of Europe, the latter being relevant to the GLS business segment.
The UK operations include the remaining two operating segments plus the ‘Other’ segments.
Segment revenues have been attributed to the respective countries based on the location of the customer.
Transfer prices between segments are set on a basis of charges reached through negotiation with the respective business units that form part
of the segments.
There are no differences in the measurement of the respective segments’ profit/loss and the consolidated financial statements prepared
under IFRSs.
Property, plant and equipment
Property, plant and equipment is recognised at cost, including directly 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
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
2-12 years
2-15 years
121
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information 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.
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 on a straight-line basis as follows:
Customer listings
Software
3 to 4 years
3 to 6 years
Investments in associates
The Group’s investments in its 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 associates, less any impairment
in value. The income statement reflects the Group’s share of post-tax profits from the 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.
Non-current assets held for sale and discontinued operations
Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its
present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one
year from the date of classification. Following their classification as held for sale, non-current assets (including those in a disposal group) are not
depreciated. The results of operations disposed during the reporting year are included in the consolidated statement of comprehensive income up
to the date of disposal.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of
operations or is a subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria
to be classified as held for sale. Discontinued operations are presented in the consolidated statement of comprehensive income as a single line
which comprises the post-tax profit or loss of the discontinued operation along with the post-tax gain or loss recognised on the remeasurement to
fair value less costs to sell or on disposal of the assets or disposal groups constituting discontinued operations.
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 capital element 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.
122
Significant accounting policies (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Leases (continued)
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases and
rentals are charged to the income statement over the lease term. The aggregate benefit of incentives is recognised as a reduction of rental
expense over the lease term on a straight-line basis.
A leasehold land payment is an upfront payment to acquire a long-term leasehold interest in land. This payment is stated at cost and is amortised
on a straight-line basis over the period of the lease.
Trade receivables
Trade receivables are recognised and carried at the 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 reporting date.
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:
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, 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, and these funds are
also categorised as cash equivalents.
For the purpose of the statement of cash flows, 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 cash at bank, conventional gilt edged securities, index-linked gilt edged securities,
Treasury bills and a money market fund investment established to provide security to the Royal Mail Senior Executive Pension Plan (RMSEPP)
in support of a deficit recovery plan agreed with the Trustee in 2013.
Conventional gilt edged securities, index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity.
Financial assets – other investments
Financial assets – other investments comprise short-term deposits (other investments) with HM Government, local government or banks with
an original maturity of three months or more. Short-term deposits are classified as loans and receivables financial instruments.
Financial liabilities – interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
123
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Financial liabilities – obligations under finance leases
All obligations under finance leases are classified as financial liabilities measured at amortised cost.
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 attributable either to a particular risk associated with a recognised asset or liability or to a highly probable forecast transaction.
In relation to cash flow hedges to hedge the interest rate, foreign exchange or commodity price 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 reporting year in which the hedged firm commitment affects the net profit/loss, for example
when the hedged transaction 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, 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 reporting year.
Fair value measurement of financial instruments
The fair value of quoted investments (including conventional gilt edged securities, index-linked gilt edged securities and Treasury bills) is
determined by reference to bid prices at the close of business on the balance sheet date. Hence the conventional gilt edged securities, index-linked
gilt edged securities and Treasury bills are within Level 1 of the fair value hierarchy as defined within IFRS 13.
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). Hence derivative assets and
liabilities are within Level 2 of the fair value hierarchy as defined within IFRS 13.
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.
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-taxation rate.
Pensions and other post-retirement benefits
The pension 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 active members of defined benefit schemes are contracted out of the earnings-
related part of the State Second 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 amount resulting from applying the Plan’s discount rate (for liabilities) to the pension surplus
at the beginning of the reporting year is recognised as net pension interest in the income statement. Due to the substantial change in the RMPP
surplus resulting from the Pensions Reform, the net pension interest was recalculated at the half year to £69 million (2013 £30 million) for the
full year. Actuarial gains and losses are recognised immediately in the statement of comprehensive income. Any deferred tax movement
associated with the actuarial gains and losses is also recognised in the statement of comprehensive income.
