TIDMRMG
RNS Number : 3522O
Royal Mail PLC
17 May 2018
FINANCIAL RESULTS
Thursday 17 May 2018
ROYAL MAIL PLC
FINANCIAL REPORT FOR THE FULL YEARED 25 MARCH 2018
Royal Mail plc (RMG.L) today announced its results for the full
year ended 25 March 2018.
Moya Greene, Chief Executive Officer, said:
"It has been another successful year, despite the challenging
environment. Group revenue is now over GBP10 billion, a significant
milestone, thanks to our geographical diversification and focus on
growth.
GLS had another strong year. Its revenue grew organically and
through targeted acquisitions in higher growth markets. Parcel
volume growth in UKPIL was our best for four years. We delivered a
resilient letters performance.
We continue to focus on cost avoidance and parcel revenue growth
in the UK and through GLS. The good cash generation characteristics
of our business will support our progressive dividend policy."
FINANCIAL AND OPERATING PERFORMANCE SUMMARY
Group financial summary(1)
52 weeks 52 weeks
ended ended
25 March 26 March Underlying
Reported results (GBPm) 2018 2017 change(2)
======================================= ========= ========= ==========
Revenue 10,172 9,776 2%
Operating profit before transformation
costs 236 490
Operating profit after transformation
costs 123 353
Profit before tax 212 335
Basic earnings per share - continuing
operations (pence) 25.9p 27.5p
Proposed full year dividend per share
(pence) 24.0p 23.0p 4%
======================================= ========= ========= ==========
Adjusted results (GBPm)
======================================= ========= ========= ==========
Revenue 10,172 9,776 2%
Operating profit before transformation
costs 694 712 1%
Operating profit after transformation
costs 581 575 6%
Margin 5.7% 5.9% 20bps
Profit before tax 565 559
Basic earnings per share (pence) 45.5p 44.1p
In-year trading cash flow 545 420
Net cash/(debt) 14 (338)
======================================= ========= ========= ==========
Business units
Adjusted operating
profit before
transformation
Revenue costs
==================== ====================
52 weeks 52 weeks 52 weeks 52 weeks
ended ended ended ended
25 March 26 March Underlying 25 March 26 March
(GBPm) 2018 2017 change(2) 2018 2017
======= ========= ========= ========== ========= =========
UKPIL 7,615 7,658 flat 503 548
GLS 2,557 2,118 10% 191 164
Group 10,172 9,776 2% 694 712
======= ========= ========= ========== ========= =========
(1) Reported results are prepared in accordance with
International Financing Reporting Standards (IFRS). Adjusted
results exclude the pension charge to cash difference and specific
items, consistent with the way that financial performance is
measured by Management and reported to the Board.
(2) Movements are presented on an underlying basis. For further
details of reported results, adjusted and underlying
reconciliations to the closest IFRS measures where appropriate, see
section entitled 'Presentation of Results and Alternative
Performance Measures (APMs)'.
Group performance(1,2)
-- Revenue up two per cent on an underlying basis, to GBP10.2
billion, driven by UKPIL and GLS parcels growth.
-- On a reported basis, operating profit before transformation costs was GBP236 million.
-- Adjusted operating profit before transformation costs was
GBP694 million, up one per cent on an underlying basis.
-- Adjusted operating profit margin after transformation costs
of 5.7 per cent increased by 20 basis points on an underlying
basis.
-- Total net cash investment was GBP445 million, down from
GBP492 million in 2016-17. In-year trading cash flow increased to
GBP545 million.
-- The Group had a net cash position of GBP14 million at 25
March 2018. This benefitted by around GBP100 million from the
timing of the 2017-18 frontline pay award.
-- The Royal Mail Pension Plan closed to future accrual in its
Defined Benefit form on 31 March 2018. A new Defined Benefit Cash
Balance Scheme was put in place from 1 April 2018. The overall
ongoing annual cash cost of pensions will continue to be around
GBP400 million.
-- The Board is recommending a final dividend of 16.3 pence per
ordinary share, giving a total dividend of 24.0 pence per share for
2017--18, up four per cent.
Business performance(1,2)
-- UKPIL revenue was unchanged. Parcel revenue grew four per
cent. Total letter revenue declined by four per cent.
-- UKPIL parcel volumes up five per cent. Addressed letter
volumes declined by five per cent, in line with expectations.
-- Underlying UKPIL operating costs before transformation costs
unchanged. Exceeded our cost avoidance target, avoiding GBP642
million over the last three financial years. Transformation costs
were GBP113 million.
-- UKPIL collections, processing and delivery productivity
improved by one per cent, outside our target range (two to three
per cent).
-- Our regulatory First Class Quality of Service performance was
91.6 per cent (target: 93 per cent). Second Class performance was
within the target range when allowing for sampling margin of error.
We are talking to Ofcom about exceptional events(3) . If taken into
account, we estimate we would have achieved our First Class target
and exceeded the Second Class one.
-- GLS performed strongly. Revenue was up 15 per cent, including
the impact of acquisitions on a constant currency basis.
-- On an underlying basis, GLS revenue grew 10 per cent. Volumes were up nine per cent.
2018-19 outlook
-- UKPIL parcel volume and revenue growth rates anticipated to
be at least the same as 2017-18.
-- Maintain outlook for addressed letter volume declines of four
to six per cent per annum (excluding election mailings) over
medium--term. Expect decline to be at higher end of range for
2018-19 due to GDPR and, or, if business uncertainty persists; may
fall outside range in a period.
-- Targeting to avoid around GBP230 million of UKPIL costs.
Productivity improvements expected to be towards the upper end of
targeted two to three per cent range. Transformation costs expected
to be at upper end of forecast GBP130-150 million range.
-- Expect continued good performance in GLS. Margins may be
impacted by continuing labour market pressures.
-- Total net cash investment expected to be around GBP500 million.
-- Remain committed to progressive dividend policy going forwards.
(3) These factors included a challenging industrial relations
environment, some very severe weather, Cyber Week and Australian
flu. It will be for Ofcom to decide.
For further information, please contact:
Investor Relations:
Catherine Nash
Phone: 020 7449 8183
Email: investorrelations@royalmail.com
Media:
Beth Longcroft
Phone: 07435 768 549
Email: beth.longcroft@royalmail.com
Peter Tilley
Phone: 020 7449 8247
Email: peter.tilley@royalmail.com
Company Secretary:
Kulbinder Dosanjh
Phone: 020 7449 8133
Email: cosec@royalmail.com
Results presentation:
A results presentation for analysts and institutional investors
will be held in London at 9:30am on 17 May 2018 and a simultaneous
webcast will be available at www.royalmailgroup.com/results.
A trading update covering the three months ending 24 June 2018
is expected to be issued on 17 July 2018.
Registered Office:
Royal Mail plc
100 Victoria Embankment
London EC4Y 0HQ
Registered in England and Wales
Company number 08680755
LEI 213800TCZZU84G8Z2M70
CHIEF EXECUTIVE OFFICER'S REVIEW
Our performance
We are the UK's number one delivery company for letters and
parcels. UKPIL revenue was flat. This was due to a good performance
in UKPIL parcels, where revenue was up four per cent; letter
revenue declined by four per cent. Parcels growth was primarily
driven by Royal Mail domestic account parcel volumes (excluding
Amazon, they were up four per cent) and international import parcel
volumes. Addressed letter volumes (excluding political parties'
election mailings) declined by five per cent, in line with our
forecast range.
GLS revenue increased by 15 per cent, including the impact of
acquisitions, on a constant currency basis in the year. It rose by
10 per cent on an underlying basis. Volumes were up nine per cent.
GLS now accounts for 33 per cent of the Group's adjusted operating
profit after transformation costs, up from 29 per cent in
2016-17.
Winning in parcels
Competitive landscape
The UK is Europe's most competitive parcels market, with 15 key
competitors. Consumers are spending more online per head than in
any other major market, including the US and China(1) . Pure play
e-retailers (those that trade online only) are now the leading
drivers of market growth. They overtook online retailers with a
store presence for the first time in 2016(2) .
As the Universal Service Provider, we provide the delivery
backbone for e-commerce in the UK. We have 53 per cent of total
market share by volume, in an addressable market growing at around
three per cent per annum(3) . Our strategy of targeting faster
growing sectors - like clothing and footwear - and winning and
retaining volumes is paying off. This year, we delivered our
biggest parcel volume growth since privatisation. Royal Mail
Tracked 24(R) /48(R) and Tracked Returns(R) growth is ahead of the
market by some distance.
E-commerce is also fuelling international growth. The largest
European B2C parcels markets outside the UK are Germany, Italy and
France - GLS' largest markets. Having recently expanded its
international FlexDeliveryService across 20 European countries, GLS
is well placed to capitalise on opportunities for growth,
particularly in cross-border parcels.
Our progress
Winning business with UK's leading e-retailers
More barcoding and delivery confirmation on UK parcels
Expanding our parcels automation programme
Strong performance from GLS
Our service and product developments are designed to meet
customer demand for faster delivery and more tracking information.
We won a number of new contracts with large customers in our target
sectors of clothing and footwear. They include New Look and
Inditex. We also secured more business from existing customers.
This includes growing the share of revenue generated by our largest
account customers. Parcelforce Worldwide volumes were up two per
cent, driven by new contract wins and existing customer
relationships.
Over 70 per cent of Royal Mail parcels now carry a barcode. In
April 2017, we began offering delivery confirmation for the
majority of those barcoded parcels. We introduced new automated
parcel sorting machines at our Chelmsford, Home Counties North,
Greenford and Warrington Mail Centres, following the successful
installation of a parcel sorting machine at our Swindon Mail Centre
in the prior year. They enable quicker and more accurate scanning
and sortation. Preparations are underway for our sixth machine in
the South Midlands Mail Centre. Automation serves to complement and
enhance; it does not replace our existing parcel sortation
processes.
Our International business performed well. This was driven by
growth in cross-border parcels, mainly from Asia into Europe. It
accounts for 20 per cent of UKPIL parcel volumes and 18 per cent of
revenue. In exports, we are focusing on major e-commerce retailers.
We are also upgrading our processing automation at our Heathrow
hub. It is helping to improve quality of service and reduce
cost.
