Royal Mail plc
Annual Report and
Financial Statements
2016-17
Strategic report
| Governance
| Financial statements
| Other information
Welcome
Strategic report
Governance
Financial
statements
Who we are ................................................................................................................... 02
Financial and operating performance summary...................................................... 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
Financial review............................................................................................................. 21
UK Parcels, International & Letters (UKPIL).......................................................... 21
General Logistics Systems (GLS) ............................................................................ 24
Group results............................................................................................................. 26
Presentation of results and Alternative Performance Measures (APMs) ......... 33
Principal risks ................................................................................................................ 37
Corporate responsibility ............................................................................................... 43
Chairman’s introduction to corporate governance................................................... 48
Board of Directors ........................................................................................................ 49
Chief Executive’s Committee ....................................................................................... 52
Statement of corporate governance .......................................................................... 54
Directors’ remuneration report................................................................................... 66
Directors’ report ............................................................................................................ 84
Independent auditor’s report ...................................................................................... 89
Consolidated income statement ................................................................................. 94
Consolidated statement of comprehensive income ................................................. 95
Consolidated balance sheet......................................................................................... 96
Consolidated statement of changes in equity........................................................... 97
Consolidated statement of cash flows ....................................................................... 98
Notes to the consolidated financial statements........................................................ 99
Significant accounting policies ..................................................................................136
Royal Mail plc – parent company financial statements .........................................146
Other
information
Group five year summary (unaudited).....................................................................149
Shareholder information............................................................................................151
Forward-looking statements.....................................................................................152
Annual Report and Financial Statements 2016-17
| 01
Royal Mail plc
| Who we are
Who we are
Royal Mail is the UK’s pre‑eminent delivery company. We deliver
more letters and parcels, to more addresses in the UK, than all of
our competitors combined. We are proud to deliver a
‘one‑price‑goes‑anywhere’ service on a range of letters and
parcels to around 30 million addresses, across the UK,
six‑days‑a‑week, in our role as the UK’s sole designated Universal
Service Provider1. Royal Mail has helped to shape the history of
the UK and the way the world communicates for 500 years.
We make a very significant contribution
to the wider UK economy. Through UK
Parcels, International & Letters (UKPIL), our
impact, including through employment and
procurement, totalled £10.8 billion last year
in terms of value added. We made the fifth
largest contribution to the UK economy of all
UK corporations2. General Logistics Systems
(GLS), our pan-European parcels business,
operates one of the largest, ground-based
deferred parcel delivery networks in Europe.
Our position
E-substitution continues to drive a
structural decline in UK addressed letter
volumes. We forecast a four to six per cent
annual decline (excluding the impact of
political parties’ election mailings) in the
medium-term. Despite this, letters are an
important part of our business. We believe
they will be for years to come. They account
for around 45 per cent of our revenue as a
Group; and almost 60 per cent of our revenue
in the UK. Royal Mail is the largest parcel
delivery company in the UK. But, we operate
in a very challenging environment. We face
significant competition from companies
with established delivery capabilities and
from new entrants. E-retail continues to fuel
overall growth in parcel volumes. Growth
available in the UK parcels market continues
to be impacted by Amazon’s activities.
International markets are also intensely
competitive, as growth continues to be
fuelled by increasing cross-border trade,
driven by e-retail.
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.
2 2016-17: comprising direct and indirect contributions.
Our people
We employ around 159,000 people across
our Group. One in every 185 jobs in the UK is
provided by Royal Mail3. We are committed to
preserving the trust members of the public
place in Royal Mail and our hard-working
employees. 78 per cent of our customers say
they are favourable to us, while 88 per cent
are satisfied with the service we provide,
putting us ahead of the companies surveyed4.
Royal Mail also ranks as the most trusted and
most preferred delivery company in Business
CSI’s Brand Tracker 2016-17 survey.
Our strong brand position means we are
proud to offer the best pay and terms
and conditions in our industry. The vast
majority of our employees are employed
on permanent contracts, except where
there is a short-term need. Our permanent
employees are paid above the Living Wage
which, in turn, is above the legal minimum
set by the UK Government. They also
receive the additional benefits associated
with permanent employment, such as paid
holidays and a good pension. In return,
however, we continually work with our
unions to agree changes to our working
practices and labour model. This process
of change is about sustaining our business
now and in the future, particularly given the
decline in letter revenues.
Our customers
Royal Mail Group has a wide range of
customers using our letters, parcels and
data services. This includes consumers,
small and medium-sized enterprises (SMEs),
some of the UK’s largest businesses and
retailers, and other postal operators who use
our downstream network. (This is where a
postal operator other than Royal Mail collects
mail from the customer, sorts it and then
3 Cebr research, conducted for Royal Mail in May 2017.
4 Ipsos MORI Corporate Image Survey Winter 2016.
02
| Annual Report and Financial Statements 2016-17
transports it to Royal Mail for delivery.) GLS
also provides a whole range of business-to-
business (B2B) and business-to-consumer
(B2C) services across continental Europe.
Only Royal Mail delivers to all parts of the
country to the same high service standards
with a geographically uniform tariff. In May
2016, our regulator, Ofcom, found that the
postal services sector saw an increase in
customers' perception of value for money
from 2005 to 2015. This was at a time when
ratings declined in many other sectors5.
Ofcom did further research on value for
money in post that concluded 75 per cent of
residential consumers said that they were
either fairly or very satisfied with the value
for money of postal services6.
Royal Mail adheres to a stringent set of
regulatory standards for the delivery of
parcels and letters. Consumer protections
are key. Royal Mail has the greatest number
of protections for parcels customers. Other
major parcel operators have limited or no
regulatory consumer protection standards
applied to them.
Our shareholders
Royal Mail is part of the fabric of UK life.
As such, we are pleased to have a large
and diverse shareholder base. We have a
proactive programme of engagement with all
of our shareholders, including institutional
investors in the UK and overseas. Following
our flotation on the London Stock Exchange
in 2013, we have a relatively large retail
shareholder base. It includes many of our
own people.
All of our eligible full-time employees
have received a maximum of 913 Free
Shares, regardless of grade. This means
that, in total, 12 per cent of the Company
has been awarded to eligible colleagues.
This is one of the largest free stakes made
available to employees as part of any major
UK privatisation.
Our transformation
Our UK operation is organised to deliver to
every household and business in the UK,
Monday to Saturday. This means we benefit
when we deliver letters and parcels together.
More than 90 per cent of the parcels we
handle in the UK pass through the Royal
Mail core network, which delivers the
Universal Service.
We will continue to invest a significant
amount of cash in our core network, although
we are now past the peak of investment.
5 Ofcom, Consultation on Review of the Regulation of
Royal Mail, 25 May 2016, Paragraph 4.12.
6 Ofcom, Review of the Regulation of Royal Mail,
1 March 2017, Paragraph 3.17.
At present, around 80 per cent of our revenue
comes from our UK business. We also want
to develop a broader revenue base and
grow in the UK and overseas. GLS remains
a focus for investment to help drive growth
as it continues to expand, including into
new geographies. It provides exposure to
markets where revenues are growing above
gross domestic product (GDP). It is well
positioned to support our overall strategy
by increasing its footprint and focusing on
growth opportunities in the deferred parcels
space, and selective growth in the B2C
parcels market. In addition, in the UK, we
are actively looking at areas where there
is market opportunity and the potential to
make the most of our assets. They include
our large network infrastructure, our trusted
brand and our data.
We need to stay ahead of the competition
in both letters and parcels if we are to
remain our customers’ number one choice.
In the medium-term, the faster areas of
growth in the parcels market are expected
to be clothing and footwear, returns and
‘same-day’ delivery. We are becoming
more flexible to accommodate the needs
of e-retailers and online shoppers. This
includes increasing the number of pick-up
and drop-off points in our network, better
systems integration with retailers and
extending acceptance times at Mail Centres
and Regional Distribution Centres.
We are also seeking to become a digital
organisation and build our overall
e-commerce capability. Becoming a digital
business is about fundamentally changing
the way we use technology and data. It is
about changing our internal and external
processes. In so doing, we aim to digitise as
many of these as possible. With better use
of technology and data, we can create better
products, services and customer experience.
We want to be able to help our customers
with every step: from purchase, to delivery,
to returns.
Our operations and networks
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.
Strategic report
| Governance
| Financial statements
| Other information
GLS
GLS is our 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 companies and
partner companies.
The GLS footprint was expanded this year.
In Europe, GLS acquired Agencia Servicios
Mensajería S.A.U. (ASM) in Spain. As part
of its careful and focused expansion outside
Europe, GLS acquired Golden State Overnight
Delivery Service Inc. (GSO) and Postal
Express7. GSO is a leading provider of
regional next day delivery services principally
in California8. Postal Express is a regional
overnight carrier operating in the states of
Washington, Oregon and Idaho.
UKPIL
c.142,000
Employees
6
GLS
c.17,000
Employees
62
Regional Distribution Centres
Network hubs
c.1,100
Depots
c.17,000
Parcel shops
389
Mail Centres
c.1,400
Delivery Offices
c.11,600
Local Collect locations
54
Parcelforce Worldwide depots
c.48,00010
Vehicles
Key
UKPIL
GLS
GLS Network
Partners
7 Postal Express was acquired after the financial year end.
8 GSO also operates in Arizona, Nevada and New Mexico.
9 Ipswich Mail Centre has ceased outward processing but
continues inward processing until the second quarter
of 2017-18.
10 Includes around 2,300 trailers.
Annual Report and Financial Statements 2016-17
| 03
Royal Mail plc
| Financial and operating performance summary
Financial and operating
performance summary
Group financial summary1
Reported results (£m)
Revenue
Operating profit before transformation costs
Operating profit after transformation costs
Profit before tax
Basic earnings per share – continuing
operations (pence)
In-year trading cash flow
Net debt
Proposed full year dividend per share (pence)
Adjusted results (£m)
Revenue
Operating profit before transformation costs
Operating profit after transformation costs
Margin
Profit before tax
Basic earnings per share (pence)
Business units
52 weeks ended
26 March 2017
52 weeks ended
27 March 2016
Underlying2
change
9,776
490
353
335
27.5p
420
(338)
23.0p
9,776
712
575
5.9%
559
44.1p
9,251
485
294
267
21.5p
254
(224)
22.1p
9,251
742
551
6.0%
538
41.3p
1%
4%
1%
(6)%
2%
10bps
52 weeks
ended
26 March
2017
7,658
2,118
9,776
Revenue
52 weeks
ended
27 March
2016
7,671
1,580
9,251
Underlying
change
(2%)
9%
1%
Adjusted operating
profit before
transformation costs
52 weeks
ended
26 March
2017
52 weeks
ended
27 March
2016
548
164
712
625
117
742
(£m)
UKPIL
GLS
Group
Group performance1,2
• Revenue was up one per cent on an
underlying basis. Growth in GLS more
than offset the decline in UKPIL revenue.
• Adjusted operating profit before
transformation costs was £712 million,
down six per cent.
• Adjusted operating profit margin after
transformation costs increased on an
underlying basis by 10 basis points.
• Reported operating profit before
transformation costs was £490 million.
• We are past the peak of investment spend.
Net cash investment was £492 million
compared to £656 million in 2015-16.
•
In-year trading cash flow increased to
£420 million.
• Net debt increased to £338 million
• The Board is recommending a final dividend
of 15.6 pence per ordinary share, giving a
total dividend of 23.0 pence per share for
2016-17, up four per cent.
1 Reported results are prepared in accordance with International Financial Reporting Standards (IFRS). Adjusted
results exclude the pension charge to cash difference and specific items, consistent with the way that financial
performance is measured by Management and reported to the Board.
2 Movements are presented on an underlying basis. For further details of reported results, adjusted and underlying
Alternative Performance Measures (APMs) used in the Annual Report and Financial Statements 2016-17, including
reconciliations to the closest IFRS measures where appropriate, see page 33.
3 Internal estimate based on Triangle Management Services/RMG Fulfilment Market Measure (2015); 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. Excludes Amazon Logistics and other retailers
own-delivery networks.
04
| Annual Report and Financial Statements 2016-17
Business performance1,2
• UKPIL revenue was down two per cent.
Parcel revenue increased by three per cent;
total letter revenue declined by five per cent.
• UKPIL parcel volumes were up three
per cent, driven by growth in Royal Mail
account parcels.
• Addressed letter volumes (excluding
the impact of political parties’ election
mailings) declined by six per cent.
As previously stated, overall business
uncertainty in the UK is impacting letters.
• Strategic focus on costs drove a one per cent
reduction in UKPIL underlying operating
costs before transformation costs. This is the
third year of underlying UKPIL cost reduction.
• UKPIL collections, processing and delivery
productivity improved by 2.7 per cent. This
is at the better end of our target range.
• We exceeded our 93.0 per cent regulatory
First Class mail target, with 93.1 per cent
delivered the next working day. We also
exceeded our regulatory Quality of Service
target of 98.5 per cent for Second Class Mail.
• GLS performed well. Volumes and
underlying revenue were up nine per cent.
GLS achieved revenue growth in almost all
its markets from a broad customer base.
• As part of a careful and focused expansion
by GLS, it acquired GSO in California and
ASM in Spain.
Outlook summary
• Responding to challenging operating
environment and continuing to focus on
sustainable cash generation.
• Expect to keep in step with addressable UK
parcels market3 growth of around three per
cent due to IT-enabled improvements.
• Maintain outlook for addressed letter
volume decline of between four to six per
cent per annum (excluding the impact of
political parties’ election mailings) – expect
to be at higher end of range of decline in
2017-18 if business uncertainty persists.
focused international expansion to help
drive growth for the Group.
• Remain on track to avoid around
£600 million of annualised operating costs
in UKPIL by 2017-18.
• Expect net cash investment of around
£450 million in 2017-18 and less than
£500 million per annum going forward.
• Progressive dividend policy supported by
in-year trading cash flow generation of
the Group.
following the acquisition of GSO and ASM.
• Continue to invest in GLS’ careful and
Strategic report
| Governance
| Financial statements
| Other information
Dividends and Free Shares
Our employees own a significant proportion
of the Company. In fact, I am delighted to
be able to say that, following the disposal
of HM Government’s holding in 2015-16,
12 per cent of the Company has been awarded
to eligible colleagues. This means that eligible
full-time employees have now received a
maximum of 913 Free Shares, regardless
of grade.
The Board is committed to our progressive
dividend policy. The Board recommends the
payment of a final dividend of 15.6 pence per
ordinary share on 28 July 2017, giving a total
dividend of 23.0 pence per share for 2016-17,
subject to shareholder approval at our 2017
Annual General Meeting (AGM). The proposed
total dividend is a four per cent increase on the
total dividend of 22.1 pence per ordinary share
for 2015-16.
Connecting companies,
customers and communities
We are the proud provider of the Universal
Service. We are committed to the
Government’s overarching policy objective
– delivering a high quality Universal Service
without recourse to public subsidy.
The postal Universal Service Obligation (USO)
is vital for economic growth. It is a key part
of the digital economy and is a key enabler
of the Government’s broadband strategy.
As the physical fulfilment arm of the digital
economy, I am pleased to report that the
USO has high customer satisfaction ratings.
As Ofcom recently noted, 82 per cent of
residential consumers are either fairly or very
satisfied with Royal Mail services1.
Royal Mail is the delivery partner of choice
for UK SMEs. Research we commissioned
from Triangle Management shows that the
Universal Service provides depth of coverage,
value for money and convenience for SMEs
(see overleaf). The substantial investments
we are making in our business – major
digitisation programmes such as the roll-out
of Postal Digital Assistants (PDAs) – are
helping SMEs to develop their e-commerce
proposition by providing more information
to their customers about the journey of their
parcels. The vital role of the letter for many
businesses, including SMEs, also remains very
much in place.
We are an international parcels business,
both through our UK and GLS operations.
GLS provides geographical diversification of
our earnings. It is well positioned to grow
in new markets. This includes careful and
focused expansion outside Europe.
This year – in Europe itself – GLS acquired
ASM in Spain. Further afield, it purchased
1 Ofcom, Review of the Regulation of Royal Mail,
1 March 2017, paragraph 3.16.
Annual Report and Financial Statements 2016-17
| 05
Chairman’s statement
2016-17 has been another year of significant change.
In my first full year as your Chairman, I have seen
first-hand – in this our 500th year – the pivotal role
this institution plays supporting households, businesses
and communities.
We connect companies, customers and communities
across the UK through Royal Mail and overseas through
GLS, our pan-European parcels business. GLS is
strategically important to the Group. It is a focus for
investment to help drive growth as it continues to expand,
including into new geographies.
We are committed to the Universal Service, delivering
sustainable value for our shareholders and being a high
quality employer. Our delivery services, including the
Universal Service, are an important part of the digital
economy. We are working with our key stakeholders to
provide the Universal Service, deliver innovation and
growth and create sustainable shareholder value.
Royal Mail plc
| Chairman’s statement
GSO and Postal Express2. As our gateway
to Europe and the US, GLS is a strategically
important part of the Royal Mail Group.
Value for money:
• Royal Mail offers a very competitive
service across lighter parcels.
• Other than Royal Mail, only one
alternative provider offers Saturday
delivery at no extra charge.
Depth of coverage:
• Royal Mail provides universal
coverage. Only two other companies
offer all their products everywhere,
including rural areas.
• 80 per cent of UK addresses are
within one kilometre of a Royal Mail
parcel access point.
Triangle Management Insights, 2015.
A responsible employer
Royal Mail is proud to be a responsible
employer. We offer the best pay and terms
and conditions in our industry. We welcome
the ongoing Taylor Review; it is currently
looking at employment conditions across the
UK, including the delivery sector. We believe
co-ordinated and effective Government action
is required to lift labour standards. Better
labour standards will lead to better service
standards for consumers.
We are committed to continuing to provide
the best pay and terms and conditions in our
industry. In return, however, we continually
work with our unions to agree changes to
our working practices and labour model. This
process of change is about sustaining our
business now and in the future, particularly
given the decline in letter revenues.
The safety of our employees is always
our first priority. In 2016-17, we delivered
a 12.3 per cent reduction3 in road traffic
collisions, one of our 2016-17 key
performance indicators (KPIs).
A responsible company
Royal Mail is a great British brand. We are
part of many local communities. We deliver
to all parts of the country to the same service
standards and have a dense network of
access points for local communities. As the
Government seeks to stimulate growth
outside major metropolitan areas, we
have an important role to play in this key
policy area.
2 Postal Express was acquired after the financial
year end.
3 As calculated per 1,000 vehicles.
Alongside our direct and indirect economic
contributions, there is, of course, the broader
role we play in UK life. That is why I have once
again been humbled by the dedication and
commitment of our people to raise money
for good causes. March 2017 saw the end of
our successful partnership with the Stroke
Association, for which we have raised a total
of £2 million, including matched giving from
Royal Mail. We – in short, our colleagues –
hold the Guinness World Record for the most
registered charities supported by a payroll
giving scheme. Since the scheme began in
1989, almost £58 million has been raised
for hundreds of registered charities and
good causes.
GLS is active in supporting community causes
across Europe. In November 2016, GLS
Denmark was named as one of the top five
large Danish companies to work for by the
international Great Place to Work Institute.
In the Netherlands, GLS launched a partnership
with Heppie, a charity that provides outings and
activities for disadvantaged children.
Last year, I touched on the importance of mental
health. Poor mental health is a leading cause of
illness in the UK and our workforce. This year
we will be devoting more resources to this key
issue. We are a signatory of the Time to Change
pledge, which aims to end the stigma of mental
ill-health. We became an official supporter of
the ‘Heads Together’ campaign, led by their
Royal Highnesses, The Duke and Duchess of
Cambridge, and Prince Harry. We launched a
ground-breaking partnership with The Prince’s
Trust, providing funding for the charity to develop
a mental health strategy. This will ensure that
every young person accessing a Prince’s Trust
programme has the mental health support
they need.
We are expanding our support for mental
health by launching a strategic partnership
with Action for Children. We are seeking
to increase people’s awareness of mental
health and support more of our own
people with mental health problems. The
partnership covers a number of key pillars:
mental health training, awareness-raising,
communications, pro-bono support, work
placements and fundraising. We hope to
raise at least £2 million to enable Action for
Children to employ specialist youth workers
to deliver face-to-face support sessions for
8,000 young people aged 15-18.
Our Board
There have been some changes to our Board
over the last 12 months. Nick Horler, who has
been with us for nearly seven years and during
a time of unprecedented change, stepped
down from the Board in February 2017.
Nick made an invaluable contribution and will
be missed. Rita Griffin, a senior executive at
BP, joined us during the year; her expertise in
marketing, logistics and change management
will be very helpful as we continue to
transform Royal Mail.
In December 2016, Matthew Lester informed
the Board of his intention to step down as
Chief Finance Officer (CFO) and leave the Board
following the Company’s AGM in July 2017.
Matthew has made a very considerable
contribution to our business across a wide
range of areas during the seven years he has
been with us. We are grateful he is staying
beyond his contractual notice period. Moya
and I join the Board in offering him our sincere
thanks and best wishes for the future.
On 15 May 2017, we announced that Stuart
Simpson, Director of Group Finance, will be
appointed CFO and join the Royal Mail Board
at the conclusion of the AGM on 20 July 2017.
Stuart's appointment follows a comprehensive
search that included both internal and
external candidates.
Turning to broader issues, as I mentioned in
last year’s Annual Report, the effectiveness
of the Board, its Committees, the Executive
Directors, Non-Executive Directors, and the
Chairman was assessed from January-March
2016 by an external consultancy. The review
covered a range of topics, including succession
planning, operations, composition, skills and
experience. This year, the review was carried
out internally and the main findings are set
out on page 57. The review concluded that the
Board and its Committees are effective but
identified areas of focus that will strengthen
the performance of the Board overall.
Thank you
This is a very special Company. The 500th
anniversary of the postal service in 2016 was
a major milestone that deserved celebration.
At a special 500 years event we hosted,
Moya and I were delighted to welcome Their
Royal Highnesses The Prince of Wales and
The Duchess of Cornwall. In his speech, the
Prince praised our contribution to the British
economy and offered his heartfelt thanks and
congratulations. It was a privilege to introduce
the Royal couple to so many inspirational
people from across our business.
Thanks to the continued hard work,
commitment and dedication of our people,
Royal Mail is making a difference on a daily
basis. I look forward to playing a part in our
continued focus on delivering shareholder
value. This is about working together with
our people, our unions and our customers to
deliver innovation and growth and become a
more efficient business.
Peter Long
Chairman
17 May 2017
06
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Our performance1,2
Group revenue was up one per cent. GLS
performed well, with revenue growth
of nine per cent more than offsetting a
two per cent reduction in UKPIL revenue.
Adjusted Group operating profit before
transformation costs was £712 million and
£575 million after transformation costs.
Adjusted Group operating profit margin after
transformation costs increased by 10 basis
points to 5.9 per cent.
UKPIL parcel volumes grew by three per
cent and revenue increased by three per cent.
Addressed letter volumes (excluding the
impact of political parties’ election mailings)
decreased by six per cent, while total letter
revenue was down five per cent.
We are past the peak of investment so our
spend reduced this year. As a result, in-year
trading cash flow increased to £420 million.
Winning in parcels
Competitive marketplaces
We are the UK’s pre-eminent parcel delivery
company with over 50 per cent of market
share by volume. At 56 per cent3, parcels
account for a higher proportion of Royal
Mail’s Group revenue than for any of our
benchmarked peers. We connect businesses,
households and communities up and down
the country. As the Universal Service
Provider, Royal Mail facilitates e-commerce
growth for UK businesses, especially SMEs.
The UK has one of the most developed
e-commerce markets in the world. Amazon
has an extensive presence in retailing as well
as logistics, including delivery. It is expanding
its presence, including in a range of new
segments. Growth available in the addressable
UK parcels market continues to be impacted by
Amazon's activities. There is significant spare
capacity in the market at non-peak times of
the year, putting downward pressure on prices.
Competition remains intense. International
express carriers are showing renewed interest in
UK e-commerce.
In the consumer/SME segment, product and
service innovations provide more choice and
convenience for customers. For example,
e-commerce services are evolving to provide
1 Adjusted results exclude the pension charge to cash
difference and specific items, consistent with the way
that financial performance is measured by
Management and reported to the Board.
2 Movements are presented on an underlying basis.
For further details of adjusted and underlying
Alternative Performance Measures (APMs) used in
the Annual Report and Financial Statements,
including reconciliations to the closest IFRS
measures where appropriate, see page 33.
3 Based on 2016 calendar year.
Chief Executive Officer's
review
We have made good progress against all of our strategic
priorities. This has been a more challenging period for UK
businesses and we have come through it well. Our multi-year
focus on costs is a key priority. We are on track to avoid around
£600 million of annualised costs in UKPIL by 2017-18. We are
past the peak of investment; we now expect net cash investment
of around £450 million in 2017-18. GLS is performing very well
and is growing revenue organically and through acquisitions.
Its deep expertise and focus on B2B parcels in multiple
geographies – now 41 European countries and seven states in
the US – positions it to be a greater force for growth for the
Company. We will continue to invest in careful and focused
international expansion by GLS. Through a combination of our
strategic approach to costs and more efficient investment spend,
we will support our progressive dividend policy with the in-year
trading cash generation of the Group.
Annual Report and Financial Statements 2016-17
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Royal Mail plc
| Chief Executive Officer's review
greater visibility over delivery windows and
more control over delivery options.
International markets are intensely
competitive. E-retail continues to fuel growth
in cross-border parcel volumes. There is
increasing demand for faster services and
tracked products. Intra-European e-commerce
trade is growing. This is driving cross-border
volumes and a significant part of the growth is
B2C. The European deferred parcels segment
grew faster than the express segment4.
Our progress
• Around two-thirds of our parcels
are barcoded and one-third can be
tracked in some way
• We can offer any retail account
customer a tracked product
• We have improved our
international services
• We strengthened GLS’ network and
extended the service offering in Spain
The depth of coverage, value for money and
convenience for customers is unparalleled –
wherever they are based in the UK. We operate
in every business segment of the parcels
market. Our tracked products continue to grow
at a fast rate. We can offer any retail account
customer a tracked product. Royal Mail Tracked
24®/48® volumes have grown by 38 per cent;
returns volumes are up 18 per cent. Our major
technology rebuild over the last five years has
been a key enabler for the repositioning of what
was already a very good parcel business. Our
customer service is good and we focus on key
areas like complaints, where we have more
work to do. We have the highest standards of
consumer protections for our parcels customers.
We deliver more parcels each year in the
UK than all of our competitors combined.
The service and product improvements we
put in place are delivering real benefits.
We have won further volumes from major
retailers, including Vistaprint and River
Island. Senders and recipients now have
better visibility of when their parcel has been
delivered. When we started using the new 2D
data-rich barcodes in 2015, we were tracking
around 20 per cent of our parcels. Today,
enabled by our enhanced IT parcels systems,
around two-thirds of parcels are barcoded
and one-third can be tracked in some way.
We aim to barcode as many of our parcels
as possible.
We have focused on improving average unit
revenues (AUR) in import parcels by improving
the service levels we offer and securing better
Universal Postal Union (UPU) rates. International
accounts for 18 per cent of UKPIL parcel
volumes and 19 per cent of revenue. We reported
in 2015-16 a reduction in export volumes, so
we built a better solution for exports. The rate of
decline in export parcel volumes has moderated
significantly. Exports have high AURs but higher
cost of sales too.
Pursuing faster-growing areas of
the UK and international markets
We are targeting higher growth areas; for
example, clothing and footwear. We have
worked with e-retailers to be more flexible
about the dimensions of the parcels
we handle.
We have expanded our relationships with
retailers and network partners to maximise
the opportunities developing from cross-
border volume growth between the UK
and Asia. For example, we are working
with China Post to provide Chinese and
UK customers with faster delivery and a
tracked service.
GLS is performing well and is growing
revenue organically and through acquisitions.
Its deep expertise and focus on parcels
positions it to be a force for growth for
the Company. We will continue to invest in
careful and focused international expansion
by GLS.
As in the UK, B2C is the fastest growing
segment in the European parcels market.
GLS provides new points of synergy for
our international business based in the UK.
It also continues to develop its premium B2C
delivery services. Launched in Germany in
April 2016, GLS Sameday offers same-day
evening deliveries in 11 cities, providing an
attractive offering for online shoppers. We are
able to leverage the deep expertise of GLS
to help forge a presence in new areas, for
example, our careful expansion in the US.
Adding value by improving our
products and services
Improving the customer experience remains
a key focus for us. This includes rolling out
delivery confirmation for the majority of
barcoded parcels. This informs the sender
whether a parcel has been delivered, or
returned to the Delivery Office.
We are the delivery partner of choice for
the UK’s SMEs. There are 5.4 million SMEs
in the UK generating 47 per cent of total
UK turnover (£1.8 trillion)5. We support the
growth of SMEs through extended weekend
collections. Local Collect remains the largest
UK network of click and collect locations,
with around 11,600 sites.
We have made it easier for customers to
access our international services. We have
built on our shipping solutions, using the
cross-border capabilities of Intersoft. With
Intersoft, we have developed our export
solutions and now have the capability to offer
tracked cross-border outbound and returns
services to our larger customers.
In Europe, GLS recently expanded GLS-ONE
in Germany. This is a portal to facilitate the
sending and receiving of parcels. Consumers
can create their own label to send a parcel
and have it delivered to a specific address,
parcel box or GLS ParcelShop.
Expanding and automating
our networks
Our first parcel sorting machine is now in
operation in Swindon. It can sort and scan
around 10,000 small parcels per hour.
Machines are currently being installed
at Home Counties North, Greenford and
Chelmsford Mail Centres. Subject to
successful deployment of the first set of
machines, further machines are planned to
be installed over the next two years. We have
worked closely with our unions on this.
We have a denser network of parcel access
points for shipping, returns and collections
than our competitors6. Sending customers
can use approximately 11,500 Post Office
branches and around 1,200 Royal Mail
Customer Service Points to drop off pre-paid
items for delivery within the UK. Over
250 Customer Service Points are now open
on a Sunday, covering 38 per cent of all
delivery points across the UK.
Parcelforce Worldwide, our express parcels
business, has improved services for
heavy and bulky parcels. Parcelforce has
introduced two new next day services for
contract customers. It has also extended
the express48large service for consumers.
It builds on Parcelforce's position as a
premium quality carrier within the courier
express market.
The recent acquisition (June 2016) of ASM
has significantly extended the GLS service
offering in Spain, in particular, in the B2C
segment, where growth rates are expected
to be higher than B2B. GLS Spain now has a
much bigger footprint both in terms of size
and scale. ASM has exceeded performance
expectations since acquisition. Given the
potential synergies, the transaction is
expected to be economic profit accretive for
GLS in 2018-19.
GLS has also rolled out its ParcelLockers in
four countries across Eastern Europe – the
4 Effigy Consulting: European Courier, Express and
Parcel 2016 Market Summary of 2014-15 data.
5 National Federation of Self Employed & Small
Businesses Limited.