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.
124
Significant accounting policies (continued)Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Foreign currencies
The functional and presentational currency of Royal Mail 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 year, being a reasonable approximation to the actual
transaction rate. The exchange rate 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 historic 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.
Accounting standards issued but not yet applied
The following new and revised accounting standards are relevant to the Group and are in issue but were not effective (and in some instances have
not yet been adopted by the EU) at the balance sheet date:
IAS 19 (Amended) Employee benefits: Employee contributions
IAS 27 (Amended) Separate Financial Statements
IAS 28 (Amended) Investments in Associates and Joint Ventures
IAS 36 (Amended) Impairment of Assets
IAS 39 (Amended) Financial Instruments: Recognition and Measurement
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
Annual Improvements 2010-2012 and Annual Improvements 2011-2013
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial performance or position
of the Group in future periods.
125
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Group five year summary (unaudited)
The following information has been prepared on a 52-week basis and excludes, for the comparative years, the Group’s former Post Office Limited
(POL) subsidiary, which was transferred to Royal Mail Holdings plc (subsequently renamed Postal Services Holding Company Limited) on 1 April
2012 (see note 1 for further details). The Directors are of the view that this non-GAAP presentation provides a meaningful comparative history of
the current Group excluding POL.
Financial reporting year (52 weeks) ending March
Income statement
2014
£m
2013
£m
2012
£m
2011
£m
Revenue
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items
Non-operating specific items
Earnings before interest and taxation (EBIT)
Finance income/(costs) – mainly net pension interest (non-operating specific item)
Finance costs – other
Profit/(loss) before taxation from continuing operations
Taxation (specific items and other)
Profit/(loss) after taxation from continuing operations
1 This net pension cost has not been adjusted in accordance with IAS 19 revised, as adopted during the 2013-14 reporting year.
9,456
671
(241)
430
1,213
21
1,664
69
(67)
1,666
(386)
1,280
9,146
598
(195)
403
(77)
4
330
52
(99)
283
246
529
2013
£m
915
(60)
(3)
(407)
(258)
(81)
106
202
(26)
52
334
2013
£m
1,916
139
24
1,012
(1,647)
-
(246)
196
3
1,397
351
20
(973)
(304)
(906)
89
580
825
1,405
8,764
381
(229)
152
(57)
182
277
(230)
(100)
(53)
(51)
(104)
2012
£m
681
(19)
(45)
(429)
(150)
(87)
(49)
-
(37)
240
154
2012
£m
1,822
135
32
1,036
(1,548)
4
(217)
189
3
1,456
473
149
(1,522)
(286)
(1,186)
(9)
261
(2,716)
(2,455)
8,415
210
(192)
18
(48)
106
74
(419)
(84)
(429)
(123)
(552)
2011
£m
493
(58)
(292)
(379)
(176)
(59)
(471)
-
(5)
230
(246)
2011
£m
1,829
126
33
906
(1,423)
40
(252)
197
9
1,465
319
87
(1,478)
(200)
(1,272)
(2)
191
(4,185)
(3,944)
2010
£m
8,547
332
(185)
147
4
2
153
(306)1
(82)
(235)
(87)
(322)
2010
£m
595
31
(395)
(325)
(234)
(64)
(392)
-
(8)
10
(390)
2010
£m
1,932
99
32
911
(1,536)
10
(233)
197
46
1,458
171
178
(1,183)
(123)
(957)
90
591
(7,477)
(6,886)
2014
£m
942
(57)
58
(284)
(333)
69
257
140
(35)
36
398
2014
£m
1,989
195
22
939
(1,683)
(20)
(268)
197
4
1,375
366
20
(600)
(341)
(555)
(142)
679
1,723
2,401
2014
148,441
13,811
3,999
166,251
2013
149,940
13,646
4,030
167,616
2012
151,156
13,362
3,926
168,444
2011
155,181
13,167
4,254
172,602
2010
160,291
12,885
4,217
177,393
Free cash flow2
EBITDA before transformation costs
Trading working capital movements
Difference between ongoing pension costs and pension cash flows
Transformation investment – operating and capital expenditure
Non-transformation investment – capital expenditure
Other (dividends, taxation, interest)
Underlying cash inflow/(outflow)
One-off working capital movements
Cash cost of operating specific items
Disposal of assets/business
Free cash inflow/(outflow)
