TIDMRMG
RNS Number : 2503G
Royal Mail PLC
25 May 2017
Royal Mail plc
25 May 2017
Annual Report and Financial Statements 2016-17
and Disclosures required in accordance with DTR 6.3.5
Annual Report and Financial Statements 2016-17
Following the release by Royal Mail plc (the Company) on 18 May
2017 of the Company's final results announcement, the Company
announces that it has today published its Annual Report and
Financial Statements 2016-17 (Annual Report 2016-17) via Royal
Mail's website: www.royalmailgroup.com/results.
The Company also announces that it will provide shareholders, by
their chosen communication means, the Annual Report 2016-17 and
Notice of Meeting for the 2017 Annual General Meeting on or around
13 June 2017.
In accordance with Listing Rule 9.6.1, a copy of the Annual
Report 2016-17 is being uploaded today to the National Storage
Mechanism and will be available shortly for viewing.
Disclosures required in accordance with DTR 6.3.5
Information on important events that have occurred during the
financial year and their impact on the Annual Report 2016-17 were
included in the results announcements released on 18 May 2017.
This, together with the following information, which is extracted
from the Financial report for the full year ended 26 March 2017
(Financial Report) and the Annual Report 2016-17, constitutes the
information required by DTR 6.3.5 to be communicated in full,
unedited text through a regulatory information service. This
information is not a substitute for reading the full Annual Report
2016-17. Any page references in the Related party information and
the Statement of Directors' Responsibilities in respect of the
Annual Report 2016-17 and Financial Statements are to those in the
Annual Report 2016-17. All other page and note references are to
those in the Financial Report which is available on the Company's
website: www.royalmailgroup.com/results.
Contacts:
Company Secretariat
Kulbinder Dosanjh
Phone: 020 7449 8133
Email: cosec@royalmail.com
Media Relations
Andrew Moys
Mobile: 07841 803 321
Email: andrew.moys@royalmail.com
Investor Relations
Catherine Nash
Phone: 07436 560 910
Email: investorrelations@royalmail.com
CONSOLIDATED INCOME STATEMENT
For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March
2016
Reported(1) Reported(1,2)
52 weeks 52 weeks
2017 2016
Notes GBPm GBPm
============================================ ===== =========== =============
Continuing operations
Revenue 2 9,776 9,251
Operating costs(3) 3/4 (9,286) (8,766)
============================================ ===== =========== =============
People costs (5,576) (5,456)
Distribution and conveyance costs (2,106) (1,736)
Infrastructure costs (868) (854)
Other operating costs (736) (720)
============================================ ===== =========== =============
Operating profit before transformation
costs 490 485
Transformation costs (137) (191)
============================================ ===== =========== =============
Operating profit after transformation
costs 353 294
Operating specific items:
Employee Free Shares charge (105) (158)
Legacy/other (costs)/credit (18) 2
Amortisation of intangible assets
in acquisitions (11) -
============================================ ===== =========== =============
Operating profit 219 138
Profit on disposal of property, plant
and equipment (non-operating specific
item) 14 29
Loss on disposal of business (2) -
-------------------------------------------- ----- ----------- -------------
Earnings before interest and tax 231 167
Finance costs 5 (18) (16)
Finance income 5 2 3
Net pension interest (non-operating
specific item) 9(c) 120 113
============================================ ===== =========== =============
Profit before tax 335 267
Tax charge 6 (62) (45)
============================================ ===== =========== =============
Profit for the year from continuing
operations 273 222
============================================ ===== =========== =============
Discontinued operations
Profit from disposal of discontinued
operations (non-operating specific
item) - 31
Tax on profit from disposal of discontinued
operations 6 - (5)
============================================ ===== =========== =============
Profit for the year 273 248
============================================ ===== =========== =============
Profit for the year attributable to:
Equity holders of the parent Company 272 241
Non-controlling interests 1 7
============================================ ===== =========== =============
Earnings per share
Basic - continuing operations 7 27.5p 21.5p
Diluted - continuing operations 7 27.3p 21.4p
Basic - total Group 7 27.5p 24.1p
Diluted - total Group 7 27.3p 24.0p
============================================ ===== =========== =============
(1) Reported - prepared in accordance with International
Financial Reporting Standards (IFRS).
(2) The sub-analysis of operating costs has been re-presented as
stated in Note 2. Total operating costs remain unchanged.
(3) Operating costs are stated before transformation costs,
Employee Free Shares charge, Legacy/other (costs)/credit and
amortisation of intangible assets in acquisitions.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March
2016
Reported Reported
52 weeks 52 weeks
2017 2016
Notes GBPm GBPm
================================================= ====== ========= ===========
Profit for the year 273 248
Other comprehensive income/(expense)
for the year from continuing operations:
Items that will not be subsequently reclassified
to profit or loss:
Amounts relating to pensions accounting 405 255
================================================= ====== ========= ===========
IFRIC 14 adjustment relating to defined
benefit surplus 9 113 (114)
Remeasurement gains of the defined benefit
surplus 9(c) 399 320
Tax on above items 6 (107) 49
================================================= ====== ========= ===========
Items that may be subsequently reclassified
to profit or loss:
Foreign exchange translation differences 18 8
================================================= ====== ========= ===========
Exchange differences on translation of
foreign operations (GLS)(1) 59 36
Net loss on hedge of a net investment
(EUR500 million bond) (38) (26)
Net loss on hedge of a net investment
(euro-denominated finance lease payable) (3) (2)
================================================= ====== ========= ===========
Designated cash flow hedges 32 5
================================================= ====== ========= ===========
Gains/(losses) on cash flow hedges deferred
into equity 22 (34)
Losses on cash flow hedges released from
equity to income 16 42
Gains on cash flow hedges released from
equity to the carrying amount of non-financial
assets (1) -
Tax on above items 6 (5) (3)
================================================= ====== ========= ===========
Total other comprehensive income for
the year 455 268
================================================= ====== ========= ===========
Total comprehensive income for the year 728 516
================================================= ====== ========= ===========
Total comprehensive income for the year
attributable to:
Equity holders of the parent Company 727 509
Non-controlling interests 1 7
================================================= ====== ========= ===========
(1) Includes net GBP4 million charge (2015-16: GBP2 million) in
relation to tax liabilities (see Note 6).
CONSOLIDATED BALANCE SHEET
At 26 March 2017 and 27 March 2016
Reported Reported
at 26 at 27
March March
2017 2016
Notes GBPm GBPm
======================================== ===== ======== ========
Non-current assets
Property, plant and equipment 2,062 2,002
Goodwill 316 206
Intangible assets 567 451
Investments in associates and joint
venture 7 9
Financial assets
Pension escrow investments 20 20
Derivatives 4 2
Retirement benefit surplus - net of
IFRIC 14 adjustment 9 3,839 3,430
Other receivables 13 12
Deferred tax assets 6 15 9
======================================== ===== ======== ========
6,843 6,141
Assets held for sale 37 39
======================================== ===== ======== ========
Current assets
Inventories 23 21
Trade and other receivables 1,117 1,020
Income tax receivable 7 6
Financial assets
Derivatives 8 5
Cash and cash equivalents 299 368
======================================== ===== ======== ========
1,454 1,420
======================================== ===== ======== ========
Total assets 8,334 7,600
======================================== ===== ======== ========
Current liabilities
Trade and other payables (1,810) (1,700)
Financial liabilities
Interest-bearing loans and borrowings (33) -
Obligations under finance leases (64) (84)
Derivatives (9) (33)
Income tax payable (12) (23)
Provisions (88) (151)
======================================== ===== ======== ========
(2,016) (1,991)
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings (430) (392)
Obligations under finance leases (130) (136)
Derivatives (2) (8)
Provisions (108) (96)
Other payables (47) (41)
Deferred tax liabilities 6 (603) (469)
======================================== ===== ======== ========
(1,320) (1,142)
Total liabilities (3,336) (3,133)
======================================== ===== ======== ========
Net assets 4,998 4,467
======================================== ===== ======== ========
Equity
Share capital 10 10
Retained earnings 4,940 4,451
Other reserves 47 (3)
======================================== ===== ======== ========
Equity attributable to parent Company 4,997 4,458
Non-controlling interests 1 9
======================================== ===== ======== ========
Total equity 4,998 4,467
======================================== ===== ======== ========
The financial statements were approved and authorised for issue
by the Board of Directors on 17 May 2017 and were signed on its
behalf by:
Moya Greene Matthew Lester
Chief Executive Chief Finance
Officer Officer
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March
2016
Equity
Foreign holders
currency of
Share Retained translation Hedging the Non-controlling Total
capital earnings reserve reserve parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ======== ========= ============ ======== ======== =============== =======
Reported at 29 March 2015 10 3,993 14 (30) 3,987 9 3,996
=================================== ======== ========= ============ ======== ======== =============== =======
Profit for the year - 241 - - 241 7 248
Other comprehensive income
for the year - 255 8 5 268 - 268
=================================== ======== ========= ============ ======== ======== =============== =======
Total comprehensive income
for the year - 496 8 5 509 7 516
Transactions with owners
of the Company, recognised
directly in equity
Release of Post Office
Limited separation provision - 5 - - 5 - 5
Dividend paid to equity
holders of the parent Company - (213) - - (213) - (213)
Dividend paid to non-controlling
interests - - - - - (7) (7)
Share-based payments
Employee Free Shares issue(1) - 152 - - 152 - 152
Save As You Earn (SAYE)
scheme - 3 - - 3 - 3
Long Term Incentive Plan
(LTIP)(2) - 15 - - 15 - 15
=================================== ======== ========= ============ ======== ======== =============== =======
Reported at 27 March 2016 10 4,451 22 (25) 4,458 9 4,467
=================================== ======== ========= ============ ======== ======== =============== =======
Profit for the year - 272 - - 272 1 273
Other comprehensive income
for the year - 405 18 32 455 - 455
=================================== ======== ========= ============ ======== ======== =============== =======
Total comprehensive income
for the year - 677 18 32 727 1 728
Transactions with owners
of the Company, recognised
directly in equity
Release of Post Office
Limited separation provision - 1 - - 1 - 1
Dividend paid to equity
holders of the parent Company - (222) - - (222) - (222)
Dividend paid to non-controlling
interests - - - - - (8) (8)
Acquisition of non-controlling
interests - (15) - - (15) (6) (21)
Recognition of put options
for non-controlling interests - (6) - - (6) - (6)
Disposal of subsidiary - - - - - (1) (1)
Acquisition of subsidiary - - - - - 6 6
Share-based payments
Employee Free Shares issue(1) - 100 - - 100 - 100
Save As You Earn (SAYE)
scheme - 2 - - 2 - 2
Long Term Incentive Plan
(LTIP)(2) - 9 - - 9 - 9
Purchase of own shares(3) - (53) - - (53) - (53)
Settlement of LTIP 2013 - (4) - - (4) - (4)
=================================== ======== ========= ============ ======== ======== =============== =======
Reported at 26 March 2017 10 4,940 40 7 4,997 1 4,998
=================================== ======== ========= ============ ======== ======== =============== =======
(1) Excludes GBP5 million (2015-16: GBP6 million) National
Insurance, charged to the income statement, included in provisions
on the balance sheet.
