Royal Mail plc
Annual Report and
Financial Statements
2015-16
Celebrating
500 Years
of Royal Mail
Royal Mail has a rich
and varied history,
characterised by a
tradition of service and
innovation spanning
500 years.
For five centuries, our postal network
has been connecting families and friends,
powering business and driving innovation
across the country.
In 1516, Henry VIII knighted Brian Tuke,
the first Master of the Posts. This act
was the catalyst for the creation of the
Royal Mail postal service, as we know
it today. Tuke had the influence and
authority to establish key post towns
across the country and set up a formal
postal network.
Since its royal beginnings, the postal
service has continued to deliver the
nation’s mail for 500 years, under 21
different monarchs and through two
World Wars, employing hundreds of
thousands of people along the way.
To mark this momentous anniversary,
Royal Mail has launched a special
website featuring the people, objects
and events that played a key role
in the development of the world’s
first national postal service. Visit:
www.royalmailgroup.com/500years
Within the pages of this report you will
find ‘then and now’ image captions
showcasing how Royal Mail has evolved
over the last 500 years.
Welcome
Strategic report
Governance
Financial
statements
Who we are ....................................................................................................................... 02
Financial and operating performance highlights .......................................................... 04
Chairman’s statement ...................................................................................................... 05
Chief Executive Officer’s review ...................................................................................... 07
Market overview................................................................................................................ 12
Our business model .......................................................................................................... 14
Our strategy ....................................................................................................................... 16
Key performance indicators ............................................................................................. 18
UK Parcels, International & Letters (UKPIL) .................................................................. 22
General Logistics Systems (GLS) .................................................................................... 24
Financial review................................................................................................................. 25
Principal risks .................................................................................................................... 32
Corporate responsibility ................................................................................................... 37
Chairman’s introduction to corporate governance ....................................................... 42
Board of Directors ............................................................................................................ 43
Chief Executive’s Committee ........................................................................................... 47
Statement of corporate governance .............................................................................. 49
Directors’ remuneration report ....................................................................................... 60
Directors’ report ................................................................................................................ 81
Independent Auditor’s Report to the members of Royal Mail plc. ............................. 86
Consolidated income statement ..................................................................................... 89
Consolidated statement of comprehensive income ..................................................... 90
Consolidated balance sheet ............................................................................................. 91
Consolidated statement of changes in equity ............................................................... 92
Consolidated statement of cash flows ........................................................................... 93
Notes to the consolidated financial statements ............................................................ 94
Significant accounting policies ......................................................................................138
Royal Mail plc parent Company financial statements ................................................148
Other
information
Group five year summary (unaudited) .........................................................................151
Shareholder information ................................................................................................153
Forward-looking statements .........................................................................................154
Annual Report and Financial Statements 2015-16
| 01
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Who we are
Who we are
2016 marks 500 years of postal services in the UK. From a few
royal messengers in Tudor times to more than 120,000 postmen
and women today, connecting people, communities and businesses
is part of who we are. Royal Mail is the UK’s pre-eminent letters
and parcels carrier. As the UK’s sole designated Universal Service
Provider1, we are proud to deliver a ‘one-price-goes-anywhere’
service on a range of letters and parcels to more than 29 million
addresses, across the UK, six-days-a-week.
Through UK Parcels, International &
Letters (UKPIL), we make a very significant
contribution to the wider UK economy.
In 2015‑16, our impact, including key
activities like employment and procurement,
totalled £10.8 billion in terms of value added.
We made the fifth largest contribution to the
UK economy of all UK corporations2. Through
our pan‑European parcels delivery business,
General Logistics Systems (GLS), we are one
of the largest, ground‑based deferred parcel
delivery service providers in Europe.
Our people
We employ around 156,000 people
across our Group. UKPIL employs around
139,000 people and approximately 3,000
people work in our UK partially‑owned
subsidiaries. On average, one in 175
employed people in the UK works for Royal
Mail3. GLS employs around 14,000 people.
Our shareholders
In 2015‑16, HM Government sold its
remaining shareholding in Royal Mail. To date,
11 per cent of Royal Mail shares have been
given to eligible employees, for free. A further
one per cent will be allocated in due course.
This is one of the largest free employee
stakes of any major UK privatisation. We are
proud to continue to have a large and diverse
shareholder base, including a significant
proportion of retail shareholders.
1 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
Service Provider. Subject to the special
administration regime, and as set out in the Act,
this designation is not time‑limited
2 Comprising direct and indirect contributions
3 Cebr research, conducted for Royal Mail in May 2016
Our position
Letters continue to be a very important part
of our business. They account for almost
60 per cent of our UK revenue. We expect
continued declines in addressed letter
volumes (excluding elections) of around
4‑6 per cent per annum in the medium‑term.
This means that delivering letters and parcels
together is a key driver of efficiency and
productivity in our Universal Service network.
Royal Mail is the largest parcel delivery
operator in the UK. Home delivery is
expected to remain customers’ preferred
delivery option4. This is a significant
opportunity for Royal Mail, as we are well
positioned to deliver to every doorstep in
the UK.
Changing relationships between retailers
and delivery operators, growing segments –
such as ‘same‑day’ delivery – and disruptive
technologies reflect an industry which is
undergoing profound change. Volume growth
in our UK addressable parcel market5,6 is
dependent on the expansion of Amazon
Logistics. In addition, there is continued
capacity growth. These factors are putting
pressure on prices across the industry.
Our transformation
We are changing from a letters company that
delivers parcels, to a parcels company that
delivers letters. In an environment of rapid
change, we need to become more agile and
respond quickly to changing customer needs.
4 IMRG Consumer Delivery Report, 2015
5 Internal estimate based on Triangle Management
Services/RMG Fulfilment Market Measure (2014);
defined as individually addressed parcels and
packets, generated and delivered in the UK, weighing
up to 30kg, that do not require special handling.
Includes access fulfilment large letters & parcels and
excludes click and collect, same‑day, small local
operators and all international traffic
6 Excludes Amazon Logistics and other retailers
own‑delivery networks
02
| Annual Report and Financial Statements 2015-16
We have made significant investments in our
core business and to develop our IT capability.
In the medium‑term, the faster areas of
growth in the parcels market are expected
to be: clothing and footwear7; returns7
and ‘same‑day'8. We are changing our
UK operations so we can handle, where
appropriate, larger parcels. We are
becoming more flexible to accommodate the
developing needs of e‑retailers and online
shoppers. This includes later acceptance
times and adding more products to our
weekend collections at Mail Centres and
Regional Distribution Centres (RDCs), and
making customer pick‑up and returns easier
with our Local Collect network.
We are demonstrating the value of letters
to our customers through product and
service innovations, such as Mailmark®. This
investment has helped us to achieve more
accurate billing. Campaigns like MAILMEN,
which features 22 leading executives in the
advertising industry, help demonstrate the
effectiveness of mail as part of a targeted and
integrated advertising campaign.
Against a backdrop of innovation and
investment, we currently have around
70 projects that focus on cost avoidance
and efficiency. Becoming more efficient and
productive allows us to be more competitive.
This, in turn, helps us to grow our existing
customer relationships and win new
business. It helps to fund further investment
in our growth and to maintain our fair terms
and conditions for our people.
7 Verdict research. UK e‑retail parcel market
growth 2015‑2020
8 Triangle Management Services and RMG
estimate 2014
Our operations
and networks
The Group operates through UKPIL and GLS.
UKPIL
UKPIL comprises Royal Mail’s core UK and
international parcels and letters 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
Service Provider. Parcelforce Worldwide is a
leading provider of express parcel services.
See page 22 for details of UKPIL’s
performance.
GLS
GLS is the Group’s European parcels
business. It operates one of the largest
ground‑based, parcel delivery networks
in Europe. The GLS network covers
41 European 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 the Royal Mail Group.
See page 24 for details of GLS’
performance.
UKPIL
c.139,000
Employees
6
GLS
c.14,000
Employees
41
Regional Distribution Centres
European hubs
c.700
Depots
c.14,000
Parcel shops
c.20,000
Sub-contractor vehicles
399
Mail Centres
c.1,400
Delivery Offices
c.11,700
Local Collect locations
54
Parcelforce Worldwide depots
c.47,00010
Vehicles
Key
UKPIL
GLS
GLS Network
Partners
9 Portsmouth Mail Centre closed April 2016
10 Includes around 2,500 trailers
Annual Report and Financial Statements 2015-16
| 03
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Financial and operating performance highlights
Financial and operating
performance highlights
Group financial highlights
Adjusted1 results (£m)
Revenue
Operating profit before transformation costs
Operating profit after transformation costs
Margin
Profit before tax
Earnings per share (pence)
Reported3 results (£m)
Operating profit before transformation costs
Operating profit after transformation costs
Profit before tax
Earnings per share (pence)
In‑year trading cash flow
Net debt
Full year proposed dividend per share (pence)
Business units
52 weeks
ended
27 March 2016
52 weeks
ended
29 March 2015
Underlying
change2
1%
5%
(2%)
(10 bps)
• Addressed letter volumes4 declined by
three per cent, better than our forecast
range, largely due to the return of direct
delivery volumes.
• UKPIL collections, processing and delivery
productivity improved by 2.4 per cent,
within our target range of a 2.0‑3.0 per
cent improvement per annum.
• We have seen a net reduction in the
number of UKPIL employees of around
3,500 this year.
• We narrowly missed the 93.0 per cent
regulatory First Class mail target, with
92.5 per cent of this mail delivered the next
working day (see page 10). We exceeded
our regulatory Quality of Service target of
98.5 per cent for Second Class mail.
5%
• GLS continued to perform strongly.
Volumes were up 10 per cent. Revenue
was up nine per cent, with growth in
almost all markets.
9,251
742
551
6.0%
538
41.3p
485
294
267
21.5p
254
(224)
22.1p
9,328
740
595
6.4%
569
42.8p
611
466
400
32.5p
315
(275)
21.0p
Revenue
52 weeks
ended
29 March
2015
7,757
1,557
14
9,328
52 weeks
ended
27 March
2016
7,666
1,580
5
9,251
Underlying
change
(1%)
9%
n/m
1%
Adjusted operating
profit before
transformation costs
52 weeks
ended
27 March
2016
52 weeks
ended
29 March
2015
608
117
17
742
615
115
10
740
(£m)
UKPIL
GLS
Other
Group
Group financial performance
• Revenue was up one per cent, with
growth in GLS offsetting the decline in
UKPIL revenue.
• Adjusted operating profit before
transformation costs was £742 million,
up five per cent.
• Adjusted operating profit margin
after transformation costs was down
10 basis points as a result of increased
transformation costs due to our cost
avoidance and efficiency programme.
•
In‑year trading cash flow of £254 million
reflects increased investment in growth
capital expenditure.
• Our strategic focus on costs resulted in
a one per cent reduction in underlying
UKPIL operating costs before
transformation costs.
• Net debt reduced to £224 million due to
free cash flow, offset by dividend payments.
• The Board is recommending a final
dividend of 15.1 pence per ordinary share
giving a total dividend of 22.1 pence per
share for 2015‑16, up five per cent.
Business performance
• UKPIL revenue was down one per cent.
A one per cent increase in parcel revenue
was offset by a two per cent decline in
total letter revenue.
• UKPIL parcel volumes were up three per
cent, driven by continued growth in import
parcels, new contract wins in account
parcels and a strong performance in
Parcelforce Worldwide. However, revenue
reflected a weaker mix due to declines in
high average unit revenue (AUR) parcels.
04
| Annual Report and Financial Statements 2015-16
Outlook
• Outlook for UK letter and parcel market
trends remains unchanged.
• UKPIL cost avoidance programme on
track and we expect to avoid a similar
level of costs in 2016‑17 as the prior year.
• We continue to seek opportunities to
drive efficiency, with transformation
costs currently expected to be around
£160 million in 2016‑17.
• Rate of revenue growth in GLS expected to
slow in 2016‑17.
• We expect total net investment spend to
be within £550‑600 million per annum in
the medium‑term.
• We remain focused on in‑year trading cash
flow, which underpins our commitment to
a progressive dividend policy.
1 All adjusted results are a non‑International Financial
Reporting Standards (IFRS) measure and exclude
specific items. The commentary in this report, unless
specified otherwise, focuses on the operating results on
an adjusted basis. This is consistent with the way that
financial performance is measured by Management and
reported to the Board and assists in providing a
meaningful analysis of the results of the Group
2 All movements are on an underlying basis unless
otherwise stated. Underlying change is calculated after
adjusting for movements in foreign exchange in GLS,
working days in UKPIL and other one‑off items that
distort the Group’s underlying performance. For volumes,
underlying movements are adjusted for working days in
UKPIL and exclude elections in letter volumes
3 Prepared in accordance with IFRS
4 Excluding election mailings
Dividend and Free Shares
Following the Government’s sale of its
remaining stake in Royal Mail, the Company is
now 100 per cent owned by private shareholders
and institutional investors. This includes
11 per cent given to eligible colleagues for free,
with a further one per cent to be allocated in due
course. This helps to create alignment between
the interests of our hard‑working colleagues
and our broad shareholder base.
Since our flotation on the London Stock
Exchange in October 2013, and including our
proposed final dividend, eligible full‑time
colleagues who have received the maximum
allocation of 832 Free Shares will have received
over £430 in dividend payments.
We remain committed to our progressive
dividend policy. The Board recommends the
payment of a final dividend of 15.1 pence
per ordinary share on 29 July 2016, subject
to approval by our shareholders at our 2016
Annual General Meeting (AGM). The proposed
total dividend of 22.1 pence per ordinary share
is a five per cent increase on the total dividend of
21.0 pence per ordinary share for 2014‑15.
A responsible employer
We are proud to deliver the Universal Service
to over 29 million addresses across the UK,
six‑days‑a‑week. Our contribution to the UK, as
an employer and a delivery company, continues
to be significant. In 2015‑16, we made the fifth
largest contribution to the wider UK economy of
all UK corporations1.
A recent survey2 found that more than
two‑thirds of British adults have a favourable
view of Royal Mail. This placed us at the top
of all the brands featured. The survey also
found that we are an important part of local
communities (85 per cent), an important part of
the UK economy (81 per cent), and an important
part of society (83 per cent).
We want to be recognised as an industry leader
in the important area of safety. We are delivering
a reduction in Lost Time Accidents – one of
our 14 Key Performance Indicators (KPIs)
for 2015‑16. We have reduced sick absence,
another of our 2015‑16 KPIs, with a five per cent
improvement on last year (see page 18 for more
information). Our aim is to build a proactive
‘zero harm’ safety culture.
Our focus on colleague health and wellbeing
means we are one of only four companies
to have achieved lead company status
in the 2015 Business in the Community
Wellbeing Benchmark.
1 Comprising direct and indirect contributions. Cebr
research, conducted for Royal Mail in May 2016
2 Ipsos MORI Corporate Image Survey Winter 2015
Annual Report and Financial Statements 2015-16
| 05
Chairman’s statement
This year marks a milestone in our history. The postal
service is celebrating 500 years of connecting people,
supporting businesses and driving innovation.
I feel privileged to join such an historic organisation at
a pivotal moment in its history. On 1 September 2015,
I succeeded Donald Brydon as Chairman. I would like to
thank Donald for his hard work and commitment. I look
forward to continuing to work with Moya and the Board
as the Company continues to transform and meet the
challenges that lie ahead.
Peter Long
Chairman
18 May 2016
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Chairman’s statement
A responsible company
2015‑16 saw the continuation of our successful
partnership with the Stroke Association,
for which we have raised £1.1 million so far,
including matched funding. By the end of our
two‑year partnership in August, we hope to
have reached our target of raising £2 million to
help the charity provide Life After Stroke grants
of up to £300 each to help around 10,000 stroke
survivors. Our colleagues always go the extra
mile to help our charity partners. Every penny
they raise is matched by our Company, up to a
total of £2,500 per employee.
Our partnership with the charity Missing People
provides additional ‘eyes and ears’ in the search
for vulnerable individuals up and down the
country. We have made our extensive Postal
Digital Assistant (PDA) network available to the
charity to distribute alerts for High Risk Missing
People and Child Rescue Alerts. By sharing Child
Rescue Alerts through our national network,
we effectively doubled the number of people
who received them.
Celebrating our heritage
We continue to support the Postal Museum
(formerly the British Postal Museum and
Archive) at an exciting time in its history.
The last year has been significant for the
Postal Museum; work is now underway on its
renovations and the Museum and Mail Rail are
due to open to the public in 2017.
We are also delighted that the Postal
Museum joined us as a heritage partner for
our celebrations marking 500 years of the
postal service. Together, we have created
an online gallery of 500 objects, people and
events at www.royalmailgroup.com/500years.
This gallery tells the story not only of the postal
service but also of its contribution to social and
political history over the last 500 years.
In this historic year for our Company, we were
honoured that Her Majesty The Queen visited
our delivery office in Windsor to mark our
500 year celebrations. The visit took place on
20 April 2016, the day before her 90th birthday.
The occasion was made even more special by
her consenting to the office being renamed
The Queen Elizabeth Delivery Office.
Our Board
In addition to the stepping down of my
predecessor, John Allan resigned from the Royal
Mail plc Board of Directors on 30 April 2015.
Journey ahead
I am impressed by the dedication of our people
to our Company and to the communities
we serve. This continues to be a time of
transformation, as we progress along our
journey of innovation, change, and growth in
new areas, while driving for increased efficiency
and embedding a cost conscious culture.
Peter Long
Chairman
18 May 2016
I have felt very welcomed by the Board and
would like to thank them for their counsel.
I also have the pleasure of working alongside
Royal Mail’s Chief Executive Officer, Moya
Greene. Her achievements to date in
transforming the Company, driving efficiency
and steering Royal Mail through a period of
significant change – which continues – are
impressive. I look forward to continuing to work
closely with Moya as we seek to create a more
agile, responsive business.
As stated in last year’s Annual Report and
Financial Statements 2014‑15, the effectiveness
of the Board, its Committees, the Executive
Directors, Non‑Executive Directors and the
Chairman (Donald Brydon) was assessed in
September 2014 by an external consultancy.
As such, the Company was not required to
carry out an independent evaluation for this
reporting year. The same company was engaged
to review the effectiveness of the Board and
the Remuneration Committee, since my
appointment, for the year ended 27 March 2016.
More details can be found in the Governance
section on page 51.
Dow Jones
In 2015, Royal Mail plc was named as global
sustainability leader in the Transportation and
Transportation Infrastructure Industry in the
Dow Jones Sustainability Indices for the second
year running. Royal Mail is included in both
the Dow Jones Sustainability World Index and
Dow Jones Sustainability Europe Index.
We achieved industry‑leading scores for
corporate citizenship and philanthropy, tax
strategy, social reporting and stakeholder
engagement, ahead of around 80 other
organisations in the transportation sector.
This includes ground‑based transportation
companies in marine, rail, trucking, freight
forwarding, and logistics and infrastructure
businesses.
The Dow Jones Sustainability Indices are
the longest running and one of the most
widely‑used benchmarks in the field. They are
based on the assessments by RobecoSAM,
a company that specialises in sustainability
investing.
The first pillar boxes in the British Isles were erected
in Jersey in 1852 as a trial. The trial was considered a
success and boxes began appearing across mainland
Britain from 1853.
See the inside back page to learn more.
06
| Annual Report and Financial Statements 2015-16
Our performance
Group revenue increased by one per cent1.
GLS revenue growth of nine per cent offset a
one per cent reduction in UKPIL revenue.
As a result of our strategic focus on costs
across the Group, adjusted2 Group operating
profit before transformation costs was
£742 million. Transformation costs were
£191 million due to our accelerated efficiency
programme. This led to a decline of 10 basis
points in the adjusted Group operating
profit margin after transformation costs to
6.0 per cent.
In‑year trading cash flow of £254 million
was £61 million lower than the prior year,
reflecting higher investment spend in
2015‑16.
Our strategy
We have a plan in place to help us protect our
core business and grow in new areas. We are
responding to our changing environment by
updating our strategic priorities. They are
underpinned by putting the customer at the
heart of everything we do.
Our strategic priorities are:
• Winning in parcels;
• Defending letters; and
• Growing in new areas.
Enabled by:
• Strategic focus on costs;
• Technology and innovation; and
• An engaged and motivated workforce.
See pages 16-17 for more information.
Winning in parcels
We are the UK’s leading parcels carrier.
Our scale as the Universal Service Provider
means that businesses selling goods
online can operate just as effectively from
a village in rural North Wales as a business
in the centre of London. We provide a vital
delivery network that, in particular, supports
consumers and small and medium‑sized
enterprises (SMEs).
1 All movements are on an underlying basis unless
otherwise stated. Underlying change is calculated
after adjusting for movements in foreign exchange in
GLS, working days in UKPIL and other one‑off items
that distort the Group’s underlying performance.
For volumes, underlying movements are adjusted for
working days in UKPIL and exclude elections in
letter volumes
2 All adjusted results are a non‑IFRS measure and
exclude specific items. The commentary in this report,
unless specified otherwise, focuses on the operating
results on an adjusted basis. This is consistent with the
way that financial performance is measured by
Management and reported to the Board and assists in
providing a meaningful analysis of the results of
the Group
Annual Report and Financial Statements 2015-16
| 07
Chief Executive Officer’s
review
We have delivered a resilient performance in challenging
markets. We are continuing to deliver service
improvements and product innovations to meet
customer needs. We are stepping up our investment in
growth, to ensure we are agile and responsive in our
fast-changing market place.
Moya Greene
Chief Executive Officer
18 May 2016
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Chief Executive Officer’s review
Competitive marketplaces
The UK parcels market remains one of the
most competitive in Europe. We estimate that
the total blended market3 volume of parcel
deliveries in the UK will grow at four4 per cent
per annum in the medium‑term. However,
we estimate that annual addressable market
volume growth will be impacted depending
on the expansion of Amazon Logistics.
In the consumer/SME segment, competition
is intense and growing. Increased collection,
delivery and return options are giving
consumers more choice. We have introduced
a wide range of initiatives to maintain our
pre‑eminent position in this segment. We are
seeing an improvement in the volume trend
through these channels.
Large retailers are seeking new fulfilment
channels by building or expanding delivery
and/or collection networks, cutting other
delivery operators out of the value chain.
Carriers are bringing new capacity online,
which is putting pressure on prices. We are
also seeing growth in the use of disruptive
technologies and fast‑growing delivery
options, albeit from a low base. Royal Mail
is performing well in the account parcels
segment. We have won new contracts with
John Lewis Partnership, Urban Group, M&S
and Waterstones. New contract wins have
more than offset lost Amazon volumes, and
we are seeing some uptrading to higher
revenue tracked services.
International markets are intensely
competitive, with UK market dynamics
increasingly replicated in international,
cross‑border services. International accounts
for 19 per cent of UKPIL parcel volumes and
18 per cent of revenue. We saw a reduction
in export volumes during the year. We have
spent a significant amount of time developing
strategies to address this. However, it
remains a key strategic focus for the next
12 months.
Our performance
Our broad customer base means that we
are less exposed to the actions of our
larger customers than some of our peers.
Our largest parcels customer, the Amazon
3 Internal estimate based on Triangle Management
Services/RMG Fulfilment Market Measure (2014);
defined as individually addressed parcels and
packets, generated and delivered in the UK, weighing
up to 30kg, that do not require special handling.
Includes access fulfilment large letters & parcels and
excludes click and collect, same‑day, small local
operators and all international traffic. Includes
Amazon Logistics and other retailers
own‑delivery networks
Group5, now accounts for around five per cent
of UKPIL parcel revenue.
UKPIL parcel volume growth of three per cent
was driven by growth in import, Royal Mail
account and Parcelforce Worldwide, where
volumes increased by 12 per cent. Excluding
Amazon volumes, total Royal Mail account
parcel volumes increased by seven per cent.
This growth more than offset the effects of
the competitive environment in consumer/
SME and export parcels. Parcel revenue
increased by one per cent, due to the impact
of this mix.
Our European parcels carrier, GLS, delivered
revenue growth in almost all of its markets.
Growth continues to be fuelled by increasing
cross‑border trade, driven by e‑retail.
Winning in parcels: key points
• Pursuing faster growing areas of the
UK and international markets;
• Adding value by improving our
products and services; and
• Expanding and automating our
networks.
Pursuing faster growing areas
of the UK and international
markets
We are successfully targeting the faster
growing areas of the UK parcels market
and are developing initiatives to address
the impact of increased competition in the
consumer/SME and export markets.
We are increasing our capability, where
appropriate, to handle larger parcels. Leeds
Mail Centre is piloting a mechanised parcel
conveyor that can safely, and more efficiently,
handle larger parcels – a growing segment of
our parcels mix.
Our returns volumes have grown by
24 per cent this year. We are improving and
extending our Tracked Returns® service
to contract customers, including eBay
merchants. We are also growing our business
with existing customers, such as ASOS.
We are developing initiatives to address
the impact of increased competition in
the export market. In February 2016,
Parcelforce Worldwide extended its tracked
globalpriority® return service to retailers
sending items to Australia, which is the
first country outside the EU to benefit from
this express returns service. The service is
currently available in 18 countries.
4 Based on Verdict UK E‑retail survey and RMG
5 Amazon Group includes Amazon Logistics, Lovefilm
market insight
and Book Depository
08
| Annual Report and Financial Statements 2015-16
We have a range of international delivery
options designed to make exporting as
simple and cost effective as possible, as part
of the Government’s Exporting is GREAT
campaign. International postage can now
also be purchased through Click & Drop,
our easy to use online postage service.
We have expanded this service across more
than 200 international destinations. Royal
Mail International Tracked & Signed is now
available in 54 destinations.
We have extended our strategic service with
Alibaba, linking Chinese exporters with UK
online shoppers, and allowing them to supply
goods for UK delivery much more quickly.
We have increased the number of brands on
the Tmall shop front to 34 since we launched
the partnership in March 2015.
Adding value by improving our
products and services
We are becoming more flexible to suit
the needs of our sending and receiving
customers. For example, we have extended
latest acceptance times in our Mail Centres
and RDCs for our Tracked 24®/48® products,
reflecting customer demand.
We are expanding the support we offer to key
business customers and online marketplace
traders, including eBay sellers. In October
2015, we launched and have subsequently
extended a trial of doorstep collections in
North West England. This service offers
marketplace sellers and SMEs next day
parcel collection from their address. Around
300 sellers are participating in the trial.
We have reduced our prices for Second Class
medium parcels under two kilograms and we
are maintaining the online price of small and
medium parcels for 2016‑17.
We are working with Post Office Limited to
improve our customers' experience. This
includes more Post Office branches being
open for longer, and on Sundays, and our
expanded Local Collect network. Local
Collect is the largest UK network of click and
collect locations. It has been extended to
Enquiry Offices to create a network of more
than 11,700 sites. Royal Mail Local Collect
has more collection points across the UK
than the next two largest competitor click
and collect networks combined.
Expanding and automating
our networks
Parcel automation is one of the next stages
on our transformation journey. The first
parcel sortation machine has been installed
in Swindon. The roll‑out to further sites will
continue over the next two years.
consumers are now realising the value and
opportunities of retaining mail as a customer
communications channel.
Marketing mail revenue is important for our
business – it provides access to revenue
pools to support the delivery of the Universal
Service. Through our MarketReach business,
we are increasing awareness of the value
of advertising mail, through campaigns like
MAILMEN (see case study).
We are launching MailshotMaker, a new
online tool that enables SMEs to design and
implement direct mail campaigns. We have
also launched a new digital stamp indicia for
business customers. They can now add high
quality, full‑colour printed versions of some
of Royal Mail Special Stamps range and our
iconic blue Second Class stamp – to their
business mailings. We intend to extend the
range of designs available over time.
Royal Mail’s stamp prices are amongst the
best value in Europe. In February 2016,
we announced price increases of one penny
for First Class and Second Class consumer
stamps. We carefully considered the impact
on our customers and our business before
deciding to apply the lowest possible increase
in stamped letter prices. We believe these
changes are necessary to help ensure the
sustainability of the Universal Service.
Optimising mail handling
We continue to implement processes to
ensure that mail is handled as efficiently
as possible. We have improved large letter
sorting machines and will be upgrading
Optical Character Reading technology to sort
more mail automatically. We began a pilot
to optimise the processing of mail through
our collection hubs, working closely with
our unions. Our Bristol and Jubilee Mail
Centres will handle this pre‑processed mail
allowing us to streamline the sorting and
trunking process.
Regulation
We await the publication of Ofcom’s
proposals under the Fundamental Regulatory
Review. We will actively participate in the
consultation process.
We are working with our customers to put
2D barcodes on as many parcels as possible.
Nearly 100 per cent of parcel volumes
through the Post Office network now use
Royal Mail 2D barcodes. Around 50 per cent
of all our UKPIL parcels now carry a barcode
and one‑third can be tracked by customers in
some way.
GLS is setting new standards in the German
parcels market. Together with DPD and
Hermes, it has founded ParcelLock GmbH,
which operates carrier‑neutral parcel boxes
for private customers. With the secure parcel
box system, delivery operators can leave
items in the parcel box for the customer
to pick up. GLS’ FlexDeliveryService is
continuing to roll‑out and is now available in
13 countries.
Defending letters
Addressed letter volumes decreased by three
per cent – better than our forecast range of a
4‑6 per cent decline per annum – due to the
one‑off return of direct delivery volumes.
Marketing mail revenue was flat. This
follows growth of three per cent in the first
six months and reflects a slowing in UK
economic activity. Direct mail is the fourth
largest advertising medium in the UK.
Overall, UK direct mail advertising spend
grew one per cent during 2015, the first
increase in four years, while print advertising
media declined 11 per cent6.
Defending letters: key points
• Promoting the value of mail;
• Optimising mail handling to increase
efficiency; and
• Participating in Ofcom’s consultation
on the Fundamental Regulatory
Review, to ensure the provision of
the Universal Service in the UK.
Promoting the value of mail
Since 2005, Ofcom has tracked consumer
ratings of value for money in eight sectors.
Postal services and delivery is the only sector
to see an increase in customers’ perception
of value for money from 2005 to 2015.
The Keep Me Posted campaign aims to
give every consumer the right to choose,
without disadvantage, how they are
contacted by companies. To date, 10
service providers have been awarded a
Keep Me Posted Mark of Distinction – the
most recent recipients being Royal Bank
of Scotland, NatWest and Ulster Bank,
which have a combined customer base
of around 16 million. This means these
6 WARC UK expenditure report, April 2016. Data from
January to December 2015
Promoting the value
of direct mail
Tess Macleod Smith, vice president of
publishing and media at Net‑a‑Porter
on making the company’s print
magazine, Porter, shoppable.
‘Porter has revolutionised print.
Eighty‑five per cent of our core
audience – who are devoted digital
shoppers – say that print is the number
one influencer in telling them what to
buy and from where.
‘Porter is sent out in the post to our
highest spenders. These days, many
of us simply don’t have time to go to a
newsstand, so mail is the best medium
for reach as well as impact. In a world
of convenience and online shopping,
having things delivered directly to us is
the new norm.
‘We use direct mail because we
know it works – we invested in two
very successful campaigns in the
UK and US this year – and they can
be directly attributed to an uplift in
Porter subscribers.
‘The mag, like mail, is a great
acquisition tool. We know that once
someone is a subscriber to Porter, they
visit the site 25 per cent more often
and spend 120 per cent more with us.
You can’t argue with figures like that.’
Annual Report and Financial Statements 2015-16
| 09
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Chief Executive Officer’s review
Growing in new areas
Growing in new areas: key points
• Making the most of our
existing assets;
• Targeted investments to build our
presence in growing areas of the
market; and
• Becoming a digital organisation and
building e‑commerce capability.
As part of our focus on growth, we are
seeking ways to generate more value from
our existing assets. The UK vehicle service,
maintenance and repair market is estimated
to be worth around £3.4 billion per annum7.
We have around 100 fleet workshops that are
expert in vehicle maintenance services. We are
conducting a pilot offering third parties access
to our vehicle maintenance services.
We are launching a new app – Swapshots –
which aims to capture growth in the printed
image market. Royal Mail is believed to be
the first European postal operator to launch
an app of this kind. Swapshots integrates
digital technology, printing and delivery
in order to print, post and deliver photos
within three days. The app will sit alongside
Mallzee, the ‘personal shopping’ app which
aggregates inventory from over 150 fashion
brands, as part of Royal Mail’s growing
digital portfolio.
We are also targeting higher growth areas.
In particular, we are looking to leverage
GLS’ expertise and reach and to strengthen
partnerships with marketplaces, e‑retailers and
other operators. In March 2016, we acquired
Intersoft, a provider of carrier management
software for international parcel shipments.
This complements the purchases of
data management and labelling provider
NetDespatch and delivery software developer
Storefeeder, further enhancing our in‑house
IT capabilities.
Strategic focus on costs
Becoming more efficient and productive allows
us to be more competitive. This, in turn, helps
us to grow our existing customer relationships
and win new business. It helps to fund
investment in our growth and maintain our fair
terms and conditions for our people.
UKPIL operating costs before transformation
costs declined by one per cent, in line with
our expectations. We have avoided around
£180 million in operating costs during the
year. We achieved productivity8 improvements
7 Estimate based on analysis performed by OC&C
Strategy Consultants
8 Collections, processing and delivery in UKPIL
core network
of 2.4 per cent, within our 2.0‑3.0 per cent
target range. This builds on a productivity
improvement of 2.5 per cent in 2014‑15 and
1.7 per cent in 2013‑14.
that Royal Mail has been named in The Times
Top 50 Employers for Women 2015, for
our commitment to gender equality in the
workplace, for the second consecutive year.
With more than 47,000 vehicles on the road,
we have the biggest fleet in the UK. New driver
technology has been installed in approximately
13,000 small, high‑mileage vans. The new
technology promotes better driving behaviour,
keeping them safe and reducing fuel usage
and maintenance costs.
Through our Together for Growth programme,
over 6,000 managers and union representatives
took part in joint training over a 16 month
period from July 2014 to October 2015.
The programme was designed jointly with
Communication Workers Union (CWU) and
Unite/CMA and is one of the UK’s largest ever
investments in this form of training.
We are extending Collections on Delivery,
by which our postmen and women collect
letters from low‑volume postboxes.
Alongside this, a nationwide review of our
national and regional routes will help us to
reduce mileage.
Technology and innovation
We are strengthening our technology
backbone so that we can support our
objectives to win in parcels, defend letters
and grow in new areas.
In parcels, we have begun the roll‑out of
76,000 new PDAs across our operation.
These handheld devices provide management
data through functions like the scanning of
2D barcodes, and the capture of signatures
on delivery. Three thousand finger scanners
have already been introduced across our Mail
Centres and RDCs. With better management
information, we can benefit from more
accurate billing for the services we provide
and identify efficiency opportunities.
Customers will enjoy easier signature capture
and, in time, better tracking information.
In our letters business, we are continuing
the rollout of Mailmark®, which provides
barcode technology and online‑reporting for
machine‑readable business, advertising and
publishing mail. Over three billion letters have
now been sent using Royal Mail Mailmark®
and around 50 per cent of machine‑readable
mail currently carries the Mailmark® barcode.
We are targeting 90 per cent of suitable
letters by 2016‑17.
We are focusing on improving our customer
experience by rolling out improved
technologies across our network. We have
deployed the 'Service‑Point‑System'
(online booking‑in tool) to 460 Enquiry
Offices. The tool allows colleagues to
locate customers’ items quickly and easily,
providing a faster service.
Engaged and motivated
workforce
Our people are at the heart of our continued
success. We want our workforce to reflect
the communities we serve. We are pleased
Royal Mail takes its Quality of Service very
seriously. We are extremely disappointed
that our full year regulatory First Class
performance of 92.5 per cent narrowly
missed the 93.0 per cent target. We again
exceeded our Second Class target, with a
performance of 98.8 per cent.
We are committed to delivering a high
Quality of Service while seeking to become
ever more efficient. In doing so, we actively
review the absorbable rate of change and
the appropriate balance between quality
and efficiency. In the second half of the year,
we increased the already very considerable
resources deployed to improve our delivery
performance.
We note that Ofcom is launching an
investigation into our Quality of Service for
2015‑16. We believe the full year outcome
was impacted by events outside our control.
These include Cyber Week, which this
year fell outside the Christmas exemption
period, and significant disruption in parts
of the network due to poor weather and
road closures. Royal Mail believes that if the
2015‑16 performance was adjusted for these
two factors, an additional 0.31 per cent would
be added to the 92.5 per cent performance.
We are asking Ofcom to take these issues
into consideration.
At Royal Mail, we strive to deliver a consistently
high quality, value for money service. While
our performance improved in two out of our
four9 main complaint categories, we were
disappointed to see that an increase in other
complaint categories offset this.
We take complaints seriously and have
developed a ‘root cause’ approach to
complaints management. This helps us
to resolve customer issues quickly, while
identifying hotspots and issues. Underpinning
this, there is also a focus on first time
delivery within our operation and constantly
driving improved performance in our
operational units. We are making it as easy
9 Redirections, redeliveries, misdeliveries and
'Something For You' cards. Performance improved in
'Something For You' and redirection complaints
10
| Annual Report and Financial Statements 2015-16
around £160 million currently expected in
2016‑17.
We expect that the rate of revenue growth
in GLS will slow in 2016‑17, given the
particularly strong performance this year.
Competitive pressures continue to intensify in
our key markets, such as Germany.
We have invested heavily over the last five
years in rebuilding our legacy IT systems and
resizing the core network. We expect to keep
total net investment spend, which includes
replacement and growth capital expenditure
and the cash cost of transformation, net
of operational asset disposals, within the
range of £550‑600 million per annum in
the medium‑term. Within this we will be
targeting an increased skew towards projects
and initiatives supporting growth.
We remain focused on our in‑year trading
cash flow, which underpins our commitment
to a progressive dividend policy.
Thank you
2016 commemorates 500 years since Henry VIII
knighted Brian Tuke, the first Master of the
Posts, in 1516. This act was the first step in
the creation of the Royal Mail. The history
of the postal service in the UK reflects the
tremendous societal and political change that
has taken us from sixteenth century Tudor
England to the United Kingdom of today.
We are proud to celebrate the heritage of
this great Company. Against this backdrop of
continued change, Royal Mail's people have
been a constant presence. They are the heart
of this Company. I hope that, through them,
we will continue to deliver the Universal
Service and play an instrumental role in
people’s lives for many years to come.
Moya Greene
Chief Executive Officer
18 May 2016
as possible for customers to receive their
parcels through services such as Delivery to
Neighbour and Nominate a Neighbour.
We are tackling other complaints through
our Operations Standards, which give us
a standard approach to key processes and
tasks. These Standards are split into four key
categories – safety, quality, efficiency and
people – helping us to work more efficiently
and consistently across the business.
Customer and You, a two‑year programme
which completed in March 2016, modernised
our Enquiry Offices to create more welcoming
and well‑maintained environments, improved
and standardised processes to ensure greater
consistency in quality across sites and
equipped our people with more customer facing
skills. We completed Customer and You training
for a total of 3,980 employees, exceeding our
overall target of 3,500.
Subject to shareholders approving the final
dividend, eligible employees with a maximum
allocation of 832 Free Shares will have
received dividend payments of over £430 by
29 July 2016.
Outlook
Our outlook for UK letter and parcel market
trends remains unchanged. However, we
will need to meet the challenges caused by
slowing economic growth, the current low
inflationary environment, and continuing
developments in the highly competitive
markets in which we operate. In particular,
in the first three months of 2016‑17 we will
be lapping the impact of elections in letter
revenue in the prior period.
Our cost avoidance programme in UKPIL is
on track and we expect to avoid a similar
level of costs in 2016‑17 as the prior year.
We continue to target avoiding around
£500 millon of annualised costs, cumulative
over the three financial years to 2017‑18.
That said, we have additional challenges to
manage in the coming year, in particular
the negotiation of pay and pensions,
while maintaining the climate of positive
engagement with our people that we have
created over the past five years. We will
continue to seek opportunities to drive
efficiency across the organisation such
that transformation costs are likely to be
above the previously indicated range of
£120‑140 million per annum over the period
of the cost avoidance programme, with
During 500 years of the postal service, new ways of
working have been embraced to deliver mail faster and
more efficiently.
Visit www.royalmailgroup.com/500years to find out more.
Annual Report and Financial Statements 2015-16
| 11
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Market overview
Market overview
Royal Mail operates in a marketplace which is undergoing
profound change, driven by a structural decline in addressed letter
volumes and continued growth in e-commerce. E-substitution in
letters and disintermediation in the parcels market have changed
our role in the value chain. In some areas, change has resulted in
new opportunities. In others, our role has reduced.
UK letters market
The UK, like many other countries, is
experiencing ongoing structural decline in
addressed letter volumes. This decline is driven
by e‑substitution and growth in mobile and
online advertising. Large businesses continue
to adopt online communication methods and
are strongly incentivising paperless billing.
However, independent research shows that
people understand information better, are more
likely to take appropriate action and make
better financial decisions as a result of receiving
information by post rather than electronically1.
We are seeing different types of letters
experiencing different rates of decline due
to this structural shift. As the leading letters
delivery operator in the UK, the decline in
addressed letter volumes means we need to
deliver letters and parcels together and seek
alternative revenue pools to underpin the
Universal Service network.
Direct mail provides revenue that supports
the Universal Service. Research shows that
direct mail advertising spend grew by one per
cent during 2015, while other forms of print
advertising declined around 11 per cent. Direct
mail is the fourth largest advertising medium in
the UK, behind TV, internet and print2. Forty‑two
per cent of people say they have taken direct
action (e.g. purchased, spent, ordered, renewed)
having received a targeted mailing3.
The UK postal access market has developed
rapidly since its introduction in 2004 and is now
by far the biggest and most developed mail
access market in the EU4. Access operators
handle about 70 per cent of all addressed
letters posted by large businesses. Royal Mail
continues to work with access operators to
ensure sending and receiving customers enjoy
a great service. Access Quality of Service was
95.7 per cent in 2015‑16.
1 London Economics behavioural economics study for
Keep Me Posted
2 WARC UK expenditure report, April 2016. Data from
January to December 2015
3 Quadrangle, Valued Mail 2014
4 FTI consulting, September 2015
UK parcels market
The UK parcels market is one of the most
competitive in Europe, with 16 major players.
It is also one of the most evolved parcel
markets in Europe; it has the highest per
capita spend on e‑retail and this is increasing.
Approximately 14 per cent of all UK retail
sales are estimated to be conducted online
and e‑commerce expenditure per head is over
50 per cent higher than in the US5.
E‑retail continues to drive overall growth
in UK parcels. The rapid pace of change in
the parcels industry is expected to continue,
due to low barriers to entry, greater
disintermediation and disruptive business
models. The actions of Amazon Logistics
remain the most fundamental driver of change
in the market. In a highly competitive retail
landscape, the delivery experience has become
a key differentiator for many online retailers.
They are increasing shoppers’ expectations
regarding the convenience, speed and price of
delivery. Several parcel carriers have invested
significantly in expanding their capacity in
recent years. This puts downward pressure
on prices.
Growth areas
Clothing and footwear represents the
majority of online non‑food sales growth, due
to frequency of purchase and a higher value
per spend. Parcel returns continue to grow
more quickly than deliveries, driven by the
clothing and footwear sector in particular.
Sales of physical books are showing some
sign of resilience. This is partially offsetting
the continued decline in music, film and video
game sales6.
In the consumer/SME segment, there has
been a very rapid expansion of click and
collect, parcel shop networks and parcel
locker stations, albeit from a low base. There
are now more than 30,000 parcel drop off and
pick up locations across the UK. Although there
has been an increase in awareness and usage
of click and collect and parcel shop deliveries,
5 Ofcom IMRC 2015
6 Verdict e‑Retail 2015
12
| Annual Report and Financial Statements 2015-16
home delivery remains the preferred option for
the vast majority of consumers7.
Consumers are increasingly shopping at a
time and place which suits them. UK industry
experts have stated that, for the second year
running, mobile platforms accounted for
all growth in overall e‑retail sales in 20158.
Many retailers are adopting a mobile‑first
channel strategy. Fashion retailer ASOS
reported that almost half of its orders came
through on a mobile device in February 2016.
International parcels
E‑commerce is similarly driving European
parcels market growth. E‑commerce
Europe research estimates that European
B2C e‑commerce grew 14 per cent in 2015
to €424 billion, with four billion parcels
sent annually. This growth is uneven
across Europe, due to varying economic
performance and e‑commerce adoption.
The largest parcels markets outside the UK
are Germany, France and Italy.
Consumers expect a seamless cross‑border
delivery and returns experience. Within Europe,
cross‑border online purchasing is growing
faster than domestic online purchasing9.
The cross‑border e‑commerce trend10 is
expected to continue in all major European
countries in the future. A recent Royal Mail
study into the international ambitions of
small UK e‑retailers found small businesses
were confident in the current climate and
were looking towards new markets, building
on their existing international success.
It found that Europe remains the main target
for exports and almost 50 per cent of small
e‑retailers aim to sell their products in
Europe in 2016, up from 30 per cent in 201511.
Outside the EU, Chinese e‑commerce
marketplaces Tmall and AliExpress
significantly gained in popularity among
online shoppers. Chinese customers spent
over £9 billion through Alibaba in 24 hours
on ‘Singles Day’ on 11 November 2015 and
many analysts predict that a new record will
be set again this year.
7 IMRG UK consumer home delivery review 2016
8 Capgemini mRetail Sales Index, March 2016
9 PostEurop December 2015
10 Forrester research. Online cross border retail
forecast 2016‑2021
11 Royal Mail Group SME seasonal research,
December 2015
Strategic report
| Governance
| Financial statements
| Other information
Mail drives customers online
And mobile is making it easier than ever for people to access and use the internet12.
Having received a mailing:
92%driven to online or
digital activity
86%connected with
business
43%download
something
87%influenced to make
online purchases
54%engaged in
social media
12 Source: Royal Mail MarketReach, Mail
and Digital Part 2, Quadrangle, 2014
Delivery matters
Home delivery is expected to remain our
customers’ preferred delivery option.
Leading in e-commerce
80%of online shoppers
would prefer to
have items delivered
to their home13.
13 Source: IMRG consumer home
delivery review 2016
£1,591
per head
The UK has the
highest spending per
capita on e-commerce
and this is increasing14.
14 Source: Ofcom ICMR 2015
Annual Report and Financial Statements 2015-16
| 13
Royal Mail plc
| Our business model
Our business model
Our business model leverages our resources and relationships (e.g. our networks, people and brand)
to deliver high-quality, value for money services for customers wanting to send and receive letters
and parcels. In our core network, we benefit when we deliver letters and parcels together – making
the most of the Universal Service network and providing services at the lowest possible cost.
Parcelforce Worldwide provides more parcel fulfilment options – particularly for business customers.
Our European business, GLS, provides geographical diversification of our earnings and exposure to
markets where revenues are growing above GDP. GLS' 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. Through this, we generate cash flow to pay dividends to our
shareholders, and reinvest in our business to generate sustainable growth over time.
Resources and relationships
We focus on delivering our customers’ expectations in the most efficient way possible, maximising the funds
available to reinvest in the business and to pay progressive dividends to shareholders.
Our networks
As the Universal Service Provider, Royal Mail has the capability to visit every address in the UK, delivering letters and
parcels. Through our long‑term relationship with the Post Office, we have the largest retail network for parcels and
letters. We are using our footprint to increase collection and delivery options for our customers. For example, we are making
returns easier with Local Collect, the largest UK click and collect network. Parcelforce Worldwide, our express delivery business,
provides additional fulfilment options and is a leading provider of express parcel services. GLS, one of the largest European
ground‑based delivery networks, offers reliable, high‑quality parcel services across Europe, complemented by logistics and
express services.
Our people
We are proud to be a responsible employer, with a total workforce of around 156,000. One in 175 working people in the
UK is employed by Royal Mail1. This number increases when we look at disadvantaged regions where jobs are scarce.
We are also committed to ensuring that our workforce reflects the communities we serve. We were pleased to have been named
in The Times Top 50 Employers for Women 2015 for our commitment to gender equality in the workplace. We have been named as
the global sustainability leader of the Transportation and Transportation Infrastructure Industry in the Dow Jones Sustainability
Indices for the second year running.
Our customers and our brand
We have a very broad customer base. In the UK, our role as the Universal Service provider means we are able to deliver to
more than 29 million businesses and consumers. GLS, our European business, has more than 220,000 customers across
41 European countries and nation states.
Our brand helps define our culture; it shapes the experiences our customers have with us and it is a unique reflection of who we
are. We are the UK’s most trusted delivery company2. The trust that our stakeholders place in our people to deliver the Universal
Service is down to the continuous dedication of our postmen and women across the UK. At the 2015 World Branding Awards,
we were named as a national brand of the year3.
Investment in our business
In 2015‑16, we invested a net £656 million, of which £253 million was in areas to support growth. We also spent £18 million
on targeted investments mainly to enhance our IT capability.
1 Cebr research, conducted for Royal Mail in May 2016
2 Delivery Matters, 2015
3 Royal Mail winner in Logistics‑Postal Services category:
https://awards.brandingforum.org/brands/royal‑mail/
14
| Annual Report and Financial Statements 2015-16
Inputs
Continually improving our efficiency and productivity allows us to be more competitive. This helps us to
meet changing customer needs, which means we can grow our existing customer relationships and win
new business. This in turn allows us to maintain financial flexibility to fund investment in our growth and
maintain our fair terms and conditions to ensure we continue to employ engaged and motivated people.
Continually improving efficiency
• Continuing to deliver efficiency improvements
and meet our productivity targets.
• Rolling out parcel sorting machines to gather
better management information and identify
efficiency opportunities.
• Getting paid fairly for what we do through
using new technologies, like Mailmark® and
2D barcodes.
• Nationwide review of national and regional
routes to help us reduce mileage.
• Targeted cost reduction through streamlined
delivery process and network optimisation
in GLS.
Maintaining financial flexibility
• Since 2012‑13, we have invested
approximately £1.3 billion designed to grow
and make the business more effective.
• Over the same time period, net debt has
reduced by around £700 million, providing
the headroom to invest further as
opportunities arise.
• Over 70 scoped and resourced projects across
UKPIL are targeted to avoid around £500
million of annualised costs by 2017‑18.
Meeting changing customer needs
• Offering later acceptance times and
opening up our network for longer,
including weekends.
• Demonstrating the value of letters through
our MarketReach business and campaigns.
• Investment in innovative B2C delivery
solutions in GLS.
Engaged, motivated people
• Increasing employee engagement and
alignment through initiatives like our Together
for Growth programme. Over 6,000 managers
and union representatives have taken part.
• Continuing to provide market‑leading rewards
and fair terms and conditions to our people.
• In total, each eligible full‑time employee has
received a maximum of 832 Free Shares in
our Company.
Outputs
• Continuing to deliver
a high‑quality,
financially‑sustainable
Universal Service, and
therefore maintaining our
trusted brand.
• Delivering a consistently
high‑quality, flexible
service to grow existing
relationships, win new
business and make sure
we are fairly paid for
our services.