6 Triangle Management Insights, 2015.
08
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
mail and secured all major UK mail operators’
commitment to it. We changed the terms
and conditions for retail customers. We can
now check items we suspect to be scam
mail, refuse to process or deliver them and
terminate a customer’s contract in certain
circumstances. Since launching this new
scheme, we have stopped over 700,000
suspect mail items from reaching customers.
Since November 2016, over 700,000
items of scam mail have been stopped
from reaching customers.
Following the year end, we launched a major
new initiative for customers who – we believe
– are receiving high volumes of scam mail.
We will block and impound scam mail at our
major distribution centres before it reaches
the customer’s letterbox. Legitimate business
and personal mail will continue to be delivered
to the customer in the usual way. This latest
anti-scam initiative will initially focus on the
most impacted customers, with plans for it to
be extended in the future.
Regulation
The USO is a key driver of UK economic growth.
It is a key part of the digital economy – the
physical fulfilment arm – and is crucial to the UK’s
economic future.
We note that Ofcom continues to find high
levels of customer satisfaction and value for
money with postal services. Ofcom has also
recognised our progress on efficiency.
We are disappointed that Ofcom does not
agree with us that there is a pressing need
for a proactive framework to help sustain the
Universal Service. There is a real need to ensure
that the revenue pools that sustain the USO are
underpinned. We need a proactive sustainability
framework and a focus on removing regulation
which restricts these vital revenue pools.
In a similar vein, we welcome the UK
Government’s focus on employment
models, and in particular, the Taylor Review.
We believe there is a public policy issue
around fictitious self-employment and poor
labour standards in the delivery sector.
A level playing field is needed.
first parcel provider to do so. More than
70 terminals have been installed, offering
consumers an easy to use and secure way of
receiving their parcels. Other options include
collecting parcels from a GLS ParcelShop or
delivery within a certain time frame.
We have rolled out initiatives to mitigate
the impact of e-substitution and business
uncertainty on letter volumes and revenues.
Through our MarketReach business, we are
demonstrating the positive impact marketing
mail can have on campaign results.
Defending letters
• Rolling out collaborative projects with
the advertising industry
• Continuing to win back and retain
key contracts
• Coordinating an industry-wide
response to tackle fraudulent mail at
its source
We are seeing the impact of overall business
uncertainty in the UK on letter volumes, in
particular on advertising and business letters.
Marketing mail is sensitive to changes in
economic activity. In 2016-17, our marketing
mail revenue decreased by eight per cent, the
same trend as at the half year. Other forms
of advertising, particularly print media, have
seen steeper declines. In 2016, there was an
overall decline of 10 per cent in direct mail.
Print advertising saw a 13 per cent decline
in revenues7.
In March 2017, the price of a First Class
stamp increased by 1p to 65p and the price of
a Second Class stamp went up by 1p to 56p.
These changes are needed to help ensure the
sustainability of the Universal Postal Service.
Royal Mail’s stamp prices are amongst the
best value in Europe. The UK has one of the
highest quality of service specifications of any
major European country.
From the Residential Postal Tracker 2016,
Ofcom found that a large majority of
residential customers said that they were
satisfied with postal services overall in
2016. 82 per cent of respondents stated
they were either ‘very satisfied’ or ‘fairly
satisfied’ with Royal Mail's services8. In a
previous report, the regulator also found
postal services/delivery to be the only
sector where customers’ perceptions of
value for money had increased from 2005
to 20159.
Promoting the value of mail
This year, we launched and built upon a
number of initiatives to add value to letters.
We are working with mailing customers
and access operators to incentivise
customer mailings.
7 WARC expenditure report for 2016 calendar year.
8 Ofcom, Review of the Regulation of Royal Mail,
1 March 2017, Paragraph 3.17.
9 Ofcom, Consultation on Review of the Regulation of
Royal Mail, 25 May 2016, Paragraph 4.12.
The Strategic Mailing Partnership™, a joint
initiative with the mailing house industry,
promotes mail through collaboration and
working to resolve critical industry issues. It aims
to improve overall efficiency and operational
processes and to grow mail volumes.
We are winning business. For example, in
2016, we won a three-year contract to handle
all London Boroughs’ postal services. We also
announced that we had been awarded a three-
year framework to provide Scottish Public
Bodies with postal services. The framework
means that Royal Mail has become the supplier
for Scottish Government, local authority and
public body postal services.
Improving mail handling
We continue to transform our network with
more automation of letter sorting and the
reorganisation of delivery routes. We have
increased letter sequencing to the final
delivery point to 83 per cent. We plan to
install more letter sorting machines and
automation equipment for large letters. This
is further increasing our efficiency.
Around 80 per cent of suitable letters now
carry a Mailmark® barcode. This enables
sending customers to track the delivery
progress of mail more closely and ensures
that we are accurately billing for the services
we provide.
Cotswold Collections mails seven
catalogues a year. Customers know the
collections are unique so many orders
are received within the first few hours
after delivery. It is critical the business
can respond to customer demand.
Royal Mail’s Mailmark® has helped
Cotswold Collections improve its business
management with accurate tracking.
Mailmark® allows Cotswold Collections
to know exactly when, where and how
many catalogues are delivered each day.
This ensures staffing is at peak efficiency,
reducing costs and maximising customer
satisfaction.
Tackling the scourge of scam mail
We understand the upset and distress that
scam mail causes. This year, we worked with
our employees, industry partners and law
enforcement agencies to tackle this issue even
more vigorously. A range of new measures
were implemented to strengthen our ability
to stem the flow of scam mail. We launched
an industry-wide Code of Practice on scam
Annual Report and Financial Statements 2016-17
| 09
Royal Mail plc
| Chief Executive Officer's review
Growing in new areas
• Acquisition of GSO and Postal Express10
Strategic focus on costs
• Achieved our cost reduction targets
• Developed customer-facing products
and services that leverage our data
and relationships
We have made investments in projects to
support growth. We are looking at areas
where there is a market opportunity and the
potential to make the most of our existing
assets, experience and relationships.
We are an international parcels business,
through both our UK and GLS operations.
GLS has a very strong network. Together
with network partners, it operates across
42 countries with different languages,
labour models and regulatory environments.
In addition, its expertise and focus on parcels
positions GLS to be an accelerating force for
growth for the whole Company.
In line with its strategy of targeted and
focused geographic expansion, GLS acquired
GSO in California. The area in which GSO
operates has a GDP roughly equivalent to the
UK. The region is experiencing faster GDP
growth than both the UK and continental
Europe. GSO is well-positioned to benefit
from growth in intra-state deliveries within
its existing geographic footprint. We expect
GSO to perform in line with our expectations
in the first full year of its ownership by the
Group. The transaction is expected to be profit
accretive for GLS in 2019-20.
In April 2017, we announced the acquisition of
the US overnight parcel delivery company, Postal
Express. Postal Express is a regional overnight
carrier operating in the states of Washington,
Oregon, and Idaho. It offers overnight parcel
delivery, mainly to B2B customers, across a
number of industries.
Our corporate strategy is in part enabled by
our focus on becoming a digital organisation.
We are becoming more digitally-enabled
internally as well as in our interactions with
customers and consumers. We are trialling a
number of initiatives as part of our customer-
facing digitisation. This approach is supported
by a more resilient IT backbone as a result
of our major IT transformation programme.
We have also developed apps such as
LovetoPost, enabling customers to turn
photographs into personalised postcards.
In 2016-17, we saw a 60 per cent increase
in consumers visiting our website using
smartphones. This leaves us well placed for
the continued growth in the use of mobile
devices to purchase delivery services.
for three consecutive years
• Delivered productivity improvement
of 2.7 per cent in 2016-17, at the
higher end of our target range
• Cost avoidance programme on track,
with £225 million of costs avoided in
2016-17
• Reducing the number of
managerial layers
We are transforming our UK network at an
absorbable rate of change. UKPIL adjusted
operating costs before transformation costs
reduced by one per cent. This is the third year
we have been able to deliver underlying cost
reduction in UKPIL.
The USO and the regulated quality of service
standards require a large fixed cost base in
order to be able to deliver our obligations.
While we are proud to be the Universal
Service Provider, it is expensive to deliver.
In addition, our workforce has the best pay
and terms and conditions in the industry.
Almost 70 per cent of our UKPIL costs are in
relation to people and their benefits.
UKPIL collections, processing and delivery
productivity increased by 2.7 per cent. This
is at the better end of our target range of a
2.0-3.0 per cent improvement per annum. This
improvement in productivity was achieved
through a 1.9 per cent reduction in core network
hours, despite an increase in workload.
We know that becoming more efficient has
a human face. Over the last four years, we
have seen a net reduction of around 12,000
UKPIL employees. We continue to reduce the
number of managerial layers – which reduces
costs and streamlines our decision making.
We work closely with our unions to ensure
our people exiting the business do so with
dignity and respect.
Non-people costs have reduced in real
terms by 15 per cent over the last four
years. We continue to reduce the number
of our facilities while ensuring we have – by
some distance – the most accessible and
convenient Delivery Office network in the UK.
We are targeting to avoid around £600 million
of annualised operating costs by 2017-1811.
More significant cost reduction will need
further modernisation of our processes
and more streamlined structures. We are
also facing the impact of wage inflation and
increases due to employment legislation.
In non-people costs, we are facing headwinds
10 Postal Express was acquired after the financial
11 Cumulative over financial years 2015-16, 2016-17 and
year end.
2017-18.
10
| Annual Report and Financial Statements 2016-17
from increasing cost of sales associated with
tracked parcels and export parcels growth
and higher depreciation.
Technology and innovation
• Completed roll-out of our new PDA
technology in our core network
•
Introduced new functionality to our
online postage service Click & Drop
• Launched our new self-service
solution, Labels to Go
We have invested a significant amount in
technology over the past five years. Some key
technological builds had to be put in place
before we could proceed. This investment
is making us a better, safer and more cost
effective operation. The rollout of our new
PDA technology is now complete in our core
network. This is one of the largest estates of
its kind in Europe.
Our PDAs significantly increase our scanning
capability. They give us more interfaces with
our customers, expanding the number of
interactions they have with their parcels.
Our postmen and women handle over
one billion parcels and nearly 15 billion
letters every year.
Our shipping tools – Storefeeder, for example
– connect retail customers and give us the
ability to dynamically capture the choices
for end customers. We introduced new
functionality to Click & Drop. We are leading
the way by providing account customers with
free access to our multi-channel despatch
management tool. Marketplace traders can
now use our software to integrate with the
marketplace and print off their barcoded
shipping labels.
We have developed digital capabilities
to enhance customer convenience.
In April 2017, we launched our new self-
service solution, Labels to Go. Customers
Click&Drop®
What is Click & Drop?
Our Click & Drop service integrates
data from online shopping platforms
(e.g. eBay, Amazon) to make it quicker
and easier to buy postage and print
address labels online. Individuals,
marketplace sellers and businesses
can manage all their sending needs.
Customers can pay by PayPal, credit
card or via their Royal Mail Online
Business Account. Account features
include multi-marketplace integration
and the ability for customers to print
up to 100 labels in one transaction.
buying postage online can now print off
delivery and return labels from their mobile
phones at the majority of our 1,200 Customer
Service Points.
Telemetry lowers maintenance costs due to
improved driving styles. The more telemetry
we have, the better our driver behaviour and
safety should be. It is more cost effective if
we know where our vehicles are and we are
better able to get paid fairly for what we do.
Our workforce
• Exceeded our full year regulatory First
Class target of 93.0 per cent
• Mean business satisfaction score
increased to 78
As one of the largest employers in the UK, we
are proud to provide the best pay and terms
and conditions in our sector. We remain
committed to high quality employment in a
very competitive industry.
We know how important pensions are to our
people. Our focus is on continuing to provide
the best retirement benefits in the industry.
We were sorry to have to conclude that
the Royal Mail Pension Plan (RMPP) is not
affordable in its current form. The RMPP was
closed to new employees joining the Group
from 1 April 2008. The RMPP is currently in
surplus12 but we expect this surplus would
run out in 2018 if members continued to build
up benefits on the current defined benefit
pension basis. The Company’s contributions
would then increase to £1.15 billion a year.
We could not increase the cash contribution
without materially reducing the necessary
investment in the UKPIL business. We set
out our proposal for the RMPP’s future after
March 2018, for consultation with all active
members. We are committed to not making
any changes before April 2018.
The consultation closed on 10 March 2017.
We have concluded that there is no affordable
solution to keeping the RMPP open in its
current form. Therefore, the Company has
come to the decision that the RMPP will
close to future accrual on 31 March 2018.
We continue to work closely with our unions
on a sustainable and affordable solution
for the provision of future pension benefits.
We will write to RMPP members once further
decisions have been made.
Our people are at the heart of everything
we do. Our mean business customer
satisfaction score – across large and medium
sized businesses and SMEs – increased
from 76 to 78. Royal Mail is committed to
delivering a high Quality of Service.
Strategic report
| Governance
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| Other information
We are pleased to report that we exceeded
our full year regulatory First Class target
of 93.0 per cent, with 93.1 per cent of mail
delivered the next day. We again exceeded
our Second class target of 98.5 per cent, with
a performance of 98.9 per cent.
We were disappointed to see an increase
in the overall number of complaints. This
is against the backdrop of an increase in
customer text and email delivery notifications
as the number of tracked parcels we handle
continues to increase. Customers have
increased visibility over whether their parcel
has been delivered or an attempt has been
made to deliver it, which can lead to an
increase in complaints.
Royal Mail takes complaints seriously and
we have a consistent approach to tackling
any issues. We continue to highlight
business standards and key procedures to
tackle denial of receipt through the use of
‘With your Neighbour’ cards and correct
doorstep scanning. Our focus on tackling
issues as quickly as possible contributed to
an improvement in two out of our five main
complaint categories13.
GLS has consistently performed well since
IPO, growing revenue on an organic basis
as well as through acquisitions. It now
contributes nearly a third of adjusted Group
operating profit. We will continue to invest
in GLS’ careful and focused international
expansion to help drive growth for the Group.
We now expect net cash investment of
around £450 million in 2017-18 and less
than £500 million per annum going forward.
Through a combination of our strategic
approach to costs and more efficient
investment spend, we will support our
progressive dividend policy with the in-year
trading cash flow generation of the Group.
Thank you
The 500th anniversary of the postal service
was all about our people – they are the
ones who have sustained our continued
important role over the centuries in the
UK. Simply put, they are our Company.
We will continue to focus on delivering
our key mission: connecting companies,
customers and communities and making
e-commerce happen.
Delivery to home remains the most
popular way to receive a parcel. Around
81 per cent of customers prefer delivery
to home over other options14.
Moya Greene
Chief Executive Officer
17 May 2017
Outlook
These results demonstrate that as a business
we can respond to our challenging operating
environment and continue to focus on
sustainable cash generation.
Royal Mail operates internationally and in
many markets with different dynamics.
In the UK, IT-enabled innovation has
improved our parcel offering, such that we
expect to be able to keep in step with the
addressable UK parcels market growth
of around three per cent. Pricing remains
constrained due to the highly competitive
market but parcel revenue should benefit
from improvements in mix.
We maintain our outlook for addressed letter
volume declines of between four to six per cent
per annum (excluding the impact of political
parties’ election mailings) over the medium
term but would expect to be at the higher end
of the range of decline in 2017-18 if the current
climate of business uncertainty persists.
We continue to focus on costs and remain on
track to avoid around £600 million of annualised
operating costs in UKPIL by 2017-18.
12 On an actuarial funding basis using 2015 valuation
assumptions.
13 Redirections and misdeliveries.
14 IMRG UK Consumer Home Delivery Review 2016.
Annual Report and Financial Statements 2016-17
| 11
Royal Mail plc
| Market overview
Market overview
As the Universal Service Provider, Royal Mail plays a vital role
in the UK economy. We enable the continued growth of
e-commerce through the Universal Service network and play
a key part in the digital economy. The Universal Service provides
depth of coverage, value for money and convenience for
businesses wherever they are based in the UK1. But, we operate
within an increasingly dynamic market. Intense competition in
parcels and ongoing structural decline in letters makes the postal
sector very challenging. To compete effectively, we need to
continue to invest to meet fast changing customer expectations.
UK parcels market
E-commerce continues to drive parcel
volume growth. It is estimated that online
retail made up 14.8 per cent of all retail sales
in 2016. This is the highest it has ever been2.
UK customers spend more online per head
than consumers in any other major market,
including the US and China.
The UK is one of Europe’s most competitive
parcels markets, with 15 major players.
We estimate that the blended UK parcels
market3,4 is growing by around four per cent
a year5. The structure and behaviour of the
parcels market continues to be influenced
by the rapid expansion of Amazon and its
logistics innovations. At the same time,
parcel carriers continue to invest in new
capacity. Traditional retailers are improving
their in-house collection and delivery
services. For example, Sainsbury’s recently
completed its £1.4 billion acquisition of
Argos. We expect that competition will
continue to intensify, driven by retailers’
investment in delivery options, logistics and
technology to support the growth of their
online sales.
1 Triangle Management Insights, 2015.
2 GlobalData, 2017.
3 Internal estimate based on Triangle Management
Services/RMG Fulfilment Market Measure (2015);
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.
4 Includes Amazon Logistics and other retailers
own-delivery networks.
5 Based on Verdict UK E-retail survey and RMG
market insight.
There is also an emerging threat from
on-demand delivery platforms that speed
up the way goods are transported in urban
areas. Innovative logistics companies are
starting to roll out parcel delivery services
beyond trial stage in the US and Europe.
They typically connect retail stores with
local ‘individual’ couriers, enabling fast and
flexible deliveries.
Growth areas
The rapid pace of change in the UK parcels
market is expected to continue, due to low
barriers to entry, greater disintermediation
and disruptive business models. Next
day parcels now account for 56 per cent
of domestic volumes6. Next day delivery
is increasingly becoming a standard,
rather than a premium delivery service for
online retailers.
Online retail growth continues to be driven by
advances in fulfilment, easier returns, new
technology and ease of shopping. Clothing
and footwear is the fastest growing sector
online. It is also driving returns of online
purchases, which are forecast to reach
£5.7 billion in 20217.
In 2016, the extension of Black Friday
promotions for a week or longer was a big
draw for the UK’s increasingly value-driven
consumers. A new online peak trading
pattern is emerging, characterised by the
Black Friday week in November and the run
up to Christmas.
Home delivery remains the preferred delivery
option for 81 per cent of consumers8.
Nevertheless, click and collect is now
12
| Annual Report and Financial Statements 2016-17
becoming established as an alternative
delivery option, particularly during peak
periods, whether in the retailer’s own
stores or through third-party parcel shops
and lockers.
Consumers are increasingly shopping at a
time and place which suits them. Mobile
commerce (M-commerce) is making it
easier than ever for people to shop on the
internet. In December 2016, just over half
of all visits to e-commerce websites were
from mobile devices9. This is the first time
that mobile (including tablet) has overtaken
desktop as the primary channel through
which consumers engaged with retailers. It is
a trend that is likely to continue as retailers
invest more in their mobile websites and
connectivity improves.
UK letters market
The UK’s letters market is significantly more
competitive than people think. E-substitution
is a potent form of competition. 82 per cent
of adults use the internet on a daily basis, up
from around 35 per cent in 200610. Addressed
letter volumes have declined by 22 per cent
over the last five years. Total letter revenue
has fallen two per cent over the same period.
We are seeing the impact of overall business
uncertainty in the UK on letter volumes,
in particular, advertising and business
letters. Television, print and mail advertising
declined in 2016, with advertisers delaying
or substituting investment decisions and
shifting from traditional to digital forms of
advertising. Advertising mail has fallen from
16 per cent to eight per cent (a c.50 per cent
reduction) of total advertising spend since
2001. Digital advertising represented almost
half (47 per cent) of all advertising spend
in 2016.
In letters, the ‘Access’ market is, by some
distance, the biggest in Europe. Access
competition is where a postal operator
other than Royal Mail collects mail from
the customer, sorts it and then transports
it to our Mail Centres for us to deliver. This
enables other operators to offer postal
services to larger business customers for
letters and large letters without setting up
a delivery network. Access operators now
account for nearly 60 per cent of addressed
inland letters in the nation’s postbag. In other
EU markets, no more than 11 per cent of
upstream letters volumes are handled by
Access operators.
International parcels
E-retail is also fuelling growth in cross-border
parcels. In 2016, European B2C e-commerce
grew 12 per cent to €510 billion, with 42 billion
6 Ofcom Annual Monitoring Update 2015-16.
7 GlobalData eretail, April 2017.
8 IMRG UK Consumer Home Delivery Review 2016.
9 IMRG Capgemini Sales Index Report, January 2017.
10 ONS: Internet Access-Households and Individuals,
2016.
parcels sent annually11. This growth is uneven
across Europe, due to varying economic
performance and e-commerce adoption.
The largest B2C parcels markets outside the
UK are Germany, France and Italy.
We are seeing an increasingly competitive
environment, with operators providing
innovative, high quality services at lower
prices. Consumers expect a seamless
cross-border delivery and returns
experience12. For example, in the UK, there
are a range of major national operators that
deliver cross-border services, alongside
hundreds of smaller operators looking to
increase market share.
A recent Royal Mail study into the international
ambitions of small UK e-retailers found that
35 per cent of small businesses think Europe
holds the most potential to generate new
sales for their business. 28 per cent think
the USA and North America are the most
promising markets.
Outside the EU, Chinese e-commerce
marketplaces Tmall and AliExpress are
strengthening international cross-border
services. Alibaba has reported that the value
of goods sold on its marketplace on Singles’
Day (11 November) rose 32 per cent to almost
$18 billion, compared with $14 billion last
year. Launched in 2009, Singles’ Day now
runs every 11 November, and has become the
biggest global shopping event.
11 E-commerce European B2C Report 2016.
12 IPC cross-border e-commerce shopper survey 2016.
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UK leading in e-commerce
E-commerce accounted for
14.8% of all retail
trade in 2016, the highest ever13.
13 GlobalData, 2017.
Black Friday/Cyber Week
£25 billion
is estimated to have been spent in
internet sales between 13th November
and 24th December 201614.
14 IMRG 2016.
M-commerce
Mobile devices continue to account for a
growing share of e-commerce activity15.
15 IMRG Capgemini Sales Index Report, January 2017.
Delivery matters
81%of online shoppers prefer
to have items delivered to
their home16.
16 IMRG UK Consumer Home Delivery
Review 2016.
Annual Report and Financial Statements 2016-17
| 13
Royal Mail plc
| Our business model
Our business model
We have a clear vision to be recognised as the best delivery company in the UK and across Europe.
Our business model leverages our resources and relationships (for example, our networks,
our people and brand) to deliver high-quality, value for money services for sending and receiving
customers. We benefit when we deliver letters and parcels together. But the network is expensive
to run, particularly against the backdrop of a continuing decline in letter revenues. Parcelforce
Worldwide, our express delivery business, provides more parcel fulfilment options – particularly for
UK business customers. Our core UK network is unparalleled in size and scope. Our European
business, GLS, provides geographical diversification of our earnings and is well positioned to grow in
new markets. Through this, we generate cash to reinvest appropriately in our core business, invest
in new growth areas and pay dividends to our shareholders.
Operating through our resources and relationships
Our networks
Our role as the Universal Service Provider means Royal Mail has the capability to deliver to every address across the
UK. Through our long‑term relationship with the Post Office, we have the largest retail network for parcels and letters.
With Local Collect, the UK’s largest click and collect network, customers can now collect their parcels from 11,600 sites – by far
the largest network. Parcelforce Worldwide provides additional fulfilment options, providing premium parcel services within the
courier express market.
GLS, one of the largest European ground‑based delivery networks, offers reliable, high‑quality parcel services, complemented
by logistics and express services. The GLS network covers 41 European countries and nation states through a combination of
wholly‑owned companies and partner companies. The GLS footprint was expanded this year. In Europe, GLS acquired ASM in
Spain. As part of its careful and focused expansion outside Europe, GLS acquired the regional next day parcel delivery companies
GSO in California and Postal Express1 in the states of Washington, Oregon, and Idaho. GLS is well positioned to support Royal Mail
Group’s overall strategy.
Our people
As one of the largest employers in the UK, we are proud to provide the best pay and terms and conditions in our industry.
One in every 185 jobs in the UK is provided by Royal Mail. We were pleased to have been named in the Times Top 50
Employers for Women for the fourth consecutive year for our commitment to gender equality in the workplace.
Our customers and our brand
We deliver to around 30 million business and consumer addresses. Around 80 per cent of addresses are within one
kilometre of a Royal Mail parcel access point. GLS has more than 270,000 customers across Europe.
Research we commissioned found that 79 per cent of online shoppers say they trust Royal Mail, compared to 64 per cent for the
nearest competitor2. Royal Mail ranked second globally in our industry in the Dow Jones Sustainability Indices. We are also a
constituent of the FTSE4Good Index, ranking in the top 15 per cent of companies.
Investment in our business
We will continue to invest in our core network, although we are now past the peak of investment. Over the last five years,
we have made significant investments to support growth and to replace and replenish our assets. Now that some of
the larger projects – rebuilding our legacy IT systems and resizing the core network – are largely complete, we have reduced our
investment spend. In 2016‑17, we invested a net £492 million, predominantly in the UK, and focused on growth.
1 Postal Express was acquired after the financial year end.
2 Royal Mail Delivery Matters 2015, page 21.
14
| Annual Report and Financial Statements 2016-17
Strategic report
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How we create value
Continually improving our efficiency and productivity allows us to be more competitive. This helps us
to meet changing customer expectations. This means we are better positioned to 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 fair terms and conditions to ensure we continue to employ
engaged and motivated people. This is the best way of delivering sustainable shareholder value.
Continually improving efficiency
• Adopting a strategic approach to costs
and efficiency
• Delivering efficiency improvements and
meeting productivity targets
• Improving the efficiency of our logistics
network; promoting more efficient driving
using telemetry technology
• Streamlining processes in areas, including
central functions
Meeting changing customer expectations
• Increasing the number of parcels we barcode
and scan
• Opened over 250 of our busiest Customer
Service Points on Sundays, covering over
one‑third of UK addresses
• Drop off pre‑paid items for delivery at around
1,200 Customer Service Points
• Demonstrating the value of letters
through initiatives such as the Strategic
Mailing Partnership™
Maintaining financial flexibility
• Harvesting the benefits of the technology
rebuild
• Investing in new areas to support growth. This
includes the careful and focused expansion
of GLS outside Europe. It is strategically
important to the Group
• More efficient investment spend
• Investing in GLS which delivers higher returns
than our core business
Engaged, motivated people
• Continuing to offer the best pay and terms and
conditions in the industry
• Our employees have a meaningful stake in the
Company through the Free Share offers
• In total, each eligible full‑time employee,
with the full allocation of 913 free shares, has
received over £500 (before tax) in dividends
since privatisation
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 2016-17
| 15
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
Key initiatives:
We have maintained our
pre‑eminent position by
pursuing faster growing
parts of the UK parcels
market while making it
easier for consumers,
SMEs and marketplace
sellers to use Royal Mail
services. Our investments
in tracking and automation
have been key to maintaining
our position. Through our
significantly enhanced IT,
we have the ability to offer
any retail account customer
a tracked service.
• Delivery confirmation on all barcoded standard parcels
• Automated parcels sortation enables us to process small parcels more
quickly
• Growing tracked and return volumes through initiatives and service
improvements
• Working with China Post to provide Chinese and UK customers with faster
delivery and tracking services
• Expanding GLS‑ONE in Germany, enabling customers to create their
own labels and choose delivery to a specific address, parcel box or GLS
ParcelShop. GLS Sameday offered in 11 cities
• Acquisition of the Spanish express parcels delivery company, ASM
Defending letters
Key initiatives:
Letters are very important to
our business. They account
for almost 60 per cent of our
UK revenue. We continually
seek to add value to mail
and increase the efficiency
and effectiveness of our
operation.
• The Strategic Mailing Partnership™, a joint initiative with the mailing house
industry, to improve overall efficiency and operational processes
• Establishment of new collaborative projects with the advertising industry to
raise the profile of marketing mail
• Working with advertising agencies to sell direct mail alongside other media
as part of integrated advertising plans
• Giving customers incentives to use direct and advertising mail at a
discount rate
• Completing the roll‑out of software upgrades to letters and large letters
sortation equipment
Strategic
priorities,
enabled
by...
Growing in new areas
Key initiatives:
• Acquisitions of GSO and Postal Express1, leading regional next‑day parcel
delivery companies, operating principally on the US west coast
• Expanding our relationships with retailers and network partners to stimulate
cross‑border volumes between the UK and Asia
• Developing consumer‑facing products and services that leverage our data,
brand and relationships
• Continuing to roll‑out our UK fleet maintenance services to other businesses,
employees, friends and family
We are making the most
of our existing assets and
increasing our capability
through carefully selected
investments. We want to
develop a broader revenue
base and grow in the UK
and overseas. GLS is well
positioned to grow in new
markets and to support the
Group’s careful and focused
geographic expansion. We
are also increasing our digital
capabilities across the Group,
particularly in e‑commerce.
16
| Annual Report and Financial Statements 2016-17
1 Postal Express was acquired after the financial year end.
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Enabling our strategic priorities
Strategic focus on costs
The highly competitive UK parcels
market, coupled with the ongoing
structural decline in letters, has
resulted in increased revenue
pressures for the Group. Being
more efficient and controlling our
costs means we can become more
competitive, win and retain more
business and continue to provide
the best employment terms and
conditions in the industry.
Key initiatives:
• Improving the efficiency of our logistics network, through the
use of telemetry
• Continuing to progress efficiency opportunities to use shared
delivery resources for the collection of mail from low volume
postboxes
• Delayering management structures
• Reducing road and air routes
• Reducing the number of facilities while ensuring we have the
most accessible Delivery Office network in the UK
• Bringing down costs in central functions
Technology and innovation
Key initiatives:
We are harvesting the benefits
of investments in our technology
backbone to support our strategic
priorities to win in parcels, defend
letters and grow in new areas.
We are working with partners to
provide delivery management
software for international
parcel shipments, better data
management and improved
labelling capabilities. We continue
to deploy technology to drive
efficiency and increase the pace of
change through our operation.
• Completed national roll‑out of our new PDA technology in our
core network
• Introduced new functionality to our online postage service Click
& Drop, making it quicker and easier to buy online postage and
print address labels
• Developing international shipping solutions using the
cross‑border capabilities of our acquisition, Intersoft
• Customers can print delivery and return labels from their mobile
phones at Customer Service Points
• More than eight billion items have now been sent with Mailmark®
An engaged and motivated workforce
Key initiatives:
• Introduced My Bundle, home of the total reward statement,
which includes our employees’ flexible benefits range
• Initiatives to support women who want to progress their
careers, including our Springboard programme
• More than 70,000 of our people took part in the
‘Big Conversation’ to identify areas that will make Royal Mail a
better place to work
• Making it easier for our employees to find out what is going on in
the business through our Royal Mail app, available on all Royal
Mail and personal devices
Our employees drive the continued
success of Royal Mail Group.