(2) Excludes GBP1 million (2015-16: GBP1 million) National
Insurance, charged to the income statement, included in provisions
on the balance sheet.
(3) Purchases in respect of LTIP and Employee Free Shares
schemes.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March
2016
Reported Reported
52 weeks 52 weeks
2017 2016
Notes GBPm GBPm
===================================================== ===== ========= =========
Cash flow from operating activities
Profit before tax 335 267
Adjustment for:
Net pension interest (120) (113)
Net finance costs 16 13
Profit on disposal of property, plant and
equipment (14) (29)
Loss on disposal of business 2 -
Legacy/other costs/(credit) 29 (2)
Employee Free Shares charge 105 158
Transformation costs 137 191
===================================================== ===== ========= =========
Operating profit before transformation costs 490 485
Adjustment for:
Depreciation and amortisation 301 272
Share of post-tax loss/(profit) from associates
and joint venture 2 (1)
===================================================== ===== ========= =========
EBITDA before transformation costs 793 756
Working capital movements (9) (20)
===================================================== ===== ========= =========
Increase in inventories (2) (1)
Increase in receivables (40) (62)
Increase in payables 56 22
Net decrease in derivative assets 2 1
(Decrease)/increase in provisions (non-specific
items) (25) 20
===================================================== ===== ========= =========
Pension charge to cash difference adjustment 222 257
Share-based awards (SAYE and LTIP) charge 11 13
Cash cost of transformation operating expenditure(1) (142) (233)
Cash cost of operating specific items (61) (6)
===================================================== ===== ========= =========
Cash inflow from operations 814 767
Income tax paid (60) (40)
===================================================== ===== ========= =========
Net cash inflow from operating activities 754 727
===================================================== ===== ========= =========
Cash flow from investing activities
Dividend received from associate company - 1
Finance income received 3 3
Proceeds from disposal of property (excluding
London property portfolio), plant and equipment
(non-operating specific item) 37 38
London property portfolio costs (non-operating
specific item) (34) (23)
Proceeds from disposal of discontinued operations
(non-operating specific item) - 41
Disposal of subsidiary (non-operating specific
item) (3) -
Purchase of property, plant and equipment(1) (230) (270)
Acquisition of business interests, net of
cash acquired (122) (14)
Purchase of intangible assets (software)(1) (157) (191)
Payment of deferred consideration in respect
of prior years' acquisitions (4) (4)
Net sale of financial asset investments
(current) - 56
===================================================== ===== ========= =========
Net cash outflow from investing activities (510) (363)
===================================================== ===== ========= =========
Net cash inflow before financing activities 244 364
===================================================== ===== ========= =========
Cash flow from financing activities
Finance costs paid (17) (16)
Acquisition of non-controlling interests (18) -
Purchase of own shares (53) -
Payment of capital element of obligations
under finance lease contracts (74) (90)
Cash received on sale and leasebacks 41 36
Drawdown of loan facility 31 -
Repayment of loans and borrowings (7) -
Dividends paid to equity holders of the
parent Company 8 (222) (213)
Dividend paid to non-controlling interests (8) (7)
===================================================== ===== ========= =========
Net cash outflow from financing activities (327) (290)
===================================================== ===== ========= =========
Net (decrease)/increase in cash and cash
equivalents (83) 74
Effect of foreign currency exchange rates
on cash and cash equivalents 14 7
Cash and cash equivalents at the beginning
of the year 368 287
===================================================== ===== ========= =========
Cash and cash equivalents at the end of
the year 299 368
===================================================== ===== ========= =========
(1) Items comprise total investment within 'In-year trading cash
flow' measure (see Financial Review).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
General information
Royal Mail plc ('the Company') is incorporated in the United
Kingdom (UK) and listed on the London Stock Exchange. The UK is the
Company's country of domicile.
The consolidated financial statements of the Company for the 52
weeks ended 26 March 2017 (2015-16: 52 weeks ended 27 March 2016)
comprise the Company and its subsidiaries (together referred to as
'the Group') and the Group's interest in its associate undertakings
and joint venture.
Basis of preparation and accounting
(a) The Directors consider that the Group has adequate resources
to continue in operational existence for a minimum of 12 months
from the signing date of these financial statements and that it is
therefore appropriate to adopt the going concern basis in preparing
its financial statements.
(b) The consolidated financial statements of the Group have been
prepared in accordance with the Companies Act 2006 and applicable
IFRS as adopted for use in the EU. The consolidated financial
statements have been prepared in accordance with the accounting
policies stated in the Group's Annual Report and Financial
Statements for the reporting year ended 26 March 2017.
The financial information set out in this document does not
constitute the Group's statutory financial statements for the
reporting years ended 26 March 2017 or 27 March 2016, but is
derived from those financial statements. The auditor's report on
those statutory financial statements was unqualified, did not draw
attention to any matters by way of emphasis and did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
Statutory financial statements for the reporting year ended 27
March 2016 have been delivered to the Registrar of Companies. The
statutory financial statements for the reporting year ended 26
March 2017 were approved by the Board of Directors on 17 May 2017
along with this Financial report, but will be delivered to the
Registrar of Companies in due course.
The Annual Report and Financial Statements 2016-17, together
with details of the Annual General Meeting (AGM), will be
despatched to shareholders before the AGM. The AGM will take place
on 20 July 2017.
Presentation of results and accounting policies
The Group's significant accounting policies, including details
of new and amended accounting standards adopted in the reporting
year, can be found in the Annual Report and Financial Statements
2016-17. Details of key sources of estimation uncertainty, are
provided below.
These financial statements and associated Notes have been
prepared in accordance with IFRS as adopted by the EU and as issued
by the International Accounting Standards Board (IASB) (i.e. on a
'reported' basis). In some instances, Alternative Performance
Measures (APMs) are used by the Group. This is because Management
are of the view that these APMs 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. Details of the APMs used by the Group are
provided on page 22.
Key sources of estimation uncertainty and critical accounting
judgements
The preparation of consolidated financial statements necessarily
requires Management to make estimates and assumptions that can have
a significant impact on the financial statements. These estimates
and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed
below.
Pensions
The value of defined benefit pension plan liabilities and
assessment of pension plan costs are determined by long-term
actuarial assumptions. These assumptions include discount rates
(which are based on the long-term yield of high-quality corporate
bonds), inflation rates and mortality rates. Differences arising
from actual experience or future changes in assumptions will be
reflected in the Group's consolidated statement of comprehensive
income. The Group exercises its judgement in determining the
assumptions to be adopted, after discussion with a qualified
actuary. Details of the key actuarial assumptions used and of the
sensitivity of these assumptions for RMPP are included within Note
9.
Deferred revenue
The Group recognises advance customer payments on its balance
sheet, predominantly relating to stamps and meter credits purchased
by customers but not yet used at the balance sheet date. The
valuation of this deferred revenue is based on a number of
different estimation and sampling methods using external specialist
resource as appropriate.
The majority of this balance is made up of stamps sold to the
general public. For sales to the general public, estimates of stamp
volumes held are made on the basis of monthly surveys performed by
an independent third-party. In order to avoid over-estimation of
the typical number of stamps held, Management applies a cap to the
results to exclude what are considered to be abnormal stamp
holdings from the estimate. The level at which holdings are capped
is judgemental and is currently set at 99 of each stamp type per
household. The impact of applying alternative capping values on the
year end public stamp deferred revenue balance is shown in the
table below.
Capped Uncapped
=====================
As reported
At 26 March 2017 30 99 300
=================================== === =========== === ========
Public stamp holdings value (GBPm) 152 184 200 216
=================================== === =========== === ========
The value of stamps and meter credits held by retail and
business customers are more directly estimated through the analysis
of sales volumes and monthly meter sampling. Further adjustments
are also made for each type of sale to take into account volume
purchasing of stamps when price changes are announced.
The results of the above procedures are reviewed by Management
in order to make a judgement of the carrying amount of the accrual.
The total accrual is held within current trade and other payables
but a portion (which cannot be measured) will relate to stamps and
meter credits used one year or more after the balance sheet
date.
Provisions
Due to the nature of provisions, a significant part of their
determination is based upon estimates and/or judgements concerning
the future. The industrial diseases claims provision is considered
to be the area where the application of judgement has the most
significant impact.
The industrial diseases claims provision arose as a result of a
Court of Appeals judgement in 2010 and relates to individuals who
were employed in the General Post Office Telecommunications
division prior to October 1981. The provision requires estimates to
be made of the likely volume and cost of future claims, as well as
the discount rate to be applied to these, and is based on the best
information available as at the year end, which incorporates
independent expert actuarial advice. The result of a 0.5 per cent
decrease in the discount rate estimate would be a GBP6 million
increase in the overall industrial diseases provision.
Business acquisitions
Identifiable assets acquired and liabilities and contingent
liabilities assumed in business acquisitions are measured initially
at their fair values at the acquisition date. The fair value of an
asset or liability represents the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. Independent valuers were
used to assist in the valuation of the Group's in-year
acquisitions.
In determining the fair value of the intangible assets acquired,
risk-adjusted future cash flows discounted using discount rates
specific to the asset are generally used. In determining cash
flows, a combination of historical data and estimates regarding
revenue growth, profit margins and operating cash flows have been
used.
-- customer relationships required judgement on future
cash flows, churn, and the expected remaining life
of the customer relationship.
-- brands were measured by estimating the savings realised
by owning or holding the right to use the brand name
(as opposed to paying a royalty fee to a third party).
This includes an estimate of the projected revenues
generated and the estimated life of the brand to
a third party.
-- internally developed software acquired was valued
using the relief from royalty approach, taking into
account software licencing costs in the postage,
courier and shipping service sector. Internally developed
software acquired, was valued on the basis of the
estimated cost to recreate the software.
-- tangible assets were valued by estimating the current
cost to purchase or replace the assets, whilst also
taking into account available market data for the
sale or transfer of such assets.
The excess of the consideration transferred over the fair value
of the net identifiable assets acquired is recorded as goodwill.
The Group has one year from the acquisition date to re-measure the
fair values of the acquired assets and liabilities and the
resulting goodwill if new information is obtained relating to
conditions that existed at the acquisition date.
Acquisition related costs are expensed as incurred. The business
acquisitions during the period are disclosed in Note 10.
Goodwill allocation and impairment testing
Goodwill recognised in a business combination is not amortised
and, as such, must be tested annually for impairment in line with
IAS 36 'Impairment of Assets'. In making assessments for
impairment, assets that do not generate independent cash flows,
such as goodwill, are allocated to an appropriate cash-generating
unit (CGU), or group of CGUs, on the basis of whether those CGUs
are expected to benefit from the synergies of the combination.