2 An explanation of free cash flow is provided in note 7.
Balance sheet
Property, plant and equipment
Intangible assets (mainly software)
Inventories
Trade and other receivables
Trade and other payables
Other net (liabilities)/assets
Provisions
Goodwill (mainly relates to GLS)
Investments in associates
Net operating assets and investments in associates
Cash and cash equivalents
Pension escrow investments
Loans and borrowings
Other net financial liabilities
Net debt
Deferred taxation (liabilities)/assets
Net assets before pension deficit and pension escrow investments
Pension surplus/(deficit)
Net assets/(liabilities)
People numbers – period end employees
UKPIL
GLS
UK partially owned subsidiaries
Group total
126
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Statement of Directors’ responsibilities in
respect of the Group financial statements
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each reporting year. Under that law the Directors are required to prepare
the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and
Article 4 of the IAS Regulation. Under Company law the Directors must not approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and accounting estimates that are reasonable and prudent;
• State that the Group has complied with IFRS as adopted by the EU, 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 adequate accounting records that are sufficient to show and explain the Company’s and Group’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure
that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and
the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Directors’ report, the Corporate Governance report and the Directors’ remuneration report
in accordance with the Companies Act 2006 and applicable regulations, including the Listing Rules and the Disclosure and Transparency Rules.
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.
Responsibility statement
Each of the Directors, whose names and functions are disclosed on page 38, confirms that, to the best of their knowledge:
• The financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Company and the Group taken as a whole; and
• The Management report, which is incorporated into the Strategic report, and the Directors’ report includes a fair review of the development and
performance of the business and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, the Board considers that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
By Order of the Board
Moya Greene
Chief Executive Officer
6 June 2014
Matthew Lester
Chief Finance Officer
127
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Independent Auditor’s Report
to the members of Royal Mail plc
We have audited the financial statements of Royal Mail plc for the period ended 30 March 2014 which comprise the Consolidated income
statement, the Consolidated statement of comprehensive income, the Consolidated statement of changes in equity, the Consolidated balance
sheet, the Consolidated statement of cash flows statement and the related notes 1 to 29. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s 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 Auditor
As explained more fully in the statement of Directors’ responsibilities set out on page 127, the Directors are responsible for the preparation of
the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion
on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the Group financial statements
An audit involves obtaining evidence about the amounts and disclosures in the Group financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment
of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed;
the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Group financial statements.
In addition, we read all the financial and non-financial information in the Annual Report 2014 to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with,
the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the Group financial statements:
• Give a true and fair view of the state of the Group’s affairs as at 30 March 2014 and of its profit for the period then ended;
• Have been properly prepared in accordance with IFRSs as adopted by the European Union; and
• Have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Our assessment of risks of material misstatement
We identified the following risks that have had the greatest effect on the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team:
• Revenue recognition across the Group’s operations, specifically in relation to the accounting for stamps and meters deferred revenue and the
risk of management override;
• Accounting and valuation of the Group’s pension scheme; and
• Completeness and measurement of the Group’s provisions, including the recognition of severance provisions and industrial diseases claims.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements on our audit and
on the financial statements. For the purposes of determining whether the financial statements are free from material misstatement we define
materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying
on the financial statements, would be changed or influenced. We also determine a level of performance materiality which we use to determine the
extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole.