• Driving the generation
of cash to support
progressive dividends for
our shareholders.
• Continuing to invest in
our business and our
people, through effective
management of our
financial resources,
including a strategic focus
on costs.
Investing in our business and our people
Annual Report and Financial Statements 2015-16
| 15
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Our strategy
Our strategy
We have a clear vision to be recognised as the best delivery company in the UK and across Europe.
Our strategy to achieve this leverages our strengths while aiming to deliver sustainable shareholder
value and our Universal Service commitment.
Our strategic priorities
Winning in parcels
We are maintaining our
pre‑eminent position by pursuing
faster growing parts of the UK
parcels market while making
it easier for customers to use
Royal Mail. We are building our
capability to handle increased
numbers of larger parcels and
are winning new volumes.
We are investing in tracking
and automation to help us
target faster‑growing areas of
the market.
Key initiatives:
• Opening our network for longer and pushing back our latest
acceptance times
• Rolling out sorting machines for smaller parcels to gain better
management information and identify efficiency opportunities
• Piloting a mechanised parcel conveyor at Leeds Mail Centre,
building our capability to handle larger parcels
• Rolled out GLS ParcelLock System to four countries in Eastern
Europe. New options for private customers to send, pick‑up
and pay for parcels
Defending letters
Our letters business accounts
for almost 60 per cent of our
UK revenue. We continue
to anticipate a decline of
4‑6 per cent in addressed letter
volumes in the medium‑term.
Royal Mail is managing this
decline by continuing to promote
the value of mail, and increase
the efficiency and effectiveness
of our delivery operation.
Key initiatives:
• MarketReach’s MAILMEN campaign is demonstrating the value
of mail
• Recovering revenue and preventing revenue leakage, for
example, through stamp cancellations
• We have improved large letter sorting machines and we are
upgrading Optical Character Reading technology to sort more
mail automatically
• Keep Me Posted campaign support base has broadened to
87 charities, trade unions, businesses and consumer groups
Strategic
priorities,
enabled
by...
Growing in new areas
We are making the most of our
existing assets. At the same
time, we are focused on service
developments and increasing
our capability through selected
investments. We are becoming
a digital organisation and
acting at pace to increase our
e‑commerce capability to retain
and attract marketplace sellers.
Key initiatives:
• Trialling third‑party vehicle maintenance services for vehicles
at our fleet workshops
• Secured a stake in Market Engine, an online marketplace
specialist that integrates the world's largest e‑commerce
sites. This follows our investment in Mallzee, the personal
shopping app
• Furthering our in‑house IT capability, providing customers
with e‑commerce solutions to better manage the shipping and
tracking of parcels
• Acquired Intersoft, a provider of delivery management
software for international parcel shipments, complementing
the purchases of data management and labelling provider
NetDespatch and delivery software developer Storefeeder
16
| Annual Report and Financial Statements 2015-16
Enabling our strategic priorities
Strategic focus on costs
The highly competitive parcels
market, coupled with the ongoing
structural decline in letters, has
resulted in increased revenue
pressures for the Group. We are
focusing on costs, driving efficiency
in our operations and embedding a
cost conscious culture throughout
the organisation. We will continue
to adopt a strategic approach and to
seek new initiatives to control costs.
Technology and innovation
We are strengthening our technology
backbone so that we can support
our priorities to win in parcels,
defend letters and grow in new
areas. We continue to promote
the value of mail, and increase the
efficiency and effectiveness of our
delivery operation.
An engaged and motivated workforce
Our employees drive the continued
success of the Royal Mail Group. We
strive to create a supportive, inclusive
work environment where our people
have the necessary tools and training
to perform their duties at their best.
This is underpinned by a proactive
relationship with the unions.
1 Collections, processing and delivery in UKPIL core network
Key initiatives:
• Over 70 scoped and resourced projects across UKPIL targeted to
avoid around £500 million of annualised costs by 2017‑18
• We continue to target 2.0‑3.0 per cent productivity1 improvements
per annum
• Extending Collections on Delivery and continuing to deploy
Operations Standards across the core network
• Reducing costs in the logistics network
• Optimising property portfolio and facilities management savings
• Targeted cost reduction through streamlined delivery process
and network optimisation in GLS
Key initiatives:
• Rolled out 3,000 finger scanners and commenced the rollout of
76,000 new PDAs across our Operation
• Approximately one‑third of our parcels traffic is currently tracked
by customers in some way. In time, we will increase the number of
items we scan in Mail Centres and on the doorstep
• Continued roll out of Mailmark®, targeting 90 per cent of suitable
letters by 2016‑17
• We have deployed an online booking‑in tool 'Service‑Point‑System'
in 460 Enquiry Offices. The tool allows colleagues to locate
customers’ items quickly and easily, providing a better, more
efficient service
• GLS FlexDelivery Service now available in 13 countries.
This delivery notification service includes a delivery date and
time window
Key initiatives:
• Over 6,000 managers and union representatives took part in joint
training through the Together for Growth programme
• Around 23,000 colleagues involved in the ‘Big Conversation’, used to
identify improvements we can make to be better and more efficient
• Full support pledged for mental health campaign, Time to
Change, which aims to reduce the stigma associated with mental
health issues
• Customer and You training rolled out to around 4,000 employees
• Operations Standards give us a standard approach to key processes
and tasks, helping colleagues tackle complaints
• Focusing on first time delivery through Nominate a Neighbour,
With your Neighbour and Safeplace
Annual Report and Financial Statements 2015-16
| 17
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Key performance indicators
Key performance indicators
Our Key Performance Indicators (KPIs) for 2015-16 are divided into People, Customer, Efficiency
and Financial segments, as represented in our business model and our Corporate Balanced
Scorecard. As the business transforms and faces new challenges, we may adapt our KPIs.
In 2015-16, we made the following changes to our KPIs: sick absence was introduced under
People; composite parcels Quality of Service was moved to Customer; the Performance quadrant
was replaced with a new Efficiency quadrant, which includes UKPIL people and non-people costs
in place of total UKPIL costs; and Group revenue was moved to the Financial quadrant.
Further details relating to the link between our KPIs and Executive Remuneration, and the Corporate Balanced Scorecard for 2016‑17, can be
found in the Directors’ remuneration report on page 75.
Key
Link to strategy
Winning in parcels
Defending letters
Growing in new
areas
Below threshold
Threshold
Target/stretch
Measured by
Key activities and achievements in the year
People
KPI and strategic
link(s)
Safety (%)
The year‑on‑year
reduction in the number
of work‑related
accidents resulting in
an absence on the next
day or shift per 100,000
hours worked1.
Sick Absence (%)
Sick Absence hours
as a percentage
of expected
working hours.
Employee engagement
(score)
Employee customer
focus (score)
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
job, supporting our
strategy and their place
in contributing to Royal
Mail Group’s success.
An annual survey by
Ipsos MORI measuring
how focused our people
are on delivering
improvements in
customer service.
• We continue to deliver reductions to Lost Time Accident
Frequency Rate
• Reduced number of road traffic collisions
• Driver training programmes, directed by a Road Safety Taskforce of vehicle
operators across Royal Mail, including our unions
• Upgraded Royal Mail Group Safety, Health and Environment (SHE)
Management System
• Established a Dog Working Group to undertake a national review of the
Group Management of Dog Attack Risk Standard and to identify best
practice engagement
• We have reduced Sick Absence across Royal Mail
• Focus on compliance with management procedures and wellbeing support
• One of only four companies to have achieved number one company status in
BITC (Business in the Community) Wellbeing benchmark
• ‘Time to Change’ pledge affirms our commitment to our mental health
programme, First Class Mental Health
• We achieved our employee engagement index score
• Promoted employee engagement within the business through: ‘My Future’,
a career development website accessible to all employees; ‘Appreciate’,
a recognition scheme to recognise our people for a job well done; and ‘My
Bundle’, a new employee benefits portal
• ‘Big Conversation’ with 23,000 colleagues
• Embedding our Operations Standards, with a focus on safety quality;
efficiency; and people
Performance
against target
2015-16
Actual: 30%
2014‑15:
14%2 (above target)
2013‑14 :
31%2 (above target)
2015-16
Actual: 4.51%
2014‑15: not a KPI
2013‑14: not a KPI
2015-16
Actual: 57
2014‑15: 56
(above target)
2013‑14: 54
(above target)
• Our employee customer focus index score reduced in 2015‑16
• Introduced new and improved products and services at pace for sending and
receiving customers
• Last acceptance times in Mail Centres and RDCs now as late as midnight
• Delivered a great Christmas – even better than last year. Extensive planning
ensured we had the capacity to accommodate additional volumes from retail
customers and other delivery operators
2015-16
Actual: 67
2014‑15: 69 (threshold)
2013‑14: 69 (above
target)
1 For 2015‑16 the lost time accident KPI was changed from an absolute in‑year metric to a year‑on‑year reduction metric
2 Prior year results are stated on a year‑on‑year reduction basis as per the 2015‑16 KPI metric definition
18
| Annual Report and Financial Statements 2015-16
Customer
KPI and strategic link(s) Measured by
Key activities in the year
First Class
Quality of Service (%)
Composite Parcels
Quality of Service (%)
Mean business customer
satisfaction (score)
Customer complaints
(’000)
An independent,
audited measure of
Quality of Service
for First Class retail
products delivered by
the next working day,
which may be adjusted
for force majeure3.
A measure of the
overall Quality of
Service perfomance of
core network parcels
delivered by their
service specification,
weighted by traffic
volume.
Mean business
customer satisfaction
scores include the
impact of a number of
issues including price,
service quality and
customer experience.
Number of complaints
(not claims) opened by
our Customer Service
team.
• We narrowly missed the 93.0 per cent First Class mail target
• Exceeded 98.5 per cent Second Class mail target
• Met or exceeded the minimum target of 91.5 per cent for First Class delivery
in 104 out of 118 postcode areas
• Embedding our Operations Standards to support high Quality of Service
2015-16
• Improvements in first time delivery rates through Delivery to Neighbour,
Actual: 94.4%
Nominate a Neighbour and With your Neighbour
• We maintained good levels of satisfaction amongst our business
customers
• Expanded support to key business customers and online marketplace
traders, including eBay sellers
• Extended e‑retailers’ access to our network to seven days a week
• More flexible about the size and shape of parcels we can deliver
• Customer complaints have increased in two out of our four
major categories: redirections, redeliveries, misdeliveries and
‘Something for You’ cards
• Operations Standards help us to work more efficiently and consistently
across the business
• Rolling out Customer and You training to around 4,000 employees as we
seek to improve our customers’ experiences at the Enquiry Office
Efficiency
KPI and strategic link(s) Measured by
Key activities in the year
• An improvement in productivity was achieved through a reduction in
2015-16
Productivity for
collections, processing and
delivery (%)
UKPIL people costs (£m)
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).
Adjusted people costs
for UKPIL.
frontline hours despite an increase in workload
• UKPIL people costs reduced by one per cent due to a 2.0 per
cent reduction in frontline hours, savings from the management
reorganisation programme last year and the impact of our cost
avoidance programme
UKPIL non-people
costs (£m)
Total non‑people costs
for UKPIL.
• Total non‑people costs reduced three per cent, driven by our cost
avoidance programme
Performance
against target
2015-16
Actual: 92.6%
2014‑15: 93.1% (above
target)
2013‑14: 93.3% (above
target)
2014‑15: 95.0% (above
threshold)
2013‑14: 95.1% (target)
2015-16
Actual: 76
2014‑15: 76 (stretch)
2013‑14: 75 (target)
2015-16
Actual: 476
2014‑15: 4534
(above target)
2013‑14: 466
(stretch)
Performance
against target
Actual: 2.4%
2014‑15: 2.5%
(above target)
2013‑14: 1.7%
(threshold)
2015-16
Actual: £4,764m
2014‑15: not a KPI
2013‑14: not a KPI
2015-16
Actual: £2,294m
2014‑15: not a KPI
2013‑14: not a KPI
3 This accounts for the impact of factors which are beyond Royal Mail's control, such as weather
4 Total number of complaints for 2014‑15 has been restated from 445,476 to 452,538 to include 7,062 complaints relating to mail consumables
Annual Report and Financial Statements 2015-16
| 19
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Key performance indicators
Financial
KPI and strategic link(s)
Measured by
Key activities in the year
Group revenue (£m)
Group revenue
adjusted for budgeted
foreign exchange rate.
• Group revenue increased by one per cent
• Revenue growth in GLS offset a decline in UKPIL revenue
Performance
against target
2015-16
Actual: £9,191m
2014‑15: £9,556m
(above threshold)
2013‑14: £9,436m
(above threshold)
Group operating profit
before transformation
costs (£m)
Adjusted Group
operating profit before
transformation costs,
adjusted for budgeted
foreign exchange rate.
• Adjusted Group operating profit before transformation costs increased
2015-16
• Tight cost control meant that UKPIL underlying operating costs before
transformation costs reduced by one per cent
Actual: £738m
2014‑15: £620m5
(target)
2013‑14: £670m5
(above threshold)
2015-16
Actual: £315m
2014‑15: £353m
(above target)
2013‑14: £398m (stretch)
Free cash flow (£m)
Free cash flow before
cash flows relating to
London development
property portfolio.
• Free cash flow before net cash flows from the London development
property portfolio was £315 million
5 Prior year results are on a Reported basis, adjusted for budgeted foreign exchange rate
20
| Annual Report and Financial Statements 2015-16
Strategic report
| Governance
| Financial statements
| Other information
Adding value and
convenient services
The journey
so far...
What’s in
our plan...
Easier shipping and
tracking platform for
e-retailers
Piloting fleet
maintenance services
to third parties
Opened network
for longer and
pushed back latest
acceptance times
3,000 finger scanners
deployed in Mail
Centres and RDCs
Extended Local Collect
network over
11,700 sites
Over next two years,
further rollout of
parcel sortation
machines
Rolling out 76,000
new PDAs
Increasing number of
parcels we barcode
and scan
Annual Report and Financial Statements 2015-16
| 21
Royal Mail plc
| UK Parcels, International & Letters (UKPIL)
UK Parcels, International & Letters
(UKPIL)
Summary trading results (£m)
Adjusted¹
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
Underlying
change2
Letters & other mail
Marketing mail
Total letters
Parcels
Revenue3
Operating costs before transformation costs
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Margin
Volumes (m)
Addressed letters
Unaddressed letters
Parcels
Core network
Parcelforce Worldwide
Total
3,312
1,158
4,470
3,196
7,666
(7,058)
608
(191)
417
5.4%
12,563
2,993
1,034
96
1,130
3,400
1,167
4,567
3,190
7,757
(7,142)
615
(145)
470
6.1%
13,009
3,157
1,015
86
1,101
(2%)
Flat
(2%)
1%
(1%)
(1%)
3%
(6%)
(30 bps)
(3%)
(5%)
2%
12%
3%
Revenue and volumes
UKPIL revenue was down one per cent,
with parcels revenue up one per cent and
total letter revenue down two per cent.
Total parcel volumes increased by three
per cent. Parcel volume growth was driven
by import parcels, Royal Mail account
parcels and Parcelforce Worldwide more
than offsetting the decline in higher AUR
consumer/SME volumes and export parcels.
We continue to see higher volumes of lower
AUR import parcels, largely from China.
Our improved product offering in account
parcels resulted in new contract wins,
which more than replaced lost Amazon
traffic. Royal Mail account parcel volumes,
excluding Amazon, grew by seven per cent.
Parcelforce Worldwide continued to perform
strongly with volume growth of 12 per cent
due to new customer wins and increased
business from existing customers. Given
this particularly strong performance, we
expect that the rate of growth will slow in
2016‑17. The decline in international export
parcel volumes was driven by difficult market
conditions, including unfavourable exchange
rate movements and an increasingly
competitive environment. Parcel revenue
was up one per cent, largely as a result of the
change in mix.
Addressed letter volumes declined by
three per cent (excluding the impact of
election mailings), better than our forecast
range. The one‑off return of direct delivery
volumes had a positive impact of around
one percentage point. Overall, this was a
good performance given the absence of
a year‑on‑year improvement in general
economic conditions. Total letter revenue
(including marketing mail) decreased by two
per cent. Price increases and growth in lower
AUR network access and import letters were
offset by declines in higher AUR consumer/
SME and export letters.
Revenue from election mailings, relating to
the general election in 2015‑16, was slightly
lower than the prior year. We are expecting
a smaller benefit from election mailings in
2016‑17, which will have a disproportionately
22
| Annual Report and Financial Statements 2015-16
negative impact on letter revenue in the first
three months of the financial year.
Marketing mail revenue, which includes
revenue from our data business, redirections,
Address Management Unit, and addressed
and unaddressed advertising mail, was flat.
We saw an increasing slow‑down in activity
in the second half of the year, reflecting the
softening economic conditions. Unaddressed
letter volumes declined by five per cent,
better than the performance in the first
half, which was impacted by a reduction in
door‑to‑door marketing spend in certain
sectors in that period.
Operating costs
Total adjusted operating costs before
transformation costs declined by one per cent
on an underlying basis, in line with our
expectations and reflecting our strategic
focus on cost avoidance and efficiency.
Our cost avoidance programme, which
targets avoiding around £500 million of
annualised costs cumulative over the three
financial years to 2017‑18, is on track.
We avoided £182 million of costs in the year,
split broadly evenly between people
(£89 million) and non‑people
(£93 million) costs.
People costs declined by one per cent.
This was driven by a 2.4 per cent
improvement in productivity4 and £40 million
1 All adjusted results are a non‑IFRS measure and
exclude specific items. The commentary in this
report, unless specified otherwise, focuses on the
operating results on an adjusted basis. This is
consistent with the way that financial performance is
measured by Management and reported to the Board
and assists in providing a meaningful analysis of the
results of the Group
2 All movements are on an underlying basis unless
otherwise stated. Underlying change is calculated
after adjusting for movements in foreign exchange in
GLS, working days in UKPIL and other one‑off items
that distort the Group’s underlying performance.
For volumes, underlying movements are adjusted for
working days in UKPIL and exclude elections in
letter volumes
3 Stamp, 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
4 Collection, processing and delivery in the UKPIL
core network
Transformation costs
Transformation costs increased as expected,
mainly due to higher voluntary redundancy
costs. There was a net reduction of around
3,500 employees in UKPIL in the period,
equivalent to around 2,800 full‑time
equivalents (FTEs). The reduction was largely
driven by voluntary redundancies and was
weighted towards the first half. Project costs
increased by £17 million, largely in relation to
projects supporting the cost avoidance and
efficiency programmes.
Operating profit after
transformation costs
Adjusted operating profit after transformation
costs was £417 million, giving a margin of
5.4 per cent, down 30 basis points due to the
increase in transformation costs.
Reported operating profit after
transformation costs was £160 million,
giving a margin of 2.1 per cent, reflecting the
IAS 19 pension charge.
Operating costs (£m)
People costs
Non‑people costs
Distribution and
conveyance costs
Infrastructure costs
Other operating costs
Total operating costs before
transformation costs
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
Underlying
change
Change after
reclassification
(4,764)
(2,294)
(776)
(890)
(628)
(4,789)
(2,353)
(821)
(919)
(613)
(7,058)
(7,142)
(1%)
(3%)
(5%)
(3%)
2%
(1%)
n/a
n/a
n/a
Flat
(2%)
n/a
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
(117)
(72)
(2)
(191)
(81)
(55)
(9)
(145)
£155 million in 2016‑17. The overall reduction
in distribution and conveyance costs was
partly offset by costs associated with the
increasing size of parcels in our network.
Infrastructure costs were flat, after the
reclassification of internal costs, as savings
on facilities management, utilities and lower
depreciation were offset by increases in
IT costs in relation to the IT transformation
programme. We have invested significantly
in IT and other assets as part of the
transformation programme and as a result,
the depreciation and amortisation charge is
expected to increase going forward, with an
increase of around £20 million in 2016‑17.
Other operating costs were down two per
cent, after the reclassification of internal
costs, due to reductions in amounts payable
to Post Office Limited and our continued
focus on discretionary costs.
As a result of the acquisition of the
minority shareholding in Romec Limited on
31 March 2016, the costs of Romec Limited,
previously reported in the ‘Other’ segment,
will be incorporated into UKPIL people and
non‑people costs from 2016‑17, replacing
the facilities management charge within
infrastructure costs.
On a reported5 basis, UKPIL operating costs
before transformation costs increased by
£44 million to £7,315 million. This was mainly
as a result of the increase in the IAS 19
non‑cash pension service charge caused by
a decrease in AA corporate bond yields.
Transformation costs (£m)
Voluntary redundancy
Project costs
Business transformation payments
Total
savings in relation to the management
reorganisation programme implemented in
2014‑15. These offset pay increases, largely
the 2.8 per cent frontline pay award, and an
increase in volume‑driven costs in
Parcelforce Worldwide. The improvement in
productivity was achieved through a 2.0 per
cent reduction in core network hours, despite
an increase in workload, partly driven by an
increase in tracked products and the
increasing size of parcels. We continue to
target productivity improvements of 2.0‑3.0
per cent per annum.
As previously disclosed, as a result of the
new single‑tier state pension scheme
introduced in April 2016, the Group expects
to see an increase in its employer National
Insurance contributions for employees
participating in the Royal Mail Pension Plan
(RMPP) of around £70 million from 2016‑17.
In addition, other wage legislation such as
the Working Time Directive, Apprentice Levy
and increased costs relating to redundancy
payments will impact people costs in the
future. We would expect to exclude the first
year impact of such legislative changes from
underlying movements if material.
Non‑people costs declined by three per
cent. Distribution and conveyance costs
reduced by five per cent. This was driven by a
reduction in terminal dues, partly as a result
of lower export volumes, improved fleet
management and a reduction in the usage of
UK air routes leading to lower jet fuel costs.
Total diesel and jet fuel costs of £172 million
were £14 million lower than the prior year.
We buy forward a large part of our fuel
requirements therefore we are not materially
exposed to short‑term fluctuations in oil
prices. We expect fuel costs to be around
5 Prepared in accordance with IFRS
Annual Report and Financial Statements 2015-16
| 23
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| General Logistics Systems (GLS)
General Logistics Systems (GLS)
Summary trading results (continuing
operations) (€m)
Year ended
March
2016
Year ended
March
20151
Revenue
Operating costs
Operating profit
Margin
(£m)
Revenue
Operating costs
Operating profit
Volumes (m)
Operating costs (€m)
People costs
Non‑people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total operating costs
2,158
(1,998)
160
7.4%
1,580
(1,463)
117
431
1,978
(1,832)
146
7.4%
1,557
(1,442)
115
391
Year ended
March
2016
Year ended
March
2015
(489)
(1,509)
(1,312)
(143)
(54)
(1,998)
(450)
(1,382)
(1,199)
(130)
(53)
(1,832)
Change
9%
9%
9%
Flat
10%
Change
9%
9%
9%
10%
2%
9%
Revenue and volumes
GLS performed strongly throughout the
year. Volumes were up 10 per cent, with
continued strong growth in international
volumes. Revenue increased by nine per
cent as pricing was impacted by lower
average parcel weights. Revenue growth
was achieved in almost all markets and
from a broad customer base, with no one
customer accounting for more than two
per cent of total GLS revenue. The three
major markets, Germany, Italy and
France, accounted for 68 per cent of total
GLS revenue.
Operating costs
Total operating costs were up nine per cent,
driven by volume growth.
People costs increased by nine per cent as
a result of increased semi‑variable costs
linked to volume, additional headcount
associated with the operational response to
the German minimum wage legislation, pay
increases and the impact of acquisitions.
Non‑people costs grew broadly in line
with volume growth. Distribution and
conveyance costs reflected higher volumes
and the impact of German minimum
wage legislation on subcontractor costs.
Infrastructure costs increased by 10 per
cent, largely due to higher depreciation and
amortisation charges following increased
investment in IT.
Operating profit
Operating profit of €160 million benefited
from one‑off provision releases of around
€3 million, largely in relation to the
successful resolution of historical litigation
claims. Excluding these, the operating profit
margin was 7.3 per cent, compared with the
margin (including discontinued operations)
of 7.0 per cent for 2014‑15. Reported profit
was impacted by exchange rate movements
of £8 million.
Summary of performance
Germany
Germany remains the largest market for
GLS by revenue. Revenue in GLS Germany
grew by four per cent. Profitability has been
impacted by the German minimum wage
legislation but this was partly mitigated
by planning and operational initiatives and
better than expected volumes from new
and existing customers. As previously
reported, on 31 March 2015 GLS Germany
sold its entire holding in its subsidiary DPD
24
| Annual Report and Financial Statements 2015-16
Systemlogistik GmbH & Co. KG (DPD SL)
resulting in a profit on disposal of £31 million.
Italy
GLS Italy performed strongly throughout
the year. Better than expected revenue
growth of 18 per cent was driven by strong
business‑to‑consumer (B2C) volume
growth, market share gains and the
benefit of acquisitions. This was reflected
in a strong profit growth. Given the strong
performance over the last two years, it will
be challenging to maintain this rate of growth
going forwards.
France
GLS France delivered revenue growth of six
per cent from existing and new customers.
Operating losses reduced by €3 million to
€13 million. The pace of the turnaround
programme has slowed due to challenging
market conditions. As a result, we now
expect to reach break‑even in 2017‑18.
Other developed European markets
(including Austria, Belgium, Denmark,
Ireland, Netherlands, Portugal and Spain)
Revenue growth was achieved in the majority
of other developed European markets, which
represent 22 per cent (2014‑15 22 per cent)
of total GLS revenue.
Other developing/emerging European
markets (including Croatia, Czech
Republic, Hungary, Poland, Romania,
Slovakia, Slovenia)
We saw revenue growth in all developing/
emerging European markets, with
particularly strong growth in Hungary,
Poland and Romania. In addition, the start‑up
company launched in Croatia in August 2013
more than doubled its revenue in 2015‑16.
In total, developing/emerging markets
represent 10 per cent (2014‑15 nine per cent)
of total GLS revenue.
1 All results for 2014‑15 have been adjusted to reflect
the sale of DPD SL on 31 March 2015. Revenue
€122 million; operating costs €122 million; volumes
45 million
Financial review
Reported results
Reported results are prepared in accordance with IFRS. Reported Group revenue reduced to £9,251 million (2014‑15 £9,328 million). Operating
costs before transformation costs increased to £8,766 million (2014‑15 £8,717 million). Group operating profit before transformation costs
reduced to £485 million (2014‑15 £611 million) and operating profit after transformation costs decreased to £294 million (2014‑15 £466 million).
The reduction was mainly driven by the year‑on‑year increase in the IAS 19 pension service charge, which is treated as a specific item. The
total charge for other operating specific items reduced to £156 million (2014‑15 £248 million) mainly due to lower legacy costs. As a result,
Group operating profit after operating specific items was £138 million (2014‑15 £218 million). Profit before tax reduced to £267 million
(2014‑15 £400 million) as the prior year benefited from the profit on disposal of the Paddington site. Earnings per share for continuing operations
reduced from 32.5 pence to 21.5 pence.
Presentation of results
The remaining commentary in this financial review, unless otherwise indicated, focuses on the adjusted results (continuing operations).
The adjusted basis reflects the cash cost of providing pensions, which Management believes is a more meaningful basis upon which to analyse
business performance. Movements in revenue, costs, profits and margins are on an underlying basis. This is consistent with the way that
financial performance is measured by Management and reported to the Board. Again, this assists in providing a meaningful analysis of the
trading results of the Group. The analysis of underlying movements in adjusted results is set out at the end of this section.
Group revenue
(£m)
UKPIL
GLS
Other1
Total revenue
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
Underlying
change
7,666
1,580
5
9,251
7,757
1,557
14
9,328
(1%)
9%
1%
The main factors impacting revenue in the year are described in the sections entitled ‘UK Parcels, International & Letters (UKPIL)’ and
‘General Logistics Systems (GLS)’. ‘Other’ revenue reduced due to the expiration of a contract to provide facilities management services to
Post Office Limited.
Group operating costs
(£m)
People costs
Non‑people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total operating costs
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
Underlying
change
(5,199)
(3,310)
(1,736)
(995)
(579)
(8,509)
(5,230)
(3,358)
(1,764)
(1,019)
(575)
(8,588)
Flat
1%
2%
(2%)
1%
Flat
Group operating costs were flat on an underlying basis as lower UKPIL costs were offset by increases in GLS. The main factors impacting
operating costs in the year are described in the sections entitled ‘UK Parcels, International & Letters (UKPIL)’ and ‘General Logistics
Systems (GLS)’.
Group operating profit after transformation costs
(£m)
UKPIL
GLS
Other
Group operating profit after transformation costs
Margin
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
417
117
17
551
6.0%
470
115
10
595
6.4%
1 ‘Other’ revenue excludes inter‑segment revenue of £141 million (2014‑15 £152 million)
Annual Report and Financial Statements 2015-16
| 25
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| Financial review
Group operating profit before transformation costs grew by five per cent. The increase in operating profit from the Other segment relates largely to
improved trading performance in Romec Limited. Group operating profit after transformation costs declined by two per cent as a result of higher
transformation costs. Operating profit margin after transformation costs decreased by 10 basis points on an underlying basis to 6.0 per cent.
Specific items
Operating specific items in the period related mainly to the ‘pension charge to cash difference’ of £257 million (2014‑15 £129 million) and the
Employee Free Shares charge of £158 million (2014‑15 £169 million). The difference between the pension charge and cash cost represents the
difference between the income statement pension charge rate of 29.8 per cent and the actual cash payments into the schemes. Year‑on‑year,
the increase in the difference has been driven by a decrease in AA corporate bond yields, which increases the income statement charge but not
the cash payments. The IAS 19 pension service charge rate for 2016‑17 is 28.8 per cent which means that the pension charge to cash difference
is expected to reduce to around £230 million. The charge for the Employee Free Shares will reduce over time reflecting the phasing of the charge
over the vesting period. For 2016‑17 the Employee Free Shares charge is expected to be around £110 million, taking into account the further
one per cent of Free Shares to be allocated in due course and an estimate of the level and mix of leavers.
Non‑operating specific items include a profit on disposal of property, plant and equipment of £29 million (2014‑15 £133 million) mainly arising
from the sale of the Croydon Delivery Office. The net pension interest credit was £113 million (2014‑15 £75 million). This is higher than the prior
year due to the increase in the accounting surplus at 29 March 2015 and the impact of the change in pension accounting policy (see Note 1 to
the financial statements). For 2016‑17 the pension interest credit is expected to be around £120 million due to the increase in the accounting
surplus at 27 March 2016. Profit on disposal of discontinued operations of £31 million (2014‑15 £nil) relates to the sale of DPD SL, a subsidiary
of GLS Germany.
Net finance costs
€500 million bond
Revolving credit facility
Total
Rate
2.5%
LIBOR+0.55%
Facility
(£m)
392
1,050
1,442
Drawn
(£m)
392
–
392
Facility end date
2024
2020‑21
Net finance costs were £13 million compared with £26 million in the prior year. The reduction was mainly due to improved terms on our
borrowing facilities and leases and lower outstanding balances of gross debt following the amendment of the syndicated bank facilities in the
prior year.
The blended interest rate on gross debt (including finance leases) for 2016‑17 is expected to be approximately three per cent.
Tax
(£m)
UK tax charge
Foreign tax charge
Total tax charge
Effective tax rate
Adjusted
52 weeks ended
27 March 2016
Adjusted
52 weeks ended
29 March 2015
(84)
(34)
(118)
22%
(102)
(36)
(138)
24%
The Group effective tax rate on adjusted profit before tax was 22 per cent. The UK effective tax rate of 20 per cent is broadly in line with the
UK Corporation Tax rate. GLS effective tax rate of 29 per cent (2014‑15 31 per cent) has reduced mainly due to changes in tax rules in certain
territories, particularly Italy.
Earnings per share (EPS)
Basic adjusted EPS for continuing operations was 41.3 pence compared with 42.8 pence in the prior year, reflecting the increase in
transformation costs.
26
| Annual Report and Financial Statements 2015-16
Cash flow
(£m)
EBITDA before transformation costs
Pension charge to cash difference
Adjusted EBITDA before transformation costs
Trading working capital movements
Share‑based awards (SAYE and LTIP) charge to cash difference
Dividends received from associate
Total investment
Income tax paid
Net finance costs paid
In-year trading cash flow
Other working capital movements
Cash cost of operating specific items
Proceeds from disposal of property (excluding London property portfolio), plant and equipment
Proceeds from disposal of discontinued operations
Acquisition of business interests
Cash flows relating to London property portfolio
Free cash flow
52 weeks
2016
756
257
1,013
(26)
13
1
(694)
(40)
(13)
254
6
(6)
38
41
(18)
(23)
292
52 weeks
20152
889
129
1,018
(5)
5
–
(648)
(37)
(18)
315
17
(8)
39
–
(10)
100
453
Adjusted EBITDA before transformation costs was broadly flat at £1,013 million.
Trading working capital movements were an outflow of £26 million largely as a result of the change in international sales mix, a trend which is
expected to continue.
In‑year trading cash flow was an inflow of £254 million, £61 million lower than the prior year mainly driven by an increase in investment.
Investment
(£m)
Growth capital expenditure
Replacement capital expenditure
Transformation operating expenditure
Voluntary redundancy – ongoing
Voluntary redundancy – management reorganisation
Project costs
Business transformation payments
Total investment
Proceeds from disposal of property (excluding London property portfolio), plant and equipment
Net investment
52 weeks
2016
52 weeks
2015
(253)
(208)
(233)
(159)
–
(72)
(2)
(694)
38
(656)
(168)
(252)
(228)
(62)
(96)
(61)
(9)
(648)
39
(609)
Total gross investment increased to £694 million, mainly due to an increase in expenditure on projects and initiatives to support growth. Growth
capital expenditure increased by £85 million with the principal investments being in relation to parcel IT systems, parcels automation, the
purchase of new PDAs and investment in GLS. Replacement capital expenditure decreased by £44 million. The main investment in the period
related to IT, in particular IT transformation, with reduced spend on vehicles. Transformation spend increased by £5 million to £233 million,
mainly as a result of increased spend in relation to project costs largely due to the cost avoidance programme. Total spend in relation to
voluntary redundancy was in line with the prior year. Proceeds from the disposal of property, plant and equipment (excluding London property
portfolio), mainly relating to the sale of the Croydon Delivery Office, were £38 million, giving a total net investment of £656 million. This was
slightly higher than expected due to timing of certain projects.
Tax payments of £40 million largely relate to amounts paid in Europe. In the UK, we continue to be able to offset the majority of taxable profits
with capital allowances and brought forward losses. This is now expected to normalise in 2018‑19, mainly due to relief available from additional
Employee Free Shares allocations.
2 52 weeks 2015 has been restated to move change in GLS client cash of £6 million from ‘Trading working capital movements’ to ‘Other working capital movements’ and to
extract £10 million in respect of ‘Acquisition of business interests’ from ‘Growth capital expenditure’ within 'Total investment'
Annual Report and Financial Statements 2015-16
| 27
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Financial review
Cash cost of operating specific items related to legacy and legal costs. Going forward, the Company is liable to pay National Insurance
contributions on any Free Shares that are sold by employees prior to the end of each of the Share Incentive Plans’ five year terms. The amounts
and timing of any such cash payments are uncertain but will be treated as operating specific items.
As previously reported, on 31 March 2015 GLS Germany sold its entire holding in its subsidiary DPD SL resulting in proceeds from sale of
discontinued operations of £41 million.
Acquisition of business interests cash flows of £18 million relate to amounts paid in respect of investments made in the year, mainly
NetDespatch Ltd, Mallzee Ltd, Intersoft Systems & Programming Limited and acquisitions in GLS, including deferred consideration paid in
relation to acquisitions made in prior periods.
Cash flows relating to the London property portfolio of £23 million largely relate to remediation work, reprovisioning costs and professional fees
at the Nine Elms and Mount Pleasant sites.
Net debt
(£m)
Obligations under finance leases
Interest‑bearing loans and borrowings
Obligations under finance leases
Total gross debt
Cash and cash equivalents
Cash at bank and in hand
Client cash
Cash equivalent investments
Financial assets – short‑term deposits
Pension escrow investments (RMSEPP)
Total net debt
Balance sheet
category
Current liabilities
Non‑current liabilities
Non‑current liabilities
Current assets
Current assets
Current assets
Current assets
Non‑current assets
52 weeks
2016
52 weeks
2015
(84)
(392)
(136)
(612)
368
185
13
170
–
20
(224)
(93)
(366)
(179)
(638)
287
127
20
140
56
20
(275)
Net debt was £224 million at 27 March 2016, £51 million lower than at 29 March 2015. The decrease in net debt was driven by the in‑year trading
cash flow and proceeds from the disposal of assets, partially offset by dividend payments to equity holders of the parent Company.
We continue to target investment grade credit metrics, that is, no lower than BBB‑ under Standard & Poor’s methodology.
A reconciliation of net debt is shown below.
(£m)
Net debt brought forward
In‑year trading cash flow
Other working capital movements
Cash cost of operating specific items
Proceeds from disposal of property (excluding London property portfolio), plant and equipment
Proceeds from disposal of discontinued operations
Acquisition of business interests
Cash flows relating to London property portfolio
Dividends paid to equity holders of the parent Company
Dividends paid to non‑controlling interests
Decrease in finance lease obligations (non‑cash)
Foreign currency exchange impact
Net debt carried forward
52 weeks
2016
52 weeks
2015
(275)
254
6
(6)
38
41
(18)
(23)
(213)
(7)
–
(21)
(224)
(555)
315
17
(8)
39
–
(10)
100
(200)
(1)
8
20
(275)
Pensions
The IAS 19 pension position at 27 March 2016 was a surplus of £3,430 million, compared with a surplus of £3,049 million at 27 September 2015
and £3,367 million (restated – see Note 1 to the financial statements) at 29 March 2015. The IAS 19 accounting position and key assumptions for
the valuation are provided in Note 10.
28
| Annual Report and Financial Statements 2015-16
The process for the triennial valuation of the Royal Mail Pension Plan (RMPP) at 31 March 2015 has commenced and the outcome will be
announced in due course. The Royal Mail Senior Executives Pension Plan (RMSEPP) triennial valuation at 31 March 2015 has been completed,
based on the assumptions agreed as part of the Funding Agreement made between the Company and the Trustee in 2013. If the assumptions
used for the 2012 triennial valuation of the RMPP and the 2015 triennial valuation of the RMSEPP are rolled forward to 31 March 2016, the
combined actuarial surplus would be £1,777 million, compared with £1,525 million at 30 September 2015 and £1,793 million at 31 March 2015.
It is this basis that the Pension Trustee and the Company use to assess the ongoing funding needs of these schemes. To support the Company’s
commitment that, subject to certain conditions, the RMPP will remain open to defined benefit accrual until at least March 2018, the Trustee
has hedged a large proportion of the interest and inflation exposure on this expected future service benefit accrual. The Trustee increased this
hedging further during 2015‑16, and on an actuarial basis the amount of the surplus at March 2016 relating to the liabilities hedged in advance of
those accrued to the same date, was approximately £550 million. This element of the surplus will unwind over time.
Under the 2012 triennial valuation of the RMPP, the Company agreed to pay ongoing cash contributions of 17.1 per cent of pensionable pay
until 2018. At that time, this amounted to around £400 million per annum. This was made possible by the creation of an actuarial surplus of
£1.6 billion as a result of the Pensions Reform in 2013. Without this surplus, the Company contributions required would have been around
£700 million per annum, or 30 per cent of pensionable pay. Accordingly, the surplus was expected to decline over time.
Although market conditions for defined benefit schemes have been very volatile over the past 12 months, the funding position of the RMPP at
the end of the 2015‑16 financial year is broadly in line with that at the end of 2014‑15, largely due to increases in the market value of gilts and
derivative assets held to hedge interest rate and inflation risks. We continue to expect that the RMPP actuarial surplus will reduce over time,
although the pace of this reduction will only be confirmed once the 2015 triennial valuation process has been concluded.
As part of the March 2012 actuarial valuation, the Company agreed to pay additional contributions of up to £50 million a year from April 2016
onwards if the Trustee considers these necessary to maintain the Plan’s projected funding position in March 2019. Until the Trustee has carried
out its assessment of liabilities at 31 March 2016, we will not know if any payment will become due for 2016‑17.
Dividends
The final dividend of 14.3 pence per share in respect of the 2014‑15 financial year was paid on 31 July 2015, following shareholder approval.
The Board is recommending a final dividend of 15.1 pence per ordinary share, payable on 29 July 2016 to shareholders on the register at
the close of business on 1 July 2016, subject to shareholder approval at the AGM on 21 July 2016. This gives a total dividend for the year of
22.1 pence, an increase of five per cent.
As previously stated, given the seasonality of the Group's business, the Board would expect to pay an interim dividend each year equal to
approximately one‑third of the prior year's total dividend and to set the final dividend for each year in light of the full year performance of
the Group.
Property
We continue to adopt a flexible approach in relation to our large London development sites at Nine Elms and Mount Pleasant and continue
to explore options to realise value from them. Proceeds from the sale of the Paddington site will be reinvested into these larger sites to
enable development.
Financial risks and related hedging
The Group is exposed to commodity and currency price risk. The Group operates hedging policies which are described in the Notes to the
financial statements.
The forecast diesel and jet commodity exposures in UKPIL are set out below together with the sensitivity of 2016‑17 operating profit to changes
in commodity prices and fuel duty.
Fuel
duty (incl
irrecoverable
VAT) – not
hedged
Underlying
commodity
exposure (incl
irrecoverable
VAT)
Underlying
commodity
volume
hedged
Forecast
total cost
Residual
unhedged
underlying
commodity
exposure (incl
irrecoverable
VAT)
Impact on
2016-17
operating
profit of a
further 10%
increase in
commodity
price
Impact on
2016-17
operating
profit of a
further 10%
increase in
fuel duty
2016-17 Exposure
Diesel
Jet
Total
£m
148
8
156
£m
94
–
94
£m
54
8
62
%
90
77
88
£m
£m
3
2
5
–
–
–
£m
(9)
n/a
(9)
As a result of hedging it is anticipated that the diesel commodity cost for 2016‑17 will reduce by £12 million. Without hedging the cost reduction
would have been £31 million (based upon closing fuel prices at 27 March 2016). Due to the policy of hedging in advance, the current oil prices will
result in anticipated lower effective diesel commodity cost in the future.
Annual Report and Financial Statements 2015-16
| 29
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Financial review
The UKPIL and Other business units’ functional currency is Sterling, while GLS’ functional currency is the Euro. Therefore the translational
exposure to the Group’s operating profit relates to GLS’ profits.
In 2015‑16, the average exchange rate between Sterling and the Euro was £1/€1.37 representing an eight per cent strengthening in Sterling
compared with £1/€1.27 in 2014‑15, which resulted in a £8 million reduction in GLS’ reported operating profits.
The Group manages its interest rate risk through a combination of fixed rates loans and leasing, floating rate loans/facilities and floating rate
financial investments. At 27 March 2016, all of the gross debt of £612 million was at fixed rate to maturity.
Counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength.
Events after the reporting year
Romec Limited (Romec) – acquisition of 49 per cent shareholding
On 31 March 2016, Royal Mail Group Limited (RMG), the main operating subsidiary of Royal Mail plc, acquired the 49 per cent of shares in Romec
that it did not already own, from ENGIE (formerly Cofely Workplace Limited), making RMG the sole shareholder of Romec. The financial terms of
the acquisition are not considered by Management to be material in the context of the Group as a whole.
Settlement of French Competition Authority fine
Following the results of an investigation by the French Competition Authority (Autorité de la Concurrence) in respect of alleged breaches of
antitrust laws by one of its subsidiaries, GLS France, a settlement amount of €55 million was paid by the Group on 15 April 2016. This amount is
fully provided for in the Group financial statements at 27 March 2016 and at 29 March 2015.
Auditor
Following the audit tender process explained on page 50 of the Annual Report and Financial Statements 2014‑15, the proposal to appoint
KPMG LLP as external auditor was approved by shareholders at the 2015 AGM.
30
| Annual Report and Financial Statements 2015-16
Underlying change
Movements in revenue, costs, profits and margins are shown on an underlying basis. Underlying movements take into account differences
in working days in UKPIL (2015‑16 303; 2014‑15 304) and movements in foreign exchange in GLS (2015‑16 £1/€ 1.37; 2014‑15 £1/€ 1.27).
In addition, adjustments are made for non‑recurring or distorting items, which by their nature may be unpredictable. For volumes, underlying
movements are adjusted for working days in UKPIL, and exclude elections in letter volumes. For 2016‑17, the estimated impact of working days
in UKPIL is around £65 million (2016‑17 305.6 days).
Adjusted
2015‑16
Adjusted
2014‑15
Working days
(UKPIL)
Foreign
exchange (GLS)
Underlying
2014‑15
Underlying
change
(£m)
Revenue
UKPIL
GLS
Other
Group
Costs
Group
People
Non‑people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating costs before transformation costs
UKPIL
People
Non‑people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
7,666
1,580
5
9,251
(5,199)
(3,310)
(1,736)
(995)
(579)
(8,509)
(4,764)
(2,294)
(776)
(890)
(628)
7,757
1,557
14
9,328
(5,230)
(3,358)
(1,764)
(1,019)
(575)
(8,588)
(4,789)
(2,353)
(821)
(919)
(613)
Operating costs before transformation costs
(7,058)
(7,142)
GLS
Operating costs
Profit, margins and EPS
Group
Operating profit before transformation costs
Margin
Transformation costs
Operating profit after transformation costs
Margin
Profit before tax
Tax
Profit for the period
Profit attributable to the Group
Group earnings per share (pence)
UKPIL
Operating profit before transformation costs
Margin
Transformation costs
Operating profit after transformation costs
Margin
GLS
Operating profit before transformation costs
Margin
(1,463)
(1,442)
742
8.0%
(191)
551
6.0%
538
(118)
420
413
41.3
608
7.9%
(191)
417
5.4%
117
7.4%
740
7.9%
(145)
595
6.4%
569
(138)
431
428
42.8
615
7.9%
(145)
470
6.1%
115
7.4%
(26)
–
–
(26)
–
–
–
–
–
–
–
–
–
–
–
–
–
(26)
–
(26)
(26)
(26)
–
–
(26)
–
(109)
–
(109)
25
76
66
7
3
101
–
–
–
–
–
–
7,731
1,448
14
9,193
(5,205)
(3,282)
(1,698)
(1,012)
(572)
(8,487)
(4,789)
(2,353)
(821)
(919)
(613)
(7,142)
101
(1,341)
(8)
–
(8)
(8)
–
–
–
–
706
7.7%
(145)
561
6.1%
535
(130)
405
402
40.2
589
7.6%
(145)
444
5.7%
107
7.4%
(1%)
9%
n/m
1%
Flat
1%
2%
(2%)
1%
Flat
(1%)
(3%)
(5%)
(3%)
2%
(1%)
9%
5%
30bps
(2%)
(10bps)
–
–
–
–
–
3%
30bps
(6%)
(30 bps)
9%
Flat
–
(8)
Annual Report and Financial Statements 2015-16
| 31
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Principal risks
Principal risks
The Corporate Governance section describes in detail how the Group manages its risk from the
Group Board level, its respective sub-committees and throughout the organisation. Further details
can be found on pages 42-84.
The table below details each principal business risk, those aspects that would be impacted were the risk to
materialise, our assessment of the current status of the risk and how the Group mitigates it.
Key
Relative severity
High
Medium
Low
Change during the year
Speed at which the risk could impact
Increasing risk
Decreasing risk
Stable
Fast: 6 months
Medium: 6‑12 months
Slow: >12 months
Included in Longer
Term Viability
assessment
Principal risk
Status
How we are mitigating the risk
Changes in market conditions and customer behaviour
The industry sectors in which we operate remain highly competitive, with customers demanding more and our competitors responding quickly to these
changing demands.
Customer behaviour and Royal Mail’s
responsiveness to market changes
V
Changes in customer behaviour, and changes to the
markets in which the Group sells its products and
services, could impact our forecast rates of decline
and growth of letter and parcel volumes, respectively.
There is a risk that our product offerings and
customer experience may not adequately meet
evolving customer needs, or that we are unable to
innovate or adapt our commercial and operational
activities quickly enough to respond to changes in
these markets.
The parcels sector is undergoing rapid and profound
change. Competition in the UK domestic and
international markets continues to intensify, with
competitors offering innovative solutions that include
convenient, reliable delivery and return options, and
improved tracking facilities. Capacity expansion in
the sector continues to exert downward pressure
on prices.
In the parcels business, disintermediation in the
on‑line marketplaces may divert our business to
other carriers or collection providers.
We expect the letters sector to remain in structural
decline, in the medium‑term, driven by the
growth in mobile and online advertising, and
e‑substitution.
There is a continuing requirement to invest in
growth and innovation to meet these challenges
in the marketplace.
• We use continuous in‑depth market monitoring and
research to track how well we match our customers’
needs, including relative to our competitors, and to
predict volume trends.
• We are investing in introducing, at pace, new and
improved products and services that: enhance
customers’ online and delivery experience; expand our
core offering to small and medium‑sized businesses and
marketplace sellers; and extend our product coverage.
We target investments that will extend our value chain
offer and increase our presence in faster growing areas of
the parcels sector.
• We promote the value of letters to customers through
our MAILMEN initiative for marketing mail, Keep Me
Posted and other campaigns, and innovations such
as Mailmark®.
Economic environment
V
Historically there has been a correlation between
economic conditions and mail volumes. Slowing
economic growth could impact our ability to maintain
and grow revenue, either through reduced volumes or
by encouraging customers to adopt alternative service
options for sending letters and parcels.
The outlook for economic conditions in the UK is
broadly in line with our planning assumptions, but
uncertainty around the outlook has increased.
Economic growth in the Eurozone is more
moderate and recovery remains fragile. Low
growth or recession in Europe could impact our
international parcel volumes, including those
handled by GLS.
• We have a robust modelling and forecasting framework
that uses a range of quantitative and qualitative
approaches to provide early warnings of changes to
overall volumes and the profile of letter and parcel
business, and to assess the effect of our pricing
structures. We have a programme of regular reviews of
outcome data compared to forecast, and recalibration and
upgrade of these models.
• We have a challenging cost avoidance programme in
place in response to revenue headwinds.
• We are pursuing initiatives to find new areas of growth,
such as fleet maintenance services and leveraging
data assets.
32
| Annual Report and Financial Statements 2015-16
Principal risk
Status
How we are mitigating the risk
Pension risk
The Group continues to operate a defined benefit pension scheme, the Royal Mail Pension Plan, open to accrual for existing members.
Affordability of the defined benefit
pension scheme
V
Our ongoing ability to maintain the Royal Mail
Pension (Plan) in its current form is subject to
financial market conditions.
As part of the Pension Reform in 2013, we
committed, subject to certain conditions, to keep
the Plan open until at least March 2018.
Current financial market conditions suggest that
keeping the Plan open to accrual in its current form
beyond 2018 will not be affordable.
• The Plan is hedged against future interest rate and
inflation rate exposures, and we are confident that this
will enable us to meet our commitment to keep the Plan
open to accrual up to March 2018.