Management necessarily applies judgement in allocating goodwill to
CGUs. As at 26 March 2017 GBP299 million of the total goodwill
balance of GBP316 million was allocated to the Group of CGUs making
up the GLS reportable segment.
In assessing whether there has been any impairment of goodwill,
Management determines whether the goodwill carrying value is higher
than the recoverable amount of the underlying CGUs. The recoverable
amount is the higher of a CGU's fair value less costs to sell
(realisable value) and value-in-use. In the case of goodwill
allocated to the GLS reportable segment the realisable value is
estimated by applying an average share price/earnings ratios of
quoted peers to the current year results of GLS. Judgement must be
made by Management in choosing a suitable peer group against which
to compare the realisable value of GLS.
Deferred tax
Assessment of the deferred tax asset requires an estimation of
future profitability. Such estimation is inherently uncertain in a
market subject to various competitive pressures. Should estimates
of future profitability change in future years, the amount of
deferred tax recognised will also change accordingly. Prior to
recording deferred tax assets for tax losses, relevant tax law is
considered to determine the availability of the losses to offset
against the future taxable profits. The carrying values of the
deferred tax assets and liabilities are included within Note 6.
2. Segment information
The Group's operating segments are based on geographic business
units whose primary services and products relate to the delivery of
parcels and letters. These segments are evaluated regularly by the
Chief Executive's Committee and the Royal Mail plc Board - the
Chief Operating Decision Maker (CODM) as defined by IFRS 8
'Operating Segments' - in deciding how to allocate resources and
assess performance.
In the year, following the acquisition of the minority
shareholding (49 per cent) on 31 March 2016, Romec Limited,
previously reported in a
third operating segment in 2015-16, has been incorporated into
the UKPIL segment. This is to better reflect how the segment's
resources are managed and reported to the CODM. The 2015-16
comparative information has been restated accordingly. There has
also been a re-presentation of GBP141 million costs between
infrastructure costs and other operating costs in the Group income
statement.
Of the residual businesses previously included in the 'Other'
segment in 2015-16, the Group disposed of its 51 per cent
shareholding in NDC 2000 Limited (NDC) on 24 April 2016 and the
results of the Quadrant Catering Limited associate company do not
materially impact Group results. A loss of GBP2 million has been
recognised in the income statement for the disposal of NDC.
A key measure of segment performance is operating profit before
transformation costs (used internally for the Corporate Balanced
Scorecard). This measure of performance is disclosed on an
'adjusted' basis, a non-IFRS measure, excluding specific items and
the pension charge to cash difference adjustment (see APMs section
on page 22). This is consistent with how financial performance is
measured internally and reported to the CODM.
Segment revenues have been attributed to the respective
countries based on the primary location of the service performed.
Transfer prices between segments are set at arm's length/fair value
on the basis of charges reached through negotiation between the
relevant business units that form part of the segments. Trading
between UKPIL and GLS is not material.
Non-UK
UK operations operations Group
================ ======================================== ========== ======= ============= =============
Specific
items
and
pension
52 weeks 2017 Adjusted adjustment(1) ReportedGroup
================ ====================================== ========== ======= ============= =============
Continuing UKPIL GLS Total Total
operations GBPm GBPm GBPm GBPm GBPm
=================== ===================================== ========== ======= ============= =============
Revenue 7,658 2,118 9,776 - 9,776
People costs (4,865) (489) (5,354) (222) (5,576)
Non-people costs (2,245) (1,465) (3,710) - (3,710)
=================== ===================================== ========== ======= ============= =============
Operating profit
before
transformation
costs 548 164 712 (222) 490
Transformation
costs (137) - (137) - (137)
=================== ===================================== ========== ======= ============= =============
Operating profit
after
transformation
costs 411 164 575 (222) 353
Operating specific
items
Employee Free
Shares charge - - - (105) (105)
Legacy/other costs - - - (18) (18)
Amortisation of
intangible assets
in acquisitions - - - (11) (11)
Operating profit 411 164 575 (356) 219
Non-operating
specific items
Profit on disposal
of property,
plant and
equipment - - - 14 14
Loss on disposal
of business - - - (2) (2)
=================== ===================================== ========== ======= ============= =============
Earnings before
interest and tax 411 164 575 (344) 231
Net finance costs (13) (3) (16) - (16)
Net pension
interest
(non-operating
specific item) - - - 120 120
=================== ===================================== ========== ======= ============= =============
Profit before tax 398 161 559 (224) 335
=================== ===================================== ========== ======= ============= =============
(1) A GBP7 million credit for specific items and a GBP222
million charge for the pension charge to cash difference adjustment
relate to UKPIL. A GBP9 million charge for specific items relates
to GLS, comprising GBP10 million amortisation offset by GBP1
million profit on disposal of property, plant and equipment.
Non-UK
UK operations operations Group
=============== ================================================ ========== ======= ============= ========
Specific
items
and
pension Reported
52 weeks 2016 Adjusted adjustment(1) Group
=============== ============================================= ========== ======= ============= ========
Continuing UKPIL GLS Total Total
operations GBPm GBPm GBPm GBPm GBPm
=================== ============================================ ========== ======= ============= ========
Revenue 7,671 1,580 9,251 - 9,251
People costs (4,841) (358) (5,199) (257) (5,456)
Non-people costs (2,205) (1,105) (3,310) - (3,310)
=================== ============================================ ========== ======= ============= ========
Operating profit
before
transformation
costs 625 117 742 (257) 485
Transformation
costs (191) - (191) - (191)
=================== ============================================ ========== ======= ============= ========
Operating profit
after
transformation
costs 434 117 551 (257) 294
Operating specific
items
Employee Free
Shares charge - - - (158) (158)
Legacy/other
credit - - - 2 2
=================== ============================================ ========== ======= ============= ========
Operating profit 434 117 551 (413) 138
Non-operating
specific items
Profit on
disposal of
property,
plant and
equipment - - - 29 29
=================== ============================================ ========== ======= ============= ========
Earnings before
interest and
tax 434 117 551 (384) 167
Net finance costs (13) - (13) - (13)
Net pension
interest
(non-operating
specific item) - - - 113 113
=================== ============================================ ========== ======= ============= ========
Profit before tax 421 117 538 (271) 267
=================== ============================================ ========== ======= ============= ========
(1) Specific items and pension charge to cash difference
adjustment all relate to UKPIL.
The expenses and share of loss from associates and joint venture
below are included within operating profit before transformation
costs in the income statement.
The non-current assets below are included within non-current
assets on the balance sheet but exclude financial assets,
retirement benefit surplus and deferred tax.
Non-UK
UK operations operations
======================================= =============== =========== =====
UKPIL GLS Total
52 weeks 2017 GBPm GBPm GBPm
======================================= ============= =========== =====
Depreciation (198) (37) (235)
Amortisation of intangible assets
(mainly software)(2) (56) (21) (77)
Share of post-tax loss from associates
and joint venture (1) (1) (2)
========================================= ============= =========== =====
Non-current assets 2,199 766 2,965
========================================= ============= =========== =====
Non-UK
UK operations operations
================================== =============== =========== =====
UKPIL GLS Total
52 weeks 2016 GBPm GBPm GBPm
================================== ============= =========== =====
Depreciation (194) (30) (224)
Amortisation of intangible assets
(mainly software)(2) (39) (9) (48)
Share of post-tax profit from
associates and joint venture 1 - 1
==================================== ============= =========== =====
Non-current assets 2,125 555 2,680
==================================== ============= =========== =====
(2) Includes GBP11 million (2015-16: GBPnil) presented as an
operating specific item in the income statement.
3. Operating costs
Operating profit before transformation costs is stated after
charging the following operating costs:
52 weeks 52 weeks
2017 2016
GBPm GBPm
=============================================== ======== ========
People costs (see Note 4) (5,576) (5,456)
Distribution and conveyance costs
Charges from overseas postal administrations (356) (294)
Fuel costs (159) (172)
Operating lease costs - vehicles (17) (11)
Infrastructure costs
Depreciation and amortisation (301) (272)
=============================================== ======== ========
Depreciation of property, plant and equipment (235) (224)
Amortisation of intangible assets(1) (66) (48)
=============================================== ======== ========
(1) Excludes GBP11 million (2015-16: GBPnil) amortisation of
intangible assets in acquisitions, presented as an operating
specific item in the income statement.
Other operating costs
Post Office Limited charges (343) (342)
Inventory expensed (49) (46)
Operating lease costs - property, plant and
equipment (143) (134)
============================================ ===== =====
Research and development
During the year, the Group continued to develop products and
services within the business. An indication of the nature of the
activities performed will be provided in the Strategic Report in
the Annual Report and Financial Statements 2016-17.
Regulatory body costs
The following disclosure is relevant in understanding the extent
of costs in relation to the regulation of the Group.
52 weeks 52 weeks
2017 2016
GBPm GBPm
============================================== ======== ========
Ofcom (4) (5)
Citizens Advice/Consumer Council for Northern
Ireland (3) (3)
============================================== ======== ========
Total (7) (8)
============================================== ======== ========
Statutory audit costs
Disclosure of statutory audit costs is a requirement of the
Companies Act 2006.
52 weeks 52 weeks
2017 2016
Auditor's fees GBP000 GBP000
============================================== ======== ========
Audit of Group statutory financial statements (2,178) (1,887)
Other fees to Auditor:
Regulatory audit (122) (122)
Other assurance (44) (6)
Taxation services - (29)
Other non-audit services (342) (216)
Total (2,686) (2,260)
============================================== ======== ========
The 2016-17 fees relate to the services of the Group's appointed
auditor KPMG LLP who, in addition to the above amounts, were paid
by the respective Trustees, GBP88,000 for the audit of the Royal
Mail Pension Plan (2015-16: GBP85,000) and GBP28,000 for the audit
of the Royal Mail Defined Contribution Plan (2015-16:
GBP31,000).