While negotiations are ongoing and the future UK-EU relationship
remains unclear, it is not possible to predict with any degree of
accuracy what impact Brexit could have on Royal Mail Group. The
main issues for us relate to any potential economic downturn, and
changes associated with customs and VAT processing. We are working
closely with Government on alternative models for customs and tax
collection after the UK leaves the EU. We were pleased that the UK
Government explicitly referenced Royal Mail's role in its recent
Customs Bill White Paper.
GLS revenue growth was achieved in almost all its markets.
Volume growth was driven by both international and domestic
parcels. We won more new business and new traffic from existing
customers.
(1) Ofcom International Communications Market report, December
2017.
(2) Mintel online retailing report, July 2017.
(3) Excludes Amazon Logistics and other retailers' own delivery
networks.
GLS is a growth engine for the Group. It has delivered
consistent, strong underlying growth. This is driven by its focus
on B2B parcels and the premium B2C market. Its recent acquisitions
in the western US and Spain have helped further establish GLS as a
major player in and outside Europe. It now operates in 41 European
countries and seven US states. Its largest markets - Germany, Italy
and France - account for 60 per cent of GLS revenue. In Italy, GLS
is now within the top three players in the market. In Germany and
France, it is in the top five.
Defending letters
Resilient performance in UK letters
Maximising the value of letters including the rollout of
Mailmark(R)
Coordinating with the industry and our customers in the lead up
to the introduction of GDPR
Leading industry response to stop scam mail
Letters performed as expected. Addressed letter volumes
(excluding the impact of political parties' election mailings) were
down five per cent. Total letter revenue benefited from 2017
General Election mailings and declined by four per cent.
Unaddressed letter volumes (which typically have low average unit
revenue), were up six per cent. Our performance in marketing mail
was resilient. Revenue was up one per cent.
The UK continues to have a relatively high number of letters per
capita compared to other major countries. Therefore, we continue to
forecast a medium-term four to six per cent annual decline in UK
addressed letter volumes (excluding political parties' election
mailings). The decline is broadly driven by e-substitution. But,
GDP is also a material driver. We are closely monitoring the
economic environment in the UK.
We introduced a number of strategic initiatives to demonstrate
the value of letters. Our Scheme for Growth incentivises companies
to grow their direct mail. It does so by giving them discounts on
incremental volumes. We launched a Joint Industry Committee to make
the case for advertising mail. Our Keep Me Posted and MAILMEN
campaigns are gaining traction. We also commenced the rollout of
Mailmark(R) to unsorted mail. This offers customers more detail on
the progress of their mailing, and online, customised reporting. It
also ensures that we bill accurately and are fairly paid for the
work we have done. Around 90 per cent of in scope mail now has a
Mailmark(R).
Protecting customer data and treating it with respect is a key
priority for us. We have been working closely with our customers
and industry stakeholders in the lead up to the introduction of
General Data Protection Regulation (GDPR) in May 2018. We have also
outlined how mail can help our customers thrive in a GDPR
world.
Scam mail is a scourge. We launched a new initiative impounding
scam mail at distribution centres before it reaches the customer's
letterbox. This is part of our rolling programme of moves to stop
postal scammers. We have stopped three million items of scam mail
since stepping up our drive against fraudsters in November
2016.
Adding value and expanding our networks
GLS' 'scale up and grow' strategy progressing well
Expansion in Spain following targeted and focused
acquisitions
Introduction of International Tracked email notifications
service
GLS occupies a leading position in all its major markets. Its
'scale up and grow' strategy to strengthen its position in its core
markets and grow in higher growth areas is progressing well. It has
delivered strong volume growth in key markets and targeted
acquisitions in Spain and the western US.
In February 2018, GLS acquired Spanish express parcels delivery
company Redyser Transporte. Redyser will further strengthen GLS'
position as Spain's second biggest national express parcels network
following the acquisition of ASM Transporte Urgente in 2016. Since
acquiring Redyser, the focus has been on integration. This is going
well. The business is performing in line with expectations.
Following its acquisitions of GSO (2016) and Postal Express
(April 2017), GLS now provides a parcel service with full US west
coast coverage. GLS' coverage in this area enables it to offer
shorter delivery times than its competitors. This, in turn, is
helping it to win more business and benefit from growth in
interstate deliveries. We are integrating Postal Express into GSO,
with the first GLS branded vans being deployed in the region
shortly. Integration costs and inflationary pressure have
negatively impacted our operational costs and profitability in the
region in the period.
GLS is making the most of the opportunities to harness growth in
cross-border e-commerce. Its FlexDeliveryService is a great example
of this strategy in action. FlexDeliveryService makes it easier for
online shoppers to take delivery of goods purchased abroad. GLS
also now offers its international returns service,
ShopReturnService, across seven European countries.
In September 2017, we announced our International Tracked email
notifications service. This enables overseas customers of UK-based
retailers to track the progress of their parcels. The service,
initially available to customers who have a business account with
Royal Mail, has received positive initial feedback. We also now
have the capability to offer tracked cross-border outbound and
returns services to our larger customers.
Strategic focus on costs and investment
Exceeded our three year GBP600 million cost avoidance target
Extended our Collection on Delivery programme
Ongoing investment programme
Underlying UKPIL operating costs before transformation costs
were flat. We have exceeded our three year cost avoidance target.
We avoided around GBP640 million of costs, while simultaneously
delivering service and product improvements. We are disappointed to
have missed our productivity target of a two to three per cent
improvement per annum. This was driven by the challenging
industrial relations environment for much of the year, high levels
of sickness-related absence and adverse weather conditions in the
last month of the year. We continue to focus on controlling costs
and making investments in technology to drive productivity.
We are constantly looking at ways to deliver efficiency
improvements across our cost base. For example, we are extending
our Collection on Delivery programme. This is where colleagues
collect mail while they are out on delivery. Over 50,000 post boxes
are now covered by this programme. We are also reducing costs in
central functions, marketing, property and technology.
Since privatisation in 2013, we have invested over GBP1.8
billion in our UK operations. This year, we made a net cash
investment of around GBP445 million. Our ongoing investment
programme is one of the largest of its kind in the UK.
Becoming more digitally-enabled
PDA rollout complete
Parcelforce Worldwide one-hour delivery timeslot notification
and My Parcel Live
GLS app and private customer portals in Europe
Investing in technology and innovation is a core part of our
growth strategy. We completed the rollout of our Postal Digital
Assistant (PDA) technology. This technology has been used in the
rollout of estimated delivery windows for customers using our
Tracked 24(R)/48(R) service. As part of our negotiations with the
CWU during the year, we reached an agreement on the use of 'PDA
outdoor actuals'. This enables us to gain a better understanding of
our outdoor delivery and collection activities. This will help us
meet the increasing demand for new and improved services. It will
also ensure that workload is fair and balanced for our postmen and
women. We are carrying out further trials before national
rollout.
Parcelforce Worldwide is expanding its range of digital tools to
enable customers to send parcels more quickly and easily. It
launched its own app to give customers more control over their
deliveries. We also launched the Parcelforce one-hour delivery
timeslot notification and 'My Parcel Live'. A new online tool also
helps marketplace sellers' customers to link their eBay and Amazon
accounts to their Parcelforce Worldwide account. This makes it
easier and quicker to send several different parcels at once.
At GLS, comprehensive technology solutions - scanning devices
and customer tracking systems - have been employed at every stage
of the parcel process. They help customers track their parcel's
delivery status for both national and cross-border shipments. We
also launched GLS--ONE for customers in Belgium and Luxembourg.
There are plans to expand this next year. GLS-ONE offers maximum
flexibility as customers can now send a parcel using the online
portal, GLS app or one of 5,500 ParcelShops. They can either order
a pickup service from their home or workplace or receive and send
goods easily and securely using a parcel box. We also upgraded the
GLS app this year. Recipients can track the current position of a
delivery vehicle and the expected delivery window of their parcel.
GLS also carried out a Europe-wide upgrade of the scanning
terminals for incoming shipments at its depots and hubs.
Our workforce
Agreement with the Communication Workers Union
Employee engagement in line with large company average
Gender pay report shows men and women are paid broadly the
same
In February 2018, we announced our agreement in principle with
the Communication Workers Union (CWU) on pensions, pay, a shorter
working week, culture and operational changes. CWU members
overwhelmingly voted in favour of the agreement in March 2018. This
is an affordable and sustainable agreement; it enables us to
continue to innovate and grow. It puts us in a better position to
serve our customers' evolving needs. The agreement contains
commitments to work together to extend last letter delivery times
and later Latest Acceptance Times (LATs). These changes are
fundamental to our objective to be the chosen delivery partner of
e-retailers. A joint review will help us to design a more efficient
and responsive pipeline. This should enable more flexibility in our
working practices, new delivery methods that benefit the single
operational pipeline and add more value to our service for our
customers. The phased introduction of a shorter working week is
dependent on the completion of trials and the successful
implementation of a range of initiatives.
Just after the reporting period, we were also pleased to
announce that, following extended discussions and difficult
negotiations, we have reached agreement with Unite on pay, pensions
and working arrangements for junior and middle managers in Royal
Mail. Unite will ballot its members on the agreement with a
recommendation that they accept. This is a positive position to
reach and much of the agreement commits both parties to ongoing
discussion to make Royal Mail the success we all want it to
continue to be.
As previously announced, the Royal Mail Pension Plan closed to
future accrual in its previous Defined Benefit form on 31 March
2018. This step was necessary to avoid an expected increase in cash
contributions to around GBP1.2 billion per annum - an unaffordable
amount. I know how important pension benefits are to our
colleagues; I have heard from and spoken to many of them on this
subject. The pension arrangements we have put in place are a good
and fair outcome. They compare favourably with the retirement
benefits offered in our industry and by other large UK employers.
Working together with the CWU, we are lobbying Government to make
the necessary legislative and regulatory changes to enable the
introduction of a Collective Defined Contribution pension scheme.
In the meantime, from 1 April 2018, the Company has put in place
transitional arrangements. For Royal Mail Pension Plan members, we
implemented a Defined Benefit Cash Balance Scheme. Members of our
Defined Contribution Plan have also benefitted from an increased
contribution from the Company.
We saw an increase in our employee engagement score, up from 57
points to 59, which is in line with the Ipsos MORI norm for large
organisations. Engagement levels also play a part in employee
turnover. This influences training and recruitment costs. Our
employee turnover rate remained low at 7.2 per cent. This compares
well with the average UK turnover rate of 23 per cent(4) .