• We are in discussions with the unions, and are
developing proposals for sustainable post‑March 2018
pension arrangements.
Business transformation
Royal Mail must continuously become more efficient and flexible in order to compete effectively in the letters and parcels sectors.
Efficiency
The success of our strategy relies on the effective
control of costs and the delivery of efficiency benefits.
We continue to make efficiency improvements.
Our productivityimprovement is within our target
range, and through our strategic focus on costs
we have reduced our underlying UKPIL operating
costs, before transformation costs, by one per cent.
• We have a strategic programme of cost avoidance,
involving approximately 70 projects targeted to avoid
around £500 million of annualised costs by 2017‑18.
• Our Agenda for Growth agreement with the CWU,
supported by the Together for Growth training
programme, and a joint mediation process, which
facilitates a collaborative approach to improving
efficiency at a local and national level.
• We have redefined and rolled out across the network core
Operations Standards that are based on best observed
practice. A programme to enable better alignment of
resourcing and workload is also being implemented
across the Delivery Office network.
• We are simplifying our operational management
structure and have programmes of activity in hand to
support operational managers in improving efficiency.
• We continue to reduce levels of Lost Time Accidents and
other sick absence through a positive focus on compliance
with attendance management procedures, safety and
wellbeing support.
Attracting and retaining senior
management and key personnel
Our performance, operating results and future growth
depend on our ability to attract and retain talent with
the appropriate level of expertise.
Turnover in senior and key personnel has been at
normal levels for the business during the year, but
this remains an inherent business risk.
• The Group’s remuneration 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.
• We operate a succession planning process and have in
place talent identification and development programmes.
IT transformation
The scale and complexity of our IT transformation
programme and the ongoing requirement for effective
management of the transition are sources of risk to its
successful delivery.
We have made significant progress in delivering
the IT transformation programme. Infrastructure
changes and transition to new providers are close
to completion.
Failure to improve our IT systems or successfully
implement the IT transformation programme could
increase the risk of: security breaches and attacks; a
material adverse effect on the Group’s operations; and
inability of IT systems to support the business plan.
This will provide us with an effective technical
infrastructure that, going forward, better
supports both routine functional activity and
business growth.
• In view of the size and complexity of the transformation
programme, we have, throughout its lifecycle,
strengthened standard programme management and
governance disciplines to provide intensive focus on key
aspects; completing residual elements of the transition is
now the primary focus.
Annual Report and Financial Statements 2015-16
| 33
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| Principal risks
Principal risk
Status
How we are mitigating the risk
Regulatory and legislative environment
The business operates in a regulated environment. Changes in legal and regulatory requirements could impact our ability to meet our targets and goals.
Fundamental review of postal
services regulation
In June 2015 Ofcom announced a fundamental review
of the regulation of Royal Mail. The review, currently
in progress, incorporates previously announced
reviews into efficiency, parcels and access pricing.
It also examines: what changes to the overall postal
regulatory framework might be appropriate to secure
the Universal Postal Service; Royal Mail's wholesale
and retail pricing; and whether the current level of
commercial flexibility allowed to Royal Mail remains
appropriate, and, if not, whether additional wholesale
or retail price controls should be introduced.
A regulatory system or approach that applies
restraints to Royal Mail’s ability to compete for traffic
to support the costs of the Universal Service network,
or imposes operational requirements not applied
generally to the industry, may impact our revenues,
our ability to compete in the highly competitive
industry sectors in which we operate, and ultimately
our ability to deliver the Universal Service on a
sustainable basis.
VAT status
New
This is a new risk that has emerged during the year.
It was disclosed in our financial results for the half
year ended 27 September 2015.
Ofcom has stated that it expects to complete the
process and have a regulatory framework in place
in early 2017.
There is an ongoing Competition Act investigation
by Ofcom relating to certain of our access pricing
proposals in January 2014, which we suspended
without implementing and subsequently withdrew.
We dispute the allegations and are robustly
defending the investigation.
• We have made comprehensive submissions to Ofcom
as part of its initial call for evidence and we have ongoing
engagement with Ofcom to build on the response to
issues raised.
• Our response to the proposal will be shaped by the detail
of the proposal and any threat it may present to our ability
to compete effectively, and to the sustainability of the
Universal Service. We will seek to work with Ofcom to
protect the Universal Service.
• We have a strategic focus on cost avoidance and
delivering efficiency improvements, as noted against
the Efficiency risk in the Business transformation
section above.
• We have made a detailed submission to Ofcom in relation
to its Competition Act investigation.
The Value Added Tax (VAT) treatment of Royal Mail’s
services, including exemption applying to certain
products, is under threat in two areas:
The proposed Vouchers Directive is
under discussion in Europe. The outcome
remains uncertain.
• We continue to liaise with HM Treasury and HMRC to
seek to minimise any adverse impact of the proposed
Vouchers Directive.
• We are monitoring and continue to feed into discussions
with the European Commission on potential
developments in VAT legislation.
• We continue to monitor developments in case law relating
to the application of the Working Time Directive in respect
of holiday pay calculations. Based on our estimates of
the potential financial impact, we believe that we have
made sufficient provision for any historic liabilities that
may arise.
• We liaise with the CBI, HMRC and HM Treasury to influence
employment tax developments and minimise the impacts
for Royal Mail as far as possible.
• The EU has published a proposal for a Vouchers
Directive, which could adversely impact Royal
Mail’s VAT position, if as a result, postage
stamps were treated in the same way as other
vouchers; and
• The European Commission is reviewing a number
of VAT exemptions, including the exemption
applying to postal services. Although Royal Mail
could benefit from greater recoverability of VAT
on costs if the VAT exemption for postal services
was removed, the cost to customers who cannot
reclaim VAT would be likely to increase.
The VAT exemption applying to mandated access
services has also been under threat, with HMRC’s
implementation of VAT legislation on these services
subject to a judicial review.
Employment legislation and regulation
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.
The European Commission has published details
of responses to its consultation about the future of
VAT exemptions, but there has been no indication of
the likely outcome or timescale of the review.
The appeal against the decision that HMRC had
correctly implemented VAT legislation in respect
of exemption applying to mandated access
services has been withdrawn and the matter is
now concluded.
The improved risk trend reflects our
re‑assessment of the potential impact of
these issues.
Recent case law has suggested that regular
overtime and commission payments should form
part of holiday pay calculations. The legal position
remains unclear as case law is still evolving in
this area.
Other risks to our cost base associated with
employment legislation have emerged and were
disclosed in our financial results for the half year
ended 27 September 2015. These are:
• Proposal for an Apprenticeship Levy. Draft
legislation sets the levy at 0.5 per cent of payroll
costs, applicable from April 2017.
• Proposed changes to National Insurance (NI)
on termination of employment have been
announced, which will increase employers’ NI
costs from April 2018.
• The Government has consulted on how pensions
tax relief is provided, but has not proposed
changes at this time. If changes are proposed in
the future, they could have a significant impact
on the cost of providing pensions.
34
| Annual Report and Financial Statements 2015-16
Principal risk
Cyber security
Status
New
How we are mitigating the risk
We are subject to a range of regulations and
contractual compliance obligations around the
governance and protection of various classes of
data, and are susceptible to cyber attacks that could
threaten the confidentiality, integrity and availability of
data in our systems.
While no material losses related to cyber security
breaches have been suffered, given the increasing
sophistication and evolving nature of this threat and
our reliance on technology and data for operational
and strategic purposes, we now consider it is
appropriate to include this as a principal risk.
• As external threats become more sophisticated,
and the potential impact of service disruption increases,
we continue to address our ongoing investment in cyber
security. We take a comprehensive view of cyber security
and continually review our resilience in light of the
changes and threats we face.
A cyber security incident could also trigger material
service interruption.
Either of these outcomes could result in financial
and reputation damage, including loss of
customer confidence.
Industrial relations
There is extensive trade union recognition in respect of our workforce in the UK, with a strong and active trade union which, historically, has used industrial action
to lever benefits for their members.
Industrial action
V
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.
The Agenda for Growth agreement developed jointly
with the CWU represents a fundamental change
in our relationship with the CWU, and promotes
stability in industrial relations.
• Our Agenda for Growth agreement with the CWU provides
a joint commitment to improved industrial relations, and
to resolving disputes at pace and in a way that is beneficial
to both employees and Royal Mail.
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. It may also cause Royal Mail to fail to meet
the Quality of Service targets prescribed by Ofcom,
leading to enforcement action and fines.
However, industrial relations is an inherent risk
within our business: we are negotiating a new pay
deal for 2016‑17, the Pension Plan affordability is
under discussion, and the increasingly competitive
environment and other sources of pressure on costs
and efficiency may put the stability of our industrial
relations under strain.
• As part of our collaborative approach with the CWU,
the Agenda for Growth is supported by our Together for
Growth programme, an industrial relations and business
skills package for managers and CWU representatives
designed jointly to improve the way that managers and
unions work together. A resolution process for local
disputes uses trained mediators nominated by and
representing both the CWU and the business.
• The Agenda for Growth agreement has legally binding
protections for the workforce in respect of future job
security and our employment model, but which can be
rescinded in the event of national industrial action.
Viability Statement
The Directors have assessed the viability of the
Group as part of their ongoing risk management
and monitoring processes.
While the Directors have no reason to believe
that the Group will not be viable over the longer
term, they consider the three financial years to
March 2019 to be an appropriate planning time
horizon to assess Royal Mail’s viability and to
determine the probability and impact of our
risks. This is the same time frame of our existing
medium‑term planning cycle.
The Directors considered all principal risks
set out in the Principal risks section on
pages 32‑35 but focused on those that could
have a plausible and severe financial impact over
the plan horizon. In particular they considered
the potential impact of industrial action and
deteriorating economic and market conditions.
The risks were quantified to create a downside
scenario that took into account the levels
of committed investment and expenditure,
as well as other short‑term cost and cash
actions which could mitigate the impact of
the risks. Consideration was also given to the
large fixed cost base required to deliver the
Universal Service Obligation in its current form.
The downside scenario was tested to determine
whether the Group would remain solvent.
The Directors have made the assumption that
the RMPP funding rate remains unchanged
from 2015‑16.
Based on the results of their analysis, the
Directors have a reasonable expectation that the
Group will be able to continue in operation and
meet its liabilities as they fall due over the period
to March 2019.
Annual Report and Financial Statements 2015-16
| 35
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Corporate responsibility
Responsibility
leader
1st
FTSE4Good
Dow Jones Sustainability
Index global leader two years
in a row in the Transportation
and Transportation
Infrastructure sector
Royal Mail constituent of
FTSE4Good, ranking in the
96th percentile
Our
performance 1st
85%
Delivery business retained
triple certification to the
Carbon Trust Standard for
carbon, water and waste
Adults surveyed in the
UK think Royal Mail is
an important part of
local communities
Winner
In partnership with Missing
People, Royal Mail won
Business Charity Awards and
Charity Times Award in 2015
30%
Reduction in our Lost time
Accident Frequency Rate
since 2014-15
36
| Annual Report and Financial Statements 2015-16
Corporate responsibility
Our corporate responsibility (CR) 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 generate sustainable shareholder value.
CR strategy objectives
Winning
in parcels
Defending
letters
Growing in
new areas
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
Our CR strategy comprises five key
objectives. They help us to deliver our
corporate strategy, as set out in the
table above. We report progress against
our corporate responsibility objectives
under the areas of Customer, People,
Community, Environment and Suppliers.
Further information will be available online
in the 2015‑16 Corporate Responsibility
(CR) Report.
Measuring our progress
We are independently rated as a leading
responsible business. We have been named
global leader in the Dow Jones Sustainability
Indices for the second year in a row in
the transportation and transportation
infrastructure industry. As the top‑scoring
company, Royal Mail has been included in
both the Dow Jones Sustainability World
Index and the Dow Jones Sustainability
Europe Index.
Royal Mail was included in the FTSE4Good
Global Index in 2015, scoring 4.1 out of
5 in the criteria, with a ranking in the
96th percentile.
Our customers
Our strategy is underpinned by putting the
customer at the heart of everything we do.
Ipsos Mori’s Corporate Image Survey found
78 per cent of our customers say they are
favourable to us, while 86 per cent are
satisfied with the service we provide, putting
us ahead of most companies surveyed1.
Our customers, both business and consumer,
want convenience and value from their
delivery provider. We have introduced a
range of new measures to make sending and
receiving items easier for our customers.
Since October 2014, more than 30,000
registered users have used our new Click
& Drop service, which integrates data from
online shopping platforms to make it quicker
and easier to buy postage and print address
labels online. We have launched a trial for
SMEs and online marketplace sellers in
the North West, offering next day parcel
collection on their doorstep.
We engage with our customers to assess
how we are doing, improve service levels and
evolve our products, so we can continue to be
their provider of choice. Through two ongoing
research initiatives, we speak with around
600 businesses and 3,000 consumers every
month. We carry out post‑call surveys and
an Online Satisfaction Survey to learn about
customers’ experiences when they interact
with us.
Our own people can also tell us how
customer‑focused our products and
services are. We use our annual Employee
Survey to ask employees four questions
to understand what they think about the
customer experience. This year we achieved
a Customer Focus Score of 67 out of 100.
Recognising and fixing problems in our
service is an important element of being
easy to do business with. We strive to
get things right the first time. But in an
operation where we deliver around 16 billion
items a year, sometimes problems arise.
We were disappointed to see that the
number of complaints we have received
has increased from 452,538 in 2014‑15 to
476,040 in 2015‑16. We are prioritising our
efforts to tackle the root causes of these
complaints, as outlined in the Chief Executive
Officer’s review.
Customer Focus, business customer
satisfaction and complaints are three of
the four customer KPIs included on the
Corporate Balanced Scorecard for 2015‑16,
which is linked to managers’ remuneration.
For more information, see page 75.
Our people
Labour standards
Royal Mail is a people business. We are one
of the largest employers in the UK with one in
every 175 employees in the country working
for Royal Mail².
We are committed to providing the best labour
standards in our industry. All our permanent
employees earn above the Living Wage.
Engagement and culture
Employee engagement is fundamental to
developing our customer‑focused culture.
Engagement is one of the four people‑related
KPIs on our Corporate Balanced Scorecard.
Our Employee Survey helps us identify the
areas where we are doing well and those
where we need to improve. The engagement
score has increased by one point to 57.
67 per cent of our people say they understand
how their jobs contribute to the success of
Royal Mail.
1 Ipsos MORI Corporate Image Survey Winter 2015
2 Cebr research, conducted for Royal Mail in May 2016
Annual Report and Financial Statements 2015-16
| 37
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Corporate responsibility
During the year, we worked closely with our
unions on the development of new values
for Royal Mail, which put the customer at
the heart of everything we do. We measure
the success of our cultural change journey
through the incorporation of a Cultural
Index within our annual employee survey.
Our Cultural Index measure, which tracks
how we well we are embedding our values
and behaviours, was 48 out of 100.
Creating a culture of ownership
The transition that the vast majority of
our people have made from employees
to shareholders is an important part
of the Royal Mail’s transformation.
It gives them a personal, financial stake
in the customer‑focused culture that
we are building. During 2015‑16, HM
Government disposed of all of its remaining
shareholding in Royal Mail meaning that
the Company is now 100 per cent privately
owned. Eligible full‑time employees have
received a maximum of 832 Free Shares,
regardless of grade. This is one of the
largest free employee stakes of any major
UK privatisation. This is in addition to our
popular Save As You Earn (SAYE) scheme,
which launched in September 2014 and
resulted in more than 34,000 employees
setting aside money from their salary for
options to buy Royal Mail shares.
Industrial relations
We took several key steps in advancing
initiatives under the Agenda for Growth
agreement during 2015–16. We created
a new, unified Conduct Policy that is
more focused on informal resolution
and incorporates a new approach to
precautionary suspension, which should only
be used in serious incidents.
We continued the roll‑out of our Together
for Growth joint training programme,
which forms a key part of our Agenda for
Growth agreement with our unions and
has now reached over 6,000 managers and
union representatives.
Health and safety
The safety and wellbeing of our workforce
is an enduring priority for us and is crucial
to our people strategy. A focus on wellbeing
engages colleagues with the business and its
future, reduces the costs and disruption of
sick absence and makes it easier to build our
customer‑focused culture.
Our safety goal is to reduce the number
of accidents to zero and reduce our sick
absence rate, commitments that are driven
by specific safety KPIs in our Corporate
Balanced Scorecard.
During 2015‑16, we once again succeeded in
reducing our Lost Time Accident Frequency
Rate, now down to 0.49. The number of
accidents and days lost due to accidents fell to
8,040 and 23,038, which amounted to a saving
of over £1 million.
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.
We continue to make strong progress in
improving gender diversity at Royal Mail, and
we are proud to be named as a Times Top 50
Employer for Women. At our Board and senior
management grades, we have relatively high
gender diversity. At Board level, 38 per cent
of members are female, compared with a
FTSE 100 average of 26 per cent. At senior
management level, 29 per cent of employees
are female, compared with 15 per cent in
operational functions. We are committed to
improving the gender balance across all areas
of the business. Following a successful pilot
programme, we rolled out a balanced shortlist
approach to recruitment during 2015‑16,
which has seen an increase in the number of
women hired to fill frontline operational roles,
from 28 per cent to 32 per cent.
Royal Mail’s ethnic profile is broadly
representative of the UK population. Around
10.2 per cent of our employees declare
themselves to be from ethnic minority
backgrounds. We work with Business in the
Community’s (BITC) Opportunity Now and
Race for Opportunity programmes, which
promote best practice in equal opportunities.
It is with great regret that we report two
people lost their lives in connection with our
activities in the UK in the past year. Both
fatalities were associated with road traffic
collisions involving 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. We have a fatal and serious
accident standard and protocol, which tracks
the investigations. This is discussed at Board
level and is communicated across the Group.
We responded to an increase in the level of
sick absence during 2014‑15 by launching
an Attendance Management Taskforce and
rolling out a new system of occupational
health management for mental health
and musculoskeletal cases. A dedicated
occupational health adviser supports both the
employee and their manager throughout the
absence. In 2015‑16, we have dealt with 3,616
cases in this way, cutting the length of absence
by an average 18 days for musculoskeletal
issues and 23 days for cases which involved
an individual’s mental health. As a result, in
2015‑16, days lost due to sickness reduced by
8.7 per cent compared with 2014‑15.
We are prioritising mental health to further
reduce sick absence and ensure our people
are supported. Moya Greene signed the
Time to Change pledge with the CMA/Unite
and the CWU. In 2015, 140 of our people
attended stress awareness workshops and 55
managers participated in a pilot, Mental Health
First Aid, to help deal with crisis situations
should they occur. Our programme ‘Feeling
First Class’ aims to remove the stigma and
raise awareness of mental health conditions
and the support available. We partnered with
the Mental Health Foundation to produce a
series of five mental health awareness training
films, which have been watched by over
4,500 managers.
Diversity
Royal Mail employs a diverse mix of people
that reflects the communities we serve. We are
Safety metrics3
2015-16
2014-15
2013-14
2012-13
Lost Time Accident Frequency Rate
0.49
Sick absence (%)
4.51
0.704
4.74
0.814
4.34
1.17
4.33
3 Data represents UKPIL safety performance
4 2014‑15 figure restated from 0.67 to 0.70 and 2013‑14 figure restated from 0.77 to 0.81 due to a change in reporting
methodology
38
| Annual Report and Financial Statements 2015-16
Gender distribution (number
of people)
Female
Royal Mail plc Board*
Senior Management
Management
Administration
Operational
UKPIL
GLS
Male
5
1,651
5,441
1,016
Female
Male
n/a
36
n/a
242
2,783
2,314
3
686
1,399
1,495
19,030
108,642
1,768
6,848
* The Board represents Royal Mail Group
As a Disability Two Ticks employer, we
welcome job applications from candidates with
a disability or health condition. Approximately
eight per cent of Royal Mail employees identify
themselves as having a disability, compared
with 16 per cent of working age adults in the
UK5. We make reasonable adjustments to the
workplace to support employees who become
disabled, and provide additional training
where required.
We are a member of Stonewall’s Diversity
Champions programme, which campaigns
for equality for lesbian, gay, bisexual and
transgender (LGBT) people. We have more
work to do to improve our overall ranking in
the Stonewall Equality Index, but we were
pleased to see our activities resulted in a
110 per cent increase in our score.
We are committed to dignity and respect in our
workplace and are determined to eliminate
any form of behaviour that undermines our
people and their ability to flourish and thrive at
Royal Mail. We have worked with our unions
to develop a new campaign, ‘We can sort it
out’, which highlights the damage that a lack
of respect and not listening can cause. After
just six months, the film had been watched
more than 5,500 times, across 85 per cent of
our sites.
Learning and development
We are committed to the training and
development of our people at all levels of
Royal Mail, providing them with opportunities
to learn new skills, and equipping them to
help deliver our business strategy.
We invested over £20.5 million in training
during 2015‑16, delivering the equivalent
of 90,000 training days. We focused
this investment more closely on the
transformation of our business through
an updated training and development
programme. In 2015‑16, our learning and
development activities included:
5 https://www.gov.uk/government/statistics/disability‑
facts‑and‑figures
• The launch of Welcome to Royal Mail,
our new induction programme, which
reflects our new business values
and supports our aim of building a
customer‑focused culture.
• Our new Manual Parcel Scanning (MPS)
training, which prepared an estimated
15,000 employees for using our new
PDAs and Finger Scanners in our
mail processing units.
• The 500th Royal Mail leader completing
our Executive Leadership Development
Programme (ELDP), which has been
developed with Oxford Saïd Business
School and has now received the EFMD
Excellence in Practice Gold Award 2015.
• A further 1,856 employees completing
our Customer and You training course,
which builds skills for first‑class customer
service in our Enquiry Offices.
The launch of the My Future careers
portal is designed to make self‑directed
learning more accessible to all Royal Mail
employees. The portal has so far been used
by more than 25,000 of our people. GLS
is working to embed similarly structured
approaches to employee development. In
Denmark, for example, every employee is
invited to participate in an annual personal
development interview with their manager.
We expanded our apprenticeship programme
to include Finance in addition to Project
Management, Vehicle Technician and
Engineering apprenticeships. Fifty apprentices
joined our programme in September 2015.
The Telegraph’s Top Apprenticeships Careers
List for 2015 named Royal Mail as one of the
Top 10 service and retailer employers in the
apprenticeship market.
Our communities
Royal Mail helps keep communities
connected, no matter where they are in the
UK. Nearly 80 per cent of residences are
within one kilometre of a Royal Mail access
point, making it easier for customers to
receive and send their items. Local Collect,
our click and collect service, remains
the largest network in the UK, enabling
businesses to offer greater flexibility to
their customers.
Overall, Royal Mail’s UK businesses directly
contribute £5.6 billion to UK GDP and a
further £5.2 billion through indirect and
induced impacts. Together they equate to
about 0.57 per cent of UK GDP⁶.
Our community investment programme
seeks to build on the social impact our
business already has through delivering the
Universal Service. In 2015‑16, Royal Mail
contributed £6.7 million to charities, good
causes and schemes for disadvantaged
groups. Our people raised a further
£3.1 million for charities and good causes
across the UK.
Our two year partnership with Charity of
the Year, the Stroke Association, saw the
creation of the Operations Fundraising
Challenge. This three month campaign saw
an estimated 10,000 employees support
fundraising activities and was shortlisted
by the prestigious Business Charity Awards
as an outstanding example of employee
engagement. It helped us pass the £1 million
mark in fundraising, when our matched
giving was included, making good progress
towards our fundraising target of £2 million.
The partnership is also raising awareness
about the importance of good health to
reduce the risk of stroke.
We are also using the partnership and the
reach of our business to raise awareness
of the risk factors leading to stroke. The
Stroke Association visits our sites to
measure colleagues' blood pressures and
raise awareness about healthy lifestyles.
More than 10,000 blood pressure readings
have been completed since the start of the
partnership, marking solid progress against
our target of 15,000.
Royal Mail’s employees engage with
communities across the UK on a daily basis.
This local knowledge and understanding is
a powerful asset, which we are drawing on
through our Missing People partnership.
Since the beginning of the partnership,
we have distributed 70 alerts for high‑risk
missing people to our network of around
139,000 people. We built on our partnership
by contributing £50,000 to fund the national
Child Rescue Alert system, which sends
out alerts when a child’s life is in imminent
danger. This contribution will support the
operation of the system for one full year.
We also launched a new freepost service
designed to encourage Missing People to
take the first step in getting back in touch
6 Cebr research, conducted for Royal Mail in May 2016
Annual Report and Financial Statements 2015-16
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Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Corporate responsibility
with their families. Freepost Missing People
enables missing people to send a message
to their families, and to do so without being
traced if they choose.
Our people continued to support a range
of good causes. They donated £2.4 million
through our award‑winning payroll giving
scheme. They also fundraised for charities,
which Royal Mail supported with nearly
£557,000 in matched funding.
Royal Mail has a long‑standing commitment to
helping young people develop across the UK’s
communities. We provide materials to teachers
and students through our online magazine,
Teacher’s Post, which is scheduled to be
published eight times a year. During 2015‑16,
Teacher’s Post resources were downloaded
on more than 500 occasions, reaching an
estimated 26,000 pupils. In August 2015, we
launched a new partnership with the charity
Career Ready in which 66 Royal Mail employees
are mentoring 16‑19 year‑olds for the world
of work.
Our environment
The scale and scope of the Universal
Service makes managing our use of natural
resources a commercial and environmental
imperative. We have the largest vehicle fleet
in the UK and maintain sites all around the
country. We manage our environmental
impacts by focusing on energy use, waste,
water and engaging with customers and
suppliers. Prioritising efficiency and reducing
waste will helps us cut operating costs,
engage our people and build a sustainable
and competitive business.
Our environment strategy and performance
is overseen by the Environment Governance
Board (EGB). During 2015‑16, the EGB
has taken the lead in streamlining our
approach to environmental management
and embedding our World Class Mail
(WCM) system within our Safety, Health
2015-16 CO2e Emissions by Scope
(’000 tonnes) i ii iii iv
Scope 1
Scope 2 (Location‑based)
Scope 3
Total
Tonnes CO2e per £1m revenue
Scope 2 (Market‑based)
and Environment (SHE) management
system. We have also worked to align this
management system more closely with
environmental standard ISO14001. As a
result, we now have group‑wide standards
for energy use in our buildings, waste, water,
fuel and carbon management. We have
maintained our accreditation to ISO 14001
for Parcelforce Worldwide and Royal Mail.
Currently, all of our Parcelforce Worldwide
sites are accredited, as well as 14 Royal Mail
sites and all GLS sites.
A new Environment Policy, which outlines
our commitment to managing environmental
issues, is scheduled to be published in
2016‑17. Our Environment Policy can be
accessed online at: www.royalmailgroup.
com/responsibility/policies.
The table below sets out our Group carbon
dioxide equivalent (C02e) emissions for
2015‑16. In 2015‑16, our total UK carbon
footprint decreased by 2.7 per cent compared
with the previous year. On a normalised basis,
emissions decreased by 1.6 per cent per
£1 million revenue. Our target is to achieve a
20 per cent reduction in our UKPIL emissions
(including Scopes 1, 2 and 3) by 2020‑21,
compared with a 2004–05 baseline. Emissions
are still down by 16.8 per cent against the
2004‑05 baseline, but our target remains very
challenging due to parcel volumes increasing
and the length of time and investment needed
to make any changes to fleet.
We diverted 86 per cent of waste from landfill
last year through a combination of recycling
and waste to energy initiatives. We also
recorded a reduction of two per cent in our
use of water during the year.
Our suppliers
Royal Mail’s supply chain is an important
part of the impact our business has on
our communities and on the environment.
Our suppliers provide vehicles, manage and
supply our buildings and systems and help
deliver mail. Managing these relationships
correctly is essential for us to compete
effectively and deliver the right experiences
for our customers, while broadening the
economic opportunities that we create. In the
UK, we spent nearly £2.5 billion on goods
and services in 2015‑16 from more than
4,800 suppliers.
We expect all our suppliers to adhere to our
Responsible Procurement Code, confirmation
of which is required when registering as
a supplier. The Code requires suppliers to
maintain high standards of social, ethical and
environmental conduct, including complying
with the Ten Principles of the United Nations
(UN) Global Compact. Suppliers must also
comply with our mail security procedures and
our approach to anti‑bribery and corruption.
By setting out our requirements clearly
and working with our suppliers to meet
them, we can help to spread responsible
business practice.
We expanded our Responsible Procurement
Code in 2015‑16. Suppliers are required to
promote fair participation and equality of
opportunity for all their employees and job
applicants, and to provide an environment
free from discrimination or harassment. In
addition, standards are being developed on
safety, health and environment, which will be
implemented in 2016‑17.
Ethical principles are embedded in the
Partner Code used by GLS Germany. The
Code requires suppliers working with GLS to
adhere to principles relating to anti‑bribery
and corruption and health and safety.
We seek to spread the positive economic
impacts of our supply chain by promoting
diversity in our supply chain and making
contracts accessible to suppliers of all sizes.
Of the suppliers that were awarded contracts
in 2015‑16, 25 per cent were SMEs.
2015‑16
2014‑15
2013‑14
Total
UKPIL
518.6
503.3
152.3
134.1
88.7
88.7
GLS
15.3
18.2
759.6
726.1
33.4
94.7
14.1
40.7
26.6
Total
514.1
166.4
100.1
780.5
UKPIL
501.1
145.4
100.1
746.5
96.2
GLS
13.0
21.0
34.0
Total
473.1
149.7
119.2
742.1
GLS
15.5
17.1
32.6
UKPIL
457.6
132.6
119.2
709.5
91.1
i 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
ii UKPIL CO2e emissions for 2014‑15 have been restated to 746,500 tonnes, due to improvements in invoicing
iii CO2e emissions have been assured by EY, except for Scope 2 (Market‑based) figures
iv Totals may differ due to rounding
40
| Annual Report and Financial Statements 2015-16
The Strategic report was approved by the
Board on 18 May 2016.
Moya Greene
Chief Executive Officer
18 May 2016
Matthew Lester
Chief Finance Officer
18 May 2016
Human rights
We are committed to upholding and
respecting human rights. In addition to
obeying the laws, rules and regulations
of every country in which we operate,
we 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.
During 2015‑16, we undertook a review
of our business against the UN Guiding
Principles on Business and Human Rights
with the support of independent advisers
Corporate Citizenship. Despite the review
noting that Royal Mail’s human rights
footprint is low, we are strengthening
measures to ensure human rights are
protected across all our operations.
We have measures in place to protect against
modern slavery, which will be set out in
our 2015‑16 CR Report. We are reviewing
these measures to ensure we continue to
minimise the potential for slavery and human
trafficking in our business and supply chain.
We will make our formal Modern Slavery Act
statement available in accordance with the
Act and within the statutory timescales.
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).
Our taxation principles
Royal Mail has adopted a set of tax principles.
Our Taxation Principles can be accessed
online at: www.royalmailgroup.com/
responsibility/policies
The pentacycle, originally invented in 1882, was tested
for both postal and telegraph delivery work. In February
2014, quad bikes operating on the island of Kerrera
were replaced by an all‑terrain utility vehicle.
Visit www.royalmailgroup.com/500years to find out more.
Annual Report and Financial Statements 2015-16
| 41
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Corporate governance
Corporate governance
Chairman’s introduction
Dear Shareholder
I am pleased to present Royal Mail’s
corporate governance report for the year
ended 27 March 2016. I joined the Company
on 18 June 2015 as a Non‑Executive Director
and succeeded Donald Brydon as Chairman
on 1 September 2015. I would like to extend
my thanks and appreciation to Donald for all
that he did for Royal Mail during his tenure.
in place to ensure good governance and set
out the operations of the Board’s primary
committees. I am pleased to endorse this
report, which I believe provides an insight
into how, through its actions, the Board and
its committees have fulfilled their governance
responsibilities and worked to ensure
that strong governance practices remain
embedded across the Group.
Peter Long
Chairman
18 May 2016
The Board of the Company is committed to
ensuring that it provides effective leadership
and promotes uncompromising ethical
standards. The Board believes that good
corporate governance will contribute to
better company performance as it helps
a board discharge its duties in the best
interests of shareholders. 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. This report aims to provide
shareholders with an understanding of the
arrangements we undertake in order to
maintain the highest standards of corporate
governance across the business, which we
consider to be essential for the long‑term
success of the Company.
It is the role of the Board to provide
leadership to the Company. I lead the Board
in reviewing long‑term strategy, monitoring,
supporting and, where required, challenging
the executive team, whose job it is to
manage the Company successfully day to
day, driving performance of the business
and creating value for our shareholders and
other stakeholders. For the Board to be
effective in discharging its responsibilities,
it must maintain a level of independence and
objectivity, the correct balance of experience
and skills and have sufficient knowledge of
the operations of the business.
The Board has continued to review its
governance framework and has adjusted,
where necessary, the roles, structure
and accountabilities of its mechanisms of
governance. During the year, the governance
structure below the Board and primary
committee level was again reviewed to
ensure the correct and accurate flow of
information and responsibility.
The following pages of this report explain,
in greater detail, the structure and processes
Index
Page
Chairman’s introduction
Board of Directors
Chief Executive’s Committee
Statement of corporate governance
Audit and Risk Committee report
Nomination Committee report
Pensions Committee report
Directors’ remuneration report
Directors’ report
42
43
47
49
52
57
58
60
81
Compliance with the UK
Corporate Governance
Code, September 2014
(the Code) and its statement
of requirements
The following sections explain how the
Company applies the main principles
set out in the Code, issued by the
Financial Reporting Council (FRC),
as required by the Listing Rules of
the Financial Conduct Authority (FCA)
and how it meets other relevant
requirements including provisions of
the Disclosure and Transparency Rules
of the FCA. Both Codes are publically
available at the website of the FRC
(www.frc.org.uk).
The Board considers that the Company
complied with the full provisions of the
Code during the year.
42
| Annual Report and Financial Statements 2015-16
Board of Directors
Peter Long N* R
Chairman
Appointed to the Board:
As Non‑Executive Director and
Chairman‑designate on 18 June 2015. Peter
became Chairman on 1 September 2015
Key areas of prior experience:
Strategic, finance, transformation and
consumer experience.
Current external appointments:
• Member of TUI AG Supervisory Board.
• Non‑Executive Director of Countrywide plc
on 11 February 2016 and Chairman with
effect from 27 April 2016.
• Non‑Executive Chairman of Parques
Reunidos Servicios Centrales S.A.U from
13 April 2016.
Previous relevant experience:
Over 20 years’ experience in FTSE 100
customer‑focused companies.
• Senior Independent Director of Rentokil
Initial plc.
• Senior Independent Director of RAC plc.
• Non‑Executive Director of Debenhams plc.
• Group Chief Executive of First Choice
Holidays PLC.
Moya Greene C*
Chief Executive Officer
Appointed to the Board:
6 September 20131
Key areas of prior experience:
Postal sector, finance, retail, transport.
Previous relevant experience:
• Non‑Executive Director of Great‑West
Lifeco Inc.
• President and Chief Executive Officer of
Canada Post Corporation.
• Assistant Deputy Minister for
Transport Canada.
• Senior Vice President, and Chief
Administration Officer, Retail Products, at
Canadian Imperial Bank of Commerce.
• Vice Chairman of Purolator Courier Ltd,
a Canadian express parcel company.
• Senior Vice President for operational
effectiveness at Bombardier.
• Non‑Executive Director of Tim Hortons
Inc. in Canada. Member of the Audit
Committee, Human Resources
Committee and Remuneration and
Compensation Committee.
• Chief Executive of TUI Travel PLC.
• Managing Director, Infrastructure Finance,
Orna Ni-Chionna A N R*
Senior Independent Non‑Executive Director
Appointed to the Board:
20 September 20132
Key areas of prior experience:
Consumer focus, retail, strategy.
Current external appointments:
• Chair of Client Service at Eden
McCallum LLP.
• Non‑Executive Director of Saga plc.
• Deputy Chairman of the National Trust.
Previous relevant experience:
• Partner at McKinsey & Company.
• Senior Independent Director of HMV plc,
Northern Foods plc and BUPA.
• Non‑Executive Director of Bank of Ireland.
• Non‑Executive Director of UK Holdings plc
and Bristol & West plc.
2 Appointed Senior Independent Director of Royal Mail
Holdings plc on 1 April 2011
• Chief Executive Officer of First Choice
Holidays PLC.
• Chief Executive of Sunworld.
• Chief Executive of International Leisure
Group Travel Division.
at TD Securities Inc.
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
Key to membership of Board Committees
A – Audit and Risk Committee
N – Nomination Committee
P – Pensions Committee
R – Remuneration Committee
C – Chief Executive Committee
* – Chair of the Committee
Annual Report and Financial Statements 2015-16
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Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Board of Directors
Matthew Lester P C
Chief Finance Officer
Appointed to the Board:
6 September 20133
Nick Horler A N
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Finance, accounting, consumer goods,
financial services.
Current external appointments:
• Non‑Executive Director of Man Group plc.
Key areas of prior experience:
Retail, energy, transport.
Current external appointments:
• Chairman of Alderney Renewable
Energy Ltd.
• Main committee member of the
100 Group of Finance Directors and
Chairman of its Investor Relations and
Markets Committee.
Previous relevant experience:
• Group Finance Director at ICAP plc.
• Chairman of Meter Provida Ltd.
• Chairman of Alder and Allan.
• Non‑Executive Director of the
Go‑Ahead Group plc, Member
of the Audit, Remuneration and
Nomination Committees.
Cath Keers A N
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Retail, consumer focus.
Current external appointments:
• Non‑Executive Director of Home Retail
Group plc and Chair of the Remuneration
Committee since July 2012.
• Non‑Executive Director of the Insurance
Group Liverpool Victoria Friendly Society
Limited (LV=).
Previous relevant experience:
• Customer Director and Marketing Director
of O2 UK.
• Group Financial Controller and Group
• Non‑Executive Director of Thames Water
• Non‑Executive Director of
Treasurer, Diageo plc.
Utilities Limited.
Telefonica Europe.
• Held positions at Kleinwort Benson after
qualifying as a chartered accountant with
Arthur Andersen.
Previous relevant experience:
• Chief Executive Officer of Scottish Power.
• Managing Director Retail and Board
member of E.ON UK plc.
3 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
• Managing Director of Powergen Energy
Trading Limited.
• Various marketing, strategy and business
development roles at Next, BskyB, Avon
and Thorn EMI.
Directors’ original appointment dates to the Board of a Royal Mail
parent company
This table 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.
Director
Moya Greene
Orna Ni‑Chionna
Matthew Lester
Nick Horler
Cath Keers
Paul Murray
Les Owen
Royal Mail Holdings plc
Royal Mail Group Limited
15 July 2010
1 June 2010
24 November 2010
1 April 2010
1 June 2010
1 August 2009
27 January 2010
1 April 2012
1 April 2012
1 April 2012
1 April 2012
1 April 2012
1 April 2012
1 April 2012
44
| Annual Report and Financial Statements 2015-16
Paul Murray A* R P
Non‑Executive Director
Appointed to the Board:
20 September 2013
Les Owen A R P*
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Finance, energy, technology.
Key areas of prior experience:
Finance, pensions, insurance.
Current external appointments:
• Non‑Executive Director of Independent Oil
Current external appointments:
• Non‑Executive Director of Computershare.
and Gas plc.
• Non‑Executive Director of Naked
Energy Ltd.
• Non‑Executive Director of Qinetiq
Group plc.
• Non‑Executive Director of Ventive Ltd.
• Audit Committee Chairman at Qinetiq
Group plc.
Previous relevant experience:
• Senior Independent Director of Taylor
Nelson Sofres plc.
• Non‑Executive Director of Discovery
Holdings, a South African listed health and
life insurer.
Previous relevant experience:
• Group Chief Executive Officer of AXA Asia
Pacific Holdings Ltd., a member of the
Global AXA Group Executive Board and
responsible for AXA’s Asian Life Insurance
and Wealth Management operations.
• Chief Executive Officer of AXA Sun Life plc.
• Non‑Executive Chairman of Jelf Group plc.
• Non‑Executive Director of Thomson SA
and of Tangent Communications plc.
• Non‑Executive Director of Post
Office Limited.
• Group Finance Director of Carlton
Communications plc and LASMO plc.
• Non‑Executive Director of Just Retirement
Group plc.
• Non‑Executive Director of CPP Group plc.
Board attendance
During the year, the Directors attended the following number of meetings of the Board.
Eligible to attend
Attended
Total number of meetings
Chairman
Donald BrydonA
Peter LongB
Executive Directors
Moya Greene
Matthew Lester
Non-Executive Directors
John AllanC
Nick HorlerD
Cath KeersE
Paul Murray
Orna Ni‑ChionnaF
Les Owen
11
5
9
11
11
0
11
11
11
11
11
5
9
11
11
0
10
10
11
10
11
A Donald Brydon resigned as a Director of the Board on
31 August 2015
B Peter Long was appointed to the Board as a
Non‑Executive Director on 18 June 2015 and became
Chairman on 1 September 2015
C John Allan resigned as a Director of the Board on
30 April 2015
D Nick Horler was unable to attend the Board meeting
on 2 June 2015 due to a prior engagement
E Cath Keers was unable to attend the Board meeting
on 20 May 2015 due to a prior engagement
F Orna Ni‑Chionna was unable to attend the Board
meeting on 22 September 2015 due to a
prior engagement
Annual Report and Financial Statements 2015-16
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Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Board of Directors
Changes to the Board during the year
• Peter Long was appointed as
a Non‑Executive Director on
18 June 2015. He became Chairman on
1 September 2015.
• John Allan resigned from the Royal Mail
plc Board of Directors on 30 April 2015.
• Donald Brydon resigned from the
Royal Mail plc Board of Directors on
31 August 2015.
There have been no other changes to the
Board during the year.
Board diversity policy
Diversity, including professional,
international and ethnic diversity, is a
key factor when assessing the Board’s
composition. It ensures there is the correct
balance of skills, experience and expertise
amongst Non‑Executive Directors 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 Nomination Committee. This policy
expresses the commitment to principles
of non‑discrimination against protected
characteristics⁴ and to the 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 this 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 27 March 2016, two of the
six (33 per cent) Non‑Executive Directors,
including the Senior Independent Director
(SID), 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.
The data depicted below is at 27 March 2016.
Board composition
Gender balance
Experience
Non‑Executive Directors
Executive Directors
Chairman
Male
Female
62%
25%
13%
62%
38%
Retail and marketing
Finance
Public utilities
Accounting
Logistics
30%
25%
20%
15%
10%
4 Race, Colour, ethnic 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
46
| Annual Report and Financial Statements 2015-16
Chief Executive’s Committee
In addition to the Royal Mail plc Board, the
Chief Executive’s Committee manages the key
strategies of the Group with an overall
framework of financial risk and business controls
to meet the needs of stakeholders.
Moya Greene
Chief Executive Officer
Matthew Lester
Chief Finance Officer
See ‘Our Board of Directors’
on pages 43‑45.
See ‘Our Board of Directors’
on pages 43‑45.
Rico Back
Chief Executive Officer, GLS
Current role
• Appointed Chief Executive Officer
of GLS in October 1999.
Previous work history
• Founding manager of German
Parcel in 1989, which was acquired
by the Group in 1999.
Stephen Agar
Managing Director, Consumer
and Network Access
Current role
• Appointed Managing Director,
Consumer and Network Access in
October 2011.
• Responsible for the regulated
letters business (both USO
and Access).
Previous work history
• A barrister who started his
career in the Government
Legal Service before moving
to Racal Electronics plc.
• Joined Royal Mail in 1991.
Jack Bertram
Managing Director, Strategy,
Pricing and Growth
Current role
• Appointed Managing Director,
Strategy, Pricing and Growth in
January 2016.
Previous work history
• Partner at McKinsey &
Company focused on strategy,
transformation and growth in
travel, post and logistics sectors.
Stephen Cameron
Deputy Chief Operations Officer
Current role
• Appointed DCOO in August 2015
alongside role as Operations
Strategy Director.
Previous work history
• Joined Royal Mail in 1985 and has
worked across all aspects of the
operation notably as Operations,
Process and Programme Director
and Territory Director.
• Successfully led the initial phase
of Royal Mail’s comprehensive
transformation programme
across UK operations.
• Stephen is a Fellow of the
Association of Project Managers.
Maaike de Bie
General Counsel
Current role
• Appointed General Counsel in
April 2016.
Previous work history
• Joined Royal Mail in January 2014
and appointed Acting General
Counsel in September 2015.
• Previously General Counsel for
the EMEA division of GE Capital
Commercial Distribution France,
a financial services unit of the
General Electric Company.
• Has held other senior international
legal roles at the European
Bank for Reconstruction and
Development, Ernst & Young LLP
and White & Case LLP.
Mick Jeavons
Chief of Staff
Current role
• Appointed Chief of Staff in
June 2015.
Previous work history
• Mick is a chartered accountant
and has performed a wide range
of senior roles in Royal Mail, most
recently as Corporate Finance
Director responsible for Group
Investment, Procurement and
the UK Finance teams. Previous
to this he was Group Financial
Controller and Finance Director of
Group Property.
Annual Report and Financial Statements 2015-16
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| Chief Executive’s Committee
Jon Millidge
Group HR Director
Mike Newnham
Chief Customer Officer
Current role
• Appointed Group HR Director in
Current role
• Appointed Chief Customer Officer
February 2014.
in March 2012.
Previous work history
• Led the Consumer division of
Orange UK.
• Prior to that held a number
of executive board positions
at Orange.
• Pension Scheme Trustee
of the Royal Mail Defined
Contribution Plan.
Previous work history
• Joined Royal Mail in 1985 as a
graduate and has worked across
a number of the businesses within
the Group.
• Previously Company Secretary
from May 2010 to February 2014
and prior to that was the Acting
Group HR Director.
Shane O'Riordain
Managing Director,
Communications & Regulation
Current role
• Appointed Managing
Director, Communications in
November 2010.
• Subsequently assumed
responsibility for Strategy and in
2014, Regulation and Pricing.
Previous work history
• Director of Communications for
Royal Mail Group.
• Held a number of Group
Communications Director
positions in the banking and
financial sector at Lloyds
Banking Group, HBOS, Halifax
and Flemings.
Stuart Simpson
Director, Group Finance
Current role
• Appointed Director of Group
Finance in July 2015.
• Joined the Royal Mail Group in 2009
and was appointed as Deputy Chief
Operations Officer in January 2014.
• Prior to this, he was running
Operations for the West Region of
the UK and was Finance Director of
UK Operations.
Previous work history
• Worked in the automotive industry
for 15 years with senior roles in
Finance and Strategy, the last 10 of
which were based outside the UK.
Sue Whalley
Chief Operations Officer
Current role
• Joined Royal Mail in 2006 and was
appointed Chief Operations Officer
in January 2014.
• Responsible for leading the next
phase of the transformation in
Operations, with specific focus
on further development of
safety, quality, efficiency, culture
and innovation.
• Previously, as Regulation and
Government Affairs Director, led
the programme for privatisation.
Previous work history
• Consultant at McKinsey &
Company for 17 years, the last six
of which were as a partner.
48
| Annual Report and Financial Statements 2015-16
Statement of corporate governance
Board responsibilities
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 and has defined those
matters that are reserved exclusively for its
consideration. These include the approval
of strategic plans, financial statements,
acquisitions and disposals, major contracts,
projects and capital expenditure.
Board focus
Some of the key areas of focus during
the year were as follows (a number of
these areas are also considered by the
Board Committees):
• The Group’s Strategy;
• Compliance and regulation;
• Revenue growth in core and new areas;
• Productivity, efficiency and cost reduction;
• Technology;
• Review of Board composition;
• Channel strategies; and
• Health & Safety.
Expected focus for the next year:
• The Group’s Strategy;
• Revenue growth in core and new areas;
• Technology;
• Composition of the Board;
• Succession planning; and
• Health & Safety.
Shareholder relations
Communication with shareholders is
given high priority. A full Annual Report
and Financial Statements is sent to all
shareholders who wish to receive one.
Presentations are given following the
announcements of the half year and full year
results, which are available to watch live and
on replay on our website. All information on
our activities, published financial results and
the Annual Report and Financial Statements
can be found on our Company website,
www.royalmailgroup.com.
There is regular dialogue with our
institutional shareholders. The Chairman
and the SID are also available to consult
with shareholders.
The Board regularly receives an update
on interaction with investors and
shareholders to ensure that the Board has
an understanding of their views. In addition,
the SID provides a point of contact for those
shareholders who wish to raise issues with
the Board, other than through the Chairman.
The AGM is used to communicate with
all investors and the Board welcomes
their participation.
Board information
The Board receives business and financial
performance reports at each Board meeting
as well as standing reports on Health &
Safety Regulation, Market Dynamics and
from the Company Secretary. In addition,
the 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 and training on
developments in matters such as corporate
governance and compliance. These processes
enable the Company to comply with the
Provisions of the Code requiring the timely
provision of information to Directors.
Risk management and
internal controls
The Board is responsible for maintaining a
risk management and internal control system
and for managing principal risks faced by
the Group. This is described in more detail
in the Audit and Risk Committee report on
pages 52‑56.
Board roles
Role of the Chairman
The Chairman’s responsibilities include:
• 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;
• 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 shareholders and
that Directors are made aware of their
views; and
• Ensuring the performance of the Board,
its Committees and individual Directors is
evaluated at least once a year and to act
on results of such evaluations.
Role of the
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,
at least annually, reviews and authorises the
schedule of Directors' interests, including any
potential conflict.
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
Annual Report and Financial Statements 2015-16
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| Statement of corporate governance
Board terms of appointment
Time commitments
The terms of appointment for the
Non‑Executive Directors require them to
devote a minimum of two days a month
to working for the Company – although in
practice they tend to devote more time than
the minimum requirement.
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 announces to the London
Stock Exchange any changes to their
directorships on the boards of other publicly
quoted companies.
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 Chief Executive Officer.
Outside appointments
The Board believes that there are significant
benefits to both the Group and the individual
from Executive Directors accepting
Board Committees
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.
Director induction and training
On appointment, all 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 meeting key personnel.
Board Committees
The Board has delegated authority to the
Committees to carry out certain tasks as
defined in each Committee’s respective terms
of reference. The Committees established by
the Board are shown in the diagram below.
The minutes of each Committee meeting are
made available to all directors on a timely
basis. In addition the Chair 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.
Royal Mail plc
Chief
Executive's
Committee
Audit and Risk
Committee
Nomination
Committee
Pensions
Committee
Remuneration
Committee
the Company’s goals and objectives. They also
monitor financial controls and the systems of
risk management.
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 AGM for a period of
15 minutes prior to the commencement of the
meeting and also during the meeting.
Role of the Senior Independent
Director
As recommended by the Code, the Board
appointed Orna Ni‑Chionna, one of its
independent Non‑Executive Directors, to be
the SID. The SID 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 SID met with the Non‑Executive Directors
during the year to assess the performance of
the Chairman.
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.