We believe good employment
conditions drive quality of service.
Our permanent employees are
paid above the Living Wage,
which, in turn, is above the legal
minimum set by the Government.
They also receive the additional
benefits associated with permanent
employment, such as National
Insurance contributions, paid
holidays and a good pension.
This is underpinned by a proactive
relationship with the unions and
a strategic focus on efficiency in
our operations.
Annual Report and Financial Statements 2016-17
| 17
Royal Mail plc
| Key performance indicators
Key performance indicators
The 2016-17 Corporate Balanced Scorecard has been simplified this year to include 10 equal
measures, all weighted at 10 per cent. The 10 measures alongside the relevant key performance
indicators (KPIs) are set out below.
Further details relating to the link between our KPIs and Executive Remuneration, and the
Corporate Balanced Scorecard for 2017-18, can be found in the Directors’ Remuneration Report
on page 66.
Key
Link to strategy
Winning in parcels
Defending letters
Target/stretch
Growing in new
areas
Threshold
Below threshold
KPI and strategic link(s) Measured by
Key activities and achievements in the year
Reduction in road traffic
collisions (%)
Reduction in road
traffic collisions per
1,000 vehicles1.
• This year, we reduced our reported road traffic collisions by
12.3 per cent
• Maintained our Lost Time Accident Frequency Rate (LTAFR) of 0.49
Employee engagement
(score)
First Class Retail Quality
of Service (%)
Mean business customer
satisfaction (score)
Average score from
the Ipsos MORI annual
employee opinion
survey measuring
involvement,
alignment and loyalty
of colleagues through
a number of employee
engagement questions.
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 majeure².
Results from the
customer satisfaction
survey completed by
business customers.
• We maintained our employee engagement score of 57
• Engaged more than 70,000 colleagues in the Big Conversation
• Over 10,000 colleagues participated in our Operations Fundraising
Challenge
• We exceeded the 93.0 per cent First Class mail target
• Exceeded 98.5 per cent Second Class mail target
• We improved our levels of satisfaction amongst our business customers
• Improvements in first time delivery rates through Delivery to Neighbour,
Safe Place and Work Time Listening and Learning sessions
Customer complaints
(‘000)
Number of complaints
(not claims) opened
by our Customer
Service team.
• There was an overall increase in complaints in 2016-17, driven
principally by the growth in tracked parcels.
• We achieved a reduction in two out of our five major categories (redirections
and misdeliveries)
Performance
against target
2016-17
Actual: 12.3%
2015-16: not a KPI
2014-15: not a KPI
2016-17
Actual: 57
2015-16:
57 (above target)
2014-15:
56 (above target)
2016-17
Actual: 93.2%
2015-16: 92.6%
(threshold)
2014-15: 93.1%
(above target)
2016-17
Actual: 78
2015-16:
76 (above threshold)
2014-15:
76 (stretch)
2016-17
Actual: 517
2015-16:
476 (below threshold)
2014-15:
453 (above target)
1 Added to Corporate Balanced Scorecard in 2016-17.
2 This accounts for the impact of factors which are beyond Royal Mail’s control, such as weather.
18
| Annual Report and Financial Statements 2016-17
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KPI and strategic link(s) Measured by
Key activities and achievements in the year
Productivity for
collections, processing
and delivery (%)
UKPIL costs (£m)3,4
Group revenue (£m)4
Group operating profit
before transformation
costs (£m)4
In-year trading cash
flow (£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) and
Regional Distribution
Centres.
Adjusted operating
costs for UKPIL.
Group revenue
adjusted for budgeted
foreign exchange rate
and the impact of GLS
acquistitions.
Adjusted Group
operating profit before
transformation costs,
adjusted for budgeted
foreign exchange rate
and the impact of GLS
acquistitions.
In-year trading cash
flow before cash flows
relating to London
development property
portfolio.
• An improvement in productivity was achieved through a reduction in
frontline hours despite an increase in workload
• Total UKPIL costs reduced by one per cent
• Group revenue was up one per cent
• Revenue growth in GLS more than offset a decline in UKPIL revenue
• Adjusted Group operating profit before transformation costs decreased
In-year trading cash flow was £420 million
Performance
against target
2016-17
Actual: 2.7%
2015-16:
2.4% (above target)
2014-15:
2.5% (above target)
2016-17
Actual: £7,082m
2015-16: not a KPI
2014-15: not a KPI
2016-17
Actual: £9,455m
2015-16:
£9,191m5 (above target)
2014-15:
£9,556m5 (above
threshold)
2016-17
Actual: £701m
2015-16:
£738m5 (above target)
2014-15:
£620m5 (target)
2016-17
Actual: £420m
2015-16: not a KPI
2014-15: not a KPI
3 Added to Corporate Balanced Scorecard in 2016-17.
4 Reported results are adjusted to reflect a constant foreign exchange rate of £1/€1.3 in GLS. Adjustments are also made to remove the impact of GLS acquisitions in the year and
the underlying inpact of weaker £ Sterling in UKPIL.
5 Prior year results are on a reported basis, adjusted for budgeted foreign exchange rate.
Annual Report and Financial Statements 2016-17
| 19
Royal Mail plc
| Key performance indicators
Adding value and
convenient services
What we have done...
Improved tracked and
return volumes through
initiatives and service
improvements
GLS SameDay
offering same day
evening deliveries
in 11 cities
Launched Labels to Go
Completed PDA roll-out
in our core network
Delivery confirmation
available on all
barcoded parcels
Improved service
and systems for
international
shipments
What’s in our plan...
Parcels automation live
and rolling-out to
further sites
Increasing the number
of parcels we track
Careful and focused
geographic expansion
through GLS
Expanding our
relationships with
retailers and network
partners to stimulate
cross-border volumes
between the UK
and Asia
20
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
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| Other information
Financial review
Reported results and Alternative Performance Measures (APMs)
Reported results are prepared in accordance with International Financial Reporting Standards (IFRS).
In addition to reported results, the Group’s performance in this Financial Review and throughout this Annual Report and Financial Statements is
also explained through the use of APMs that are not defined under IFRS. These APMs relate to adjusted results and movements on an underlying
basis. Management are of the view that these measures provide a more meaningful basis on which to analyse business performance and are
consistent with the way that financial performance is measured by Management and reported to the Board.
These APMs are explained in detail on pages 33 to 36 and include reconciliations to the closest measure prescribed under IFRS where
appropriate. The analysis of underlying movements in adjusted results is set out at the end of the Financial Review. Following the publication
of an amendment to IAS 1, the Group no longer shows non-IFRS adjustments on the face of its income statement.
UK Parcels, International & Letters (UKPIL)
Summary trading results (£m)
Letters and other revenue
Marketing mail
Total letters
Parcels
Revenue2
Operating costs before transformation costs
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Margin
Volumes (m)
Letters
Addressed letters
Unaddressed letters
Parcels
Core network
Parcelforce Worldwide
Total
Adjusted
52 weeks ended
26 March 2017
Re-presented1
52 weeks ended
27 March 2016
Underlying
change
3,234
1,087
4,321
3,337
7,658
(7,110)
548
(137)
411
5.4%
11,922
2,934
1,073
96
1,169
3,299
1,176
4,475
3,196
7,671
(7,046)
625
(191)
434
5.7%
12,563
2,993
1,034
96
1,130
(3%)
(8%)
(5%)
3%
(2%)
(1%)
(11%)
(4%)
(10bps)
(6%)
(3%)
3%
(1%)
3%
Reported results
UKPIL revenue decreased to £7,658 million (2015-16: £7,671 million). Operating costs before transformation costs increased to £7,332 million
(2015-16: £7,303 million). UKPIL operating profit before transformation costs decreased to £326 million (2015-16: £368 million) and operating
profit after transformation costs increased to £189 million (2015-16: £177 million).
Adjusted results
UKPIL revenue declined by two per cent, with parcel revenue up three per cent and total letter revenue down five per cent. Weaker Sterling had
a positive impact of £28 million on UKPIL revenue. This has been excluded from underlying movements.
Total parcel volumes increased by three per cent, with growth largely driven by Royal Mail account parcels. Account parcel volumes, excluding
Amazon, grew by four per cent. In the consumer channel, we saw improving trends in volume and revenue. The weakening of Sterling has
impacted our international parcel volumes. The rate of growth of import volumes slowed compared to last year. We undertook a number
1 Following the Group’s acquisition of the remaining 49 per cent shareholding in Romec Limited (Romec) at the beginning of 2016-17, Romec has been consolidated into the UKPIL
segment (previously the Group’s 51 per cent shareholding was reported within 'Other' segment). The 2015-16 UKPIL results have been re-presented to reflect this change.
2 Stamped, metered and other prepaid revenue channels are subject to statistical sampling surveys to derive the revenue relating to parcels, marketing mail and letters. These
surveys are subject to continuous refinement, which may over time reallocate revenue between the products above, and which may occasionally lead to a consequent change
to this estimate.
Annual Report and Financial Statements 2016-17
| 21
Royal Mail plc
| UK Parcels, International & Letters (UKPIL)
of initiatives, including working to improve the UK delivery service with China Post which improved import AURs and revenue. Export volumes
declined for the year overall but grew in the second half. Total parcel revenue was up three per cent.
Addressed letter volumes declined by six per cent (excluding the impact of political parties’ election mailings), at the higher end of our forecast
range of decline of four to six per cent per annum. This reflected the levels of business uncertainty following the EU Referendum and a strong
prior year which saw a one-off return of direct delivery volumes. Total letter revenue (including marketing mail) decreased by five per cent
reflecting the impact of low inflation on pricing and declines in volumes across all main letter products.
The methodology used to estimate the value of marketing mail revenue was refined during the year. The prior year estimate for marketing mail
revenue has been re-presented to reflect the change in methodology resulting in a reallocation of £18 million of revenue from 'Letters and other'
to 'Marketing mail' revenue.
Marketing mail revenue, which includes our data businesses, declined by eight per cent. There was a slowdown in marketing activity over the
year reflecting a softening in economic conditions. Low AUR unaddressed letter volumes were down three per cent.
Revenue from election mailings relating to the EU Referendum was in line with that in the prior year relating to the 2015 General Election. We are
expecting revenue from election mailings relating to the General Election called for June 2017. Given the short run-up, it is likely to be lower
than in 2016-17.
UKPIL's performance in the first half of 2017-18 will be impacted by the phasing of performance over the prior year. In particular, letters
performance in the first quarter of 2017-18 may look relatively weak given the strong comparative quarter last year (Q1 2016-17: Addressed
letter volume two per cent decline).
Operating costs before transformation costs
(£m)
People costs
Non-people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total
Adjusted
52 weeks ended
26 March 2017
Re-presented1
52 weeks ended
27 March 2016
Underlying
change
(4,865)
(2,245)
(828)
(740)
(677)
(7,110)
(4,841)
(2,205)
(776)
(749)
(680)
(7,046)
(1%)
Flat
1%
(1%)
Flat
(1%)
Total adjusted operating costs before transformation costs were down one per cent on an underlying basis, reflecting a better performance in the second
half. Our cost avoidance programme in UKPIL delivered £225 million costs avoided in the year, comprising people costs of £132 million and non-people
costs of £93 million. We have delivered benefits across a number of initiatives during the year, including reducing layers in our management structures
within operations, better vehicle utilisation, transformation of our IT infrastructure and lower property costs.
As previously disclosed, as a result of the new single-tier state pension scheme introduced in April 2016, the Group saw an increase in its employer
National Insurance contributions for employees participating in the RMPP of £65 million in the year. This has been excluded from underlying movements.
People costs declined by one per cent, largely driven by a 2.7 per cent improvement in collections, processing and delivery productivity in the core
network. This more than offset pay increases, largely the 1.6 per cent frontline pay award. The improvement in productivity was achieved through
a 1.9 per cent reduction in core network hours, coupled with the absorption of a higher workload. The higher workload was driven by an increase
in tracked products which more than offset the impact of declining letter volumes. We continue to target annual productivity improvements
of 2.0-3.0 per cent per annum.
As previously disclosed, wage legislation such as the Working Time Directive, Apprentice Levy and increased costs relating to redundancy
payments will impact people costs in the future. The impact of the Apprentice Levy for 2017-18 is expected to be around £20 million. We would
expect to exclude the first year impact of such legislative changes from underlying movements if material.
Non-people costs were flat. Distribution and conveyance costs increased by one per cent, driven by increases in the cost of sales related to the
international business. Terminal dues increased by £62 million, of which £37 million reflects weaker Sterling and has been excluded from underlying
movements. The remaining £25 million of the increase reflects the mix of export parcels revenue. This trend is expected to continue next year. In addition,
we have seen increased costs associated with handling tracked volumes and larger parcels and we expect this to continue. Total diesel and jet fuel costs
of £159 million were £13 million lower than the prior year due to lower pricing and improved fleet management. We expect diesel and jet fuel costs to be
around £140 million in 2017-18.
Infrastructure costs were down one per cent with benefits from our cost avoidance programme more than offsetting the increase in depreciation
and amortisation of around £20 million, due to parcels systems and tracking investments coming into use. Within infrastructure costs, the cost
avoidance programme has delivered benefits in property through the integration of Romec, IT transformation and lower discretionary spend
across the entire estate. Over the past five years, we have invested significantly in IT and other assets as part of the transformation programme.
As a result, the depreciation and amortisation charge is expected to increase by a further £30 million in 2017-18 but should stabilise thereafter.
Other operating costs were flat, with the increased cost of marketing and other spend in our new business areas being offset by activity within
the cost avoidance programme, including lower discretionary spend.
22
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
We remain on track to avoid annualised operating costs of around £600 million by 2017-18. However, there remain cost pressures, in particular,
the next pay deal and increased depreciation.
Transformation costs
(£m)
Voluntary redundancy
Project costs
Business transformation payments
Total
Adjusted
52 weeks ended
26 March 2017
Adjusted
52 weeks ended
27 March 2016
(62)
(75)
–
(137)
(117)
(72)
(2)
(191)
Transformation costs were £137 million, at the lower end of our range of £130 to £160 million due to a change in mix of activity within the cost
avoidance programme. There was a net decrease of around 730 employees in UKPIL in the year. However, there was a reduction of around
3,500 full time equivalent employees (FTEs)3 to 148,170 FTEs reflecting a change in the mix of full-time and part-time employees and a reduction
in variable hours. Project costs were £75 million, largely relating to projects supporting the cost avoidance programme.
We expect transformation costs to be in the range £130 to £150 million per annum going forward.
Operating profit after transformation costs
Adjusted operating profit after transformation costs was £411 million, giving a margin of 5.4 per cent, down 10 basis points on an
underlying basis.
3 Full time equivalent (FTE) numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the standard full-time working hours
in the same period.
Annual Report and Financial Statements 2016-17
| 23
Royal Mail plc
| General Logistics Systems (GLS)
General Logistics Systems (GLS)
Reported results
The tables below reflect the reported Euro results. Underlying change excludes the impact of acquisitions.
Summary trading results (continuing operations) (€m)
Revenue
Operating costs
Operating profit
Margin
(£m)
Revenue
Operating costs
Operating profit
Volumes (m)
Reported
Year ended
March 2017
Reported
Year ended
March 2016
2,521
(2,325)
196
7.8%
2,118
(1,954)
164
508
2,158
(1,998)
160
7.4%
1,580
(1,463)
117
431
Underlying
change
9%
9%
17%
50bps
9%
Revenue and volumes
GLS continued to perform well. Performance in the period benefited from the timing of Easter and other public holidays across Europe, which is
estimated to have accounted for around two percentage points of the volume and revenue underlying change. Volumes were up nine 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 in Sterling terms benefited from a £233 million impact from exchange rate movements which is excluded from underlying
movements. Revenue growth was achieved in almost all markets and from a broad customer base, with the largest customer accounting for
around two per cent of total GLS revenue. The three major markets, Germany, Italy and France, accounted for 63 per cent of total GLS revenue
down from 68 per cent in 2015-16 reflecting the impact of the acquisitions in Spain and the US.
In 2017-18, the timing of public holidays across Europe is expected to have the effect of reducing underlying revenue and volume movements
by around two percentage points compared with 2016-17.
Operating costs (€m)
People costs
Non-people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total
Reported
Year ended
March 2017
Reported
Year ended
March 2016
Underlying
change
(582)
(1,743)
(1,521)
(152)
(70)
(2,325)
(489)
(1,509)
(1,312)
(143)
(54)
(1,998)
8%
9%
10%
Flat
11%
9%
Total operating costs were up nine per cent in line with volume.
People costs increased by eight per cent as a result of increased semi-variable costs linked to volume and increases in rates of pay. Distribution
and conveyance costs were up ten per cent, driven by higher volumes. Infrastructure costs were flat, with a one-off provision release of €3 million
for IT related costs offsetting inflationary pressures. Other operating costs increased by 11 per cent, partly driven by costs associated with our
geographic expansion activities. The prior year benefited from a one-off provision release of around €3 million.
Operating profit
Operating profit was €196 million giving a reported margin of 7.8 per cent. This represents an underlying margin improvement of 50 basis points
over the prior year. This performance was largely due to improved profitability in Italy, Germany and France. Reported profit in Sterling terms
benefited from an £18 million impact from exchange rate movements which is excluded from underlying movements.
Germany
Germany remains the largest market for GLS by revenue. Revenue in GLS Germany grew by five per cent, driven by international volumes
and improved domestic pricing. Profitability has been impacted by legislation which increased the minimum wage by four per cent from
1 January 2017. This has increased costs in the period by €1 million with an estimated twelve month impact of €5 million.
24
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Italy
GLS Italy continues to perform strongly. Revenue growth of 13 per cent was due to strong B2C volume growth, driven by Amazon and other
customers. Given the strong performance over the last two years, it will be challenging to maintain this rate of growth in the future.
France
GLS France delivered an improved rate of revenue growth of eight per cent, largely from domestic volumes. Reported operating losses reduced
by €5 million to €8 million. France remains a challenging market and while actions are underway which target a break-even result, higher costs
of sale including those associated with a changing mix of parcel sizes means that it is unlikely we will achieve this in the short term.
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 with strong growth in Denmark. In June 2016, we
announced the acquisition of ASM for a total consideration (including debt taken on) of €71 million. ASM has exceeded performance expectations
since acquisition. Given the potential synergies, the transaction is expected to be economic profit accretive for GLS in 2018-19.
Other developing/emerging European markets (including Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia)
We saw revenue growth in all developing/emerging European markets, with particularly strong growth in Romania. This has been largely driven
by the growing parcels markets in these countries.
USA
On 4 October 2016, we announced the acquisition of GSO, a regional next day parcel delivery company operating primarily in California, for
a total consideration of $90 million. We expect GSO to perform in line with our expectations in the first full year of its ownership by the Group.
The transaction is expected to be economic profit accretive for GLS in 2019-20.
On 6 April 2017, we announced the acquisition of Postal Express, a regional overnight parcel carrier operating in the states of Washington,
Oregon and Idaho for a total consideration of $13.3 million. Postal Express offers overnight parcel delivery, mainly to B2B customers, across
a number of industries. The transaction is expected to be economic profit accretive for GLS in 2018-19.
GSO and Postal Express will be operated as standalone businesses but will be incorporated into the results of GLS.
Annual Report and Financial Statements 2016-17
| 25
Royal Mail plc
| Group results
Group results
Reported results
Group revenue increased to £9,776 million (2015-16: £9,251 million). Operating costs before transformation costs increased to £9,286 million
(2015-16: £8,766 million). Group operating profit before transformation costs increased to £490 million (2015-16: £485 million). Operating
profit after transformation costs increased to £353 million (2015-16: £294 million). Operating specific items decreased to £134 million
(2015-16: £156 million). As a result, Group operating profit was £219 million (2015-16: £138 million). Profit before tax from continuing operations
increased to £335 million (2015-16: £267 million), of which, UKPIL accounted for £183 million (2015-16: £150 million) and GLS accounted for
£152 million (2015-16: £117 million). Earnings per share from continuing operations increased from 21.5 pence to 27.5 pence.
There is a full reconciliation of reported to adjusted results set out on page 34.
Adjusted results
Group revenue
(£m)
UKPIL
GLS
Total
Adjusted
52 weeks ended
26 March 2017
Re-presented1
52 weeks ended
27 March 2016
7,658
2,118
9,776
7,671
1,580
9,251
Underlying
change
(2%)
9%
1%
Parcel revenue accounted for 56 per cent of Group revenue (2015-16: 52 per cent). The main factors impacting revenue in the year are described
in the sections entitled ‘UK Parcels, International & Letters (UKPIL)’ and ‘General Logistics Systems (GLS)’.
Group operating costs
(£m)
People costs
Non-people costs
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Total
Adjusted
52 weeks ended
26 March 2017
Re-presented1
52 weeks ended
27 March 2016
Underlying
change
(5,354)
(3,710)
(2,106)
(868)
(736)
(9,064)
(5,199)
(3,310)
(1,736)
(854)
(720)
(8,509)
Flat
3%
6%
(1%)
Flat
1%
Group operating costs increased by one per cent due to increases at 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
Total
Margin
Adjusted
52 weeks ended
26 March 2017
Re-presented1
52 weeks ended
27 March 2016
411
164
575
5.9%
434
117
551
6.0%
Lower transformation costs in UKPIL led to Group operating profit margin after transformation costs increasing by 10 basis points on an
underlying basis to 5.9 per cent.
1 Following the Group’s acquisition of the remaining 49 per cent shareholding in Romec Limited (Romec) at the beginning of 2016-17, Romec has been consolidated into the UKPIL
segment (previously the Group’s 51 per cent shareholding was reported within 'Other' segment). The 2015-16 UKPIL results have been re-presented to reflect this change.
26
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Specific items and pension charge to cash difference adjustment
(£m)
Pension charge to cash difference adjustment (within People costs)
Operating specific items
Employee Free Shares charge
Amortisation of acquired intangible assets
Legacy/other (costs)/credit
Potential industrial diseases claims
Personal injury provision discount rate decrease
Other
Total operating specific items and pensions adjustment
Non-operating specific items
Profit on disposal of property, plant and equipment
Loss on disposal of business
Net pension interest
Profit on disposal of discontinued operations
Total non-operating specific items
Total specific items and pensions adjustment before tax
Total tax credit on specific items and pensions adjustment
52 weeks ended
26 March 2017
52 weeks ended
27 March 2016
(222)
(105)
(11)
(18)
(6)
(4)
(8)
(356)
14
(2)
120
–
132
(224)
59
(257)
(158)
–
2
3
–
(1)
(413)
29
–
113
31
173
(240)
68
The pension charge to cash difference adjustment was £222 million (2015-16: £257 million). The difference between the pension charge and cash
cost largely comprises the difference between the IAS 19 income statement pension charge rate of 28.8 per cent and the actual cash payments
agreed with the RMPP Trustee of 17.1 per cent. The IAS 19 pension service charge rate for 2017-18 is projected to significantly increase to
41.1 per cent as a result of the reduction in corporate bond yields which means that the pension charge to cash difference adjustment for
2017-18 is expected to increase to around £440 million.
Operating specific items in the year related mainly to the Employee Free Shares charge of £105 million (2015-16: £158 million). The Employee
Free Shares charge has decreased as a result of SIP 2013 maturing in October 2016. This has been partially offset by the charge in relation to
the Free Shares awarded in October 2015 (SIP 2015) and October 2016 (SIP 2016). The charge for Employee Free Shares will reduce over time
reflecting the phasing of the charge over the vesting period. For 2017-18, the Employee Free Shares charge is expected to be around £40 million.
Amortisation of acquired intangibles of £11 million reflects the amortisation of goodwill relating largely to ASM and GSO.
The increase in the provision for legacy costs is driven by a reduction in the discount rate used to calculate the industrial diseases provision and
the legislative decrease in discount rate used to determine personal injury claims announced in February 2017. Other specific items mainly relate
to the integration of Romec into the Group.
Non-operating specific items include a profit on disposal of property, plant and equipment of £14 million (2015-16: £29 million). This mainly
arises from the sale of a GLS property in Munich and the Maidstone Delivery Office. The loss on disposal of business relates to the sale of
NDC 2000 Limited (NDC) and reflects the transfer of cash and other assets to the purchasers. The net pension interest credit was £120 million
(2015-16: £113 million), higher than the prior year due to the increase in the accounting surplus at 27 March 2016. The net pension interest is
expected to be £91 million in 2017-18, due to the lower discount rate more than offsetting the impact of the increased surplus.
Net finance costs
Reported net finance costs were £16 million compared with £13 million in the prior year. Interest on the €500 million bond was £11 million,
£2 million higher than the prior year as a result of weaker Sterling.
Facility
€500 million bond
Loans in GLS (Spain)
Revolving credit facility
Total
Rate
2.5%
2.0%
LIBOR+0.55%
Facility
(£m)
430
1
1,050
1,481
Drawn
(£m)
430
1
32
463
Facility end date
2024
2017
2020-22
The blended interest rate on gross debt, including finance leases for 2017-18, is expected to be approximately three per cent. The retranslation
impact of the €500 million bond is accounted for within equity.
Annual Report and Financial Statements 2016-17
| 27
Royal Mail plc
| Group results
Taxation
(£m)
Reported
Profit before tax
Tax charge
Effective tax rate
Adjusted
Profit before tax
Tax charge
Effective tax rate
52 weeks ended
26 March 2017
UK
GLS
Group
183
(20)
11%
398
(76)
19%
152
(42)
28%
161
(45)
28%
335
(62)
19%
559
(121)
22%
52 weeks ended
27 March 2016
GLS
Group
117
(31)
26%
117
(34)
29%
267
(45)
17%
538
(118)
22%
UK
150
(14)
9%
421
(84)
20%
The Group effective tax rate on adjusted profit before tax was 22 per cent. The UK adjusted effective tax rate of 19 per cent is broadly in line with
the UK statutory tax rate. GLS’ effective tax rate of 28 per cent has reduced due to lower French losses for which no deferred tax is recognised
and increased notional interest deductions in Italy.
In the UK, the reported effective tax rate is lower than the adjusted effective tax rate as the impact of the one-off deferred tax credit due to a
reduction in future corporation tax rate is treated as a specific item and excluded from the adjusted tax result. Additionally, tax associated with
property disposal profits within the reported result is offset by reinvestment relief contributing to the lower reported effective tax rate.
Earnings per share (EPS)
Adjusted basic EPS for continuing operations was 44.1 pence compared with 41.3 pence in the prior year, largely reflecting the decrease in
transformation costs.
In-year trading cash flow
(£m)
EBITDA before transformation costs
Pension charge to cash difference adjustment
Adjusted EBITDA before transformation costs
Trading working capital movements
Share-based awards (SAYE and LTIP) charge
Dividends received from associate
Total investment
Income tax paid
Net finance costs paid
Total
52 weeks ended
26 March 2017
52 weeks ended
27 March 2016
793
222
1,015
(3)
11
–
(529)
(60)
(14)
420
756
257
1,013
(26)
13
1
(694)
(40)
(13)
254
In-year trading cash flow inflow was £420 million, £166 million higher than the prior year, mainly driven by lower investment spend and lower
trading working capital absorption. Adjusted EBITDA before transformation costs was broadly flat, as higher EBITDA was offset by the lower
pension charge to cash difference adjustment. Trading working capital outflow was £3 million, an improvement of £23 million compared with
the prior year due to a change in international sales mix. Income tax paid was £60 million, £20 million higher than the prior year mainly due to a
repayment received in the prior year and tax paid this year on the sale of DPD SL.
On a cash tax basis, in the UK, we continue to be able to offset the majority of taxable profits with capital allowances and brought forward losses.
UK cash tax paid is now expected to stay at similar levels until 2019-20 due to research and development credits and patent box tax reliefs, and
normalise thereafter.
28
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Net cash investment
(£m)
Growth capital expenditure
Replacement capital expenditure
Transformation operating expenditure
Voluntary redundancy
Project costs
Business transformation payments
Total investment
Proceeds from disposal of property (excluding London property portfolio), plant and equipment
Total
52 weeks ended
26 March 2017
52 weeks ended
27 March 2016
(208)
(179)
(142)
(66)
(76)
–
(529)
37
(492)
(253)
(208)
(233)
(159)
(72)
(2)
(694)
38
(656)
Total gross cash investment decreased from £694 million to £529 million, due to lower spend in relation to voluntary redundancy payments and
more efficient investment spend. Total gross investment was skewed towards growth capital expenditure of which parcels automation, parcel
systems, PDA initiatives and investment in GLS represented the majority of spend in the year. Replacement capital expenditure reduced by £29
million, due to the timing of ongoing property maintenance and lower spending on certain property and technology projects. Both growth and
replacement capital expenditure have reduced in 2016-17.
We are past the peak of investment and are targeting net cash investment of around £450 million in 2017-18 and less than £500 million per
annum going forward.
Net debt
Net debt was £338 million at 26 March 2017, £114 million higher than at 27 March 2016.
A reconciliation of net debt is set out below.
(£m)
Net debt brought forward at 27 March 2016 and 29 March 2015
In-year trading cash inflow
Other working capital movements
Cash cost of operating specific items
Proceeds from disposal of property (excluding London property portfolio),
plant and equipment
Cash impact of disposal of discontinued operations and subsidiary
Acquisition of business interests
Cash flows relating to London property portfolio
Debt transferred on acquisitions
Purchase of own shares
Foreign currency exchange impact
Dividends paid to equity holders of the parent Company
Dividends paid to non-controlling interests
Net debt carried forward
420
(6)
(61)
37
(3)
(144)
(34)
(10)
(53)
(30)
(222)
(8)
52 weeks ended
26 March 2017
(224)
52 weeks ended
27 March 2016
(275)
254
6
(6)
38
41
(18)
(23)
–
–
(21)
(213)
(7)
(338)
(224)
Movements in GLS client cash are included within other working capital movements. The amount held at 26 March 2017 was £22 million.
The cash cost of operating specific items largely related to the French Competition Authority fine of €55 million that was paid in April 2016.
Property disposal proceeds of £37 million largely relate to the sale of a GLS property in Munich and the Maidstone Delivery Office.
Annual Report and Financial Statements 2016-17
| 29
Royal Mail plc
| Group results
A reconciliation of cash flows relating to acquisitions is shown below.
(£m)
GSO
ASM
Other
Total consideration (see Note 10)
Add back net cash acquired on acquisition of business
Acquisition of business interests, net of cash acquired (see statutory cash flow statement)
Deferred consideration paid in respect of prior years' acquisitions
Acquisition of non-controlling interests
Acquisition of business interests
52 weeks ended
26 March
2017
(66)
(49)
(11)
(126)
4
(122)
(4)
(18)
(144)
Other acquisitions included eCourier. The acquisition of non-controlling interests represents the purchase of the remaining 49 per cent of Romec.
Debt transferred on acquisitions includes £3 million of finance leases and £7 million of interest bearing loans and borrowings on GLS acquisitions.