When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material for
the financial statements as a whole. We determined planning materiality for the Group to be £27.0 million, which is approximately 5 per cent
of adjusted profit before tax (2013: 0.5 per cent of revenue). This provided a basis for determining the nature, timing and extent of risk
assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further
audit procedures.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement is that overall
performance materiality for the Group should be 75 per cent of planning materiality, namely £20.3 million. Our objective in adopting this
approach is to ensure that total detected and undetected audit differences do not exceed our planning materiality of £27.0 million for the
financial statements as whole.
We agreed with the Audit and Risk Committee that we would report to the Committee all adjusted and unadjusted audit differences in excess
of £1.4 million. We also agreed to report differences below those thresholds that, in our view, warranted reporting on qualitative grounds.
128
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 An overview of the scope of our audit
Following our assessment of the risk of material misstatement to the Group financial statements, we selected eleven components which
represent the principal business units within the Group’s reportable segments and account for 95 per cent of the Group’s revenue and
99 per cent of the Group’s profit before tax. Two of these components were subject to a full audit, four were subject to audits of specific
account balances and five were subject to review procedures. For the remaining components, we performed other procedures to confirm
there were no significant risks of material misstatement in the Group financial statements.
The audit work for some of the locations and the statutory audits were executed at levels of materiality applicable to each individual entity
which were much lower than Group materiality.
The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor
or his designate visits each of the two full scope locations at least once a year. This year, the Group audit team visited the UK and overseas
full scope locations. For all full scope entities, the Group audit team reviewed key working papers and participated in the component team’s
planning including the component team’s discussion of fraud and error.
Our response to the risks of material misstatement included the following procedures:
• We performed controls testing over revenue recognition, including the timing of revenue recognition, challenged management’s underlying
assumptions and methodology used in its stamps and meters deferred revenue calculations, as well as assessing whether the revenue
recognition policies adopted complied with IFRSs. We performed analytical procedures and journal entry testing in order to identify and test
the risk of fraud arising from management override of controls;
• Using the knowledge and expertise of our own actuarial specialists, we challenged management’s key assumptions and estimates used in its
pension accounting to evaluate the appropriateness of the methodology. We also considered whether the Group’s pension disclosures are
appropriate and in accordance with IFRSs; and
• We reviewed the Group’s provisions to understand the appropriateness of assumptions supporting management’s estimates, challenging
management’s accounting treatment and disclosures. We also assessed the completeness of the Group’s provisions and contingent liabilities
and compliance with IFRSs recognition and measurement criteria.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• The information given in the Strategic report and the Directors’ report for the financial period for which the financial statements are
prepared is consistent with the financial statements; and
• The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
• Materially inconsistent with the information in the audited financial statements; or
• Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing
our audit; or
• Is otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit
and the Directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report
appropriately discloses those matters that we communicated to the Audit & Risk Committee which we consider should have been disclosed.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• Returns adequate for our audit have not been received from branches not visited by us, or
• The part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and return, or
• Certain disclosures of Directors’ remuneration specified by law are not made; or
• We have not received all the information and explanations we require for our audit.
129
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Independent Auditor’s Report
to the members of Royal Mail plc (continued)
Under the Listing Rules we are required to review:
• The Directors’ statement, set out on page 46, in relation to going concern; and
• The part of the Corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review.
Other matter
We have reported separately on the parent Company financial statements of Royal Mail plc for the period ended 30 March 2014 and on the
information in the Directors’ remuneration report that is described as having been audited.
Richard Wilson (Senior statutory auditor)
for and on behalf of Ernst and Young LLP,
Statutory Auditor
London
6 June 2014
130
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Royal Mail plc – parent Company financial
statements
The majority of the Annual Report and Financial Statements relates to the Royal Mail plc Group consolidated accounts, which comprise the
aggregation of all the Group’s trading entities (subsidiaries and associated undertakings). This mandatory section reports the individual balance
sheet and notes of the ultimate holding company, Royal Mail plc (the Company).