4. People information
People costs
52 weeks 52 weeks
2017 2016
GBPm GBPm
================================================ ======== ========
Wages and salaries (4,371) (4,323)
================================================ ======== ========
UK-based (3,949) (4,020)
GLS (422) (303)
================================================ ======== ========
Pensions (see Note 9) (776) (768)
================================================ ======== ========
Defined benefit UK (568) (619)
Defined contribution UK (51) (45)
UK defined benefit and defined contribution
Pension Salary Exchange (PSE) (151) (99)
GLS (6) (5)
================================================ ======== ========
Social security (429) (365)
================================================ ======== ========
UK-based (368) (315)
GLS (61) (50)
================================================ ======== ========
Total people costs (5,576) (5,456)
================================================ ======== ========
Defined benefit pension plan rates:
Income statement 28.8% 29.8%
Cash flow 17.1% 17.1%
Defined contribution pension plan average rate:
Income statement and cash flow(1) 6.0% 5.7%
================================================ ======== ========
People numbers
The number of people employed during the reporting year was as
follows:
Full-time equivalents(2) Headcount
================================== ==================================
Year end Average Year end Average
============================ ================ ================ ================ ================
52 52 52 52 52 52 52 52
weeks weeks weeks weeks weeks weeks weeks weeks
2017 2016 2017 2016 2017 2016 2017 2016
============================ ======= ======= ======= ======= ======= ======= ======= =======
UKPIL 148,170 151,713 151,601 154,572 141,819 142,544 142,579 143,835
GLS - continuing operations 12,966 9,683 12,617 9,471 17,136 13,991 16,912 13,829
Total 161,136 161,396 164,218 164,043 158,955 156,535 159,491 157,664
============================ ======= ======= ======= ======= ======= ======= ======= =======
Directors' remuneration
52 weeks 52 weeks
2017 2016
GBP000 GBP000
=============================================== ======== ========
Directors' remuneration(3) (3,345) (2,830)
=============================================== ======== ========
Amounts earned under Long Term Incentive Plans
(LTIP) (400) (676)
=============================================== ======== ========
Number of Directors accruing benefits under - -
defined benefit plans
=============================================== ======== ========
Number of Directors accruing benefits under
defined contribution plans 1 1
=============================================== ======== ========
(1) Employer contribution rates are one per cent for employees
in the entry level category and seven to nine per cent for those in
the standard level category, depending on the employees' selected
contribution rate.
(2) These people numbers relate to the total number of paid
hours (including part-time, full-time and agency hours) divided by
the number of standard full-time working hours in the same
year.
(3) These amounts include any cash supplements received in lieu
of pension.
5. Net finance costs
52 weeks 52 weeks
2017 2016
GBPm GBPm
================================================== ======== ========
Unwinding of discount relating to industrial
diseases claims provision (2) (2)
Interest payable on financial liabilities (16) (14)
================================================== ======== ========
Syndicated bank loan facility
Loans and borrowings (1) -
Unused facility fees (2) (2)
Arrangement fees (1) (2)
EUR500 million bond - 2.375% Senior Fixed Rate
Notes due July 2024 (11) (9)
Finance leases (4) (5)
Capitalisation of borrowing costs on specific
qualifying assets 4 4
Other finance costs (1) -
================================================== ======== ========
Finance costs (18) (16)
================================================== ======== ========
Finance income - interest receivable on financial
assets 2 3
================================================== ======== ========
Net finance costs (16) (13)
================================================== ======== ========
6. Taxation
52 weeks 52 weeks
2017 2016
GBPm GBPm
---------------------------------------------------- -------- --------
Tax (charged)/credited in the income statement
Current income tax:
Current UK income tax charge (16) (16)
Foreign tax (45) (35)
---------------------------------------------------- -------- --------
Current income tax charge (61) (51)
Amounts overprovided in previous years 1 1
---------------------------------------------------- -------- --------
Total current income tax charge (60) (50)
Deferred income tax:
Effect of change in tax rates 9 6
Relating to origination and reversal of temporary
differences (20) (17)
Amounts overprovided in previous years 9 11
---------------------------------------------------- -------- --------
Total deferred income tax charge (2) -
---------------------------------------------------- -------- --------
Tax charge in the consolidated income statement (62) (50)
---------------------------------------------------- -------- --------
Tax credited/(charged) to other comprehensive
income
Current tax:
==================================================== ======== ========
Tax credit on foreign currency translation 1 -
==================================================== ======== ========
Deferred tax:
Tax (charge)/credit in relation to actuarial
gains on defined benefit pension plans (107) 49
Tax charge on revaluation of cash flow hedges (5) (3)
Tax charge on foreign currency translation (5) (2)
---------------------------------------------------- -------- --------
Total deferred income tax (charge)/credit (117) 44
---------------------------------------------------- -------- --------
Total (charge)/credit in the consolidated statement
of other comprehensive income (116) 44
---------------------------------------------------- -------- --------
Reconciliation of the total tax charge
A reconciliation of the tax charge in the income statement and
the UK rate of corporation tax applied to accounting profit for the
52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016 is
shown below.
52 weeks 52 weeks
2017 2016
GBPm GBPm
---------------------------------------------------------- -------- --------
Profit before tax(1) 335 298
---------------------------------------------------------- -------- --------
At UK standard rate of corporation tax of 20%
(2015-16: 20%) (67) (60)
Effect of higher taxes on overseas earnings (9) (10)
Tax overprovided in previous years 10 12
Non-deductible expenses (5) (6)
Associates' profit after tax charge (included
in Group pre-tax profit) - 1
Tax effect of property disposals 5 7
Net increase in tax charge resulting from non-recognition
of deferred tax assets and liabilities (5) -
Effect of change in tax rates 9 6
---------------------------------------------------------- -------- --------
Tax charge in the income statement(2) (62) (50)
---------------------------------------------------------- -------- --------
Tax on specific items
52 weeks 52 weeks
2017 2016
GBPm GBPm
-------------------------------------------- -------- --------
Continuing operations 59 72
Discontinued operations - (5)
Tax specific items - adjustments in respect
of previous years - 1
-------------------------------------------- -------- --------
Total tax credit on specific items 59 68
-------------------------------------------- -------- --------
The tax credit on specific items of GBP59 million (2015-16:
GBP68 million) includes the tax impact of property transactions and
certain tax-only adjustments, such as the impact of changes in tax
law.
Current tax
The current tax charge for the Group is mainly in respect of
GLS. UK taxable profits in 2016-17 are partially covered by a
combination of brought forward losses and capital allowance claims.
Accordingly, the current tax rate for the Group is 18 per cent
(2015-16: 17 per cent).
Effective tax rate
The effective tax rate on reported profit is 19 per cent
(2015-16: 17 per cent), comprising current tax due on reported
profits and deferred tax in relation to temporary differences. This
rate is below the UK statutory rate, principally due to changes to
tax law detailed below, tax overprovided in previous years and no
tax charge recognised in relation to property disposals(3) . The
majority of the prior year overprovision is in relation to tax
incentives in earlier years.
GLS pays tax in a number of territories, with the majority of
its profits in the reporting year to 26 March 2017 earned in
territories where the tax rate is above the UK statutory tax rate.
Certain subsidiaries, notably GLS France, continue to not recognise
deferred tax credits on losses made during the reporting year as it
is not sufficiently certain of its capacity to utilise them in the
future. These factors contribute to GLS having a higher effective
tax rate for the year than the UK statutory rate.
(1) The 2015-16 profit includes GBP31 million in respect of
discontinued operations.
(2) The 2015-16 charge includes GBP5 million in respect of
discontinued operations.
(3) No tax charge has been recognised on property disposals
included in specific items, as no tax liability would be expected
to crystallise on the grounds that, were the assets (into which the
gains have been rolled over) to be sold at their residual values,
no capital gain would arise.
Deferred tax
(Charged)/
(Charged)/ credited
Deferred tax by At credited to (Charged)/
balance sheet 28 to other credited At 26
category March income comprehensive directly Acquisition R&D March
52 weeks ended 2016 statement income to equity of subsidiaries credit 2017
26 March 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------ ---------- -------------- ---------- ---------------- ------- -------
Liabilities
Accelerated capital
allowances (1) (13) (2)4 - - - (16)
Pensions temporary
differences (565) 25 (107) - - - (647)
Employee share
schemes (25) 15 - (1) - - (11)
Intangible assets (33) 17 (3)(4) - (17) - (36)
Hedging derivatives
temporary differences 4 - (5) - - - (1)
-------------------------- ------ ---------- -------------- ---------- ---------------- ------- -------
Deferred tax liabilities (620) 44 (117) (1) (17) - (711)
-------------------------- ------ ---------- -------------- ---------- ---------------- ------- -------
Assets
Deferred capital
allowances 78 (41) - - - - 37
Provisions and
other 19 - - - 1 - 20
Losses available
for offset against
future taxable
income 63 (5) - - 4 - 62
R&D expenditure
credit - - - - - 4 4
Deferred tax assets 160 (46) - - 5 4 123
-------------------------- ------ ---------- -------------- ---------- ---------------- ------- -------
Net deferred tax
liability (460) (2) (117) (1) (12) 4 (588)
-------------------------- ------ ---------- -------------- ---------- ---------------- ------- -------
(Charged)/
(Charged)/ credited
Deferred tax by At credited to
balance sheet 30 to other At 27
category March income comprehensive March
52 weeks ended 2015 statement income 2016
27 March 2016 GBPm GBPm GBPm GBPm
------------------------- ------ ---------- -------------- -------
Liabilities
Accelerated capital
allowances (1) - - (1)
Pensions temporary
differences (667) 53 49 (565)
Employee share
schemes (48) 23 - (25)
Intangible assets (29) (2) (2)(4) (33)
----------------------------- ------ ---------- -------------- -------
Deferred tax liabilities (745) 74 47 (624)
----------------------------- ------ ---------- -------------- -------
Assets
Deferred capital
allowances 127 (49) - 78
Provisions and
other 25 (6) - 19
Losses available
for offset against
future taxable
income 82 (19) - 63
Hedging derivatives
temporary differences 7 - (3) 4
----------------------------- ------ ---------- -------------- -------
Deferred tax assets 241 (74) (3) 164
----------------------------- ------ ---------- -------------- -------
Net deferred tax
liability (504) - 44 (460)
----------------------------- ------ ---------- -------------- -------
At 26 At 27
March March
2017 2016
Deferred tax - balance sheet presentation GBPm GBPm
------------------------------------------ ------ ------
Liabilities
GLS group (50) (34)
Net UK position (553) (435)
------------------------------------------ ------ ------
Deferred tax liabilities (603) (469)
------------------------------------------ ------ ------
Assets
GLS group 15 9
Net UK position - -
------------------------------------------ ------ ------
Net deferred tax liability (588) (460)
------------------------------------------ ------ ------
(4) GBP5 million charged (2015-16: GBP2 million) to the 'Foreign
currency translation reserve'.
The deferred tax position shows an increased overall liability
in the reporting year to 26 March 2017.
This increase in the liability is primarily as a result of the
deferred tax impact of the increase in the surplus in RMPP.
The movement in pensions temporary differences credited to
'Other comprehensive income' includes a credit of GBP43 million
(2015-16: GBP48 million) relating to the change in tax law detailed
below. Additionally a charge of GBP65 million (2015-16: GBP59
million credit) has been recognised in relation to the IFRIC 14
adjustment detailed in Note 9.
GLS has deferred tax assets and liabilities in various
jurisdictions which cannot be offset against one another. The main
elements of the liability relate to goodwill and intangibles in GLS
Germany, for which the Group has already taken tax deductions, and
acquisition intangibles in relation to ASM and GSO.