Board composition
At the end of the year, the Board of Royal Mail
plc comprised a Chairman, two Executive
Directors and five Non‑Executive Directors.
Prior to their appointment as Directors of
the Company, each of the Directors (with the
exception of Peter Long) 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 43‑45.
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| Annual Report and Financial Statements 2015-16
The evaluations concluded that the Board
and its Committees are effective but have
identified areas for potential improvement
that will strengthen the performance of the
Board overall. Potential improvement or
actions will be discussed in May 2016.
Board effectiveness review
The effectiveness of the Board, its
Committees, the Executive and
Non‑Executive Directors and the Chairman
(Donald Brydon) was assessed in
September 2014 by an external consultancy,
Independent Board Evaluation (which had
not previously had a business relationship
with the Company and therefore was not
subject to any conflicts of interest). As such
the Company was not required to facilitate an
external evaluation for this reporting period.
However, Peter Long, the new Chairman,
believed that it would be prudent to engage
Independent Board Evaluation to review
the effectiveness of the Board and the
Remuneration Committee.
This external consultancy observed Board
and Remuneration Committee Meetings
with supporting materials being provided
by the Company. The external consultancy
also conducted individual interviews with
each Board member and other relevant
stakeholders such as senior executives and
managers. Participants were interviewed
according to a set agenda, tailored for the
Board. The review covered a range of topics
including succession planning, operations,
composition, skills and experience, diversity,
how the Board works together, governance
and compliance. The evaluation of the Audit
and Risk Committee was undertaken by
way of an online questionnaire facilitated by
Thinking Board. Internal evaluations were
also carried out for the Nomination and
Pensions Committees as part of the normal
annual evaluation process.
Annual Report and Financial Statements 2015-16
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| Statement of corporate governance
Audit and Risk
Committee report
Introduction from the Chair
Dear Shareholder,
The Audit and Risk Committee (ARC) has
two fundamental responsibilities which
inform the work we do as a committee of
independent Directors. The first is to review
and recommend to the Board all financial
statements and associated disclosures.
The second is to continually satisfy ourselves
that internal controls and risk management
processes put in place by the management
team are working effectively. The Committee
gets independent assurance from the Group’s
Internal Audit (IA) and Risk Management
(RM) function and also receives regular
reports from the Compliance function as well
as the external auditor (KPMG) across a wide
range of issues in support of their respective
oversight responsibilities.
The Committee is further supported by
the Risk Management Committee (RMC),
a management committee of the Chief
Executive’s Committee with a reporting line
to the ARC. The RMC’s key responsibilities
are to drive the monitoring, identification and
management of key risks in the organisation.
Alongside myself, the members of
the Committee are all independent
Non‑Executive Directors – Orna Ni‑Chionna,
Nick Horler, Cath Keers and Les Owen.
During the year, the Committee continued to
challenge the assumptions and judgements
made by Management in determining the
half year and full year financial results of the
Company and to assess for appropriateness
their disclosure in the financial statements.
To gain further insight into the basis for
accounting judgements made in relation to
advance customer payments from the public,
we received in January a presentation from
the independent company that undertakes
a UK‑wide survey to estimate the stamp
holding by households.
The Committee has received and considered
several papers on the impact of the Code,
both with respect to the introduction of a
longer‑term viability statement and the
increased focus on risk management and
internal controls, and Management’s plans
to support the Board in meeting the new
requirements. We reviewed the Group
Risk Profile at each of our meetings, with
particular focus on risks where likelihood
or impact had changed or increased, along
with their supporting action plans to manage
those risks. We paid particular attention to
cyber security risks and data protection,
the efficiency of resourcing of Royal Mail
operations and employment issues facing
the business (see Principal Risks page 32).
We considered in detail the findings of three
internal audit reviews which were rated as
requiring urgent attention and discussed
with Management how the concerns are
being addressed.
On 15 December 2015, the Company
received notification of the fine from the
French Competition Authority in relation
to antitrust law breaches by GLS France.
The fine of €55 million (around £40 million),
which was fully provided for in our financial
results for the year ended 29 March 2015,
was paid in April 2016. We have continued
to focus on our compliance framework
and its implementation across the Group,
receiving quarterly updates from our
Compliance function.
New external auditor
Following a competitive tender process
in 2014, the proposal to appoint KPMG
as external auditor received shareholder
approval at the AGM on 23 July 2015.
Richard Pinckard has been appointed the lead
engagement partner from the same date.
Management and KPMG have worked
collaboratively to ensure a thorough induction
process has been undertaken. The induction
has enabled KPMG to gain a deep
understanding of the business, its systems
and processes, and the significant estimates
and management judgements required in
producing our financial results. The induction
process has included in‑depth workshops
with our Finance Shared Services, Payroll
and IT functions, visits to operational sites
and monthly meetings with Management
and Executives.
The Statutory Audit Services for
Large Companies Market Investigation
(Mandatory Use of Competitive Tender
Processes and Audit Committee
Responsibilities) Order 2014
We have complied fully throughout the
year with the Statutory Audit Services
Order 2014 issued by the Competition and
Markets Authority.
Paul Murray
Chair, Audit and Risk Committee
18 May 2016
Committee membership
and attendance
Total number
of meetings
Chair
Paul Murray
Members
Nick Horler
Orna Ni‑Chionna
Les Owen
Cath Keers
Eligible
to attend
Attended
5
5
5
5
5
5
5
5
41
5
5
1 Orna Ni‑Chionna was unable to attend the Committee
meeting on 14 May 2015 due to a prior engagement
Meetings of the Committee were also
attended, where relevant, by the Chairman
of the Board, the Chief Executive Officer, the
Chief Finance Officer, the Director of IA and
RM, other members of senior management
and representatives from the external
auditor, KPMG. The Board considers that a
number of the members of the Committee
have recent and relevant financial experience,
in particular Paul Murray (the Chair) and
Les Owen.
Audit and Risk 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
Key areas of focus during the year
Matters the Committee considered during the
year include:
• Financial reporting, particularly in
considering information presented by
Management on significant accounting
judgements and policies adopted in
respect of the Company’s half year and
full year results and the assessment
of whether the Annual Report and
52
| Annual Report and Financial Statements 2015-16
Financial Statements were fair, balanced
and understandable;
• Risk management and internal control,
receiving regular updates from IA and RM
on the results of their reviews and the
introduction of a strengthened risk and
control self‑assessment process;
• Compliance with the Code, with particular
focus on the requirement to provide a
longer‑term viability statement;
• Compliance framework, including
receiving quarterly updates from the
Group Compliance team on areas within
their oversight remit; and
• Technology, including progress of
the ongoing major transformation
programme, the cyber risks facing the
business and the risks associated with
data protection.
Additional areas of focus for next year
• Evolving practice in external reporting;
• Assurance mapping across the Group; and
• Prioritised risk reviews.
Meeting cycle and agenda items
The Committee uses a meeting tracker,
approved once a year, which provides a
framework for each meeting agenda.
During 2015‑16 the Committee met
five times.
• Two meetings mainly focused on the half
year and full year results; and
• Three meetings mainly focused on internal
audit and risk management.
One of the meetings was held in Germany,
with specific focus on GLS‑related items.
All regular meetings contain elements of both
financial reporting and internal audit and risk
management, with reports from the Director
of Group Finance and the Director of IA and
RM being standing items on all agendas.
Reliance on external and in-house experts
The Group’s actuary, Willis Towers Watson
Limited, provides expert opinion and
long‑term assumption advice with respect to
pension accounting. Following a competitive
tender process, Aon Limited has been
engaged during the year to provide similar
expertise in relation to other long‑term
liabilities. The Committee has concluded
that these companies have the necessary
expertise and resources.
The Committee also relies on:
• Advice and information provided by
the General Counsel with respect to
specific provisions and other contingent
liabilities; and
• 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 by the public but
not used.
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.
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.
Key activity in relation to the financial statements
The main areas of focus for the Committee during the year in relation to the financial statements were:
One-off matters considered due to their materiality or nature
Matter considered
What the Committee did
Ofcom investigation
(Contingent liability, see note 25 on page 133)
On 28 July 2015, Royal Mail received a Statement of Objections setting out Ofcom’s
provisional, preliminary findings in relation to its investigation into the terms on
which Royal Mail proposed to offer access to letter delivery services, alleging a
potential distortion of competition. The investigation was launched in February 2014
following a complaint brought by TNT Post UK (now Whistl) about certain proposed
changes to Royal Mail’s Access contracts.
Following the receipt of the Statement of Objections, the Committee sought detailed
background information from General Counsel and an assessment of accounting
treatment from Management.
We reviewed and challenged Management’s assessment of the issue with reference
to the accounting standards.
We concluded that it is appropriate to treat this issue as a contingent liability.
The Committee have reviewed and approved the wording of its disclosure.
French Competition Authority investigation
(€55 million, see note 22 on page 131 and note 27 on page 135)
In October 2014, Royal Mail entered into a settlement agreement with the French
Competition Authority in respect of the alleged breaches of antitrust laws by one of
its subsidiaries, GLS France, during the period before the end of 2010.
On 15 December 2015, Royal Mail received notification of the fine from the French
Competition Authority. The fine of €55 million (around £40 million) was fully
provided for in our financial results for the year ended 29 March 2015.
The Committee received regular updates from Management on the progress of
the French Competition Authority’s investigation and sought confirmation of the
continuing appropriateness of the level of provision recognised, based on external
legal advice.
On receipt of the notification of the fine, we sought confirmation from Management
that this amount was fully provided for in the prior year’s results. In accordance with
the payment demand from the French Treasury, the fine was paid on 15 April 2016.
We will continue to seek updates from Management on the status of the appeal of
the amount of the fine.
Ongoing matters considered due to their materiality and/or the application of judgement
Advance customer payments (£306 million, see note 19 on page 118)
Included within Advance customer payments is an estimate of the amounts
of stamps and meter credits that have been sold but not used prior to the
reporting date. At March 2016, this estimate totalled £252 million (March 2015
£259 million).
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 received a presentation from TNS (the independent company that
undertakes the UK‑wide survey of households to establish the level of stamp
holding for personal use) to gain further insight into how the survey is compiled and
the various statistical methods of excluding non‑representative stamp holdings.
We continued to review and challenge the outcome from the statistical survey at
the half year and full year, along with the judgement made by Management as to
the level at which a stamp holding is considered abnormal. We compared the level
of deferred income recognised by Management at each reporting date to ensure a
consistent application.
Separately, the auditor used their own experts to review the statistical processes
and assess the judgemental assumption. We concluded that the level of deferred
revenue remained appropriate.
Annual Report and Financial Statements 2015-16
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| Statement of corporate governance
Matter considered
What the Committee did
Royal Mail Defined Benefit Pension Surplus
(£3,430 million, see balance sheet and note 10 on page 105)
The valuation of the pension liabilities relies on the estimation of long‑term
assumptions such as RPI/CPI and mortality. Small movements in these
assumptions can lead to material impacts on the balance sheet.
In view of the complexity of accounting for pension schemes, significant focus
is required on the associated disclosure to ensure that it is fair, balanced
and understandable.
Industrial diseases claims provision
(£78 million, see note 22 on page 131)
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 impact the income statement and net assets.
Impact of changing employment legislation
(see Principal risks on page 32)
The Group has a large workforce and changes to laws and regulations relating to
employment can have a significant effect on the Group’s results.
Key long‑term assumptions were prepared by the Group’s actuary, Willis Towers
Watson Limited, and benchmarked to prevailing economic indicators and other
large pension schemes. The assumptions were reviewed and approved by the
Pensions Committee (see Report on page 58). All of these assumptions are
disclosed in note 10 to the financial statements. Changes in the assumptions were
summarised for the Committee and explanations provided for the returns on
scheme assets, particularly as a result of the liability hedging strategy.
The auditor used their own independent actuarial experts to confirm that the
assumptions used were reasonable and appropriate.
To determine whether the level of provisioning in the balance sheet was reasonable,
the Committee examined reports from Management and estimates of the gross
provision (including the number of claims incurred but not received and the
associated expected cash outflow, undiscounted) calculated by Aon Limited.
The discount factor used by Aon, as advised by Management, to calculate the
present value of the provision was validated against applicable bond rates.
We received KPMG’s comments on the assumptions and the calculation used to
reach the discounted provision and concluded that the approach taken to setting the
provision continued to be appropriate.
Throughout the year, the Committee received regular updates on relevant
employment law cases from the General Counsel along with impact assessments
of judgements on the Group.
In light of the legal updates, we examined reports prepared by Management to
determine whether their interpretation of the potential liabilities for the Group
was appropriate. We concluded that these potential liabilities were accounted for
appropriately based on the legal assessments provided by the General Counsel.
Audit Committee effectiveness
This year’s evaluation of the Committee’s
effectiveness was performed through the use
of a third party online questionnaire, focusing
on the financial reporting environment,
risk management oversight, the assurance
provided by our internal and external
auditors and the quality and content of the
meetings. The questionnaire identified areas
of potential improvement in the provision of
training in financial reporting and corporate
governance and even greater focus on risk
governance. The questionnaire also identified
areas of focus for next year. Feedback
from the questionnaire was reviewed
at the Committee’s year end meeting.
The conclusion of the evaluation was that the
Committee continues to be effective.
Effectiveness of the external
audit process
In view of their recent appointment as
external auditor, KPMG and Management
have worked closely throughout the year
to ensure a smooth transition. Meetings
between the senior audit team and Finance
have been held at least monthly, giving the
opportunity for any concerns to be raised
and addressed on a timely basis. KPMG’s
2015 Audit Quality Inspection Report has also
been discussed. There has been significant
collaboration between the IT department and
audit team to facilitate the greater emphasis
on data and analytics that had been agreed as
part of the audit tender.
The Committee received a report on the
areas of audit risk identified by KPMG and
approved their proposed audit approach.
The Committee also reviewed and approved
the respective engagement letters for the
statutory and regulatory audits.
focus on the execution of the full year audit;
the preparedness of the business; sufficiency
of resources; communication and interaction;
and overall satisfaction.
At the end of the half year review and year
end statutory audit, the Committee received
reports from KPMG covering significant
issues identified and discussed during the
audit visits. In addition KPMG presented
updates on their data and analytics approach,
and their control findings. These reports were
compared with the matters that Management
had identified, to ensure consistency.
The Committee also held regular private
meetings with the external auditor.
The formal evaluation of the external audit
process is being addressed in two stages.
A third party online questionnaire was used
to assess the transition, the audit approach
and the half year review. It was completed
after our half year results announcement
and responses were sought from individuals
who had been closely involved in the audit
(predominantly IT, Finance and HR) as well as
Executive and Non‑Executive Directors, audit
partners and team members. Improvement
areas were identified in relation to requests
for information and communication of
findings. These issues were addressed during
the planning of the full year audit.
The second stage of the evaluation will be
undertaken using a mixture of an online
questionnaire and meetings with key
stakeholders following the conclusion of the
first full cycle of KPMG’s engagement and will
While the outcome of the second stage of the
formal evaluation will not be available until
after the signing of the financial statements,
the informal feedback received and the
review of reports presented by Management
and KPMG to their May 2016 meeting have
enabled the Committee to conclude that there
has been appropriate focus on the primary
areas of audit risk and KPMG have applied
robust challenge and scepticism throughout.
Safeguarding the independence and
objectivity of the external auditor
The Committee has a policy in respect of
non‑audit work which requires Management
to seek pre‑approval prior to the engagement
of the external auditor for the provision of
any non‑audit services. This is to ensure
that the level of fees earned from non‑audit
services and the type of services provided
do not impair the external auditor’s
independence and objectivity. In general, the
external auditor is not approached to perform
non‑audit work. However, the auditor may be
engaged to perform non‑audit services if they
are uniquely placed to undertake them, or if
the performance of the non‑audit services
will support a future statutory audit (including
the provision of buyer assist due diligence).
The engagement may follow a competitive
tender process. The Committee currently
permits the external auditor to provide
non‑audit services in respect of audit‑related
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| Annual Report and Financial Statements 2015-16
services, tax services and other services
insofar as permitted by auditor independence
rules. The Committee has delegated authority
to the Chief Finance Officer to pre‑approve
assignments up to £25,000, with an annual
limit of £500,000.
Prior to their appointment as the external
auditor, KPMG had been engaged to provide
certain non‑audit services. These include
the provision of investor relations advice
and share register analysis (through KPMG
Makinson Cowell) and tax advice, reviews and
filings. The majority of these engagements
concluded during the year. Since their
appointment as external auditor, KPMG have
been engaged to perform the iXBRL tagging
of the Group’s subsidiary financial statements
and to provide financial due diligence. Total
fees earned for non‑audit services during
2015‑16 were £313,000 which represented
around 19 per cent of the external audit
fee. In addition to the fees earned from the
Company, KPMG has been engaged by the
respective Pension Trustee as external
auditor of the Royal Mail Pension Plan and
the Royal Mail Defined Contribution Plan, the
fees for which were £116,000 in 2015‑16.
The Committee also has a policy that
restricts the recruitment or secondment of
individuals employed by the external auditor
into positions that provide financial reporting
oversight where they could exercise influence
over the financial or regulatory statements
of the Group or the level of audit and
non‑audit fees.
Reappointment of the external auditor
The Committee has recommended the
reappointment of KPMG as the Group’s
external auditor to the Board for approval by
shareholders at the Annual General Meeting
in July 2016.
Risk management and internal
control overview
The Board collectively, including the
Committee members, believes that effective
risk management and a sound control
environment are fundamental to the Group.
The Code requires the Board to maintain
sound risk management and internal control
systems, 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, risk as taking on manageable
risk is an inherent part of undertaking
the commercial activities of the Group.
The system can only provide reasonable,
not absolute, assurance against material
misstatement or loss.
There is an ongoing process for identifying,
evaluating and managing the principal risks
faced by the Group in accordance with the
guidance detailed by the 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.
Internal control framework
The Group has in place an internal control
framework in relation to the Group’s
financial reporting process and the Group’s
process for preparing consolidated
accounts. This framework includes an
established organisation structure with
clear lines of responsibilities, approval
levels and delegated authorities; policies
and procedures to ensure that adequate
accounting records are maintained and
transactions are recorded accurately; robust
quarterly business unit performance reviews
by the Chief Executive Officer and Chief
Finance Officer; and a rigorous preparation
process for the consolidated financial results
including technical and disclosure reviews.
Risk management 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:
• Assessed its approach to risk
management in line with the revised
Code requirements, reviewed its
Risk Management Policy, and further
developed the management and
monitoring of risk within the Group
including strengthening the Risk & Control
Self‑Assessment (RCSA) process; and
• Continued its emerging risk identification
process through regular structured
dialogue with subject‑matter experts
across the business.
The Group’s approach to risk management
is based on the underlying principle of line
management accountability for effective
implementation of internal controls to
manage risk as illustrated below.
Royal Mail Governance and Three Lines of Defence
Royal Mail plc Board
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e
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Chief Executive Committee
Audit & Risk Committee
Risk Management
Committee
Senior Management
First Line
Second Line
Third Line
Operational and Business
Management
Internal Monitoring and
Assurance Mechanisms
Independent Assurance
Primary business as usual
controls over the risks to the
business, located in the day to
day operation.
Internal monitoring and
oversight of the fi rst line,
through regular reviews,
assessments and dedicated
oversight functions.
Independent evaluation over
the adequacy and effectiveness
of risk management, control
and governance processes
by IA and RM and other
asssurance providers external
to the business.
RCSA1 – Monitoring and Reporting of Risks and Internal Controls
1Risk & Control Self-Assessment
Annual Report and Financial Statements 2015-16
| 55
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| Statement of corporate governance
Role of the Committee in assessing the principal risks
Review of principal
risk areas
The Committee routinely assessed the risks that might impact the achievement
of the Business Plan, including consideration of whether these should
be categorised as a principal risk to the business (see Principal Risks on
pages 32–35). Committee discussions on risk also covered new and emerging
risks and the interrelationships between the significant risks to the business.
The Committee held ‘deep dive’ discussions of principal risk areas with risk
owners. During the year, these discussions included:
Deep dive
discussions
• Industrial and employee relations
• Pensions
• Cyber risks
• Delivery of efficiency benefits versus maintenance of Quality of Service levels
• The Universal Service Obligation 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.
In the carrying out of these activities,
the Board considers it has fulfilled its
obligations under the Code in respect of risk
management and internal controls. Further
details of the principal risks and how they
are managed and mitigated can be found on
pages 32‑35.
Speak Up Line
Arrangements are in place to enable
employees to raise concerns about potential
wrongdoings in confidence and to ensure
independent investigation of such matters.
During the year, IA and RM reported to the
Committee on the number of notifications
and the time taken to process them through
the Employee Disclosure Committee (EDC).
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 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 and RM provide 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 level
risks. IA and RM establish and agree with the
Committee an annual plan of assignments
and activities covering the whole Group,
including GLS, 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. During the year
the Committee evaluated the performance
of IA and RM and concluded that the function
continued to be effective.
The IA work programme during 2015‑16
included more than 40 risk‑based reviews in
the UK and over 180 reviews in GLS covering
both depots and head office. The programme
was focused towards the key business
priorities and included:
• Business Transformation
reviews including Parcels and IT
Service Transformation;
• Major business process reviews including
National Returns Centre, Mobile Devices,
Operational Resourcing and Overtime
Payments, Traffic Measurement, and
Billing Processes (Data Services and large
Parcelforce Customers);
• Continued rolling programme of review
of the basic business controls and
independent validations related to the
management of Group level risks; and
• Conformance of key units/functions
to defined Risk Management
Mandatory Standards.
3. 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
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
56
| Annual Report and Financial Statements 2015-16
Nomination Committee
report
Introduction from the Chair
Dear Shareholder,
The role of the Nomination Committee is to
review the composition of the Board and plan
for its refreshment as applicable with regard
to composition, balance and structure.
As well as succession planning and the
continued evaluation of the balance of skills,
knowledge and experience of the Board, the
Committee continues to focus on diversity,
reviewing leadership attributes, approving
changes to senior management and various
appointments within the Company.
In 2016, an internal evaluation of the
Committee was undertaken by way of a
questionnaire. The evaluation concluded that
the Committee continued to be effective.
The following report outlines the Committee’s
membership and attendance, its role, its
focus during the year, Directors’ re‑election
and diversity.
Peter Long
Chairman
18 May 2016
Committee membership
and attendance
Eligible
to attend
Attended
Attended
Total number
of meetings
Chair
Peter Long
Members
Nick Horler
Cath Keers
Orna Ni‑Chionna
1
1
1
1
1
1
1
1
1
Meetings of the Committee were also
attended, where relevant, by the Company
Secretary, the Deputy Company Secretary
and the Group HR Director. The Chief
Executive Officer and other Non‑Executive
Directors may also be requested to attend
when required.
Nomination Committee Terms of
Reference
The full Terms of Reference for the
Committee can be found on our website
http://www.royalmailgroup.com/
about‑us/management‑and‑committees/
nomination‑committee.
Role of the Committee
A summary of the responsibilities of the
Committee in connection with appointments
to the Board and senior management 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 of the Board
to inform the capabilities required for a
particular appointment;
• To give full consideration to succession
planning for Chairman, Directors, Chief
Executive Officer and senior management
in the course of its work, taking into
account the challenges and opportunities
facing the Company, and the skills
and expertise needed on the Board in
the future;
• Keep up to date and fully informed about
strategic issues and commercial changes
affecting the Company and the market in
which it operates;
• To identify, and nominate for approval
by the Board, candidates to fill Board
vacancies as and when they arise;
•
In identifying suitable Board Candidates
the Committee shall:
–
–
–
Use open advertising or the services
of external advisers to facilitate
the search;
Consider candidates from a wide
range of backgrounds; and
Consider candidates on merit and
against objective criteria and with due
regard for the benefits of diversity
on the Board, including gender,
taking care that appointees have
enough time available to devote to
the position.
• To ensure that on appointment to the
Board, Non‑Executive Directors receive a
formal letter of appointment setting out
clearly what is expected of them in terms
of time commitment, committee service
and involvement outside meetings;
• 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; and
• To make recommendations to the
Board concerning:
–
Formulating plans for succession for
both Executive and Non‑Executive
Directors and in particular for the
key roles of Chairman and Chief
Executive Officer;
–
Nominations for the role of SID;
– Membership of the Board
Committees in consultation with the
Chairs of those committees;
–
–
–
–
–
The re‑appointment 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;
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
(the Articles), having due regard
to their performance and ability to
continue to contribute to the Board in
the light of the knowledge, skills and
experience required and the need for
progressive refreshing of the Board;
Any matters relating to the
continuation in office of any Director
at any time, including the suspension
or termination of service of an
Executive Director as an employee of
the Company subject to the law and
their service contract;
Nominations for the appointment
of Director positions on the Boards
of subsidiary/joint venture Boards/
main Business Unit Executive
Committee; and
Nominations for the appointment of
trustees of the Company’s pension
schemes and trustees of the Postal
Heritage Trust.
Annual Report and Financial Statements 2015-16
| 57
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| Statement of corporate governance
Key areas of focus during the year
Matters the Committee considered during
the year include:
• Assessing the composition of the
Board and its Committees following
the appointment of Peter Long and the
departures of Donald Brydon and John
Allan from the Board;
• Succession planning and executive
talent management;
• Appointment of Directors and Secretary to
subsidiaries and Joint Ventures;
• The annual evaluation of the Terms of
Reference of the Committee; and
• The annual evaluation of the Committee
paying particular attention to the
frequency of the Committee meetings.
Key areas of focus for the next year
• Succession planning and executive
talent management;
• A review of the Board structure, size
and composition;
• A review of the balance of skills,
knowledge, experience, independence and
diversity of the Board; and
• Appointment of Directors and Secretary to
subsidiaries and Joint Ventures.
Directors’ re-election
The Committee considers the performance
of each individual Director, 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 AGM. Biographical details of each
of the Directors, together with details of
their skills and experience may be found
on pages 43‑45. Following a performance
evaluation of each Director and the Board as
a whole, all Directors are considered by the
Board to be fully effective.
Pensions Committee report
Introduction from the Chair
Committee membership
and attendance
Total number
of meetings
Chair
Les Owen
Members
Matthew Lester
Paul Murray
Eligible
to attend
Attended
Attended
3
3
3
3
3
3
3
Further details of the Committee’s role, its
membership and the key areas of focus
during the year are set out below.
Les Owen
Chair of the Pensions Committee
18 May 2016
The meetings of the Committee have also
been attended by the Director of Group HR,
the Chief of Staff, the Company Secretary,
the Director of Corporate Finance, the
Head of Pensions Strategy, representatives
of the Trustee Executive, including their
external advisers, and representatives from
the Company’s pensions advisers, Willis
Towers Watson.
Pensions Committee Terms of Reference
The full terms of reference for the Committee
can be found on our website
www.royalmailgroup.com/about‑us/
management‑and‑committees/pensions‑
committee.
Role of the Committee
Further to the responsibilities outlined in the
Committee Chair’s statement, the role of the
Committee also includes:
• Reviewing and recommending to
the Audit and Risk Committee the
actuarial assumptions to be used in
calculating the accounting charge and
pension disclosures in the Company’s
Financial Results;
• Reviewing reports from the Trustee
Executive on the Royal Mail pension
schemes’ financial position, investment
performance, administration levels and
other activities;
• Reviewing recommendations from the
Pensions Policy Committee in relation to
Royal Mail pensions policy and strategy
(where significant to Royal Mail Group)
and make decisions or report to the
Board accordingly;
• Agreeing the assumptions to be used
by the Trustees relating to funding
Dear Shareholder,
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 and Risk Committee and the Board.
The Committee reports and makes
recommendations to the Board (and to Royal
Mail Group Limited as principal employer of
the Group’s pension’s schemes) on:
• Pension matters which it reasonably
considers are of strategic importance to
the Group;
• Pension matters involving a financial
impact of over £100 million;
• Material changes to benefits that require
rule changes or changes to the pension
scheme Trust Deeds; and
• Material matters in relation to
the accounting for the Group’s
pensions obligations.
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 CWU and Unite/CMA.
In 2016, an internal evaluation of the
Committee was undertaken by way of
questionnaire. The evaluation concluded that
the Committee continued to be effective.
58
| Annual Report and Financial Statements 2015-16
Other Committees
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.
Risk Management Committee
The Risk Management Committee supports
the Audit and Risk Committee and meets
to promote and support the establishment,
communication and embedding of risk
management throughout the business.
The Committee meets quarterly and is
chaired by the Chief Executive Officer.
valuations, and providing the Group’s
opinion and feedback on the Trustees’
Statement of Investment Principles;
• Approving, in accordance with the pension
schemes’ Rules, the appointment,
re‑appointment, 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.
Key areas of focus during the year
Matters the Committee considered during the
year include:
• The likely outcome of the April 2015
Valuation Scheme funding and the
implications for future benefit design;
•
•
Investment strategy and
risk management;
Investment performance and fees
and costs;
• The impact of pension legislation changes;
• Pensions accounting and treatment of
scheme surplus;
• The annual evaluation of the Terms of
Reference of the Committee;
• The annual evaluation of the Committee’s
effectiveness; and
• Pension scheme administration.
Key areas of focus for next year
Matters the Committee expect to be
considering during the year ahead include:
• The pension schemes’ funding valuations,
future affordability and management
proposals for future benefit design;
•
Investment strategy and risk management;
• Pensions accounting;
• Pension scheme administration; and
• The impact of the 2015 pensions freedoms
on the schemes.
Annual Report and Financial Statements 2015-16
| 59
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Directors’ remuneration report
Directors’ remuneration report
Dear Shareholder
I am pleased to report that, during 2015-16, the Company continued
to make progress in several important areas. We delivered an increase
in adjusted operating profit (before transformation costs), while
continuing to manage our ongoing and complex transformation in a
rapidly changing industry.
This year the Committee is proposing changes to the Company’s
Directors’ Remuneration Policy, to reflect our fast-changing
marketplace. I will make some brief comments on both of these themes
here – the report on the following pages gives more detail on each.
Performance and
remuneration in 2015-16
The year was one of continued
steady progress, despite intensifying
competition in a rapidly changing market.
Highlights included:
• Adjusted operating profit, before
transformation costs, of £738 million at
the budgeted foreign exchange rate;
• A one per cent reduction in UKPIL
underlying operating costs;
• A productivity improvement in collections,
processing and delivery of 2.4 per cent,
within our 2.0 – 3.0 per cent target
range; and
• Rolling out new products and services
at pace.
The performance achieved resulted in
payouts to our executive team on both
our annual bonus and our Long Term
Incentive Plan (LTIP), in accordance with
our Remuneration Policy. Their total
compensation remained broadly flat year
on year.
Annual bonus
Our performance in 2015‑16 resulted in
the achievement of a good score against
many of the financial, people, efficiency and
customer targets in our Corporate Balanced
Scorecard. This scorecard, along with a series
of Strategic Objectives, made up 80 per cent
of the potential annual bonus for Executive
Directors. Performance against personal
objectives, which were set by the Committee
and represented 20 per cent each of the
potential bonus, was also good.
This resulted in a bonus of almost 82 per cent
of salary for our Chief Executive Officer (CEO),
Moya Greene; and 81 per cent of salary for
our Chief Finance Officer (CFO), Matthew
Lester. More detail about the annual bonus
targets and performance against specific
KPIs is given on page 75.
Long Term Incentive Plan
During 2015‑16, the Company partly met the
stretching performance targets that were set
in 2013 for Operating Profit and Return on
Total Assets (ROTA). The gateway for ROTA
was achieved, Operating Profit performance
was between threshold and a very challenging
target. As a result, 83 per cent of the 2013
LTIP target award vested for both Executive
Directors. This award had originally been
made in cash and was converted to shares
two weeks after flotation, in October 2013,
at a share price of £5.29. The Committee had
no reason to use its discretion to reduce the
award. More details of the LTIP payout can be
found on pages 76‑77.
Annual salary review
The Committee also considered the Executive
Directors’ salaries. The CFO’s salary was
last increased in April 2014. The Committee
approved an increase of 4.6 per cent, taking
his salary to £475,000 per annum, with effect
from 1 April 2016. As we said in last year’s
Report, no change was made to the CEO’s
salary in 2015‑16.
Designing a policy to match our
market context
Last year, I mentioned to shareholders in
this letter that we were considering making
changes to our Remuneration Policy because
of the fast‑changing market environment
in which Royal Mail operates. Since then
we have studied our options carefully.
We have consulted with many of our largest
shareholders in the course of designing these
changes. We have taken their comments and
suggestions into account in finalising the
proposed policy. We are now recommending
these changes for shareholder approval.
If approved, the new policy would apply
from 2016‑17.
The factors which have shaped our proposals
include the following:
• The market in which Royal Mail operates
is intensely competitive and very dynamic.
To thrive and grow in this market requires
our Management to maintain an intensity
of pace in improving productivity and
efficiency month by month and year by
year. This is an increasingly challenging
task. This hard won, short‑term success
is essential to support our long‑term
performance. Accordingly, increasing our
relative focus on short‑term performance
is appropriate, provided it supports
enduring performance.
• We want to create a reward structure that
appropriately balances the importance of
short‑term delivery with the creation of
long‑term sustainable value.
60
| Annual Report and Financial Statements 2015-16
performance period. It is also aligned with
our commitment to a progressive dividend
policy, which is an important element of
TSR. We are proposing to keep the level
of vesting threshold at 50% of the award,
as is the case for the current LTIP. This
is a high percentage of maximum LTIP
award compared to companies of similar
size and complexity, but as our maximum
LTIP award is half that of our peers, and
our salaries are also lower, it is a similar
percentage of salary vesting for threshold
performance; and a lower overall value
than that of most comparable companies.
These proposed changes are more fully
explained in the following pages. Taken in
the round, we believe that they will provide a
coherent framework that will reward delivery
at pace on the objectives required to achieve
sustainable success, while maintaining
appropriate flexibility in target setting from
year to year:
• More aligned with our fast‑changing
market place and with what our senior
managers need to focus on year by year;
•
•
Incentivises sustained year on year
improvements with the aim of delivering
long‑term value for shareholders;
Increased proportion of remuneration
which is delivered in the form of deferred
equity, from around 25 per cent to
40 per cent of the total; and
• Reduces complexity and is more
transparent to shareholders.
We believe that this new policy will continue
to help us attract and retain the right people,
who are incentivised to drive the creation of
sustainable, long‑term shareholder value.
However, the total package for our CEO
remains below the lower quartile level of our
FTSE 100 peers, and we continue to retain our
commitment to avoid any pay for failure.
I hope that you agree with our proposed
changes and that you will support our
proposed Remuneration Policy and Annual
Report on Remuneration this year.
Orna Ni-Chionna
Chair, Remuneration Committee
18 May 2016
• We are keen to ensure that our reward is
more closely aligned with the interests of
long‑term shareholders, i.e. more of the
potential reward should be in shares, and
shares should be held by our executives
for longer periods.
• Our aim and intention is to deliver
sustainable shareholder value. The
amount of change that is occurring both
in the parcels market, and in Royal Mail’s
cost base, makes specific targets, such as
EPS, complex to measure. We are keen to
avoid complexity.
Our proposed new policy seeks to address
these issues and contains three proposed,
substantive changes:
1.
Increase the maximum incentive
opportunity available based on annual
performance through the introduction
of a deferred share element, which
would vest three years after award,
subject to continued employment and
malus provisions. This maximum deferred
element would be equal to the current
maximum cash bonus opportunity
(100 per cent of salary), creating a
combined maximum annual incentive
opportunity of 200 per cent of salary.
This change coincides with a careful
review of the performance metrics,
increasing the quantitative operational and
financial targets significantly. We believe
that this will focus attention on delivery of
key objectives consistently and at pace,
while aiding retention and recruitment.
It will also increase the speed at which
executives are likely to accumulate
shares. Therefore, we are proposing to
increase the shareholding guideline for
our Executive Directors to 200 per cent
of salary.
2.
Introduce a two year holding period
on shares vesting under the LTIP for the
CEC and Executive Directors, to achieve
greater alignment between the interests
of Management and shareholders.
We propose to increase the maximum
LTIP opportunity by two per cent to
100 per cent. This remains relatively low
for a company of our size and complexity
but we do not believe it is appropriate
to introduce further leverage into our
executive incentive plans at this stage.
3. Use relative Total Shareholder Return
(TSR) as the only performance
measure for the LTIP, as this is a
measure of the success in delivering our
strategy. In a competitive environment
that is changing as rapidly as ours, this
measure, which is focused on shareholder
alignment, will still be as relevant at the
end of the period as it is at the start of the
Annual Report and Financial Statements 2015-16
| 61
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Directors’ remuneration report
Our current and proposed Remuneration Policy
What is our proposed Remuneration Policy for Executive Directors?
The following tables outline our current and proposed Remuneration Policy. We intend to apply the new policy to our Executive Directors, subject
to shareholder approval, from 21 July 2016 (the date of the AGM), for a period of three years.
Over the past year, the Remuneration Committee has carried out an extensive review of the current Remuneration Policy. We believe there are
opportunities to improve the current remuneration structure, adhering to the remuneration principles agreed by the Committee:
Overall package
Incentive levels &
structure
Remuneration Principles
Implications for Remuneration Policy
The overall remuneration package should take account
of the dynamics of the market in which we operate. Our
incentive arrangements are evolving to ensure that we can
reward performance appropriately
There is scope to better align Remuneration Policy with Group
strategy, ensuring that Management is appropriately incentivised
and rewarded to deliver sustainable shareholder value
Incentive payouts should be based primarily on the
achievement of relevant operational, financial and
strategic goals, as well as the creation of long‑term
shareholder value
Design incentives to take into account the challenges that
exist in relation to setting long‑term financial, operational and
strategic goals whilst the Company continues to go through
significant transformation
Alignment with
shareholders
Management interests should be aligned to the interests of
shareholders, including through building a significant Royal
Mail shareholding
Increase the equity based components of the total package in
order to create a stronger alignment with shareholder interests
We are proposing a number of key changes to the structure of our remuneration:
1. Introduce a deferred share component to the existing annual bonus opportunity: as outlined above, a deferred share award of up to
100 per cent of salary, based on annual performance in the previous financial year, would be introduced subject to a three‑year vesting period,
continued employment and malus provisions. In parallel, the Committee is proposing some simplification of our KPIs to ensure the annual
bonus rewards delivery against the most critical financial, operational and strategic goals.
This change will give the Committee flexibility to incentivise and reward financial and operational success during our ongoing transformation,
while making the remuneration package more competitive in the market to attract and retain key talent. In addition, it provides a route for the
Executive Directors to increase their shareholding more quickly. Accordingly, we are proposing to increase the shareholding guideline to
200 per cent of salary (from 100 per cent of salary).
2. Restructure the current LTIP:
a) Introduce a holding period following the end of the performance period
We are proposing the addition of a two‑year holding period on LTIP shares, following vesting, to increase alignment between the interests
of executives and long‑term shareholders and further balance the shorter‑term focus of the annual bonus; and
b) Simplify the performance measures
We propose to focus the award on the Group’s TSR performance relative to the FTSE 100 (excluding mining and financial companies) over
three years.
Taken together, we believe that these changes will create a simpler and more direct linkage to the mind‑set that our executives need to have
to achieve the changes that the Board is seeking and as such, are an important element in driving the continued success of the Company in
its current competitive context. We believe that by executing our strategy and delivering against our annual KPIs, the Company will be able to
pursue a progressive dividend policy and create long‑term value for shareholders.
62
| Annual Report and Financial Statements 2015-16
We are mindful of the need to ensure that having a single performance measure does not lead to an inappropriate vesting outcome. We are
committed to completing a thorough review of underlying business performance at the end of each three year performance period to ensure that
our TSR result is reflective of Company performance over that time. We are also aware of the need to create an appropriate balance between
short‑term and long‑term incentives. For this reason:
• all of the increase in the maximum incentive opportunity based on annual performance is delivered in deferred shares, which only vest after
three years;
• we have doubled our executive shareholding guideline to 200 per cent of salary; and
• we are proposing a new two year holding period for the LTIP following vesting.
The annual bonus and LTIP are also underpinned by malus and clawback provisions.
Under the proposed policy, a larger proportion of the overall package will be linked to performance, more will be delivered in shares and the
payout will be over a longer timeline:
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Current
Fixed Remuneration: Base Salary & Pension
Allowance
Annual Bonus:
Cash
Cash
LTIP: Shares
Shares
Paid in Year
Paid just after end of
performance period
Paid after the 3 year performance period
Proposed
Fixed Remuneration: Base Salary & Pension
Allowance
Annual Bonus:
Cash & Shares
LTIP: Shares
Cash
Shares
Paid in Year
Paid just after end of
performance period
Paid 3 years after end
of performance period
Paid after the 3 year performance period,
with a further 2 year holding period
Policy table
The following tables set out the key elements of our remuneration, its purpose and link to strategy and the maximum opportunity. In addition,
where relevant, we have set out the changes proposed to the policy for each element of remuneration and the rationale behind these changes.
The Committee has discretion in several areas of the policy. The Committee may also exercise operational and administrative discretions
under relevant incentive plan rules approved by shareholders as set out in those rules. In addition, the Committee has the discretion to amend
policy with regard to minor or administrative matters where it would be, in the opinion of the Committee, disproportionate to seek or await
shareholder approval.
In setting the Remuneration Policy for Directors, the pay and conditions of other employees of the Company are taken into account, including any
base salary increases awarded.
It is the Committee’s intention that commitments made in line with its policies prior to the approval of the new policy will be honoured. This will
be the case even if meeting such commitments is made after the approval of the new policy and may be inconsistent with the new policy.
The approach outlined here will be reviewed in three years’ time. Amongst other factors, the balance between short and long‑term elements in
the package will be reviewed and may change in favour of the long‑term. In addition, the measure used to assess this performance may change,
reflecting the pace of change and the challenges facing the Company at the time.
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| Directors’ remuneration report
Fixed remuneration
Operation
Base salary
Maximum
Opportunity
Performance Measures
Change from current policy and
rationale
Purpose & Link To Strategy
Reflects the scope and responsibility of the role, while taking account of the skills and experience of the individual.
Used to attract and retain talented executives to deliver the business strategy.
Not applicable
No change
Salary levels for the Executive Directors are
normally reviewed annually.
The Committee takes into account factors
such as the performance of the Company,
the performance of the Executive Director,
any changes in role and responsibility,
assessment against relevant comparator
groups, internal relativities and the
level of increase being offered to our
frontline employees.
Increases will
normally be in
line with the
broader employee
population.
Increases may
be made above
this level to
take account
of changing
circumstances
such as a change
in responsibility,
progression in the
role, individual
performance
or a significant
increase in the
scale or size of
the role.
Benefits
Purpose & Link To Strategy
To support the attraction and retention of talented executives by providing a competitive offering.
Not applicable
No change
The maximum
value of the
benefits is
the cost to
the Company.
Benefits currently include the provision
of a company car and health insurance,
or the cash equivalent of these benefits.
Life assurance and health screening are
also provided. Additional benefits may
be offered such as relocation allowances
on recruitment.
Moya Greene is entitled to financial advice,
use of a driver for business‑related travel
and two return flights to Canada each year.
Executive Directors are entitled to
participate in the SAYE scheme, with
monthly deductions being taken for a period
of three or five years. The savings can be
used to purchase shares at a discounted
price set at the start of each plan.
Executive Directors are eligible to receive
Free Shares when released by the
Government. They participate in any Free
Share allocations on the same basis as all
other eligible full‑time employees.
Pension
Purpose & Link To Strategy
To provide a competitive post‑retirement income.
Company contribution to a defined
contribution pension scheme and/or a cash
supplement (in lieu of pension).
Not applicable
£200,000 per
annum cash
allowance for the
CEO.
40% of salary
paid as a cash
allowance for
the CFO.
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| Annual Report and Financial Statements 2015-16
The Committee maintains contractual historical
pension supplements for existing Executive
Directors; however it recognises that the
pension provision is high. It would adopt a lower
percentage for newly appointed Executive
Directors, up to median FTSE100 levels.
Variable remuneration
Operation
Annual bonus
Maximum
Opportunity
Performance Measures
Change from current policy
and rationale
Purpose & Link To Strategy
Current policy: Designed to reward achievement of key strategic, financial and operational priorities for the year, to deliver strong performance in service of
longer term strategic goals and creation of long‑term shareholder value.
Proposed policy: As the current policy, with the addition of the provision of part of the total annual incentive opportunity being a deferred share award encouraging
a long‑term view, providing alignment with shareholders’ interests.
Current policy
The bonus is paid in cash.
Best practice clawback provisions are
included in the annual bonus.
Maximum bonus
opportunity of
100% of salary.
Aligned to the Corporate Balanced Scorecard for the
Executive Directors each year.
Proposed policy
The total annual incentive opportunity is
provided as follows:
• one half is payable in cash, paid at the
end of the annual performance period
• one half is granted as a deferred share
award, after the end of the performance
period and subject to continued
employment over the three year
vesting period.
Deferred share awards will be granted
to Executive Directors in the form of a
conditional share award.
Malus provisions would apply to the
deferred share award over the three year
vesting period.
A clawback mechanism would apply to
the cash bonus for a period of three years
following the bonus determination.
Maximum total
annual incentive
opportunity of
200% of salary,
with two thirds
earned for target
performance
split equally
between
cash and
deferred shares.
The Committee
will normally
award dividend
equivalents
on deferred
shares to plan
participants to
the extent that
they vest.
Annual performance measures and weightings will
be selected at the start of each financial year to align
with the key strategic, financial and operational
priorities of the business.
The measures themselves may change on an annual
basis as the key strategic, financial and operational
priorities of the business change.
For 2016, 80% of the annual bonus will be based on
the scorecard targets, and 20% will be based on the
achievement against strategic objectives.
A minimum of 50% of the scorecard targets shall
be financial, with the remainder robust operational,
customer and people KPIs.
A minimum level of operating profit must be achieved
before any bonus is payable to an Executive Director.
The proposed changes increase the proportion of
the package weighted on short‑term performance,
allowing the Company to set annual KPIs which
more significantly incentivise the successful
delivery of the Company’s transformation agenda,
alongside its operational, financial and strategic
goals. This allows the Company some flexibility to
respond to a rapidly evolving market and ensure
that KPIs remain relevant and focused on the
business stage of transformation.
The increase to bonus quantum aims to improve the
competitiveness of the Company’s annual bonus
versus the market. The proposed maximum total
annual incentive opportunity of 200% of salary
would go some way to addressing this.
However, the increase in maximum bonus is
delivered in the form of a deferred share award.
Bonus deferral and the malus provisions act as
a balance to the increase in quantum and ensure
that Executive Directors continue to be exposed
to the long‑term share‑based performance of
the Company.
Combined with the LTIP of 100% of salary, the total
package remains relatively low compared to other
FTSE 100 companies.
The Committee may use its discretion to:
• change the performance measures and targets and the weighting attached to the performance measures and targets part‑way through a performance year if there is a
significant and material event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate; and
• to make downward or upward movements to the amount of bonus earned resulting from the application of the performance measures, if the Committee believes that the
bonus outcomes are not a fair and accurate reflection of business performance.
Annual bonus: current policy vs proposed policy
0
Start of Performance Period
10
End of Performance Period
20
+1 Years
30
+2 Years
40
+3 Years
Current
Performance period,
subject to malus
Proposed
Cash Bonus
Performance period,
subject to malus
Cash award paid
Cash award paid
Subject to clawback
Subject to clawback
Deferred Share Award
Pre-grant performance
period, subject to malus
Vesting period, subject to malus
Deferred shares
released
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| Directors’ remuneration report
Long term incentive plan
Operation
Maximum
Opportunity
Performance Measures
Change from current policy and
rationale
Purpose & Link To Strategy
Current policy: Supports executive recruitment and retention, with an appropriate balance between short‑term performance and the creation of long‑term,
sustainable shareholder value.
Proposed policy: As the current policy, with greater emphasis on the creation of shareholder value.
Maximum award
level of 98%
of salary.
The performance conditions for the 2015 awards
were measured over a three year performance
period as follows:
For 2016, vesting will be based on a single
measure, TSR. The rationale for this measure is
set out in more detail on page 61.
Current policy
Awards are granted annually to Executive
Directors in the form of a conditional share
award.
These will vest at the end of a three year
period subject to:
• the Executive Director’s continued
employment at the date of vesting; and
• satisfaction of the performance
conditions.
Malus and clawback provisions are
included in the LTIP.
The Committee
may award
dividend
equivalents on
those shares to
the extent that
they vest.
• 50% of the award assessed against Earnings
Per Share, with 12.5% of the award vesting at
threshold and 50% vesting at maximum.
• 35% of the award dependent on Operating profit
margin (before transformation costs), with 8.75%
of the award vesting at threshold performance
and 35% vesting at maximum.
• 15% of the award dependent on TSR against
the FTSE 100 (excluding mining and financial
companies). If the Group’s TSR performance is
ranked at median, 7.5% of the award will vest,
increasing to full vesting (15% of the award) if
performance is in the top quartile of the group.
Different performance measures and/or weightings
may be used for each award.
Maximum award
level of 100%
of salary.
Performance measures and/or weightings reflect
the business strategy at the time, and are measured
over three years.
The Committee
will normally
award dividend
equivalents on
those shares to
the extent that
they vest.
The Committee may change the balance of the
measures, or use different measures for subsequent
awards, as appropriate.
For the 2016 award, 100% of the award will be
dependent on TSR against the FTSE 100 (excluding
mining and financial companies). If the Group’s
relative TSR performance is ranked at median, 50%
of the award will vest, increasing to full vesting if
performance is in the top quartile of the group.
Proposed policy
Awards are granted annually to Executive
Directors in the form of a conditional
share award.
These will vest at the end of a three year
period subject to:
• the Executive Director’s continued
employment at the date of vesting; and
• satisfaction of the
performance conditions.
Following the vesting, there is a holding
period of two years when Executive
Directors hold vested shares net of tax.
Malus provisions apply over the
performance period.
Clawback will apply over the holding period.
In exceptional circumstances the Committee retains the discretion to:
• vary or waive the performance conditions applying to LTIP awards if the Board considers it appropriate and that the new performance conditions are deemed reasonable
and are not materially more or less difficult to satisfy than the original conditions;
LTIP: current policy vs proposed policy:
Start of
Performance Period
+1 Years
+2 Years
+3 Years
+4 Years
+5 Years
+6 Years
Current
Performance period; subject to malus terms
Subject to clawback
Award vests subject
to performance
Proposed
Performance period; subject to malus terms
Holding period; subject to clawback
Award vests subject
to performance
Post-tax shares
released
66
| Annual Report and Financial Statements 2015-16
The Committee decided to retain the existing
vesting schedule that applies to the TSR
measure within the current LTIP, with 50% of the
TSR element of the award vesting for median
TSR performance.
The Committee recognises that the threshold
vesting level of 50% of the award may seem high
compared to a threshold vesting level of 25%
in a typical FTSE 100 company. However most
of these organisations have an LTIP maximum
award of 200% of salary or more, whereas ours
remains at 100% of salary. Therefore the actual
percentage of salary vesting for threshold
performance of 50% is similar to typical practice.