Company balance sheet
At 30 March 2014
Fixed assets
Investment in subsidiary
Total fixed assets
Current assets
Debtors – amounts falling due in less than one year
Current liabilities
Creditors – amounts falling due in less than one year
Provisions for liabilities and charges
Net current assets
Net assets
Capital and reserves
Called up share capital
Retained earnings
Shareholders’ funds
The balance sheet was approved and authorised for issue by the Board of Directors on 6 June 2014 and signed on its behalf by:
Matthew Lester
Chief Finance Officer
At 30 March
2014
£m
Notes
6
7
8
9
10
1,591
1,591
–
(4)
–
(4)
1,587
10
1,577
1,587
131
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information
Notes to the parent Company
financial statements
1. Parent Company accounting policies
Financial reporting year
The Company was incorporated on 6 September 2013 (see note 9 for further details).
The financial reporting year ends on the last Sunday in March and, accordingly, these financial statements are made up for the period
6 September 2013 to 30 March 2014.
Basis of preparation
The financial statements of the Company were authorised for issue by the Board on 6 June 2014.
The financial statements and notes on pages 131 to 133 have been prepared in accordance with applicable UK accounting standards and law,
including the requirements of the Companies Act 2006. Unless otherwise stated in the accounting policies below, the financial statements have
been prepared under the historic cost accounting convention.
The Company has not presented its own profit and loss account as permitted by section 408 of the Companies Act 2006. However, the results
of the Company are presented in notes 4 and 10 to the financial statements.
The Company has taken advantage of paragraph 2D of FRS 29 (IFRS 7) ‘Financial instruments’ 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 financial statements have been issued.
Investment in subsidiary
The investment in subsidiary is stated at cost less any accumulated impairment losses.
Debtors
Debtors are recognised with an allowance for any non-collectable amounts, including where collection is no longer probable.
2. Directors’ emoluments
The Directors of the Company are not paid any fees by the Company for their services as Directors of the Company. The Directors are paid fees by
other companies of the Group. These emoluments are disclosed in the Group financial statements.
3. Auditor’s remuneration
The auditor of the Company is not paid fees by the Company. The auditor of the Company is paid fees by other companies of the Group. This
remuneration is disclosed in the Group financial statements (see note 13).
4. Profit and loss account
The Company is a non-trading company. The loss for the period of £4 million (2013 £nil) is in respect of transaction-related costs.
5. Taxation
There is no taxation charge/credit for the period.
6. Investment in subsidiary
At 12 September 2013
Investment in subsidiary – cost of Employee Free Shares
At 30 March 2014
£m
1,500
91
1,591
The investment in subsidiary at 12 September 2013 relates to the transfer of Royal Mail Group Limited (see note 9).
7. Debtors – amounts falling due within one year
This balance includes the share capital issued at incorporation (see note 9).
8. Provisions for liabilities and charges
In connection with the transfer of Royal Mail Group Limited (see note 9), a provision for liabilities and charges of less than £1 million is recognised.
132
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 9. Called up share capital
Authorised
1,000,000,000 Ordinary Shares of £0.01 each
Total
Allotted and issued
1,000,000,000 Ordinary Shares of £0.01 each
Total
At 30 March
2014
£m
10
10
10
10
The Company was incorporated as Royal Mail Limited on 6 September 2013 with share capital of 100 Ordinary Shares of £1.50 each (£150)
issued to Royal Mail Holdings plc. Royal Mail Holdings plc was renamed Postal Services Holding Company plc (’PSH’) on 11 September 2013.
Subsequently on 12 September 2013, share capital of 999,999,900 Ordinary Shares of £1.50 each (£1,499,999,850) was issued by the Company
to PSH in consideration for the transfer from PSH of the entire issued share capital of Royal Mail Group Limited. Following this transfer, and
therefore as at 12 September 2013, the issued share capital of the Company comprised 1,000,000,000 Ordinary Shares of £1.50 each
(£1,500,000,000). In connection with the transfer, a provision for liabilities and charges has been recognised (see note 8 above). This is included
in the cost of investment.