Cash outflows relating to the London property portfolio of £34 million largely relate to remediation work, reprovisioning costs and planning and
marketing costs in relation to the Nine Elms and Mount Pleasant sites. These sites, in particular Mount Pleasant, will require further investment
once sales proceeds are received. Both sites continue to be marketed.
Approach to capital management
The Group has established four key objectives for capital management.
Objectives
Enablers
2016-17 Update
Meet the Group’s obligations as they fall due By maintaining sufficient cash reserves and committed
facilities to –
• meet all obligations, including pensions; and
• manage future risks, including those set out in the Principal
Risks section on pages 37 to 41
Support a progressive dividend policy
Generate sufficient in-year trading cash flow to cover the
ordinary dividend and maintain sufficient distributable
reserves to sustain the Group’s dividend policy
At 26 March 2017, the Group had available resources of
£1,317 million (2015-16: £1,418 million); made up of cash and
cash equivalents of £299 million (2015-16: £368 million) and
undrawn committed revolving credit facilities of £1,018 million
(2015-16: £1,050 million)
The Group met the loan covenants and other obligations for its
revolving credit facility and €500 million bond, (see Note 20)
As set out in the Viability Statement, the Directors have a
reasonable expectation that the Group will continue to meet its
obligations as they fall due
Generated £420 million of in-year trading cash flow (2015-16:
£254 million) to cover the full year dividend of 23.0 pence
per share (2015-16: 22.1 pence per share) equivalent to
£230 million
Capital managed by the Group excluding the net assets of the
pension scheme is £1,806 million (2015-16: £1,602 million)2
The Group had retained earnings of £4,940 million at 26 March
2017 (2015-16: £4,451 million). The Group considers it has a
maximum level of distributable reserves of around £2 billion
which excludes the impact of the pension surplus on retained
earnings, more than sufficient to cover the dividend
Reduce the cost of capital for the Group
Target investment grade standard credit metrics i.e. no lower
than BBB- under Standard & Poor’s rating methodology
During the year, the Group maintained a credit rating of BBB
with a stable outlook from Standard & Poor’s
Retain sufficient flexibility to invest in the
future of the business
Funded by retained cash flows and manageable levels of debt
consistent with our target credit rating
During the year, the Group made total gross investments of
£529 million (2015-16: £694 million) and acquisition of business
interests of £144 million (2015-16: £18 million) while retaining
sufficient capital headroom
Pensions
The Company’s overall IAS 19 pension position at 26 March 2017 was a surplus of £3,839 million, compared with a surplus of £3,430 million
at 27 March 2016. The IAS 19 accounting position and key assumptions for the valuation are provided in Note 9 to the consolidated
financial statements.
2 At 26 March 2017 consists of net assets (comprising of investment balances, working capital, provisions and net debt) of £4,998 million (2015-16: £4,467 million), less pension
assets of £3,839 million (2015-16: £3,430 million), with the associated deferred tax liability on pension assets of £647 million credited back (2015-16: £565 million).
30
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
The accounting liabilities have increased over the year due to the fall in corporate bond yields. This has been offset by the increase in the RMPP
assets, largely due to the hedging strategy adopted by the RMPP.
Royal Mail Pension Plan (RMPP)
The triennial valuation of RMPP at 31 March 2015 was agreed on 8 May 2017. Based on this set of assumptions, the RMPP actuarial
surplus at 31 March 2017 was estimated to be £1,074 million, comprising of assets of £9,603 million and liabilities of £8,529 million
(2015-16: £1,765 million).
Using these assumptions, the projected cost of benefits being accrued each year, based on market conditions at the end of March 2017, would
currently be around £1,260 million. This is significantly greater than projected 2017-18 contributions of £320 million by the Company and
£110 million by employees. Accordingly, we expect that the actuarial funding surplus would be exhausted during 2018 if the RMPP had remained
open in its current form.
Following the Company’s decision the RMPP will close to future accrual on 31 March 2018.
In accordance with the new Schedule of Contributions, the service contribution rate for 2017-18 will remain at 17.1 per cent. The March 2015
valuation continues to show the scheme in surplus and therefore no deficit correction payments are expected to be made.
Royal Mail Senior Executives Pension Plan (RMSEPP)
The 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 Trustees in 2013. On this basis, the actuarial surplus was £16 million at 31 March 2015 comprising assets
of £410 million and liabilities of £394 million.
The RMSEPP closed in December 2012 to future accrual. Therefore the Company makes no regular future service contributions. As agreed in the
February 2013 Funding Agreement with the Trustees, the Company 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).
Dividends
The final dividend of 15.1 pence per ordinary share in respect of the 2015-16 financial year was paid on 29 July 2016, following
shareholder approval.
The interim dividend of 7.4 pence per ordinary share in respect of the 2016-17 financial year was paid on 11 January 2017 to shareholders on the
register at the close of business on 9 December 2016.
The Board is recommending a final dividend of 15.6 pence per ordinary share, payable on 28 July 2017 to shareholders on the register at the
close of business on 30 June 2017, subject to shareholder approval at the AGM on 20 July 2017. This gives a total dividend for the year of
23.0 pence.
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.
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 Annual
Report and Financial Statements in 2016-17.
The forecast diesel and jet commodity exposures in UKPIL are set out below together with the sensitivity of 2017-18 operating profit to changes
in commodity prices and fuel duty.
2017-18 Exposure
Diesel
Jet
Total
Forecast total
cost
£m
134
8
142
Fuel duty/
other costs (incl
irrecoverable
VAT) – not
hedged
2017-18
£m
Underlying
commodity
exposure (incl
irrecoverable
VAT)
2017-18
£m
Underlying
commodity
volume hedged
%
Residual
unhedged
underlying
commodity
exposure (incl
irrecoverable
VAT)
£m
Impact on
2017-18
operating profit
of a further
10% increase
in commodity
price
£m
Impact on
2017-18
operating profit
of a further
10% increase in
fuel duty/other
cost
£m
92
3
95
42
5
47
94
79
92
3
1
4
–
–
–
(9)
–
(9)
As a result of hedging, it is anticipated that the diesel commodity cost for 2017-18 will reduce by £10 million. Without hedging, the cost reduction
would have been £12 million (based upon closing fuel prices at 26 March 2017).
Annual Report and Financial Statements 2016-17
| 31
Royal Mail plc
| Group results
The Group is exposed to foreign currency risk due to interest payments on the €500 million bond, certain obligations under Euro denominated
finance leases, trading with overseas postal administrations and various purchase contracts denominated in foreign currency. GLS’ functional
currency is the Euro which results in translational exposure to the Group’s operating profit.
The average exchange rate between Sterling and the Euro was £1/€1.19, representing a 13 per cent weakening in Sterling compared with
£1/€1.37 in 2015-16, which resulted in an £18 million increase in GLS’ reported operating profit before tax in 2016-17. This weakness of Sterling
resulted in lower UKPIL operating profit of £9 million in the international business. The net impact on Group operating profit before tax was
therefore £9 million.
The Group manages its interest rate risk through a combination of fixed rate loans and leasing, floating rate loans/facilities and floating rate
financial investments. At 26 March 2017, all of the gross debt of £657 million was at fixed rates to maturity.
Counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength.
Events after the reporting year
Acquisition of Postal Express
On 6 April 2017, we announced the acquisition of Postal Express for $13.3 million. Operating in the states of Washington, Oregon and Idaho
Postal Express offers overnight parcel delivery services, mainly to B2B customers, across a number of industries.
Closure of Royal Mail Pension Plan (RMPP)
On 8 May 2017, the Company and the RMPP Trustee agreed the March 2015 actuarial valuation and revised Schedule of Contributions following
the decision to close the RMPP to future accrual from 31 March 2018.
32
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Presentation of results and Alternative Performance
Measures (APMs)
In its financial reporting, the Group uses certain measures that are not defined under International Financial Reporting Standards (IFRS), the
Generally Accepted Accounting Principles (GAAP) under which the Group produces its statutory financial information. These APMs are not a
substitute, or superior to, any IFRS measures of performance. They are used as Management considers them to be an important means of
comparing performance year-on-year and are key measures used within the business for assessing performance.
The Group makes adjustments to results reported under IFRS to exclude specific items and the pension charge to cash difference adjustment
(see definitions below). Management believes this is a more meaningful basis upon which to analyse the business performance (in particular
given the volatile nature of the IAS 19 charge) and is consistent with the way financial performance is reported to the Board.
IFRS can have the impact of causing high levels of volatility in reported earnings which do not relate to changes in the operations of the Company.
Management has reviewed the long term differences between reported and adjusted profit after tax. Cumulative reported profit after taxation
for the five years ended March 2017 was £2,632 million. Cumulative adjusted profit after tax was £1,820 million. Annual reported profit after tax
showed a range of £222 million to £1,280 million. The principal cause of the difference and volatility is due to pension-related accounting.
APMs should not be considered in isolation from, or as a substitute to, financial information presented in compliance with GAAP. Where appropriate,
reconciliations to the nearest GAAP measure have been provided. The APMs used may not be directly comparable with similarly titled APMs used by
other companies.
Presentation of results
Re-presentation of 2015-16 results
As a result of the acquisition of the minority shareholding in Romec Limited ('Romec') on 31 March 2016, the external revenues, costs and profits of
Romec, previously reported in the Other segment, have been incorporated into UKPIL for 2016-17. As a result, £5 million of Romec revenue in 2015-16
is now reported within letters and other revenue. The £141 million facilities management charge previously included within infrastructure costs has been
reallocated between people and non-people costs. UKPIL operating profit in 2015-16 increased by £17 million as a result. There is no impact on Group
operating profit. Both the Group and UKPIL operating costs for 2015-16 have been re-presented to reflect these changes as shown below:
Adjusted 52 weeks ended
27 March 2016
£m
Romec adjustment
£m
Re-presented 52 weeks
ended 27 March 2016
£m
Group
Revenue
Operating costs
People
Non-people
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating profit before transformation costs
UKPIL
Revenue
Operating cost
People
Non-people
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating profit before transformation costs
Other
Revenue
Operating cost
People
Non-people
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Operating profit before transformation costs
9,251
(8,509)
(5,199)
(3,310)
(1,736)
(995)
(579)
742
7,666
(7,058)
(4,764)
(2,294)
(776)
(890)
(628)
608
5
12
(77)
89
–
–
89
17
–
–
–
–
–
141
(141)
–
5
12
(77)
89
–
141
(52)
17
(5)
(12)
77
(89)
–
–
(89)
(17)
9,251
(8,509)
(5,199)
(3,310)
(1,736)
(854)
(720)
742
7,671
(7,046)
(4,841)
(2,205)
(776)
(749)
(680)
625
–
–
–
–
–
–
–
–
Annual Report and Financial Statements 2016-17
| 33
Royal Mail plc
| Presentation of results and Alternative Performance Measures (APMs)
Adjusted results
The following table reconciles the reported results, prepared in accordance with IFRS, to the adjusted results.
(£m)
Revenue
Operating costs
People costs1
Non-people costs
Distribution and conveyance costs
Infrastructure costs1
Other operating costs1
Operating profit before transformation costs
Transformation costs
Operating profit after transformation costs
Operating specific items:
Employee Free Shares charge
Legacy/other (costs)/credit
Amortisation of intangible assets in acquisitions
Operating profit
Non-operating specific items:
Profit on disposal of property, plant and
equipment
Loss on disposal of business
Earnings before interest and tax
Finance costs
Finance income
Net pension interest (non-operating
specific item)
Profit before tax
Tax charge
Profit for the period from continuing
operations
Discontinued operations
Profit from disposal of discontinued operations
(non-operating specific item)
Tax on profit from disposal of discontinued
operations
Profit for the period
Profit for the period 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
52 weeks ended
26 March 2017
Specific items
and pension
adjustment
Reported
52 weeks ended
27 March 2016
Specific items
and pension
adjustment
Adjusted
Reported1
9,776
(9,286)
(5,576)
(3,710)
(2,106)
(868)
(736)
490
(137)
353
(105)
(18)
(11)
219
14
(2)
231
(18)
2
120
335
(62)
273
–
–
273
272
1
27.5p
27.3p
27.5p
27.3p
–
(222)
(222)
–
–
–
–
(222)
–
(222)
(105)
(18)
(11)
(356)
14
(2)
(344)
–
–
120
(224)
(59)
(165)
–
–
(165)
(165)
–
9,776
(9,064)
(5,354)
(3,710)
(2,106)
(868)
(736)
712
(137)
575
–
–
–
575
–
–
575
(18)
2
–
559
(121)
438
–
–
438
437
1
(16.6p)
(16.5p)
(16.6p)
(16.5p)
44.1p
43.8p
44.1p
43.8p
9,251
(8,766)
(5,456)
(3,310)
(1,736)
(854)
(720)
485
(191)
294
(158)
2
–
138
29
–
167
(16)
3
113
267
(45)
222
31
(5)
248
241
7
21.5p
21.4p
24.1p
24.0p
–
(257)
(257)
–
–
–
–
(257)
–
(257)
(158)
2
–
(413)
29
–
(384)
–
–
113
(271)
73
(198)
31
(5)
(172)
(172)
–
(19.8p)
(19.7p)
(17.2p)
(17.1p)
Adjusted1
9,251
(8,509)
(5,199)
(3,310)
(1,736)
(854)
(720)
742
(191)
551
–
–
–
551
–
–
551
(16)
3
–
538
(118)
420
–
–
420
413
7
41.3p
41.1p
41.3p
41.1p
Alternative performance measures
Non-IFRS measures
Adjusted operating profit before transformation costs, adjusted operating profit after transformation costs and adjusted operating profit margin
after transformation costs reflect reported operating profit excluding the ‘pension charge to cash difference’ adjustment.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) before transformation costs
Adjusted EBITDA before transformation costs is reported EBITDA before transformation costs with the pension charge to cash difference
added back.
EBITDA is considered to be a useful measure of operating performance because it approximates the underlying operating cash flow by
eliminating depreciation, amortisation and the performance of associate companies.
1 Re-presented to reflect the Group’s acquisition of the remaining 49 per cent shareholding in Romec at the beginning of 2016-17, and to consolidate the results of Romec into
the UKPIL segment (previously the Group’s 51 per cent shareholding was reported within the ‘Other’ segment). The 2015-16 UKPIL results have been re-presented to reflect
this change.
34
| Annual Report and Financial Statements 2016-17
The following table reconciles adjusted EBITDA before transformation costs to reported operating profit before transformation costs.
Strategic report
| Governance
| Financial statements
| Other information
(£m)
Reported operating profit before transformation costs
Depreciation and amortisation
Share of post-tax (loss)/profit from associates
Reported EBITDA before transformation costs
Pension charge to cash difference adjustment
Adjusted EBITDA before transformation costs
52 weeks ended
26 March 2017
52 weeks ended
27 March 2016
490
301
2
793
222
1,015
485
272
(1)
756
257
1,013
Adjusted earnings per share
Adjusted earnings per share is reported basic earnings per share, excluding operating and non-operating specific items and the pension charge to
cash difference adjustment. A reconciliation of this number to reported basic earnings per share is included in the adjusted results table on page 34.
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 Management’s opinion require separate identification.
These include items that have resulted from events that are non-recurring in nature, even though related income/expense can be recognised in
subsequent periods.
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 in Management’s opinion require separate identification.
Further details of specific items can be found on page 27.
Pension charge to cash difference adjustment
This adjustment represents the difference between the IFRS income statement pension charge rate of 28.8 per cent and the actual cash payments
into the RMPP at 17.1 per cent. This adjustment is made to eliminate the volatility of the IAS 19 accounting charge and to include only the true
cash cost of the pension plans in the adjusted operating profit of the Group.
In-year trading cash flow
In-year trading cash flow reflects the cash generated from the trading activities of the Group. It is based on reported net cash inflow from
operating activities, adjusted to exclude other working capital movements and the cash cost of operating specific items and to include the cash
cost of property, plant and equipment and intangible asset acquisitions and net finance payments. Other working capital movements include
movements in GLS client cash held and in deferred revenue from stamps purchased in prior periods. In-year trading cash flow is used primarily
by Management as a measure of liquidity, showing cash being generated by operations less cash investment.
The following table reconciles in-year trading cash flow to the nearest IFRS measure ‘net cash inflow from operating activities’.
(£m)
Net cash inflow from operating activities
Adjustment for:
Other working capital movements
Cash cost of operating specific items
Purchase of property, plant and equipment
Purchase of intangible assets (software)
Dividend received from associate company
Net finance costs paid
In-year trading cash inflow
Reported
52 weeks ended
26 March 2017
754
Reported
52 weeks ended
27 March 2016
727
6
61
(230)
(157)
–
(14)
420
(6)
6
(270)
(191)
1
(13)
254
Net debt
Net debt is calculated by netting the value of financial liabilities (excluding derivatives) against cash and other liquid assets.
Net debt is a measure of the Group’s net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single measure
that can be used to assess the combined impact of the Group’s indebtedness and its cash position. The use of the term net debt does not
necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure.
A reconciliation of net debt to reported balance sheet line items is shown below.
(£m)
Loans/bonds
Finance leases
Cash and cash equivalents
Pension escrow (RMSEPP)
Net debt
At 26 March
2017
463
At 27 March
2016
392
194
(299)
(20)
338
220
(368)
(20)
224
Annual Report and Financial Statements 2016-17
| 35
Royal Mail plc
| Presentation of results and Alternative Performance Measures (APMs)
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 (2016-17: 305.6; 2015-16: 303.0) and movements in foreign exchange (2016-17: £1/€ 1.19; 2015-16: £1/€ 1.37) by re-presenting
the 2015-16 results at 2016-17 working days/rates. In addition, adjustments are made for non-recurring or distorting items, which by their nature
may be unpredictable, such as acquisitions and changes in wage legislation such as National Insurance. For volumes, underlying movements are
adjusted for working days in UKPIL, the results of acquisitions and exclude political parties’ election mailings in letters volumes. For 2017-18, the
estimated revenue and profit impact of working days in UKPIL is a redcution of around £15 million (2017-18: 305 days).
(£m)
Revenue
UKPIL
GLS
Group
Group costs
People
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Non-people costs
Operating costs before
transformation costs
UKPIL
People
Distribution and conveyance costs
Infrastructure costs
Other operating costs
Non-people costs
Operating costs before
transformation costs
GLS
Operating costs
Profit, margins and EPS
Group
Operating profit before
transformation costs
Transformation costs
Operating profit after
transformation costs
Margin
Profit before tax
Tax
Profit for the period
Profit attributable to equity holders
of the parent Company
Earnings per share (pence)
UKPIL
Operating profit before
transformation costs
Transformation costs
Operating profit after
transformation costs
Margin
GLS
Operating profit before
transformation costs
Margin
Adjusted
52 weeks
ended
26 March 17
Re-presented
52 weeks
ended
27 March 16 Working days
Wage
legislation
Foreign
exchange
Acquisitions
Underlying
52 weeks
ended
27 March 16
Underlying
change
7,658
2,118
9,776
(5,354)
(2,106)
(868)
(736)
(3,710)
(9,064)
7,671
1,580
9,251
(5,199)
(1,736)
(854)
(720)
(3,310)
(8,509)
(4,865)
(4,841)
(828)
(740)
(677)
(2,245)
(7,110)
(776)
(749)
(680)
(2,205)
(7,046)
(1,954)
(1,463)
712
(137)
575
5.9%
559
(121)
438
437
44.1
548
(137)
411
5.4%
164
7.7%
742
(191)
551
6.0%
538
(118)
420
413
41.3
625
(191)
434
5.7%
117
7.4%
66
–
66
–
–
–
–
–
–
–
–
–
–
–
–
–
66
–
66
–
66
–
66
–
66
–
–
–
–
–
–
(65)
–
–
–
–
(65)
(65)
–
–
–
–
(65)
28
233
261
(53)
(179)
(15)
(5)
(199)
(252)
–
(37)
–
–
(37)
(37)
13
124
137
(45)
(68)
(9)
(8)
(85)
(130)
(3)
(8)
(1)
–
(9)
(12)
7,778
1,937
9,715
(5,362)
(1,983)
(878)
(733)
(3,594)
(8,956)
(4,909)
(821)
(750)
(680)
(2,251)
(7,160)
(2%)
9%
1%
Flat
6%
(1%)
Flat
3%
1%
(1%)
1%
(1%)
Flat
Flat
(1%)
–
(215)
(118)
(1,796)
9%
(65)
–
(65)
–
(65)
–
(65)
–
(65)
–
–
–
9
–
9
–
9
–
(9)
–
(9)
–
18
–
7
–
7
–
7
–
1
–
1
–
6
–
759
(191)
568
5.8%
555
(118)
420
413
41.3
618
(191)
427
(6%)
(28%)
2%
10bps
1%
–
–
–
–
(11%)
(28%)
(4%)
5.5%
(10bps)
141
7.3%
16%
40bps
36
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Principal risks
The 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 48 – 87.
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
Link to strategy
Winning in parcels
Defending letters
Growing in new areas
Relative severity
Change during the year
Speed at which the risk could impact
High
Medium
Low
Increasing risk
Decreasing risk
Stable
Fast: 6 months
Medium: 6-12 months
Slow: >12 months
Principal risk
Status
How we are mitigating the risk
New arrangements and the risk of industrial action
There is extensive trade union recognition in respect of our workforce in the UK with a strong and active trade union. As Royal Mail Group continues to pursue the
necessary efficiency programmes in order to remain competitive in the letters and parcels markets and implements the new pension arrangements, there is an
even greater risk of industrial action.
Industrial action
There is a risk that one or more material disagreements
or disputes between the Group and its trade unions
could result in widespread localised or national
industrial action.
Widespread localised or national industrial action
would cause material disruption to our business in the
UK and would be likely to result in an immediate and
potentially ongoing significant loss of revenue for the
Group. It may also cause Royal Mail to fail to meet the
Quality of Service targets prescribed by Ofcom, leading
to enforcement action and fines.
The Agenda for Growth agreement developed jointly
with the Communications Workers Union (CWU)
represented a fundamental change in our relationship
with the CWU, and continues to promote 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.
Industrial relations is an inherent risk within our
business. We are negotiating a new pay deal for
2017-18 onwards and have completed a consultation
of the future of the Royal Mail Pension Plan (RMPP).
This, in combination with the continued pressure on
costs and efficiencies in an increasingly competitive
market, may put additional strain on the stability of
our industrial relations.
• 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.
Pension arrangements
We recognise that pension benefits are important to
our people.
There is a risk that we are unable to continue
to provide sustainable and affordable pension
arrangements which are acceptable to our people
and unions, leading to industrial action.
The Group is exposed to financial market conditions,
changes in life expectancy and regulatory changes
for defined benefits already accrued. Benefits
accrued in the Royal Mail Pension Plan before April
2012 have been transferred to Government.
• We are exploring a range of options with
our people, unions and advisers regarding
future pension benefits. We have a clear set of
affordability and capital allocation criteria for
assessing any future pension arrangements.
• The March 2015 Royal Mail Pension Plan valuation
was agreed on 8 May 2017 with the RMPP Trustee.
This is based on a prudent set of assumptions,
appropriate to the Company’s circumstances.
• After the RMPP closes to accrual, we will continue
to work closely with the Trustee to limit the risk
of any deficit recovery payments being required
from the Company in future.
In 2013, we committed to keeping the RMPP
open until at least March 2018, subject to certain
conditions. The RMPP Trustee put in place a hedging
strategy for that period of accrual which means
we will be able to meet this commitment despite
significant reductions in real interest rates.
While the RMPP is currently in surplus, we expect this
surplus will run out in 2018. On 8 May 2017, the Company
and the Trustee agreed the March 2015 actuarial valuation
and revised Schedule of Contributions following the
decision to close the RMPP to future accrual from
31 March 2018. Closing the RMPP now avoids an
unaffordable increase in pension costs for the Group.
As noted, the RMPP is hedged against future
interest rate and inflation rate exposures, arising
on commitments made until March 2018, so we
are confident that this will enable us to meet our
commitment to keep the RMPP open to accrual up to
31 March 2018.
We remain in discussions with our unions regarding the
provision of future pension benefits from April 2018.
Annual Report and Financial Statements 2016-17
| 37
Royal Mail plc
| Principal risks
Principal risk
Efficiency
Status
How we are mitigating the risk
Royal Mail must continuously become more efficient
and flexible in order to compete effectively in the
letter and parcel markets.
The success of our strategy relies on the effective
control of costs across all areas and the delivery of
efficiency benefits.
In the current industrial relations environment,
there is a risk we cannot make the required short
term business as usual and/or programme level cost
reductions in a timely way; nor can we trial, with a
view to broader roll out, more fundamental changes
in methods required to meet customer requirements
and to underpin future cost reductions.
We are continuing to see the positive impact of our
cost reduction activities across the UK business.
This has involved continuous focus on our efficiency
performance in all areas, while providing a high
quality service to our customers through our
engaged workforce.
Our productivity improvement is towards the upper
range of our 2-3 per cent target, and we are confident
that we will deliver the £600 million cumulative
annualised cost avoided target, previously
announced.
As we negotiate fundamental changes to our pension
and other terms and conditions, there is a risk that
our workforce will delay the change we need.
• We have ongoing collaborative meetings with
our unions to involve them in the efficiency
improvements and growth opportunities.
• We are delivering efficiencies both in and outside
of the core operations and have over 200 projects
and initiatives which underpin the £600 million
cumulative annualised cost avoided target.
• We continue to scope additional cost saving
opportunities beyond 2017-18. However, the
present trend of cost savings may not be
sustainable and the need to deliver operational
efficiencies will become greater.
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 expectations and Royal Mail’s
responsiveness to market changes
Changes in customer expectations, and changes
in the markets in which the Group operates, could
impact the demand for our products and services.
We expect the letters sector to remain in structural
decline, in the medium term, driven by e-substitution
and further economic uncertainty.
There is a risk that our product offerings and
customer experience may not adequately meet
evolving customer expectations, or that we are
unable to innovate or adapt our commercial and
operational activities fast enough to respond to
changes in the market.
The parcels sector is undergoing rapid 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.
The UK has one of the most developed e-commerce
markets in the world. Growth available in the
addressable UK parcels market continues to be
impacted by Amazon's activities. Capacity expansion
in the sector continues to exert downward pressure
on prices.
In the parcels business, disintermediation in online
marketplaces may divert traffic to other carriers.
There is a continuing requirement to invest in
targeted growth and innovation to meet these
challenges in the marketplace as well as reducing
cost to ensure better price competitiveness.
There are also potential behavioural changes by
customers relating to the upcoming regulatory
developments at the European level around data,
including marketing mail.
• We use continuous in depth market monitoring
and research to track how well we match our
customers’ expectations, including relative to our
competitors, and to predict volume trends.
• We continue to invest and introduce, 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 continue to work with Amazon to provide
enhanced propositions and high quality of service.
• We promote the value of letters to customers
through targeting advertisers and ad agencies,
using our Mailmen campaign. We are also giving
customers incentives to test new ways of using
mail at a discounted rate.
• We are investing in our Mail Centre equipment
to ensure we get the best out of our machinery.
To help add value to the mail and keep customers
using it, we invested in Mailmark® last year.
It gives customers visibility of their items in our
pipeline and data on the effectiveness of their
mailings. Around 80 per cent of suitable letters are
sent using Mailmark®. Further, we are planning
investment to rollout barcodes to unsorted letters
next year.
• We continue to monitor developments and actively
promote the value of marketing mail.
38
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Principal risk
Economic environment
Status
How we are mitigating the risk
Historically, there has been a correlation between
economic conditions and the level of letter and
parcel volumes. Flat or adverse economic conditions
could impact our ability to maintain and grow
revenue, either by reducing volumes or encouraging
customers to adopt cheaper service options for
sending letters and parcels.
While economic conditions in the UK have proved
resilient, business uncertainty before and after
the EU referendum has resulted in a slowdown
in marketing activity. We continue to monitor the
broader long term economic impact on the UK
economy.
Economic growth in the Eurozone remains fragile.
Low growth or recession in Europe could impact
our international parcel volumes, including those
handled by GLS.
• We have a challenging cost avoidance programme
in place to respond to revenue headwinds.
• Net cash investment is expected to be around
£450 million in 2017-18 and less than £500 million
per annum going forward.
•
In the event of an economic shock, we are able to
reduce investment over the short term to protect
the cash and indebtedness position of the business.
Growing in new areas
Our success in growing in new areas of business is
dependent on such factors as our continued ability
to identify new profitable and sustainable areas of
business, implementing appropriate investments,
and having in place suitable structures to support
continued transformation of the business.
Royal Mail Group is well positioned to grow in
new markets through its subsidiary, GLS. It has a
replicable and scalable business model founded on
the development of strong regional businesses.
Through increasing its footprint and focusing on
growth opportunities in the deferred parcels space,
with selective growth in the B2C parcels market,
GLS is well positioned to support Royal Mail Group’s
overall strategy.
• Our acquisitions are primarily delivered
through a targeted and focused expansion of
GLS’ geographic footprint, investing behind a
proven operating model with a track record of
identification, integration and optimisation of
acquisitions over many years.
• We are also developing partnerships with
retailers and network partners to stimulate
cross-border volumes between the UK and Asia,
as well as working with China Post to provide
Chinese and UK customers with faster delivery
and tracking services.
• We also have a number of small scale initiatives
to seek new revenues which leverage our
existing assets.
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.
Absence of a sustainability framework to
sustain the USO
USO finances are fragile. The regulatory system
applies constraints to Royal Mail’s ability to
compete for traffic to support the costs of the
Universal Service network. It imposes operational
requirements not applied generally to the industry.
These may impact our revenues and our ability
to compete in the highly competitive sectors in
which we operate. This could ultimately impact
our ability to deliver the Universal Service on a
sustainable basis.
Ofcom concluded its Fundamental Review of the
Regulation of Royal Mail (FRR) in March 2017. It did
not re-introduce price controls or add binding
efficiency targets. However, it has not taken
forward our proposal for a proactive sustainability
framework. It has also not taken forward the
opportunity to raise consumer protection standards
across the industry.
In terms of follow-up consultations, Ofcom is
consulting on a new regulatory reporting framework
to reflect the outcome of its FRR. It is also planning
on conducting a cost allocation review. This will
review the allocation of Royal Mail’s delivery costs
between parcels and letters.
We are continuing to lobby BEIS and Ofcom to tackle
emerging issues of USO sustainability. We are
arguing for fundamental changes in the regulatory
environment including:
• greater focus on sustainability, rather than
on competition issues, including through
the prompt introduction of a proactive
sustainability framework;
• procedural fairness issues and enforcement;
• a material decrease in the significant regulatory
burden; and
• a level playing field across the whole industry,
including higher consumer protection standards
in parcels.
We will engage fully with Ofcom’s regulatory
reporting review, to ensure a more targeted regime
that reduces the regulatory burden.
Annual Report and Financial Statements 2016-17
| 39
Royal Mail plc
| Principal risks
Principal risk
Status
How we are mitigating the risk
Competition Act investigation
In January 2014, Royal Mail issued Contract Change
Notices (CCNs) under the terms of the access
contract regime.