The Committee does not feel it is appropriate
to operate a highly leveraged package at this
stage in Royal Mail’s development and therefore
does not want to increase the LTIP opportunity
in order to correspondingly reduce the level of
vesting at threshold. Any future change in LTIP
maximum award would of course be put to
shareholders for approval.
The addition of a two year holding period to
the terms of the LTIP award further aligns
the interests of Management with those of
long‑term shareholders.
The Committee will retain the discretion to make
adjustments to the vesting of the LTIP resulting
from the application of the performance
measures if the Committee believes that
the outcomes are not a fair and accurate
reflection of underlying business performance.
The Committee will consider its discretion
very carefully taking account of underlying
business performance during the three year
vesting period and explain in full in the relevant
Remuneration Committee Report the basis of its
determination.
Shareholding guideline
Operation
Maximum
Opportunity
Performance Measures
Change from current policy and
rationale
Purpose & Link To Strategy
To ensure alignment between remuneration and long‑term shareholder value creation.
Current policy
Directors are expected to keep any shares
they already own and 50% of any shares
released under the LTIP (after selling
sufficient shares to meet any associated tax
obligation) until this is achieved.
Shareholding
guideline of 100%
of salary
Not applicable
Proposed policy
Directors are expected to keep any shares
they already own and any shares released
under the LTIP and the Deferred Share
Bonus Plan (except for those sold to cover
any tax and social security obligations) until
this is achieved.
Shareholding
requirement of
200% of salary
Not applicable
Shareholders have recently raised their
expectations of the level of minimum
shareholdings held by Executive Directors of
listed companies.
Part of the rationale behind the new policy
proposed by the Committee is to provide a larger
element of the potential remuneration for the
Company’s Executive Directors in equity.
The Committee has therefore determined
to increase the minimum shareholding
requirement to 200% for the Executive Directors.
Due to the restrictions on share purchase at the
IPO, and the fact that LTIPs have not previously
vested in shares, the shareholding requirements
for the Executive Directors will take a while
to fulfil.
Now that Executive Directors can increase their
shareholding requirement through both the LTIP
and the deferred share award, it is intended that
they will not sell any shares (other than to cover
tax and social security) until they build up the
required shareholding guideline.
How do the KPIs for our annual bonus and LTIP link to the Group strategy?
Annual bonus
A significant proportion of the performance in the annual bonus is measured through the Corporate Balanced Scorecard. This scorecard tracks
a range of short‑term measures that are critical to the creation of long‑term, sustainable shareholder value and the delivery of our strategy.
The Committee is proposing to simplify the number of metrics that comprise the scorecard to sharpen Management focus on the most important
targets. Specific quadrants are removed under this new approach. However, the metrics continue to focus on our people, customer, efficiency and
financial performance. All Executive Directors and CEC members participating in this plan are also set strategic and/or personal objectives that
reflect the priorities of their respective roles.
The current scorecard is shown below, with the proposed policy shown on the right hand side:
3%
3%
3%
3%
3%
6%
People
15%
Customer
15%
3%
First Class quality of service
Composite parcels quality
Mean business customer
satisfaction
Total customer
complaints
Current policy
Employee customer focus
Employee engagement
Sick absence rate
Accident rate
UKPIL non-
people costs
UKPIL people costs
Productivity for
collections,
processing &
delivery
Free cashflow
Group operating profit
Total Group Revenue
6%
3%
6%
6%
Efficiency
15%
6%
Financial
15%
6%
3%
Strategy
40%
40%
Proposed policy
g great cu st o m
Total
Customer
Complaints (’000)
10%
Mean Business
Customer
Satisfaction
10%
rin
e
v
i
l
e
D
•
s
r
e
r
e
s e r v i c e through engag
1st Class
Retail Quality
of Service
10%
Employee
Engagement
10%
e
d,
s
a
f
e
&
Road Traffic
Collisions
(av. no. vehicles)
(’000) 10%
Productivity for
Delivery, Collections
& Processing (%)
10%
p
r
o
d
u
c
t
i
v
e
p
e
o
p
l
e
, a
In-Year Trading
Cashflow (£m)
10%
d
l
o
h
e
r
a
Group
Operating
Profit excl
transformation
costs (£m)
10%
h
s
Total Group
Revenue (£m)
10%
le business results for all
a
b
Total UKPIL
Costs (£m)
10%
chieving sustain
Annual Report and Financial Statements 2015-16
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Royal Mail plc
| Directors’ remuneration report
The Executive Directors will be assessed against a series of strategic objectives, in line with the Group Strategy described in pages 16‑17 earlier
in the Report. In summary, they are:
• Articulate the ambition for the Company for the next five years and define the route to achieving that vision.
• Defend the Letters business by managing the cost base of the core network effectively, continuing to transform the business to become more
efficient, and stemming letters decline through initiatives.
• Continuing to evolve the Parcels business both in the UK and internationally to win more profitable business in a dynamic and highly
competitive market place.
• Growing in new areas through acquisitions as well as leveraging our existing assets.
• Continue to refresh our approach to technology, defining a digital strategy which identifies and embraces technology relevant for our
business’ future.
LTIP
Under the proposed policy we are simplifying our LTIP by having a single metric directly reflecting shareholder value achieved, including
dividends, relative to other large quoted companies.
The Committee believes relative TSR is an appropriate measure of strategy implementation over the next three years. It rewards the creation
of value for shareholders through the successful execution of our strategy. TSR also reflects the importance of dividend yield to the Group’s
shareholders and the Company’s commitment to a progressive dividend policy. In the event that the underlying financial performance of the
Group is not reflected in the TSR performance, the Committee would retain discretion to adjust the award.
What is the remuneration opportunity under the proposed policy?
The following charts set out the remuneration scenarios under the proposed policy for the Executive Directors.
CEO (£000s)
Fixed Remuneration
Variable Remuneration
Maximum
On Target
31%
41%
23%
23%
23%
£2,422
19%
19%
21%
£1,893
Minimum
100%
£779
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
Fixed Remuneration
Annual Bonus
Deferred Share Award
LTIP
CFO (£000s)
Fixed Remuneration
Variable Remuneration
Maximum
31%
23%
23%
23%
£2,105
On Target
41%
19%
19%
21%
£1,646
Minimum
100%
£680
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
Fixed Remuneration
Annual Bonus
Deferred Share Award
LTIP
Assumptions
Minimum/fixed remuneration: This includes salary (2016‑17 salaries – CEO: £547,800, CFO: £475,000), pension (CEO: £200,000, CFO: 40% of salary) and benefits (CEO: £31,000, CFO: £15,000).
On‑target:
Bonus: For the proposed bonus, on‑target is taken as two‑thirds of maximum (and the same value is used for the deferred share award)
LTIP: The expected value is taken as 70% of maximum.
Maximum:
Bonus: For the cash bonus and deferred share award this is 100% of salary
LTIP: For the proposed LTIP this is 100% of salary.
No assumptions have been made in relation to future share price movements or dividend reinvestments.
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| Annual Report and Financial Statements 2015-16
Element
Base salary
Benefits
Pension
Annual bonus
Implementation of policy in 2016-17
Increase in base salary for the CFO from £454,065 to £475,000 with effect from 1 April 2016. This is the first increase the CFO has
received since April 2014.
As the Committee said in last year’s Report, there is no change to the salary of the CEO.
No change to benefit provision for 2016‑17
No change to pension provision for 2016‑17
The maximum total annual incentive opportunity for the Executive Directors will be 200% of salary, per proposed policy, half
delivered in cash and half in deferred shares.
For the 2016‑17 annual bonus, 80% of the award will be based on the achievement against the scorecard, of which at least 50%
of the measures will be financial, with the remainder focused on operational, customer and people‑related targets. 20% of the
award will be based on achievement against strategic objectives.
The Committee is of the opinion that given the commercial sensitivity arising in relation to the detailed financial targets used
for the annual bonus, disclosing precise targets for the annual bonus in advance would not be in shareholder interests. Actual
targets, performance achieved and awards made will be published at the end of the performance periods so shareholders can
fully assess the basis for any pay‑outs under the Plan.
LTIP
The Executive Directors will be eligible for an award equivalent to 100% of salary, which is relatively low compared to the
external market.
100% of the award will be based on the Group’s relative TSR performance against the FTSE 100 (excluding mining and
financial companies).
The vesting schedule will measure the Group’s performance over three years as follows:
• 50% of salary will vest if TSR performance is equal to the median TSR of the companies in the comparator group;
• Maximum vesting will occur if TSR is equal to, or greater than, the upper quartile TSR of the comparator group;
The award is subject to straight line vesting between these two points.
In the event that the underlying financial performance of the Group is not reflected in the TSR performance, the Committee
would retain discretion to adjust the award.
Shareholding guidelines
200% of salary for Executive Directors.
Have shareholders been engaged in the design of this proposed policy?
The Chair of the Committee has engaged with many of our larger shareholders to explain the proposed changes to the Remuneration Policy,
the reasons for those changes and the desired outcomes. Shareholders were generally positive in their comments and made constructive
suggestions for improving the proposals. We have taken this feedback into account in arriving at our final proposal.
What would the remuneration arrangements be for a new Executive Director?
Salaries for new Executive Directors appointed to the Board will be set in accordance with the terms of the approved Remuneration Policy in
force at the time of appointment. In particular, they will take account of the appointee’s skills and experience as well as the scope and market
rate for the role.
Benefits consistent with those offered to other Executive Directors under the approved Remuneration Policy in force at the time of
appointment will be offered, including the discretion to offer additional benefits such as relocation allowance on recruitment. Pensions for
new Executive Directors appointed to the Board will be set in accordance with the terms of the approved Remuneration Policy in force at
the time of appointment, and will typically be up to the median of the market and will be lower than the pension provision for our existing
Executive Directors.
Incentive arrangements for new Executive Directors will be in accordance with the approved Remuneration Policy in force at the time of
appointment. This means the maximum total annual incentive opportunity award in any year would be 200 per cent of salary and the maximum
LTIP award would be 100 per cent of salary, (with the ability to offer up to 200 per cent of salary for the year of recruitment) if the proposed policy
is approved.
For an externally appointed Executive Director, the Company may offer additional cash or share‑based payments that it considers necessary
to buy out current entitlements from the former employer that will be forfeited on recruitment. Any such arrangements would reflect the type
of award e.g. cash or shares, time horizons and levels of conditionality of the remuneration lost. In order to facilitate buy‑out arrangements,
existing incentive schemes will be used to the extent possible, and the Committee will retain discretion on the application of holding periods,
performance conditions and performance periods.
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| Directors’ remuneration report
For an internally appointed Executive Director, any outstanding variable pay element, such as a long‑term incentive plan awarded in respect of
the prior role will continue on its original terms.
The fees for Non‑Executive Directors appointed will be set in accordance with the terms of the approved Remuneration Policy in force at the time
of appointment.
The Committee always seeks to ensure that any remuneration package is set such that the Company is able to attract the right calibre of
individual required, whilst taking account of affordability, and therefore must be allowed to exercise its judgement.
What are the Executive Directors’ terms of employment?
The Executive Directors are employed under service contracts. The dates of these contracts are:
Moya Greene
Matthew Lester
Date of Contract
15 July 2010
24 November 2010
Unexpired Term (months)
12
12
The contracts have an indefinite term that may be terminated by the Executive Directors with six months’ written notice. The Company
can terminate contracts with 12 months’ notice. Copies of the Executive Directors’ service contracts are available for inspection at the
Company’s AGM.
What happens when an Executive Director leaves?
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 cash 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. The bonus provision is not replicated in any other contracts and would not be part of the terms of appointment of a new
Executive Director.
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. 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. 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 for Executive Directors 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.
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| Annual Report and Financial Statements 2015-16
The following table sets out the position under the incentive plans on cessation of employment:
Good Leaver Reason1 Other Reasons2
Committee Discretion
Annual
bonus: cash
awards
Performance conditions will
be measured at the bonus
measurement date. Bonus
will normally be pro‑rated.
No bonus payable for
year of cessation.
Annual
bonus:
deferred
share awards
All subsisting deferred
share awards will normally
vest on the normal
vesting date.
Lapse of any
unvested deferred
share awards.
Lapse of any unvested
LTIP awards.
LTIP
Pro‑rated to time and
performance in respect of
each LTIP award. Awards
will vest on the normal
vesting date and the holding
period will apply, except
in the case of death when
awards will vest on date of
cessation of employment
(and no holding period
will apply).
• to determine that an executive is a good leaver; and
• to determine whether to pro‑rate the bonus to time. The normal policy is that
bonus will be pro‑rated; provided that where any discretion is exercised,
there is an appropriate business case which will be explained in full to
shareholders.
• to determine that an executive is a good leaver;
• to vest deferred shares at the date of cessation of employment;
• to determine whether to pro‑rate the award to time. The normal policy for
existing awards is that they will not be pro‑rated; provided that where any
discretion is exercised, there is an appropriate business case which will be
explained in full to shareholders; and
• In respect of the year of cessation, discretion may be exercised to provide
a pro‑rated deferred share award based on achievement of performance
conditions as measured at the bonus measurement date.
• to determine that an executive is a good leaver;
• to measure performance over the original performance period or at the date of
cessation of employment;
• to vest the shares on date of cessation of employment;
• to determine whether to pro‑rate the award to time. The normal policy is that
awards will be pro‑rated; and
• to disapply the holding period; provided that where any discretion is exercised,
there is an appropriate business case which will be explained in full to
shareholders.
1 A good leaver reason is defined as cessation in the following circumstances: death; injury, ill‑health or disability, as established to the satisfaction of the Committee,
redundancy with the agreement of the Committee, retirement with the agreement of the Committee, the company employing the executive ceasing to be a member of the
Group, the business or part of the business to which the executive’s office or employment relates being transferred to a person who is not a member of the Group, or any other
reason where the Committee in its discretion so permit
2 Cessation of employment in circumstances other than those set out above is cessation for other reasons
What happens in the case of a takeover?
The Committee’s policy on the vesting of incentives on a change of control is summarised below:
Name of Incentive
Plan
Takeover
Discretion
Annual bonus: cash
awards
Pro‑rated to time and performance
to the date of the takeover.
Annual bonus: deferred
share awards
Subsisting deferred share awards
may vest on a takeover.
The Committee’s normal policy is that it will pro‑rate the bonus for time. It is
the Committee’s intention to use its discretion to not pro‑rate in circumstances
only where there is an appropriate business case which will be explained in full
to shareholders.
The Committee has discretion regarding whether to pro‑rate the award to time.
The Committee’s normal policy is that it will not pro‑rate awards for time. The
Committee will make this determination depending on the circumstances of
the takeover.
LTIP
Subsisting LTIP awards may vest
on a takeover, pro‑rated to time
and performance.
The Committee will determine the proportion of the LTIP Award which vests
taking into account, among other factors, the period of time the LTIP Award has
been held by the participant and the extent to which any applicable performance
conditions have been satisfied at that time.
In the event of a demerger, the Committee has wide flexibility as to what should happen to awards, including whether all or part of an award
should vest and on what terms, or whether an award should continue on amended terms.
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| Directors’ remuneration report
How do the remuneration arrangements for Executive Directors compare with arrangements for
employees across the Company?
When making decisions on the levels of remuneration for Executive Directors, the Committee takes account of pay increases and incentive
awards for all employees. The Company does not use remuneration comparison measurements, such as pay ratios, nor have employees been
consulted directly on the policy.
A number of different incentive schemes operate across the Company; as far as possible the metrics used for the Executive Directors to assess
performance for those schemes are cascaded through the Company.
What is the Company’s policy on Directors holding external positions?
It is the Company’s policy to allow each Director to accept one Non‑Executive Director position on the board of another company. The fees for such
appointments are retained by the Executive Directors and are disclosed on page 78.
What is the Remuneration Policy for the Chairman and Non-Executive Directors?
Operation
Opportunity
Performance metrics
Chairman and Non-Executive Directors Policy
Purpose & Link To Strategy
Provides a level of fees to support recruitment and retention of Non‑Executive Directors and a Chairman with the necessary experience to fulfil the leadership role
required of them.
The Board is responsible for setting the remuneration of the
Non‑Executive Directors. The Remuneration Committee is responsible
for setting the Chairman’s fees.
The fees for Non‑Executive Directors and the
Chairman are set at broadly the median of the
comparator group.
None
Non‑Executive Directors are paid an annual fee and additional fees
for chairmanship of committees. The Chairman does not receive any
additional fees for membership of committees.
Fees are reviewed annually based on equivalent roles in the
comparator group used to review salaries paid to the Executive
Directors. Fees are set at broadly the median of the comparator group.
Non‑Executive Directors and the Chairman do not participate in any
variable remuneration or benefits arrangements.
In general, the level of fee increase for the
Non‑Executive Directors and the Chairman will be
set taking account of any change in responsibility
and will take into account the general rise in salaries
across the UK workforce.
The Company will pay reasonable expenses incurred
by the Non‑Executive Directors and Chairman and
may settle any tax incurred in relation to these.
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| Annual Report and Financial Statements 2015-16
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. 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). The dates of the Chairman’s and Non‑Executive Directors’ letters of appointment are set out in the following table.
Date of Contract
Unexpired Term (months)
Peter Long
Donald Brydon
John Allan
Nick Horler
Cath Keers
Paul Murray
Orna Ni‑Chionna
Les Owen
18 June 2015
20 September 2013
20 September 2013
20 September 2013
20 September 2013
20 September 2013
20 September 2013
20 September 2013
26
Resigned 31 August 2015
Resigned 30 April 2015
4
4
4
4
4
The Company follows the Code’s recommendation that all directors of FTSE 350 companies be subject to annual re‑appointment by shareholders.
Which of the Board members sit on the Remuneration Committee, and how frequently do they meet?
Number of meetings eligible to attend
Number of meetings attended
Total number of meetings
Chair
Orna Ni‑Chionna
Members
Donald Brydon
Peter Long
Paul Murray
Les Owen
6
6
2
4
6
6
6
2
4
6
5¹
1 Les Owen was unable to attend the Committee meeting on 16 December 2015 due to a prior engagement
Meetings of the Committee were also attended, where relevant, by the Chief Executive Officer, Group HR Director, Company Secretary, the
Group Reward and Recognition Director, and other members of senior management and representatives from the executive remuneration
consultants PwC.
No individual was present when matters regarding their own remuneration were discussed.
What is the role of the Remuneration 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 Chairman, 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:
http://www.royalmailgroup.com/about‑us/management‑and‑committees/remuneration‑committee.
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| Directors’ remuneration report
Annual report on Directors’ remuneration
This part of the Directors' Remuneration Report sets out details of how the current Remuneration Policy has been applied for the Financial
Year 2015‑16. This detailed information, set out below and on the following pages, has been audited by the Company's independent auditors,
KPMG LLP.
Single figure for total remuneration
£'000
Salary/
Fees1
Benefits2
Annual Bonus
Plan3
Long Term
Incentive Plan4
Pension5
Other
Total
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Chairman
Peter Long6
Donald Brydon7
Executive Directors
Moya Greene
Mark Higson
Matthew Lester
185
96
548
–
454
Non‑Executive Directors
John Allan8
Jan Babiak9
Nick Horler
Cath Keers
Paul Murray
Orna Ni‑Chionna
Les Owen
TOTAL
4
–
50
50
65
75
60
–
210
510
135
454
45
3
45
45
60
70
55
–
–
31
–
15
–
–
–
–
–
–
–
–
–
29
5
15
–
–
–
–
–
–
–
–
–
448
–
367
–
–
–
–
–
–
–
–
–
433
80
359
–
–
–
–
–
–
–
–
–
302
115
259
–
–
–
–
–
–
–
–
–
350
226
301
–
–
–
–
–
–
–
–
–
200
–
182
–
–
–
–
–
–
–
–
–
200
54
182
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
185
96
–
210
1,529
1,522
316
115
816
–
–
–
–
–
–
–
–
1,277
1,311
4
–
50
50
65
75
60
45
3
45
45
60
70
55
316
3,506
4,182
1,587
1,632
46
49
815
872
676
877
382
436
1 Moya Greene’s salary was increased on 1 January 2015 from £498,000 to £547,800. The 2014‑15 salary above is 9/12ths of £498,000 (her previous salary) and 3/12ths of
£547,800. Moya Greene has received no further increase in her base salary since 1 January 2015
2 Benefits include medical insurance and car allowance. The figure for Moya Greene also includes return flights to Canada
3 Bonuses are determined based on the salary as at 1 January 2016 in line with the Company’s policy for all staff. All bonus payments are made in cash
4 The current year figure relates to the 2013 LTIP award. The prior year figure relates to the 2012 LTIP award, which was based on performance to 29 March 2015
5 For Moya Greene, £40,000 is paid into the Royal Mail Defined Contribution Plan and the remaining £160,000 is paid as an allowance. The full amount for Matthew Lester is paid
as an allowance
6 Peter Long was appointed to the Board as a Non‑ Executive Director on 18 June 2015 and became Chairman on 1 September 2015
7 Donald Brydon resigned from the Board on 31 August 2015
8 John Allan resigned from the Board on 30 April 2015
9 Jan Babiak resigned from the Board on 29 April 2014
The following sections outline how the data in the table above was determined, with regard to base salary and incentives.
Were base salaries reviewed in the year?
During the course of our Remuneration Policy review, the Committee considered the relative competitiveness of the current packages for our
Executive Directors. Although no change was made during 2015‑16, it was agreed that Matthew Lester’s salary should be increased from
1 April 2016. The Committee agreed to apply an increase of £20,935 (4.6 per cent), taking his salary to £475,000. This is the first salary increase
that Matthew Lester has been awarded since April 2014. Moya Greene’s salary was left unchanged since January 2015.
This compares to salary increases for frontline staff over the last four years as shown below:
% increase in salary
2016-17
2015-16
2014-15
2013-14
2012-13
Moya Greene
Matthew Lester
0%
4.6%
Average frontline employee
Under negotiation
10%
0%
2.8%
0%
6%
3%
0%
0%
3%
0%
0%
3.5%
With this most recent change, Matthew Lester’s total salary increases since joining Royal Mail in 2012 amount to 10.6 per cent. Our frontline
employees have received an increase of 12.3 per cent up to 2015‑16, with a further salary increase for the coming year still under negotiation.
74
| Annual Report and Financial Statements 2015-16
What was the outcome of the annual bonus?
The performance period for the annual bonus is the same as the financial year, with achievement being assessed against a range of financial and
non‑financial targets, as set out in the Corporate Balanced Scorecard, and against a set of personal objectives. The maximum bonus opportunity
for the CEO and CFO was 100 per cent of salary.
The table below contains a summary of the performance metrics which are used to determine the annual bonus award for the CEO and CFO.
Corporate Balanced Scorecard
Weighting Measure
Threshold
Target
Max
Actual
Outcome
Segment
Outcome
Financial
Efficiency
Customer
People
3%
6%
6%
6%
6%
3%
3%
3%
6%
3%
6%
3%
3%
3%
Strategic
Objectives
40%
% of the Scorecard
100%
As a % of the bonus
80%
Total Group revenue (£m)
Group operating profit before
transformation costs (£m)
Free cashflow (£m)
Productivity for delivery,
collections & processing (%)
8,708
482
165
1.7
8,886
567
206
2.1
9,067
667
258
2.5
9,191
738
315
2.4
UKPIL people costs (£m)
(4,928)
UKPIL non‑people costs (£m)
(2,377)
(4,829)
(2,329)
(4,733)
(2,282)
(4,764)
(2,294)
First Class Quality of Service (%)
92
94.4
75
451
0
4.70
55
68
Composite parcels Quality of
Service (%)
Mean business customer
satisfaction
Complaints ('000)
Lost time accident rate
frequency rate reduction (%)
Sick absence rate (%)
Employee engagement
Employee customer focus (%)
See below for key highlights
(for more details on our
progress against our strategic
priorities. Please see
pages 16‑17)
93.0
95.4
76
430
7
4.50
57
69
93.5
95.9
77
411
12
4.30
58
70
92.6
94.4
76
476
30
4.51
57
67
5.0%
10.0%
10.0%
9.0%
8.7%
4.5%
2.4%
1.5%
6.0%
0.0%
10.0%
2.9%
3.0%
0.0%
25.0%
22.2%
9.9%
15.9%
50%
100%
167%
150%
60.0%
133.0% of target
63.8% of salary
Strategic objectives: for the 2015‑16 bonus, we placed a strong focus on incentivising delivery against our strategic priorities, accounting for
40 per cent of our corporate scorecard. Summarised below are some of the key achievements that demonstrate the progress made during the year:
Winning in parcels: in the UK we have maintained our pre‑eminent position in parcels, with a three per cent increase in parcel volume and one
per cent revenue growth. We also have revenue growth of nine per cent in GLS. Key points include:
• Opening our network for longer by pushing back our latest acceptance times;
• Winning major new retail accounts including John Lewis, M&S, Urban Group and Waterstones and growing our business with existing
customers, such as ASOS;
• Extending our tracked products services: e.g. Royal Mail International Tracked & Signed is now available to 54 destinations; and
• Extending our strategic service with Alibaba, linking Chinese exporters with UK online shoppers, allowing them to supply goods for UK
delivery much more quickly.
Defending letters: over the year, addressed letter volumes decreased by three per cent – better than our forecast range of a four to six per cent
decline per annum due to:
• Promoting the value of marketing mail through MarketReach’s MAILMEN campaign; and
•
Implementing processes ensuring mail is handled efficiently e.g. improved large letter sorting machines and upgraded Optical Character
Reading technology to sort more mail automatically.
Growing in new areas: this has seen us exploit our existing assets e.g. offering fleet maintenance services to third parties and make targeted
acquisitions to explore opportunities for expansion in growing sectors of the market and/or to further develop organisational capability in
digital/e‑commerce space. Acquisitions include Intersoft, NetDespatch and a stake in Market Engine.
This commercial activity is enabled by:
A strategic focus on costs: we have scoped over 70 projects to target to avoid over £500 million of additional annualised costs by 2017‑18 in UKPIL.
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| Directors’ remuneration report
Investing in technology to support our transformation: we have commenced the roll out of new sorting machines for small parcels and
76,000 PDAs across our operation in addition to 3,000 finger scanners. These investments will help to transform management and customer
information e.g. with better tracking.
An engaged and motivated workforce: continued to promote culture change through many initiatives including joint training for over
6,000 managers and union representatives in our Together for Growth programme promoting better dialogue and collaborative working. Through
this and other initiatives, only 325 days were lost due to unballoted strikes in 2015‑16, a reduction of 37 per cent compared to the previous year.
Personal objectives (20% of the bonus): both the CEO’s and CFO’s personal objectives are linked to their specific roles in the implementation
of the strategy. For the CEO:
• Seeking ways to mitigate increasingly competitive market place (see above for evidence);
• Develop and implement workforce strategy including continue to deliver initiatives which support cultural change, enhancing managerial
capability through a more effective talent pipeline and promoting diversity;
• Seeking new revenue sources: focusing on winning new customers in existing markets and looking to grow new revenue opportunities in new
adjacent market; and
• Channel strategy: including expanding customer products and services including expanding our Local Collect network – the largest UK
network of click and collect locations and working with Post Office Limited, to improve our customers' experience.
For the CFO:
•
Increasing efficiency and a wholesale review of all costs (see above for evidence);
• Driving transformation initiatives including parcel automation (see above for evidence);
• Channel strategy in partnership with the CEO; and
• Develop new revenue sources in partnership with the CEO.
Performance against these personal objectives has been assessed by the Committee and the following level of satisfaction determined:
Personal
objectives
Max % of salary
Actual % of salary
Max % of salary
Actual % of salary
CEO
20%
18%
CFO
20%
17%
When added to the outcome of the Corporate Balanced Scorecard, the total bonus value, and the percentage of salary, were as follows:
Moya Greene: £448,379, 81.9 per cent of salary
Matthew Lester: £367,116, 80.9 per cent of salary
What was the outturn of the 2013 LTIP?
The 2013 LTIP was granted as a cash award as it was made just prior to the IPO. Following the IPO, the awards were converted into shares at a
conversion rate of £5.29.
The award itself was based on achievement against two performance conditions to be achieved by 27 March 2016. The tables below show the
performance conditions and the vesting of this plan:
Performance conditions:
Performance
conditions
Operating
profit before
transformation
costs
Definition
Operating profit of the Group before interest and
taxation and before exceptional items as reported
in the Annual Report and Accounts of the
Company, adjusted for such other items or events
as the Committee considers appropriate
Target
measurement
period
Target
Vesting
(% of award straight line
sliding scale)
Financial year 2015‑16
£573m – £654m
0 – 80
£654m
80
£654m – £818m
80 – 100
£818m
100
£818m – £982m
100 – 140
ROTA
Return (Adjusted Operating Profit1) on total net
operating assets of the Group as reported in the
Annual Report and Accounts of the Company
expressed as a percentage as determined by
the Committee
£982m
Financial year 2015‑16²
<17.55%
140
0
17.55% – 21.06%
Restriction on vesting to 50%
>21.06%
No restriction on vesting
1 The operating profit for ROTA purposes is adjusted for the interest cost charges embedded in the Group’s operating leases
2 The average of 13 periods, being with the opening balance sheet plus 12 monthly periods
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| Annual Report and Financial Statements 2015-16
Actual achievement:
Measure
Threshold
Target
Outcome
2013-14 LTIP vesting
(as % of Target)
Moya Greene
Matthew Lester
Resulting Share Awards
Operating
profit before
transformation costs
£573m
£818m
£680m*
ROTA
17.55%
21.06%
22.17%
83.1%
60,509
52,003
*Operating profit before transformation costs, adjusted to reflect the pension service rate and foreign exchange rate assumed in the 2013 business plan
The resulting share awards also include the dividends that were paid during the performance period, since IPO, and have been reinvested.
What previous LTIP awards remain outstanding at the year end?
The grant made for the 2014 LTIP remains outstanding. The performance conditions are:
Measure
EPS
Operating profit margin before
transformation costs*
TSR versus FTSE100
(excluding mining & financial companies)
Threshold
Maximum
Weighting
Performance
Vesting
(% of award)
50%
35%
15%
9% CAGR
–
Median
12.5%
8.75%
7.5%
Performance
21% CAGR
–
Vesting
(% of award)
50%
35%
Top Quartile
15%
*The precise figures are deemed to be commercially sensitive but will be disclosed on vesting of the award
The grant made for the 2015 LTIP remains outstanding. The performance conditions are:
Threshold
Maximum
Measure
EPS
Operating profit margin before
transformation costs*
TSR versus FTSE100
(excluding mining & financial companies)
50%
35%
15%
Weighting
Performance
Vesting
(% of award)
40.8 pence
achieved in
respect of 2017‑18
financial year
12.5%
–
8.75%
–
Performance
44.7 pence
achieved in
respect of 2017‑18
financial year
Vesting
(% of award)
50%
35%
Median
7.5%
Top Quartile
15%
*The precise figures are deemed to be commercially sensitive but will be disclosed on vesting of the award
The amount of the awards outstanding, for each of the Executive Directors, is shown in the following table, as at 27 March 2016:
Measure
Moya Greene
Matthew Lester
Year
2014
2015
2014
2015
Type
LTIP shares
LTIP shares
LTIP shares
LTIP shares
Maximum
value of
award
at grant
(% salary)
Maximum
value of
award
at grant
(£’000)
% vesting at
threshold
performance
(% of salary)
98%
98%
98%
98%
488
537
445
445
28%
28%
28%
28%
Final year of
performance
period
Number of
shares
2016‑17
2017‑18
2016‑17
2017‑18
108,357
105,057
98,797
87,080
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| Directors’ remuneration report
Following these LTIP awards, what are the current shareholding levels of the Board?
The table below sets out details of the shareholdings of the Executive and Non‑Executive Directors at 27 March 2016. There has been no change
in the Directors’ interests in the ordinary share capital of the Company between 27 March 2016 and 27 May 2016, except as noted in (2) below.
Shareholding
guideline
Number of
shares owned
outright on
27/03/16
Number of
shares owned
outright on
29/03/15
Value of
shares owned
outright on
27/03/161
Number
of options
granted under
SAYE plan
Chairman
Donald Brydon3
Peter Long
Executive Directors
Moya Greene
Matthew Lester
Non‑Executive Directors
John Allan4
Nick Horler
Cath Keers
Paul Murray
Orna Ni‑Chionna
Les Owen
–
–
100%
100%
–
–
–
–
–
–
15,530
50,000
3,862
3,862
3,257
3,313
3,030
15,617
3,313
3,030
15,530
–
3,759
3,759
3,257
3,173
3,030
15,477
3,173
3,030
–
–
£18,333
£18,333
–
–
–
–
–
–
–
–
590
590
–
–
–
–
–
–
1 Value based on closing share price on 27/03/16
2 Shares include those which have subsequently vested following the end of the performance period
3 Shareholding as at 31 August 2015
4 Shareholding as at 30 April 2015
Data is reported prior to the sale of shares required to cover tax obligations.
Conditional
share awards
subject to
performance
conditions
(LTIP 2013,
2014, 2015)2
–
–
279,294
242,497
–
–
–
–
–
–
The impact of LTIPs previously vesting in cash rather than shares means that it will take some time for the Executive Directors to achieve the
minimum required level of shareholding guideline.
Were any payments made for loss of office?
Donald Brydon resigned from his position as Non‑Executive Director of the Board on 31 August 2015 and John Allan resigned from his position
as a Non‑Executive Director of the Board on 30 April 2015. No payments were made in respect of loss of office.
Were any payments made to past Directors in the year?
Mark Higson left the Company on 24 July 2014; for the LTIPs that he participated in he was granted ‘good leaver’ status. The value of the 2013
award that he remained eligible for is based on the prior table outlining the vesting, and using a pro‑rated calculation of 44 per cent, being the
time served during the performance period.
His total vested award is 23,133 shares, including reinvested dividends. Using the closing share price on the day of vesting, this gives a value
of £115,457.
Did the Executive Directors receive fees from external appointments?
The Executive Directors are entitled to receive fees from external appointments. Moya Greene was a Director at Great‑West Lifeco Inc. and
received fees of £48,000 (sterling equivalent) for the last reported financial year. Moya Greene stepped down from her position on the Board
of Great‑West Lifeco in January 2016. Matthew Lester is a Non‑Executive Director at Man Group plc and received fees of £95,000 for the last
reported financial year.
How does the change in the Chief Executive's pay compare to that for Royal Mail employees?
The table overleaf shows the percentage change in the Chief Executive's salary, benefits and annual bonus between 2014‑15 and 2015‑16,
compared with the average for all employees across the Group.
78
| Annual Report and Financial Statements 2015-16
Salary1
Benefits2
Annual bonus
Chief Executive Officer
Moya Greene
Average Of All Employees
2015-16
2014-15
% Change
2015-16
2014-15
% Change
£547,800
£547,800
£31,000
£29,000
£448,379
£432,762
0.0%
6.9%
3.6%
£28,988
£28,690
£49
£920
£48
£902
1.0%
0.9%
2.0%
1 Full time equivalent salary including overtime and shift allowances
2 All taxable benefits
What has the pay for the CEO been over the last seven years?
The total remuneration figure for the Chief Executive over the last seven years is shown in the table below. The annual bonus pay‑out and LTIP
vesting level as a percentage of the maximum opportunity is also shown.
2009-10
2010-11
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
Chief Executive Officer
Adam Crozier Adam Crozier Moya Greene Moya Greene Moya Greene Moya Greene Moya Greene Moya Greene
Total Remuneration (£'000)
858
2,428
Annual bonus award as %
maximum
LTIP award as % maximum
–
–
–
100%
778
41%
–
1,107
74%
1,962
80%
–
100%
1,360
77%
100%
1,522
1,529
85%
69%
82%
59%
How does TSR compare to that
of other similar companies?
TSR is the measure of the returns that a
company has generated for its shareholders,
reflecting both movement in the share price
and dividends, which are assumed to be
reinvested, over a period of time. The following
graph shows the TSR of the Company, since
the date of the first day of trading, relative to
the FTSE 100 Index. The FTSE 100 Index has
been chosen for comparison as the Company
has been a constituent of the Index for the
majority of the period shown, and it provides a
benchmark of the performance of other large
UK listed companies.
)
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
180
160
140
120
100
80
60
40
20
0
171
104
140
112
157
104
11 October 2015
30 March 2014
29 March 2015
27 March 2016
Royal Mail
FTSE 100
TSR over the Financial Year
2013-14*
2014-15
2015-16
Royal Mail plc
FTSE 100
71%
4%
‑18%
7%
12%
‑7%
* The chart and table show performance since the first day of conditional trading following the IPO (11 October 2013); in accordance with the Code, they will show an increasing
timeframe in the coming years
Annual Report and Financial Statements 2015-16
| 79
Strategic report | Governance | Financial statements | Other information
Royal Mail plc
| Directors’ remuneration report
How much does Royal Mail spend
on pay?
The following chart shows the Company's
actual spend on pay (for all employees) relative
to dividends, revenue and operating profit.
Revenue has been included because this measure
represents the amount of money the Company
received during the year and provides a clear
illustration of the ratio of people costs to income.
Does the Remuneration
Committee seek advice from
internal and external advisers?
The members of the Committee are Orna
Ni‑Chionna, Peter Long, Paul Murray and
Les Owen.
10,000
9,000
8,000
7,000
6,000
m
£
5,000
4,000
3,000
2,000
1,000
0
2015-16
2014-15
Revenue
2014-15
2015-16
Adjusted People Costs
2015-16
2014-15
Adjusted Operating Profit
2014-15
2015-16
Declared Dividends
The Committee takes information and advice
from inside and outside the Company. Internal
support was provided by Jon Millidge, the Group
HR Director (supported by other members of the HR department as appropriate) and Kulbinder Dosanjh, the Company Secretary. No individual
was present when matters relating to his or her own remuneration were discussed.
Note: the data used for Revenue and Adjusted Operating Profit in the chart is not adjusted for foreign exchange
movement, which is included in the outturn for the Scorecard
The Committee seeks advice from independent external advisers as appropriate. The appointed advisers, PwC, were selected through a
competitive tendering process, led by the Chair of the Remuneration Committee, and appointed in October 2014. PwC provided information to
the Committee regarding external market trends and advice on executive remuneration design. The total fees paid for advice to the Committee
were £201,075.
PwC has provided tax, technology, finance, operations, regulatory and strategic consulting services to the Group in the financial year.
PwC are signatories to the Remuneration Consultants Code of Conduct and report directly to the Chair of the Committee. The Chair of the
Committee meets regularly with its advisers without Management present. The Committee is satisfied that the advice it receives is objective
and independent.
2015 Voting By Shareholders
The table below shows the advisory vote on the 2014‑15 Remuneration Report at the AGM on 23 July 2015.
Number of votes cast
For
525,689,690
499,637,018
95.04%
Approved by the Board on 18 May 2016 and signed by
Orna Ni-Chionna
Chair, Remuneration Committee
Against
26,052,672
4.96%
Withheld
152,184,245
80
| Annual Report and Financial Statements 2015-16
Directors’ report
The Directors present their report together with audited financial
statements for the year ended 27 March 2016.
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. This information can be found in the
following sections of the Annual Report and
Financial Statements and are incorporated
by reference.
The information required to be disclosed in
the Annual Report under Listing Rule 9.8.4R
is marked with an asterisk below.
Index
Business model
Strategy for delivering objectives
Results
Financial assets and liabilities
Principal risks
Corporate responsibility
Greenhouse gas emissions
Disabled employees
Our people
Going concern
Viability Statement
Page
14
16
4
91
32
37
40
39
37
95
35
Long‑Term Incentive Plans*
Statement of the amount of
interest capitalised*
Dividend waiver*
115
111 and
112
81
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. This information can
be found in the Statement of corporate
governance on pages 49‑80 and is
incorporated into this Directors’ Report
by reference.
Dividends
Final dividend
The Board recommends a final dividend
of 15.1 pence per ordinary share, giving a
total dividend for the year of 22.1 pence per
ordinary share. The final dividend will be
payable on 29 July 2016 to shareholders
whose names appear on the register of
members on 1 July 2016.
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.
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 16‑17 and Principal
risks on pages 32‑35 of the Strategic report.
Share capital
As at 27 March 2016, the Company’s issued
share capital comprised 1,000,000,000
ordinary shares of one penny each as set out
in note 23 to the accounts on page 132.
A block listing of 5,000,000 shares was
undertaken in November 2014, to date no
new shares have been issued.
Rights and obligations attaching to shares
Voting
Subject to the provisions of the Articles and
to any special rights or restrictions as to
voting attached to any class of shares in the
Company (of which there is 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 holder 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
Annual Report and Financial Statements 2015-16
| 81
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Directors’ report
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 AGM to be held on
21 July 2016 will be set out in the Notice of
Annual General Meeting.
Special rights
There are no persons holding securities that
carry special rights with regard to the control
of the Group.
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 a resolution passed by shareholders on
23 July 2015, at the AGM, the Directors were
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 in the Company:
a.
b.
up to a nominal amount of
£3,333,333; and
comprising equity securities up to a
nominal amount of £6,666,666 (such
amount to be reduced by any allotments
made under paragraph (a) above) in
connection with an offer by way of a
rights issue;
The authorities conferred on the Directors to
allot securities under paragraph (a) and (b)
will expire on the date of the 2016 AGM or
on 31 July 2016, whichever is sooner, (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.
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 shareholders on
23 July 2015, at the AGM, the Company 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 27 March 2016.
The Directors require express authorisation
from shareholders to purchase our own
shares. Accordingly, at the 2016 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 Company has no plans to exercise
this authority.
Employee Benefit Trust
As at 27 March 2016 a total of 27,042
(2014‑15 40,935) shares were held by the
EBT on behalf of the Company.
Substantial shareholdings
As at 27 March 2016, the Company had been
notified, in accordance with the Disclosure
and Transparency Rules, of the following
interests amounting to three per cent or
more of the voting rights in the issued
ordinary share capital of the Company:
Shareholder
Number of
shares
% of
voting
rights
BlackRock, Inc
55,076,360
5.50%
As at 18 May 2016, the Company had been
notified, in accordance with the Disclosure
and Transparency Rules, of the following
interests amounting to three per cent or
more of the voting rights in the issued
ordinary share capital of the Company:
Shareholder
Number of
shares
% of
voting
rights
BlackRock, Inc
55,076,360
5.50%
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.
These types of indemnity are qualifying
third‑party indemnities as defined by section
243 of the Company’s Act 2006. No amount
was paid under this provision during the year.
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.
Following privatisation, Directors may now
be appointed by the Company by ordinary
resolution or by the Board.
In accordance with the Code, all
Directors of the Company are subject to
annual re‑election.
82
| Annual Report and Financial Statements 2015-16
A Director appointed by the Board 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 43‑45. 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 60–80.
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 Articles, the Companies
Act 2006 and any ordinary resolution of
the Company.
Directors’ annual bonus and
Long Term Incentive Plan awards
upon a change in the control
of the Company
Upon a change of control of the Company,
share awards under the annual bonus and
vesting under the 2014 LTIP arrangements
could pay out on a pro‑rated basis if the
performance conditions have been met.
The performance‑testing period would
automatically end on the date of the
change in control. Under the 2011 LTIP
arrangements, 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
Remuneration Committee decides otherwise.
Events after the reporting period
On 31 March 2016, Royal Mail Group Limited
(RMG), the main operating subsidiary of Royal
Mail plc, acquired the 49 per cent of shares
in Romec that it did not already own, from
ENGIE (formerly Cofely Workplace Limited),
making RMG the sole shareholder of Romec.
The financial terms of the acquisition are not
considered by Management to be material in
the context of the Group as a whole.
Please see Note 27 on page 135 for further
detail about the payment of the fine levied by
the French Competition Authority (Autorité de
la Concurrence).
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 21 to the
accounts on page 120. See the financial risks
and related hedging contained on page 29 of
the Financial Review in the Strategic Report.
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 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 Syndicated Loan Facility with various
financial institutions provides the Group
with a revolving credit facility for general
corporate and working capital purposes. 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.
The €500 million bond issued by the Company
in July 2014 contains provisions such that, on a
change of control that is combined with a credit
rating downgrade in certain circumstances,
the noteholders may require the Company to
redeem or, at the Company’s option, purchase
the notes for their principal amount, together
with interest accrued to (but excluding) the date
of redemption or repurchase.
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.
New products and services
In the ordinary course of business the Group
develops new products and services in each
of its business units.
Environmental social and
governance risks
The Strategic Report, together with
greenhouse gas (GHG) emissions which
are located on page 40, set out key
environmental, social and governance (ESG)
risks faced by the business.
The Board identifies and assesses
significant risks, including those relating
to ESG matters, through the maintenance
and review of the Group Risk Profile. This
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.
The Board annually reviews the Company’s
Corporate Responsibility report, which covers
in detail the Group’s non‑financial (ESG)
performance. The report is prepared in
alignment with the reporting framework of
the Global Reporting Initiative Index 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. See also
pages 37–41 for a summary of key corporate
responsibility aspects.
Annual Report and Financial Statements 2015-16
| 83
Strategic report | Governance | Financial statements | Other information Royal Mail plc
| Directors’ report
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 25‑31. 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.
Viability Statement
The Viability Statement can be viewed on
page 35 of the Strategic Report.
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.
The Directors confirm full compliance with
the Competition and Markets Authority’s
Statutory Audit Services Order. A full
competitive audit tender was undertaken
in 2014, which resulted in KPMG LLP being
appointed in place of Ernst & Young LLP.
Further information about the audit transition
can be found on page 52 of the Audit and Risk
Committee Report.
This confirmation is given and should be
interpreted in accordance with the provisions
of section 418 of the Companies Act 2006.
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, 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.
By Order of the Board
Kulbinder Dosanjh
Company Secretary
18 May 2016
Royal Mail plc
100 Victoria Embankment
London
EC4Y OHQ
Company number 08680755
Statement of Directors’
responsibilities in respect of the
Annual Report and Financial
Statements
The Directors are responsible for preparing
the Annual Report and the Group and parent
Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to
prepare Group and parent Company financial
statements for each financial year. Under that
law they are required to prepare the Group
financial statements in accordance with
IFRSs as adopted by the EU and applicable
law and have elected to prepare the parent
Company financial statements in accordance
with UK Accounting Standards, including FRS
101 ‘Reduced Disclosure Framework’.
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 Group and
parent Company and of their profit or loss for
that period. In preparing each of the Group
and parent Company financial statements,
the Directors are required to:
• select suitable accounting policies and
then apply them consistently;
• make judgements and estimates that are
reasonable and prudent;
•
for the Group financial statements, state
whether they have been prepared in
accordance with IFRS as adopted by the EU;
•
for the parent Company financial
statements, state whether applicable UK
Accounting Standards have been followed,
subject to any material departures
disclosed and explained in the parent
Company financial statements; and
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the Group
and the parent Company will continue
in business.
The Directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
Company’s transactions and disclose
with reasonable accuracy at any time the
financial position of the parent Company
and enable them to ensure that its financial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the
Directors are also responsible for preparing
a Strategic Report, Directors’ Report,
Directors’ remuneration report and Corporate
Governance Statement that complies with
that law and those regulations.
The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination
of financial statements may differ from
legislation in other jurisdictions.
Each of the Directors, whose names and
function are set out on pages 43‑45 confirm
that, to the best of their knowledge:
•
•
the financial statements, which have been
prepared in accordance with the applicable
set of accounting standards, give a true
and fair view of the assets, liabilities,
financial position and profit or loss of the
Company and the undertakings included in
the consolidation taken as a whole; and
the Strategic report includes a fair review
of the development and performance
of the business and the position of the
Company and the undertakings included
in the consolidation taken as a whole,
together with a description of the principal
risks and uncertainties that they face.
84
| Annual Report and Financial Statements 2015-16
Financial statements
Independent Auditor’s Report to the members of Royal Mail plc
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated statement of cash flows
Core notes to the financial statements
1. Basis of preparation
2. Segment information
3. Operating costs
4. People information
5. Specific items
6. Net finance costs
7. Taxation
8. Earnings per share
9. Dividends
10. Retirement benefit plans
Other notes to the financial statements
11. Property, plant and equipment
12. Goodwill
13. Intangible assets
14. Investments in associates and joint venture
15. Share-based payments
16. Assets and liabilities held for sale
17. Current trade and other receivables
18. Cash and cash equivalents
19. Current trade and other payables
20. Loans and borrowings
21. Financial assets and liabilities and risk management
22. Provisions
23. Share capital and reserves
24. Commitments
25. Contingent liabilities
26. Related party information
27. Events after the reporting year
28. Related undertakings of Royal Mail plc
Significant accounting policies
Royal Mail plc parent Company financial statements
86
89
90
91
92
93
94
96
98
99
100
100
101
104
104
105
110
111
112
113
114
116
117
118
118
119
120
131
132
132
133
134
135
136
138
148
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Strategic report | Governance | Financial statements | Other information
Royal Mail plc
|
Independent Auditor’s Report to the
members of Royal Mail plc
Opinions and conclusions arising from our audit
1 Our opinion on the financial statements is unmodified
We have audited the financial statements of Royal Mail plc for the 52 weeks ended 27 March 2016 set out on pages 89-150. In our opinion:
•
the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 27 March 2016
and of the Group’s profit for the 52 weeks then ended;
•
•
•
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted
by the European Union;
the parent Company financial statements have been properly prepared in accordance with UK Accounting Standards, including FRS 101
Reduced Disclosure Framework; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
2 Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit
in decreasing order of significance were as follows:
The determination of deferred revenue associated with advance customer payments arising from stamps and meter credits sold
£252 million (2014-15: £259 million)
Refer to page 53 (Audit and Risk Committee report), page 138 (accounting policy) and page 118 (financial disclosures).
Risk
Advance payments are made by households, retailers and businesses who purchase stamps and meter credits in advance of actual usage.
The Group estimates the amounts that have been sold but not used at year end and defers revenue to reflect that the service will need to be
provided by the Group during future accounting periods for pre-purchased stamps and meter credits.
As no unique identification of the stamps and meter credits unused is possible, the calculation and methodology of the advance customer
payments balance is inherently subjective by nature and is based on inputs including third party surveys, Group sales data and internal
survey data on meter usage. The methodology adjusts for stamp holdings which are considered to be abnormal.
Our response
Our procedures included:
•
•
•
•
Assessing the methodology and assumptions used to determine the number of stamps and meter credits held at the balance sheet date
and its consistency of application year on year. We used our own statistical specialists and held discussions with the independent third
party specialist to assist us in evaluating the methodologies used by the Group.
Evaluating the methodology and results of the external surveys (including consideration of survey size, household adjustment and caps
in place to address the impact of abnormal holdings) using our own specialists to assist us in this evaluation.
Assessing the competence, independence and integrity of the Group’s third party survey specialist which provides the survey data.
Independently testing the revenue data in the calculation.
86
| Annual Report and Financial Statements 2015-16
Independent Auditor’s Report to the
members of Royal Mail plc (continued)
The carrying valuation of pension scheme surplus (£3,430m asset) (2014-15: £3,367m asset)
Refer to page 54 (Audit and Risk Committee report), page 145 (accounting policy) and page 105 (financial disclosures).