On 17 September 2013, Royal Mail Limited (subsequently re-registered as Royal Mail plc on 19 September 2013) approved a reduction of
capital by way of solvency statement to cancel £1.49 from each issued Ordinary Share of £1.50. This reduction of capital was registered on
18 September 2013, and reduced share capital from £1,500 million to £10 million and increased distributable reserves by £1,490 million.
Postal Services Holding Company plc was subsequently renamed Postal Services Holding Company Limited (‘PSH’) on 12 December 2013.
10. Shareholders’ funds
At 6 September 2013 (incorporation – see note 9)
Loss for the period
Issue of shares in consideration for the transfer of Royal Mail Group Limited shares
Reduction of capital (see note 9)
Investment in subsidiary
At 30 March 2014
Called up
share capital
£m
–
–
1,500
(1,490)
–
10
Retained
earnings
£m
–
(4)
–
1,490
91
1,577
2014
Total
£m
–
(4)
1,500
–
91
1,587
133
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Statement of Directors’ responsibilities in
respect of the parent Company financial
statements
The Directors are responsible for preparing the Directors’ report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare
the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards
including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’) and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the
state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are
required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and accounting 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 adequate accounting records that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
Matthew Lester
6 June 2014
134
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014
Independent Auditor’s Report
to the members of the parent Company,
Royal Mail plc
We have audited the parent Company financial statements of Royal Mail plc for the period ended 30 March 2014 which comprise the parent
Company balance sheet and the related notes 1 to 10. The financial reporting framework that has been applied in their preparation is applicable
law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
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
As explained more fully in the Statement of Directors’ responsibilities statement set out on page 134, the Directors are responsible for the
preparation of the parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the parent Company financial statements sufficient to give reasonable
assurance that the parent Company financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the parent Company’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the parent
Company financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the parent Company financial statements:
• Give a true and fair view of the state of the Company’s affairs as at 30 March 2014;
• Have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• Have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion:
• The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• The information given in the Strategic report and the Directors’ report for the financial period for which the financial statements are prepared is
consistent with the parent Company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• The parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the
accounting records and returns; or
• Certain disclosures of Directors’ remuneration specified by law are not made; or
• We have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Royal Mail plc for the period ended 30 March 2014.
Richard Wilson (Senior statutory auditor)
for and on behalf of Ernst and Young LLP,
Statutory Auditor
London
6 June 2014
135
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014Strategic reportGovernanceFinancial statementsOther information Shareholder information
Information for investors
Information for investors is provided on the internet
as part of the Group’s website which can be found at:
www.royalmailgroup.com/investor-centre.
Investor enquiries
Enquiries can be directed via our website or by contacting:
Registrars
Equiniti
Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA
www.shareview.co.uk
Tel: 0871 384 2656 (from outside the UK: +44 (0)121 415 7086)
Fax: 0871 384 2100 (from outside the UK: +44 (0)1903 698403)
Calls to this number cost 8p per minute from a BT landline, other
providers’ costs may vary. Lines are open 8.30am to 5.30pm UK time,
Monday to Friday.
Registered office
Royal Mail plc
100 Victoria Embankment
London EC4Y 0HQ
Registered in England and Wales
Company number 08680755
Corporate websites
Information made available on the Group’s websites does not, and is
not intended to, form part of these Results.
Royal Mail, the Cruciform and the Parcelforce Worldwide logo are
registered trade marks of Royal Mail Group Limited. The GLS arrow
logo is a registered trade mark of General Logistics Systems Germany
GmbH & Co. OHG. Annual Report 2013-14 © Royal Mail Group Limited
2014. All rights reserved.
Financial calendar
Interim Management Statement – 22 July 2014
Annual General Meeting – 24 July 2014
Dividend dates
Ex-dividend date – 2 July 2014
Record date – 4 July 2014
Payment date – 31 July 2014
Shareholder information online
The Company’s registrars, Equiniti, are able to notify shareholders by
email of the availability of an electronic version of shareholder information.