In February 2014, Ofcom announced that they would
investigate some of these CCNs. The opening of the
investigation automatically suspended the CCNs that
were the subject of the investigation. These CCNs
were therefore never implemented.
Ofcom issued a statement of objections in July
2015. This statement sets out Ofcom’s provisional
view that Royal Mail breached competition law by
engaging in conduct that amounted to unlawful
discrimination against postal operators competing
with Royal Mail in delivery.
Depending on the outcome of the Ofcom
investigation and any appeal, Royal Mail may
be fined.
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. Given the size of the Group’s workforce, this
could have an adverse effect on the Group.
Other
Cyber security
We are subject to a range of regulations, contractual
compliance obligations, and customer expectations
around the governance and protection of various
classes of data. In common with all major
organisations, we are the potential target of cyber
attacks that could threaten the confidentiality,
integrity and availability of data in our systems.
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.
Royal Mail is refuting all of the allegations.
Ofcom has stated that their final decision is likely to
be made in 2017-18.
• We have robustly defended our conduct in both
written and oral representations to Ofcom.
• This reflects our belief that the 2014 CCNs under
investigation, which were never implemented and
have now been withdrawn, were fully compliant
with competition law. Please refer to our
contingent liabilities disclosure on page 130.
• We will continue to defend our case.
• 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.
Recent case law has suggested that, in some
circumstances, 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. We have
commenced discussions with the trade union
about the application of holiday pay for part timers
but anticipate that this still will take some time
to implement.
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 2016. These are:
• The Apprenticeship Levy came into effect in
April 2017, with an estimated cost to Royal Mail of
around £20 million.
• Proposed changes to National Insurance (NI) on
termination of employment have been announced,
which will increase employers’ NI costs from
April 2018.
• Changes to tax/NI on salary sacrifice benefits
came into effect from 1 April 2017, although
pensions have specifically been excluded from
these regulations.
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 consider cyber security a
principal risk.
• As external threats become more sophisticated,
and the potential impact of service disruption
increases, we continue to invest in cyber security.
Recognising that this risk cannot be eliminated,
we have implemented significant protective
measures which will need to be continuously
enhanced in light of the changes and threats
we face.
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| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Principal risk
Status
How we are mitigating the risk
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.
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 2020 to be an appropriate planning
time horizon to assess Royal Mail’s viability
and to determine the probability and impact of
our principal risks. This is the same time frame
of our existing medium term planning cycle
and therefore a period over which planning
assumptions and the impact of strategic
initiatives are scrutinised. This period also aligns
with the performance criteria in our long-term
incentive plans (LTIP).
Business divisions prepare detailed annual
forecasts for a 12 month period and project
performance over three years with reference to
economic assumptions and strategic initiatives.
The key assumptions within the projections were
stress-tested with reference to risks set out in
the Principal Risks section on pages 37-41 but
focused on those that could have a plausible and
severe financial impact over the plan horizon.
This year, the Directors considered (i) the potential
impact of industrial action; (ii) deteriorating
economic and market conditions which could
result in letters volume decline greater than
our projected four to six per cent range and (iii)
increased competition in the UK parcels sector.
In addition we have not assumed any material
impact from our initiatives to grow in new areas.
These risks were quantified to create a
downside scenario that took into account the
levels of committed capital 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 Company has decided that the Royal Mail
Pension Plan will close to future accrual on
31 March 2018. On 8 May 2017, the Company
and the RMPP Trustee agreed the March
2015 actuarial valuation and revised Schedule
of Contributions following this decision.
We continue to work closely with our unions
on a sustainable and affordable solution for the
provision of future pension benefits. In making
their assessment of viability, the Directors have
assumed that future cash pension contributions
are consistent with those made in 2016-17.
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 2020.
Annual Report and Financial Statements 2016-17
| 41
Royal Mail plc
| Corporate responsibility
Responsibility
leader
Our
performance
FTSE4Good
Ranked second globally
in the Transportation and
Transportation Infrastructure
industry in the Dow Jones
Sustainability Indices
Royal Mail is a constituent
of the FTSE4Good Index,
ranking in the top 15 per cent
of companies
12.3%
12.3 per cent reduction in
road traffic collisions
Times Top 50
Employer for
Women, for
the fourth
consecutive
year2
85 per cent of people in
the UK think Royal Mail is
an important part of local
communities1
Winner
Two awards won for our
partnership with the charity
Missing People
1 Ipsos MORI Corporate Image Survey Winter 2016.
2 During the year, we were listed as a Times Top 50 Employer for Women for the third time. Shortly after the financial
year end, we were included in the list for the fourth time.
42
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Corporate responsibility
experience. This year we achieved a customer
focus score of 692, an increase of two points
compared to the previous year.
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.
Our CR strategy comprises six key objectives:
• Deliver economic and social benefit to the
communities we serve
• Drive colleague advocacy for the Group
and its community role
• Manage the environmental impacts of our
business and operations
• Deliver our transformation responsibly
• Operate with integrity
• Communicate our management of
corporate responsibilities openly
and transparently
Our CR objectives support the delivery of
our business strategy. We report progress
against them under the areas of Customer,
People, Community, Environment and
Suppliers. Further information will
be available in the 2016-17 Corporate
Responsibility Report.
Measuring our progress
We are independently rated as a leading
responsible business. We have been named a
global leader in the Dow Jones Sustainability
Indices for a third year. We were ranked
second among around 100 companies in
the Transportation and Transportation
Infrastructure Industry. We were previously
ranked number one globally, two years in
a row. Royal Mail is included in both the
Dow Jones Sustainability World Index and
the Dow Jones Sustainability Europe Index.
We have been included every year we have
been eligible, since our flotation.
We were again included in the FTSE4Good
Global Index in 2016. We were ranked in the
top 15 per cent of companies included, on
account of our environmental, social and
governance performance.
Our customers
Royal Mail is the UK’s most trusted delivery
company1. We are proud of the role we
play in connecting customers, businesses,
organisations and communities, including
those in remote and rural areas.
We are continuously adapting our business to
respond to customers’ changing expectations.
This includes improving customer convenience
and flexibility to support consumers, small
and medium enterprises and marketplace
sellers. We are building our capability to
handle increased numbers of larger parcels,
where appropriate, and investing in tracking
and automation.
We have three customer service indicators
on our Corporate Balanced Scorecard.
All of them are equally weighted. They
are: Retail First Class Quality of Service;
business customer satisfaction; and
customer complaints. (See page 18 for more
information). We exceeded our First Class
target. Our mean business satisfaction score
improved by two points to 78. The consumer
satisfaction score remained stable at 72.
There was, however, an overall increase in
complaints in 2016-17, driven principally by
the growth in tracked parcels. As a result
of a range of initiatives, we reduced the
number of complaints in key categories like
misdeliveries and redirections. On the other
hand, Denial of Receipt complaints – these
relate to parcels – increased. This is an area
of real focus for us. We are concentrating on
improving the scanning of items and ensuring
that if an item is left with a neighbour,
the appropriate details are written on the
‘Something for You’ card.
After our customers, our employees are best
placed to evaluate how customer-focused
our products and services really are. We use
our annual Employee Survey to gauge what
they think about key aspects of the customer
1 Research by the Business Brand Tracker 2016–17
Tackling the scourge of scam mail
Royal Mail never knowingly delivers scam
mail – it is a scourge. We understand the
upset and distress that it can cause. This
year, we worked with our employees,
industry partners and law enforcement
agencies to tackle this issue even more
vigorously. A range of new measures were
implemented to strengthen our ability to
stem the flow of scam mail in the postal
system. We launched an industry-wide Code
of Practice on scam mail, and have secured
all major UK mail operators’ commitment
to it. We also introduced anti-scam clauses
into bulk mail contracts with our customers.
We can now check items we suspect to be
scam mail, refuse to process or deliver it, and
terminate a customer’s contract in certain
circumstances. Since launching this new
scheme, we have stopped over 700,000 scam
items from reaching customers.
Following year end, we launched another
major new initiative to protect consumers
from scam mail. We are contacting
households that we believe are receiving high
volumes of scam mail. This latest anti-scam
initiative will initially focus on the most
impacted customers. It will be extended in
due course.
Our people
Achievement of our strategic priorities
depends on our people. They represent
our Company among customers and
communities. We rely on them to fulfil the
Universal Service and deliver high-quality
customer service. Engaging our people within
a fair, rewarding and customer-focused
culture is essential for our future success.
Pay and terms & conditions
We believe good employment conditions
drive quality of service. All of our permanent
employees earn above the Living Wage. They
also receive the additional benefits associated
with permanent employment, such as paid
holiday and a good pension. We are committed
to continuing to provide the best pay and
terms and conditions in our industry. In return,
however, we continually work with our unions
to agree changes to our working practices and
labour model. This process of change is about
sustaining our business now and in the future,
particularly given the decline in letter volumes.
Our Agenda for Growth agreement with
the Communications Workers Union, put in
place in 2013, includes legally binding terms
covering employee pay, protections and
industrial stability as well as a programme
Survey.
2 Out of 100.
Annual Report and Financial Statements 2016-17
| 43
Royal Mail plc
| Corporate responsibility
of work to help deliver change. We are
now working with our unions to agree and
implement our vision for the future. We are
seeking more change at pace and in a way
that is fair to all of our people across the UK.
We recognise that change is difficult. But, it
is essential that we keep transforming the
business given the challenges we face.
Engagement and culture
Employee engagement is one of the two
people-related key performance indicators
on our Corporate Balanced Scorecard (see
page 18 for more information). Employee
engagement is measured through our annual
Employee Survey. In 2016-17, we maintained
our employee engagement score of 57.
Against a backdrop of significant change for
our business, we have achieved an above
average3 employee engagement score for the
last two years.
An extensive internal communications
programme is in place across our business.
We held 39 ‘town hall’ meetings in the UK
this year, where senior managers addressed
thousands of frontline colleagues and middle
managers. Senior managers also held many
on-site engagement sessions.
Share ownership
During 2016-17, the Royal Mail Share
Incentive Plan Trust distributed the final one
per cent of shares that had been gifted to it
for eligible employees, following the disposal
of HM Government’s holding in 2015-16.
All of our eligible full-time employees have
now received a maximum of 913 Free
Shares, regardless of grade. This means that
12 per cent of the Company has been awarded
to colleagues. This is one of the largest free
stakes made available to employees as part of
any major UK privatisation.
Health and safety
The safety and wellbeing of our workforce
is a key priority for us. There was a slight
increase in sick absence this year, from
4.51 per cent in 2015-16, to 4.63 per cent
in 2016-17. We maintained our Lost Time
Accident Frequency Rate at 0.49 in 2016-17.
We use on-going communications to
reinforce safety messages with the aim of
making safe behaviours part of our business
as usual activities. Road traffic collisions
are one of the main causes of accidents.
In 2016-17, the Road Traffic Collision
Frequency Rate (RTCFR) was added to our
Corporate Balanced Scorecard to increase
focus on this area. This year, we reduced our
RTCFR by 12.3 per cent.
3 Our engagement score compares favourably with the
Ipsos MORI norm for large organisations. Our score is
one point higher than the norm, which is 56. Currently
the trend is downwards for employee engagement in
large organisations.
Unfortunately, however, accidents still
sometimes happen. It is with great regret
that we report that one4 person lost their life
in connection with our activities in the UK
in the past year. We liaise closely with the
relevant authorities and complete our own
detailed investigations to determine the root
cause of each accident and, where possible,
to determine what lessons can be learned.
Investigations are discussed at Board level and
outcomes are communicated across the Group.
Musculoskeletal issues are one of the leading
causes of illness among our people. This
year, we launched a new programme to
investigate the causes of musculoskeletal
problems and identify any job-specific trends.
We held workshops at sites with higher than
average rates of musculoskeletal issues and
surveyed colleagues about their roles. We also
established a working group to look specifically
at health issues faced by older colleagues and
created an action plan to improve job design
and the support services available.
Mental health is another leading form of
ill health in the UK and our workforce. It is
a focal point of our health and wellbeing
strategy. This is about reaffirming our
commitment to helping end the stigma
of mental ill-health in the workplace.
We created a dedicated ‘First Class Mental
Health’ self-help toolkit for managers, and
produced five short films on mental health,
in partnership with the Mental Health
Foundation, to support colleagues. We have
begun delivering Mental Health First Aid
training to managers. So far, 431 managers
have been trained on the course, delivered
by Mental Health First Aid England. There
is much more, however, that we need to do
as a major employer. In 2017-18, we will
significantly expand our support for mental
health by launching a major, strategic
charity partnership with Action for Children
focused on mental health. It will be an
integrated programme covering training,
awareness-raising, communications,
pro-bono support, work placements and
fundraising (see page 45).
Promoting diversity
Royal Mail employs a diverse mix of
people who reflect the communities we
serve. We are committed to being an equal
opportunities employer and we proactively
seek to recruit people from socially
excluded groups. It is our policy to provide
opportunities for our employees based on
an individual’s performance and skills, with
no discrimination.
Gender diversity
In 2016-17, Royal Mail was named as one of
The Times Top 50 Employers for Women for
the fourth consecutive year. We were also
listed as a top 20 company for senior leader
gender diversity in the Hampton-Alexander
Review; an independent, Government
supported review of diversity in FTSE
100 companies. At Board level, 50 per cent
of members are women, which compares
well to the FTSE 100 average of 27 per cent.
At senior management level, 30 per cent of
our colleagues are women, compared with
16 per cent in operational grades.
We address the gender balance across
our organisation through initiatives such
as balanced shortlisting. This has helped
to increase the number of women hired in
frontline roles. During the year, we launched
a new drive to increase the number of
women appointed to Delivery Office Manager
positions, offering candidates support
through a 12-week development programme
before being placed into a role. As a result,
we have appointed 46 women in Delivery
Office Manager roles in 2016-17, making up
26 per cent of Delivery Office hires this year.
Each year, we conduct a gender pay review
across our UK business, comparing the
salaries we pay men and women. We are
currently carrying out the required analysis
in accordance with the new gender pay
gap reporting regulations. We will publish
the outcomes in 2017-18, in line with the
statutory timescales.
Ethnic diversity
Royal Mail’s ethnic profile is broadly
representative of the UK population. Around
11 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.
KPIs5
2016-17
2015-16
2014-15
2013-14
Lost Time Accident Frequency Rate6
0.49
Sick absence (%)
4.63
0.49
4.51
0.70
4.74
0.81
4.34
4 We disclose fatalities that have been confirmed during the reporting year.
5 Data represents UKPIL safety performance.
6 Lost Time Accident Frequency Rate is calculated by dividing the number of Lost Time Accidents for last 12 months
by the number of hours worked for last 12 months, and multiplying this by 100,000.
44
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
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| Other information
Gender distribution
(number of people)
Royal Mail plc Board
Senior Management1
Management
Administration
Operational
UKPIL
GLS
Female
Male
Female
Male
4
731
1,420
1,428
4
1,704
5,280
980
n/a
39
n/a
246
3,183
2,528
20,011
107,131
1,993
9,147
1 Includes direct reports of Chief Executive’s Committee members
Supporting people with
disabilities
We are committed to employing people
with disabilities and supporting disabled
employees during employment. This year,
we have achieved Employer Level 2 of the
new Disability Confident programme, which
replaces the Disability Two Ticks scheme.
Approximately seven per cent of our
employees identify themselves as having a
disability. We make reasonable adjustments
to the workplace to support employees who
are disabled, or become disabled. We provide
training as required, for example, in assistive
technology and software.
Since 2006, we have been a national partner
of the disability charity Remploy, working
together to provide jobs and placements
for people with disabilities. In 2016-17,
we offered 142 placements to disabled
and disadvantaged candidates. To date,
we have employed over 2,200 people
through Remploy.
Inclusive workplaces
We are a member of Stonewall’s Diversity
Champions programme, which campaigns
for equality for lesbian, gay, bisexual and
transgender (LGBT) people. We moved up
25 places in the 2017 Workplace Equality
Index by Stonewall. We are now ranked
number 266 out of 439 organisations,
up from 291 in 2016. In June 2016, more
than 100 of our people took part in the
Pride in London parade celebrating the
LGBT community.
Training and career development
We are committed to investing in our people
to equip them with the skills they need to
deliver our business strategy. In 2016-17, we
invested £13.8 million in training, delivering
the equivalent of almost 25,000 training days
for our UK colleagues. We also established
a Continuous Improvement Leadership
Academy to support the development of Mail
Centre leaders. The eight-week programme
aims to improve leaders’ ability to streamline
processes and reduce waste. So far,
44 colleagues have taken part. At senior
levels, we enrol our people in leadership
programmes at Oxford Said Business School.
Since the programme began in 2014, 280
colleagues attended, of which 35 per cent
were women.
In GLS, employees in Poland have access to
books and audio-books covering professional
and personal development. GLS Denmark
has rolled out customer focus training,
which involves colleagues learning from best
practice across the organisation. So far, more
than 110 colleagues have taken part.
Our communities
Royal Mail seeks to be an integral, valued
and trusted part of every community
that our service reaches. Our main
contribution to communities is our social
and economic impact. We make the fifth
biggest contribution of any UK company to
the UK economy7. The Universal Service is
a key driver of UK economic growth and an
integral part of the digital economy, which is
strategically important to the UK’s economic
future. One in every 185 jobs in the UK is
provided by Royal Mail. Our employment is
disproportionately weighted towards areas
where there are fewer job opportunities
available, enabling us to make a significant
contribution to social inclusion. We seek
to build on the core economic and social
contribution of our business operations by
making strategic community investments
7 Cebr adapted the original gross valued added (GVA)
scoreboard developed by the Department for
Business, Energy & Industrial Strategy (BEIS, BIS at
the time) to take account of companies’ UK operations
only. The original GVA scoreboard included
companies’ overseas impacts. In this adapted
scoreboard, for 2016-17, UKPIL ranks in fifth place.
Cebr inputted financial, supply chain and employee
data for the financial year 2016-17 into the national
accounting framework provided by the Office for
National Statistics’ supply-use and input-output
tables to establish UKPIL’s direct and indirect
contribution to the UK and enable UKPIL to be ranked
in this way. The full study methodology is published
online at www.royalmailgroup.com/responsibility/
cr-reports.
and by using our business assets to
benefit society.
In 2016-17, Royal Mail contributed
£7.9 million directly to good causes and
schemes for disadvantaged groups.
That includes £700,000 in matched giving
and grant schemes to support employees’
fundraising for charities and good causes.
In addition, our people donated £3.1 million
to hundreds of charities and good causes
across the UK, including £2.4 million through
our award-winning payroll giving scheme.
Our partnership with the Stroke Association
ended during the reporting period. We raised
£2 million for the charity, including matched
giving. This will fund up to 10,000 grants for
stroke survivors, to support their recovery.
We also took over 15,000 blood pressure
readings, to highlight the link between high
blood pressure and stroke risk.
We decided to focus on the theme of
mental health for our subsequent charity
partnership. This is an important issue
for our business and in society in general.
We will deliver an integrated programme with
our new charity partner, Action for Children,
covering mental health training, awareness-
raising, communications, pro-bono support,
work placements and fundraising. Around
36,000 colleagues voted for Action for
Children as their preferred charity partner in
our 2017 Employee Survey.
The partnership has four key objectives:
•
to support our own colleagues’
mental health;
• drive awareness amongst customers
and communities;
•
fundraise £2 million, including matched
giving from Royal Mail, to enable the charity
to support more young people; and
• engage our suppliers to raise awareness
and support for the cause.
Action for Children will use the funds we
raise to employ specialist youth workers
to deliver face-to-face support sessions
for 8,000 young people aged 15-18, to help
prevent them from developing depression
and other mental health problems.
Royal Mail partners with the charity Missing
People to distribute missing people alerts
through our network of handheld scanners,
which are usually used to track and sign for
deliveries. We sent our 100th alert during
the year. We also funded the charity’s Child
Rescue Alert system, which allows members
of the public to sign up for alerts to their
mobile phones. At Christmas, we sponsored
a campaign to enable missing people to send
Annual Report and Financial Statements 2016-17
| 45
Royal Mail plc
| Corporate responsibility
a Message Home for free. We distributed
10,000 freepost cards to help them take the
first step in reconnecting with loved ones.
Our partnership was recognised by two
prestigious awards: the CorpComms Best
Partnership award and PostEurop’s Coup
de Coeur for Society award. CorpComms
Awards judges said “This is a truly stand out
partnership. It is extremely clever, relevant
and built out of insight.”
GLS is active in supporting community
causes across Europe. In 2017, GLS
Netherlands launched a partnership with
Heppie, a charity that provides support
to disadvantaged children. Through
the partnership, GLS will fund around
50 excursions a year for the children.
GLS Belgium provided assistance to the
Belgian deaf football team to transport
their equipment to Italy for the European
Deaf Football Championships. In Germany,
GLS colleagues spread some festive cheer
by donating 750 advent calendars to local
children’s hospitals.
Our environment
We aim to minimise the environmental
impact of our business operations.
Management of natural resources is a
commercial imperative too for us. Reducing
our impact will help us save costs and
compete more effectively.
Our Environment Policy, which outlines our
commitment to managing environmental
issues, was revised during 2016-17.
CO2e Emissions
(’000 tonnes)2,3,4,5
Scope 1
Scope 2
Scope 3
Total
The new policy can be accessed online at
www.royalmailgroup.com/responsibility/
policies. We also developed a new suite
of environmental standards in 2016-17,
aligned to ISO140001. This is about enabling
business units in our UK operations to
identify environmental efficiencies and ensure
we continue to meet legal obligations.
The table below sets out our Group carbon
dioxide equivalent (CO2e) emissions for
2016-17. In 2016-17, our total UK carbon
footprint decreased by 4.7 per cent compared
with the previous year. On a normalised
basis, emissions decreased by 4.6 per cent
per £1 million revenue. Our target has been
to reduce UKPIL carbon emissions (including
Scopes 1, 2 and 3) by 20 per cent, by 2020-21,
compared with a 2004-05 baseline. We have
achieved our target at a time of significant
change for our business. We are transforming
from a letters company that delivers parcels,
to a parcels company that delivers letters.
We are having to accommodate more and
bigger parcels than ever before. This places
increasing demand on our fleet and fuel
consumption. We have achieved our target by
pursuing energy-saving opportunities across
our fleet and property portfolio, exploring
more efficient ways of balancing the air, rail
and road transport that we use to deliver mail
items, and training our employees in more
energy-efficient behaviours. The target will
remain in place until 2020-21. This means
that we will aim to keep our carbon emissions
at 20 per cent below the levels in 2004-05
until 2020-21. This will be challenging. Parcel
volumes are increasing, and demands on our
vehicles and fuel consumption will continue
to grow.
Fleet emissions
We have replaced air transport with road on
several routes across the UK. This has helped
us to reduce costs as well as associated
carbon emissions. We trained over 13,500
drivers in fuel efficient driving, and fitted
telemetry technology in approximately
2,900 vehicles. In total, 40 per cent of our
fleet is now fitted with this technology.
It promotes safer, more efficient driving
styles. We also continue to trial vehicles
that use low or zero-emission technology.
In 2017-18, we will trial nine electric
heavy goods vehicles at a central London
Mail Centre.
GLS is introducing more gas powered
vehicles into its fleet, bringing the total
number to 180. Almost 10 per cent of its fleet
in Italy is gas-powered.
Buildings emissions
The size of our property portfolio makes
reducing its energy use another key priority.
During the year, we replaced inefficient
fluorescent lights with new LED lights at
15 of our UK sites, and lighting controls
at a further 17 Mail Processing Units and
Delivery Office sites. This will generate an
expected electricity saving of 11 GWh per
year. In addition, in 2016-17 we focused
on reducing our use of gas across our UK
estate. Our improved use of Building Energy
2016-17
2015-161
2014-151
Total
UKPIL
458.2
444.9
134.4
116.3
GLS
13.3
18.1
Total
UKPIL
473.7
458.4
152.2
134.1
GLS
15.3
18.2
Total
UKPIL
483.7
470.7
166.4
145.4
GLS
13.0
21.0
87.7
87.7
88.7
88.7
100.1
100.1
680.3
648.9
31.4
714.6
681.2
33.4
750.1
716.1
34.0
Tonnes CO2e per £1m revenue
Scope 2 (market-based)
40.3
84.7
14.3
26.0
40.7
88.8
14.1
26.6
92.2
1 Last year, we reported that we had achieved a 16.8 per cent reduction in carbon emissions against the baseline. However, we actually achieved a 22 per cent reduction. Carbon
emissions figures have been restated here to ensure transparency. During 2016-17, we identified two issues that resulted in an overestimation of our carbon emissions for
2015-16, and for 2014-15. Firstly, Parcelforce Worldwide road fleet emissions had been double counted in 2015-16 and 2014-15. Secondly, issues with gas meter billing resulted
in some double counting during 2015-16. This means that we overestimated our total carbon emissions by 5.9 per cent in 2015-16 and 3.9 per cent in 2014-15. These issues have
been rectified. Appropriate additional control steps have been included as part of the data collection and validation process to reduce the risk of misreporting in the future.
Ernst & Young (EY) – who we engage to provide limited assurance of our annual Corporate Responsibility reports, including our carbon emissions data – checked the
rectifications and the additional controls that were implemented. EY’s full assurance statement will be available in the 2016-17 Corporate Responsibility Report.
2 We quantify and report our organisational greenhouse gas emissions according to the Defra Environmental Reporting Guidelines 2013 and have utilised the UK Government
2014 Conversion Factors for Company Reporting in order to calculate carbon dioxide equivalent emissions from corresponding activity data. 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. Scope 3 emissions are included in UKPIL reporting only.
3 We report our Scope 2 market-based carbon emissions in line with the Greenhouse Gas Protocol, which takes into account the use of lower carbon forms of energy such as
renewables. Based on the total Scope 2 market-based figures in table above, our total carbon emissions in 2016–17 are 586.1 kilotonnes CO2e.
4 Totals may differ due to rounding.
5 CO2e emissions have been assured by EY, with the exception of 2015-16 Scope 2 (market-based) emissions.
46
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
The Strategic Report was approved by the
Board on 17 May 2017 and signed on its
behalf by:
Moya Greene
Chief Executive Officer
17 May 2017
Matthew Lester
Chief Finance Officer
17 May 2017
Management Systems helped to reduce
gas consumption by seven per cent in total,
in sites where we have those systems.
GLS’ sites in Barcelona, Vitoria and Zaragoza
source 100 per cent of their electricity
through a green tariff. These locations
represent approximately 52 per cent of our
parcel volumes in Spain. GLS plans to move
all of its Spanish operations to this tariff by
the end of 2017-2018.
Waste and water management
In 2016-17, 91 per cent of UK waste was
diverted from landfill, four per cent more than
our target of 87 per cent, using a combination
of recycling and waste to energy initiatives.
45 per cent of UK sites that reported waste
this year, now do not send any waste to
landfill. In addition, we recorded a reduction
of four per cent in our use of water,
exceeding our water reduction target of three
per cent. During the year, we also set new
waste-to-landfill and water reduction targets
for the next three years. These are detailed in
our 2016-17 Corporate Responsibility Report.
Our suppliers
In the UK, we contribute around £2.4 billion
annually procuring goods and services from
around 5,000 suppliers. Where commercially
viable, we break contracts down into
smaller lots to increase their attractiveness
to small and medium sized enterprises.
By making our tendering process accessible
to businesses of all sizes, we significantly
expand our options. We also widen the
economic opportunities that our business
creates. During 2016-17, we awarded over
30 per cent of new contracts to SMEs.
We are committed to ensuring suppliers
to Royal Mail maintain high standards of
social, ethical and environmental conduct.
We expect UK suppliers to adhere to our
Responsible Procurement Code. The Code
requires suppliers to maintain high standards
of social, ethical and environmental conduct,
including complying with the Ten Principles of
the United Nations Global Compact. Suppliers
must also comply with our mail security
procedures and our approach to anti-bribery
and corruption. The Code is embedded into
our tendering process for UK procurement
and it is referenced in our contracts. We may
terminate a contract if we identify that a
supplier fails to comply with our Code.
We delivered several training sessions
for colleagues in our UK procurement
team last year, covering various corporate
responsibility issues.
Ethical principles are embedded in the
Partner Code used by GLS Germany.
The Code requires transport partners
working with GLS to adhere to principles
relating to anti-bribery and corruption,
and health and safety.
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 act in
accordance with the UN Guiding Principles
on Business and Human Rights. We support
the United Nations Universal Declaration of
Human Rights and the International Labour
Organization Fundamental Conventions,
covering freedom of association, the
elimination of all forms of forced and
compulsory labour, the abolition of child
labour and the elimination of discrimination
in the workplace.
Royal Mail welcomes the introduction of the
UK Government’s Modern Slavery Act. This
requires businesses to publicly report any
steps they are taking to guard against the
occurrence of slavery and trafficking in their
business operations. We will publish our
formal Modern Slavery Act statement within
the recommended timeframes. It will cover
both UKPIL and GLS.
Our commitment to human rights is
embedded in our company-wide Corporate
Responsibility Policy, our Responsible
Procurement Code and our Business
Standards, which set out the standards and
behaviours we expect of our colleagues.
Further information about our approach to
human rights protection will be available in
our 2016-17 Corporate Responsibility Report.
Our taxation principles
Our taxation strategy is published on
our website, at the following address:
www.royalmailgroup.com/responsibility/policies.
We have published our taxation principles
for a number of years. Our strategy provides
further detail and transparency. Our approach
remains the same. Royal Mail has a low risk
appetite in relation to tax matters. We are
committed to complying with all applicable
tax laws and will make decisions in relation
to tax with due regard to our reputation,
integrity and status as a Group whose shares
are listed on the London Stock Exchange.
Annual Report and Financial Statements 2016-17
| 47
Royal Mail plc
| Chairman’s introduction
Corporate governance
Chairman’s introduction
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
48
49
52
54
59
63
64
66
84
Dear Shareholder
On behalf of the Board, I am pleased to
present Royal Mail’s corporate governance
report, following my first full year as Chairman
of your Company. Although it has been
a year of considerable change and challenge,
we continue to ensure we maintain the highest
standards of governance and confirm that the
Company has, once again, fully complied with
the UK Governance Code 2014 throughout the
year. We were delighted that Royal Mail was
recognised in the Institute of Directors’ 2016
Good Governance Report by being ranked
in the top 10 of all FTSE 100 companies for
corporate governance. The following pages
in this report explain, in detail, the structure
and processes in place to ensure excellent
governance and sets out the operations of the
Board’s primary committees.
Our Board is committed to ensuring that it
provides effective leadership and promotes a
culture of uncompromising ethical standards
based on honesty, integrity, openness and
effective debate. As individuals, we believe
that the highest standard of corporate
governance is vitally important to the success
of the business and will contribute to improve
company performance as well as help the
Board discharge its duties in the best interests
of shareholders and for the long term success
of the Company. The Board achieves this by
requiring that good governance principles and
practices are adhered to and are embedded
throughout the Company.