At 26 March 2017, the Group had unrecognised deferred tax assets
of GBP73 million (2015-16: GBP68 million) comprising GBP68 million
(2015-16: GBP62 million) relating to tax losses of GBP259 million
(2015-16: GBP234 million), mainly in GLS, that are available for
offset against future profits if generated in the relevant GLS
companies, and GBP5 million (2015-16: GBP6 million) in relation to
GBP30 million (2015-16: GBP30 million) of UK capital losses carried
forward. The Group has not recognised these deferred tax assets on
the basis that it is not sufficiently certain of its capacity to
utilise them in the future.
The Group also has temporary differences in respect of GBP211
million (2015-16: GBP211 million) of capital losses, the tax effect
of which is GBP36 million (2015-16: GBP38 million) in respect of
assets previously qualifying for industrial buildings allowances.
Further temporary differences exist in relation to GBP212 million
(2015-16: GBP217 million) of gains for which rollover relief has
been claimed, the tax effect of which is GBP36 million (2015-16:
GBP40 million). No tax liability would be expected to crystallise
on the basis that, were the assets (into which the gains have been
rolled over) to be sold at their residual values, no capital gain
would arise.
Changes to UK corporation tax rate
Reductions in the UK corporation tax rate from 20 per cent to 19
per cent (effective from 1 April 2017) and to 17 per cent
(effective 1 April 2020) were substantively enacted on 26 October
2015 and 15 September 2016 respectively. In future, this will
reduce the Group's current tax charge accordingly. In accordance
with accounting standards, the effect of these rate reductions on
deferred tax balances has been reflected in these financial
statements, dependent upon when temporary differences are expected
to reverse.
7. Earnings per share
52 weeks 2017 52 weeks 2016
============================= =============================
Reported Specific Adjusted Reported Specific Adjusted
items(1) items(1)
===================================== ======== ========= ======== ======== ========= ========
Attributable to equity holders
of the parent Company
Profit for the year from continuing
operations (GBPmillion) 272 (165) 437 215 (198) 413
Weighted average number of
shares issued (million) 990 n/a 990 1,000 n/a 1,000
Basic earnings per share from
continuing operations (pence) 27.5 n/a 44.1 21.5 n/a 41.3
Diluted earnings per share
from continuing operations
(pence) 27.3 n/a 43.8 21.4 n/a 41.1
===================================== ======== ========= ======== ======== ========= ========
Profit for the year (GBPmillion) 272 (165) 437 241 (172) 413
Weighted average number of
shares issued (million) 990 n/a 990 1,000 n/a 1,000
Basic earnings per share (pence) 27.5 n/a 44.1 24.1 n/a 41.3
Diluted earnings per share
(pence) 27.3 n/a 43.8 24.0 n/a 41.1
===================================== ======== ========= ======== ======== ========= ========
(1) Further detail of the balances which make up the specific
items totals can be found in the Financial Review on page 16.
The diluted earnings per share for the year ended 26 March 2017
is based on a weighted average number of shares of 996,593,330
(2015-16: 1,004,792,701) to take account of the potential issue of
3,252,077 ordinary shares resulting from the Long Term Incentive
Plans (LTIP) for certain senior management and 2,923,428 ordinary
shares resulting from the the Save As You Earn (SAYE) scheme. The
9,582,175 shares held in an Employee Benefit Trust for the
settlement of options and awards to current and former employees,
are treated as treasury shares for accounting purposes. The
Company, however, does not hold any shares in treasury.
Basic and diluted earnings per share from discontinued
operations were nil pence per share (2015-16: 2.6 pence per
share).
8. Dividends
52 weeks 52 weeks 52 weeks 52 weeks
2017 2016 2017 2016
Dividends on ordinary Pence per Pence per GBPm GBPm
shares share share
======================= ========= ========= ======== ========
Final dividends paid 15.1 14.3 149 143
Interim dividends paid 7.4 7.0 73 70
======================= ========= ========= ======== ========
Total dividends paid 22.5 21.3 222 213
======================= ========= ========= ======== ========
In addition to the above dividends paid, the Directors are
proposing a final dividend for the year ending 26 March 2017 of
15.6 pence per share, equivalent to GBP156 million. This dividend
will be paid to shareholders on 28 July 2017 subject to approval at
the AGM to be held on 20 July 2017.
9. Retirement benefit plans
Summary pension information
52 weeks 52 weeks
2017 2016
GBPm GBPm
=================================================== ======== ========
Ongoing UK pension service costs
UK defined benefit plan (including administration
costs)(1) (568) (619)
UK defined contribution plan (51) (45)
UK defined benefit and defined contribution
plans' Pension Salary Exchange (PSE)(2) employer
contributions (151) (99)
=================================================== ======== ========
Total UK ongoing pension service costs (770) (763)
GLS defined contribution type plan costs (6) (5)
=================================================== ======== ========
Total Group ongoing pension service costs (776) (768)
=================================================== ======== ========
Cash flows relating to ongoing pension service
costs
UK defined benefit plan employer contributions(3) (336) (352)
Defined contribution plans' employer contributions (57) (50)
UK defined benefit and defined contribution
plans' PSE employer contributions (151) (99)
=================================================== ======== ========
Total Group cash flows relating to ongoing
pension service costs (544) (501)
=================================================== ======== ========
RMSEPP deficit correction payments (10) (10)
=================================================== ======== ========
Pension charge to cash difference adjustment (222) (257)
=================================================== ======== ========
At 26 At 27
March March
2017 2016
'000 '000
===================================== ====== ======
UK pension plans - active membership
UK defined benefit plan 88 93
UK defined contribution plan 45 42
===================================== ====== ======
Total 133 135
===================================== ====== ======
(1) These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 28.8 per cent (2015-16: 29.8 per cent)) of the increase
in the defined benefit obligation due to members earning one more
year's worth of pension benefits. They are calculated in accordance
with IAS 19 and are based on market yields (high quality corporate
bonds and inflation) at the beginning of the reporting year.
Pensions administration costs for the Royal Mail Pension Plan
(RMPP) of GBP5 million (2015-16: GBP6 million) continue to be
included within the Group's ongoing UK pension service costs.
(2) At the beginning of August 2015, PSE was introduced under
which eligible employees who are enrolled into PSE opt out of
making employee contributions to their pension and the Group makes
additional contributions in return for a reduction in basic pay. As
a result, there is a decrease in wages and salaries and a
corresponding increase in pension costs of GBP151 million (2015-16:
GBP99 million) in the reporting year.
(3) The employer contribution cash flow rate (17.1 per cent in
both the current and prior year) forms part of the payroll expense
and is paid into the RMPP. The contribution rate is set following
each actuarial funding valuation, usually every three years. These
actuarial valuations are required to be carried out on assumptions
determined by the Trustee and agreed by Royal Mail.
UK Defined Contribution plan
Royal Mail Group Limited, the Company's main operating
subsidiary, operates the Royal Mail Defined Contribution Plan,
which was launched in April 2009 and is open to employees who
joined the Group from 31 March 2008, following closure of the RMPP
to new members.
Ongoing UK defined contribution plan costs have increased from
GBP63 million in 2015-16 to GBP82 million (including GBP31 million
PSE costs). This is mainly due to the introduction of PSE, but also
as a result of the continued increase in plan membership and an
increase in the average employer's contribution rate from 5.7 per
cent in 2015-16 to 6.0 per cent in 2016-17.
UK Defined Benefit plans
Royal Mail Group Limited had one of the largest defined benefit
pension plans in the UK (based on membership and assets), called
the Royal Mail Pension Plan (RMPP). On 1 April 2012 (one week into
the 2012-13 reporting year) - after the granting of State Aid
approval by the European Commission to HM Government on 21 March
2012 - almost all of the historic pension liabilities and pension
assets of RMPP, built up until 31 March 2012, were transferred to a
new HM Government pension scheme, the Royal Mail Statutory Pension
Scheme (RMSPS).
On this date, RMPP was also sectionalised, with Royal Mail Group
Limited and Post Office Limited each responsible for their own
sections from 1 April 2012 onwards.
The transfer left the Royal Mail section (RM section) of the
RMPP fully funded on an actuarial basis. On this basis, using
long-term actuarial assumptions agreed at that date, it was
predicted the Company would have to make no further cash deficit
correction payments relating to the historic liabilities. All
further references in this Note to the RMPP, relate to its RM
section.
Royal Mail Pension Plan
The RMPP is funded by the payment of contributions to separate
trustee administered funds. RMPP includes sections A, B and C, each
with different terms and conditions:
-- Section A is for members (or beneficiaries of members)
who joined before 1 December 1971;
-- Section B is for members (or beneficiaries of members)
who joined on or after 1 December 1971 and before
1 April 1987, or for members of Section A who chose
to receive Section B benefits; and
-- Section C is for members (or beneficiaries of members)
who joined on or after 1 April 1987 and before 1
April 2008.
Benefits provided are based on final salary in respect of
service to 31 March 2008, and on career salary blocks for each year
of service, revalued annually, for service from 1 April 2008.
Royal Mail Pensions Trustees Limited acts as the corporate
trustee to the RMPP. Within the Trustee, there is a Trustee Board
of nine nominated Trustee Directors. The Trustee Board is supported
by an executive team of pension management professionals who
provide day-to-day plan management, advise the Trustee on its
responsibilities and ensures that decisions are fully
implemented.
The Trustee has several responsibilities. It must always act in
the best interests of all RMPP beneficiaries - including active
members, deferred members, pensioners and beneficiaries.
Specifically, it must pay all benefits as they fall due under the
Trust Deed and Rules. The Trustee is responsible for:
-- monitoring the RMPP - to help protect benefits, the
Trustee monitors the financial strength of the participating
employers;
-- investing contributions - the Trustee invest the
member and employer contributions in a mix of equities,
bonds, property and other investments including derivatives.
It holds all the contributions and investments on
behalf of the members; and
-- keeping members informed - the Trustee sends active
members an annual benefit illustration, which shows
what members can expect in the future, together with
a summary of the RMPP's annual report and accounts.
2013 Pensions Review
In June 2013, the Group began a consultation with RMPP members
on a proposal to ensure the RMPP could remain open to future
accrual, subject to certain conditions, at least until the
conclusion of the next periodic review in March 2018. Subsequently,
on 26 September 2013, the Company agreed with the RMPP Trustee to
implement a Pensions Reform with effect from 1 April 2014.
This agreement enabled the March 2012 actuarial valuation to be
concluded, and allowed the Company's regular future service
contribution rate for RMPP, expressed as a percentage of
pensionable pay, to remain at 17.1 per cent.
The RMPP's investment strategy was developed to mitigate the
largest risks - movements in interest rates and inflation rates.
This has enabled the Company to maintain its March 2018
commitment.