Risk
Significant estimates are made in valuing the Group’s post-retirement defined benefit plan’s obligations, including in particular the discount
rate, the inflation assumptions and the mortality assumptions used to calculate the retirement benefit obligation. Small changes in the
assumptions used in the valuation could have a significant effect on the financial position of the Group.
Our response
Our procedures included:
•
Challenging the key assumptions applied being the discount rate, inflation rate, mortality and salary growth with the support of our own
actuarial specialists. This included a comparison of these key assumptions against externally derived data.
•
•
Assessing the competence, independence and integrity of the Group’s actuarial expert.
Considering the adequacy of the Group’s disclosures in respect of the sensitivity of the surplus to these assumptions.
The recognition, measurement and disclosure of the Group’s provisions and contingent liabilities associated with the potential
industrial diseases and the Ofcom investigation under its competition authority powers
Refer to page 53 and 54 (Audit and Risk Committee report), page 139 (accounting policy) and page 131 and 133 (financial disclosures).
Risk
A number of significant judgments are made by the Group in the accounting for the industrial diseases provision and in assessing whether
any contingent liability or provision arises from the ongoing Ofcom regulatory investigation. The assessment of the likelihood and quantum of
any liability in respect of legal and regulatory matters can be judgmental due to the uncertainty inherent in their nature.
Response
Our procedures included:
•
Challenging the estimates and ranges underlying the Group’s independent adviser’s reports on the industrial disease provision by
assessing the methodology used to calculate the provision and independently assessing the inputs into the report including the discount
rate and the historical incidence of claims. We used our own valuation specialists to assist us in evaluating the assumptions and
methodologies used by the Group.
Assessing the competence, independence and integrity of the Group’s third party independent adviser.
Examining the latest correspondence and other evidence used by the Group in assessing whether a contingent liability or provision
arises in relation to the ongoing Ofcom investigation.
Inspecting correspondence and holding discussions with the Group’s legal advisers on all significant legal cases.
Considering the adequacy of the Group’s disclosures in respect of these claims
•
•
•
•
3 Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £18 million. This was determined with reference to a benchmark of
five per cent of Group profit before tax adjusted to add back the IFRS 2 charge for employee free shares issues and to deduct the profit on
disposal of DPD assets. We consider adjusted profit to be one of the principal considerations for members of the company in assessing the
financial performance of the Group. The specific items not included in the benchmark were all subject to audit procedures.
We agreed with the Audit and Risk Committee to report to it all corrected and uncorrected misstatements we identified through our audit
with a value in excess of £0.9 million, in addition to other audit misstatements below that threshold that we consider warranted reporting on
qualitative grounds.
Audits for Group reporting purposes were performed at the key reporting components being, UKPIL (the core UK and international parcels
and letter delivery business) and GLS (the Group’s European parcels business). The Group engagement team performed the audit of UKPIL
and instructed component auditors to perform the audit of GLS. These Group procedures covered 99.9 per cent of total Group revenue;
87 per cent of Group profit before taxation; and 99.5 per cent of total Group assets. For the remaining components, we performed analysis
at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these.
The audits undertaken for Group reporting purposes at the key reporting components of the Group were all performed to materiality levels
set by, or agreed with, the Group audit team.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the
information to be reported back. The Group team visited the GLS component during the planning, execution and finalisation phases of the GLS audit.
Annual Report and Financial Statements 2015-16
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Royal Mail plc
|
Independent Auditor’s Report to the
members of Royal Mail plc (continued)
The Group team also held regular telephone conference meetings with this component team. At these visits and meetings, the findings reported to
the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
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 reporting year for which the financial statements are
prepared is consistent with the financial statements.
5 We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
•
the Directors’ statement of viability on page 35, concerning the principal risks, their management, and, based on that, the Directors’ assessment
and expectations of the Group’s continuing in operation over the three years to 2019; or
•
the disclosures in Note 1 of the financial statements concerning the use of the going concern basis of accounting.
6 We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other
information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material
misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
•
we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that they
consider 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 Group’s position and performance, business model and strategy; or
•
the Audit and Risk Committee report does not appropriately address matters communicated by us to the Audit and Risk Committee.
Under the Companies Act 2006 we are required 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.
Under the Listing Rules we are required to review:
•
the Directors’ statements, set out on page 84, in relation to going concern and longer-term viability; and
•
the part of the Corporate Governance Statement on page 42 relating to the Company’s compliance with the eleven provisions of the 2014 UK
Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors’ responsibilities statement set out on page 84, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is
provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as
a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at
www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding
of the purpose of this report, the work we have undertaken and the basis of our opinions.
Richard Pinckard (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
18 May 2016
88
| Annual Report and Financial Statements 2015-16
Consolidated income statement
For the 52 weeks ended 27 March 2016 and 52 weeks ended 29 March 2015
52 weeks 2016
52 weeks 2015
Notes
Reported1
£m
Specific
items
£m
Adjusted2
£m
Reported1
£m
Specific
items
£m
Adjusted2
£m
Continuing operations
Revenue
Operating costs3
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:
Employee Free Shares charge
Legacy credit/(costs) and impairment
Operating profit
Profit on disposal of property, plant and equipment (non-operating
specific item)
Earnings before interest and tax
Finance costs
Finance income
2
3/4
5
5
6
6
Net pension interest (non-operating specific item)
5/10(c)
Profit before tax
Tax (charge)/credit
Profit for the year from continuing operations
Discontinued operations
Profit from disposal of discontinued operations (non-operating specific
item)
Tax on profit from disposal of discontinued operations
7
5/16
7
Profit for the year
Profit for the year attributable to:
Equity holders of the parent Company
Non-controlling interests
Earnings per share
Basic – continuing operations
Diluted – continuing operations
Basic – total Group
Diluted – total Group
9,251
(8,766)
(5,456)
(1,736)
(995)
(579)
485
(191)
294
(257)
(257)
-
-
-
(257)
-
(257)
-
9,251
(8,509)
(5,199)
(1,736)
(995)
(579)
742
(191)
551
-
-
(158)
(158)
2
138
2
(413)
551
9,328
(8,717)
(5,359)
(1,764)
(1,019)
(575)
611
(145)
466
(169)
(79)
218
-
9,328
(129)
(129)
-
-
-
(129)
-
(129)
(169)
(79)
(377)
(8,588)
(5,230)
(1,764)
(1,019)
(575)
740
(145)
595
-
-
595
29
29
-
133
133
-
167
(16)
3
113
267
(45)
222
31
(5)
248
241
7
(384)
-
-
113
(271)
73
(198)
551
(16)
3
-
538
(118)
420
351
(30)
4
75
400
(72)
328
(244)
-
-
75
(169)
66
(103)
595
(30)
4
-
569
(138)
431
31
(5)
-
-
-
-
-
-
-
-
(172)
420
328
(103)
431
(172)
-
413
7
325
3
(103)
-
428
3
8
8
8
8
21.5p
21.4p
24.1p
24.0p
(19.8)p
(19.7)p
(17.2)p
(17.1)p
41.3p
41.1p
41.3p
41.1p
32.5p
32.5p
32.5p
32.5p
(10.3)p
(10.3)p
(10.3)p
(10.3)p
42.8p
42.8p
42.8p
42.8p
1 Reported – prepared in accordance with International Financial Reporting Standards (IFRS)
2 Adjusted – a non-IFRS measure, being Reported results excluding specific items
3 Operating costs are stated before transformation costs, Employee Free Shares charge and legacy credit/(costs) and impairment
Annual Report and Financial Statements 2015-16
| 89
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Royal Mail plc
|
Consolidated statement of
comprehensive income
For the 52 weeks ended 27 March 2016 and 52 weeks ended 29 March 2015
Profit for the year
Other comprehensive income/(expense) for the year from continuing operations:
Items that will not be subsequently reclassified to profit or loss:
Amounts relating to pensions accounting
IFRIC 14 adjustment relating to defined benefit surplus
Remeasurements gains of the defined benefit surplus1
Tax on above items1
Items that may be subsequently reclassified to profit or loss:
Foreign exchange translation differences
Exchange differences on translation of foreign operations (GLS)2
Net (loss)/gain on hedge of a net investment (€500 million bond)
Net loss on hedge of a net investment (Euro denominated finance lease payables)
Designated cash flow hedges
Losses on cash flow hedges deferred into equity
Losses on cash flow hedges released from equity to income
Tax on above items
Total other comprehensive income for the year
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
Equity holders of the parent Company
Non-controlling interests
1
Restated for the 52 weeks ended 29 March 2015 for change in accounting policy relating to pensions administration costs (see Note 1)
2 Includes £2 million charge (2014-15 £3 million credit) in relation to net deferred tax liabilities (see Note 7)
Notes
10
10(c)
7
7
Reported
52 weeks
2016
£m
248
Reported
52 weeks
2015
Restated1
£m
328
255
(114)
320
49
8
36
(26)
(2)
5
(34)
42
(3)
268
516
1,228
(2)
1,534
(304)
(47)
(74)
27
-
(21)
(53)
27
5
1,160
1,488
509
7
1,485
3
90
| Annual Report and Financial Statements 2015-16
Consolidated balance sheet
At 27 March 2016, 29 March 2015 and 30 March 2014
Non-current assets
Property, plant and equipment
Leasehold land payment
Goodwill
Intangible assets
Investments in associates and joint venture
Financial assets
Pension escrow investments
Derivatives
Retirement benefit surplus – net of IFRIC 14 adjustment1
Other receivables
Deferred tax assets
Assets held for sale
Current assets
Inventories
Trade and other receivables
Income tax receivable
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 tax payable
Provisions
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings
Obligations under finance leases
Derivatives
Provisions
Other payables
Deferred tax liabilities1
Liabilities associated with assets held for sale
Total liabilities
Net assets
Equity
Share capital
Retained earnings1
Other reserves
Equity attributable to parent Company
Non-controlling interests
Total equity
Reported
at 27
March
2016
£m
Reported
at 29
March
2015
Restated1
£m
Reported
at 30
March
2014
Restated1
£m
Notes
11
12
13
14
21
21
10
7
16
17
21
21
18/21
2,000
2
206
451
9
20
2
3,430
12
9
6,141
39
21
1,020
6
5
-
368
1,420
7,600
1,933
2
182
300
5
20
2
3,367
11
8
5,830
32
20
944
5
5
56
287
1,317
7,179
1,989
3
197
195
4
20
3
1,889
13
9
4,322
3
22
920
6
2
1
366
1,317
5,642
19
(1,700)
(1,668)
(1,652)
21/24
21
22
20/21
21/24
21
22
7
16
23
(84)
(33)
(23)
(151)
(1,991)
(392)
(136)
(8)
(96)
(41)
(469)
(1,142)
-
(3,133)
4,467
10
4,451
(3)
4,458
9
4,467
(93)
(34)
(14)
(149)
(1,958)
(366)
(179)
(14)
(104)
(40)
(512)
(1,215)
(10)
(3,183)
3,996
10
3,993
(16)
3,987
9
3,996
(87)
(12)
(14)
(173)
(1,938)
(600)
(255)
(5)
(95)
(31)
(184)
(1,170)
-
(3,108)
2,534
10
2,465
52
2,527
7
2,534
1 Restated at 29 March 2015 and 30 March 2014 for change in accounting policy relating to pensions administration costs (see Note 1)
The financial statements were approved and authorised for issue by the Board of Directors on 18 May 2016 and were signed on its behalf by:
Moya Greene
Chief Executive Officer
Matthew Lester
Chief Finance Officer
Annual Report and Financial Statements 2015-16
| 91
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Royal Mail plc
|
Consolidated statement of
changes in equity
For the 52 weeks ended 27 March 2016 and 52 weeks ended 29 March 2015
Reported at 30 March 2014
Pensions accounting policy change
Reported at 30 March 2014 restated1
Profit for the year
Other comprehensive income/(expense) for the year1
Total comprehensive income/(expense) for the year1
Transactions with owners of the Company, recognised directly in equity
Release of Post Office Limited separation provision (see Note 22)
Dividend paid to equity holders of the parent Company
Dividend paid to non-controlling interests
Share-based payments (see Note 15)
Employee Free Shares issue2
Save As You Earn (SAYE) scheme
Long-Term Incentive Plan (LTIP)3
Reported at 29 March 2015 restated1
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners of the Company, recognised directly in equity
Release of Post Office Limited separation provision (see Note 22)
Dividend paid to equity holders of the parent Company
Dividend paid to non-controlling interests
Share-based payments (see Note 15)
Employee Free Shares issue2
Save As You Earn (SAYE) scheme
Long-Term Incentive Plan (LTIP)3
Reported at 27 March 2016
Share
capital
£m
10
-
10
–
–
-
Retained
earnings
£m
2,332
133
2,465
325
1,228
1,553
Foreign
currency
translation
reserve
£m
61
-
61
–
(47)
(47)
Hedging
reserve
£m
(9)
-
(9)
–
(21)
(21)
Equity
holders of
the parent
£m
2,394
133
2,527
325
1,160
1,485
Non-
controlling
interests
£m
7
-
7
3
–
3
Total
Equity
£m
2,401
133
2,534
328
1,160
1,488
-
–
–
–
-
–
10
-
-
-
-
-
-
-
-
-
10
7
(200)
-
163
1
4
3,993
241
255
496
5
(213)
-
152
3
15
4,451
-
–
–
–
-
–
14
-
8
8
-
-
-
-
-
-
22
-
–
–
–
-
–
(30)
-
5
5
-
-
-
-
-
-
(25)
7
(200)
-
163
1
4
3,987
241
268
509
5
(213)
-
152
3
15
4,458
-
–
(1)
7
(200)
(1)
–
-
–
9
7
-
7
-
-
(7)
-
-
-
9
163
1
4
3,996
248
268
516
5
(213)
(7)
152
3
15
4,467
1 Restated for change in accounting policy relating to pensions administration costs (see Note 1)
2 Excludes £6 million (2014-15 £6 million) National Insurance, charged to the income statement, included in provisions on the balance sheet
3 Excludes £1 million (2014-15 £1 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 23.
92
| Annual Report and Financial Statements 2015-16
Consolidated statement of cash flows
For the 52 weeks ended 27 March 2016 and 52 weeks ended 29 March 2015
Cash flow from operating activities
Profit before tax
Adjustment for:
Net pension interest
Net finance costs
Profit on disposal of property, plant and equipment
Legacy credit/(costs) and impairment
Employee Free Shares charge
Transformation costs
Operating profit before transformation costs
Adjustment for:
Depreciation and amortisation
Share of post-tax profit from associates
EBITDA before transformation costs
Working capital movements
(Increase)/decrease in inventories
Increase in receivables
Increase in payables
Net decrease/(increase) in derivative assets
Increase/(decrease) in provisions (non-specific items)
Pension charge to cash difference (operating specific item)
Share-based awards (SAYE and LTIP) charge to cash difference
Cash cost of transformation operating expenditure1
Cash cost of operating specific items
Cash inflow from operations
Income tax paid
Net cash inflow from operating activities
Cash flow from investing activities
Dividend received from associate company
Finance income received
Proceeds from disposal of property (excluding London property portfolio), plant and equipment (non-operating
specific item)
London property portfolio (costs)/net proceeds (non-operating specific item)
Proceeds from disposal of discontinued operations (non-operating specific item)
Purchase of property, plant and equipment1
Acquisition of business interests
Purchase of intangible assets (software)1
Payment of deferred consideration in respect of prior years’ acquisitions
Net sale/(purchase) of financial asset investments (current)
Net cash outflow from investing activities
Net cash inflow before financing activities
Cash flow from financing activities
Finance costs paid
Payment of capital element of obligations under finance lease contracts
Cash received on sale and leasebacks
New loans
Repayment of loans and borrowings
Dividends paid to equity holders of the parent Company
Dividend paid to non-controlling interests
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 year
Cash and cash equivalents at the end of the year
1 Items comprise total investment within free cash flow measure (see Financial review)
Reported
52 weeks
2016
£m
Reported
52 weeks
2015
£m
Notes
267
400
(113)
13
(29)
(2)
158
191
485
272
(1)
756
(20)
(1)
(62)
22
1
20
257
13
(233)
(6)
767
(40)
727
1
3
38
(23)
41
(270)
(14)
(191)
(4)
56
(363)
364
(16)
(90)
36
-
-
(213)
(7)
(290)
74
7
287
368
(75)
26
(133)
79
169
145
611
279
(1)
889
12
1
(52)
72
(8)
(1)
129
5
(228)
(8)
799
(37)
762
-
4
39
100
-
(267)
(7)
(153)
(3)
(55)
(342)
420
(22)
(75)
13
393
(600)
(200)
(1)
(492)
(72)
(7)
366
287
11/13
14
14
16
9
18
18
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements
1. Basis of preparation
This note explains how these consolidated financial statements have been prepared, including details of; an accounting policy change
relating to pensions administration costs; non-GAAP performance measures; and the Directors’ going concern assessment.
General information
Royal Mail plc (the Company) is incorporated in the United Kingdom (UK) and the consolidated financial statements are produced in
accordance with the Companies Act 2006 and applicable International Financial Reporting Standards (IFRS) as adopted by the European
Union. The UK is the Company’s country of domicile.
The consolidated financial statements of the Company for the 52 weeks ended 27 March 2016 (2014-15 52 weeks ended 29 March 2015)
comprise the Company and its subsidiaries (together referred to as ‘the Group’) and the Group’s interest in its associate undertakings.
The consolidated financial statements for the 52 weeks ended 27 March 2016 were authorised for issue by the Board on 18 May 2016.
Basis of preparation and accounting
The 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.
Accounting reference date
The financial reporting year ends on the last Sunday in March and, accordingly, these financial statements are prepared for the 52 weeks
ended 27 March 2016 (2014-15 52 weeks ended 29 March 2015).
Presentation of results and accounting policies
The Group’s significant accounting policies, including details of new accounting standards adopted in the reporting year, can be found after
the notes to the consolidated financial statements on page 138. Details of a change in accounting policy impacting the balance sheet, other
comprehensive income and the statement of changes in equity in the current and comparative years are given below.
Prior year adjustment - pensions administration costs
During the reporting year, a decision was taken to change Group policy in relation to pensions administration costs. Previously an allowance
for the administration costs for the relevant reporting period was included as part of the ongoing UK defined benefit pension service costs and
actual costs incurred offset against the return on plans’ assets. An estimate of future administration costs was also included as part of the
defined benefit liability. Under this revised policy, administration costs are now recognised as they are incurred and included only within the
ongoing UK defined benefit pension service costs in the income statement. This has had the impact of reducing the defined benefit liability at
29 March 2015 by £188 million, being the discounted value of future administration costs, and therefore increasing the net surplus by the
same amount as at that date. This policy has been adopted to better reflect the reality of the plan and the intentions of IAS 19 ‘Employee
Benefits’.
In line with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, this change in policy has been applied retrospectively in
the Group financial statements, the impact of which is shown below.
Consolidated balance sheet
Total equity previously reported
Impact of accounting policy change on ‘Retained earnings’
Retirement benefit surplus – net of IFRIC 14 adjustment
Deferred tax liabilities
Total equity restated
At 29 March
2015
£m
3,846
At 30 March
2014
£m
2,401
188
(38)
3,996
166
(33)
2,534
The impact of this restatement on the retirement benefit surplus – net of the IFRIC 14 adjustment - is as follows:
Consolidated balance sheet
Reported surplus in plans (pre IFRIC 14 adjustment)
Pensions administration costs impact on defined benefit liability
Restated surplus in plans (pre IFRIC 14 adjustment) (see Note 10)
IFRIC 14 adjustment
Restated surplus net of IFRIC 14 (see Note 10)
94
| Annual Report and Financial Statements 2015-16
At 29 March
2015
£m
3,194
188
3,382
(15)
3,367
At 30 March
2014
£m
1,736
166
1,902
(13)
1,889
Notes to the consolidated
financial statements (continued)
1. Basis of preparation (continued)
Consolidated statement of comprehensive income
Total comprehensive income for the year previously reported
Impact of accounting policy change on ‘Amounts relating to pensions accounting’
Remeasurements of the defined benefit surplus
Tax on above item
Total comprehensive income for the year restated
52 weeks ended
29 March 2015
£m
1,471
22
(5)
1,488
There is no material impact on the comparative year’s income statement and no impact on the statement of cash flows as a result of this
policy change. This policy change has also had no material impact on the comparative year’s basic or diluted earnings per share.
Reported performance
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and as issued by the International
Accounting Standards Board (IASB) (i.e. on a ‘reported’ basis). The notes to the financial statements have also been prepared on a ‘reported’
basis unless otherwise stated.
Non-GAAP performance measures
In the reporting of financial information, the Group uses certain measures that are not required under IFRS, the Generally Accepted
Accounting Principles (GAAP), under which the Group reports. Management believe that these non-GAAP measures assist with the
understanding of the performance of the business.
These non-GAAP measures (see definitions on page 140) are not a substitute, or superior to, any IFRS measures of performance, but they
have been disclosed as Management consider them to be an important means of comparing performance year-on-year and they include key
measures used within the business for assessing performance.
Going concern
In assessing the going concern status of the Group, the Directors are required to look forward by a minimum of 12 months from the signing
date of these financial statements, to ensure that there is sufficient headroom to enable the Group to pay its creditors as they fall due.
The Directors have reviewed business projections and assessed these against committed and undrawn funding facilities (£1,050 million at 27
March 2016) and other liquid resources available to the Group (cash at bank £185 million and cash equivalent investments £170 million at
27 March 2016). Funding facilities and cash and cash equivalents available to the Group are described in further detail in notes 18 and 21.
The Directors are satisfied that these facilities, coupled with business projections, show that the Group will continue to operate for a minimum
of 12 months from the signing date of these financial statements.
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements (continued)
2. Segment information
The Group’s revenue, costs and earnings before interest and tax are segmented in this note to align with how business performance is
managed and reported to the Board.
The Group’s financial performance is reported internally based on three operating segments, namely UK Parcels, International & Letters
(UKPIL), General Logistics Systems (GLS) and ‘Other’, the latter a combination, on the basis of materiality, of the two 51 per cent-owned
subsidiaries Romec Limited and NDC 2000 Limited and the associate company Quadrant Catering Limited.
These operating segments, which are structured on a geographic business unit basis, report into the Chief Executive’s Committee and the
Royal Mail plc Board – the Chief Operating Decision Maker as defined by IFRS 8 Operating Segments. Each of these units has discrete
revenue, costs, profit, cash flows, assets and people. This 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.
The key measure of segment performance is operating profit before transformation costs (used internally for the Corporate Balanced
Scorecard). From the beginning of the reporting year 2015-16, this measure of performance is disclosed on an ‘adjusted’ basis i.e. excluding
specific items, which is consistent with how financial performance is now measured internally and reported to the Board. The comparative
year has been restated accordingly. A reconciliation of the Group’s ‘adjusted’ to ‘reported’ earnings before interest and tax and profit before
tax by segment is provided below.
The majority of inter-segment revenue relates to the provision of facilities management by Romec Limited to UKPIL. Trading between UKPIL
and GLS is not material.
Transfer prices between the segments are set on the basis of charges reached through commercial negotiation with the respective business
units that form each of the segments.
52 weeks 2016
UK operations
Reported
Other
£m
5
141
146
(77)
(52)
17
-
17
Eliminations2
£m
-
(141)
(141)
-
141
-
-
-
Total
£m
7,671
-
7,671
(5,098)
(2,205)
368
(191)
177
-
-
17
-
17
-
-
-
-
-
-
-
-
(158)
2
21
29
50
(13)
113
150
UKPIL
£m
7,666
-
7,666
(5,021)
(2,294)
351
(191)
160
(158)
2
4
29
33
not reported
at this level
Other
European
operations
GLS
£m
1,580
-
1,580
(358)
(1,105)
117
-
117
-
-
117
-
117
-
-
117
Group
Total
£m
9,251
-
9,251
(5,456)
(3,310)
485
(191)
294
(158)
2
138
29
167
(13)
113
267
Specific
Items1
£m
Adjusted
Total
£m
9,251
-
9,251
(5,199)
(3,310)
742
(191)
551
-
-
-
(257)
-
(257)
-
(257)
(158)
2
(413)
29
(384)
-
113
(271)
-
-
551
-
551
(13)
-
538
Continuing operations
External revenue
Inter-segment revenue
Total segment revenue
People costs
Non-people costs
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items
Employee Free Shares charge
Legacy credit
Operating profit
Profit on disposal of property, plant and equipment
(non-operating specific item)
Earnings before interest and tax
Net finance costs
Net pension interest (non-operating specific item)
Profit before tax
1 These specific items all relate to the UKPIL segment
2 Elimination of inter-segment revenue charged to UKPIL
96
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
2. Segment information (continued)
52 weeks 2015
Continuing operations
External revenue
Inter-segment revenue
Total segment revenue
People costs
Non-people costs
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items
Employee Free Shares charge
Impairment and legacy costs
Operating profit
Profit on disposal of property, plant and equipment
(non-operating specific item)
Earnings before interest and tax
Net finance costs
Net pension interest (non-operating specific item)
Profit before tax
UK operations
Other
European
operations
Group
UKPIL
£m
7,757
-
7,757
(4,918)
(2,353)
486
(145)
341
(169)
(33)
139
133
272
Other
£m
14
152
166
(87)
(69)
10
-
10
-
-
10
-
10
not reported
at this level
Reported
Eliminations2
£m
-
(152)
(152)
-
152
-
-
-
-
-
-
-
-
-
-
-
Total
£m
7,771
-
7,771
(5,005)
(2,270)
496
(145)
351
(169)
(33)
149
133
282
(27)
75
330
GLS
£m
1,557
-
1,557
(354)
(1,088)
115
-
115
-
(46)
69
-
69
1
-
70
Total
£m
9,328
-
9,328
(5,359)
(3,358)
611
(145)
466
(169)
(79)
218
133
351
(26)
75
400
The following amounts are included within operating profit before transformation costs:
52 weeks 2016
Specific
Items3
Adjusted
Total
£m
9,328
-
9,328
(5,230)
(3,358)
740
(145)
595
£m
-
-
-
(129)
-
(129)
-
(129)
(169)
(79)
(377)
133
(244)
-
75
(169)
-
-
595
-
595
(26)
-
569
Depreciation
Amortisation of intangible assets (mainly software)
Share of post-tax profit from associates
52 weeks 2015
Depreciation
Amortisation of intangible assets (mainly software)
Share of post-tax profit from associates
UK operations
UKPIL
£m
(194)
(39)
-
Other
£m
-
-
1
UK operations
Other
£m
(1)
-
1
UKPIL
£m
(211)
(31)
-
Other
European
operations
GLS
£m
(30)
(9)
-
Total
£m
(194)
(39)
1
Other
European
operations
GLS
£m
(30)
(6)
-
Total
£m
(212)
(31)
1
Total
£m
(224)
(48)
1
Total
£m
(242)
(37)
1
3 These specific items all relate to the UKPIL segment, with the exception of £46 million legacy costs (including fine) in the GLS segment relating to the French Competition Authority
investigations
Annual Report and Financial Statements 2015-16
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|
Notes to the consolidated
financial statements (continued)
3. Operating costs
This analysis of operating costs in the income statement includes amounts that require either separate disclosure under IFRS or have
been disclosed because of their nature and/or materiality.
Operating profit before transformation costs is stated after charging the following operating costs:
People costs (see Note 4)
Distribution and conveyance costs
Charges from overseas postal administrations
Fuel costs
Operating lease costs - vehicles
Infrastructure costs
Depreciation and amortisation
Depreciation of property, plant and equipment (see Note 11)
Amortisation of intangible assets (mainly software – see Note 13)
Other operating costs
Post Office Limited charges
Inventory expensed
Operating lease costs - property, plant and equipment
Research and development expenditure during the year amounted to £nil million (2014-15 £nil million).
The following disclosure is relevant in understanding the extent of costs in relation to the regulation of the Group.
Regulatory body costs
Ofcom
Citizens Advice/Consumer Council for Northern Ireland
Total
Disclosure of statutory audit costs is a requirement of the Companies Act 2006.
Auditor’s fees
Audit of Group statutory financial statements
Other fees to Auditor:
Statutory audits for subsidiaries
Regulatory audit
Taxation services
Other non-audit services
Total
52 weeks
2016
£m
(5,456)
52 weeks
2015
£m
(5,359)
(294)
(172)
(11)
(272)
(224)
(48)
(342)
(46)
(134)
(311)
(186)
(11)
(279)
(242)
(37)
(358)
(43)
(136)
52 weeks
2016
£m
(5)
(3)
(8)
52 weeks
2015
£m
(3)
(4)
(7)
52 weeks
2016
£000
(325)
52 weeks
2015
£000
(390)
(1,297)
(68)
(29)
(216)
(1,935)
(1,494)
(143)
(177)
(88)
(2,292)
The 2015-16 fees relate to the services of the Group’s recently appointed auditor KPMG LLP, who in addition to the above amounts were
paid by the respective Trustees, £85,000 for the audit of the Royal Mail Pension Plan and £31,000 for the audit of the Royal Mail Defined
Contribution Plan.
The 2014-15 fees relate to the services of the Group’s previous auditor EY LLP, who were paid additional amounts of £85,000 in 2015-16
in respect of the 2014-15 audit (2014-15 £90,000 in respect of the 2013-14 audit).
98
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
4. People information
People costs account for 62 per cent (2014-15 61 per cent) of total Group operating costs. The analysis below provides details of people
costs and numbers as well as specific disclosures in relation to Directors’ remuneration. Further details on Directors’ remuneration paid
can be found in the Directors’ remuneration report.
People costs
Wages and salaries
UK based
GLS
Pensions (see note 10)
Defined benefit UK
Defined contribution UK
UK defined benefit and defined contribution Pension Salary Exchange (PSE)
GLS
Social security
UK based
GLS
Group total people costs
Defined benefit pension plan rates:
Income statement
Cash flow
Defined contribution pension plan average rate:
Income statement and cash flow1
People numbers
The number of people employed during the reporting year was as follows:
52 weeks
2016
£m
(4,323)
(4,020)
(303)
(768)
(619)
(45)
(99)
(5)
(365)
(315)
(50)
52 weeks
2015
£m
(4,433)
(4,138)
(295)
(552)
(508)
(38)
-
(6)
(374)
(321)
(53)
(5,456)
(5,359)
29.8%
17.1%
23.6%
17.1%
5.7%
5.4%
Full-time equivalents2
Headcount
Year end
Average
Year end
Average
UKPIL
GLS – continuing operations
– discontinued operations3
UK partially owned subsidiaries
Group total
Directors’ remuneration
52 weeks
2016
52 weeks
2015
149,220 152,010
9,311
422
2,446
161,396 164,189
9,683
-
2,493
52 weeks
2015
52 weeks
2015
52 weeks
2016
52 weeks
2016
52 weeks
2016
52 weeks
2015
152,059 154,584 139,408 142,910 140,679 145,205
9,073 13,991 13,754 13,829 13,400
642
3,543
164,043 166,895 156,535 160,518 157,664 162,790
9,471
-
2,513
422
2,816
655
3,199
-
3,156
-
3,136
Directors’ remuneration4
Amounts earned under Long-Term Incentive Plans (LTIP)
Number of Directors accruing benefits under defined benefit plans
Number of Directors accruing benefits under defined contribution plans
52 weeks
2016
£000
(2,830)
(676)
52 weeks
2015
£000
(3,305)
(877)
-
1
-
1
1 Employer contribution rates are one per cent for employees in the entry level category and seven to nine per cent for those in the standard level category, depending on the
employees’ selected contribution rate
2 These people numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the number of standard full-time working hours in the
same period
3 The discontinued operations relate to the GLS Germany subsidiary DPD Systemlogistik GmbH & Co. KG (DPD SL – sold on 31 March 2015) (see Note 16)
4 These amounts include any cash supplements received in lieu of pension. Details of the highest paid Director are included in the Directors’ remuneration report
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements (continued)
5. Specific items
These are both recurring and non-recurring income/expense items which in the Directors’ view should be disclosed separately to provide
greater understanding of the underlying performance of the business. A definition of specific items is provided on page 140.
Operating specific items
Pension charge to cash difference (within People costs)
Employee Free Shares charge
Legacy credit/(costs) and impairment
Potential industrial diseases claims
Historical employment costs
Impairment
French Competition Authority investigation costs (including fine)
Other
Total operating specific items
Non-operating specific items
Profit on disposal of property, plant and equipment
Net pension interest
Profit from disposal of discontinued operations (see Note 16)
Total non-operating specific items
Total specific items before tax
Total tax credit on specific items (see Note 7)
52 weeks
2016
£m
52 weeks
2015
£m
(257)
(158)
2
3
-
-
-
(1)
(129)
(169)
(79)
(19)
15
(24)
(46)
(5)
(413)
(377)
29
113
31
173
(240)
133
75
-
208
(169)
68
66
6. Net finance costs
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.
Unwinding of discount relating to industrial diseases claims provision
Interest payable on financial liabilities
Syndicated bank loan facility
Loans and borrowings
Unused facility fees
Arrangement fees1
€500 million bond – 2.375% Senior Fixed Rate Notes due July 2024
Finance leases
Capitalisation of borrowing costs on specific qualifying assets
Losses realised on interest rate swap contracts2
Other finance costs
Finance costs
Finance income - interest receivable on financial assets
Net finance costs
52 weeks
2016
£m
(2)
(14)
52 weeks
2015
£m
(2)
(28)
-
(2)
(2)
(9)
(5)
4
-
-
(16)
3
(13)
(7)
(2)
(4)
(6)
(7)
1
(2)
(1)
(30)
4
(26)
1 In 2014-15 arrangement fees of £2 million were written off upon repayment of £350 million of the term loans following the bond issue. No such fees were relevant to 2015-16
2 The interest rate swap contracts were closed out early upon repayment of the remaining term loan on 9 March 2015
100
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
7. Taxation
This note provides details about current tax (charges)/credits on profit and deferred tax (charges)/credits relating to the impact of past
events on expected future tax. The note also provides details about the tax impact of specific items.
Tax (charged)/credited in the income statement
Current income tax:
Current UK income tax charge
Foreign tax
Current income tax charge
Amounts over provided in earlier years
Total current income tax charge
Deferred income tax:
Effect of change in tax rates
Relating to origination and reversal of temporary differences
Amounts over provided in previous years
Total deferred income tax charge
Tax charge in the consolidated income statement
Tax on non-GAAP, specific items:
Tax credit relating to specific items
Tax credited/(charged) to other comprehensive income
Deferred tax:
Tax credit/(charge) in relation to actuarial gains on defined benefit pension plans
Tax relief on pension payments
Tax (charge)/credit on revaluation of cash flow hedges
Tax (charge)/credit on foreign currency translation
Total credit/(charge) in the consolidated statement of other comprehensive income
52 weeks
2016
£m
52 weeks
2015
£m
(16)
(35)
(51)
1
(50)
6
(17)
11
-
(50)
(13)
(32)
(45)
6
(39)
2
(36)
1
(33)
(72)
68
66
49
-
(3)
(2)
44
(308)
4
5
3
(296)
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Notes to the consolidated
financial statements (continued)
7. Taxation (continued)
Reconciliation of the total tax charge
A reconciliation of the tax charge in the income statement and the UK rate of corporation tax applied to accounting profit for the 52 weeks
ended 27 March 2016 and 52 weeks ended 29 March 2015 is shown below.
Profit before tax
At UK standard rate of corporation tax of 20% (2014-15 rate 21%)
Effect of higher taxes on overseas earnings
Tax over provided in prior years
Non-deductible expenses
Associates’ profit after tax charge (included in Group pre-tax profit)
Tax effect of property disposals
Net increase in tax charge resulting from non-recognition of deferred tax assets and liabilities
Effect of change in tax rates
Tax charge in the income statement
Tax on specific items
Continuing operations1
Discontinued operations
Tax specific items – adjustments in respect of prior years
Total tax on specific items
52 weeks
2016
£m
298
52 weeks
2015
£m
400
(60)
(10)
12
(6)
1
7
-
6
(50)
(84)
(6)
7
(19)
1
29
(2)
2
(72)
52 weeks
2016
£m
72
(5)
1
68
52 weeks
2015
£m
57
-
9
66
The tax credit on specific items of £68 million (2014-15 £66 million) reflects the tax effect of specific items, including the tax impact of
property transactions and certain tax-only adjustments, such as the impact of changes in tax law and amounts over or under provided in
previous years in respect of specific items.
Current tax
The current tax charge for the Group is mainly in respect of GLS. UK taxable profits in 2015-16 are partially covered by a combination of
brought forward losses and capital allowance claims. Accordingly, the current tax rate for the Group is 17 per cent.
Effective tax rate
The effective tax rate on reported profit is 17 per cent, comprising current tax due on reported profits and deferred tax in relation to
temporary differences. This rate is below the UK statutory rate, principally because of the changes to tax law detailed below, and no tax
charge recognised in relation to property disposals1.
GLS pays tax in a number of territories, with the majority of its profits in the reporting year to 27 March 2016 earned in territories where the
tax rate is above the UK statutory tax rate. Certain subsidiaries, notably GLS France, remain unable to recognise tax credits on losses made
during the reporting year. The effect of this is partially offset by the initial recognition of tax losses in GLS Spain. These factors contribute to
GLS having a higher effective tax rate for the year than the UK statutory rate.
1 No tax charge has been recognised on property disposals included in specific items, as no tax liability would be expected to crystallise on the grounds that, were the assets (into
which the gains have been rolled) to be sold at their residual values, no capital gain would arise
102
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
7. Taxation (continued)
Deferred tax
Deferred tax by balance sheet category
Liabilities
Accelerated capital allowances
Pensions temporary differences2
Employee share schemes
Goodwill qualifying for tax allowances
Deferred tax liabilities2
Assets
Deferred capital allowances
Provisions and other
Losses available for offset against future
taxable income
Hedging derivatives temporary differences
Deferred tax assets
(1)
(667)
(48)
(29)
(745)
127
25
82
7
241
-
53
23
(2)
74
(49)
(6)
(19)
-
(74)
Net deferred tax (liability)/asset2
(504)
-
Deferred tax – balance sheet presentation
Liabilities
GLS group
Net UK position
Deferred tax liabilities
Assets
GLS group
Net UK position
Deferred tax assets
Net deferred tax liability
(Charged)/
credited to
income
statement
£m
(Charged)/
credited to
other
comprehensive
income
£m
At 30 March
2015
£m
At 27 March
2016
£m
At 31 March
2014
Restated2
£m
(Charged)/
credited to
income
statement
£m
(Charged)/
credited to
other
comprehensive
income2
£m
At 29 March
2015
Restated2
£m
-
49
-
(2)3
47
-
-
-
(3)
(3)
44
(1)
(565)
(25)
(33)
(624)
78
19
63
4
164
(1)
(372)
(65)
(28)
(466)
169
30
90
2
291
-
13
17
(4)
26
(42)
(5)
(12)
-
(59)
-
(308)
-
33
(305)
-
-
4
5
9
(1)
(667)
(48)
(29)
(745)
127
25
82
7
241
(460)
(175)
(33)
(296)
(504)
At 27 March
2016
£m
At 29 March
2015
£m
(34)
(435)
(469)
9
-
9
(460)
(31)
(481)
(512)
8
-
8
(504)
The deferred tax position shows a decreased overall liability in the reporting year to 27 March 2016.
This decrease in the liability is primarily as a result of the deferred tax impact of the reduction in UK Corporation Tax rates by 2020.
Decreases in UK pension deferred tax assets are broadly offset by a reduction in capital allowance and loss assets.
The movement in pensions temporary differences credited to Other Comprehensive Income includes a credit of £48 million (2014-15 £nil)
relating to the change in tax law detailed below. Additionally a credit of £59 million (2014-15 £1 million) has been recognised in relation to
the IFRIC 14 adjustment detailed in Note 10.
GLS has deferred tax assets and liabilities in various jurisdictions which cannot be offset against one another. The main element of the
liability relates to goodwill and intangibles in GLS Germany, for which the Group has already taken tax deductions. The initial recognition of
tax losses in GLS Spain has contributed to the increase in deferred tax assets.
At 27 March 2016, the Group had unrecognised deferred tax assets of £68 million (2014-15 £68 million) comprising £62 million (2014-15
£61 million) relating to tax losses of £234 million (2014-15 £227 million), mainly in GLS, that are available for offset against future profits if
generated in the relevant companies, and £6 million (2014-15 £7 million) in relation to £30 million (2014-15 £33 million) of UK capital
losses carried forward. The Group has not recognised these deferred tax assets on the basis that it is not sufficiently certain of its capacity to
utilise them in the future.
The Group also has temporary differences in respect of £211 million (2014-15 £295 million) of capital losses, the tax effect of which is £38
million (2014-15 £59 million) in respect of assets previously qualifying for industrial buildings allowances. Further temporary differences
exist in relation to £217 million (2014-15 £308 million) of gains for which rollover relief has been claimed, the tax effect of which is £40
million (2014-15 £62 million). No tax liability would be expected to crystallise on the basis that, were the assets (into which the gains have
been rolled) to be sold at their residual values, no capital gain would arise.
2 Restated for change in accounting policy relating to pensions administration costs (see Note 1)
3
£2 million charged (2014-15 £3 million credited) to the foreign currency translation reserve
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Notes to the consolidated
financial statements (continued)
7. Taxation (continued)
Changes to UK corporation tax rate
Reductions in the UK corporation tax rate from 20 per cent to 19 per cent (effective from 1 April 2017) and to 18 per cent (effective 1 April
2020) were substantively enacted on 26 October 2015. In future, this will reduce the Group's current tax charge accordingly. In accordance
with accounting standards, the effect of these rate reductions on deferred tax balances has been reflected in these financial statements,
dependent upon when temporary differences are expected to reverse.
In his budget of 16 March 2016, the Chancellor of the Exchequer announced that the UK corporation tax rate will reduce to 17 per cent
(effective 1 April 2020). This will supersede the rate of 18 per cent already enacted. This announced reduction in rate is not expected to
significantly affect the deferred tax assets and liabilities of the Group.
8. Earnings per share
This note explains the calculation of the Group’s earnings per share. The adjusted earnings per share (a non-IFRS measure) is a key
indicator used by Management to assess earnings performance.
Attributable to equity holders of the parent Company
Profit from continuing operations (£million)
Profit for the year (£million)
Weighted average number of shares issued (million)
Basic earnings per share (pence)
Diluted earnings per share (pence)
52 weeks 2016
Reported
Adjusted
52 weeks 2015
Reported
Adjusted
215
241
1,000
24.1
24.0
413
413
1,000
41.3
41.1
325
325
1,000
32.5
32.5
428
428
1,000
42.8
42.8
The diluted earnings per share for the year ended 27 March 2016 is based on a weighted average number of shares of 1,004,792,701
(2014-15 1,001,485,583) to take account of the potential issue of ordinary shares resulting from the Long-Term Incentive Plans (LTIP) for
certain senior management and the Save As You Earn (SAYE) scheme (see Note 15). Shares held in an Employee Benefit Trust for the
settlement of options and awards to current and former employees are treated as treasury shares for accounting purposes. The Company,
however, does not hold any shares in treasury.
9. Dividends
This note provides details on the amount of dividends paid to equity holders of the parent Company during the year. Details are also
provided on the amount of dividends per share which have been paid and proposed.
Dividends on ordinary shares
Final dividends paid
Interim dividends paid
Total dividends paid
52 weeks
2016
Pence per share
52 weeks
2015
Pence per share
14.3
7.0
21.3
13.3
6.7
20.0
52 weeks
2016
£m
143
70
213
52 weeks
2015
£m
133
67
200
In addition to the above dividends paid the Directors are proposing a final dividend for the year ending 27 March 2016 of 15.1 pence per
share amounting to £151 million. This dividend will be paid to shareholders on 29 July 2016 subject to approval at the AGM to be held on 21
July 2016.
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| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
10. Retirement benefit plans
In applying IAS 19, the Group has recognised a pension asset of £3,430 million at 27 March 2016, compared with £3,367 million at 29
March 2015. This note includes the key assumptions used in determining the pension asset and also provides details of the pension
surplus on an actuarial basis.
Summary pension information
Ongoing UK pension service costs
UK defined benefit plan (including administration costs)1
UK defined contribution plan
UK defined benefit and defined contribution Pension Salary Exchange (PSE)2
Total UK ongoing pension service costs
GLS defined contribution type plan costs
Total Group ongoing pension service costs
Cash flows relating to ongoing pension service costs
UK defined benefit plan employer contributions3
Defined contribution plan employer contributions
UK defined benefit and defined contribution plan employer PSE contributions
Total Group cash flows relating to ongoing pension service costs
RMSEPP deficit correction payments
Pension charge to cash difference (operating specific item)
UK pension plans – active membership
UK defined benefit plan
UK defined contribution plan
Total
52 weeks
2016
£m
52 weeks
2015
£m
(619)
(45)
(99)
(763)
(5)
(768)
(352)
(50)
(99)
(501)
(10)
(257)
(508)
(38)
-
(546)
(6)
(552)
(369)
(44)
-
(413)
(10)
(129)
At 27 March
2016
’000
At 29 March
2015
’000
93
42
135
100
39
139
1 These pension service costs are charged to the income statement. They represent the cost, as a percentage of pensionable payroll (2015-16 29.8 per cent; 2014-15 23.6 per cent)
of the increase in the defined benefit obligation due to members earning one more year’s worth of pension benefits. They are calculated in accordance with IAS 19 and are based on
market yields (high quality corporate bonds and inflation) at the beginning of the reporting year. The £111 million increase in costs is mainly as a result of the increased pension
service cost rate. Pensions administration costs for the RMPP of £6 million (2014-15 £6 million) continue to be included within the ongoing UK pension service costs
2 At the beginning of August 2015, PSE was introduced under which eligible employees who are enrolled into PSE opt out of making employee contributions to their pension and the
Group makes additional contributions in return for a reduction in basic pay. As a result, there is a decrease in wages and salaries and a corresponding increase in pension costs of
£99 million (2014-15 £nil) in the reporting year
3 The employer contribution cash flow rate (17.1 per cent in both the current and prior year) 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
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Notes to the consolidated
financial statements (continued)
10. Retirement benefit plans (continued)
UK Defined Contribution plan
Royal Mail Group Limited, the Company’s main operating subsidiary, operates the Royal Mail Defined Contribution Plan, which was launched
in April 2009 and is open to employees who joined the Group from 31 March 2008, following closure of the Royal Mail Pension Plan (RMPP)
to new members.
Ongoing UK defined contribution plan costs have increased from £38 million in 2014-15 to £63 million (including £18 million PSE costs).
This is mainly due to the introduction of PSE, but also as a result of the continued increase in plan membership and an increase in the
average employer’s contribution rate from 5.4 per cent in 2014-15 to 5.7 per cent in 2015-16.
UK Defined Benefit plans
Royal Mail Group Limited had one of the largest defined benefit pension plans 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 Post Office Limited each responsible for their own sections
from 1 April 2012 onwards.
The transfer left the Royal Mail section (RM section) of the RMPP fully funded on an actuarial basis. On this basis, using long-term actuarial
assumptions agreed at that date, it was predicted the Group would have to make no further cash deficit correction payments relating to the
historic liabilities. All further references in this note to the RMPP, relate to its RM section.
Pensions Reform
In June 2013, the Group began a consultation with RMPP members on a proposal to ensure the RMPP 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 Group agreed with the RMPP Trustee to implement a Pensions Reform with effect from 1 April 2014.
The agreed changes due to the Pensions Reform were considered to be a ‘Plan amendment’ which met the IAS 19 definition of a past service
cost, and as such a £1,350 million credit was recognised in the Group income statement (as a specific item) in the year ended 30 March
2014.
Royal Mail Pension Plan (RMPP)
The RMPP is funded by the payment of contributions to separate trustee administered funds. RMPP 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 final salary in respect of service to 31 March 2008, and on career salary blocks for each year of service,
revalued annually, for service from 1 April 2008.
Following the conclusion of the March 2012 actuarial valuation, the regular future service contribution rate for RMPP, expressed as a
percentage of pensionable pay, remained at 17.1 per cent. As the valuation showed the RMPP to be in surplus, no deficit correction
payments are currently being made by the Group. The Group expects to contribute around £343 million to the RMPP in respect of normal
cash service costs in 2016-17.
As part of the March 2012 actuarial valuation, the Group agreed to pay additional contributions of up to £50 million each year from April
2016 onwards if the Trustee considers these necessary to maintain the Plan’s projected funding position in March 2019. Until the Trustee
has carried out its assessment of liabilities at March 2016 and presented the results to the Group, it is not known whether any payment will
become due for 2016-17.
Royal Mail Senior Executives Pension Plan (RMSEPP)
Royal Mail Group Limited also contributes to a smaller defined benefit plan for executives, RMSEPP – which closed in December 2012 to
future accrual, therefore the Group makes no regular future service contributions. As agreed in the February 2013 Funding Agreement with
the Trustee, the Group makes deficit correction payments of £10 million per annum until at least the date on which the March 2018
valuation is completed (no later than 30 September 2018). Deficit correction payments in 2015-16 were £10 million (2014-15 £10 million).
A liability of £2 million (2014-15 £2 million) has been recognised for future payment of pension benefits to a past Director.
106
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
10. Retirement benefit plans (continued)
Accounting and actuarial surplus position (RMPP and RMSEPP)
Fair value of plans’ assets (10(b) below)4
Present value of plans’ liabilities5
Surplus in plans (pre IFRIC 14 adjustment) 5
IFRIC 14 adjustment
Surplus in plans5
Accounting (IAS 19)
Actuarial/cash funding
At 27 March
2016
£m
7,374
(3,815)
3,559
(129)
3,430
At 29 March
20155
£m
6,619
(3,237)
3,382
(15)
3,367
At 31 March
2016
£m
7,442
(5,665)
1,777
n/a
1,777
At 31 March
2015
£m
6,462
(4,669)
1,793
n/a
1,793
There is no element of the present value of the plans’ liabilities above that arises from plans that are wholly unfunded.
As the Group has a legal right to benefit from a surplus, under IAS 19 and IFRIC 14 it is required to recognise the economic benefit it is
assumed it will derive either in the form of a reduction to future contributions or a refund of the surplus.
At the half year, the RMPP surplus was no longer assumed to be fully recoverable as a reduction to future employer contributions. At that
time, the economic benefit resulting from comparing the future service costs to the employer contributions was less than the accounting
surplus.
This remains the case at 27 March 2016 and the amount of surplus no longer assumed to be recoverable as a reduction to future employer
contributions is assumed to be available as a refund as per IFRIC 14 and, as such, is shown net of taxation withheld.
As RMSEPP is closed to future accrual, the surplus is assumed to be available as a refund as per IFRIC 14 and, as such, is shown net of
taxation withheld in both periods.
The Directors do not believe that the current excess of pension plan assets over the liabilities on an accounting basis will result in an excess
of pension assets on an actuarial/cash funding basis. However, the Directors are required to account for the pension plan based on their legal
right to benefit from a surplus, using long-term actuarial assumptions current at the reporting date, as required by IFRS.