We were pleased - but not complacent as there is more to do -
with the results of our annual pay review. The average salaries for
male and female Royal Mail employees are broadly the same. On a
mean basis, women are paid 2.1 per cent more than men. This is
because we have a greater proportion of women in senior positions.
On a median basis, men are paid 1.5 per cent more than women. This
compares to an average UK pay gap, according to the Government, of
9.7 per cent(5) . Our difference in median pay rates is due to
males being more likely to select work that qualifies for
allowances, such as shift work during the evening or at night.
Customer focus
Mean business customer satisfaction score of 78; in line with
last year
Named global sustainability leader of the Transportation
industry group in the Dow Jones Sustainability Indices
For 2017-18, our mean business customer satisfaction score was
78, in line with our performance in 2016-17. In a recent survey
conducted by Ipsos MORI, 81 per cent of customers said they were
favourable towards Royal Mail in 2017; 88 per cent said they were
satisfied with our services. This was well above the average for
all the brands in the survey. The majority of our customers rated
us as delivering extremely or very good value for money(6) .
We were disappointed that our full year regulatory First Class
Quality of Service performance was 91.6 per cent, below our target
of delivering 93 per cent of First Class mail the next working day.
For Second Class mail delivered within three working days, our
performance of 98.4 per cent was within the 98.5 per cent annual
regulatory target range when allowing for the margin of error in
sampling.
We are talking to Ofcom about a number of exceptional events
during the year. They impacted our Quality of Service performance.
These factors included a very challenging industrial relations
environment, some very severe weather, Cyber Week falling outside
the exemption period and significantly reduced staffing levels
caused by the Australian flu outbreak. We believe that, if the
2017-18 performance was adjusted for these factors, we would have
achieved our First Class Target. We are asking Ofcom to take these
issues into consideration. It will be for Ofcom to decide.
We were disappointed that we have seen an overall increase in
complaints. This was driven principally by an increase in 'Denial
of receipt' claims. We continue to highlight the importance of
correct doorstep scanning and ensuring that if an item is left with
a neighbour, the appropriate details are written on the 'Something
for You' card.
We make the seventh biggest contribution to the UK economy of
any UK company through our high quality employment, our procurement
activities and the taxes that we pay. That is why we are delighted
to be named global sustainability leader of the Transportation
industry group in the Dow Jones Sustainability Indices.
Current trading and outlook
Trading in the first few weeks of 2018-19 has been in line with
our expectations.
The UK parcels market remains highly competitive. We anticipate
that UKPIL parcel volume and revenue growth rates in 2018-19 will
be at least the same as in 2017-18 due to the expected growth in
our tracked and international products, as well as additional
initiatives.
We maintain our outlook for addressed letter volume declines of
between four to six per cent per annum (excluding political
parties' election mailings) over the medium--term. However, due to
the potential impact of GDPR and, or, if business uncertainty
persists, we expect to be at the higher end of the range of decline
for 2018-19 and may fall outside the range in a period. In
addition, we are not expecting any benefit from political parties'
election mailings in 2018-19.
The new Pensions, Pay and Pipeline agreement provides a
framework for the next phase of transformation of our UK business
into a truly customer-focused organisation. In this first year of
the agreement we will be working with our unions and people to
implement operational changes to help retain and grow parcel
volumes and to lay the foundations for future growth and
productivity opportunities through operational trials.
Our cost avoidance programme in UKPIL is targeting to deliver
around GBP230 million costs avoided this year. This encompasses
productivity improvements towards the upper end of our targeted two
to three per cent range. Higher variable costs associated with
increasing volumes of tracked and international products are
expected to create some incremental cost pressures. Transformation
costs for the year are expected to be at the upper end of our
forecast GBP130-150 million range due to the expected productivity
improvements.
GLS has performed consistently strongly over the past few years
and we expect continued good performance in 2018-19 although
margins may be impacted by continuing labour market pressures in
many of its markets.
Total net cash investment is expected to be around GBP500
million in 2018-19, within which transformation operating
expenditure will reflect the expected productivity
improvements.
(4) Total UK turnover rate taken from
www.xperthr.co.uk/survey-analysis/labour-turnover-rates-2017/162496/
(5) Data reported by over 10,000 companies with more than 250
employees to the Government Equalities Office.
(6) Ipsos MORI Corporate Image Survey Winter 2017.
In-year trading cash flow in 2018-19 will reflect the payment of
the 2017-18 frontline pay award in the first quarter of 2018-19.
Given the good cash generation characteristics of the business we
remain committed to our progressive dividend policy going
forwards.
As in previous years, the outcome for the full year will be
dependent on our performance over the important Christmas
period.
Thank you
As you may know, we announced that the Board and I agreed that I
will retire in September 2018, and step down as CEO on 1 June 2018.
It has been my pleasure and a great privilege to serve as CEO of
this cherished UK institution. I am proud of what we have achieved
over the last eight years.
I would like to warmly congratulate Rico Back and Sue Whalley on
their new roles, as our Group CEO and CEO of Post and Parcels,
Royal Mail UK. I have had the privilege of working closely with
Rico and Sue for many years. They are the best possible team to
continue to transform our business. I am delighted that they have
both been promoted to the Board and into expanded roles.
We are pleased to have come to an agreement with the CWU during
the year. We are determined to continue to provide the best pay and
terms and conditions in our industry by some distance. Good labour
standards lead to better service standards for customers. Our
commitment to serving our customers throughout this period has
enabled our good trading performance to continue and helps to
secure a sustainable future for our people and our business.
I am honoured to have worked alongside Royal Mail's people and
the union leadership. It is their hard work and dedication that
connects households, communities and companies across the UK every
day.
Moya Greene
Chief Executive Officer
16 May 2018
FINANCIAL REVIEW
Reported results and Alternative Performance Measures (APMs)
Reported results are prepared in accordance with International
Financial Reporting Standards (IFRS). Reported results are set out
in the section entitled 'Presentation of results and Alternative
Performance Measures' and the audited Financial Statements.
In addition to reported results, the Group's performance in this
Financial Review is also explained through the use of APMs that are
not defined under IFRS. Management considers that these measures
provide a more meaningful basis on which to analyse business
performance. They are consistent with the way that financial
performance is measured by Management and reported to the
Board.
The APMs used are explained in the paragraphs entitled
'Alternative Performance Measures' and reconciliations to the
closest measure prescribed under IFRS are provided where
appropriate. The analysis of underlying movements in adjusted
results is set out in the paragraph entitled 'Underlying change
adjustments'. Commentary is provided on both reported and adjusted
results.
UK PARCELS, INTERNATIONAL & LETTERS (UKPIL)
Reported results
Reported Reported
52 weeks 52 weeks
ended ended
25 March 26 March
Summary results (GBPm) 2018 2017
============================================= ========= =========
Revenue 7,615 7,658
Operating costs (7,570) (7,332)
========= =========
Operating profit before transformation
costs 45 326
Transformation costs (113) (137)
========= =========
Operating (loss)/profit after transformation
costs (68) 189
Operating (loss)/profit margin after
transformation costs (0.9%) 2.5%
============================================= ========= =========
UKPIL reported revenue declined by GBP43 million compared with
2016-17. Operating profit before transformation costs declined to
GBP45 million, mainly due to the International Accounting Standards
(IAS) 19 pension charge. After lower transformation costs of GBP113
million, there was an operating loss after transformation costs of
GBP68 million.
Adjusted results
The adjustments made to reported results are set out in the
paragraph entitled 'Specific items and pension charge to cash
difference adjustment'. The full UKPIL reported results are set out
in the paragraph entitled 'Segmental reported results'.
Adjusted
52 weeks Adjusted
ended 52 weeks
25 March ended 26 Underlying
Summary results (GBPm) 2018 March 2017 change(1)
======================================= ========= =========== ==========
Letters and other revenue 3,051 3,234 (6%)
Marketing mail revenue 1,101 1,087 1%
========= ===========
Total letters revenue 4,152 4,321 (4%)
Parcels revenue 3,463 3,337 4%
========= ===========
Total revenue(2) 7,615 7,658 Flat
Operating costs before transformation
costs (7,112) (7,110) Flat
========= ===========
Operating profit before transformation
costs 503 548 (2%)
Transformation costs (113) (137) (17%)
========= ===========
Operating profit after transformation
costs 390 411 4%
Operating profit margin after
transformation costs 5.1% 5.4% 20bps
======================================= ========= =========== ==========
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis, taking into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS and working days and the first
year costs of the Apprenticeship Levy in UKPIL. More details are
available in the paragraph entitled 'Underlying change
adjustments'.
(2) Stamped, metered and other prepaid revenue channels are
subject to statistical sampling surveys to derive the revenue
relating to parcels, marketing mail and letters. These surveys are
subject to continuous refinement, which may over time reallocate
revenue between the products above, and which may occasionally lead
to a consequent change to this estimate.
Adjusted
52 weeks Adjusted
ended 52 weeks
25 March ended 26 Underlying
Volumes (m) 2018 March 2017 change(1)
====================== ========= =========== ==========
Letters
Addressed letters 11,269 11,922 (5%)
Unaddressed letters 3,109 2,934 6%
Parcels
Core network 1,132 1,073 6%
Parcelforce Worldwide 98 96 2%
========= ===========
Total 1,230 1,169 5%
====================== ========= =========== ==========
UKPIL delivered a resilient performance. Revenue was flat on an
underlying basis. Total parcel revenue was up four per cent,
offsetting total letter revenue which was down four per cent.
Total parcel volumes increased by five per cent on an underlying
basis. Performance in the last month of the year was impacted by
adverse weather conditions in the UK. Total parcel revenue growth
of four per cent reflects the mix in domestic and international
traffic channels.
Royal Mail domestic account parcels saw good growth. We won new
customers and gained more traffic from existing customers. Royal
Mail domestic account parcel volumes, excluding Amazon, were up
four per cent on an underlying basis. Royal Mail Tracked 24(R)
/48(R) and Tracked Returns(R) , our key e-commerce products, grew
by 28 per cent. We expect growth from these products to moderate in
2018-19 due to the strong historic performance. Amazon parcel
traffic grew strongly due to higher volumes of letterbox-sized
parcels. We continue to launch new initiatives to win more volumes.