As part of the March 2012 actuarial valuation, the Group agreed
to pay additional contributions of up to GBP50 million a year from
April 2016 onwards if the RMPP Trustee considers these necessary to
maintain the RMPP's projected funding position in March 2019. The
RMPP Trustee has carried out its assessment of liabilities as at
March 2016 and confirmed that no payment was due for 2016-17.
Following agreement on the revised Schedule of Contributions, such
assessments will no longer be carried out.
2018 Pensions Review
In January 2017, the Company consulted RMPP members about its
proposal for the future of the RMPP. The consultation closed on 10
March 2017. Following a review of member feedback, on 13 April 2017
the Company announced that it had not found an affordable way to
keep the RMPP open in its current form after March 2018, and had
made the decision to close the RMPP(4) to future accrual on 31
March 2018.
On 8 May 2017, after the balance sheet date, agreement was
reached between the Company and the RMPP Trustee on the March 2015
actuarial valuation and a revised Schedule of Contributions.
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. The Company expects to contribute around GBP320 million and
employees around GBP110 million towards the RMPP in 2017-18.
(4) The decision was made to close Sections B and C of the RMPP
to future accrual. Section A of the Plan which has a small number
of active members remains open to future accrual.
Royal Mail Senior Executives Pension Plan (RMSEPP)
Royal Mail Group Limited also contributes to a smaller defined
benefit plan for executives, RMSEPP - which closed in December 2012
to future accrual, therefore the Group makes no regular future
service contributions. As agreed in the February 2013 Funding
Agreement with the Trustees, the Group makes deficit correction
payments of GBP10 million per annum until at least the date on
which the 2018 valuation is completed (no later than 30 September
2018). Deficit correction payments in 2016-17 were GBP10 million
(2015-16: GBP10 million). 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.
In April 2016 the RMSEPP Trustees purchased a 'buy-in' policy of
insurance in respect of pensions in payment of its oldest members.
This is considered an asset of the RMSEPP and does not confer any
rights to individual members. All benefit payments due from the
RMSEPP remain unchanged. The insurance policy exactly matches the
value and timing of the benefits payable under the RMSEPP (for the
oldest members) and the fair value is deemed to be the present
value of the related obligation. The buy-in policy valued at GBP151
million is included as a pension asset and a pension liability at
26 March 2017.
A liability of GBP2 million (2015-16: GBP2 million) has been
recognised for future payment of pension benefits to a past
Director.
Accounting and actuarial surplus position (RMPP and RMSEPP)
The combined plans' assets and liabilities are shown below.
Accounting Actuarial/cash
(IAS 19) funding
=========================================== ================ ================
At 26 At 27 At 31 At 31
March March March March
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
=========================================== ======= ======= ======= =======
Fair value of plans' assets (9(b)
below)(5) 9,847 7,374 10,066 7,442
Present value of plans' liabilities (5,992) (3,815) (8,984) (5,665)
=========================================== ======= ======= ======= =======
Surplus in plans (pre IFRIC 14 adjustment) 3,855 3,559 1,082 1,777
IFRIC 14 adjustment (16) (129) n/a n/a
=========================================== ======= ======= ======= =======
Surplus in plans 3,839 3,430 1,082 1,777
=========================================== ======= ======= ======= =======
(5) Difference between accounting and actuarial/cash funding
asset fair values arises from the different year end dates used for
the valuation of the assets under both methods.
There is no element of the present value of the plans'
liabilities above that arises from plans that are wholly
unfunded.
Accounting (IAS 19)
As the Group has a legal right to benefit from a surplus, under
IAS 19 and IFRIC 14 it is required to recognise the economic
benefit it is assumed it will derive either in the form of a
reduction to future contributions or a refund of the surplus.
In the current period, the RMPP surplus is assumed to be fully
recoverable as a reduction to future employer contributions as the
economic benefit resulting from comparing the future service costs
to the employer contributions is more than the accounting surplus.
Therefore, no IFRIC 14 adjustment is required.
Following the Company's decision to close the RMPP, after 31
March 2018 the surplus will no longer be assumed to be recoverable
as a reduction to future employer contributions. If this had been
the position at 26 March 2017, only one year of economic benefit
would be recoverable as a reduction to future employer
contributions, with the remaining surplus assumed to be available
as a refund. This would result in an additional IFRIC 14 adjustment
of GBP1,176 million and a reduction in the overall 26 March 2017
pension surplus (net of IFRIC 14) from GBP3,839 million to GBP2,663
million. On this basis, the deferred tax liability in respect of
the surplus as at 26 March 2017 of GBP647 million would be reduced
to GBP85 million. It is not currently anticipated that any
curtailments will arise as a result of the closure of RMPP.
Included in the IAS 19 figures in the table above is an RMSEPP
surplus at 26 March 2017 of GBP47 million (pre IFRIC 14) (2015-16:
GBP37 million surplus).
As RMSEPP is closed to future accrual, the surplus is assumed to
be available as a refund as per IFRIC 14 and, as such, is shown net
of taxation withheld in both years.
The Directors do not believe that the current excess of pension
plan assets over the liabilities on an accounting basis will result
in an excess of pension assets on an actuarial/cash funding basis.
However, the Directors are required to account for the pension plan
based on their legal right to benefit from a surplus, using
long-term actuarial assumptions current at the reporting date, as
required by IFRS. The legal right to benefit from a surplus has not
changed as a result of the changes agreed between the Company and
Trustee on 8 May 2017.
Actuarial/cash funding
The actuarial funding surplus of the RMPP and RMSEPP is GBP1,082
million at 31 March 2017 (2015-16: GBP1,777 million surplus). The
cost of benefits being accrued to RMPP each year, based on market
conditions at the end of March 2017, would currently be GBP1,260
million. This is significantly greater than projected 2017-18
contributions of GBP320 million by the Company and GBP110 million
by employees. Accordingly we expect the actuarial surplus would be
exhausted during 2018 if the RMPP had remained open in its current
form.
The following disclosures relate to the major assumptions,
sensitivities, assets and liabilities in the RMPP and RMSEPP.
a) Major long-term assumptions used for accounting (IAS 19)
purposes - RMPP and RMSEPP
The major assumptions used to calculate the accounting position
of the pension plans are as follows:
At 26 March At 27 March
2017 2016
============================================= =========== ===========
Retail Price Index (RPI) 3.2% 3.0%
Consumer Price Index (CPI) 2.2% 2.0%
Discount rate
- nominal 2.5% 3.5%
- real (nominal less RPI)(6) (0.7)% 0.5%
Rate of increase in pensionable salaries(7) RPI-0.1% RPI-0.1%
Rate of increase for deferred pensions CPI CPI
Rate of pension increases - RMPP Sections CPI CPI
A/B
Rate of pension increases - RMPP Section RPI-0.1% RPI-0.1%
C(7)
Rate of pension increases - RMSEPP members CPI CPI
transferred from Section A or B of RMPP
Rate of pension increases - RMSEPP all other RPI-0.1% RPI-0.1%
members(7)
Life expectancy from age 60 - for a current 28/26 years 29/27 years
40/60 year old male RMPP member
Life expectancy from age 60 - for a current 31/29 years 32/30 years
40/60 year old female RMPP member
============================================= =========== ===========
(6) The real discount rate used reflects the long average
duration of the RMPP of around 30 years.
(7) The rate of increase in salaries, and the rate of pension
increase for Section C members (who joined RMPP on or after April
1987) and RMSEPP 'all other members', is capped at five per cent,
which results in the average long-term pension increase assumption
being 10 basis points lower than the RPI long-term assumption.
Mortality
The March 2017 mortality assumptions have been updated in line
with the March 2015 valuation. The RMPP assumptions are based on
the latest Self-Administered Pension Scheme (SAPS) S2 mortality
tables with appropriate scaling factors (116 per cent for male
pensioners and 109 per cent for female pensioners). Future
improvements are based on the CMI 2015 core projections with a
long-term trend of 1.5 per cent per annum.
Sensitivity analysis for RMPP liabilities
The RMPP liabilities are sensitive to changes in key
assumptions. The potential impact of the largest sensitivities on
the RMPP liabilities is as follows:
Potential
Increase
in
liabilities
Key assumption change GBPm
============================================================= ============
Additional one year of life expectancy 220
Increase in inflation rate (both RPI and CPI simultaneously)
of 0.1% p.a. 160
Decrease in discount rate of 0.1% p.a. 160
Increase in CPI assumption (assuming RPI remains
constant) of 0.1% p.a. 30
============================================================= ============
This sensitivity analysis has been determined based on a method
that assesses the impact on the defined benefit obligation,
resulting from reasonable changes in key assumptions occurring at
the end of the reporting year. Changes inverse to those in the
table (e.g. an increase in discount rate) would have the opposite
effect on liabilities. The average duration of the RMPP obligation
is 30 years (2015-16: 27 years).
b) RMPP and RMSEPP assets
At 26 March At 27 March
2017 2016
======================= ========================
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ===== ======= ======== =====
Equities
UK 22 126 148 20 138 158
Overseas 561 27 588 427 - 427
Bonds
Fixed interest - UK 306 11 317 272 7 279
- Overseas 938 14 952 793 2 795
Index linked - UK 26 151 177 191 - 191
Pooled investments
Managed funds 1,018 - 1,018 775 - 775
Unit Trusts 6,004 - 6,004 4,188 - 4,188
Property (UK) 26 317 343 25 302 327
Cash and cash equivalents 320 - 320 210 - 210
Other 5 - 5 (3) - (3)
Derivatives (25) - (25) 27 - 27
============================ ====== ======== ===== ======= ======== =====
Total plans' assets 9,201 646 9,847 6,925 449 7,374
============================ ====== ======== ===== ======= ======== =====
There were open equity derivatives within this portfolio with a
fair value of GBP1 million at 26 March 2017 (2015-16: GBP48
million). GBP5 billion (2015-16: GBP4 billion) of HM Government
Bonds are primarily included in Unit Trusts above. The plans'
assets do not include property or assets used by the Group, but do
include shares of the Royal Mail plc with an approximate market
value of GBP21,000 at 26 March 2017 (2015-16: GBP27,000).
Risk exposure and investment strategy
The investment strategy of the RMPP Trustee aims to safeguard
the assets of the Plan and to provide, together with contributions,
the financial resource from which benefits are paid. Investment is
inevitably exposed to risks. The investment risks inherent in the
investment markets are partially mitigated by pursuing a widely
diversified approach across asset classes and investment managers.
The RMPP uses derivatives (such as swaps, forwards and options) to
reduce risks whilst maintaining expected investment returns. The
RMPP Trustee recognises that there is a natural conflict between
improving the potential for positive return and limiting the
potential for poor return. The RMPP Trustee has specified
objectives for the investment policy that balance these
requirements.