The Board reviews Royal Mail’s long‑term
strategy and monitors, supports and, where
required, challenges the executive team,
whose role it is to manage the Company
successfully day‑to‑day, driving performance
and creating value for our shareholders
and other stakeholders. I lead the Board
and for it to be effective in discharging its
responsibilities, a level of independence
and objectivity is maintained to ensure we
have the correct balance of experience and
skills and have sufficient knowledge of the
operations of the business.
This year, the Board has devoted much of its
attention to strategy, market changes and
succession planning. Key discussions have
been held around operational delivery, our
business transformation and the associated
business risks and their management.
During the year, our Board saw changes
to its composition with the retirement of
Non‑Executive Director Nick Horler in
February 2017, having served on the Board
for almost seven years. We also welcomed
Rita Griffin to the Board in December 2016
as a Non‑Executive Director. Rita brings
considerable knowledge developing and
implementing strategies and leading
substantial transformation programmes.
As we have announced, further changes will
take place with the stepping down of our
Chief Finance Officer Matthew Lester at the
conclusion of this year’s AGM.
On 15 May 2017, we announced that Stuart
Simpson, Director of Group Finance, will be
appointed CFO and join the Royal Mail Board
at the conclusion of the AGM on 20 July 2017.
Stuart's appointment follows a comprehensive
search that included both internal and
external candidates.
We continue to support and promote diversity
within our business and Royal Mail employs
a diverse mix of people that reflects the
communities we serve. The Board is proud
that we were listed as a top 20 company
for senior leader gender diversity in the
Hampton‑Alexander Review; an independent,
Government supported review of diversity
in FTSE 100 companies. Royal Mail has also
been recognised as a Times Top 50 Employers
for Women for the fourth consecutive year.
We strongly believe that the business benefits
from a diverse Board and Senior Management
team in all aspects – not just gender – and this
facilitates better collective decision‑making
capacity. We will continue to promote diversity
in its broadest sense.
The Board carries out an evaluation of
our own performance on an annual basis.
Following an external evaluation facilitated
by Independent Board Evaluation in 2015‑16,
this year it was agreed that the annual
evaluation would be carried out internally.
The results found that our Board and each
of the Board committees function very well
and make an effective contribution and a
strong commitment to the leadership and
progression of the Group. The findings of the
evaluation are discussed in more detail on
page 57.
Peter Long
Chairman
17 May 2017
48
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
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:
Strategy, finance, transformation and
consumer experience.
Moya Greene C*
Chief Executive Officer
Appointed to the Board:
6 September 20131
Key areas of prior experience:
Postal sector, finance, retail, transport.
Current external appointments:
• Trustee of Tate.
Current external appointments:
• Member of TUI AG Supervisory Board.
Previous relevant experience:
• Non‑Executive Director of Great‑West
Lifeco Inc.
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.
• Non‑Executive Chairman of
Countrywide plc.
• Non‑Executive Chairman of Parques
Reunidos Servicios Centrales S.A.U.
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.
• Chief Executive of TUI Travel PLC.
• Chief Executive of Sunworld.
• President and Chief Executive Officer of
• Trustee of Sir John Soane’s Museum.
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.
• Managing Director, Infrastructure Finance,
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 of International Leisure
at TD Securities Inc.
Group Travel Division.
1 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’s Committee
* – Chair of the Committee
Annual Report and Financial Statements 2016-17
| 49
Royal Mail plc
| Board of Directors
Matthew Lester P C
Chief Finance Officer
Appointed to the Board:
6 September 20133
Rita Griffin A
Non‑Executive Director
Appointed to the Board:
1 December 2016
Cath Keers A N
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Finance, accounting, consumer goods,
financial services.
Key areas of prior experience:
Marketing, finance, logistics, strategy,
transformation.
Current external appointments:
• Non‑Executive Director of Capita plc and
Chair of the Audit and Risk Committee.
Current external appointments:
• Chief Operating Officer, Global
Petrochemicals at BP plc.
• Non‑Executive Director of Shanghai
SECCO Petrochemicals Limited.
Previous relevant experience:
• Chief Marketing Officer, BP plc.
• Chief Operating Officer roles for several
BP businesses including automotive fuels,
aviation fuels, LPG, lubricants and retail.
• Non‑Executive Director of Man Group plc
and Chair of the Audit and Risk Committee.
Previous relevant experience:
• Group Finance Director at ICAP plc.
• Group Financial Controller and Group
Treasurer, Diageo plc.
• Main committee member of the 100 Group
of Finance Directors and Chairman of its
Investor Relations and Markets Committee.
3 Appointed on 6 September 2013 to the Board of Royal
Mail Limited, which changed its name to Royal Mail plc
on 19 September 2013. Matthew Lester has informed
the Board that it is his intention to leave the Company
following the AGM on 20 July 2017. He will not stand for
re‑election. On 15 May 2017, we announced that Stuart
Simpson, Director of Group Finance, will be appointed
CFO and join the Royal Mail Board at the conclusion of
the AGM on 20 July 2017.
Key areas of prior experience:
Retail, consumer focus, digital.
Current external appointments4:
• Non‑Executive Director of Talk Talk
Group plc.
• Non‑Executive Director of the Insurance
Group Liverpool Victoria Friendly Society
Limited (LV=).
• Chairman of USTWO Fampany Limited.
Previous relevant experience:
• Non‑Executive Director of Home Retail
Group plc and Chair of the Remuneration
Committee.
• Customer Director and Marketing Director
of O2 UK.
• Non‑Executive Director of Telefonica
Europe.
• Various marketing, strategy and business
development roles at Next plc, Sky plc,
Avon Products and Thorn EMI.
4 Appointed to Sage Group plc as Non‑Executive
Director with effect from 1 July 2017.
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
Peter Long
Moya Greene
Orna Ni‑Chionna
Matthew Lester
Rita Griffin
Cath Keers
Paul Murray
Les Owen
Royal Mail Holdings plc
Royal Mail Group Limited
N/A
15 July 2010
1 June 2010
24 November 2010
N/A
1 June 2010
1 August 2009
27 January 2010
N/A
1 April 2012
1 April 2012
1 April 2012
N/A
1 April 2012
1 April 2012
1 April 2012
50
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Changes to the Board during the year
• Rita Griffin was appointed to the
Royal Mail plc Board with effect from
1 December 2016.
• Nick Horler retired from the Royal Mail plc
Board on 28 February 2017.
• Matthew Lester has informed the
Board that it is his intention to leave the
Company following the AGM on 20 July
2017. He will not stand for re‑election.
• On 15 May 2017, we announced that
Stuart Simpson, Director of Group
Finance, will be appointed CFO and join
the Royal Mail Board at the conclusion of
the AGM on 20 July 2017.
There have been no other changes to the
Board during the year.
Paul Murray A* N R P
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Finance, energy, technology.
Current external appointments:
• Non‑Executive Director of Naked
Energy Ltd.
Les Owen A R P*
Non‑Executive Director
Appointed to the Board:
20 September 2013
Key areas of prior experience:
Finance, pensions, insurance.
Current external appointments:
• Non‑Executive Director of Computershare.
• Non‑Executive Director of Discovery
• Non‑Executive Director of Qinetiq Group
plc and Chair of the Audit Committee.
Holdings, a South African listed health and
life insurer.
• Non‑Executive Director of Ventive Ltd.
Previous relevant experience:
• Non‑Executive Director of Independent Oil
and Gas plc.
• Senior Independent Director of Taylor
Nelson Sofres plc.
• Non‑Executive Director of Thomson SA
and of Tangent Communications plc.
• Group Finance Director of Carlton
Communications plc and LASMO plc.
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 Director of Post Office
Limited.
• Non‑Executive Director of Just Retirement
Group plc.
• Non‑Executive Director of CPP Group plc.
• Non‑Executive Chairman of Jelf Group plc.
Board and Committee attendance
During the year, the Directors attended the following meetings of the Board and Committees.
Board
Audit & Risk
Committee
Nomination
Committee
Pensions
Committee
Remuneration
Committee
Total number of meetings 8
6
Chairman
Peter Long
Executive Directors
Moya Greene
Matthew Lester
NonExecutive Directors
Rita Griffin1
Nick Horler2
Cath Keers3
Paul Murray4
Orna Ni‑Chionna
Les Owen
8/8
8/8
8/8
3/3
7/7
8/8
8/8
8/8
8/8
2/2
3/5
5/6
6/6
6/6
6/6
3
3/3
2/3
3/3
1/1
3/3
3
3/3
3/3
3/3
7
7/7
7/7
7/7
7/7
1 Rita Griffin was appointed to the Board as a
Non‑Executive Director on 1 December 2016.
2 Nick Horler resigned as a Director of the Board on
28 February 2017. He was unable to attend the Audit
and Risk Committee on 24 August 2016 which was an
ad hoc meeting, the Audit and Risk Committee and
the Nomination Committee on 10 November 2016 due
to prior business commitments.
3 Cath Keers was unable to attend the Audit and Risk
Committee on 22 March 2017 due to prior business
commitments.
4 Paul Murray was appointed to the Nomination
Committee on 16 November 2016.
Annual Report and Financial Statements 2016-17
| 51
Royal Mail plc
| Chief Executive’s Committee
Chief Executive’s Committee
In addition to the Royal Mail plc Board, the Chief
Executive’s Committee (CEC) 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
Member of TopCo
Member of TopCo
see page 65.
see page 65.
See ‘Board of Directors’ on
pages 49‑51.
pages 49‑51.
See ‘Board of Directors’ on
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), Philatelic and Postcodes.
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.
Rico Back
Chief Executive Officer, GLS
Member of TopCo
see page 65.
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.
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
UK Operations Director
Maaike de Bie
General Counsel
Mick Jeavons
Chief of Staff
Current role
• Appointed UK Operations Director in
Current role
• Appointed General Counsel in
Current role
• Appointed Chief of Staff in
March 2016.
April 2016.
June 2015.
• Previously appointed in August
2015 as Deputy Chief Operations
Officer 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.
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.
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.
52
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Jon Millidge
Group HR Director
Current role
• Appointed Group HR Director in
February 2014.
• 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.
Phil Morris
Group Chief Technology Officer
Current role
• Appointed Group Chief Technology
Officer in April 2017, following his
interim appointment as Group
Chief Information Officer in
May 2016.
• Appointed IT Director for Strategy,
Architecture, Security and Service
in January 2012.
Previous work history
• Partnership at the PA
Consulting Group.
• Managing Director for EquaTerra
Europe and Asia.
• Executive Director for Morgan
Chambers.
Mike Newnham
Managing Director, New Markets
and Digital
Current role
• Appointed Managing Director,
New Markets and Digital in
January 2017.
• Appointed Chief Customer Officer
in March 2012.
Shane O'Riordain
Managing Director, Corporate
Affairs, Regulation and
Customer Experience
Current role
• Appointed Managing Director,
Corporate Affairs, Regulation
and Customer Experience in
December 2016.
Previous work history
• Led the Consumer division of
Orange UK.
• Prior to that held a number
of executive board positions
at Orange.
Previous work history
• Appointed Managing Director,
Communications, in November
2010. Subsequently assumed
responsibility for Strategy,
Regulation and Pricing in 2014.
• Held a number of Group Corporate
Affairs 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.
Sue Whalley
Chief Operations Officer
Member of TopCo
see page 65.
Current role
• Joined Royal Mail in 2006 and was
appointed Chief Operations Officer
in January 2014.
• Prior to this, he was running
• Responsible for leading the next
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.
* On 15 May 2017, we announced that
Stuart Simpson, Director of Group
Finance, will be appointed CFO and join
the Royal Mail Board at the conclusion
of the AGM on 20 July 2017.
phase of the transformation in the
UK core business, 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 in the
London office.
Annual Report and Financial Statements 2016-17
| 53
Royal Mail plc
| Statement of corporate governance
Statement of corporate governance
Compliance with the UK Corporate
Governance Code, September 2014,
and its statement of requirements
The UK Corporate Governance Code 2014
(Code) applied to the 2016‑17 financial year.
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 the 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.
Board leadership
The Board
The Board is responsible for the stewardship
of the Company and overseeing its conduct
and affairs to create sustainable value for the
benefit of its stakeholders.
The Board is committed to ensuring that it
provides effective leadership and promotes
uncompromising ethical standards, setting
the tone for the Company. All its members
have the knowledge, talent and experience to
perform the functions required of a Director
of the business.
At the end of the year, the Board of Royal Mail
plc comprised the 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 and Rita Griffin, 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 49‑51.
The Board holds regular scheduled meetings
throughout the year. The Board met eight
times during the year.
The division of responsibilities between the
Chairman and the Chief Executive Officer is
fully documented. A summary is set out on
page 55.
During the financial year, the Non‑Executive
Directors and the Chairman met on a
number of occasions 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 senior management. In addition, the
Senior Independent Director met with
the Non‑Executive Directors to assess
the Chairman’s performance without the
Chairman being present.
Executive Directors have rolling 12‑month
contracts and Non‑Executive Directors are
generally appointed for three year terms.
In accordance with the requirements of
the Code, copies of the Directors’ service
contracts and letters of appointment for
the Non‑Executive Directors are available
for inspection at the Company’s registered
office during normal office hours and by the
shareholders at each AGM for a period of
15 minutes prior to the commencement of
the meeting and also during the meeting.
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
matters reserved for the Board 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):
• productivity and efficiency of the
operations;
future technology;
•
the Board's composition;
•
• key stakeholder relations;
• Group’s financial performance, including
the management of share plans;
• human resources updates;
• Group’s property portfolio; and
• health and safety.
Key areas of focus for the next year:
• Group’s strategy;
• revenue growth opportunities;
•
technological developments;
• digitisation of Royal Mail;
• composition of the Board;
• succession planning and talent pipeline;
• security, including cyber risk and data
protection; and
• health and safety.
Independence of Directors
The Board reviews the independence of its
Non‑Executive Directors as part of its Annual
Board Effectiveness review.
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
impact their judgement.
Shareholder relations
Communication with shareholders is
given high priority. The 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.
• Group’s strategy, structure and viability;
• compliance and regulation;
• revenue growth in the core businesses as
well as new areas;
The AGM is used to communicate with all
investors and the Board welcomes their
participation.
54
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
as well as standing reports on Health and
Safety, Regulation, Market Dynamics and
from the Company Secretary. In addition, the
Directors have access to an online reference
manual to support them in the 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 59‑63.
There is regular dialogue with our
institutional shareholders. The Chairman and
the Senior Independent Director (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.
Board information
The Board receives business and financial
performance reports at each Board meeting
Board roles
Chairman
Peter Long
Key responsibilities
• Leads the Board
• Promotes the highest standard of
corporate governance
Senior Independent Director
Orna Ni‑Chionna
Key responsibilities
• Provides a sounding board for the
Chairman and Chief Executive Officer
• Leads the annual appraisal of the
• Sets its agenda and ensures that Directors
Chairman’s performance
• Acts as a trusted intermediary through
which Non‑Executive Directors can
express their views or concerns
• Available to meet with shareholders
should they have issues or concerns
receive accurate, timely and clear
information with adequate time available
for discussion of all agenda items
• Builds an effective and complementary
Board, including effective contribution and
sufficient challenge from the Directors
• Ensures effective communications with
shareholders and makes the Directors
aware of their views
• Ensures the Board determines the nature
and extent of the significant risks that
the Company is willing to embrace in
implementing its strategy
Non‑Executive Directors
Rita Griffin
Cath Keers
Paul Murray
Les Owen
Key responsibilities
• Constructively challenge Management
• Help develop strategy
• Scrutinise Management’s performance
• Satisfy themselves on the integrity
of financial information and on the
effectiveness of financial controls and risk
management systems
• Determine the appropriate level of
remuneration for Executive Directors
Chief Executive Officer
Moya Greene
Chief Finance Officer
Matthew Lester*
Company Secretary
Kulbinder Dosanjh
Key responsibilities
• Has day‑to‑day responsibility for
managing the Group’s operations
• Makes decisions on matters affecting the
operations, performance and strategy
• Provides leadership and direction to
senior management
• Coordinates all activities to implement
strategy for managing the business in
accordance with the Group’s risk appetite
and business plan set by the Board
• Promotes the Company’s culture
and standards
Key responsibilities
• Supports the Chief Executive Officer
and leads on the financial and risk
management of the Group
• Develops the financial and operational
strategy and the metrics tied to
that strategy
• Develops and monitors control systems
designed to preserve company assets and
report accurate financial results
* On 15 May 2017, we announced that Stuart Simpson,
Director of Group Finance, will be appointed CFO and
join the Royal Mail Board at the conclusion of the AGM
on 20 July 2017.
Key responsibilities
• Provides advice on corporate governance
issues and ensures all statutory and
regulatory requirements are met
• Acts as a secretary to the Board and
its Committees
• Maintains and ensures efficiency
of the Company’s and Board’s
governance framework
• Organises Directors’ induction and training
• Ensures good information flows and
comprehensive practical support is
provided to the Board
• Communicates with shareholders
ensuring due regard is paid to
their interests
Annual Report and Financial Statements 2016-17
| 55
Royal Mail plc
| Statement of corporate governance
Board diversity
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 so they can 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
characteristics1 and 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
Board diversity at 26 March 2017
Officer and at 26 March 2017, three of the
six (50 per cent) Non‑Executive Directors,
including the 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, we will look to
maintain a strong representation of women
on the Board.
The Board believes that there are significant
benefits to both the Group and the
individual when Executive Directors accept
Non‑Executive directorships from companies
outside the Group. The Board’s approach is
normally to limit Executive Directors to one
Non‑Executive directorship, for which the
Director may retain the fees.
See pages 44 and 45 for further
information on diversity.
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. In practice, they
tend to devote more time than the stated
minimum requirement.
The Non‑Executive Directors were required
to declare any of their other significant
commitments prior to their appointment.
The Board is informed of any subsequent
changes as and when they arise. The
Company announces to the London Stock
Exchange any changes to their directorships
on the boards of other publicly quoted
companies. The Board is also informed
of any non‑publicly quoted appointments
and assesses external appointment levels
to ensure the Board members are not too
thinly spread.
External appointments
Peter Long’s Directorships (listed in his
biography on page 49) qualify as his other
significant commitments for the purposes
of the Companies Act 2006. These were
discussed on his appointment to the Board
and during this financial year. The Board has
considered the time commitment required
of the Chairman’s role and believes that
Peter Long continues to lead and support
the Board and demonstrates the appropriate
time commitment required. The Board
considers that there is no impact on his role
or performance as Chairman as a result of
his external directorships.
Matthew Lester was appointed as a
Non‑Executive Director of Capita plc
on 1 March 2017, bringing his external
appointments to two. This is not the
Company’s usual Policy but, as Matthew
announced his intention to leave after the
AGM in July 2017, the Board approved
Matthew’s appointment to Capita plc.
Board composition
Gender balance
Experience
Non‑Executive Directors
Executive Directors
Chairman
Male
Female
62%
25%
13%
50%
50%
Retail and marketing
Finance
Public utilities
Accounting
Logistics
32%
26%
10%
16%
16%
1 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.
56
| Annual Report and Financial Statements 2016-17
Conflicts of interest
The Companies Act 2006 and the Articles
require the Board to consider any potential
conflicts of interest. The Board considers
the conflicts during the financial year and,
if appropriate, authorises each Director’s
reported actual and potential conflicts of
interest regularly. The conflicts of interest
register was reviewed several times during
the year by the Board. It concluded that
Directors’ conflicts had been appropriately
authorised and that the process for
authorisation was operating effectively.
Each Director abstains from approving their
own reported potential conflicts. The Board
operates a policy to identify and, where
appropriate, manage potential conflicts of
interest for Directors. The Board will continue
to monitor the status of each conflict and will
review potential conflicts of interest and take
action to mitigate them as necessary.
Related parties
Internal controls are in place to ensure
Directors advise the Board of any related
party transactions involving themselves or
their connected persons and that these are
conducted at an arm’s length basis. Directors
have an ongoing obligation to advise any
changes which would be reviewed and
monitored by the Board. As at 26 March
2017, no Director had advised the Board of
any related party transactions. Note 26 on
page 131 sets out the Group’s related party
transactions.
Director induction and training
The Chairman and Company Secretary
are responsible for the induction of
new Directors. They participate in a
comprehensive induction programme
following appointment to the Board.
This is tailored to each Director. It includes
face‑to‑face meetings with management and
operational site visits to understand the key
strategies and risks of the business.
Ongoing training is also provided to the Board
and additional training is available on request
and where appropriate.
The Board is also kept up to date with legal,
regulatory and governance matters by the
Company Secretary at each Board meeting.
Board Committees and
governance structure
The Board has delegated authority to the
Committees to carry out certain tasks. This is
defined in each Committee’s respective terms
of reference. The Committees established
by the Board are shown in the Board
Committees diagram above.
Strategic report
| Governance
| Financial statements
| Other information
Board Committees
Royal Mail plc
Audit and Risk
Committee
Nomination
Committee
Pensions
Committee
Remuneration
Committee
Chief
Executive's
Committee
For 2016‑17, the effectiveness reviews were
conducted internally in February 2017 via
online questionnaires and, for the Board,
through individual discussions with each
Director. The Senior Independent Director,
Orna Ni‑Chionna, conducted the evaluation
of the Chairman’s performance through both
a questionnaire and individual discussions
with Directors. The results of the evaluation
exercises were reviewed by the Board and
Committees in March and April 2017. Having
completed the effectiveness reviews, the
Directors are satisfied that the Board and
each of its Committees operated effectively
during 2016‑17.
For the Board and each of its Committees,
the Directors agreed areas of focus for the
forthcoming year which would strengthen the
performance of the Board overall, as set out
below. Opportunities to review these topics in
depth have been built into the 2017‑18 Board
and Committee programme.
The minutes of each Committee meeting
are made available to 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.
Board and Committee
evaluations
In accordance with the Code and recognising
the significant benefits, the effectiveness of
the Board, its Committees, Chairman and
Directors are reviewed annually. This is
facilitated by an independent third party at
least once every three years. Last year, we
engaged Independent Board Evaluation to
conduct an external evaluation of the Board
and the Remuneration Committee. The other
Committees, the Chairman and the Directors
reviews were conducted internally.
For 2015‑16, the effectiveness reviews for
the Board and the Remuneration Committee
were conducted by Independent Board
Evaluation, who also conducted individual
interviews with each Board member and
other relevant stakeholders. The evaluation
for the Audit and Risk Committee was
undertaken by way of an online questionnaire
facilitated by Thinking Board® and internal
evaluations were carried out for the
Nomination and Pensions Committees.
Following these reviews, it was concluded
that the Board and its Committees were
effective and an action list, focusing on
strategy, succession and Director induction
and training was developed and completed
during 2016‑17.
Annual Report and Financial Statements 2016-17
| 57
Royal Mail plc
| Statement of corporate governance
Board
Key areas of focus for 2017‑18
•
•
to continue to progress the Board Succession Plan for both Executive and Non‑Executive
directors and ensure smooth succession plan for the executive directors;
to ensure adequate time is spent on labour issues as part of the business transformation
agenda of the core network and ensure sufficient time is given to growth opportunities in
the UK;
• with regards the expansion of GLS’ geographic footprint, to ensure full Board support is
provided to Management on the execution of this strategic priority; and
•
to explore more deeply what ‘digital’ means for the Royal Mail Group and its relevance for
its customers.
Audit and Risk Committee
• provide full support to ensure the successful transition to the new Director of Internal Audit
and Risk Management;
• continue to focus on the Group’s risk appetite and the risk framework with in‑depth reviews
into specific areas that might materially impact the delivery of the Group’s strategy; and
•
introduce an enhanced training programme to complement the induction programme for
new directors to widen their knowledge both from a corporate governance/regulatory
perspective and to give depth to their knowledge of the Group.
Remuneration Committee
• ensure greater transparency by the Committee of the senior management team and review
the remuneration strategy for the broader Royal Mail management; and
•
introduce regular formal training sessions into the annual meeting cycle to
understand emerging governance themes, legislation changes and other trends in
remuneration matters.
Nomination Committee
• support the Board in delivering the Board Succession Plan for both the Executive and
Non‑Executive Directors; and
•
talent and succession planning across the senior leadership group as well as for the Board,
ensuring sufficient time can be afforded to the succession planning programme across
the Group.
Pensions Committee
• continue to fully understand the broader pension developments and ensure full awareness
at Board level;
• provide relevant pensions training to both the Board and the Committee;
• complete the 2018 Pension Review; and
• determine appropriate future investment strategy for the pensions within the Group.
58
| Annual Report and Financial Statements 2016-17
Audit and Risk
Committee report
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 for approval by 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 receives independent
assurance from the Group’s Internal Audit (IA)
and Risk Management (RM) function. It 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.
During the year, the Committee considered
the selection criteria and approved the
appointment of the new Director of Internal
Audit and Risk Management.
Alongside myself, the members of the
Committee are all independent Non‑Executive
Directors – Orna Ni Chionna, Rita Griffin,
Cath Keers and Les Owen. Nick Horler was
a member of the Committee until he retired
from the Board at the end of February 2017.
The number of Committee meetings held
during 2016‑17 and Committee members’
attendance is set out on page 51.
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 Internal Audit and
Risk Management, the Company Secretary,
other members of senior management and
Strategic report
| Governance
| Financial statements
| Other information
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
myself, Rita Griffin and Les Owen.
During the year, the Committee continued
to challenge the assumptions and
judgements made by the management
team in determining the half year and full
year financial results of the Company and
to assess the appropriateness of their
disclosure in the financial statements.
The Committee has continued to consider the
assessment and supporting papers provided by
management in relation to the Group’s longer
term viability statement and the increased
focus on risk management and internal
controls. We have reviewed the Group Risk
Profile at each of our meetings, with particular
focus on risks where likelihood or impact had
changed, along with their supporting action
plans to manage those risks. We paid particular
attention to changes in employment tax; parcels
competition; regulatory stance; GLS expansion;
digitisation of Royal Mail and data loss,
(see Principal Risks pages 37‑41).
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
17 May 2017
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 Financial Statements
were fair, balanced and understandable.
A paper considering the Financial
Reporting Council's current areas of focus
has been considered;
• risk reviews, 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;
• continued compliance with the Code,
including the longer term viability
statement;
• compliance framework, including
receiving quarterly updates from the
Group Compliance team on areas within
their oversight;
•
technology, including progress of
the ongoing major transformation
programme, the cyber risks facing the
business and the risks associated with
data protection;
•
the annual evaluation of the Committee’s
effectiveness;
• Group taxation, governance, policy
and risk;
•
the consideration of the selection criteria
for the new Director of Internal Audit and
Risk Management and the approval of
their appointment; and
• external auditor and audit process review.
Key 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 has a meeting planner,
approved once a year, which provides a
framework for each meeting agenda.
During 2016‑17, the Committee met six times.
•
•
two meetings mainly focused on the half
year and full year results; and
four meetings mainly focused on internal
audit and risk management.
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.
Annual Report and Financial Statements 2016-17
| 59
Royal Mail plc
| Statement of corporate governance
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. Aon Limited provides
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 the advice and
information provided by the General Counsel
with respect to specific provisions and other
contingent liabilities
The external auditor had full access to these
experts and, using their own actuarial and
statistical experts, was able to provide further
assurance to the Committee on these matters.
The Committee is satisfied that the General
Counsel has, or has access to, the relevant
necessary expertise and resources and
that the company conducting the statistical
surveys also has the relevant necessary
expertise and resources.
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 130)
An Ofcom investigation was launched in February 2014, following a complaint
brought by TNT Post UK (now Whistl), relating to certain Contract Change Notices
issued by the Group in January 2014. As part of that investigation, on 28 July 2015,
the Group received a Statement of Objections setting out Ofcom’s provisional,
preliminary findings of anti‑competitive conduct.
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.
Ongoing matters considered due to their materiality and/or the application of judgement
Advance customer payments (£289 million, see Note 19 on page 122)
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 2017, this estimate totalled £240 million (March 2016 £252 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.
Royal Mail Defined Benefit Pension Surplus
(£3,839 million, see balance sheet and Note 9 on page 108)
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
(£84 million, see Note 22 on page 128)
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 25‑35 years. Changes to
the provision will impact the income statement and net assets.
Impact of changing employment legislation
(see Principal Risks on page 40)
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.
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.
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 64). All of these assumptions are
disclosed in Note 9 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.
Accounting for acquisitions
(See Note 10 on page 114)
The Group made a number of acquisitions during the year including ASM in June and
GSO in October. IFRS 3 requires the purchase price to be allocated between Tangible
assets, Intangible assets and Goodwill.
The Committee examined reports from Management and the calculations of the fair
values of assets acquired prepared by BDO.
We received KPMG’s comments on the assumptions and the calculation used to
calculate the fair value of assets acquired and concluded that the approach taken
was appropriate.
60
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Audit Committee effectiveness
An internal evaluation was carried out in
2016‑17 and is discussed in greater detail on
page 57.
Effectiveness of the external audit process
Following their appointment as external
auditor in July 2015, KPMG and Management
have worked closely and the transition has
been successful. 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 2016 Audit Quality
Inspection Report has also been discussed.
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.
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 using an
online questionnaire. The first part was
completed shortly before our full 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
Directors and audit partners.
The results of the online questionnaire will
be supplemented with a further survey
following the conclusion of the year end audit
and will focus on the execution of the audit;
the preparedness of the business; sufficiency
of resources; communication and interaction;
and overall satisfaction.
While the outcome of the second survey
will not be available until after the signing of
the financial statements, the feedback from
the first survey and the review of reports
presented by Management and KPMG to
their May 2017 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 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.
During the year, KPMG have been engaged
to provide financial due diligence and review
the conversion of UK subsidiary accounts
to FRS 101. Total fees earned for non audit
services during 2016‑17 were £508,000
which represented around 23 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 2016‑17.
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.
External auditor
KPMG was appointed as external auditor in
July 2015, following a competitive tender
process during the 2014‑15 financial year.
Under the current regulations, the Company
will be required to tender no later than the
2025‑26 financial year and the current audit
partner will be required to rotate after the
2020‑21 audit.
The Committee has recommended the
reappointment of KPMG as the Group’s
external auditor to the Board for approval by
shareholders at the AGM in July 2017.
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.
In addition, the Directors carry out a robust
risk assessment of the Principal Risks
facing the Group as set out on pages 37
to 41. These include those principal risks
that threaten the business model, future
performance, solvency and liquidity of the
Group. These reviews have been informed
by the financial evaluation of severe but
plausible scenarios of our principal risks
which has also been used to support our
Viability Statement on page 41.
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 organisational 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.
Annual Report and Financial Statements 2016-17
| 61
Royal Mail plc
| Statement of corporate governance
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 Code
requirements, reviewed its Risk
Management Policy and continued
to strengthen 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.
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 cases received
and an analysis of the outcomes through
the Employee Confidential Disclosure (EDC)
Committee.
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 conclusions 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. It also
seeks to ensure that risks that are significant
at Group level are being effectively managed.