They include providing later LATs for next day delivery.
Our international parcels business benefitted from our new
initiative to attract cross-border traffic mainly from Asia into
Europe. This accounted for around two percentage points of the
underlying parcel volume growth and around one percentage point of
the parcel revenue growth in the year, contributing GBP48 million
of revenue. We are targeting continued growth in this product as we
plan to expand the service to the US in 2018-19. We saw improved
import volumes outside our cross-border initiative, however
contract export volumes were flat due to the competitive market.
Parcelforce Worldwide volumes increased by two per cent. This was
driven by new contract wins and growth in existing customers in a
highly competitive express parcels market.
Addressed letter volumes (excluding political parties' election
mailings) declined by five per cent on an underlying basis, in line
with our expectations. Low average unit revenue (AUR) unaddressed
letter volumes were up six per cent reflecting recent initiatives
to encourage incremental volumes. Total letter revenue (including
marketing mail) decreased by four per cent, benefiting from revenue
from mailings associated with the 2017 General Election. Marketing
mail revenue, which includes redirections and our Address
Management Unit, increased by one per cent following last year's
sharp slowdown due to business uncertainty.
We are monitoring the impact of continuing business uncertainty
in the UK on letter volumes. We are also monitoring the potential
impact of the General Data Protection Regulation (GDPR), which
takes effect from 25 May 2018. This may lead to a decline in
marketing mail volumes. We maintain our medium-term outlook for an
annual decline of four to six per cent in addressed letter volumes
(excluding political parties' election mailings). However, due to
the potential impact of GDPR and, or, if business uncertainty
persists, we expect that addressed letter volume decline will be at
the higher end of the four to six per cent range in 2018-19 and may
fall outside the range in a period.
Operating costs before transformation costs
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March Underlying
(GBPm) 2018 2017 change(1)
============================== ========= ========= ==========
People costs (4,908) (4,865) Flat
Non-people costs (2,204) (2,245) (2%)
============================== ========= ========= ==========
Distribution and conveyance
costs (798) (828) (4%)
Infrastructure costs (751) (740) 1%
Other operating costs (655) (677) (3%)
============================== ========= ========= ==========
Total (7,112) (7,110) Flat
============================== ========= ========= ==========
Total adjusted operating costs before transformation costs were
flat on an underlying basis. Whilst we have seen an increase in
semi-variable costs associated with the growth in tracked and
international parcel volumes, this was largely offset by our cost
avoidance programme.
The cost avoidance programme in UKPIL was ahead of our
expectations. It delivered GBP235 million of costs avoided in the
year, comprising people costs of GBP90 million and non-people costs
of GBP145 million. We delivered benefits across a number of
initiatives during the year. They included distribution
optimisation, transformation of our IT infrastructure, management
headcount reduction, improvements in network productivity, terminal
dues revenue protection activities, lower property costs and
supplier contract renegotiations. We avoided annualised operating
costs of GBP642 million over the past three financial years, ahead
of our GBP600 million target. We are planning to avoid a further
GBP230 million of costs in 2018-19, including absorption of the
shorter working week for full-time employees covered in the new
Pensions, Pay and Pipeline agreement.
Adjusted people costs were flat on an underlying basis. The five
per cent frontline pay award effective from October 2017 was
partially offset by our cost avoidance programme activities,
largely management headcount reduction and network productivity.
The frontline pay award of GBP101 million has been accrued this
year and was paid in the first quarter of 2018-19. Bonus costs were
GBP15 million lower as we missed our annual bonus targets on
productivity, complaints and Quality of Service. Taking into
account factors including a challenging industrial relations
environment, severe weather, Cyber Week and Australian flu, we
estimate we would have achieved our First Class target and exceeded
the Second Class one. Higher volumes in Parcelforce Worldwide led
to incremental people costs.
We saw a one per cent improvement in core network productivity.
This was achieved through a 0.9 per cent reduction in core network
hours, with workload 0.1 per cent higher as the increase in parcel
volumes was partially offset by declining letter volumes.
Productivity was lower than our annual improvement target of two to
three per cent due to the industrial relations environment, high
levels of sickness-related absence and adverse weather conditions
in the second half, which drove an increase in variable hours. We
are targeting productivity improvement towards the upper end of our
two to three per cent target range in 2018-19.
The first year impact of the Apprenticeship Levy was GBP20
million, which we have excluded from underlying movements. As
previously disclosed, further changes in wage legislation such as
the Working Time Directive may also impact people costs in the
future.
Non-people costs decreased by two per cent on an underlying
basis. Distribution and conveyance costs decreased by four per
cent. This was mainly due to terminal dues GBP14 million lower as
increases of GBP6 million driven largely by volume were more than
offset by savings from revenue protection activities. Total diesel
and jet fuel costs of GBP147 million were GBP12 million lower than
the prior year due to lower pricing and improved fleet management.
We expect diesel and jet fuel costs to be broadly flat in
2018-19.
Infrastructure costs were one per cent higher on an underlying
basis. This was largely driven by a GBP36 million increase in
depreciation and amortisation from investment in IT, new vehicles
and other assets. We expect depreciation costs to increase by
around GBP10 million in 2018-19. Increased utilisation of
technology to support growth in tracked parcels led to an increase
in infrastructure costs in the year. We expect growth in tracked
parcel volumes to continue in 2018-19, driving a further increase
in IT costs of around GBP15 million. Within infrastructure costs,
the cost avoidance programme delivered benefits in property through
the integration of the Romec business, supplier contract
renegotiations and lower discretionary spend across the estate.
Other operating costs decreased by three per cent on an
underlying basis due to cost avoidance activities, including
savings on other supplier contract renegotiations and lower
marketing and discretionary spend. This more than offset an
increase in customer service costs driven by higher tracked parcel
volumes.
Transformation costs
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
===================== ========= =========
Voluntary redundancy (44) (62)
Project costs (69) (75)
Total (113) (137)
===================== ========= =========
Transformation costs of GBP113 million were below our
expectation of around GBP130 million. This was due to the
industrial relations environment, which affected the pace of change
and therefore voluntary redundancies in the year. There was a net
decrease of around 660 employees in the year largely reflecting
management headcount reductions. At the year end, full time
equivalent employees (FTEs)(3) reduced by 185 to 147,985 FTEs
reflecting the higher level of variable hours in the network to
recover from the impact of adverse weather and sickness-related
absences. Project costs largely comprised initiatives supporting
the cost avoidance programme. We continue to forecast
transformation costs of between GBP130-150 million per annum.
However, we expect transformation costs to be at the higher end of
the range in 2018-19 as we continue to drive network productivity
improvements.
Operating profit after transformation costs
Adjusted operating profit after transformation costs of GBP390
million was up four per cent on an underlying basis due to lower
transformation costs. Operating profit margin after transformation
costs was 5.1 per cent. It is up 20 basis points compared with the
prior year.
(3) FTE numbers relate to the total number of paid hours
(including part-time, full-time and agency hours) divided by the
standard full-time working hours in the same period.
GENERAL LOGISTICS SYSTEMS (GLS)
Reported results
The table below sets out a summary of the reported GLS Sterling
and Euro results. GLS results are not subject to adjustment.
Reported Reported
Year Year
ended ended
March March Underlying
Summary results (GBPm) 2018 2017 change(1)
======================= ======== ======== ==========
Revenue 2,557 2,118 10%
Operating costs (2,366) (1,954) 10%
======== ========
Operating profit 191 164 10%
Margin 7.5% 7.7% 10bps
(EURm)
======================= ======== ======== ==========
Revenue 2,899 2,521 10%
Operating costs (2,682) (2,325) 10%
======== ========
Operating profit 217 196 10%
Volumes (m) 584 508 9%
======================= ======== ======== ==========
GLS continued to perform strongly. Performance in the year was
impacted by the timing of Easter and other public holidays across
Europe. Excluding this impact, underlying revenue and volume
movements would each have been two percentage points higher.
Volumes were up nine per cent on an underlying basis, with
growth in both domestic and international volumes in most markets.
Revenue increased by 10 per cent, slightly better than volume
growth due to price and product mix improvements in several
markets. Revenue in Sterling terms benefited from a GBP106 million
impact from exchange rate movements and a GBP105 million impact
from acquisitions. These have been excluded from underlying
movements. Including the impact of acquisitions, revenue was up 15
per cent on a constant currency basis.
Revenue growth was achieved in almost all markets and from a
broad customer base. The largest customer accounted for around
three per cent of total GLS revenue. The three major markets,
Germany, Italy and France, accounted for 60 per cent of total GLS
revenue. This is down from 63 per cent in 2016-17, reflecting the
impact of recent acquisitions and growth in other GLS markets.
Reported Reported
Year Year
ended ended
March March Underlying
Operating costs (GBPm) 2018 2017 change(1)
==================================== ======== ======== ==========
People costs (608) (489) 8%
Non-people costs (1,758) (1,465) 10%
==================================== ======== ======== ==========
Distribution and conveyance costs (1,558) (1,278) 12%
Infrastructure costs (148) (128) 5%
Other operating costs (52) (59) (21%)
==================================== ======== ======== ==========
Total (2,366) (1,954) 10%
==================================== ======== ======== ==========
Total operating costs were up 10 per cent on an underlying
basis. They were broadly in line with volumes. People costs
increased by eight per cent as a result of higher semi-variable
costs linked to volumes and higher rates of pay due to wage
inflation. This was especially the case across Central and Eastern
European markets.
Distribution and conveyance costs were up 12 per cent. This was
driven by higher volumes and sub-contractor costs due to labour
market conditions in many of GLS' European markets and the US. This
included around EUR5 million due to the four per cent minimum wage
increase in Germany from 1 January 2017. We expect these trends to
persist in 2018-19, which may place pressure on operating
margins.
Infrastructure costs increased by five per cent, principally due
to the one-off provision release for IT related costs which
benefited the prior year. Other operating costs decreased by 21 per
cent, due to a one-off provision release in the year and higher
acquisition costs in the prior year.
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis, taking into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS and working days and the first
year costs of the Apprenticeship Levy in UKPIL. More details are
available in the paragraph entitled 'Underlying change
adjustments'.
Operating profit
Operating profit was GBP191 million with a margin of 7.5 per
cent, 10 basis points higher compared with 2016-17 on an underlying
basis. This was slightly better than our expectations due to a
stronger revenue performance. Operating profit in Sterling
benefited from a GBP9 million impact from exchange rate movements,
which is excluded from underlying movements.