The largest risks faced by the RMPP are movements in interest
rates and inflation rates. To reduce the risk of movements in these
rates driving the RMPP into a funding deficit, and the Group not
being able to maintain its March 2018 commitment, the RMPP Trustee
has hedged in advance, a significant proportion of the funding
liabilities which it is estimated will build up by March 2018. It
has done this predominantly through investment in index-linked
gilts and derivatives (interest rate and inflation rate swaps) held
in Unit Trust pooled investments providing economic exposure to
gilts. The impact of the RMPP's advance hedging of projected
funding liabilities is to increase near term volatility in the
pension surplus, due to the return on the liability-hedging assets
not being matched by an increase in the accrued liabilities.
As the accrued liabilities get closer to the projected
liabilities that have been hedged, this volatility will reduce. The
increase in the liability-hedged assets is predominantly reflected
in the Unit Trust values above which have increased from GBP4,188
million at 27 March 2016 to GBP6,004 million at 26 March 2017.
The notional value covered by the interest rate swaps (full
exposure to the relevant asset class incurred by entering into a
derivative contract) held in a specific managed portfolio for this
purpose at 26 March 2017 is GBP2.3 billion (2015-16: GBP2.6
billion) and the notional value covered by the inflation rate swaps
at 26 March 2017 is GBP1.9 billion (2015-16: GBP1.8 billion).
The equity exposure of RMPP was reduced in October 2016 by means
of a short Total Return Swap (TRS), a derivative that can be used
to reduce exposure to a particular asset class without selling the
physical assets held. TRS were introduced in order to control some
downside risk whilst broadly maintaining the existing expected
returns. The TRS economically offset GBP260 million of the Plan's
global equity exposure.
The spread of investments continues to balance security and
growth in order to pay the RMPP benefits when they become due.
In addition to holding return-seeking assets, RMSEPP holds
long-dated index linked gilts of GBP26 million (2015-16: GBP191
million) and the buy-in annuity policy of GBP151 million at 26
March 2017 (2015-16: GBPnil) to match its liabilities.
c) Movement in RMPP and RMSEPP assets, liabilities and net
position
Changes in the value of the defined benefit pension liabilities,
fair value of the plans' assets and the net defined benefit surplus
are analysed as follows:
Defined Defined Net defined
benefit benefit benefit
asset liability surplus
========================================= ============ ================ ==============
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ===== ===== ======= ======= ======= =====
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 28 March
2016 and 30 March 2015 7,374 6,619 (3,815) (3,237) 3,559 3,382
Amounts included in the income
statement
Ongoing UK defined benefit pension
plan and administration costs (included
in people costs) (5) (6) (683) (694) (688) (700)
Pension interest income/(cost)(8) 265 240 (145) (127) 120 113
========================================= ===== ===== ======= ======= ======= =====
Total included in profit before
tax 260 234 (828) (821) (568) (587)
========================================= ===== ===== ======= ======= ======= =====
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising from:
Financial assumptions - - (1,711) 102 (1,711) 102
Demographic assumptions - - 243 - 243 -
Experience assumptions - - 76 186 76 186
Return on plans' assets (excluding
interest income) 1,791 32 - - 1,791 32
========================================= ===== ===== ======= ======= ======= =====
Total remeasurement gains/(losses)
of the defined benefit surplus 1,791 32 (1,392) 288 399 320
========================================= ===== ===== ======= ======= ======= =====
Other
Employer contributions 476 488 - - 476 488
Employee contributions 6 48 (6) (48) - -
Benefits paid (55) (47) 55 47 - -
Curtailment costs - - (5) (45) (5) (45)
Movement in pension-related accruals (5) - (1) 1 (6) 1
========================================= ===== ===== ======= ======= ======= =====
Total other movements 422 489 43 (45) 465 444
========================================= ===== ===== ======= ======= ======= =====
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 26 March
2017 and
27 March 2016 9,847 7,374 (5,992) (3,815) 3,855 3,559
========================================= ===== ===== ======= ======= ======= =====
In addition to the above items which affect the net defined
benefit surplus, estimated curtailment costs of GBP4 million
(2015-16: GBP36 million) have been provided for in Transformation
costs in the income statement, along with the associated redundancy
costs.
(8) Pension interest income results from applying the plans'
discount rate at 27 March 2016 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 27 March 2016 to the plans' liabilities
at that date.
10. Acquisition of businesses
Acquisitions made in the year for a total consideration of
GBP129 million in respect of Golden State Overnight Delivery
Services Inc. (GSO), and other smaller acquisitions, Agencia
Servicios Mensajería S.A.U. (ASM) and Revisecatch Limited (trading
name eCourier), are detailed below. This information includes the
provisional fair value of the identifiable assets and liabilities
recognised as at the date of acquisition.
52 weeks ended 26
March 2017
GSO Other Total
GBPm GBPm GBPm
============================================ ====== ====== =====
Tangible assets acquired 5 4 9
Intangible assets recognised on acquisition 24 32 56
Trade and other receivables 10 21 31
Cash and cash equivalents 1 3 4
Goodwill recognised on acquisition 46 44 90
============================================ ====== ====== =====
Total assets acquired 86 104 190
Trade and other payables (9) (22) (31)
Obligations under finance leases (3) - (3)
Interest bearing loans and borrowings - (7) (7)
Tax liabilities (8) (6) (14)
Non-controlling interests - (6) (6)
============================================ ====== ====== =====
Net assets acquired 66 63 129
============================================ ====== ====== =====
Cash paid during the period 66 60 126
Deferred consideration - 3 3
============================================ ====== ====== =====
Total consideration 66 63 129
============================================ ====== ====== =====
The fair value of trade debtors is equal to the gross
contractual amounts receivable. An initial review of trade debtors
has not indicated any recoverability issues.
The intangible assets recognised at fair value on acquisition
relate to customer lists, software and brands. The goodwill of
GBP90 million arising on these acquisitions is indicative of the
acquired business knowledge of products and markets, and synergies
that are expected through the integration of services.
No material fair value adjustments have been identified in
respect of the remaining assets and liabilities acquired in the
year.
Revenue generated from these entities since the date of
acquisition is GBP139 million and the combined profit is GBP7
million, of which GBP51 million and GBP1 million relates to GSO,
respectively. If these combinations had taken place at the
beginning of the financial year, revenue generated would have been
GBP222 million and the combined profit would have been GBP11
million, of which GBP98 million and GBP3 million relates to GSO,
respectively.
The Group obtained control of GSO on 30 September 2016, through
the acquisition of 100 per cent of the company's voting equity
interest. GSO is a regional next day parcel delivery company,
operating principally in California, and was purchased as part of
GLS' careful and focused expansion outside of Europe.
There are no material non-controlling interests in relation to
these acquisitions.
11. Events after the reporting year
Acquisition of Postal Express
On 6 April 2017, GLS acquired 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 business-to-business customers across a number
of industries. The total consideration paid for 100 per cent of the
shares in Postal Express was $13.3 million (approximately GBP10.6
million).
No fair value disclosure has been made in these financial
statements as the acquisition balance sheet is still being compiled
under the terms of the purchase agreement.
Royal Mail Pension Plan (RMPP)
On 13 April 2017, the Company announced its decision to close
RMPP to future accrual on 31 March 2018.
On 8 May 2017, agreement was reached between the Company and the
RMPP Trustee on the March 2015 actuarial valuation and a revised
Schedule of Contributions.
Further details can be found in the Strategic Report in the
Annual Report and Financial Statements 2016-17 and Note 9.
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.
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.
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 The Agenda for
that one or more Growth agreement * Our Agenda for Growth agreement with the CWU provides
material developed jointly a joint commitment to improved industrial relations,
disagreements with the Communications and to resolving disputes at pace and in a way that
or disputes Workers Union (CWU) is beneficial to both employees and Royal Mail.
between represented a fundamental
the Group and change in our relationship
its with the CWU, and * A resolution process for local disputes uses trained
trade unions continues to promote mediators nominated by and representing both the CWU
could stability in industrial and the business.
result in relations.
widespread Industrial relations
localised or is an inherent * The Agenda for Growth agreement has legally binding
national risk within our protections for the workforce in respect of future
industrial business. We are job security and our employment model, but which can
action. negotiating a new be rescinded in the event of national industrial
Widespread pay deal for 2017-18 action.
localised onwards and have
or national completed a consultation
industrial on the future of
action would the Royal Mail
cause Pension Plan (RMPP).
material This, in combination
disruption with the continued
to our business pressure on costs
in the UK and and efficiencies
would in an increasingly
be likely to competitive market,
result may put additional
in an immediate strain on the stability
and potentially of our industrial
ongoing relations.
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.
Pension
arrangements
We recognise In 2013, we committed
that to keeping the * We are exploring a range of options with our people,
pension benefits RMPP open until unions and advisers regarding future pension
are important to at least March benefits. We have a clear set of affordability and
our people. 2018, subject to capital allocation criteria for assessing any future
There is a risk certain conditions. pension arrangements.
that we are The RMPP Trustee
unable put in place a
to continue to hedging strategy * The March 2015 Royal Mail Pension Plan valuation was
provide for that period agreed on 8 May 2017 with the RMPP Trustee. This is
sustainable and of accrual which based on a prudent set of assumptions, appropriate to
affordable means we will be the Company's circumstances.
pension able to meet this
arrangements commitment despite
which significant reductions * After the RMPP closes to accrual, we will continue to
are acceptable in real interest work closely with the Trustee to limit the risk of
to rates. any deficit recovery payments being required from the
our people and While the RMPP Company in future.
unions, is currently in
leading to surplus, we expect
industrial this surplus will
action. run out in 2018.
The Group is On 8 May 2017,
exposed the Company and
to financial the Trustee agreed
market the March 2015
conditions, actuarial valuation
changes and revised Schedule
in life of Contributions
expectancy following the decision
and regulatory to close the RMPP
changes to future accrual
for defined from 31 March 2018.
benefits Closing the RMPP
already accrued. now avoids an unaffordable
Benefits accrued increase in pension
in the Royal costs for the Group.
Mail As noted, the RMPP
Pension Plan is hedged against
before future interest
April 2012 have rate and inflation
been transferred rate exposures,
to Government. 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.
Efficiency
Royal Mail must We are continuing
continuously to see the positive * We have ongoing collaborative meetings with our
become impact of our cost unions to involve them in the efficiency improvements
more efficient reduction activities and growth opportunities.
and across the UK business.
flexible in This has involved
order continuous focus * We are delivering efficiencies both in and outside of
to compete on our efficiency the core operations and have over 200 projects and
effectively performance in initiatives which underpin the GBP600 million
in the letter all areas, while cumulative annualised cost avoided target.
and providing a high
parcel markets. quality service
The success of to our customers * We continue to scope additional cost saving
our through our engaged opportunities beyond 2017-18. However, the present
strategy relies workforce. trend of cost savings may not be sustainable and the
on the effective Our productivity need to deliver operational efficiencies will become
control of costs improvement is greater.
across all areas towards the upper
and the delivery range of our 2-3
of efficiency per cent target,
benefits. and we are confident
In the current that we will deliver
industrial the GBP600 million
relations cumulative annualised
environment, cost avoided target,
there is a risk previously announced.
we cannot make As we negotiate
the fundamental changes
required short to our pension
term and other terms
business as and conditions,
usual there is a risk
and/or programme that our workforce
level cost will delay the
reductions change we need.