The RMC oversees and evaluates a ‘bottom
up’ assessment of risks on a quarterly basis.
It receives presentations from Business Units
Royal Mail Governance and Three Lines of Defence
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Chief Executive’s Committee
Audit and 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
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 37‑41). Committee discussions on risk also covered new and emerging
risks and the interrelationships between the significant risks to the business.
In particular, the Committee reviewed changes to the Group Risk Profile on
a quarterly basis and held ‘deep dive’ discussions of principal risk areas with
risk owners.
The Committee holds the business to account for the management of risk and
operation of control across the Group.
During the year, deep dive risk discussions included:
• Cyber risks
• Competition
Deep dive
discussions
• Delivery of efficiency benefits versus maintenance of Quality of Service levels
• Employment legislation and regulation
• Growing in new areas
• Pensions
on the operation of risk management and
control processes on a cyclical basis.
2. Assurance from Internal Audit
IA and RM provide independent assurance
to the Committee, Executive Management
and the Board on the effectiveness of the
internal control system and elements of the
risk management process. This includes
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. This also takes into account
known issues in the business, areas of
importance to the delivery of the business
plan, areas subject to strong or emerging
regulation or legislation or specific issues in
the industry. During the year, the Committee
evaluated the performance of IA and RM.
It concluded that the function continued to
be effective.
62
| Annual Report and Financial Statements 2016-17
The IA work programme during 2016‑17
included more than 30 risk based reviews in
the UK and over 140 reviews in GLS covering
both depots and head office. The programme
was focused towards the key business
priorities and included:
• business transformation and key
programme reviews, including PDA
service transformation, parcels
programme activity and identity
based products;
• major business process reviews including
data loss prevention, payroll, aviation
security, operational compliance and
IT disaster recovery;
• 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 Ofcom 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
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 37‑41.
Strategic report
| Governance
| Financial statements
| Other information
Nomination Committee
report
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 and approving
changes to senior management.
See page 56 for further information on
diversity.
There were a number of changes to our Board
composition during the year. We were pleased
to appoint Rita Griffin in December 2016 as
a Non‑Executive Director and a member of
the Audit and Risk Committee. The Board
employed the executive search firm, Egon
Zehnder, to assist with Rita’s appointment.
The Nomination Committee considered
candidates against objective criteria, having
due regard for the benefits of Board diversity,
and, following interviews with other Directors,
recommended to the Board that they appoint
Rita as a Director of the Company. The
Company also employs Egon Zehnder for
both senior executive appointments and some
executive development. Our Non‑Executive
Director Nick Horler retired in February
2017, having served on the Board for nearly
seven years. We have also announced further
changes with the stepping down of our
Chief Finance Officer Matthew Lester at the
conclusion of this year’s AGM.
The Chief Executive led the search and
proposed candidates to the Nomination
Committee based on the skill, knowledge and
experience required for the role. On 15 May
2017, we announced that Stuart Simpson,
Director of Group Finance, will be appointed
CFO and join the Royal Mail Board at the
conclusion of the AGM on 20 July 2017.
Stuart's appointment follows a comprehensive
search that included both internal and external
candidates.
Alongside myself, the Committee members
are Cath Keers, Orna Ni‑Chionna and
Paul Murray, who was appointed to the
Committee on 16 November 2016. Meetings
of the Committee were also attended by the
Company Secretary and, where relevant, the
Group HR Director. The Chief Executive Officer
and other Non‑Executive Directors may
also be requested to attend when required.
The number of Committee meetings held
during 2016‑17 and Committee members’
attendance is set out on page 51.
The following report outlines the Committee’s
membership and attendance, its role, its
focus during the year, Directors’ re‑election
and diversity.
Nomination Committee Terms of Reference
The full Terms of Reference for the
Committee can be found on our website
www.royalmailgroup.com/aboutus/
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;
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 to the benefits of diversity for
the Board, including gender, taking
Annual Report and Financial Statements 2016-17
| 63
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 in view of
the appointment of Rita Griffin as a
Non‑Executive Director, the retirement
of Nick Horler as a Non‑Executive
Director, the forthcoming departure
of Matthew Lester as Chief Finance
Officer and the appointment of Paul
Murray, a Non‑Executive Director to this
Committee;
• succession planning and executive talent
review and management;
•
•
the annual evaluation of the Committee’s
performance; and
the annual review of the Committee’s
Terms of Reference.
Key areas of focus for next year
During 2017‑18, the Committee will continue
to focus on the succession plans for both
the Board and senior management with a
keen focus on the diversity framework and
ensuring the skills and experience within the
Group help it deliver its strategic framework.
Nomination Committee effectiveness
An internal evaluation of the Committee was
carried out in 2016‑17 and is discussed in
greater detail on page 57.
Directors’ re‑election
The Committee has considered the
performance of each individual Director:
whether he or she continues to be
effective and can continue to demonstrate
commitment to the role. Biographical details
of each of the Directors, together with details
of their skills and experience, may be found
on pages 49‑51. Following a performance
evaluation of each Director and the Board as
a whole, all Directors are considered by the
Board to be fully effective. This supports the
proposal for their re‑election at the AGM.
Peter Long
Chairman
17 May 2017
•
•
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. Any changes to the
Chairman’s commitments should be
reported to the Board as they arise;
•
to review annually the time required
from Non‑Executive Directors to fulfil
their duties;
•
to make recommendations to the
Board concerning:
– succession planning for 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 and the need
for progressive refreshing of the Board;
– 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.
64
| Annual Report and Financial Statements 2016-17
Pensions Committee report
Dear Shareholder,
Recognising the significance of the Group’s
pension schemes to its financial management
and affairs, and to its employees, the Board
has appointed a standing committee to
provide additional oversight and review of
pension matters.
Role of the Committee
The Committee reports and makes
recommendations to the Board (and to
Royal Mail Group Limited as principal
employer of the Group’s pension schemes),
and, where appropriate, to the Risk and Audit
Committee, on:
• pension matters which 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
schemes’ Trust Deeds; and
•
the actuarial assumptions to be used in
calculating the accounting charge and
pension disclosures in the Company’s
Financial Results.
In particular, the Committee:
• reviews advice and information provided
by the Group’s external pension advisers;
• reviews and provides input on the
assumptions to be used by the Trustees
relating to funding valuations, and
provides the Group’s opinion and
feedback on the Trustees’ Statement of
Investment Principles;
• reviews major policy, regulatory,
legislative, accounting, reporting,
industrial relations and Governmental
issues impacting the pension schemes
and makes decisions, recommendations
and reports to the Board accordingly;
• reviews reports from the Trustee
Executive on the schemes’ financial
position, investment performance,
administration levels and other activities;
and
• approves the appointment,
re‑appointment, period of appointment,
removal, and remuneration of the Chair
of Trustees.
The full Terms of Reference for the
Committee can be found at www.
royalmailgroup.com/about‑us/management‑
and‑committees/pensions‑committee
Membership
In addition to myself, the members of the
Committee are Paul Murray and Matthew
Lester. The meetings of the Committee
have also been attended by the Group HR
Director, the Chief of Staff, the Company
Secretary, Legal Director, Pensions and
Employee Benefits, the Director of Corporate
Finance, the Head of Pensions Strategy,
and representatives from the Company’s
pensions’ advisers, Willis Towers Watson
Limited. The number of Committee meetings
held during 2016‑17 and Committee
members’ attendance is set out on page 51.
Key areas of focus during the year
For some time, Royal Mail has been
reviewing the future of its pension plans
as part of the 2018 Pension Review.
Recognising the affordability challenge
of the Group’s current arrangements,
Royal Mail consulted during 2016‑17 with
approximately 90,000 members of the
Royal Mail Pension Plan (RMPP). Royal Mail
confirmed that it is committed to continue
to provide sustainable, good quality pension
benefits. The Committee engaged with
Management throughout the year regarding
the 2018 Pension Review, and provided input
on Management’s thinking and proposals in
advance of discussions with stakeholders.
Further information on the 2018 Pension
Review can be found on page 110.
In addition, the Committee reviewed:
•
•
the likely results of the April 2015
Valuation and Scheme funding review and
the implications for future affordability
and benefit design;
investment strategy and risk
management, investment performance,
fees and costs and scheme
administration;
Strategic report
| Governance
| Financial statements
| Other information
•
•
the impact of pension legislation changes,
pensions accounting and treatment of
scheme surplus and current developments
in corporate pensions;
the actuarial assumptions used in
calculating the accounting charge and
pension disclosures in the Company’s
interim and full year Financial Results; and
•
the annual evaluation of the Committee’s
effectiveness and its Terms of Reference.
Key areas of focus for next year
In addition to the ongoing matters under its
Terms of Reference, the Committee expects
to be giving particular consideration during
the year ahead to:
•
•
the conclusion of 2018 Pension
Review and the proposals for future
pension benefits prior to these being
recommended to the Board for approval;
the implementation of the outcomes
of the Review and communication to
members; and
•
the results and implications of the RMPP’s
2015 valuation.
Pension Committee effectiveness
An internal evaluation of the Committee was
carried out in 2016‑17. The Committee was
judged to be fully effective in carrying out its
responsibilities. The results are set out in
greater detail on page 57.
Les Owen
Chair of the Pensions Committee
17 May 2017
Other Committees
TopCo Committee
TopCo Committee provides overall support
for the Chief Executive in discharging the
responsibility for managing the business and
accountability to the Board. The Committee
also oversees performance management
and outlook for the business, achievement
of KPIs and the Corporate Balanced
Scorecard, the Company’s compliance with
the Market Abuse Regulations and any other
significant business issues. The Committee
meets monthly and is chaired by the Chief
Executive Officer.
See pages 52‑53 for Committee
members' biographies.
Chief Executive’s Committee
The Chief Executive’s Committee supports the
Chief Executive Officer on matters concerning
the Group’s overall framework, including
risk management, financial and operating
performance, annual and strategic plans,
external stakeholders, industrial relations
and health and safety policy. The Committee
also develops and monitors deployment of
the Group’s strategy, annual operating plans
and budgets for plc Board approval. The
Committee meets monthly and is chaired by
the Chief Executive Officer.
See pages 52‑53 for Committee
members' biographies.
Risk Management Committee
The Risk Management Committee is a
Management Committee of the Chief
Executive’s Committee with a reporting line
to – and which supports – the Audit and Risk
Committee. It 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.
Annual Report and Financial Statements 2016-17
| 65
Royal Mail plc
| Directors’ remuneration report
Directors’ remuneration report
Dear Shareholder
On behalf of the Board, I am pleased to present our Remuneration
Report for 2016-17. I was delighted to receive your support for
our new Directors’ Remuneration Policy at the AGM in July last
year, endorsing our proposals to align our executive reward
principles and practice more closely to the successful
transformation of our business, and this report covers our first
year of implementation of this policy.
Performance in 2016-17
As discussed elsewhere in this Annual
Report, during 2016-17 the Company
continued to make progress on our
transformation programme. We delivered a
great service at Christmas, even better than
last year, with 138 million parcels handled in
December alone.
We have continued to transform the
organisation in order to manage the decline in
letter volumes whilst becoming increasingly
competitive in the parcels business.
We are seeing the impact of overall business
uncertainty in the UK on letter volumes, in
particular advertising and business letters.
Against this backdrop, we managed our cost
base efficiently. Highlights included:
• An adjusted operating profit, before
transformation costs, of £701 million, at
the budgeted foreign exchange rate;
• The third consecutive year of achieving our
UKPIL cost reduction target;
• A productivity improvement in collections,
processing and delivery of 2.7 per
cent, towards the higher end of our
2.0 – 3.0 per cent target range; and
• A significant reduction in the number of
road traffic collisions, improving the safety
of our colleagues and our communities.
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. This is explained in
more detail below.
Board changes
As mentioned elsewhere, our Chief Finance
Officer (CFO), Matthew Lester has decided
to leave the business this July, after nearly
seven years of service with the Company.
Other than for the 2014 award vesting this
year, his outstanding LTIP awards will lapse
in accordance with the plan rules, and he
will not be eligible for the award of deferred
shares that is determined from the 2016-17
bonus outturn. He will also not receive any
payment for loss of office. The Committee
determined that he would be eligible for
the cash element of the 2016-17 Annual
Bonus given that he was employed for the
full financial year; and the Committee also
agreed that his 2014 LTIP award, subject to
the achievement of performance conditions,
would be capable of vesting given that he was
employed by the Company for the whole of
the performance period. The Committee took
the view that this was justifiable on account
of his dedicated service to the Company
throughout his notice period. It has been to
the Company’s advantage that he gave us
more than his contractual notice in order for
us to plan succession.
I am delighted that Stuart Simpson will
be joining the Board as our new Chief
Finance Officer. On appointment, Stuart’s
remuneration package will be in accordance
with the Remuneration Policy, including
a reduced level of pension allowance as
shown below:
£450,000
Base Salary
Maximum Annual Cash Bonus
100% of salary
Maximum Deferred Share Bonus 100% of salary
100% of salary
Maximum LTIP
17.5% of salary
Pension Allowance
Remuneration outcomes in
2016-17
Annual bonus
Our performance in 2016-17 resulted in the
achievement of a good outturn against our
Corporate Balanced Scorecard. This scorecard
accounts for 80 per cent of the potential
Annual Bonus for Executive Directors. A
series of strategic objectives, which were set
by the Committee, represented the remaining
20 per cent of the potential bonus, against
which there was also strong performance.
This resulted in a cash bonus of 80 per cent
of salary for both our Chief Executive Officer
(CEO), Moya Greene, and for Matthew Lester.
In accordance with the new Policy, this same
amount will be awarded in shares to our CEO
under the Deferred Share Bonus Plan (DSBP),
to be granted in June and deferred for three
years. More detail about the annual bonus
and our performance is given on pages 77-79.
Long Term Incentive Plan (LTIP)
The 2014 LTIP is due to vest in July
2017, once the outcome under the Total
Shareholder Return (TSR) metric (which has
a performance period that runs from the
July 2014 grant date for three calendar years)
is known. Using the latest available data for
the TSR metric, the plan is likely to vest in
July 2017 between 46 per cent and 53.5 per
cent of maximum. More details of the LTIP
performance can be found on pages 79 to 80.
Pension provision
Following the shareholder consultation we
undertook last year, the Committee decided
to reduce the pension allowance paid to
any newly appointed Executive Director
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to 17.5 per cent of salary. The existing
arrangements for current Executive Directors
will remain the same.
The impact of the new
Remuneration Policy on
delivering our strategic aims
This year was the first in which shares were
granted in accordance with the new LTIP
rules and will be granted in respect of our
DSBP, following the approval of the new
Policy at last year’s AGM.
As outlined in last year’s report, the new LTIP
is now more focused, based solely on TSR
which the Committee determined as the most
effective way of measuring the successful
implementation of our business strategy.
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.
The CEO will receive the first grant of shares
under the new DSBP in June following a
successful year. Under our shareholding
guidelines, Executive Directors are expected
to keep any shares already owned and any
shares released under the LTIP and the
DSBP (except for those sold to cover any
tax and social security obligations) until the
shareholding guideline of 200 per cent of
base salary has been met.
We continue to aim to maintain an open
dialogue with our shareholders on director
pay arrangements. We believe that our
policies and their implementation are true
to the spirit as well as the letter of what
the various regulations and Codes seek
to achieve. And we continue to pay close
attention to the discussion of this subject so
that we can reflect the best thinking in our
own context. Together with the rest of the
Board, I look forward to hearing your views
on our remuneration arrangements and will
be available to answer any questions you
may have at the AGM.
Orna Ni-Chionna
Chair, Remuneration Committee
17 May 2017
Our current Remuneration Policy
What is our current Remuneration Policy for Executive Directors?
Our current Remuneration Policy was approved by shareholders at our AGM on 21 July 2016.
The improvements we made are intended to reward delivery at pace of the objectives required to achieve sustainable success, while maintaining
appropriate flexibility in target setting from year to year. In summary, the objectives for our new policy are to:
• be more aligned with our fast-changing market place and with what our executives need to focus on year on year
•
•
incentivise sustained year on year improvements with the aim of delivering long-term value for shareholders
increase the 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 encourage long term shareholding supported by an increase in the shareholding requirement for our Executive Directors.
Under our new policy, a larger proportion of the overall package is linked to performance, more is delivered in shares and the potential payout is
over a longer timeline.
Remuneration Principles
Remuneration Principles
Overall package
The overall remuneration package should take account of the dynamics of the market in which we operate.
Our incentive targets need to be flexible enough to ensure that we can reward performance appropriately.
Incentive levels and structure
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.
Alignment with shareholders
Management interests should be aligned to the interests of shareholders, including through building a
significant Royal Mail shareholding.
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Policy table
The following tables summarise the key elements of our remuneration, its purpose and link to strategy and the maximum opportunity. The policy
is not subject to a shareholder vote this year. The full policy can be found at http://www.royalmailgroup.com/about-us/management-and-
committees/remuneration-committee.
Fixed remuneration
At a Glance
Base Salary
Operation
Purpose & Link To Strategy
Reflects the scope and responsibility of the role, whilst taking account of the skills and experience of the individual.
Used to attract and retain talented executives to deliver the business strategy.
CEO: £547,800 (effective 1 January 2015)
CFO: £475,000 (effective 1 April 2016)
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.
The value of the benefits stated is the maximum cost to
the Company of providing them
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 contractually 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.
Pension Allowance
Purpose & Link To Strategy
To provide a competitive post-retirement income.
CEO: £200,000 per annum cash allowance
Company contribution to a defined contribution pension scheme and/or a cash supplement (in lieu of pension).
CFO: 40 per cent of salary cash allowance
For newly appointed Executive Directors, the pension
allowance is 17.5 per cent of salary
The Committee maintains historical rates of pension allowance for existing Executive Directors, in line with their
contracts; however it has adopted a lower per cent pension allowance for newly appointed Executive Directors.
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Variable remuneration
At a Glance – maximum opportunity
Operation
Performance measures
Annual bonus
Purpose & Link To Strategy
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. Part of the total annual incentive opportunity is a deferred share award encouraging a long-term view,
providing alignment with shareholders’ interests.
Maximum total annual incentive opportunity of 200 per cent
of salary, split equally between two plans, an annual cash
bonus award and a deferred share bonus award. Two thirds
earned for target performance.
The total annual incentive opportunity is provided as
follows:
Aligned to the Corporate Balanced Scorecard for the
Executive Directors each year.
• 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.
The Committee will normally award dividend
equivalents on deferred shares to plan participants to
the extent that they vest.
Malus provisions will apply to the deferred share
award over the three year vesting period. A clawback
mechanism will apply to the cash bonus for a period
of three years following the bonus determination.
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 financial and operational priorities of the
business change.
For 2017, 80 per cent of the Annual Bonus will be
based on the scorecard targets, and 20 per cent
will be based on the achievement against strategic
objectives.
A minimum of 50 per cent of the scorecard targets
shall be financial, with the remainder including 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 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 that the original measures, weightings and targets are no longer appropriate;
• to make downward or upward movements to the amount of bonus earned resulting from the application of the performance measures, if the Committee believe that the
bonus outcomes are not a fair and accurate reflection of business performance.
Long Term Incentive Plan
Purpose & Link To Strategy
Supports executive recruitment and retention, with an appropriate balance between short-term performance and the creation of long-term, sustainable
shareholder value.
Maximum award level of 100 per cent of salary.
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
• the satisfaction of the performance conditions.
The Committee will normally award dividend
equivalents on those shares to the extent that
they vest.
Following the vesting, there is a holding period of
two years when Executive Directors cannot sell the
vested shares other than to pay tax.
Malus provisions apply over the performance period.
Clawback will apply over the holding period.
Performance measures and/or weightings reflect
the business strategy at the time, and are measured
over three years. The Committee may change the
balance of the measures, or use different measures
for subsequent awards, as appropriate.
For the 2017 award, 100 per cent 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 per cent of the award will vest, increasing to full
vesting if performance is in the top quartile of the
group. The underlying performance of the business
will also be taken into account when determining the
vesting.
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 the new performance conditions are deemed reasonable and
are not materially more or less difficult to satisfy than the original conditions.
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Shareholding guideline
At a Glance
Operation
Purpose & Link To Strategy
To ensure alignment between remuneration and long-term shareholder value creation.
Shareholding guideline of 200 per cent of salary
Directors are expected to keep any shares they already own and any shares released under the LTIP and the
DSBP (except for those sold to cover any tax and social security obligations) until this is achieved.
The periods over which malus and clawback operate under our Policy
Start of Performance Period
+1 Years
+2 Years
+3 Years
+4 Years
+5 Years
Annual Cash Bonus
Performance period,
subject to malus
Subject to clawback
Cash award paid
Deferred Share
Award
Pre-grant performance
period, subject to malus
Vesting Period, subject to malus
Long Term
Incentive Award
Performance period, subject to malus terms
Holding period, subject to clawback
Deferred shares
released
Award vests subject
to performance
Post-tax shares
released
What is the remuneration policy for the Chairman and Non-Executive Directors?
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.
Operation
The Board is responsible for setting the remuneration of the Non-Executive Directors. The Remuneration Committee is responsible for setting the Chairman’s fees.
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.
The fees for Non-Executive Directors and the Chairman are set at broadly the median of the comparator group. Fees are reviewed annually based on equivalent roles in the
comparator group used to review salaries paid to the Executive Directors. 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.
Non-Executive Directors and the Chairman do not participate in any variable remuneration or benefits arrangements.
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How do the KPIs for the annual bonus and LTIP link to the Group strategy?
Annual bonus
80 per cent 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. There are no
changes to the metrics for 2017-18, which continue to focus on our people, customer, efficiency and financial performance. The scorecard is
shown below:
First Class quality of service
Composite parcels quality
Mean business customer
satisfaction
Total customer
complaints
3%
40%
g great cu st o m
Total
Customer
Complaints (’000)
Mean Business
Customer
Satisfaction
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
Employee
Engagement
e
d,
s
a
f
e
&
Road Traffic
Collisions
(av. no. vehicles)
(’000)
Productivity for
Delivery, Collections
& Processing (%)
p
r
o
d
u
c
t
i
v
e
p
e
o
p
l
e
, a
d
l
o
h
In-Year Trading
Cashflow (£m)
e
r
a
h
s
Group
Operating
Profit excl
transformation
costs (£m)
Total Group
Revenue (£m)
le business results for all
a
b
Total UKPIL
Costs (£m)
chieving sustain
20 per cent of performance in the plan will be assessed against a series of strategic objectives. The following objectives have been agreed
between the Chairman and the CEO. They will be used in conjunction with the Corporate Scorecard to measure the performance of the Executive
Directors at the end of the financial year:
1. Apply sufficient resource focused on global parcels to enable acceleration of our rate of expansion (primarily via acquisition).
2. Continue to drive profitable growth in GLS, our parcels business in Europe.
3. Deliver the next stage of the parcels strategy in the UK, including enhancement of the customer proposition at acceptable cost through
technology deployment.
4.
Implement the steps necessary to defend the sustainability of the core UK business in the face of continuing and substantial declines in
letter volumes and revenues.
LTIP
Our LTIP has 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 a three year period. 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.
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What is the remuneration opportunity under the policy?
The following charts set out the remuneration scenarios under the policy for the Executive Directors and the actual level of the single figure for
the year being reported on. We have included the single figure so that you can see where against our policy scenarios the actual remuneration for
the year sits.
CEO (£000s)
Fixed Remuneration
Variable Remuneration
Maximum
31%
23%
23%
23%
£2,434
On Target
42%
20%
20%
18%
£1,850
Minimum
100%
£791
Actual
2016-17
42%
23%
23%
12%
£1,880
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
42%
20%
20%
18%
£1,599
Minimum
100%
£680
Actual
2016-17
54%
31%
15%
£1,252
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 (CEO: £547,800, CFO: £475,000), pension allowance (CEO: £200,000, CFO: 40 per cent of salary) and benefits (CEO: £43,000,
CFO: £15,000).
On target:
Bonus: For the cash bonus, on target is two-thirds of maximum and the same value is used for the deferred share award.
LTIP: The expected value is taken as 60 per cent of maximum.
Maximum:
Bonus: For the cash bonus, this is 100 per cent of salary and the same value is used for the deferred share award.
LTIP: For the LTIP this is 100 per cent of salary.
No assumptions have been made in relation to future share price movements or dividend reinvestments.
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How will the Policy be implemented in 2017-18?
The following table sets out how the Committee proposes to operate the Policy next year.
Element
Base salary
Benefits
Implementation of policy in 2017-18
We annually review the salary of the CEO and CFO and will do the same in 2017-18. Any increases in salary will be no greater
than the general increase provided to employees.
No change to benefit provision for 2017-18
Pension Allowance
No change to pension allowance provision for 2017-18
Annual Bonus
The maximum total annual incentive opportunity for the Executive Directors will remain at 200 per cent of salary, as per agreed
policy, half delivered in cash and half in deferred shares.
For the 2017-18 annual bonus, 80 per cent of the award will be based on achievement against the scorecard, in which at least
50 per cent of the measures will be financial, with the remainder focused on operational, customer and people-related targets.
20 per cent 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, the disclosure of precise targets for the Annual Bonus in advance would not be in shareholders’
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 payouts under the Plan.
LTIP
The Executive Directors will be eligible for an award equivalent to 100 per cent of salary.
100 per cent 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 per cent 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 per cent of salary for Executive Directors.
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. Following the shareholder
consultation we undertook last year, the pension allowance paid to any newly appointed Executive Director will be 17.5 per cent of salary.
All existing arrangements will remain the same.
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, split equally
between cash and deferred shares, 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).
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 (for example, cash or shares); time horizons; and levels of conditionality of the remuneration foregone. 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.
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 the Committee must be allowed to exercise its judgement.
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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
Notice Period from RMG (months)
15 July 2010
24 November 2010
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 twelve months’ notice. Copies of the Executive Directors’ service contracts are available for inspection at the
Company’s AGM.
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.
Peter Long
Rita Griffin
Nick Horler
Cath Keers
Paul Murray
Orna Ni-Chionna
Les Owen
Date of Contract
Unexpired Term at 26 March 2017
(months)
18 June 2015
1 December 2016
20 September 2016
20 September 2016
20 September 2016
20 September 2016
20 September 2016
14
32
Resigned 28 February 2017
30
30
30
30
The Company follows the UK Corporate Governance Code’s recommendation that all directors of FTSE 350 companies be subject to annual
re-appointment by shareholders.
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. Matthew Lester will be leaving the
Company at the end of July and will not receive a payment for loss of office.
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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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.
• 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 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
• 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.
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).
Lapse of any unvested
LTIP awards.
• 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 permits.
2 Cessation of employment in circumstances other than those set out above is cessation for other reasons.
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 nor have employees been consulted directly on
the Policy.
A range of different incentive and commission schemes operate across the Company, designed to support the delivery of the Company-wide
annual bonus scorecard, through which the Executive Directors are incentivised.
How does the change in the Chief Executive's pay compare to that for Royal Mail employees?
The table below shows the percentage change in the Chief Executive's salary, benefits and annual bonus between 2016-17 and 2015-16,
compared with the average for all employees across the Group.
Salary1
Benefits2
Cash Bonus
Chief Executive Officer
Moya Greene
Average of All Employees
2016-17
2015-16
% Change
2016-17
2015-16
% Change3
£547,800
£547,800
£43,000
£31,000
£439,883
£448,379
0.0%
38.7%
(1.9)%
£28,919
£28,988
£48
£853
£49
£920
(0.2)%
(1.7)%
(7.3)%
1 Full time equivalent salary including overtime and shift allowances.
2 All taxable benefits. There has been no change to the contractual benefit entitlement for the CEO but she has made use of her financial advice during 2016-17, and the Company
has paid benefit in kind tax on her flights.
3 The small reduction in the averages shown for ‘All Employees’ is not due to a reduction in the terms and conditions we offer our employees overall. However, the data is
impacted by employee turnover and a change in the mix of employees across our grades.
Annual Report and Financial Statements 2016-17
| 75
Royal Mail plc
| Directors’ remuneration report
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 below.
Did the Executive Directors receive fees from external positions?
The Executive Directors are entitled to receive fees from external appointments. Moya Greene has held no paid external appointments for the last
reported financial year. Matthew Lester is a Non-Executive Director at Man Group plc and received fees of £95,000 for the last reported financial
year, and of Capita plc, effective 1 March 2017, for which he received fees of £5,375 for the last reported financial year. Exceptionally, a second
Non-Executive Director appointment was approved for Matthew Lester because the appointment became effective during his notice period.
76
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
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
2016-17. 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 (audited)
Salary/
Fees
Benefits1
Annual
Bonus Plan2
Deferred
Share
Bonus
Plan3
Long Term
Incentive
Plan4
Pension
Allowance5
Other
Total
2017 2016 2017 2016 2017 2016
2017
2017 2016 2017 2016 2017 2016 2017 2016
£'000
Chairman
Peter Long
300
185
–
–
–
–
–
–
–
–
–
Executive Directors
Moya Greene
Matthew Lester
548
475
548
454
43
15
31
15
440
381
448
367
Non‑Executive Directors
Rita Griffin6
Nick Horler7
Cath Keers
Paul Murray
Orna Ni-Chionna
Les Owen
17
46
50
65
75
60
–
50
50
65
75
60
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
440
0
–
–
–
–
–
–
209
191
302
259
200
190
200
182
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
TOTAL
1,636
1,487
58
46
821
815
440
400
561
390
382
–
0
0
–
–
–
–
–
–
0
–
0
0
–
–
–
–
–
–
0
300
185
1,880
1,529
1,252
1,277
17
46
50
65
75
60
–
50
50
65
75
60
3,745
3,291
1. There has been no change to the contractual benefits entitlement which includes medical insurance and car allowance. The figure for Moya Greene also includes return flights
to Canada. The increase in value for Moya Greene is due to the contractual benefit in kind tax paid on the flights and the use of financial advice.
2. Bonuses are determined based on the salary as at 1 January 2017 in line with the Company’s policy for all staff. Bonus payments are made in cash.
3. The DSBP is a deferred share award, granted at the end of the annual performance period, the grant being of equal value to the Annual Bonus, and subject to continued
employment over a three year vesting period.
4. The current year figure relates to an estimated vesting of the 2014 LTIP award as shown in the 2014 LTIP Outturn section below. The 2014 LTIP is due to vest in July 2017, once
the outcome under the TSR metric (which has a performance period that runs from the July 2014 grant date for three calendar years) is known. The prior year figure relates to
the 2013 LTIP award, which was based on performance to 27 March 2016.
5. For Moya Greene, £10,000 is paid into the Royal Mail Defined Contribution Plan and the remaining £190,000 is paid as an allowance. The full amount for Matthew Lester is paid
as an allowance.
6. Rita Griffin was appointed to the Board as a Non-Executive Director on 1 December 2016.
7. Nick Horler retired from the Board on 28 February 2017.
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?