Germany
Germany remains the largest GLS market by revenue. Revenue grew
by six per cent, driven by international volume, improved domestic
pricing, winning new customers and growing premium B2C volumes.
Italy
GLS Italy continued to perform strongly. Revenue growth of 19
per cent reflected strong B2C volume growth driven by Amazon and
other customers. Given the strong performance over the last three
years and the evolving competitive environment, it will be
challenging to maintain this rate of growth in the future.
France
In GLS France, revenue growth slowed to one per cent (2016-17:
eight per cent). It was impacted by customer losses, lower new
customer acquisitions and fewer working days. Operating losses
increased by EUR4 million to EUR12 million.
France remains a challenging market. While actions are underway
which target a break even result, higher costs of sales, including
those associated with a changing mix of parcel size, means that it
is unlikely we will achieve this in the short term. Despite the
challenges in the domestic market, GLS France continues to be
integral to the GLS network by supporting exports from other
markets into France, allowing GLS to provide a comprehensive
service across Europe.
Spain
Spain is now the fifth largest market for GLS in terms of
revenue. Revenue grew by 13 per cent on an underlying basis,
benefitting from nine months' incremental contribution from ASM.
The integration of ASM into GLS Spain is progressing well and a
number of operational activities are being streamlined. ASM has
exceeded performance expectations since acquisition due largely to
strong volume growth and higher network rationalisation
opportunities.
We announced the acquisition of Redyser Transporte in February
2018. Redyser strengthens GLS' position as Spain's second largest
national express parcels network. It predominantly serves the
express B2C parcels segment and delivers around 14 million parcels
annually. It operates through a network of over 200 agencies and
franchisees and 12 own operated sites in Spain's main cities.
Redyser generated revenue of approximately EUR45 million in the
year ended 31 December 2017 and will be consolidated within our
existing Spanish operations.
USA
We are pleased with the revenue development in Golden State
Overnight (GSO), in particular, the growth in interstate traffic.
However, profitability was impacted by local cost pressures.
On 6 April 2017, we announced the acquisition of Postal Express,
a regional overnight parcel carrier operating in the states of
Washington, Oregon and Idaho. Postal Express offers overnight
parcel delivery mainly to B2B customers across a number of
industries. GSO and Postal Express are being integrated to create
an interstate overnight parcel delivery service with full US west
coast coverage and to realise operational synergies and commercial
benefits.
Postal Express' profitability during the period was impacted by
its integration with GSO and yield management activities. These
initiatives are expected to result in improved financial
performance going forward.
Other developed European markets (including Austria, Belgium,
Denmark, Ireland, Netherlands and Portugal)
Revenue growth was achieved in the majority of the other
developed European markets. There was continued strong volume and
revenue growth in Denmark due to changing dynamics in the market,
driving higher B2C volumes. We are planning to increase the number
of ParcelShops to support our growth in this market.
Other developing/emerging European markets (including Croatia,
Czech Republic, Hungary, Poland, Romania, Slovakia and
Slovenia)
We saw revenue growth in all developing/emerging European
markets. There was strong double digit growth in Croatia, Czech
Republic, Hungary, Poland, Romania and Slovenia. We will continue
to invest in our network in these countries to take advantage of
their growing parcel markets.
GROUP RESULTS
Reported results
Summary Results
Reported Reported
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
======================================= ========= =========
Revenue 10,172 9,776
Operating costs (9,936) (9,286)
========= =========
Operating profit before transformation
costs 236 490
Transformation costs (113) (137)
========= =========
Operating profit after transformation
costs 123 353
Operating specific items (57) (134)
========= =========
Operating profit 66 219
========= =========
Non-operating specific items 71 12
Net finance costs (16) (16)
Net pension interest (non-operating
specific item) 91 120
========= =========
Profit before tax 212 335
Earnings per share (basic) 25.9p 27.5p
======================================== ========= =========
We achieved a milestone in 2017-18, delivering over GBP10
billion of Group revenue at GBP10,172 million. Group operating
costs before transformation costs increased by GBP650 million. This
was due mainly to the IAS 19 pension charge in UKPIL and
volume-related increases in GLS semi-variable costs. Operating
specific items decreased by GBP77 million (see paragraph entitled
'Specific items and pension charge to cash difference adjustment').
Group operating profit decreased by GBP153 million to GBP66 million
largely as a result of the increase to the IAS 19 pension charge.
Profit before tax decreased to GBP212 million. Of the profit, UKPIL
accounted for GBP39 million (2016-17: GBP183 million) while GLS
contributed GBP173 million (2016-17: GBP152 million). Basic
earnings per share decreased from 27.5 pence to 25.9 pence. A full
reconciliation of reported to adjusted results is set out in the
section entitled 'Presentation of results and Alternative
Performance Measures'.
Adjusted results
Group revenue
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March Underlying
(GBPm) 2018 2017 change(1)
======= ========= ========= ===========
UKPIL 7,615 7,658 Flat
GLS 2,557 2,118 10%
Total 10,172 9,776 2%
======= ========= ========= ===========
Group revenue was up two per cent. This was driven by parcels
growth in both UKPIL and GLS. Parcel revenue continued to grow as a
percentage of Group revenue and accounted for 59 per cent of Group
revenue (2016-17: 56 per cent). The main factors impacting revenue
in the year are described in the sections entitled 'UK Parcels,
International & Letters (UKPIL)' and 'General Logistics Systems
(GLS)'.
Group operating costs
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March Underlying
(GBPm) 2018 2017 change(1)
==================================== ========= ========= ===========
People costs (5,516) (5,354) 1%
Non-people costs (3,962) (3,710) 3%
==================================== ========= ========= ===========
Distribution and conveyance costs (2,356) (2,106) 6%
Infrastructure costs (899) (868) 2%
Other operating costs (707) (736) (5%)
==================================== ========= ========= ===========
Total (9,478) (9,064) 2%
==================================== ========= ========= ===========
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis. They take into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS and working days and the first
year costs of the Apprenticeship Levy in UKPIL. More details are
available in the paragraph entitled 'Underlying change
adjustments'.
Group operating costs increased by two per cent on an underlying
basis. This was mainly as a result of higher GLS semi-variable
costs linked to volumes. The main factors impacting operating costs
in the year are described in the sections entitled 'UK Parcels,
International & Letters (UKPIL)' and 'General Logistics Systems
(GLS)'.
Group operating profit before transformation costs
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
======= ========= =========
UKPIL 503 548
GLS 191 164
========= =========
Total 694 712
========= =========
Margin 6.8% 7.3%
======== ========= =========
Group operating profit after transformation costs
Adjusted Adjusted
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
======= ========= =========
UKPIL 390 411
GLS 191 164
========= =========
Total 581 575
========= =========
Margin 5.7% 5.9%
======== ========= =========
Group operating profit margin after transformation costs was up
20 basis points on an underlying basis. This was driven by lower
transformation costs in UKPIL.
Specific items and pension charge to cash difference
adjustment
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
===================================== ========= =========
Pension charge to cash difference
adjustment (within people costs) (458) (222)
Operating specific items
Employee Free Shares charge (33) (105)
Amortisation of acquired intangible
assets (16) (11)
Legacy/other credits/(costs) (8) (18)
====================================== ========= =========
Potential industrial diseases
claims 2 (6)
Personal injury provision discount
rate decrease - (4)
Other (10) (8)
====================================== ========= =========
Total operating specific items
and pensions adjustment (515) (356)
====================================== ========= =========
Non-operating specific items
Profit on disposal of property,
plant and equipment 71 14
Loss on disposal of business - (2)
Net pension interest 91 120
Total non-operating specific items 162 132
====================================== ========= =========
Total specific items and pensions
adjustment before tax (353) (224)
====================================== ========= =========
Total tax credit on specific items
and pensions adjustment 157 59
====================================== ========= =========
The IAS 19 pension charge to cash difference adjustment was
GBP458 million (2016-17: GBP222 million). The difference between
the pension charge and cash cost largely comprises the difference
between the relevant IAS 19 income statement pension charge rate of
41.1 per cent (2016-17: 28.8 per cent) and the actual cash payment
agreed with the Royal Mail Pension Plan (RMPP) Trustee of 17.1 per
cent of pensionable pay (2016-17: 17.1 per cent). As a result of
the introduction of the Defined Benefit Cash Balance Scheme (DBCBS)
from 1 April 2018, the IAS 19 pension service charge rate for
2018-19 is projected to decrease to 18.9 per cent and the cash
contribution rate will decrease to 15.6 per cent. As a result, the
pension charge to cash difference adjustment for 2018-19 is
expected to reduce significantly to around GBP90 million.
Operating specific items in the year related mainly to the
Employee Free Shares charge of GBP33 million (2016-17: GBP105
million). This decreased as a result of the Share Incentive Plan
(SIP) 2013 maturing in October 2016, partially offset by the charge
in relation to the Free Shares awarded in October 2016 (SIP 2016).
The Employee Free Shares charge is expected to be around GBP26
million for 2018-19. This reflects the phasing of the charge over
the vesting period.
Amortisation of acquired intangible assets of GBP16 million
(2016-17: GBP11 million) related mainly to the acquisitions by
GLS.
Legacy costs in the prior year were driven by a reduction in the
discount rate used to calculate the industrial diseases provision
and the legislative decrease in the discount rate used to determine
personal injury claims announced in February 2017. Other specific
items mainly related to the integration of Romec into the
Group.
Non-operating specific items included a profit on disposal of
property, plant and equipment of GBP71 million (2016-17: GBP14
million). This arose due largely to the GBP24 million overage
payment in respect of the sale of Rathbone Place in 2011, GBP22
million from the completion of the sale of the Phoenix Place plot
at Mount Pleasant and the GBP20 million overage payment in respect
of the sale of the Paddington Mail Centre in 2014. The profit on
disposal of property, plant and equipment in the prior year related
mainly to the sale of a GLS property in Munich and the Maidstone
Delivery Office. The loss on disposal of business in the prior year
related to the sale of NDC 2000 Limited (NDC) and reflected the
transfer of cash and other assets to the purchasers.