The actuarial/cash funding surplus of £1,777 million at 31 March 2016 (31 March 2015 £1,793 million surplus) allows the RMPP 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 Group or individuals to make unaffordable increases to their cash contributions.
The funding liabilities have increased more than the accounting liabilities since they are calculated by reference to gilt yields which have fallen
slightly, whereas corporate bond yields, on which the accounting liabilities are calculated have increased. However, this is mostly offset by the
difference in the market value of asset movements which, because of the different year end dates, have increased more on a funding basis
than on an accounting basis.
The following disclosures relate to the major assumptions, sensitivities, assets and liabilities in the RMPP and RMSEPP.
a) Major long-term assumptions used for accounting (IAS 19) purposes - RMPP and RMSEPP
The major assumptions used to calculate the accounting position of the pension plans are as follows:
Retail Price Index (RPI)
Consumer Price Index (CPI)
Discount rate
– nominal
– real (nominal less RPI)6
Rate of increase in pensionable salaries7
Rate of increase for deferred pensions
Rate of pension increases – RMPP Sections A/B
Rate of pension increases – RMPP Section C7
Rate of pension increases – RMSEPP members transferred from Section A or B of RMPP
Rate of pension increases – RMSEPP all other members7
Life expectancy from age 60 – for a current 40/60 year old male RMPP member
Life expectancy from age 60 – for a current 40/60 year old female RMPP member
At 27 March
2016
3.0%
2.0%
At 29 March
2015
3.1%
2.1%
3.5%
0.5%
RPI–0.1%
CPI
CPI
RPI–0.1%
CPI
RPI–0.1%
29/27 years
32/30 years
3.5%
0.4%
RPI–0.1%
CPI
CPI
RPI–0.1%
CPI
RPI–0.1%
29/27 years
32/30 years
4 Difference between accounting and actuarial/cash funding asset fair values arises from the different year end dates used for the valuation of the assets under both methods
5 Restated at 29 March 2015 for change in accounting policy relating to pensions administration costs (see Note 1)
6 The real discount rate used reflects the long average duration of the RMPP of around 27 years
7 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
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements (continued)
10. Retirement benefit plans (continued)
Mortality
The mortality assumptions for RMPP 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.
Sensitivity analysis for RMPP liabilities
The RMPP liabilities are sensitive to changes in key assumptions. The potential impact of the largest sensitivities on the RMPP liabilities is as follows:
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 remains constant) of 0.1% p.a.
Potential
Increase in
liabilities
£m
110
90
90
20
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 inverse 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 obligation is 27 years (2014-15 30 years).
b) RMPP and RMSEPP assets
Equities
UK
Overseas
Bonds
Fixed interest – UK
– Overseas
Index linked – UK
Pooled investments
Managed funds
Unit Trusts
Property (UK)
Cash and cash equivalents
Other
Derivatives
Total plans’ assets
At 27 March 2016
Quoted
£m
Unquoted
£m
Total
£m
At 29 March 2015
Quoted
£m
Unquoted
£m
20
427
272
793
191
775
4,188
25
210
(3)
27
6,925
138
-
7
2
-
-
-
302
-
-
-
449
158
427
279
795
191
775
4,188
327
210
(3)
27
7,374
22
411
60
525
195
576
4,166
23
175
25
(27)
6,151
165
–
8
–
–
–
–
295
–
–
–
468
Total
£m
187
411
68
525
195
576
4,166
318
175
25
(27)
6,619
There were open equity derivatives within this portfolio with a fair value of £48 million at 27 March 2016 (at 29 March 2015 £nil million). £4
billion (2014-15 £3.7 billion) of HM Government Bonds are primarily included in the Unit Trusts values above. The plans’ assets do not
include property or assets used by the Group, but do include shares of Royal Mail plc with an approximate market value of £27,000 at 27
March 2016 (at 29 March 2015 £17,000).
Risk exposure and investment strategy
The investment strategy of the RMPP Trustee aims to safeguard the assets of the Plan 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 uses derivatives (such as
swaps, forwards and options) 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 largest risks faced by the Plan are movements in interest rates and inflation rates. To reduce the risk of movements in these rates driving
the Plan into a funding deficit, and the Group not being able to maintain its March 2018 commitment, the Trustee has hedged in advance a
significant proportion of the funding liabilities which it is estimated will build up by March 2018. It has done this predominantly through
investment in gilts and derivatives (interest rate and inflation rate swaps) held in Unit Trust pooled investments providing economic exposure to
gilts. The impact of the Plan’s advance hedging of projected funding liabilities is to increase near term volatility in the pension surplus due to the
return on the liability-hedging assets not being matched by an increase in the accrued liabilities. As the accrued liabilities get closer to the
projected liabilities that have been hedged, this volatility will reduce. The increase in the liability-hedging assets is predominantly reflected in the
Unit Trusts values above which have increased from £4,166 million at 29 March 2015 to £4,188 million at 27 March 2016.
108
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
10. Retirement benefit plans (continued)
The notional value covered by the interest rate 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 27 March 2016 is £2.6 billion (29 March 2015 £2.5 billion) and the notional value
covered by the inflation rate swaps at 27 March 2016 is £1.8 billion (29 March 2015 £1.8 billion).
The spread of investments continues to balance security and growth in order to pay the RMPP benefits when they become due.
c) Movement in RMPP and RMSEPP assets, liabilities and net position
Changes in the value of the defined benefit pension liabilities, fair value of the plans’ assets and the net defined benefit surplus are analysed
as follows:
Retirement benefit surplus (pre IFRIC 14 adjustment) at 30 March 2015 and 31 March
20145
Amounts included in the income statement
Ongoing UK defined benefit pension plan and administration costs (included in people costs)5, 8
Pension interest income/(cost)9
Total included in profit before tax
Amounts included in other comprehensive income – remeasurement gains/(losses)
Actuarial gain/(loss) arising from:
Financial assumptions5
Experience adjustment
Return on plans’ assets (excluding interest income) 5, 8
Total remeasurement gains/(losses) of the defined benefit surplus
Other
Employer contributions
Employee contributions
Benefits paid
Curtailment costs
Movement in pension-related accruals
Total other movements
Retirement benefit surplus (pre IFRIC 14 adjustment) at 27 March 2016 and 29 March
20155
Defined benefit
asset
Defined benefit
liability
Net defined benefit
surplus
2016
£m
20155
£m
2016
£m
20155
£m
2016
£m
20155
£m
6,619
3,833
(3,237)
(1,931)
3,382
1,902
(6)
240
234
(6)
183
177
(694)
(127)
(821)
(502)
(108)
(610)
(700)
113
(587)
(508)
75
(433)
-
-
32
32
–
–
2,103
2,103
488
48
(47)
-
-
489
409
129
(33)
–
1
506
102
186
-
288
-
(48)
47
(45)
1
(45)
(574)
5
–
(569)
-
(129)
33
(31)
-
(127)
102
186
32
320
488
-
-
(45)
1
444
(574)
5
2,103
1,534
409
–
–
(31)
1
379
7,374
6,619
(3,815)
(3,237)
3,559
3,382
In addition to the above items which affect the net defined benefit surplus, estimated curtailment costs of £36 million (2014-15 £10 million)
have been provided for in Transformation costs in the income statement, along with the associated redundancy costs.
8 Previously an allowance was made for pensions administration costs in the ongoing UK defined benefit pension service costs (income statement rate) and actual costs incurred
offset against the return on plans’ assets. An estimate of future administration costs was also included as part of the defined benefit liability. These costs are now recognised as
pensions administration costs as they are incurred and are included only within ongoing UK defined benefit pension service costs. Further details of this accounting policy change are
provided in Note 1
9 Pension interest income results from applying the plans’ discount rate at 29 March 2015 to the plans’ assets at that date. Similarly, the pension interest cost results from applying
the plans’ discount rate at 29 March 2015 to the plans’ liabilities at that date
Annual Report and Financial Statements 2015-16
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|
Notes to the consolidated
financial statements (continued)
11. Property, plant and equipment
Below are details of the Group’s property, equipment and vehicle assets, which are recorded at their historic cost (i.e. what the Group paid
for them) less accumulated depreciation, reflecting their usage within the business over their useful life – from two to 50 years.
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Motor
vehicles
£m
Fixtures
and
equipment
£m
Total
£m
4,668
38
-
304
(88)
(38)
4,884
2,735
19
-
224
(83)
(11)
2,884
367
6
-
83
(2)
-
454
279
4
-
37
(2)
-
318
136
88
2,000
1,933
136
-
136
1,671
329
2,000
Cost
At 30 March 2015
Exchange rate movements
Reclassification
Additions
Disposals
Reclassification to non-current assets held for sale
At 27 March 2016
Depreciation
At 30 March 2015
Exchange rate movements
Reclassification
Depreciation (see Note 3)
Disposals
Reclassification to non-current assets held for sale
At 27 March 2016
Net book value:
At 27 March 2016
At 29 March 2015
Net book value comprises:
Owned assets
Finance leased assets
At 27 March 2016
1,614
18
(31)
88
(5)
(38)
1,646
812
6
(1)
42
(5)
(11)
843
803
802
803
-
803
263
1
5
10
-
-
279
170
1
1
7
-
-
179
100
93
89
11
100
719
-
26
30
(2)
-
773
494
-
-
40
(2)
-
532
241
225
236
5
241
1,048
10
-
50
(30)
-
1,078
670
6
-
51
(29)
-
698
380
378
274
106
380
657
3
-
43
(49)
-
654
310
2
-
47
(45)
-
314
340
347
133
207
340
110
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
11. 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
Cost
At 31 March 2014
Exchange rate movements
Reclassification
Additions
Disposals
Reclassification to non-current assets held for sale
At 29 March 2015
Depreciation
At 31 March 2014
Exchange rate movements
Depreciation (see Note 3)
Disposals
Reclassification to non-current assets held for sale
At 29 March 2015
Net book value:
At 29 March 2015
At 30 March 2014
Net book value comprises:
Owned assets
Finance leased assets
At 29 March 2015
1,649
(35)
(19)
89
(14)
(56)
1,614
825
(10)
43
(12)
(34)
812
802
824
802
-
802
265
(2)
3
(1)
(1)
(1)
263
167
(1)
6
(1)
(1)
170
93
98
82
11
93
692
-
15
22
(10)
–
719
463
–
41
(10)
–
494
225
229
220
5
225
1,184
(18)
1
28
(133)
(14)
1,048
762
(12)
62
(133)
(9)
670
378
422
259
119
378
609
(6)
-
94
(38)
(2)
657
296
(4)
53
(34)
(1)
310
347
313
145
202
347
Total
£m
4,778
(72)
-
257
(220)
(75)
4,668
2,789
(36)
242
(213)
(47)
2,735
379
(11)
-
25
(24)
(2)
367
276
(9)
37
(23)
(2)
279
88
103
1,933
1,989
88
-
88
1,596
337
1,933
Depreciation rates are disclosed within ‘Significant accounting policies’. No depreciation is provided on land, which represents £198 million
(2014-15 £202 million) of the total cost of properties.
The net book value of the Group’s property, plant and equipment includes £119 million (2014-15 £127 million) in respect of assets in the
course of construction. The net book value of the Group’s land and buildings includes £431 million (2014-15 £413 million) in respect of
building fit-out.
The £304 million (2014-15 £257 million) additions do not include any borrowing costs capitalised in relation to specific qualifying assets.
12. Goodwill
This note provides details of the Group’s goodwill, most of which relates to the Group’s acquisition of its overseas subsidiary, General
Logistics Systems (GLS).
Cost
At 30 March 2015 and 31 March 2014
Exchange rate movements
Acquisition of businesses
At 27 March 2016 and 29 March 2015
Impairment
At 30 March 2015 and 31 March 2014
Exchange rate movements
At 27 March 2016 and 29 March 2015
Net book value:
At 27 March 2016 and 29 March 2015
At 29 March 2015 and 30 March 2014
2016
£m
2015
£m
512
36
11
559
330
23
353
206
182
569
(65)
8
512
372
(42)
330
182
197
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Notes to the consolidated
financial statements (continued)
12. Goodwill (continued)
The carrying value of goodwill of £206 million (2014-15 £182 million) at the balance sheet date includes £192 million (2014-15 £177 million)
in relation to the acquisition of the GLS business unit. In line with the Group’s accounting policy (see page 142), this goodwill has been reviewed
for impairment. The carrying value of GLS, excluding interest-bearing and tax-related assets and liabilities, is £557 million (2014-15 £434
million) and the operating profit before transformation costs is £117 million (2014-15 £115 million) for the year (see Note 2).
The carrying value of GLS of £557 million represents a multiple of 4.8 (2014-15 3.8) 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 5.6 (fair value hierarchy level 2 input). 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 33 per cent to 3.7 to reduce the net realisable value to below the carrying value.
The provisional goodwill of £11 million (2014-15 £8 million) arising from an aggregation of business acquisitions during the reporting year is
not considered material in the context of the Group’s total goodwill.
13. Intangible assets
Intangible assets, mainly software, are recorded in much the same way as the Group’s physical assets such as property and vehicles, but
with shorter useful lives over which they are amortised (three to ten years).
2016
Master
franchise
licences
£m
Customer
listings
£m
Software
£m
Total
£m
2015
Master
franchise
licences
£m
Customer
listings
£m
Software
£m
Cost
At 30 March 2015 and 31 March 2014
Additions
Disposals
Acquisition of business
Reclassification to non-current assets held for sale
Exchange rate movements
At 27 March 2016 and 29 March 2015
Amortisation and impairment
At 30 March 2015 and 31 March 2014
Amortisation (see Note 3)
Impairment charge
Disposals
Reclassification to non-current assets held for sale
Exchange rate movements
At 27 March 2016 and 29 March 2015
Net book value:
At 27 March 2016 and 29 March 2015
At 29 March 2015 and 30 March 2014
21
-
-
-
-
-
21
21
-
-
-
-
-
21
-
-
31
-
-
1
-
4
36
26
2
-
-
-
4
32
4
5
496
194
(25)
1
-
4
670
201
46
-
(25)
-
1
223
548
194
(25)
2
-
8
727
248
48
-
(25)
-
5
276
447
295
451
300
23
–
–
–
-
(2)
21
23
–
-
–
-
(2)
21
–
–
32
-
–
3
-
(4)
31
28
2
-
–
-
(4)
26
5
4
Total
£m
425
166
(35)
3
(1)
(10)
548
230
37
24
(35)
(1)
(7)
248
370
166
(35)
–
(1)
(4)
496
179
35
24
(35)
(1)
(1)
201
295
191
300
195
The intangible assets detailed above have finite lives and are being written down on a straight-line basis. The £194 million (2014-15 £166
million) additions include £4 million (2014-15 £1 million) borrowing costs capitalised in relation to specific qualifying assets. Borrowing costs
capitalised are deducted in determining taxable profit in the reporting year in which they are incurred.
112
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
14. Investments in associates and joint venture
This note provides details of the Group’s associate and joint venture companies, including the Group’s share of the revenue, profit and
net assets of these entities.
Details of the associates and joint venture of the Group are shown below. To ensure that the reported share of the results of these
companies aligns with the Group’s reporting year ended 27 March 2016 (2014-15 29 March 2015), information provided by each of the
respective companies is analysed and an estimate of profit/loss accrued for the period for which actual results are not available in time for
inclusion in these financial statements.
Principal activities
Country of incorporation
Reporting year
end date
% ownership
2016
% ownership
2015
Associate company
Quadrant Catering Limited (‘Quadrant’) Catering services
Mallzee Limited
Market Engine Global Pty Limited
Joint venture company
ParcelLock GmbH
Parcel locker provision
Personal shopping application (‘app’)
Software development
United Kingdom
United Kingdom
Australia
30 September
30 April
30 June
Germany
31 December
51.0
25.0
34.5
33.3
51.0
-
-
-
The majority of board membership and voting power to direct relevant activities in Quadrant, is held by the other investor company. For this
reason it is Management’s view that the Group does not have control over Quadrant and so it is not considered to be a subsidiary in line with
IFRS 10.
Movements in interests in associates
Cost
At 30 March 2015 and 31 March 2014
Additions
Share of profit after tax for the year from continuing operations1
Dividends received
At 27 March 2016 and 29 March 2015
Movements in interest in joint venture
Cost
At 30 March 2015 and 31 March 2014
Additions
At 27 March 2016 and 29 March 2015
2016
£m
2015
£m
5
3
1
(1)
8
4
-
1
-
5
2016
£m
2015
£m
-
1
1
-
-
-
There are no significant restrictions on the ability of associates or joint venture to transfer funds to the Group in the form of cash dividends,
repayment of loans or advances.
1 The Group’s share of profit after tax is recorded against ‘Other operating costs’ in the income statement
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Notes to the consolidated
financial statements (continued)
15. Share-based payments
This note provides details about the Free Shares awarded to employees, including the associated accounting charge to the Group’s
income statement under IFRS 2, and the number of Shares held at the end of the reporting year. Details of shares awarded under the
Long-Term Incentive Plan (LTIP) and Save As You Earn (SAYE) scheme are also included.
Employee Free Shares
Employee Free Shares are held on behalf of employees in a tax-advantaged Share Incentive Plan (SIP).
The shares are held in a Trust administered by Equiniti Share Plan Trustees Limited (Equiniti) and may only be distributed to, or for the
benefit of, eligible employees. The Trust is funded by the Company and has been consolidated within these financial statements.
2013 and 2014 SIP
613 shares were awarded in October 2013 to each eligible full-time employee, with a further 116 shares allocated to eligible full-time
employees in April 2014. Part-time eligible employees were allocated a pro-rata number of shares for both allocations. For both full-time
and part-time eligible employees, the award of shares is subject to them remaining employees of Royal Mail Group Limited over the vesting
period. The vesting period for each award is three years from the award date with all allocated shares to be equity-settled.
2015 SIP
On 5 October 2015 ordinary shares representing one per cent of the Company were awarded free of charge to eligible full-time employees
by HM Government, in addition to a portion of the unallocated shares arising from earlier SIP schemes. Accordingly, each eligible full-time
employee received 103 shares as their 2015 SIP allocation, with part-time eligible employees being allocated a pro-rata number of shares.
All allocated shares will be equity-settled.
On 17 March 2016 HM Government transferred a further one per cent of ordinary shares to Equiniti through a Deed of Gift. These are to be
allocated to eligible employees in due course.
The fair value of the 2015 award of Free Shares is £63 million (including £2 million National Insurance) which is being charged to the income
statement on a straight-line basis, adjusted for ‘good leavers’1 and forfeitures, over the three year period of vesting from the award date. The
fair value of the award was established based on prevailing market prices at the award date and did not incorporate expected dividends.
A charge to the income statement of £158 million (including £6 million National Insurance) has been made for the year ended 27 March
2016 for all three SIP allocations (see Note 5).
1 ‘Good leavers’ refers to former employees whose shares vested under specific circumstances, in accordance with the rules of the scheme
114
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
15. Share-based payments (continued)
A reconciliation of the ordinary shares held in the SIP at 27 March 2016 is shown below.
Total shares remaining in SIP at 29 March 2015
2015 SIP shares awarded in the reporting year
Shares transferred into SIP on 17 March 2016
Shares transferred out of SIP during the reporting year (‘good leavers’1)
Total shares remaining in SIP at 27 March 2016
Number of
shares
94,855,917
10,000,000
10,000,000
(4,205,341)
110,650,576
Of the total shares remaining in the scheme, 99,967,360 have been allocated to current employees. The remaining 10,683,216 shares are
unallocated. This includes 10,000,000 received from HM Government on 17 March 2016 that are to be allocated to eligible employees in due
course. The remainder arose as a result of forfeitures.
Award of shares under the Long-Term Incentive Plan (LTIP)
LTIP awards were granted to senior management on 17 September 2013 (2013 LTIP), 31 March 2014 (2014 LTIP) and 28 March 2015
(2015 LTIP). These awards are equity-settled with the fair value of the shares awarded being set at the grant date market value of 529.1
pence, 450.4 pence and 511.0 pence, respectively. The maximum shares that have the potential to vest under each of the schemes are: 1.9
million under the 2013 LTIP, 3.3 million under the 2014 LTIP and 3.1 million under the 2015 LTIP.
The total income statement charge arising from LTIP schemes is summarised in the table below.
2013 LTIP
2014 LTIP
2015 LTIP
Total
52 weeks
2016
£m
6
2
4
12
52 weeks
2015
£m
-
5
-
5
The LTIP shares are not part of the SIP explained above. Further details of each LTIP plan, including performance conditions, can be found in
the Directors’ remuneration report on page 66.
Save As You Earn (SAYE) share option scheme
On 24 July 2014, a SAYE share option scheme was introduced for eligible employees. Under the terms of the scheme, the Board permits the
grant of options in respect of ordinary shares in the Company to those employees who enter into an HMRC-approved SAYE savings contract.
These contracts are for a term of three years, with contributions from employees of an amount between £5 and £59 each month. The
options purchased may be exercised during the six month period following the end of the contract, at an exercise price of not less than 80
per cent of the average of the mid-market quotations of an ordinary Share over the three dealing days immediately preceding the offer date.
A charge to the income statement of £3 million (2014-15 £1 million) has been made in relation to the SAYE scheme.
The table below shows the movements in share options during the reporting year.
Balance at the beginning of the reporting year
Options exercised
Options forfeited
Balance at the end of the reporting year
Number of
options
14,781,540
(43,893)
(822,607)
13,915,040
For SAYE options exercised during the year (by ‘good leavers’), the weighted average share price at the date of exercise was 468 pence. The
weighted average exercise price for each of the above categories of share options is 360 pence.
As a result of the scheme rules in relation to ‘good leavers’, 85,860 (2014-15 43,850) share options were exercisable at 27 March 2016 at a
weighted average exercise price of 360 pence.
The fair values of the options have been calculated using the Black-Scholes share option pricing model.
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements (continued)
16. Assets and liabilities held for sale
This note provides details of the assets and liabilities classified as held for sale at the beginning and end of the reporting year. Assets and
liabilities are classified in this way when their carrying value is to be recovered principally through a sale transaction and a sale is
considered highly probable. Their value in the balance sheet is the lower of their carrying amount and fair value less costs to sell. At the
reporting date of 27 March 2016, only certain surplus property assets are held for sale.
The balance sheet values of the assets and liabilities held for sale during the reporting year are shown below. The disposal group in this note,
as defined in IFRS 5 ‘Non-current assets held for sale and discontinued operations’, relates to GLS Germany’s subsidiary, DPD Systemlogistik
GmbH & Co. KG (DPD SL).
Assets of disposal group (DPD SL) held for sale
Other non-current (property) assets held for sale
Total non-current assets held for sale
Total liabilities associated with non-current assets held for sale (DPD SL)
At 27 March
2016
£m
-
39
39
At 29 March
2015
£m
17
15
32
-
(10)
Disposal group (DPD SL) – discontinued operations
The Group’s assets and liabilities held for sale reduced by £17 million assets and £10 million liabilities reported at 29 March 2015, as a
result of the sale of DPD SL on 31 March 2015. A further £1 million of assets was subsequently identified and included as part of the sale.
From the previous reporting year ended 29 March 2015 to the date of its sale on 31 March 2015, there were no material revenues, costs or
cash flow in respect of DPD SL operations (reporting year ended 29 March 2015 £96 million revenue, £96 million costs, net £nil million cash
flow).
A pre-tax profit on disposal of DPD SL of £31 million, including a £2 million loss released from equity in relation to foreign currency
exchange translation differences, has been recognised as a specific item in the income statement. Basic and diluted earnings per share from
discontinued operations were 2.6 pence per share in the current reporting year (2014-15 nil pence per share) reflecting the after tax profit
on disposal.
The property used for administrative purposes by DPD SL employees is now surplus to operational requirements and has met the Group’s
criteria to enable its transfer in the reporting year from ‘property, plant and equipment’ to ‘non-current assets held for sale’ on the Group
balance sheet.
Property assets held for sale
Other non-current assets held for sale of £39 million (2014-15 £15 million) relate to land and buildings which are being actively marketed
with a view to a sale within 12 months, including the property occupied by DPD SL employees as explained above and the former South
London Mail Centre site in Nine Elms, Vauxhall. An assessment of the fair value of these properties was made at the time of their
reclassification to ‘held for sale’ and no adjustment to the carrying amount of these properties was necessary.
116
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
17. Current trade and other receivables
The following information relates to amounts owed to the Group by third parties and also the amount of bad and doubtful debts that the
Group has provided for in the financial statements.
Trade receivables
Prepayments and accrued income
Total
Movements in the provision for bad and doubtful debts are shown below.
At 29 March 2015 and 30 March 2014
Receivables provided for during the year
Release of provision
Utilisation of provision
Exchange difference on foreign denominated provision
At 27 March 2016 and 29 March 2015
The amount of trade receivables that were past due but not impaired are shown below.
Not yet overdue
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
At 27 March
2016
£m
897
123
1,020
At 29 March
2015
£m
836
108
944
2016
£m
(21)
(12)
3
5
(1)
(26)
2015
£m
(27)
(4)
4
5
1
(21)
At 27 March
2016
£m
806
68
14
9
897
At 29 March
2015
£m
766
49
11
10
836
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Notes to the consolidated
financial statements (continued)
18. Cash and cash equivalents
This note details the Group’s cash balance and other short-term investments that can be readily converted into cash.
Cash and cash equivalents at 27 March 2016 and at 29 March 2015 are as follows:
Cash at bank and in hand
Client cash
Cash equivalent investments: Short-term bank and local authority deposits and money market fund investments
Total cash and cash equivalents
At 27 March
2016
£m
185
13
170
368
At 29 March
2015
£m
127
20
140
287
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.
Client cash is cash collected from consignees by GLS on behalf of its posting customers.
19. Current trade and other payables
The following details relate to amounts owed by the Group to third parties and deferred revenue for services still to be provided.
Trade payables and accruals
Advance customer payments (mainly for stamps held, not yet used by customers)
Social security
Capital expenditure payables
Other
Total
At 27 March
2016
£m
(1,226)
(306)
(81)
(70)
(17)
(1,700)
At 29 March
2015
£m
(1,215)
(286)
(98)
(53)
(16)
(1,668)
The fair value of trade and other payables is not materially different from the carrying value.
£20 million in respect of the estimated exposures for vehicle-related legal claims has been reclassified from accruals to provisions (see Note
22) during the year.
118
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
20. 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.
Syndicated bank loan facilities
€500 million bond – 2.375% Senior Fixed Rate Notes
Total
Syndicated bank loan facilities
€500 million bond – 2.375% Senior Fixed Rate Notes
Total
At 27 March 2016
Loans and
borrowings
£m
-
392
392
Further
committed
facility
£m
1,050
-
1,050
Total
facility
£m
1,050
392
1,442
Average
interest rate
of loan drawn
down
%
Basis of interest
rate chargeable
at 27 March 2016
n/a LIBOR plus 0.55%
Fixed at 2.5%
2.5
2.5
Average
maturity date
of loan
drawn down
Year
n/a
2024
2024
Average
maturity date
of loan
facility
Year
2021
2024
2022
Loans and
borrowings
£m
-
366
366
Further
committed
facility
£m
1,050
-
1,050
Total
facility
£m
1,050
366
1,416
At 29 March 2015
Average
interest rate
of loan drawn
down
%
n/a
2.5
2.5
Basis of interest
rate chargeable
at 29 March 2015
LIBOR plus 0.55%
Fixed at 2.5%
Average
maturity date
of loan
drawn down
Year
n/a
2024
2024
Average
maturity date
of loan
facility
Year
2020
2024
2021
The €500 million bond, issued in July 2014, is shown net of issue discount and fees and at a closing spot rate of £0.789/€. The effective
interest rate on the bond (2.5 per cent) consists of the interest coupon of 2.375 per cent plus the unwinding of the discount and fees on
issuing the bond (0.08 per cent). The bond is designated as a hedge of the net investment in GLS, which has the Euro as its functional
currency. During the year, a loss of £26 million (2014-15 gain of £27 million) on the retranslation of this borrowing was transferred to other
comprehensive income, which offsets the gains on translation of the net investment in GLS. There was no hedge ineffectiveness in the
current or comparative reporting years.
In March 2016, the Group extended £952 million of the syndicated bank loan facilities for a further year (to March 2021) with the remaining
£98 million maturing in March 2020.
The syndicated bank loan facility can be cancelled and any loans drawn under the facility can 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 (excluding arrangement fees), adjusted net debt and EBITDA. It is not anticipated that the Group is at risk of
breaching any of these obligations.
The covenants require the Group to maintain the (leverage) ratio of adjusted net debt to EBITDA below 3:1 and EBITDA to interest (excluding
certain arrangement fees) above 3.5:1. Adjusted net debt consists of net debt plus Letters of Credit (contingent liabilities in respect of the
UKPIL insurance programme, where the possibility of an outflow of economic benefits is considered remote) and is adjusted for exchange
rate movements during the year. The Group’s leverage ratio at 27 March 2016 is 0.4:1 (at 29 March 2015 0.4:1). The Group’s ratio of
EBITDA to interest (excluding certain arrangement fees) at 27 March 2016 is 63.0:1 (at 29 March 2015 40.4:1). Accordingly, the Group
comfortably satisfies the covenants tests within its syndicated bank loan facilities agreement.
The interest rate chargeable on the syndicated bank loan facility would increase if more than one third of the facility was drawn and also if
the Group's leverage ratio exceeded 1:1. Under the loan agreement, the maximum interest rate chargeable would be LIBOR plus 1.45 per
cent. The €500 million bond becomes repayable immediately on the occurrence of an event of default under the bond agreement. These
events of default include non-payment and insolvency. It is not anticipated that the Group is at risk of breaching any of these obligations.
The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date, all expire in more
than two years.
There is no security in place under the syndicated bank loan facilities or the bond.
Annual Report and Financial Statements 2015-16
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Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management
Section A – provides analysis of the carrying values and fair values of financial assets and liabilities held within the Group. This includes an
analysis of gross contractual cash flows on financial liabilities.
Section B – includes details of how the various risks associated with the Group’s assets and liabilities are managed, and also the Group’s
capital management policy.
Section C – provides information regarding the various hedging programmes in place to mitigate volatility in commodity prices and foreign
currency exchange rates. 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.
A. FINANCIAL ASSETS AND LIABILITIES – ANALYSIS
The Group’s financial assets and liabilities are summarised below.
RMSEPP pension escrow investments
Cash and cash equivalents
Other bank and local authority deposits
Derivative assets
Total financial assets
Syndicated bank loans
€500 million bond – 2.375% Senior Fixed Rate Notes due July 2024
Total loans and borrowings
Obligations under finance leases
Derivative liabilities
Total financial liabilities
Non-current
£m
20
-
-
2
22
-
(392)
(392)
(136)
(8)
(536)
At 27 March 2016
Current
£m
-
368
-
5
373
-
-
-
(84)
(33)
(117)
At 29 March 2015
Total
£m
20
368
-
7
395
-
(392)
(392)
(220)
(41)
(653)
Non-current
£m
20
–
–
2
22
-
(366)
(366)
(179)
(14)
(559)
Current
£m
–
287
56
5
348
–
–
–
(93)
(34)
(127)
Total
£m
20
287
56
7
370
-
(366)
(366)
(272)
(48)
(686)
Carrying amounts and fair values
Trade receivables, payables, prepayments and accruals have been omitted from this analysis on the basis that carrying value is a reasonable
approximation of fair value. Pension plan assets and liabilities are also excluded. Fair values have been calculated using current market
prices (bond price, interest rates, forward exchange rates and 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 €500 million bond (non-current) is £424 million (2014-15 £402 million), calculated
as the closing market bond price converted to Sterling using the closing spot exchange rate. The fair value of total ‘Obligations under finance
leases’ is £222 million (2014-15 £282 million). For all other financial instruments fair value is equal to the carrying amount. The tables
below also set out the carrying amount and classification of the Group’s financial instruments.
120
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
The following table shows the classification of the Group’s financial assets and liabilities.
Level Classification
At 27 March
2016
£m
At 29 March
2015
£m
Financial assets
Cash
Cash equivalent investments
Money market funds
Short-term deposits – bank
Cash and cash equivalents
Financial assets – investments (current) – bank and local government deposits
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)
€500 million bond – 2.375% Senior Fixed Rate Notes due July 2024
Obligations under finance leases (non-current)
Derivative liabilities – current
Derivative liabilities – non-current
Total financial liabilities
Net total financial liabilities
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
2
2
Amortised cost
Amortised cost
Amortised cost
2
2
198
170
120
50
368
-
20
5
2
395
(84)
(392)
(136)
(33)
(8)
(653)
(258)
147
140
110
30
287
56
20
5
2
370
(93)
(366)
(179)
(34)
(14)
(686)
(316)
The ‘Level’ classification in the above table is explained in the ‘Fair value measurement of financial instruments’ section of ‘Significant
accounting policies’.
Derivative assets and liabilities 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.
Derivative assets and liabilities that are not part of an effective hedge designation are classified at fair value through profit and loss. There
are no other financial assets or liabilities designated at fair value through profit and loss on initial recognition.
Gross contractual cash flows
The tables below set out the gross (undiscounted) contractual cash flows of the Group’s financial liabilities. For overdrafts, loans and Sterling
denominated finance lease contracts, these cash flows represent the undiscounted total amounts payable, including interest. The cash flows
for the €500 million bond and Euro denominated finance leases represent the undiscounted total amounts payable (interest and nominal
repayment) which have been converted to Sterling at 27 March 2016 market forward exchange rates.
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.
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Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
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
Less exchange rate adjustment
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
Less exchange rate adjustment
Net total
At 27 March 2016
Gross
loans and
borrowings
commitments
£m
Gross
finance lease
instalments
£m
9
521
9
29
483
530
(89)
(49)
392
87
242
56
78
108
329
(108)
(1)
220
Sub-total
£m
96
763
65
107
591
859
(197)
(50)
612
Gross
payments on
derivatives
settled gross
£m
Gross
payments on
derivatives
settled net
£m
8
1
1
-
-
9
n/a
n/a
n/a
33
8
8
-
-
41
n/a
n/a
n/a
At 29 March 2015
Gross
loans and
borrowings
commitments
£m
Gross
finance lease
instalments
£m
Sub-total
£m
Gross
payments on
derivatives
settled gross
£m
Gross
payments on
derivatives
settled net
£m
9
494
9
27
458
503
(93)
(44)
366
98
288
78
96
114
386
(114)
-
272
107
782
87
123
572
889
(207)
(44)
638
7
-
-
-
–
7
n/a
n/a
n/a
33
14
13
1
–
47
n/a
n/a
n/a
Total
£m
137
772
74
107
591
909
n/a
n/a
n/a
Total
£m
147
796
100
124
572
943
n/a
n/a
n/a
B. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial assets and liabilities comprise short-term deposits, money market liquidity investments, cash loans (including
bonds) and finance leases. The main purpose of these financial instruments is 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.
No speculative trading in financial instruments has been undertaken during the current or comparative reporting years, in line with Group
policy.
The main risks arising from the Group’s financial assets and liabilities are interest rate risk, foreign currency risk, commodity price risk, credit
risk and liquidity risk. The Board reviews and agrees policies for managing these risks, each of which is summarised below.
122
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
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.
Drawings under the syndicated bank loan facilities are at floating rate. There were no balances outstanding at 27 March 2016 and at 29
March 2015. The total interest-bearing financial assets of the Group (excluding the non-current investments) of £247 million (2014-15
£269 million), which consist of the fixed and floating rate cash and cash equivalent investments, plus current financial asset investments, are
at short-dated fixed or variable interest rates with an average maturity of 6 days (2014-15 an average maturity of 31 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 gross debt fixed.
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 is fixed until the maturity of the instrument.
The tables below set out the carrying amount of the Group’s financial instruments that are exposed to interest rate risk.
Cash
Cash equivalent investments
RMSEPP pension escrow investments
Derivative assets
Derivative liabilities
€500 million bond
Obligations under finance leases
Net total financial (liabilities)/assets
Cash
Cash equivalent investments
Financial asset investments (current)
RMSEPP pension escrow investments
Derivative assets
Derivative liabilities
Syndicated bank loans
Obligations under finance leases
Net total financial (liabilities)/assets
At 27 March 2016
Floating
rate
£m
77
170
20
-
-
-
-
267
Non-interest
bearing
£m
121
-
-
7
(41)
-
-
87
At 29 March 2015
Floating
rate
£m
73
140
25
20
–
–
-
–
258
Non-interest
bearing
£m
74
-
-
-
7
(48)
–
–
33
Fixed rate
£m
-
-
-
-
-
(392)
(220)
(612)
Fixed rate
£m
-
-
31
-
–
–
(366)
(272)
(607)
Total
£m
198
170
20
7
(41)
(392)
(220)
(258)
Total
£m
147
140
56
20
7
(48)
(366)
(272)
(316)
Foreign currency transaction risk
The Group is exposed to foreign currency risk due to; interest payments on the €500 million bond and certain obligations under Euro
denominated finance leases; trading with overseas postal administrations 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’ functional currency is the
Euro and most of its revenues and profits are Euro denominated. There is some exposure to non-Euro currencies, principally in emerging
European markets.
These risks are mitigated by hedging programmes managed by the Group Treasury function. 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.
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Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
Foreign currency translational risk
The Group’s functional currency is Sterling and 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 that does not relate to underlying performance. GLS’ balance sheet is
converted at year end exchange rates, and movements related to foreign currency translation are taken to equity.
UKPIL’s obligation to settle with overseas postal administrations is denominated in Special Drawing Rights (SDRs) – a basket of currencies
which comprise 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 has four active hedge programmes (commenced during the current and previous reporting years) covering obligations to settle Euro
and US Dollar invoices on automation projects.
The €500 million bond issued in July 2014 acts as a hedge of part of the translation exposure created by the net assets of GLS. The Group
entered into €37 million of Euro denominated finance leases during the year (2014-15 €nil million) which similarly act as a hedge of the net
assets of GLS. The bond and lease payables are revalued at year end exchange rates and the movement taken to equity to offset the
movement taken to equity from the revaluation of GLS’ balance sheet. The remaining net assets of GLS in excess of the bond and lease
payables are not hedged. The Group uses the translational exposure arising from GLS Euro profits to offset against other transactional
exposures.
The net total financial liabilities are held in various different currencies as summarised in the table below. The majority of the non-Sterling
financial assets and liabilities (other than the €500 million bond and certain finance leases) are held within cash or derivatives.
Net total financial assets/(liabilities) at 27 March 2016
Net total financial (liabilities)/assets at 29 March 2015
Sterling
£m
13
(34)
US$
£m
(10)
(33)
Euro
£m
(290)
(271)
Other
£m
29
22
Total
£m
(258)
(316)
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 price
contracts with suppliers and using over-the-counter derivative products.
As the GLS business relies on the use of subcontractors, responsible for purchasing their own fuel, GLS has no direct exposure to diesel
costs. The only other significant commodity exposure within GLS is electricity, which is fragmented across its European bases. In view of the
other highly hedged positions, 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 to ensure that UKPIL is not in breach of compliance legislation. Assessment of credit for 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 written off in the year for the whole Group is 0.1 per cent (2014-15 0.1 per cent) of revenue. An analysis of aged debt
is included within Note 17.
With regard to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalent investments, loans and
receivables 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.
124
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
The table below analyses the Group’s financial assets, cash equivalent investments and derivatives by credit rating.
Cash equivalent investments
RMSEPP pension escrow investments
Derivative assets
Total
Cash equivalent investments
Other bank and local authority deposits
RMSEPP pension escrow investments
Derivative assets
Total
AAAm/
AAAf
£m
120
20
-
140
AAAm/
AAAf
£m
110
-
20
-
130
At 27 March 2016
AA+
to AA-
£m
50
-
2
52
A+
to A-
£m
-
-
4
4
BBB+
and below
£m
-
-
1
1
No rating
£m
-
-
-
-
At 29 March 2015
AA+
to AA-
A+
to A-
£m
-
-
-
2
2
£m
30
55
-
5
90
BBB+
and below
£m
-
-
-
-
-
No rating
£m
-
11
-
-
1
AAA
£m
-
-
-
-
AAA
£m
-
-
-
-
-
Total
£m
170
20
7
197
Total
£m
140
56
20
7
223
GLS operates a decentralised credit management model whereby each country is responsible for managing the credit risk associated with its
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 companies.
None of the financial assets is either past due or considered to be impaired.
1 This deposit, which matured in 2015, was placed with a local authority
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|
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
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 £1,050 million expire in 2020-2021 (2014-15 £1,050 million expiring in 2020).
Below is a summary of when all the financial assets and liabilities fall due. The pension escrow investment 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 the investment is
therefore disclosed as maturing in two to five years.
Fixed rate
Financial liabilities
€500 million bond
Obligations under finance leases
Total
Floating rate
Cash at bank
Cash equivalent investments – money market funds
Cash equivalent investments – bank deposits
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
Total financial assets
Total financial liabilities
Net total financial assets/(liabilities)
Average
effective
interest
rate
%
2.5
3.3
0.3
0.6
0.6
0.5
At 27 March 2016
Within
1 year
£m
1-2 years
£m
2-5 years
£m
More than
5 years
£m
-
(84)
(84)
77
120
50
-
247
121
5
(33)
93
373
(117)
256
-
(52)
(52)
-
-
-
-
-
-
2
(8)
(6)
2
(60)
(58)
-
(71)
(71)
-
-
-
20
20
-
-
-
-
20
(71)
(51)
(392)
(13)
(405)
-
-
-
-
-
-
-
-
-
-
(405)
(405)
Total
£m
(392)
(220)
(612)
77
120
50
20
267
121
7
(41)
87
395
(653)
(258)
126
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
At 29 March 2015
Average
effective
interest rate
%
Within
1 year
£m
1-2 years
£m
2-5 years
£m
More than
5 years
£m
Total
£m
Fixed rate:
Financial assets – investments (current) – bank/local government deposits
Financial liabilities:
€500 million bond
Obligations under finance leases
Total
Floating rate:
Cash at bank
Cash equivalent investments – money market funds
Cash equivalent investments – bank deposits
Financial assets – investments (current) - bank deposits
Financial assets – pension escrow investments (non-current):
RMSEPP pension escrow – money market funds
0.8
2.5
3.5
0.4
0.6
0.6
0.7
0.4
Total
Non-interest bearing
Cash at bank or in hand
Derivative assets
Derivative liabilities
Total
Total financial assets
Total financial liabilities
Net total financial assets/(liabilities)
31
–
(93)
(62)
73
110
30
25
–
238
74
5
(34)
45
348
(127)
221
–
–
(74)
(74)
–
–
-
-
–
–
–
2
(13)
(11)
2
(87)
(85)
–
-
(90)
(90)
–
–
-
-
20
20
–
-
(1)
(1)
20
(91)
(71)
–
31
(366)
(15)
(381)
–
–
-
-
–
–
–
–
–
–
-
(381)
(381)
(366)
(272)
(607)
73
110
30
25
20
258
74
7
(48)
33
370
(686)
(316)
Obligations under finance leases are either unsecured or secured on the leased assets. The average interest rate is 3.3 per cent (2014-15
3.5 per cent). The average maturity date is more than five years (2014-15 between four and five years).
Capital management
The Group’s principal objectives are to manage the mix of debt and equity in order to (i) meet all obligations as they fall due; (ii) support a
progressive dividend policy; and (iii) reduce the cost of capital of the Group.
The Group aims to do this by:
generating sufficient in-year trading cash flows to support the ordinary dividend;
•
• maintaining sufficient cash reserves and committed facilities;
•
• managing and maintaining positive adjusted net assets and distributable reserves; and
•
retaining sufficient flexibility to invest in the future of the business.
targeting investment grade2 standard metrics;
In the reporting year the Group generated £254 million (2014-15 £315 million) of in-year trading cash flow3.
As set out in the viability statement, the Directors have a reasonable expectation that the Group will be able to continue in operation and
meet its liabilities as they fall due. At 27 March 2016, the Group had cash and cash equivalents of £368 million (at 29 March 2015 £287
million) and undrawn committed loan facilities of £1,050 million maturing on average in five years (at 29 March 2015 £1,050 million
maturing in five years).
At 27 March 2016 the Group met the loan covenants and other obligations for its revolving credit facility and €500 million bond, (see Note
20).
At 27 March 2016, the Group had net debt4 of £224 million (at 29 March 2015 £275 million). During the year the Group maintained a credit
rating of BBB with a stable outlook from Standard & Poor’s.
The capital managed by the Group, consists of net assets (made up of investment, working capital, provisions and net debt), less the pension
asset recognised at 27 March 2016 adjusted for any deferred tax liability on the pension asset. The Group’s defined benefit plans are
separately managed by RMPP and RMSEPP Trustees and funded from Group contributions (see Note 10). The Group’s adjusted capital is
shown in the table below.
2 No worse than BBB- under Standard & Poor’s methodology
3 A non-GAAP performance measure (see Financial review on page 27)
4 Net debt consists of loans, borrowings and lease payables, offset by cash and financial asset investments excluding derivatives
Annual Report and Financial Statements 2015-16
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|
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
Net assets
Deduct pension asset
Add back deferred tax liability on pension asset
Adjusted capital
At 27 March
2016
£m
4,467
(3,430)
565
1,602
At 29 March
2015
£m
3,996
(3,367)
667
1,296
The Board has recommended a final dividend of 15.1 pence per share. Including the interim dividend of 7.0 pence per share, this represents
a total dividend of 22.1 pence per share for 2015-16. This is a five per cent increase on the previous year’s dividend of 21.0 pence per share
and equivalent to £151 million of cash.
As previously stated, given the seasonality of the Group’s business, the Board would expect to pay an interim dividend each year equal to
approximately one-third of the prior year’s total dividend and to set the final dividend for each year in light of the full year performance of the
Group.
Sensitivity analysis
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 profit risk from interest rate risk, exchange rate risk or commodity price risk (2014-15 £nil million risk).
The Group has an exposure to the exchange rate risk on translating the GLS net assets into Sterling on consolidation and an offsetting
exposure on translating the €500 million bond and Euro denominated finance leases into Sterling at each balance sheet date. The impact of
a five per cent strengthening of Sterling during the reporting year would have been to reduce the Group net assets by £5 million (2014-15
£8 million).
C. HEDGING PROGRAMMES
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 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 jet fuel usage.
iii) The air conveyance hedge programme used US Dollar forward currency purchase contracts to hedge the exposure arising from US
Dollar/Sterling exchange rates for forecast air conveyance purchases. The programme finished in April 2015.
iv) Four capital programmes (two of which commenced in 2015-16) use Euro and US Dollar forward currency purchase contracts to hedge
the exposure arising from Sterling/Euro and Sterling/US Dollar 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 prices5.
vi) The gas hedge programme uses forward commodity price swaps to hedge the exposure arising from gas prices.
vii) The interest rate hedge programme used interest rate swap contracts to hedge the exposure arising from interest rates on borrowings
under the syndicated bank loan facilities. The hedge programme finished when the interest rate swap contracts were sold, following the
repayment on 9 March 2015 of the floating rate term loans.
viii) UKPIL trades in SDRs with overseas postal administrations, for delivering UK origin mail abroad and delivering foreign origin mail in the
UK. The UKPIL overseas postal administrations hedge programme uses US Dollar and Japanese Yen forward currency purchase contracts to
hedge the forecast future net purchases of delivery services. The 2014-15 hedge programme covered the exposure up until the purchases
were incurred and recognised on the balance sheet. No hedge was put in place for 2015-16 due to a reduction in the net imbalance position.
The Group has an undesignated cash flow hedge programme for the exposure of UKPIL to overseas postal administrations’ liabilities for the
year 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.
5 In addition to this hedge programme, the Group uses fixed price contracts with suppliers to set future prices
128
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
The Group uses the €500 million bond and the Euro denominated finance lease payables as hedges against movements in the Sterling/Euro
exchange rate and therefore the net investment in GLS. Foreign currency exchange differences arising from the translation of the net assets
of GLS, the €500 million bond and the Euro denominated finance lease payables, at closing Sterling/Euro exchange rates, are deferred into
equity. These exchange differences would be released from equity to the income statement as part of the gain or loss if GLS was sold. During
the year foreign currency exchange losses on the bond of £26 million (2014-15 gains of £27 million) and foreign exchange losses on the
lease payables of £2 million (2014-15 £nil million) were deferred into equity. There was no hedge ineffectiveness in the current or prior
reporting years.
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. For
electricity, the Group also uses fixed price contracts with suppliers to set future prices.
The following table shows the commodity, risk and the percentage of the expected consumption hedged or fixed. The Group hedges the cost
of the underlying commodity and any irrecoverable VAT that is incurred on this cost. The exposures shown in the following table therefore
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 around £94 million to diesel costs each reporting year.
Total diesel and jet fuel costs for 2016-17 are estimated to be £156 million.
Commodity
Diesel fuel
Jet fuel
Electricity
Gas
Risk
US$ price and $/£ exchange rate movements
US$ price and $/£ exchange rate movements
£ price movement
£ price movement
Exposure
£m
54
8
13
9
% hedged
90
77
76
79
Exposure
£m
42
5
13
7
% hedged
72
64
61
64
Exposure
£m
39
6
13
6
% hedged
22
22
61
5
Exposure (excluding fuel duty) and expected consumption hedged/fixed 2016
52 weeks 2019
52 weeks 2018
52 weeks 2017
Commodity
Diesel fuel
Jet fuel
Electricity
Gas
Risk
US$ price and $/£ exchange rate movements
US$ price and $/£ exchange rate movements
£ price movement
£ price movement
Exposure
£m
67
10
16
12
% hedged
86
100
95
98
Exposure
£m
52
8
14
10
% hedged
69
63
60
53
52 weeks 2018
Exposure
£m
44
7
14
9
% hedged
24
–
60
–
Exposure (excluding fuel duty) and expected consumption hedged 2015
52 weeks 2017
52 weeks 2016
Foreign currency hedging for non-commodity items
The Group, where possible, nets exposure to foreign currency internally. The remaining net exposure is hedged with external forward foreign
currency contracts. For existing currency liabilities, the underlying exposures (e.g. the overseas postal administration related liabilities) and
the derivatives are both revalued to current market prices at the balance sheet date, meaning that no net gains or losses arise in the income
statement. For forecast future currency exposures, the derivatives are revalued at the balance sheet date and effective movements in value
are deferred into equity until the hedged transaction occurs.
The following table shows for each hedge programme, the risk and the percentage hedged of the next 12 months’ exposure:
Hedge programme
Air conveyance
Capital programmes
Overseas postal administrations
Risk
US$/£ exchange rate movements
€/£ exchange rate movements
SDR/£ exchange rate movements
Percentage of next 12 months’
exposure that has been hedged
At 29 March
2015
96%
100%
56%
At 27 March
2016
n/a
100%
69%
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.
The Group hedges part of the translational exposure created by the net assets of its overseas subsidiaries, mainly GLS, by designating the
€500 million bond and the Euro denominated lease payables as hedges of the net investment in GLS.