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.
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 We expect the letters
customer sector to remain * We use continuous in depth market monitoring and
expectations, in structural decline, research to track how well we match our customers'
and in the medium term, expectations, including relative to our competitors,
changes in the driven by e-substitution and to predict volume trends.
markets and further economic
in which the uncertainty.
Group The parcels sector * We continue to invest and introduce, at pace, new and
operates, could is undergoing rapid improved products and services that: enhance
impact the change. Competition customers' online and delivery experience; expand our
demand in the UK domestic core offering to small and medium sized businesses
for our products and international and marketplace sellers; and extend our product
and services. markets continues coverage. We target investments that will extend our
There is a risk to intensify, with value chain offer and increase our presence in faster
that our product competitors offering growing areas of the parcels sector.
offerings and innovative solutions
customer that include convenient,
experience may reliable delivery * We continue to work with Amazon to provide enhanced
not and return options, propositions and high quality of service.
adequately meet and improved tracking
evolving facilities.
customer The UK has one * We promote the value of letters to customers through
expectations, or of the most developed targeting advertisers and ad agencies, using our
that we are e-commerce markets Mailmen campaign. We are also giving customers
unable in the world. Growth incentives to test new ways of using mail at a
to innovate or available in the discounted rate.
adapt addressable UK
our commercial parcels market
and continues to be * We are investing in our Mail Centre equipment to
operational impacted by Amazon's ensure we get the best out of our machinery. To help
activities activities. Capacity add value to mail and keep customers using it, we
fast enough to expansion in the invested in Mailmark(R) last year. It gives customers
respond sector continues visibility of their items in our pipeline and data on
to changes in to exert downward the effectiveness of their mailings. Around 80 per
the pressure on prices. cent of suitable letters are sent using Mailmark(R) .
market. In the parcels Further, we are planning investment to rollout
business, disintermediation barcodes to unsorted letters next year.
in online marketplaces
may divert traffic
to other carriers. * We continue to monitor developments and actively
There is a continuing promote the value of marketing mail.
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.
Economic
environment
Historically, While economic
there conditions in the * We have a challenging cost avoidance programme in
has been a UK have proved place to respond to revenue headwinds.
correlation resilient, business
between economic uncertainty before
conditions and and after the EU * Net cash investment is expected to be around GBP450
the referendum has million in 2017-18 and less than GBP500 million per
level of letter resulted in a slowdown annum going forward.
and parcel in marketing activity.
volumes. We continue to
Flat or adverse monitor the broader * In the event of an economic shock, we are able to
economic long term economic reduce investment over the short term to protect the
conditions impact on the UK cash and indebtedness position of the business.
could impact our economy.
ability to Economic growth
maintain in the Eurozone
and grow remains fragile.
revenue, Low growth or recession
either by in Europe could
reducing impact our international
volumes or parcel volumes,
encouraging including those
customers to handled by GLS.
adopt
cheaper service
options for
sending
letters and
parcels.
Growing in new
areas
New
Our success in Royal Mail Group
growing is well positioned * Our acquisitions are primarily delivered through a
in new areas of to grow in new targeted and focused expansion of GLS' geographic
business is markets through footprint, investing behind a proven operating model
dependent its subsidiary, with a track record of identification, integration
on such factors GLS. It has a replicable and optimisation of acquisitions over many years.
as our continued and scalable business
ability to model founded on
identify the development * We are also developing partnerships with retailers
new profitable of strong regional and network partners to stimulate cross-border
and businesses. volumes between the UK and Asia, as well as working
sustainable Through increasing with China Post to provide Chinese and UK customers
areas its footprint and with faster delivery and tracking services.
of business, focusing on growth
implementing opportunities in
appropriate the deferred parcels * We also have a number of small scale initiatives to
investments, space, with selective seek new revenues which leverage our existing assets.
and having in growth in the B2C
place parcels market,
suitable GLS is well positioned
structures to support Royal
to support Mail Group's overall
continued strategy.
transformation
of
the business.
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 Ofcom concluded We are continuing
fragile. The its Fundamental to lobby BEIS and
regulatory Review of the Regulation Ofcom to tackle emerging
system applies of Royal Mail (FRR) issues of USO sustainability.
constraints in March 2017. We are arguing for
to Royal Mail's It did not re-introduce fundamental changes
ability to price controls in the regulatory
compete or add binding environment including:
for traffic to efficiency targets. * greater focus on sustainability, rather than on
support However, it has competition issues, including through the prompt
the costs of the not taken forward introduction of a proactive sustainability framework;
Universal our proposal for
Service a proactive sustainability
network. It framework. It has * procedural fairness issues and enforcement;
imposes also not taken
operational forward the opportunity
requirements to raise consumer * a material decrease in the significant regulatory
not applied protection standards burden; and
generally across the industry.
to the industry. In terms of follow-up
These may impact consultations, * a level playing field across the whole industry,
our revenues and Ofcom is consulting including higher consumer protection standards in
our ability to on a new regulatory parcels.
compete reporting framework
in the highly to reflect the
competitive outcome of its We will engage fully
sectors in which FRR. It is also with Ofcom's regulatory
we operate. This planning on conducting reporting review,
could ultimately a cost allocation to ensure a more targeted
impact our review. This will regime that reduces
ability review the allocation the regulatory burden.
to deliver the of Royal Mail's
Universal delivery costs
Service on a between parcels
sustainable and letters.
basis.
Competition Act
investigation
In January 2014, Royal Mail is refuting
Royal Mail all of the allegations. * We have robustly defended our conduct in both written
issued Ofcom has stated and oral representations to Ofcom.
Contract Change that their final
Notices (CCNs) decision is likely
under to be made in 2017-18. * This reflects our belief that the 2014 CCNs under
the terms of the investigation, which were never implemented and have
access contract now been withdrawn, were fully compliant with
regime. competition law.
In February
2014,
Ofcom announced * We will continue to defend our case.
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 Recent case law
and regulations has suggested that, * We continue to monitor developments in case law
relating to in some circumstances, relating to the application of the Working Time
employment regular overtime Directive in respect of holiday pay calculations.
(including the and commission Based on our estimates of the potential financial
interpretation payments should impact, we believe that we have made sufficient
and enforcement form part of holiday provision for any historic liabilities that may
of those laws pay calculations. arise.
and The legal position
regulations) remains unclear
could, as case law is * We liaise with the CBI, HMRC and HM Treasury to
directly or still evolving influence employment tax developments and minimise
indirectly, in this area. We the impacts for Royal Mail as far as possible.
increase the have commenced
Group's discussions with
labour costs. the trade union
Given about the application
the size of the of holiday pay
Group's for part timers
workforce, but anticipate
this could have that this still
an adverse will take some
effect time to implement.
on the Group. 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
GBP20 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.
Other
Cyber security
We are subject While no material
to losses related * As external threats become more sophisticated, and
a range of to cyber security the potential impact of service disruption increases,
regulations, breaches have been we continue to invest in cyber security. Recognising
contractual suffered, given that this risk cannot be eliminated, we have
compliance the increasing implemented significant protective measures which
obligations, and sophistication will need to be continuously enhanced in light of the
customer and evolving nature changes and threats we face.
expectations of this threat,
around the and our reliance
governance on technology and
and protection data for operational
of and strategic purposes,
various classes we consider cyber
of data. In security a principal
common risk.
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.
Attracting and
retaining
senior
management
and key
personnel
Our performance, Turnover in senior
operating and key personnel * The Group's remuneration policy sets out that the
results has been at normal overall remuneration package should be sufficiently
and future levels for the competitive to attract, retain and motivate
growth business during executives with the commercial experience to run a
depend on our the year, but this large, complex business in a highly challenging
ability remains an inherent context.
to attract and business risk.
retain
talent with the * We operate a succession planning process and have in
appropriate place talent identification and development
level programmes.
of expertise.
Related party information
This Note provides details of amounts owed to and from
related parties, which include the Royal Mail Pension
Plan (RMPP), the Group's associate companies, and payments
to key management personnel. Details of the Group's principal
subsidiaries and associates are also provided.
==============================================================
Related party transactions
During the reporting year the Group entered into transactions
with related parties as follows:
52 weeks 52 weeks
2017 2016
GBPm GBPm
==================================================== ======== ========
Sales/recharges to:
RMPP (administration and investment service
recharge) 5 5
==================================================== ======== ========
Purchases/recharges from:
Associate undertaking (Quadrant Catering Limited) (8) (11)
==================================================== ======== ========
Amounts owed to:
Associate undertaking (Quadrant Catering Limited) (1) (1)
==================================================== ======== ========
The sales to and purchases from related parties are made at
normal market prices. Balances outstanding at the year end are
unsecured, interest free and settlement is made by cash.
Key management compensation
52 weeks 52 weeks
2017 2016
GBP000 GBP000
============================= ======== ========
Short-term employee benefits (11,174) (9,809)
Post-employment benefits (44) (172)
Other long-term benefits (734) -
Share-based payments (4,102) (1,879)
============================= ======== ========
Total (16,054) (11,860)
============================= ======== ========
Key management are considered to be the Executive and
Non-Executive Directors of Royal Mail plc, all other members of the
Chief Executive's Committee (see page 52) and the remainder of the
Persons Discharging Managerial Responsibilities.
The ultimate parent and principal subsidiaries
Royal Mail plc is the ultimate parent Company of the Group. The
consolidated financial statements include the financial results of
Royal Mail Group Limited and the other principal subsidiaries
listed below. The reporting year end for these entities is 26 March
2017 unless otherwise indicated.
% equity % equity
interest interest
Company Principal activities Country of incorporation 2017 2016
======================= ======================== ========================= ========= =========
General Logistics Parcel services holding
Systems B.V.(1) company Netherlands 100 100
Royal Mail Estates
Limited Property holdings United Kingdom 100 100
Royal Mail Investments
Limited Holding company United Kingdom 100 100
Romec Limited Facilities management United Kingdom 100 51
======================= ======================== ========================= ========= =========
The Company has complied with section 410 of the Companies Act
2006 by including, in these financial statements, a schedule of
interests in all undertakings (see Note 28).
(1) GLS' reporting year end date is 31 March each year. No
adjustment is made in the financial statements in this regard on
the basis that, irrespective of the Group's reporting year end date
(last Sunday in March) a full year of GLS results is consolidated
into the Group.
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 of the Annual Report and Financial Statements 2016-17
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.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACSGMGZKMKMGNZM
(END) Dow Jones Newswires
May 25, 2017 07:04 ET (11:04 GMT)
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