The net pension interest credit of GBP91 million (2016-17:
GBP120 million) was lower than the prior year. This was due to the
lower discount rate and lower surplus for 2017-18 compared with
2016-17. The net pension interest for 2018-19 in relation to RMPP
and RMSEPP is expected to be around GBP80 million due to the lower
pension surplus position at 25 March 2018 compared to 26 March
2017.
Net finance costs
Reported net finance costs were GBP16 million (2016-17: GBP16
million) comprising largely interest on the EUR500 million bond of
GBP11 million (2016--17: GBP11 million).
Facility Drawn Facility
Facility Rate (GBPm) (GBPm) end date
=============================== =========== ======== ======= =========
EUR500 million bond 2.5% 435 435 2024
Loans in overseas subsidiaries 1.4% 2 2 2018-23
Syndicated loan facilities LIBOR+0.55% 1,050 - 2020-22
======== =======
Total 1,487 437
=============================== =========== ======== ======= =========
The blended interest rate on gross debt, including finance
leases for 2018-19, is expected to be approximately three per cent.
The retranslation impact of the EUR500 million bond is accounted
for within equity.
Taxation
52 weeks ended 52 weeks ended
25 March 2018 26 March 2017
================== ==================
(GBPm) UK GLS Group UK GLS Group
===================== ===== ==== ===== ===== ==== =====
Reported
Profit before tax 39 173 212 183 152 335
Tax credit/(charge) 93 (47) 46 (20) (42) (62)
Effective tax rate n/a 27% n/a 11% 28% 19%
===================== ===== ==== ===== ===== ==== =====
Adjusted
Profit before tax 378 187 565 398 161 559
Tax charge (59) (52) (111) (76) (45) (121)
Effective tax rate 16% 28% 20% 19% 28% 22%
===================== ===== ==== ===== ===== ==== =====
The Group adjusted effective tax rate was 20 per cent (2016-17:
22 per cent).
The UK adjusted effective tax rate of 16 per cent (2016-17: 19
per cent) was lower than the prior year due to catch ups on patent
box claims and the reduction in the UK statutory rate from 20 per
cent to 19 per cent in 2017-18.
The GLS adjusted effective tax rate of 28 per cent (2016-17: 28
per cent) was consistent with the prior year.
The Group reported tax was a credit of GBP46 million on a
reported profit before tax of GBP212 million. This was due mainly
to the one-off deferred tax credit of GBP78 million which is a
result of the closure of the RMPP to future accrual after 31 March
2018 and profits made on the disposal of properties which, for tax
purposes, are offset by reinvestment relief.
The one-off deferred tax credit was due to the change to the
previous assumption that the surplus would be recoverable from a
reduction in contributions at some point in the future, which would
have been taxed at the corporate tax rate. It is now assumed that
the majority of the surplus will be available through a refund, net
of withholding tax. This withholding tax is a charge on the pension
scheme and recognised in the statement of comprehensive income by
application of the International Financial Reporting Interpretation
Committee (IFRIC) 14 guidance. This one-off tax credit is an
accounting adjustment with no cash benefit to the Company.
Excluding this one-off deferred tax credit, the total Group
reported tax in the income statement would change from a credit of
GBP46 million to a charge of GBP32 million.
Earnings per share (EPS)
Adjusted basic EPS for continuing operations was 45.5 pence
compared with 44.1 pence in the prior year. This largely reflected
the decrease in transformation costs.
In-year trading cash flow
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
====================================== ========= =========
EBITDA before transformation costs 577 793
Pension charge to cash difference
adjustment 458 222
========= =========
Adjusted EBITDA before transformation
costs 1,035 1,015
Trading working capital movements 74 (3)
Share-based awards (SAYE, LTIP
and DSBP) charge 6 11
Total investment (485) (529)
Income tax paid (75) (60)
Research and Development expenditure
credit 5 -
Net finance costs paid (15) (14)
Total 545 420
====================================== ========= =========
In-year trading cash flow of GBP545 million was GBP125 million
higher than the prior year. This was mainly due to the growth in
adjusted EBITDA before transformation costs, positive movements in
trading working capital and a decrease in total investment.
Trading working capital inflow of GBP74 million was GBP77
million higher than the prior year. It benefited from the timing of
the settlement of the 2017-18 frontline pay award of GBP101
million, which was paid in the first quarter of 2018-19. This was
partially offset by GBP15 million higher bonus payments relating to
2016-17 and higher terminal dues payments in the first half
associated with the growth in export volumes seen in the second
half of 2016-17.
Income tax paid was GBP15 million higher than the prior year due
to GLS tax payments.
Net cash Investment
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017(2)
============================================== ========= =========
Growth capital expenditure (224) (190)
Replacement capital expenditure (136) (197)
Transformation operating expenditure (125) (142)
============================================== ========= =========
Voluntary redundancy (56) (67)
Project costs (69) (75)
============================================== ========= =========
Total gross investment (485) (529)
Proceeds from disposal of property (excluding
London Development Portfolio), plant
and equipment 40 37
============================================== ========= =========
Total net investment (445) (492)
============================================== ========= =========
Total gross cash investment decreased by GBP44 million. Growth
capital expenditure increased by GBP34 million as a result of
continued investment in strategic projects in UKPIL and GLS. They
included operations modernisation, parcel IT systems and parcel
innovation projects. Replacement capital expenditure reduced by
GBP61 million. This was driven by the completion of the IT
transformation programme and lower property refurbishments.
Transformation operating expenditure was GBP17 million lower, due
to the industrial relations environment affecting the pace of
change and voluntary redundancies in the year.
The proceeds from disposals of property (excluding London
Development Portfolio), plant and equipment related to the GBP24
million overage for Rathbone Place, GBP14 million from the sale of
various smaller Mail Centres and Delivery Offices and GBP2 million
from the sale of vehicles. The cash payment from the GBP20 million
overage due on the sale of the Paddington Mail Centre was received
in April 2018.
(2) We have reclassified GBP18 million of growth capital
expenditure in the prior year as replacement capital expenditure
and GBP1 million of project costs as voluntary redundancy cash
payments to more accurately reflect the nature of these cash
investments.
Net cash/(debt)
The Group had a net cash position of GBP14 million at 25 March
2018. This compares with a net debt position of GBP338 million at
26 March 2017. The net cash position benefitted by GBP101 million
from the timing of the settlement of the 2017-18 frontline pay
award. This was paid in the first quarter of 2018-19.
A reconciliation of net cash/(debt) is set out in the following
table.
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
==================================== ========= =========
Net debt brought forward
at 26 March 2017 and 27 March
2016 (338) (224)
Free cash flow 562 209
====================================== ========= =========
In-year trading cash inflow 545 420
Other working capital movements (3) (6)
Cash cost of operating specific
items (12) (61)
Proceeds from disposal of
property (excluding London
Development Portfolio), plant
and equipment 40 37
Cash impact of disposal of
discontinued operations and
subsidiary - (3)
Acquisition of business interests (18) (126)
Cash flows relating to London
Development Portfolio 10 (34)
Acquisition of non-controlling
interests - (18)
====================================== ========= =========
Debt transferred on acquisitions (3) (10)
Purchase of own shares - (53)
Employee exercise of SAYE
options 28 -
Foreign currency exchange
impact (2) (30)
Increase in finance lease
obligations (non-cash) (2) -
Dividends paid to equity
holders of the parent Company (231) (222)
Dividends paid to non-controlling
interests - (8)
====================================== ========= =========
Net cash/(debt) carried forward 14 (338)
====================================== ========= =========
Movements in GLS client cash are included within other working
capital movements. The amount held at 25 March 2018 was GBP24
million (26 March 2017: GBP22 million).
The cash cost of operating specific items was an outflow of
GBP12 million due to employer National Insurance contributions on
the SIP 2013 and 2014 employee share sales, industrial disease
settlements and Romec business integration costs. The cash costs of
operating specific items in the prior year largely comprised the
French Competition Authority fine of EUR55 million paid in April
2016, as disclosed in 2015-16. Proceeds from disposal of property
(excluding London Development Portfolio), plant and equipment of
GBP40 million is explained in the paragraph entitled 'Net cash
investment'.
Cash inflow relating to the London Development Portfolio was
GBP10 million. Infrastructure and enabling works costs of GBP33
million on the Nine Elms and Mount Pleasant sites were offset by
GBP43 million of receipts in relation to the two Mount Pleasant
plots. Debt transferred on acquisitions relates to GBP3 million of
interest bearing loans and borrowings on GLS acquisitions.
The impact of foreign currency exchange rate movements reduced
compared with the prior year. The exchange rate against Sterling in
the prior year was affected by the reaction to the outcome of the
EU referendum. It has subsequently remained relatively
consistent.
The GBP53 million cash outflow in the prior year was in relation
to the Company purchasing its own shares in advance of the Save As
You Earn (SAYE) options exercised this year. Cash payments of GBP28
million were received from employees exercising their SAYE options
to purchase company shares this year.
Acquisition of business interests in the year largely related to
the acquisition of Postal Express and Redyser by GLS. The
acquisition of business interests in the prior year related to the
acquisitions of GSO and ASM by GLS and eCourier by UKPIL. The
acquisition of non-controlling interests in the prior year was
mainly in respect of the Romec business.
A reconciliation of cash flows relating to acquisitions is shown
in the following table.
52 weeks ended
(GBPm) 25 March 2018
=========================================== ==============
Postal Express (8)
Redyser (8)
=========================================== ==============
Acquisition of business interests, net
of cash acquired (see statutory cash flow
statement) (16)
Deferred consideration paid in respect
of prior years' acquisitions (2)
=========================================== ==============
Acquisition of business interests (18)
=========================================== ==============
Approach to capital management
The Group has established four key objectives for capital
management. Management proposes actions which reflect the Group's
investment plans and risk characteristics as well as the
macro-economic conditions in which we operate. The Board keeps this
policy under constant review to ensure that capital is allocated to
achieve our stated objective of delivering sustainable shareholder
value.
Objectives Enablers 2017-18 Update
====================== ========================================================== =========================
Meet the Group's Maintaining sufficient At 25 March 2018,
obligations as they cash reserves and the Group had available
fall due committed facilities resources of GBP1,650
to - million (2016-17:
* meet all obligations, including pensions; and GBP1,317 million);
made up of cash
and cash equivalents
* manage future risks, including those set out in the of GBP600 million
Principle Risks section (2016-17: GBP299
million) and undrawn
committed revolving
credit facilities
of GBP1,050 million
(2016-17: GBP1,018
million).