Whenever new shareholder information becomes available, such as
the Company’s interim and full-year results, Equiniti will notify you by
email and you will be able to access, read and print documents at your
own convenience.
To take advantage of this service for future communications, please go
to www.shareview.co.uk and select ‘Shareholder Services’, where full
details of the shareholder portfolio service are provided. When
registering for this service, you will need to have your 11-digit
shareholder reference number to hand, which is shown on your
dividend tax voucher, share certificate or form of proxy.
Should you change your mind at a later date, you may amend your
request to receive electronic communication by entering your
shareview portfolio online and amending your preferred method of
communication from ‘email’ to ‘post’.
Shareholder fraud
Fraudsters use persuasive and high-pressure tactics to lure investors
into scams. They may offer to sell shares that turn out to be worthless
or non-existent, or to buy shares at an inflated price in return for an
upfront payment. While high profits are promised, if you buy or sell
shares in this way you will probably lose your money.
5,000 people contact the Financial Conduct Authority (FCA) about
share fraud each year, with victims losing an average of £20,000.
If you are approached by fraudsters please tell the FCA using the share
fraud reporting form at www.fca.org.uk/scams, where you can find out
more about investment scams. You can also call the FCA Consumer
Helpline on 0800 111 6768. If you have already paid money to share
fraudsters you should contact Action Fraud on 0300 123 2040.
Advisers
Corporate Brokers and Financial Advisers
Barclays Bank plc, The North Colonnade, London, E14 4BB
Independent Auditor
Ernst & Young LLP, 1 More London Place, London SE1 2AF
Trustee of The Royal Mail Share Incentive Plan
Equiniti Share Plan Trustees Limited, Aspect House, Spencer Road,
Lancing, West Sussex, BN99 6DA
www.royalmailemployeeshares.co.uk
Tel: 0800 012 1213
136
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 Forward looking statements
Disclaimers
This document contains certain forward looking 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. Forward looking
statements are sometimes, but not always, identified by their use of
a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’,
‘may’, ‘will’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘potential’,
‘targets’, ‘goal’ or ‘estimates’.
Forward looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the Group’s actual
financial condition, performance and results to differ materially from
the plans, goals, objectives and expectations set out in the forward
looking statements included in this document. Accordingly, readers are
cautioned not to place undue reliance on forward looking statements.
By their nature, forward looking statements relate to events and
depend on circumstances that will occur in the future and are
inherently unpredictable. Such forward looking statements should,
therefore, be considered in light of various important factors that could
cause actual results and developments to differ materially from those
expressed or implied by these forward looking statements. These
factors include, among other things: changes in the economies and
markets in which the Group operates; changes in the regulatory regime
within which the Group operates; changes in interest and exchange
rates; the impact of competitive products and pricing; the occurrence of
major operational problems; the loss of major customers; undertakings
and guarantees relating to pension funds; contingent liabilities; the
impact of legal or other proceedings against, or which otherwise affect,
the Group; and risks associated with the Group’s overseas operations.
All written or verbal forward looking statements, made in this
document or made subsequently, which are attributable to the Group
or any persons acting on their behalf are expressly qualified in their
entirety by the factors referred to above. No assurance can be given
that the forward looking statements in this document will be realised;
actual events or results may differ materially as a result of risks and
uncertainties facing the Group. Subject to compliance with applicable
law and regulation, the Company does not intend to update the forward
looking statements in this document to reflect events or circumstances
after the date of this document, and does not undertake any obligation
to do so.
137
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138
Royal Mail plc Annual Report and Financial Statements for the year ended 30 March 2014 100% recycled. 100% FSC accredited.
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Annual Report 2013-14 © Royal Mail Group Limited 2014. All rights reserved.