Annual Report and Financial Statements 2015-16
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|
Notes to the consolidated
financial statements (continued)
21. Financial assets and liabilities and risk management (continued)
Derivative values
At any point in time, the derivatives in the cash flow hedge programmes are either ‘in the money’ meaning that 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 relating to the effective portion of the hedges are released when the hedged transaction occurs. The following tables
show the derivative contracts entered into at 27 March 2016 and 29 March 2015 and the associated derivative assets and liabilities.
Commodity/
currency
Nominal
amount
Maturity date
Average
Contracted
Commodity
price/
exchange rate
Derivative
asset non-
current
fair value
£m
Derivative
asset
current
fair value
£m
Derivative
liability
non-current
fair value
£m
Derivative
liability
current
fair value
£m
At 27 March 2016
Diesel fuel
Diesel fuel
Diesel fuel
Jet fuel
Jet fuel
Jet fuel
Air conveyance
Capital programmes
Electricity
Gas
Total cash flow hedges
Other derivatives
Total derivative assets/(liabilities)
$87m Apr 16 – Jan 19
98m litres May 16 – Oct 18
Diesel fuel 183m litres Apr 16 – Jan 19 US$ 0.52/litre
US$1.55/£
£0.33/litre
6m litres Apr 17 – Dec 18 US$ 0.37/litre
US$1.46/£
£0.35/litre
£0.72/€
US$1.54/£
£50/MWh
Gas 29m therms Apr 16 – Oct 18 £0.50/therm
$1m Apr 18 – Dec 18
28m litres Apr 16 – Sep 18
€6m Apr 16 – Oct 17
$7m Apr 16 – Oct 17
178k MWh Apr 16 – Apr 17
US$
Diesel fuel
Jet fuel
US$
Jet fuel
Euro
US$
Electricity
1
1
-
-
-
-
-
-
-
-
2
-
2
-
4
-
-
-
-
1
-
-
-
5
-
5
(5)
-
(2)
-
-
-
-
-
-
(1)
(8)
-
(8)
(17)
-
(6)
-
-
(3)
-
-
(3)
(4)
(33)
-
(33)
Commodity/
currency
Nominal
amount
Maturity date
Average
contracted
commodity
price/
exchange rate
Derivative
asset non-
current
fair value
£m
Derivative
asset
current
fair value
£m
Derivative
Liability
non-current
fair value
£m
Derivative
liability
current
fair value
£m
At 29 March 2015
Diesel fuel
Diesel fuel
Diesel fuel
Jet fuel
Jet fuel
Jet fuel
Air conveyance
Capital programmes
Electricity
Gas
Total cash flow hedges
Other derivatives
Total derivative assets/(liabilities)
Diesel fuel 216m litres Apr 15 – Jan 18 US$ 0.69/litre
US$1.58/£
$149m Apr 15 – Jan 18
43m litres Apr 15 – Apr 17
£0.46/litre
21m litres Apr 15 – Mar 16 US$ 0.75/litre
US$1.57/£
£0.45/litre
US$1.63/£
£0.8/€
£55/MWh
Gas 29m therms Apr 15 – Apr 17 £0.65/therm
$16m Apr 15 – Jan 18
13m litres Apr 15 – Apr 17
Apr 15
$82k
€9m Apr 15 – Apr 16
411k MWh Apr 15 – Apr 17
US$
Diesel fuel
Jet fuel
US$
Jet fuel
US$
Euro
Electricity
–
–
2
–
–
-
–
–
–
–
2
–
2
-
–
3
–
1
-
–
–
–
–
4
1
5
(8)
(3)
-
–
–
(1)
–
–
(1)
(1)
(14)
–
(14)
(21)
(3)
-
(3)
-
-
–
(1)
(3)
(3)
(34)
–
(34)
Other derivatives represent hedges by the Group of other foreign exchange exposures, which are not designated under IAS 39 (including the
hedge of the trading balance with overseas postal administrations).
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 2016 mature in April 2016. At 27 March 2016 therefore, the balance
sheet includes the market value of these derivatives but the cumulative gains and losses on these derivatives have been released from the
hedging reserve in equity to the income statement to match the exposure to purchasing fuel in March 2016. There are differences therefore
between derivative balances (shown above) and the balance on the hedging reserve.
130
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
22. Provisions
This note provides an analysis of the Group’s constructive or legal obligations, resulting from a past event, that have been provided for
in the financial statements.
At 30 March 2015
Arising during the year:
Charged in transformation costs and operating specific items
Charged in other operating costs
Reclassification
Unused amounts released
Utilised in the year
Foreign exchange rate adjustment
Discount rate adjustment
At 27 March 2016
Disclosed as:
Current at 27 March 2016
Non-current at 27 March 2016
Disclosed as:
Current at 29 March 2015
Non-current at 29 March 2015
Transformation
costs
£m
(56)
Specific
items
£m
(154)
(117)
-
-
-
161
-
-
(12)
(12)
-
(12)
(53)
(3)
(56)
(7)
-
-
8
5
(4)
(2)
(154)
(67)
(87)
(154)
(58)
(96)
(154)
Other
£m
(43)
-
(47)
(20)
3
26
-
-
(81)
(72)
(9)
(81)
(38)
(5)
(43)
Total
£m
(253)
(124)
(47)
(20)
11
192
(4)
(2)
(247)
(151)
(96)
(247)
(149)
(104)
(253)
Transformation costs
Transformation costs provisions comprise £12 million (2014-15 £56 million) in respect of redundancy schemes.
Specific items
The specific items provisions of £154 million (2014-15 £154 million) include £78 million (2014-15 £81 million) for potential industrial
diseases claims relating to both current and former employees of the Group. This 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 actuarial adviser, 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. £2 million of this provision
is expected to be utilised in 2016-17.
The remaining £76 million (2014-15 £73 million) includes French Competition Authority investigation costs (including fine), of which £43
million was utilised in 2016-17 (see Note 27) and IT systems costs associated with Post Office Limited (POL) separation, of which £2
million is expected to be utilised in 2016-17. A release of the POL separation provision was recognised directly in equity, consistent with
the accounting treatment of the provision on its initial recognition in 2012-13 (resulting from a transaction with the owner, in their capacity
as owner). A further £29 million is in respect of: German property tax liability of £5 million, expected to be utilised in 2016-17; employer’s
National Insurance associated with the award of Employee Free Shares of £15 million, of which £13 million is expected to be utilised in
2016-17 and £2 million within two to five years; and legacy property costs of £9 million, of which £1 million is expected to be utilised
within two to five years and £8 million over a period greater than five years.
Other provisions (charged in operating costs)
Other provisions of £81 million (2014-15 £43 million) mainly comprise: onerous property lease and decommissioning obligations of £21
million, of which £14 million is expected to be utilised in 2016-17 and £7 million within two to three years; onerous contracts of £20
million, expected to be utilised in 2016-17; and exposures resulting from legal claims incurred in the normal course of business of £38
million, expected to be utilised in 2016-17. The remaining £2 million is in relation to employer’s National Insurance associated with the
Long-Term Incentive Plan, which is expected to be utilised within two to five years.
£20 million was reclassified as a provision during the year (presented within accruals previously) in respect of the estimated exposures for
vehicle-related legal claims. This reclassification was made as a result of increased uncertainty over the timing and amount of future
expenditure required in settlement of the legal claims.
Annual Report and Financial Statements 2015-16
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Royal Mail plc
|
Notes to the consolidated
financial statements (continued)
23. Share capital and reserves
This note details the number of shares Royal Mail plc has issued, and any special features of the issued shares. A description of certain
reserves that form part of total equity is also included.
Issued and fully paid share capital
1,000,000,000 ordinary shares of £0.01 each
Total
At 27 March
2016
£m
10
10
At 29 March
2015
£m
10
10
Of the issued ordinary shares, a total of 27,042 (2014-15 40,935) are held by an Employee Benefit Trust (EBT) administered by Sanne
Fiduciary Services Limited. These shares are treated as treasury shares for accounting purposes in accordance with IAS 32 ‘Financial
Instruments: Presentation’. The Company, however, does not hold any shares in treasury. The EBT is funded by the Company and has been
consolidated within these financial statements.
Reserves included in the consolidated statement of changes in equity
Foreign currency translation reserve
The Foreign currency translation reserve is used to record the gains and losses arising since 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.
24. 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 leased assets have passed to the 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 27 March
2016
£m
(120)
(358)
(427)
(905)
At 29 March
2015
£m
(117)
(365)
(441)
(923)
At 27 March
2016
£m
(13)
(25)
(7)
(45)
At 29 March
2015
£m
(10)
(12)
(2)
(24)
At 27 March
2016
£m
(9)
(22)
-
(31)
At 29 March
2015
£m
(3)
(1)
–
(4)
At 27 March
2016
£m
(142)
(405)
(434)
(981)
At 29 March
2015
£m
(130)
(378)
(443)
(951)
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 ten years. Vehicle leases generally have a
term of between one and seven years, depending on the asset class, with the average term being three years. The existing leases have an
average term remaining of three years. The majority of the IT commitments relate to four contracts, with an average term remaining of
three years.
132
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
24. Commitments (continued)
Finance lease commitments
Within one year
Between one and five years
Beyond five years
Total minimum lease payments
Less future finance charges
Less exchange rate impact
Total finance lease obligations
At 27 March 2016
At 29 March 2015
Minimum
lease
payments
£m
(87)
(134)
(108)
(329)
108
1
(220)
Present value of
minimum lease
payments
£m
(84)
(123)
(13)
(220)
-
-
(220)
Minimum
lease
payments
£m
(98)
(174)
(114)
(386)
114
-
(272)
Present value of
minimum lease
payments
£m
(93)
(164)
(15)
(272)
-
-
(272)
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 two years. Property leases have a term of
between 10 and 110 years with the average term being 48 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 £34 million (2014-15 £37 million) for property, plant and equipment, £3 million (2014-15 £nil) for vehicles
and £12 million (2014-15 £26 million) for intangible assets, which are contracted for but not provided for in the financial statements.
25. Contingent liabilities
Contingent liabilities are possible obligations depending on the outcome of uncertain future events, or present obligations where outflows
of resources are not certain or cannot be measured reliably. This disclosure has been included on the basis that the Group may be subject
to a financial penalty, dependent on a future Ofcom decision.
On 28 July 2015, the Group received a Statement of Objections setting out Ofcom's provisional, preliminary findings in relation to its
investigation into the terms on which the Group proposed to offer access to letter delivery services, alleging a potential distortion of
competition. The investigation was launched in February 2014 following a complaint brought by TNT Post UK (now Whistl) about certain
proposed changes to Royal Mail’s Access contracts.
The Group has publically stated that it is considering Ofcom’s provisional findings, and that it will robustly defend against Ofcom’s allegations.
The Group is not in a position to accurately predict when it will receive Ofcom’s final decision nor has it received any detail as yet from Ofcom
as to the quantum of any potential penalty (which will only be received if Ofcom intends to make an infringement finding).
The Group continues to maintain that it has not infringed competition law and its representations to Ofcom have been on that basis.
Annual Report and Financial Statements 2015-16
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Royal Mail plc
|
Notes to the consolidated
financial statements (continued)
26. 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 as follows:
Sales/recharges to:
RMPP (administration and investment service recharge)
Purchases/recharges from:
Associate undertaking (Quadrant Catering Limited)
Amounts owed to:
Associate undertaking (Quadrant Catering Limited)
52 weeks
2016
£m
52 weeks
2015
£m
5
5
(11)
(14)
(1)
(1)
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 benefits
Total compensation earned by key management
52 weeks
2016
£000
(9,981)
-
(1,879)
(11,860)
52 weeks
2015
£000
(10,202)
-
(2,846)
(13,048)
Key management are considered to be the Executive and Non-Executive Directors of Royal Mail plc, all other members of the Chief
Executive’s Committee (see page 47) and the remainder of the Persons Discharging Managerial Responsibilities.
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. The reporting year end for these entities is 27 March 2016 unless otherwise
indicated.
Company
General Logistics Systems B.V.1
Royal Mail Estates Limited
Royal Mail Investments Limited
Romec Limited2
Principal activities
Parcel services holding company
Property holdings
Holding company
Facilities management
Country of incorporation
Netherlands
United Kingdom
United Kingdom
United Kingdom
% equity
interest
2016
100
100
100
51
% equity
interest
2015
100
100
100
51
The Company has complied with section 410 of the Companies Act 2006 by including in these financial statements a schedule of interests in
all undertakings (see Note 28).
1 GLS’ reporting year end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group’s reporting year
end date (last Sunday in March) a full year of GLS results is consolidated into the Group
2 Romec Limited’s reporting year end date is 31 March each year and adjustments are made in the Romec Limited financial statements to align with the Group’s reporting year end
date of the last Sunday in March. See Note 27 for details of the transaction to acquire the 49 per cent minority shareholding of Romec Limited
134
| Annual Report and Financial Statements 2015-16
Notes to the consolidated
financial statements (continued)
27. Events after the reporting year
This note confirms whether or not there have been any material events occurring between the end of the financial reporting year on 27
March 2016 and the publication date of the Annual Report and Financial Statements.
Romec Limited (Romec) – acquisition of 49 per cent shareholding
On 31 March 2016, Royal Mail Group Limited (RMG), the main operating subsidiary of Royal Mail plc, acquired the 49 per cent of shares in
Romec that it did not already own, from ENGIE (formerly Cofely Workplace Limited), making RMG the sole shareholder of Romec. The
financial terms of the acquisition are not considered by Management to be material in the context of the Group as a whole.
Settlement of French Competition Authority fine
Following the results of an investigation by the French Competition Authority (Autorité de la Concurrence) in respect of alleged breaches of
antitrust laws by one of its subsidiaries, GLS France, a settlement amount of €55 million was paid by the Group on 15 April 2016. This
amount is fully provided for in the Group financial statements at 27 March 2016 and at 29 March 2015.
Annual Report and Financial Statements 2015-16
| 135
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Royal Mail plc
|
Notes to the consolidated
financial statements (continued)
28. Related undertakings of Royal Mail plc
This requirement to disclose as a Note to the financial statements, a list of all related undertakings of the Company, is new to annual
financial statements approved by directors on or after 1 July 2015. Previously, this information was filed as part of the Company’s Annual
Return, in line with an exemption (which is no longer available) under section 410 of the Companies Act 2006.
In accordance with Section 409 of the Companies Act 2006 a full list of related undertakings, the country of incorporation and the effective
percentage of equity owned, as at 27 March 2016 is disclosed below. Unless otherwise stated, the share capital disclosed comprises ordinary
or common shares which are held by subsidiaries of Royal Mail plc Group.
Subsidiary undertakings included in the consolidation
Name of undertaking
Agone S.R.L
Angard Staffing Solutions Limited
Community Couriers Ltd
Consignia (Customer Management) Limited
Consignia Limited
Der Kurier Beteiligungsgesellschaft GmbH
Der Kurier GmbH & Co. KG
DGMH Clayton Limited
EBP Consultancy (Beijing) Co. Ltd1
Envision Licensing Limited
General Logistics Systems Austria GmbH
General Logistics Systems B.V.
General Logistics Systems Belgium N.V.
General Logistics Systems Croatia D.O.O
General Logistics Systems Czech Republic S.R.O
General Logistics Systems D.O.O.
General Logistics Systems Denmark A/S
General Logistics Systems Enterprise S.R.L
General Logistics Systems Express A/S
General Logistics Systems Finland Oy
General Logistics Systems France S.A.S
General Logistics Systems Germany GmbH & Co. OHG
General Logistics Systems Ireland Limited
General Logistics Systems Italy S.P.A.
General Logistics Systems Netherlands B.V.
General Logistics Systems Poland Spolka Z.O.O.
General Logistics Systems Portugal Lda
General Logistics Systems Spain S.L.
GLS Belgium Distribution S.A/N.V.
GLS Beteiligungs Gmbh
GLS General Logistics Systems Hungary Kft.
GLS General Logistics Systems Romania Srl
GLS General Logistics Systems Slovakia S.R.O.
GLS Invest France S.A.S.
GLS IT Services Gmbh
GLS Netherlands Holding B.V.
GLS Netherlands Services B.V.
GLS Verwaltungs-Und Service GmbH
Gruppo Executive Societa Consortile S.R.L
Intersoft Systems & Programming Limited
IRED Partnership Limited
NDC 2000 Limited
NDC 2001 Limited
136
| Annual Report and Financial Statements 2015-16
Country of
incorporation
Italy
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Germany
Germany
United Kingdom
China
United Kingdom
Austria
Netherlands
Belgium
Croatia
Czech Republic
Slovenia
Denmark
Italy
Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Poland
Portugal
Spain
Belgium
Germany
Hungary
Romania
Slovakia
France
Germany
Netherlands
Netherlands
Germany
Italy
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Share class
€10,000.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
€25,000.00 Ordinary shares
€2,561,572.32 Cash Contribution
£1.00 Ordinary shares
-
£1.00 Ordinary-A shares
£1.00 Ordinary-B shares
£1.00 Ordinary-C shares
€1,090,092.51 Ordinary shares
€100.00 Ordinary shares
€100.00 Ordinary shares
HRK760,000.00 Ordinary shares
CZK2,970,000.00 Ordinary shares
CZK30,000.00 Ordinary shares
€751,127.00 Ordinary shares
DKK100.00 Ordinary shares
€1,011,000.00 Ordinary shares
DKK1,000.00 Ordinary shares
€50.00 Ordinary shares
€50.00 Ordinary shares
€178,249,643.37 Cash
Contribution
€1.2697 Ordinary shares
€0.52 Ordinary shares
€50.00 Ordinary shares
PLN1.721 Ordinary shares
€199,900.00 Ordinary shares
€100.00 00 Ordinary shares
€20.00 Ordinary shares
€4.27 Ordinary shares
€7,720,507.41 Ordinary shares
HUF30,000,000.00 Ordinary
shares
RON4,000.00 Ordinary shares
€98,604.00 Ordinary shares
€996.00 Ordinary shares
€21.00 Ordinary shares
€127,822.97 Ordinary shares
€0.50 Ordinary shares
€50.00 Ordinary shares
€153,387.56 Ordinary shares
€255.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary-A shares
£1.00 Ordinary shares
% of class
directly held
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Group interest
held %
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
81.667
100.000
100.000
51.000
100.000
Notes to the consolidated
financial statements (continued)
Name of undertaking
NetDespatch Ltd
Overnight Services GmbH Vermittlung Ueberregionaler
Kurierdienste
Parcelforce Limited
Phatware Limited
POSG Limited
Postcap (Guernsey) Limited
RM (International) Limited
RM Financing Operations Limited
ROMEC Enterprises Limited
ROMEC Limited
Royal Mail Courier Services Ltd
Royal Mail Enterprises Limited
Royal Mail Estates Limited
Royal Mail Finance (No2) Limited
Royal Mail Finance Limited
Royal Mail Group Limited
Royal Mail Innovations Limited
Royal Mail Investments Limited
Royal Mail Pensions Trustees Limited
Senditnow Limited
Storefeeder Ltd
Viacode Limited
Williames Cargo Systems Limited
Joint venture and associated undertakings
Name of undertaking
Mallzee Ltd
Market Engine Global Pty Limited
ParcelLock GmbH
Quadrant Catering Limited
1 100% of the equity contribution. No shares are issued by EBP
United Kingdom
United Kingdom
United Kingdom
Guernsey
United Kingdom
Ireland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Ireland
Country of
incorporation
United Kingdom
Australia
Germany
United Kingdom
Country of
incorporation
United Kingdom
Share class
£0.001 Ordinary-A shares
£0.001 Ordinary-B shares
% of class
directly held
-
-
Group interest
held %
56.808
14.377
Germany
€25,564.59 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
€1.00 Ordinary
€1.00 Redeemable Preference
shares
£1.00 Ordinary shares
£1.00 B Shares
£1.00 C Shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
£1.00 Ordinary shares
€1.2697 Ordinary shares
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100.000
-
-
-
-
-
-
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
0.980
0.980
50.000
100.000
100.000
100.000
100.000
100.000
-
100.000
100.000
100.000
100.000
100.000
100.000
100.000
Share class
£0.01 Ordinary shares
AUD1.00 Preference shares
€50,000.00 Ordinary shares
£1.00 Ordinary-A shares
% of class
directly held
-
-
-
-
Group interest
held %
25.005
34.474
33.333
51.000
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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 interests 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 and Financial
Statements for the year ended 29 March 2015, except for a change in policy in respect of pensions administration costs as detailed in Note 1
on page 94, and the adoption of new and amended accounting standards with effect from 30 March 2015 as detailed below:
New accounting standard amendments adopted in 2015-16
Annual improvements 2010 – 2012
Annual improvements 2011-2013
IAS 19 (Amended) ‘Defined benefit plans: Employee contributions’
The adoption of these amendments to the standards has not had a material impact on the financial performance or position of the Group.
Key sources of estimation uncertainty and critical accounting judgements
The preparation of consolidated financial statements necessarily requires Management to make estimates and assumptions that can have a
significant impact on the financial statements. These estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas
involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial
statements are disclosed below.
Pensions
The value of defined benefit pension plan liabilities and assessment of pension plan costs are determined by long-term actuarial
assumptions. These assumptions include discount rates (which are based on the long-term yield of high-quality corporate bonds), 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 a qualified actuary. Details of the key actuarial assumptions used and of the sensitivity of these assumptions are included
within Note 10.
Deferred revenue
The Group recognises advance customer payments on its balance sheet, predominantly relating to stamps and meter credits purchased by
customers but not yet used at the balance sheet date (see Note 19). The valuation of this deferred revenue is based on a number of different
estimation and sampling methods using external specialist resource as appropriate.
The majority of this balance is made up of stamps sold to the general public. For sales to the general public, estimates of stamp volumes held
are made on the basis of monthly surveys performed by an independent third party. In order to avoid over-estimation of the typical number
of stamps held, Management applies a cap to the results to exclude what are considered to be abnormal stamp holdings from the estimate.
The level at which holdings are capped is judgemental and is currently set at 99 of each stamp type per household. The impact of applying
alternative capping values on the year end public stamp deferred revenue balance is shown in the table below.
At 27 March 2016
Public stamp holdings value (£m)
Capped
As reported
99
195
30
157
Uncapped
300
218
226
The value of stamps and meter credits held by retail and business customers are more directly estimated through the analysis of sales
volumes and monthly meter sampling. Further adjustments are also made for each type of sale to take into account volume purchasing of
stamps when price changes are announced.
The results of the above procedures 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.
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Significant accounting policies (continued)
Provisions
Due to the nature of provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future. Of
the provisions in place, the transformation costs and industrial diseases claims provisions are considered to be the areas where the
application of judgement has the most significant impact.
Transformation costs provisions relating to redundancy and project costs, are derived based upon the most recent business plans where
these are sufficiently detailed and where appropriate, communication to those affected has been undertaken. These plans include the
expected number of employees impacted and expected rate of compensation per employee.
The industrial diseases claims provision arose as a result of a Court of Appeal’s judgement in 2010 and relates to individuals who were
employed in the General Post Office Telecommunications division prior to October 1981. The provision requires estimates to be made of the
likely volume and cost of future claims and is based on the best information available as at the year end, which incorporates independent
expert actuarial advice.
Onerous property provisions require an estimate of the period for which the property is likely to remain vacant and any expected
decommissioning costs. The carrying values of all provisions are included within Note 22.
Deferred tax
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. Prior to recording deferred tax assets for tax losses, relevant tax law is considered to determine the availability of
the losses to offset against the future taxable profits. The carrying values of the deferred tax assets and liabilities are included within Note 7.
Revenue
Revenue recognised 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. Contracted services that have not
yet been rendered at the balance sheet date are designated as deferred income.
Revenue from direct sales of products or services is recognised when services are rendered, goods are delivered and the amount of revenue
that will flow to the Group can be measured reliably. Where payments are received for a service to be provided over a specified length of
time, payments received are recognised as deferred revenue and released to the income statement over the period that the service is
performed.
Revenue derived from Network Access agreements is recognised when the delivery of the related items is complete. Where products are sold
through third party agents, the revenue receivable is recognised gross with any commission payments being charged to operating costs.
Revenue relating to public, retail and business stamp and meter sales is recognised when the sale is made, adjusted to reflect a value of
stamp and meter credits held but not used by the customer. Further details on this ‘deferred revenue’ adjustment are provided in the ‘Key
sources of estimation uncertainty and critical accounting judgements’ section above.
General Logistics Systems
Revenue is derived from specific contracts and is recognised when the delivery of an item is complete.
People costs
These are costs incurred in respect of the Group’s employees and comprise wages and salaries, pensions and social security costs.
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.
Infrastructure costs
These are costs primarily relating to the day-to-day operation of the delivery network and include depreciation/amortisation, IT and property
facilities management costs.
Share-based payments
The Group operates a number of equity settled, share-based compensation schemes under which the Group receives services from
employees as consideration for equity instruments (shares) of the Company. These include the tax-advantaged (Employee Free Shares) Share
Incentive Plan (SIP) and the Save As You Earn (SAYE) scheme. Both schemes are based on non-market conditions and do not vest until the
employee completes a specific period of service. Share-based payments awarded as part of Long-Term Incentive Plans (LTIP) vest based on
a combination of non-market and market conditions. 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 equity instruments at the date on which they
are granted. The fair value of each award is measured using the Black-Scholes share option pricing model where appropriate.
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Significant accounting policies (continued)
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.
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. 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.
Non-GAAP measures of performance
In the reporting of financial information, the Group uses certain measures that are not defined under IFRS, the Generally Accepted
Accounting Principles (GAAP) under which the Group reports. Management believe that these non-GAAP measures assist with the
understanding of the performance of the business.
These non-GAAP measures are not a substitute, or superior to, any IFRS measures of performance but they have been included as
Management consider them to be an important means of comparing performance year-on-year and they include key measures used within
the business for assessing performance.
Transformation costs
These costs relate to the ongoing transformation of the business, and include voluntary redundancy, project costs and other transformation-
related payments.
Reported operating profit before transformation costs
This is the operating profit including the ‘pension charge to cash difference’ operating specific item (see below for definition) and before
transformation costs.
Reported operating profit after transformation costs
This is the operating profit including the ‘pension charge to cash difference’ operating specific item and after transformation costs.
Operating specific items
These are recurring or non-recurring items of income or expense of a particular size and/or nature relating to the operations of the business
that in the Directors’ opinion require separate identification. These items are included within ‘reported’ results but are excluded from
‘adjusted’ results.
These items include: the recurring ‘pension charge to cash difference’ (resulting from the increasing difference between the Group’s income
statement pension charge and the actual cash cost of pensions, including deficit payments); and other items that have resulted from events
that are non-recurring in nature, even though related income/expense can be recognised in subsequent periods. These items currently
include the charge for Employee Free Shares, legacy costs (for example, movements in the industrial diseases provision) and impairments.
Non-operating specific items
These are recurring or non-recurring items of income or expense of a particular size and/or nature which do not form part of the Group’s
trading activity and which in the Directors’ opinion require separate identification. These items include profit on disposal of property, plant
and equipment and businesses, the IAS 19 non-cash pension interest credit, and profit on disposal of discontinued operations.
Adjusted operating profit before transformation costs
This is operating profit excluding the ‘pension charge to cash difference’ operating specific item and before transformation costs. This is a key
performance indicator in the Corporate Balanced Scorecard which is used to determine employee incentives.
Adjusted operating profit margin before transformation costs
This is operating profit excluding the ‘pension charge to cash difference’ operating specific item and before transformation costs, expressed as
a percentage of revenue.
Adjusted operating profit after transformation costs
This is operating profit excluding the ‘pension charge to cash difference’ operating specific item and after transformation costs.
Adjusted operating profit margin after transformation costs
This is operating profit excluding the ‘pension charge to cash difference’ operating specific item and after transformation costs, expressed as a
percentage of revenue.
Adjusted earnings per share
Basic earnings per share, excluding operating and non-operating specific items.
Free cash flow
Free cash flow is based on statutory (reported) net cash flow before financing activities, adjusted to include finance costs paid and exclude net
cash generated from the purchase/sale of financial asset investments.
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Significant accounting policies (continued)
Net debt
Net debt is calculated by netting the value of financial liabilities (excluding derivatives) against cash and other liquid assets.
Income tax and deferred tax
The charge for current tax is based on the results for the reporting year, adjusted for items that are non-assessable or disallowed. It is
calculated using rates that have been substantively enacted at the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and unused tax 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 tax 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 tax 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 tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been substantively enacted at the balance sheet date. Deferred tax balances are
not discounted.
Current and deferred tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity, otherwise
it is recognised in the income statement.
Earnings per share (EPS)
Basic EPS from continuing operations is calculated by dividing the profit from continuing operations (adjusted for non-controlling interests’
share of profit) by the weighted average number of ordinary shares in issue. The Group EPS is calculated in the same way, except that it also
includes profit or loss from discontinued operations.
Diluted EPS is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all
potentially dilutive ordinary shares arising from share-based payment schemes. These potential shares are treated as dilutive only when their
conversion to ordinary shares would decrease EPS from continuing operations.
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. The Board (Chief Operating
Decision Maker as defined by IFRS 8) monitors the operating results of its main business units separately for the purpose of making decisions
about resource allocation and performance assessment. Segment performance is evaluated based on adjusted operating profit before
transformation costs.
There is no aggregation of operating segments. The business units that make up the three operating segments are included 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 unit.
The UK operations comprise the UKPIL business unit plus the Other operating segment.
Segment revenues have been attributed to the respective countries based on the primary location of the service performed.
Transfer prices between segments are set at arm’s length/fair value 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 IFRS.
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Significant accounting policies (continued)
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 cost, the 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
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or
disposal. Any gain or loss arising at de-recognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the asset) is included in the income statement in the year that the asset is de-recognised. Gains or losses from the
disposal of assets are recognised in the income statement when all significant risks and rewards of ownership are transferred to the
customer.
All subsequent expenditure on property, plant and equipment is capitalised if it meets the recognition criteria, and the carrying amount of
those parts replaced is de-recognised where appropriate. All other expenditure, including repairs and maintenance expenditure, is recognised
in the income statement as incurred.
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.
For the purpose of such impairment reviews, goodwill is allocated to the relevant cash generating units.
An impairment loss is recognised in the income statement for the amount by which the carrying value of the goodwill (or cash generating
unit) exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.
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 intangible 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
Master franchise licences
Software
3 to 4 years
7 to 10 years
3 to 10 years
Investment in associates
The Group’s investment in its associate companies is accounted for under the equity method of accounting. Under this 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 annual post-tax profits from the associates (netted off other
operating costs as the values are not material enough for separate disclosure).
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.
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Significant accounting policies (continued)
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, the assets (including those in a disposal
group) cease being depreciated.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of
operations, that has been disposed of, 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 up
to the date of disposal, and the post-tax gain or loss recognised on any remeasurement of the disposal group 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 and cash generating units 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.
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.
In addition to lease contracts, other significant arrangements or contracts are assessed (by reference to IFRIC 4) to determine whether, in
substance, they are, or contain, a lease. This assessment is based on the substance of the arrangement at inception date, including whether
the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
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 with the amount of the loss recognised in the income
statement within operating costs. When a bad debt is recognised, it is written off against the allowance for trade receivables. Subsequent
recoveries of amounts previously written off are credited against operating costs in the income statement.
Inventories
Inventories are valued on a weighted average cost basis and carried at the lower of cost and net realisable value. Cost includes all direct
expenditure and other costs attributable in bringing inventories to their present location and condition. The principal stock balance consists of
engineering spare parts.
Trade payables
Trade payables are recorded initially at fair value and subsequently measured at amortised cost. Generally this results in their recognition at
their nominal value.
Financial instruments
Financial assets within the scope of IAS 39 ‘Financial Instruments: Recognition and Measurement’ are classified as: financial assets at fair
value through profit and loss (FVTPL) if they are not part of an effective hedge designation (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 FVTPL 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 FVTPL, any directly attributable transactional costs. The Group only has loans and receivables, financial liabilities
measured at cost and derivative assets and liabilities measured at FVTPL if they are not part of an effective hedge designation.
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Significant accounting policies (continued)
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 at FVTPL 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.
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 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.
Financial assets – other investments
Financial assets – other investments comprise short-term deposits (other investments) with 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. The €500 million bond is measured at amortised
cost in Euro and converted to Sterling at the closing spot Sterling/Euro exchange rate.
Financial liabilities – obligations under finance leases
All obligations under finance leases are classified as financial liabilities measured at amortised cost. The Euro denominated finance lease
payables is measured at amortised cost in Euro and converted to Sterling at the closing Sterling/Euro exchange rate.
Derivative financial instruments and hedging programmes
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 year.
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.
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Significant accounting policies (continued)
Fair value measurement of financial instruments
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value
hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market
transactions; reference to the current market value of another instrument which is substantially the same; and discounted cash flow analysis
and pricing models. Specifically, in the absence of quoted market prices, derivatives are valued by using quoted forward prices for the
underlying commodity/currency and discounted using quoted interest rates (both as at the close of business on the balance sheet date).
Hence derivative assets and liabilities are within Level 2 of the fair value hierarchy as defined within IFRS 13.
The Group determines whether any transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each
reporting year. 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. For the €500 million bond, the disclosed fair value is calculated as the closing
market bond price converted to Sterling using the closing spot Sterling/Euro exchange rate.
Borrowing costs
Interest on borrowings related to the construction or development of qualifying assets is capitalised, until such time as the assets are
substantially ready for their intended use.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect
of the time value of money is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax
rate. Accounting estimates used in calculating the provisions are discussed further in the ‘Key sources of estimation uncertainty and critical
accounting judgements’ part of this accounting policies section.
Contingent liabilities
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or present obligations
where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial
statements but are disclosed unless an outflow of resources is considered to be remote.
Dividends
Distributions to owners of the Company are not recognised in the income statement under IFRS, but are disclosed as a component of the
movement in shareholders’ equity. A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders but not
paid at the year end. Interim dividends are recognised as a distribution when paid.
Pensions and other post-retirement benefits
The pension assets for the defined benefit plans 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. The amount of any pension
surplus that can be recognised is limited to the economic benefits unconditionally available in the form of refunds or reductions in future
contributions. Where the economic benefit to be obtained is in the form of a refund, this is recognised net of taxation withheld in line with
IFRIC 14.
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 surplus disclosed. All active members of defined
benefit plans are contracted out of the earnings-related part of the State Second pension scheme.
For defined benefit plans, 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. Remeasurement gains and
losses are recognised immediately in the statement of comprehensive income. Any deferred tax movement associated with the
remeasurement gains and losses is also recognised immediately in the statement of comprehensive income.
For defined contribution plans, the Group’s contributions are charged to operating profit within People costs in the year to which the
contributions relate. Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits.
Annual Report and Financial Statements 2015-16
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Royal Mail plc
|
Significant accounting policies (continued)
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 IFRS, are taken directly to the foreign
currency translation reserve in equity.
Foreign currency exchange differences arising from translation of the €500 million bond and the Euro denominated finance leases
(designated as hedges of the net investment in GLS) to closing Sterling/Euro exchange rates are deferred to the foreign currency translation
reserve in equity. These exchange differences would be released from equity to the income statement as part of the gain or loss if GLS was
sold.
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 their 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 a 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 amended/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 1 (Amended) Improving the Effectiveness of Disclosure in Financial Reporting
IAS 7 (Amended) Disclosure Initiative*
IAS 12 (Amended) Recognition of Deferred Tax Assets for Unrealised Losses*
IAS 16 (Amended) and IAS 38 (Amended) Acceptable Methods of Depreciation and Amortisation
IAS 27 (Amended) Equity Method in Separate Financial Statements
IFRS 9 Financial Instruments*
IFRS 10 (Amended) and IAS 28 (Amended) Sale of Assets between an Investor and its Associate or Joint Venture*
IFRS 11 (Amended) Accounting for Acquisitions of Interests in Joint Operations
IFRS 15 Revenue from Contracts with Customers*
IFRS 16 Leases*
Annual Improvements 2012-2014
* Not yet endorsed by the EU
Of the accounting standards listed above, the following are considered of particular relevance to the Group.
IFRS 9 ‘Financial Instruments’
This standard was issued in July 2014 and is a replacement of IAS 39 ‘Financial Instruments: Recognition and Measurement’. The standard is
effective for accounting periods beginning on or after 1 January 2018 with early adoption permitted. The standard will affect the
classification, measurement and derecognition of the Group’s financial assets and liabilities and provides a new credit loss model for
calculating impairment. IFRS 9 also introduces a new hedge accounting model. The changes to the measurement of financial instruments and
the new hedge accounting rules are not currently considered likely to have a major impact on the Group’s financial performance or position.
IFRS 15 ‘Revenue from Contracts with Customers’
This standard was issued in May 2014 and replaces IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’ and related interpretations. The
standard is effective for accounting periods beginning on or after 1 January 2018 with early adoption permitted. The standard introduces a
single, five-step revenue recognition model that is based upon the principle that revenue is recognised at the point that control of goods or
services is transferred to the customer. The standard also updates revenue disclosure requirements. Whilst an assessment of this new
standard is ongoing, the Group does not expect its adoption to have a material impact on the Group’s financial performance or position.
146
| Annual Report and Financial Statements 2015-16
Significant accounting policies (continued)
IFRS 16 ‘Leases’
This standard was issued in January 2016 and replaces IAS 17 ‘Leases’. The standard is effective for accounting periods beginning on or
after 1 January 2019 with early adoption permitted where IFRS 15 has also been adopted. The standard will bring the majority of leases
previously classed as operating leases onto the balance sheet with a corresponding lease liability also recognised with some exemptions for
small value or short leases. The Group is currently assessing the impact of IFRS 16 on the financial performance and position of the Group,
however, it is expected that the adoption of the standard will result in a material increase in property, plant and equipment and
corresponding lease liability balances; a decrease in operating costs; and an increase in finance costs. The classification of related cash flows
will also change.
Currently, the Group does not expect to early adopt any of these standards.
The Directors do not expect that the adoption of the remaining standards listed above will have a material impact on the financial
performance or position of the Group in future periods.
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Royal Mail plc – parent Company
financial statements
The Annual Report and Financial Statements primarily relates to the consolidated results of Royal Mail plc and its trading entities. The
mandatory disclosures in this section relate solely to the financial statements of the ultimate parent company, Royal Mail plc (the Company).
Statement of changes in equity
For the 52 weeks ended 27 March 2016 and 52 weeks ended 29 March 2015
At 30 March 2014
Profit for the year
Investment in subsidiary
Dividend paid
At 29 March 2015
Profit for the year
Investment in subsidiary
Dividend paid
At 27 March 2016
Balance sheet
At 27 March 2016 and 29 March 2015
Registered number: 08680755
Non-current assets
Investment in subsidiary
Total non-current assets
Current assets
Trade and other receivables
Current liabilities
Trade and other payables
Provisions
Net current assets
Interest-bearing loans and borrowings
Net assets
Equity
Share capital
Retained earnings
Total equity
Share
capital
£m
10
–
–
-
10
-
-
-
10
Retained
earnings
£m
1,577
207
168
(200)
1,752
221
170
(213)
1,930
Total
equity
£m
1,587
207
168
(200)
1,762
221
170
(213)
1,940
At 27 March
2016
£m
At 29 March
2015
£m
Notes
6
7
8
9
10
1,929
1,929
1,759
1,759
409
375
(6)
-
403
(392)
1,940
10
1,930
1,940
(6)
–
369
(366)
1,762
10
1,752
1,762
The balance sheet was approved and authorised for issue by the Board of Directors on 18 May 2016 and signed on its behalf by:
Matthew Lester
Chief Finance Officer
148
| Annual Report and Financial Statements 2015-16
Royal Mail plc – parent Company
financial statements (continued)
1. Parent Company accounting policies
Accounting reference date
The financial reporting year ends on the last Sunday in March and accordingly, these financial statements are made up for 52 weeks ended
27 March 2016 (2014-15 52 weeks ended 29 March 2015).
Authorisation of financial statements and statement of compliance with FRS 101
The financial statements of the Company for the year ended 27 March 2016 were authorised for issue by the board of Directors on 18 May
2016. The Company is incorporated and domiciled in England and Wales.
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101)
and in accordance with applicable accounting standards. The amendments to FRS 101 (2013-14 Cycle) issued in July 2014 and effective
immediately have been applied.
The Company has not presented its own income statement as permitted by section 408 of the Companies Act 2006. However, the results of
the Company are presented in Note 4 of these financial statements.
Basis of preparation
The Company has transitioned to FRS 101 from previously extant UK Generally Accepted Accounting Practice (UK GAAP) for all periods
presented. No material adjustments arose within the Company as a result of this transition. The accounting policies which follow, set out
those policies which apply in preparing the financial statements for the reporting year ended 27 March 2016.
The Company has taken advantage of the following disclosure exemptions under FRS 101:
(a) the requirements of paragraphs 45(b) and 46-52 of IFRS 2 Share-based Payment;
(b) the requirements of IFRS 7 Financial Instruments: Disclosures;
(c) the requirements of paragraphs 91-99 of IFRS 13 Fair Value Measurement;
(d) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative information in respect of:
(i) paragraph 79(a)(iv) of IAS 1;
(ii) paragraph 73(e) of IAS 16 Property, Plant and Equipment; and
(iii) paragraph 118(e) of IAS 38 Intangible Assets.
(e) the requirements of paragraphs 10(d), 10(f), 39(c) and 134-136 of IAS 1 Presentation of Financial Statements;
(f) the requirements of IAS 7 Statement of Cash Flows;
(g) the requirements of paragraph 17 of IAS 24 Related Party Disclosures; and
(h) the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members
of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member.
No cash flow statement has been presented as the Company has presented a consolidated cash flow statement within its Group financial statements.
The consolidated accounts for the Group will continue to be prepared under full IFRS. The Board considers that it is in the best interests of
the Group for Royal Mail plc to continue to adopt FRS 101 ‘Reduced Disclosure Framework’ for the foreseeable future. However, a
shareholder or shareholders holding in aggregate five per cent or more of the total allotted shares in Royal Mail plc may serve objections to
the use of the disclosure exemptions on Royal Mail plc, in writing, to its registered office (100 Victoria Embankment, London, EC4Y 0HQ) and,
if so received, Royal Mail plc may not continue to use these disclosure exemptions.
Accounting standards issued but not yet applied
Following the Company’s adoption of FRS 101 in the reporting year, no new UK Accounting Standards, which affect the presentation of
these financial statements, have been issued.
Changes in accounting policy
The accounting policies are consistent with those of the previous year other than where there has been a consequential change resulting
from the transition to FRS 101.
Key sources of estimation uncertainty and critical accounting judgements
Due to the relatively straightforward nature of the Company and its activities, it is Management’s view that there are no significant
estimates or accounting judgements applied in the preparation of these financial statements.
Investment in subsidiary
The investment in subsidiary is stated at cost plus deemed capital contributions arising from share-based payment transactions, less any
accumulated impairment losses.
Trade receivables
Trade receivables are recognised with an allowance for any non-collectable amounts, including where collection is no longer probable.
Annual Report and Financial Statements 2015-16
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Royal Mail plc – parent Company
financial statements (continued)
2. Directors’ remuneration
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. This remuneration is disclosed in the Group consolidated 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 3).
4. Income statement
The Company is a non-trading company. The profit for the year of £221 million (2014-15 £207 million) is primarily the net sum of; the
£219 million dividends received from Royal Mail Group Limited; management charges to and from Royal Mail Group Limited; and net interest
on the €500 million Bond and intercompany balances.
5. Taxation
There is no tax charge/credit for the year.
6. Investment in subsidiary
At 30 March 2015 and 31 March 2014
Investment in subsidiary – charge for Employee Free Shares/LTIP/SAYE1
At 27 March 2016 and 29 March 2015
1 Excludes £7 million (2014-15 £7 million) associated National Insurance costs
At 27 March
2016
£m
1,759
170
1,929
At 29 March
2015
£m
1,591
168
1,759
7. Trade and other receivables
This balance mainly consists of an intercompany loan to Royal Mail Group Limited amounting to the proceeds from the issue of the €500
million bond (see Note 9).
8. Provisions
In relation to the transfer of Royal Mail Group Limited to the Company in 2013-14, a provision of less than £1 million remains.
9. Interest-bearing loans and borrowings
In July 2014 the Company issued €500 million 2.375 per cent Senior Fixed Rate Notes due July 2024 with a fixed annual interest coupon of
2.375 per cent. The proceeds raised were loaned to Royal Mail Group Limited.
10. Share capital
Authorised and issued
1,000,000,000 ordinary shares of £0.01 each
Total
At 27 March
2016
£m
At 29 March
2015
£m
10
10
10
10
Of the issued ordinary shares, a total of 27,042 (2014-15 40,935) are held by an Employee Benefit Trustee (EBT) administered by Sanne
Fiduciary Services Limited. These shares are treated as treasury shares for accounting purposes in accordance with IAS 32 ‘Financial
Instruments: Presentation’. The Company, however, does not hold any shares in treasury.
The EBT is funded by the Company and has been treated as an extension of the Company for accounting purposes within these financial
statements.
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| Annual Report and Financial Statements 2015-16
Group five year summary (unaudited)
The following information has been prepared on a 52 week basis and excludes, for the 2012 to 2013 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. The Directors are of the view that this presentation provides a meaningful comparative history of the
current Group excluding POL.
This five year summary includes the financial performance and position of the DPD SL subsidiary, up to and including the 2014 reporting
year, after which time it was sold (on 31 March 2015).
Income statement – Adjusted
Revenue
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Finance costs
Profit before tax
Tax
Profit after tax
Income statement - Reported
Revenue
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items
Non-operating specific items
Earnings before interest and tax (EBIT)
Finance income/(costs) – mainly net pension interest (non-operating specific item)
Finance costs
Profit/(loss) before tax
Tax (specific items and other)
Profit/(loss) after tax
Free cash flow1
EBITDA before transformation costs
Pension charge to cash difference
Adjusted EBITDA before transformation costs
Trading working capital movements
Total investment
Other (dividends, tax, interest)
In-year trading cash inflow/(outflow)
Other working capital movements
Cash cost of operating specific items
Proceeds from disposal of assets/business
Free cash inflow
1 An explanation of free cash flow is provided in the Financial Review on page 25
Financial reporting year (52 weeks) ended March
2016
£m
9,251
742
(191)
551
(13)
538
(118)
420
2015
£m
9,328
740
(145)
595
(26)
569
(138)
431
2014
£m
9,456
729
(241)
488
(67)
421
(110)
311
2013
£m
9,146
595
(195)
400
(99)
301
(81)
220
Financial reporting year (52 weeks) ended March
2016
£m
9,251
485
(191)
294
(156)
29
167
113
(13)
267
(45)
222
2015
£m
9,328
611
(145)
466
(248)
133
351
75
(26)
400
(72)
328
2014
£m
9,456
671
(241)
430
1,213
21
1,664
69
(67)
1,666
(386)
1,280
2013
£m
9,146
598
(195)
403
(77)
4
330
52
(99)
283
246
529
Financial reporting year (52 weeks) ended March
2016
£m
756
257
1,013
(26)
(694)
(39)
254
6
(6)
38
292
2015
£m
889
129
1,018
(5)
(648)
(50)
315
17
(8)
129
453
2014
£m
940
58
998
(57)
(617)
(67)
257
140
(35)
36
398
2013
£m
915
(3)
912
(60)
(665)
(81)
106
202
(26)
52
334
2012
£m
8,764
372
(229)
143
(100)
43
(13)
30
2012
£m
8,764
381
(229)
152
(57)
182
277
(230)
(100)
(53)
(51)
(104)
2012
£m
681
(9)
672
(19)
(615)
(87)
(49)
–
(37)
240
154
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Royal Mail plc
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Group five year summary (unaudited) (continued)
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 tax (liabilities)/assets
Net assets before pension deficit and pension escrow investments
Pension surplus/(deficit)1
Net assets/(liabilities)1
People numbers – year end headcount
UKPIL
GLS
UK partially owned subsidiaries
Group total
1 Restated at 29 March 2015 for change in accounting policy relating to pensions administration costs
At March financial reporting year end date
2016
£m
2,000
451
21
1,038
(1,741)
(16)
(247)
206
9
1,721
368
20
(392)
(220)
(224)
(460)
1,037
3,430
4,467
20151
£m
1,933
300
20
960
(1,708)
(31)
(253)
182
5
1,408
287
20
(366)
(216)
(275)
(504)
629
3,367
3,996
2014
£m
1,989
195
22
939
(1,683)
(20)
(268)
197
4
1,375
366
20
(600)
(341)
(555)
(175)
645
1,889
2,534
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
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)
Financial reporting year (52 weeks) ended March
2016
139,408
13,991
3,136
156,535
2015
142,910
14,409
3,199
160,518
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
152
| Annual Report and Financial Statements 2015-16
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: 0371 384 2656 (from outside the UK: +44 (0)121 415 7086)
Lines are open 8.30am to 5.30pm UK time, Monday to Friday,
excluding public holidays in England and Wales.
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 trademarks of Royal Mail Group Limited. The GLS arrow
logo is a registered trade mark of General Logistics Systems
Germany GmbH & Co. OHG. Annual Report 2015-16 © Royal Mail
Group Limited 2016. All rights reserved.
Financial calendar
Trading update – 19 July 2016
Annual General Meeting – 21 July 2016
Dividend dates
Ex-dividend date – 30 June 2016
Record date – 1 July 2016
Payment date – 29 July 2016
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 half year 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
Bank of America Merrill Lynch, 2 King Edward Street, London, EC1A
1HQ
Independent Auditor
KPMG LLP, 15 Canada Square, London E14 5GL
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
Annual Report and Financial Statements 2015-16
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Royal Mail plc
|
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.
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Strategic report | Governance | Financial statements | Other information Postboxes:
the start
of a legend
Origins of a national icon
The first pillar box was erected in
Guernsey in the Channel Islands in 1852
as an experiment. The idea of postboxes
was introduced by novelist, Anthony
Trollope, after he saw them in France. The
boxes proved such a success that they
were soon introduced on the mainland.
It is said that the early postboxes were
made tall enough so that a man wearing
a top hat could use them.
Right from their introduction, postboxes
have carried the insignia, or cipher, of
the reigning monarch at the time of
placement. Queen Elizabeth II is the most
common cipher, featuring on more than
60 per cent of current postboxes.
Blue airmail postboxes were introduced in
1930 and were designed to advertise the
new air mail service. By 1936, there were
139 airmail boxes in London and 174 in
other towns and cities around the country.
Celebrating 500 years of
service and innovation
To mark this momentous anniversary,
Royal Mail has launched a special website
showcasing the people, objects and
events that played a key role in the
development of the world’s
first national postal service.
Discover more by visiting our website:
www.royalmailgroup.com/500years
Royal Mail, the cruciform, Parcelforce Worldwide and the Parcelforce Worldwide logo are trade marks of
Royal Mail Group Limited. The GLS arrow logo is a trade mark of General Logistics Systems Germany GmbH & Co. OHG.
Annual Report 2015-16 © Royal Mail Group Limited 2016. All rights reserved.