The Group met the
loan covenants and
other obligations
for its revolving
credit facility
and EUR500 million
bond.
As set out in the
Viability Statement,
the Directors have
a reasonable expectation
that the Group will
continue to meet
its obligations
as they fall due.
====================== ========================================================== =========================
Support a progressive Generate sufficient Generated GBP545
dividend policy in-year trading million of in-year
cash flow to cover trading cash flow
the ordinary dividend. (2016-17: GBP420
Maintain sufficient million) to cover
distributable reserves the full year dividend
to sustain the Group's of 24.0 pence per
dividend policy share (2016-17:
23.0 pence per share)
equivalent to GBP240
million. In-year
trading cash flow
benefitted by GBP101
million due to the
timing of the cash
payment of the 2017-18
frontline pay award.
Capital managed
by the Group, excluding
the net assets of
the pension scheme,
is GBP2,274 million
(2016-17: GBP1,806
million).
The Group had retained
earnings of GBP4,381
million at 25 March
2018 (2016-17: GBP4,940
million). The Group
considers it has
a maximum level
of distributable
reserves of around
GBP2 billion which
excludes the impact
of the pension surplus
on retained earnings,
more than sufficient
to cover the dividend.
====================== ========================================================== =========================
Reduce the cost Target investment During the year,
of capital for the grade standard credit the Group maintained
Group metrics i.e. no a credit rating
lower than BBB- of BBB with a stable
under Standard & outlook from Standard
Poor's rating methodology & Poor's.
====================== ========================================================== =========================
Retain sufficient Funded by retained During the year,
flexibility to invest cash flows and manageable the Group made total
in the future of levels of debt consistent gross investments
the business with our target of GBP485 million
credit rating (2016-17: GBP529
million) and acquisition
of business interests
and non-controlling
interests of GBP18
million (2016-17:
GBP144 million)
while retaining
sufficient capital
headroom.
====================== ========================================================== =========================
Pensions
Royal Mail Pension Plan (RMPP)
As previously announced, the RMPP in its previous Defined
Benefit pension form, closed to future accrual after 31 March 2018.
The legal right to benefit from any surplus in the Plan has not
changed as a result of this decision. Therefore, only one week of
economic benefit is recoverable as a reduction to future employer
contributions at 25 March 2018, with the remaining surplus assumed
to be available as a refund.
This has resulted in a change to the tax treatment of the
economic benefit of the surplus. Following guidance from IFRIC 14,
the accounting surplus has been adjusted downwards by GBP1,134
million (2016-17: GBPnil million) as a result of this change. This
represents the taxation that would be withheld on the surplus
amount.
The pre IFRIC 14 accounting surplus of the RMPP at 25 March 2018
was GBP3,250 million, comprising assets of GBP9,939 million and
liabilities of GBP6,689 million. The reduction in the pre IFRIC 14
accounting surplus of GBP558 million, compared with the position at
26 March 2017, is mainly the result of the additional benefits
accrued over the period being greater than the contributions paid
during the period. After the IFRIC 14 adjustment, the accounting
surplus of the RMPP was GBP2,116 million at 25 March 2018. This is
an accounting adjustment with no cash benefit to the company.
It was agreed between the Company and the Trustee in May 2017
that the Company would continue to contribute 17.1 per cent of
pensionable pay until 31 March 2018. It was subsequently agreed
with the Trustee that the employer contributions payable in respect
of the period 1 September 2017 to 31 March 2018 would be held in
pension escrow investments for the benefit of members.
In 2018-19, the IAS 19 pension service cost rate in respect of
members' service up to 31 March 2018 (i.e. for one week) will be
charged to the income statement at 41.0 per cent after which there
will be no further IAS 19 pension service costs or regular cash
contributions in respect of the RMPP. There will still be a pension
interest income/cost in respect of RMPP and the assets and
liabilities will still be shown on the balance sheet. The RMPP will
still be subject to triennial actuarial valuations.
The actuarial funding position at 31 March 2018 will not be
known until the actuarial valuation has been agreed between the
Trustee and the Company, with the results being very sensitive to
the assumptions adopted at that date. However, based on the rolled
forward assumptions used for the March 2015 valuation, the RMPP
actuarial surplus at 31 March 2018 was estimated to be GBP100
million (31 March 2017: GBP1,074 million). There is no cash benefit
to the Company from this current actuarial surplus. Any actuarial
surplus will remain in the RMPP for the benefit of members until
the point at which all benefits have been paid out or secured.
Royal Mail Senior Executives Pension Plan (RMSEPP)
Based on the rolled forward assumptions used for the March 2015
valuation, the RMSEPP actuarial surplus at 31 March 2018 was
estimated to be GBP36 million (31 March 2017: GBP8 million),
comprising assets of GBP479 million and liabilities of GBP443
million. The RMSEPP closed in December 2012 to future accrual and
the Company makes no regular future service contributions.
In accordance with the new Schedule of Contributions agreed for
the period 29 March 2018 to 31 March 2025, deficit payments of
GBP10 million per annum are due to be paid for the period up to 31
March 2018 resulting in a final amount of GBP1 million being paid
in 2018-19, together with GBP1 million per annum for the period 1
April 2018 to 31 March 2025 in respect of the death-in-service lump
sum benefits and administration expenses.
Transitional arrangements
Royal Mail and the CWU have agreed to work together to introduce
a Collective Defined Contribution (CDC) scheme with a Defined
Benefit Lump Sum Scheme (DBLSS) sitting alongside it, subject to
the necessary legislative and regulatory changes. This would
provide one scheme for all Royal Mail employees and would be the
first of its type in the UK. The Company has put in place
transitional arrangements from 1 April 2018 while it lobbies
Government to make the necessary legislative and regulatory changes
to enable a CDC scheme. As part of these transitional changes, the
Company has implemented a new Defined Benefit Cash Balance Scheme
(DBCBS) within the RMPP, and an improved Royal Mail Defined
Contribution Plan (RMDCP).
Defined Benefit Cash Balance Scheme (DBCBS)
RMPP members have automatically started building up DBCBS
benefits from 1 April 2018. If preferred, RMPP members can opt to
join the improved RMDCP instead of the DBCBS. Under the DBCBS, the
Company guarantees a minimum lump sum at age 65, based on Company
and member contributions. The DBCBS will aim to provide increases
to the lump sum each year, depending on investment performance.
The DBCBS will be accounted for as a defined benefit scheme and
in a similar way to the RMPP. Specifically, the assets and
liabilities that will build up from the start of the scheme will be
shown on the balance sheet. IAS 19 pension service charge rates
based on market yields of high quality corporate bonds and
inflation at the start of the year will be charged to the income
statement. Pension interest will be calculated on the assets and
liabilities at the end of 2018-19 for inclusion in the income
statement from 2019-20 onwards. The scheme will be subject to
triennial valuations.
Under the DBCBS, the Company will contribute 15.6 per cent of
DBCBS pensionable pay to the scheme. Of this, 13.6 per cent will go
to the member's guaranteed lump sum. The remaining two per cent of
the Company's contribution will go to the cost of other member
benefits, including death in service and ill-health benefits.
Members will contribute six per cent (including Pension Salary
Exchange contributions where the Group makes additional employee
pension contributions in return for a reduction in basic pay). The
IAS 19 pension service cost rate is 18.9 per cent for 2018-19. The
pension charge is greater than the cash contribution rate as there
is an assumed constructive obligation for annual pension benefit
increases of CPI plus two per cent. This means that the pension
charge to cash difference adjustment for 2018-19 is expected to
reduce significantly to around GBP90 million.
Improved Royal Mail Defined Contribution Plan (RMDCP)
Under the RMDCP, Company contributions have increased by one
percentage point in each tier, up to a maximum of ten per cent.
Current and future RMDCP members in the standard section will
contribute at the highest contribution tier unless they opt to
contribute at a lower level.
RMDCP members with a minimum of five years' service, including
four years' continuous service at the standard level of
contribution, can instead choose to join the DBCBS.
Assuming that all RMPP and eligible RMDCP members join the
DBCBS, the Company expects to contribute around GBP350 million in
the 2018-19 financial year in respect of RMPP, RMSEPP and DBCBS
with employees expected to contribute around GBP135 million. The
Company expects to contribute around GBP50 million to the RMDCP.
Total employer contributions in respect of all pension schemes
would therefore be around GBP400 million.
Collective Defined Contribution (CDC) scheme and Defined Benefit
Lump Sum Scheme (DBLSS)
Based on current intentions and legislation, the CDC will be
accounted for as a defined contribution scheme with the Group's
contributions being charged to operating profit in the year to
which the contributions relate. The CDC scheme will have fixed
employer contributions of 13.6 per cent and employee contributions
of six per cent. Investment and longevity risk will be pooled
between members and will target but not guarantee the benefit the
employee will receive in retirement. No benefit guarantees are
underwritten by the employer. The DBLSS will be accounted for as a
defined benefit scheme with the accounting treatment expected to be
similar to the transitional DBCBS.
Dividends
The final dividend of 15.6 pence per ordinary share in respect
of the 2016-17 financial year was paid on 28 July 2017, following
shareholder approval.
The interim dividend of 7.7 pence per ordinary share in respect
of the 2017-18 financial year was paid on 10 January 2018 to
shareholders on the register at the close of business on 8 December
2017.
The Board is recommending a final dividend of 16.3 pence per
ordinary share, payable on 31 August 2018 to shareholders on the
register at the close of business on 27 July 2018, subject to
shareholder approval at the AGM on 19 July 2018. This gives a total
dividend for the year of 24.0 pence.
As previously stated, given the seasonality of the Group's
business, the Board would expect to pay an interim dividend each
year equal to approximately one-third of the prior year's total
dividend and to set the final dividend for each year in light of
the full year performance of the Group in line with the progressive
dividend policy.
Financial risks and related hedging
The Group is exposed to commodity price and currency risk. The
Group operates hedging policies which are stated in the Notes to
the Annual Report and Financial Statements 2017-18. The forecast
diesel and jet commodity exposures in UKPIL are set out below
together with the sensitivity of 2018-19 operating profit to
changes in commodity prices and fuel duty.