The Committee has considered the relative competitiveness of the current packages for our Executive Directors and decided not to make any increases
to salary in 2016-17. Moya Greene’s salary has been left unchanged since January 2015. Matthew Lester’s salary was last increased on 1 April 2016.
This compares to salary increases for frontline staff over the last five years as shown below:
% increase in salary
2016-17
2015-16
2014-15
2013-14
2012-13
Moya Greene
Matthew Lester
Average frontline employee
0%
4.6%
1.6%
10%
0%
2.8%
0%
6%
3%
0%
0%
3%
0%
0%
3.5%
Over the last five years, Moya Greene has received total salary increases of 10 per cent and Matthew Lester 10.6 per cent. Our frontline
employees have received an increase of 13.9 per cent up to 2016-17, with a further salary increase for the coming year still under negotiation.
What was the outcome of the Annual Cash Bonus?
The performance period for the Annual Cash 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 strategic objectives. The maximum cash
bonus opportunity for the CEO and CFO was 100 per cent of salary.
Annual Report and Financial Statements 2016-17
| 77
Royal Mail plc
| Directors’ remuneration report
The table below contains a summary of the performance metrics which are used to determine the Annual Bonus award for the CEO and CFO.
Performance against the Corporate Balanced Scorecard makes up 80 per cent of the bonus for Executive Directors. A further 20 per cent is based
on strategic objectives set by the Board.
Corporate Balanced Scorecard 2016-17
Measure
Weighting
Threshold
Target
Road Traffic Collisions per 1,000 vehicles reduction (%)
Employee Engagement
First Class Retail Quality of Service (%)
Mean Business Customer Satisfaction
Total Customer Complaints (’000)
Productivity for Delivery, Collections & Processing (%)
Total UKPIL Costs (£m)
Total Group Revenue (£m)
Group Operating Profit Before Transformation Costs (£m)
In-year Trading Cashflow (£m)
% of the Scorecard
Scorecard Outcome as % of salary
Strategic Objectives Outcome as % of salary
Annual Bonus as % of salary
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
100%
80%
20%
100%
0
56
–
76
520
2.0
(7,281)
9,322
622
258
7
57
93
76.5
499
2.5
(7,138)
9,512
732
323
53.3%
13.3%
Max
12
58
93.2
77
476
3.0
(6,995)
9,702
842
388
Actual
Outcome
12.3
57
93.2
77.8
516.8
2.7
(7,082)
9,455
701
420
18.0%
15.0%
10.0%
15.0%
15.0%
5.7%
12.0%
12.0%
8.5%
8.6%
15.0%
116.8%
62.3%
18.0%
80.3%
Financial targets and actuals are based on reported results subject to adjustments approved by the Remuneration Committee. Group revenue and Group operating profit
before transformation costs are adjusted for foreign exchange movements. Free cash flow excludes net cash flows from the London property portfolio.
Strategic objectives: Achievement against the Strategic Objectives was assessed by the Chairman and ratified by the Remuneration
Committee. Performance was determined to be strong due to the finalisation of a very clear strategy being implemented successfully, as follows:
1. Articulate the ambition for the Company for the next five years and define the route to achieving that vision
A five year strategic plan was agreed with the Board and communicated effectively to key stakeholders (including investors, employees, unions
and the regulator). Following this agreement, the strategy has been progressed by reshaping the UKPIL business to create more focused
business units, progress has been made on a more efficient labour model and we have established a programme of work to acquire and build
a global network parcels business: this has included the completion of two successful acquisitions in the USA. In addition we have continued to
build our know how in Consumer and Data Services while evaluating the potential for Royal Mail to operate as an ‘E-commerce Enabler’.
2. 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
A strategic cost programme was successfully implemented across the Group, as shown by the third consecutive year of achieving our cost
saving targets. Actions included a 1.9 per cent reduction in core hours, £225 million of cost avoided and significantly improved revenue recovery
totalling £218 million. This allowed us to keep prices low without impacting our excellent quality of service. A series of collaborative projects
with the advertising industry helped to slow letter decline.
3. 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
In the UK the sales mix improved with full-year UKPIL parcels revenue growth of three per cent compared to one per cent for last year.
GLS revenue grew by nine per cent in an increasingly competitive market. Cost containment translated this into an increase in profitability
of 17 per cent. Further deployment of ‘medium’ parcels processing has progressed with the first Parcels Sortation Automation machine now
live and a further two are undergoing installation. Parcels technology has improved on multiple fronts to support customer convenience.
4. Growing in new areas through acquisitions as well as leveraging our existing assets
The diversification strategy is proving effective with the three substantial acquisitions completed of ASM, GSO and Postal Express (the latter
completed just after the year-end). ASM is expected to be economic profit accretive in 2018-19, while GSO should be economic profit accretive
in 2019-20. We continue to build out the pipeline of potential acquisition candidates for 2017-18 and onwards. Amongst other initiatives,
we established a ‘Fleet’ business unit, offering vehicle maintenance services to third parties, and a new consumer ID service that will be ready
to launch in 2017-18.
5. Continue to refresh our approach to technology, defining a digital strategy which identifies and embraces technology relevant
for our business’ future
The Board’s approval of the digital strategy allowed the development of products for customers; market trials for “Tamoco” for doorstep
delivery instructions and “Glympse” for predicted time of delivery have been implemented. Operational performance was enhanced through the
deployment of PDAs. The PDA platform can now manage 4.5 million scans an hour, up from 730,000, which supports an increasing proportion
of parcels (68 per cent) now carrying a barcode.
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| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
When added to the outcome of the Corporate Balanced Scorecard, the total bonus value, and the percentage of salary, were as follows:-
Moya Greene: £439,883, 80 per cent of salary.
Matthew Lester: £381,425, 80 per cent of salary.
Additionally, in line with the Remuneration Policy and subject to Committee approval, this performance outturn determines the value of the
deferred share award to be granted to the CEO, equal to the value of her bonus. This award will vest in three years.
What was the outturn of the 2014 LTIP?
The 2014 award was based on achievement against two performance conditions to be achieved by 26 March 2017 and a third condition, TSR,
to be achieved by July 2017. The tables below show the performance conditions and the vesting of this plan. However, overall performance
of the plan will be finalised ahead of the vesting in July 2017. Performance targets for the 2014 LTIP were not previously published due to
commercial sensitivity.
Performance conditions:
Performance
conditions
Weighting Definition
Earnings per share
("EPS")
50%
Operating profit
margin before
transformation costs
35%
15%
Total Shareholder
Return ("TSR") versus
FTSE 100 comparator
group
Growth in ‘Basic EPS
excluding specific items’
as reported in the Annual
Report and Accounts
of the Company from a
base of 26.3 pence
Operating profit margin
before transformation
costs as reported in
the Annual Report and
Accounts of the Company
The change in the
Net Return Index
(as calculated by an
independent financial
information provider)
for Royal Mail compared
with the ranked Net
Return Indices of the
comparator group.
Threshold
Maximum
Target
measurement
period
Financial year
2016-17
Target
34.1 pence per
share
(9% Compound
Annual Growth
Rate)
Vesting
(% of award) Target
Vesting
(% of award)
12.50%
50%
46.6 pence per
share
(21% Compound
Annual Growth
Rate)
Financial year
2016-17
6%
8.75%
7.50%
35%
Median
7.50%
Top Quartile
15%
3 calendar years
from the date
of grant of the
award1
1. TSR calculation:
TSR2 – TSR1.
TSR1
TSR1 is its average Net Return Index over each weekday (excluding Saturdays) during the three months period ending on the first day of the TSR Performance Period.
TSR2 is its average Net Return Index over each weekday (excluding Saturdays) during the three months period ending on the last day of the TSR Performance Period.
Actual achievement:
Performance conditions
Earnings per share (“EPS”)
Threshold
34.1pps
(9% CAGR)
Maximum
46.6pps
(21% CAGR)
Outcome
38.0pps
(13.1% CAGR)
Operating profit margin before
transformation costs
Total Shareholder Return (“TSR”)
versus FTSE 100 comparator group
6%
7.5%
6.8%
Median
Top Quartile
Estimated Below Threshold
Vesting
(as % of Max)
Estimated 2014
LTIP Vesting
(as % of Max)
24%
22%
46%
The 2014 LTIP is due to vest in July 2017, once the outcome under the TSR metric (which has a performance period that runs from the July 2014
grant date for three calendar years) is known. Using the latest available data for the TSR metric, the plan is likely to vest in July 2017 between
46 per cent and 53.5 per cent of maximum.
Annual Report and Financial Statements 2016-17
| 79
Royal Mail plc
| Directors’ remuneration report
What previous LTIP awards remain outstanding at the year end? (audited)
The grants made for the 2015 LTIP and the 2016 LTIP remain outstanding. The performance conditions for the 2015 LTIP are:
Threshold
Maximum
Measure
EPS
Operating profit margin before transformation
costs*
TSR versus FTSE 100
(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 performance conditions for the 2016 LTIP are:
Measure
Weighting
Performance
Vesting
(% of award)
Performance
Vesting
(% of award)
TSR versus FTSE 100
(excluding mining & financial companies)
100%
Median
50%
Top Quartile
100%
Threshold
Maximum
The amount of the LTIP awards outstanding, for each of the Executive Directors, is shown in the following table, as at 26 March 2017:
Executive Director
Moya Greene
Matthew Lester
Year
2015
2016
2015
2016
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%
100%
98%
100%
537
548
445
475
28%
50%
28%
50%
Final year of
performance
period
Number of
shares
2017-18
105,057
2018-19
107,800
2017-18
2018-19
87,080
93,474
It should be noted that, on Matthew Lester’s cessation of employment, his 2015 and 2016 LTIP awards will lapse. See page 81 for
additional details.
80
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Following these LTIP awards, what are the current shareholding levels of the Board? (audited)
The table below sets out details of the shareholdings of the Executive and Non-Executive Directors as at 26 March 2017. There has been no
change in the Directors’ interests in the ordinary share capital of the Company between 26 March 2017 and 25 May 2017 except as noted in (2)
and (3) below.
Shareholding
Requirement
Number of
shares owned
outright on
26/03/17
Number of
shares owned
outright on
27/03/16
Value of
shares owned
outright on
26/03/171
Number
of options
granted under
SAYE plan
Chairman
Peter Long
Executive Directors
Moya Greene
Matthew Lester
Non‑Executive Directors
Rita Griffin
Nick Horler
Cath Keers
Paul Murray
Orna Ni-Chionna
Les Owen
–
100,000
50,000
–
200%
200%
–
–
–
–
–
–
40,173
30,591
–
3,466
3,030
15,770
13,217
3,030
3,862
3,862
–
3,313
3,030
15,617
3,313
3,030
£168,767
£128,513
–
–
–
–
–
–
–
590
590
–
–
–
–
–
–
1 Value based on closing share price on 26/03/17.
2 Includes the DSBP to be granted in respect of the 2016-17 Annual Bonus.
3 Shares include those which are subsequently due to vest following the end of performance period in July 2017.
Data is reported prior to the sale of shares required to cover tax obligations.
Value of
conditional
share awards
not subject to
performance
conditions
(DSBP)2
Conditional
share awards
subject to
performance
conditions
(LTIP 2014,
2015, 2016)3
–
–
£439,883
–
–
–
–
–
–
–
321,214
279,351
–
–
–
–
–
–
The impact of pre-IPO LTIP awards 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?
As mentioned elsewhere, our CFO, Matthew Lester has decided to leave the business this July, after nearly seven years of service with the
Company. Other than for the award vesting this year, his outstanding LTIP awards will lapse in accordance with the plan rules, and he will not
be eligible for the award of deferred shares that forms part of the 2016-17 bonus. He will also not receive any payment for loss of office. The
Committee determined that he would be eligible for the cash element of the 2016-17 Annual Bonus given that he was employed for the full
financial year; and the Committee also agreed that his 2014 LTIP award, subject to the achievement of performance conditions, would be capable
of vesting given that he was employed by the Company for the whole of the performance period. The Committee took the view that this was
justifiable on account of his dedicated service to the Company throughout his notice period. It has been to the Company’s advantage that he gave
us more than his contractual notice in order for us to plan succession.
Were any payments made to past Directors during the year?
No payments were made to past Directors during the year.
What has the pay for the CEO been over the last eight years?
The total remuneration figure for the Chief Executive over the last eight years is shown in the table below. The annual bonus payout and the LTIP
vesting level as a percentage of the maximum opportunity are also shown.
2009-10 2010-11
2010-11
2011-12
2012-13 2013-14
2014-15
2015-16
2016-17
Chief Executive Officer
Adam Crozier Adam Crozier Moya Greene Moya Greene Moya Greene Moya Greene Moya Greene Moya Greene Moya Greene
Total Remuneration (£'000)
858
2,428
Annual Bonus awarded as
% maximum
LTIP vesting as %
maximum
–
–
–
100%
778
41%
–
1,107
1,962
1,360
1,522
1,529
1,880
74%
80%
77%
85%
82%
80%
–
100%
100%
69%
59%
46%
Annual Report and Financial Statements 2016-17
| 81
Royal Mail plc
| Directors’ remuneration report
How does TSR compare to that
of other similar companies?
Total Shareholder Return (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 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
145
130
11th October
2013
30th March
2014
29th March
2015
27th March
2016
26th March
2017
Royal Mail
FTSE 100
TSR over the Financial Year
FY 2013-14*
FY 2014-15
FY 2015-16
FY 2016-17
Royal Mail plc
FTSE 100
71%
4%
(18)%
7%
12%
(7)%
(8)%
25%
* 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.
How much does Royal Mail
spend on pay?
The 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.
10,000
9,000
8,000
7,000
6,000
m
£
5,000
4,000
3,000
2,000
1,000
0
2016-17
2015-16
Revenue
2015-16
2016-17
Adjusted People Costs
2016-17
2015-16
Adjusted Operating Profit
2015-16
2016-17
Declared Dividends
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.
82
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Which of the Board members sit on the Remuneration Committee, and how frequently do they meet?
The members of the Committee are shown in the table below.
Number of meetings eligible to attend
Number of meetings attended
Total number of meetings
Chair
Orna Ni-Chionna
Members
Peter Long
Paul Murray
Les Owen
7
7
7
7
7
7
7
7
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, the Company Secretary and the members
of the Chief Executive’s Committee; 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.
Does the Remuneration Committee seek advice from internal and external advisors?
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 and senior leadership as appropriate) and Kulbinder Dosanjh, the Company
Secretary. No individual was present when matters relating to his or her own remuneration were discussed.
The Committee seeks advice from independent external advisors as appropriate. The appointed advisors, 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
£112,640.
PwC has provided tax, technology, finance, operations, and other HR, commercial and strategic consulting services to the Group during the
financial year.
PwC are signatories to the Remuneration Consultants Group 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.
2016 Voting By Shareholders
The table below shows the advisory vote on the 2015-16 Remuneration Report at the AGM on 21 July 2016 and the vote on the new
Remuneration Policy, effective immediately from the date of the AGM, and for up to three years.
Votes For
% For
Votes
Against
% Against
Total Votes
Cast
Votes withheld
(abstentions)
Approval of Remuneration Report
586,759,324
96.58%
20,795,146
Approval of Remuneration Policy
523,665,626
83.46%
103,807,987
3.42%
16.54%
607,554,470
627,473,613
27,633,259
7,731,040
The Remuneration Committee feels that the strong level of support for the new Policy does not require the Committee to make any changes to
its implementation for the next financial year. The reasons for the votes against the Policy in 2016 primarily related to a minority of shareholders
who did not support the increase in potential compensation related to short term performance or the sole use of TSR as a performance
condition for the LTIP.
Approved by the Board on 17 May 2017 and signed by
Orna Ni-Chionna
Chair, Remuneration Committee
Annual Report and Financial Statements 2016-17
| 83
Royal Mail plc
| Directors’ report
Directors’ report
The Directors present their report together with audited financial
statements for the year ended 26 March 2017.
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
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
96
37
43
46
44
43
99
41
Long-Term Incentive Plans*
120
Statement of the amount of interest
capitalised*
116 and
118
Dividend waiver*
84
Disclosure and
Transparency Rules
The Strategic Report and the Directors’
Report together include the management
report required by DTR 4.1 of the Disclosure
Guidance and Transparency Rules of the
UK Financial Conduct Authority (Disclosure
Guidance and Transparency Rules), the
Directors having consulted with the
Management on such matters.
Corporate governance statement
The Disclosure Guidance 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 54-58 and
is incorporated into this Directors’ Report
by reference.
Shares
Final dividend
The Board recommends a final dividend
of 15.6 pence per ordinary share, giving a
total dividend for the year of 23.0 pence
per ordinary share. The final dividend will
be payable on 28 July 2017, subject to
shareholder approval, to shareholders whose
names appear on the register of members on
30 June 2017.
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 Directors, 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 37-41 of the Strategic Report.
84
| Annual Report and Financial Statements 2016-17
Share capital
As at 27 March 2017, 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 129.
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. Every
proxy present who has been duly
appointed by appointing 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.
• On a poll, every member has one vote per
share held by them and they may vote
in person or by appointing one or more
proxies. Where they appoint more than
one proxy, the proxies appointed, 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, or her, if any call
or other sum then payable by him or her in
respect of that share remains unpaid or if a
member has been served with a restriction
notice (as defined in the Articles) after failure
to provide the Company with information
concerning interests in those shares required
Strategic report
| Governance
| Financial statements
| Other information
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.
Authority of the Directors to allot shares
By a resolution passed by shareholders on
21 July 2016, 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:
Substantial shareholdings
As at 26 March 2017, the Company had been
notified, in accordance with the Disclosure
Guidance 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:
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.
a.
b.
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
20 July 2017, will be set out in the Notice
of AGM.
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.
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 2017
AGM or close of business 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
21 July 2016, 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 26 March 2017.
The Directors require express authorisation
from shareholders to purchase our own
shares. Accordingly, at the 2017 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 (EBT)
As at 26 March 2017, a total of 9,582,175
(2015-16 27,042) shares were held by the
EBT on behalf of the Company.
Shareholder
Number of
shares
% of
voting
rights
BlackRock, Inc
55,076,360
5.50%
As at 18 May 2017, 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.
Directors
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 Companies 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.
Directors may 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.
Annual Report and Financial Statements 2016-17
| 85
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 2006, 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 49–51. 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 66-83.
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 or 2016 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. 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
The events after the reporting period
are disclosed in Note 27 of the
financial statements.
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 123. See the financial risks
and related hedging contained on page 31 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 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 46, 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 page 43
for a summary of key corporate
responsibility aspects.
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 21-36. 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 41 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.
86
| Annual Report and Financial Statements 2016-17
The Directors confirm full compliance with
the Competition and Markets Authority’s
Statutory Audit Services Order. Further
information about the audit transition can
be found on page 61 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 Disclaimer can be found on page 152 of
the Report.
By Order of the Board.
Kulbinder Dosanjh
Company Secretary
17 May 2017
Royal Mail plc
100 Victoria Embankment
London
EC4Y OHQ
Company number 08680755
Strategic report
| Governance
| Financial statements
| Other information
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 IFRS
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.
The Directors consider that the Annual
Report and Financial Statements 2016-17,
when 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.
Each of the Directors, whose names and
function are set out on pages 49-51 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.
Annual Report and Financial Statements 2016-17
| 87
Royal Mail plc
|
Financial
statements
Independent Auditor’s Report to the members of Royal Mail plc ................. 89
Consolidated income statement ............................................................................. 94
Consolidated statement of comprehensive income........................................... 95
Consolidated balance sheet..................................................................................... 96
Consolidated statement of changes in equity..................................................... 97
Consolidated statement of cash flows .................................................................. 98
Core notes to the financial statements......................................................................
1. Basis of preparation................................................................................................. 99
2. Segment information ............................................................................................100
3. Operating costs.......................................................................................................102
4. People information.................................................................................................103
5. Net finance costs ....................................................................................................104
6. Taxation....................................................................................................................104
7. Earnings per share.................................................................................................107
8. Dividends.................................................................................................................108
9. Retirement benefit plans.......................................................................................108
10. Acquisition of businesses ....................................................................................114
Other notes to the financial statements....................................................................
11. Property, plant and equipment..........................................................................115
12. Goodwill.................................................................................................................117
13. Intangible assets ..................................................................................................118
14. Investments in associates and joint venture....................................................118
15. Share-based payments ......................................................................................119
16. Assets and liabilities held for sale......................................................................121
17. Current trade and other receivables .................................................................121
18. Cash and cash equivalents .................................................................................122
19. Current trade and other payables .....................................................................122
20. Loans and borrowings ........................................................................................122
21. Financial assets and liabilities and risk management ....................................123
22. Provisions..............................................................................................................128
23. Share capital and reserves.................................................................................129
24. Commitments.......................................................................................................130
25. Contingent liabilities ............................................................................................130
26. Related party information ..................................................................................131
27. Events after the reporting year .........................................................................131
28. Related undertakings of Royal Mail plc ............................................................132
Significant accounting policies .............................................................................136
Royal Mail plc – parent Company financial statements .................................146
88
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
Independent auditor’s
report
to the members of Royal Mail plc only.
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements
Overview
is unmodified
We have audited the financial statements of Royal Mail plc for
the 52 weeks ended 26 March 2017 set out on pages 94 to 148.
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 26 March 2017
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.
Materiality:
Group financial
statements as a
whole
Coverage
£20 million (2015-16: £18 million)
5% (2015-16: 5%) of Group profit
before tax excluding certain items*
100% (2015-16: 100%) of Group profit
before tax
Risks of material misstatement
vs 2015-16
Recurring risks
Deferred revenue
Valuation of pension
scheme liabilities
Industrial disease claims
provision
Event driven
Ofcom investigation
contingent liability (recurring risk)
Acquisition accounting
(new risk)
◀▶
◀▶
◀▶
◀▶
▲
*Items added back to Group profit before tax are the IFRS 2 charge
for employee free shares issued (2016-17: £105 million, 2015-16:
£158 million), loss on disposal of business (2016-17: £2 million,
2015-16: £nil) and net of profit on disposal of property, plant and
equipment (2016-17: £14 million, 2015-16: £29 million).
Annual Report and Financial Statements 2016-17
| 89
Royal Mail plc
|
Independent auditor’s report
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 audit significance, were as follows:
Deferred revenue associated with
advance customer payments arising from
stamps sold
£184 million (2015-16: £195 million)
Refer to page 60 (Audit Committee Report),
page 136 (accounting policy) and page 122
(financial disclosures).
The risk
Subjective estimate
Deferred revenue is estimated for advance
payments made by households who purchase
stamps 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 the fact that that the service will
need to be provided by the Group during future
accounting periods for pre-purchased stamps.
As no unique identification of the stamps
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 and Group sales data.
The methodology adjusts for stamp holdings
which are considered to be abnormal.
Valuation of pension scheme liabilities
(£3,839 million surplus, net of £5,992 million
liability; 2015-16: £3,430 million surplus, net of
£3,815 million liabilities)
Refer to page 60 (Audit Committee Report),
page 136 (accounting policy) and page 108
(financial disclosures).
Subjective valuation
Significant estimates are made in valuing the
Group’s post retirement defined benefit plan
obligations, including in particular the discount
rate, the inflation assumptions and the
mortality assumptions. Small changes in the
assumptions and estimates used to value the
Group’s pension obligations (before deducting
scheme assets) would have a significant effect
on the financial position of the Group.
Our response
Our procedures included:
• Our statistical expertise: with the
assistance of our own statistical
specialists, assessing and evaluating
the methodology used by the Group’s
independent third party specialist to
determine the number of stamps held at
the balance sheet date and its consistent
application year on year.
• Benchmarking assumptions:
challenging key assumptions and inputs
to the calculation, including survey size,
household data and caps in place to
address the impact of abnormal holdings.
• Survey specialist’s credentials:
assessing the competence, independence
and integrity of the Group’s third party
survey specialist which provides the
survey data.
• Independent reperformance: testing
the revenue data used in the calculation,
agreeing inputs to the survey specialist’s
results, reperforming the calculation of
deferred revenue and comparing this to
the Group’s result.
• Assessing transparency: Considering
the adequacy of the Group’s disclosures
in respect of the deferred revenue
adjustment.
Our procedures included:
• Benchmarking assumptions: challenging
key assumptions applied, being the
discount rate, inflation rate, mortality
and salary growth with the support of
our own actuarial specialists, including a
comparison of key assumptions against
market data.
• Actuary’s credentials: assessing the
competence, independence and integrity
of the Group’s actuarial expert.
• Assessing transparency: considering
the adequacy of the Group’s disclosures in
respect of the sensitivity of the surplus to
key assumptions.
90
| Annual Report and Financial Statements 2016-17
Strategic report
| Governance
| Financial statements
| Other information
2. Our assessment of risks of material misstatement
Industrial disease claims provision
(£84 million, 2015-16: £78 million)
Refer to page 60 (Audit Committee Report),
page 137 (accounting policy) and page 128
(financial disclosures).
The risk
Subjective estimate
A number of judgments are made in the
assessment of the Group’s liability for
industrial disease claims including the future
number of claims, average cost of claims,
future claims inflation and discount rate.
Our response
Our procedures included:
• Our valuation expertise: with the
assistance of our own valuation
specialists, assessing the method used
by the Group’s independent adviser to
calculate the provision based on our
experience of models used in the market
for comparative types of provisions.
• Benchmarking assumptions:
challenging the assumptions used,
including the discount rate and the
historical incidence of claims, in the
calculation of the provision, including
a comparison against the UK Asbestos
Working Party Update 2009.
• Third party provider credentials:
assessing the competence, independence
and integrity of the Group’s third party
adviser used in estimating the industrial
disease provision.
• Assessing transparency: considering
the adequacy of the Group’s disclosures in
respect of this provision.
Ofcom investigation contingent liability
Dispute outcome
• Our procedures included:
Refer to page 60 (Audit Committee Report),
page 143 (accounting policy) and page 130
(financial disclosures).
An investigation by Ofcom is ongoing. Ofcom’s
provisional view is that Royal Mail breached
competition law by engaging in conduct that
amounted to unlawful discrimination against
postal operators competing with Royal Mail
delivery.
Depending on the outcome of the Ofcom
investigation and any appeal, Royal Mail may
be fined. Whether a liability to the Group will
result from this investigation is inherently
uncertain.
Acquisition accounting
Valuation of intangible assets in the acquisition
of GSO and ASM
Subjective estimate
The Group made two acquisitions during the
year, ASM in June and GSO in September.
£90 million goodwill and £56 million intangible
assets arising on acquisition
Refer to page 60 (Audit Committee Report),
page 137 (accounting policy) and page 114
(financial disclosures).
The exercise to recognise the intangible assets
acquired at fair value involves a significant
degree of judgement in relation to the inputs
used to value the intangibles, including
estimated useful economic life and discount
rate giving rise to a material estimate.
• Enquiry with lawyers: inspecting
correspondence with Ofcom and
holding discussions with the Group’s in
house team.
• Accounting analysis: challenging the
assessment performed by the Directors to
determine if the criteria for recognising a
provision have been met.
• Assessing transparency: Considering
the adequacy of the Group’s disclosures in
respect of the contingent liability.
Our procedures included:
• Our valuation expertise: with the
assistance of our own valuation
specialists, assessing and evaluating
the methodology used by the Group’s
independent third party experts to value
the intangible assets acquired.
• Benchmarking assumptions: using
our sector experience and knowledge,
challenging the key assumptions used in
the valuation including estimated useful
economic life and discount rate.
• Valuer’s credentials: Assessing the
competence, independence and integrity
of the Group’s valuation expert.
• Assessing transparency: considering
the adequacy of the Group’s disclosures in
respect of determining the fair value of the
intangible assets acquired.
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Independent auditor’s report
3. Our application of
materiality and an
overview of the scope of
our audit
Materiality for the Group financial statements
as a whole was set at £20 million (2015-16:
£18 million), determined with reference
to a benchmark of Group profit before tax,
adjusted to add back the IFRS 2 charge for
employee free shares issued and to add back
the loss on disposal of business net of profit
on disposal of property, plant and equipment,
of £428 million of which it represents
5 per cent (2015-16: 5 per cent). The items
not included in the benchmark were all
subject to audit procedures by the Group
audit team.
We reported to the Audit Committee
any corrected or uncorrected identified
misstatements exceeding a profit before
tax impact of £1.0 million or a balance
sheet reclassification impact of £5.0
million, in addition to other identified
misstatements that warranted reporting on
qualitative grounds.
Of the Group’s three (2015-16: three)
reporting components, we subjected two
(2015-16: two) to full scope audits for Group
purposes. The components within the scope
of our work accounted for the percentages of
the Group’s results illustrated opposite.
The work on one of the two components
(2015-16: one of the two components) was
performed by component auditors and the
rest by the Group audit team.
For the residual component, we performed
analysis at an aggregated Group level to
re-examine our assessment that there were
no significant risks of material misstatement.
The Group audit 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 audit team also approved
the component materialities having regard to
the mix of size and risk profile of the Group
across the components.
The Group audit team visited the GLS
component (2015-16: GLS component) at the
planning, execution and finalisation stages
of the audit including to assess the audit risk
and strategy. Video and telephone conference
meetings were also held regularly with the
component auditor, including specific calls
held in relation to the acquisition accounting
for the two acquisitions made by GLS in
the year. Part of these visits and meetings
included discussion of the findings reported
to the Group audit team in more detail, and
any further work required by the Group
audit team was then performed by the
component auditor.
Profit before tax excluding
certain items*
£428 million (2015-16: £396 million)
Materiality
£20 million (2015-16: £18 million)
£20 million
Whole financial statements
materiality (2015-16:
£18 million)
Adjusted profit
Group materiality
£18 million
Materiality at components
£18m (2015-16: £16 million)
£1.0 million
Misstatements reported to
the audit committee
(2015-16: £0.9 million)
*Items added back to Group profit before tax are the IFRS 2 charge for employee free shares issued (2016-17: £105 million,
2015-16: £158 million), loss on disposal of business (2016-17: £2 million, 2015-16: £nil) and net of profit on disposal of
property, plant and equipment (2016-17: £14 million, 2015-16: £29 million).
Group revenue
Group profit before tax
100%
(2015-16 100%)
100%
(2015-16 100%)
100
100
100
100
Group total assets
98%
(2015-16 98%)
98
98
Full scope for Group audit purposes 2016-17
Full scope for Group audit purposes 2015-16
Residual components
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Strategic report
| Governance
| Financial statements
| Other information
Scope and responsibilities
As explained more fully in the Directors’
Responsibilities Statement set out on
page 87, 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
17 May 2017
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 41, in relation to going concern and
longer-term viability; and
the part of the Corporate Governance
Statement on page 54 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.
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 year is consistent with the
financial statements.
Based solely on the work required to be
undertaken in the course of the audit of the
financial statements and from reading the
Strategic Report and the Directors’ Report:
• we have not identified material
misstatements in those reports; and
•
in our opinion, those reports have
been prepared in accordance with the
Companies Act 2006.
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 41, 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 2020; 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.
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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 2016-17 © Royal Mail Group Limited 2016.
All rights reserved.