Impact
Fuel Impact on 2018-19
duty/other Residual on 2018-19 operating
costs Underlying unhedged operating profit
(incl commodity underlying profit of a
irrecoverable exposure commodity of a further
VAT) (incl Underlying exposure further 10% increase
Forecast - not irrecoverable commodity (incl 10% increase in fuel
total hedged VAT) volume irrecoverable in commodity duty/other
cost 2018-19 2018-19 hedged VAT) price cost
2018-19 Exposure GBPm GBPm GBPm % GBPm GBPm GBPm
================= ======== ============== ============== ========== ============== ============= =============
Diesel 136 90 46 91 5 - 9
Jet fuel 8 2 6 90 1 - -
================= ======== ============== ============== ========== ============== ============= =============
Total 144 92 52 91 6 - 9
================= ======== ============== ============== ========== ============== ============= =============
As a result of hedging, it is anticipated that the diesel and
jet fuel commodity cost for 2018-19 will be GBP3 million lower.
Without hedging, the associated cost would be GBP9 million higher
(based upon closing fuel prices at 25 March 2018).
The Group is exposed to foreign currency risk due to interest
payments on the EUR500 million bond, certain obligations under Euro
denominated finance leases, trading with overseas postal
administrations and various purchase contracts denominated in
foreign currency. GLS' functional currency is the Euro which
results in translational exposure to revenue, costs and operating
profit.
The average exchange rate between Sterling and the Euro was
GBP1:EUR1.13, representing a five per cent weakening in Sterling
compared with GBP1:EUR1.19 in 2016-17. This resulted in a GBP9
million increase in GLS' reported operating profit before tax in
2017-18. The impact of foreign exchange transactions in the UK was
not material in 2017-18. The net impact on Group operating profit
before tax was GBP8 million.
The Group manages its interest rate risk through a combination
of fixed rate loans and leasing, floating rate loans/facilities and
floating rate financial investments. At 25 March 2018, all of the
gross debt of GBP606 million was at fixed rates to maturity.
Counterparty risk is managed by limiting aggregate exposure to
any individual counterparty based on their financial strength.
Property
Mount Pleasant
It was announced on 30 August 2017 that contracts had been
exchanged for the sale of 6.25 acres of Royal Mail's Mount Pleasant
site (comprising the Phoenix Place and Calthorpe Street plots) to
Taylor Wimpey UK Ltd (part of the Taylor Wimpey plc group of
companies) for a total gross consideration of GBP193.5 million. The
consideration is made up of GBP190 million in cash and the fair
value of parking facilities to be provided for Royal Mail of GBP3.5
million. The sale of the Phoenix Place plot to Taylor Wimpey UK Ltd
completed in the first half of 2017-18.
As previously disclosed, significant further investment by Royal
Mail is required for the works to separate the retained operational
site from the development plots. These works are expected to cost
around GBP100 million. They are planned to be completed by
2021.
A deposit of GBP9.5 million was paid to Royal Mail following the
exchange of contracts. We have received a further GBP33.3 million
payment in 2017--18. Cash proceeds of GBP72.2 million are to be
paid in contractually agreed staged payments over the 2018-19 to
2020-21 financial years which, in aggregate, are expected to cover
Royal Mail's outgoings on the separation and enabling works over
this period. Further proceeds of GBP75.1 million are then due in
2024 for the balance of the consideration. We are contractually
guaranteed to receive a payment of GBP20.8 million in 2018-19.
Completion on the Calthorpe Street plot is subject to completion
of the separation and enabling works expected in 2021. Completion
on the Phoenix Place plot was unconditional. A profit on disposal
of GBP22 million, based on an apportionment of the total
consideration less the book value of the plot (including an
apportionment of the total cost of the separation and enabling
works), was recognised in the period, following completion of the
sale.
Nine Elms
It was announced on 2 June 2017 that Royal Mail had exchanged
contracts for the sale of two of the seven plots at its Nine Elms
site to Greystar Real Estate Partners, LLC for GBP101 million. A
deposit of GBP3 million was paid into escrow following exchange of
contracts. The remaining GBP98 million payable is conditional on
Greystar Real Estate Partners, LLC receiving planning consent from
the London Borough of Wandsworth.
A detailed planning application has been submitted by Greystar.
Subject to the planning process and timescales, consent is expected
to be granted in 2018-19. Around GBP30 million has been committed
to be re-invested in the Nine Elms site for infrastructure works
associated with these plots. The remaining plots continue to be
marketed for sale.
Rathbone Place
Overage agreements were made with Great Portland Estates plc on
the sale of Rathbone Place in 2011. The resulting overage payment
received under these agreements was GBP24 million. This was
recorded as a profit on disposal of property in the year.
Paddington Mail Centre
Overage agreements were made with Great Western Developments
Limited on the sale of the Paddington Mail Centre in 2014. The
resulting overage payment received under these agreements was GBP20
million. This has been recorded as a profit on disposal of property
in the period, while the cash payment was received in April
2018.
PRESENTATION OF RESULTS AND ALTERNATIVE PERFORMANCE MEASURES
(APMs)
The Group uses certain Alternative Performance Measures (APMs)
in its financial reporting that are not defined under International
Financial Reporting Standards (IFRS), the Generally Accepted
Accounting Principles (GAAP) under which the Group produces its
statutory financial information. These APMs are not a substitute,
or superior to, any IFRS measures of performance. They are used as
Management considers them to be an important means of comparing
performance year-on-year and are key measures used within the
business for assessing performance.
APMs should not be considered in isolation from, or as a
substitute to, financial information presented in compliance with
GAAP. Where appropriate, reconciliations to the nearest GAAP
measure have been provided. The APMs used may not be directly
comparable with similarly titled APMs used by other companies.
Reported to Adjusted results
The Group makes adjustments to results reported under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment (see definitions in the paragraph entitled
'Alternative performance measures'). Management believes this is a
more meaningful basis upon which to analyse the business
performance (in particular given the volatile nature of the IAS 19
charge) and is consistent with the way financial performance is
reported to the Board.
IFRS can have the impact of causing high levels of volatility in
reported earnings which do not relate to changes in the operational
performance of the Company. Management has reviewed the long-term
differences between reported and adjusted profit after tax.
Cumulative reported profit after taxation for the six years ended
25 March 2018 was GBP2,890 million compared with cumulative
adjusted profit after tax of GBP2,269 million. Annual reported
profit after tax showed a range of GBP222 million to GBP1,280
million. The principal cause of the difference and volatility is
due to pension-related accounting.
Further details on specific items excluded are included in the
paragraph entitled 'Specific items and pension charge to cash
difference adjustment'. A reconciliation showing the adjustments
made between reported and adjusted group results can be found in
the paragraph entitled 'Consolidated reported and adjusted results
reconciliation'.
Underlying change
Movements compared with prior year in volumes, revenue, costs,
profits and margins are shown on an underlying basis. Underlying
movements improve comparability between periods by making
adjustments to the prior year to take into account differences in
working days in UKPIL and movements in foreign exchange in GLS. We
only adjust for items with an impact greater than GBP10 million. We
have not adjusted for transactional foreign exchange movements in
UKPIL this year as the impact of GBP1 million was below the
threshold.
In addition, adjustments are made for non-recurring or
distorting items, which by their nature may be unpredictable, such
as the first year impact of acquisitions and changes in legislation
such as the Apprenticeship Levy. For volumes, underlying movements
are adjusted for working days in UKPIL and the first year impact of
acquisitions. It also excludes political parties' election mailings
in addressed letter volume movements.
The paragraph entitled 'Underlying change adjustments' provides
further details on the adjustments we have made to the prior year
to calculate the underlying change.
Presentation of results
Consolidated reported and adjusted results reconciliation
The following table reconciles the reported results, prepared in
accordance with IFRS, to the adjusted results.
52 weeks ended 52 weeks ended
25 March 2018 26 March 2017
================================ ===============================
Specific
Specific items
items and
and pension pension
(GBPm) Reported adjustment Adjusted Reported adjustment Adjusted
============================== ======== ============ ======== ======== =========== ========
Revenue 10,172 - 10,172 9,776 - 9,776
Operating costs (9,936) (458) (9,478) (9,286) (222) (9,064)
People costs (5,974) (458) (5,516) (5,576) (222) (5,354)
Non-people costs (3,962) - (3,962) (3,710) - (3,710)
============================== ======== ============ ======== ======== =========== ========
Distribution and conveyance
costs (2,356) - (2,356) (2,106) - (2,106)
Infrastructure costs (899) - (899) (868) - (868)
Other operating costs (707) - (707) (736) - (736)
============================== ======== ============ ======== ======== =========== ========
Operating profit before
transformation costs 236 (458) 694 490 (222) 712
Transformation costs (113) - (113) (137) - (137)
============================== ======== ============ ======== ======== =========== ========
Operating profit after
transformation costs 123 (458) 581 353 (222) 575
Operating specific
items:
Employee Free Shares
charge (33) (33) - (105) (105) -
Legacy/other costs (8) (8) - (18) (18) -
Amortisation of intangible
assets in acquisitions (16) (16) - (11) (11) -
============================== ======== ============ ======== ======== =========== ========
Operating profit 66 (515) 581 219 (356) 575
Non-operating specific
items:
Profit on disposal
of property, plant
and equipment 71 71 - 14 14 -
Loss on disposal of
business - - - (2) (2) -
============================== ======== ============ ======== ======== =========== ========
Earnings before interest
and tax 137 (444) 581 231 (344) 575
Finance costs (19) - (19) (18) - (18)
Finance income 3 - 3 2 - 2
Net pension interest
(non-operating specific
item) 91 91 - 120 120 -
============================== ======== ============ ======== ======== =========== ========
Profit before tax 212 (353) 565 335 (224) 559
Tax charge 46 157 (111) (62) (59) (121)
============================== ======== ============ ======== ======== =========== ========
Profit for the period 258 (196) 454 273 (165) 438
============================== ======== ============ ======== ======== =========== ========
Profit for the period
attributable to:
Equity holders of
the parent Company 259 (196) 455 272 (165) 437
Non-controlling interests (1) - (1) 1 - 1
============================== ======== ============ ======== ======== =========== ========
Earnings per share
Basic 25.9p (19.6p) 45.5p 27.5p (16.6p) 44.1p
Diluted 25.7p (19.5p) 45.2p 27.3p (16.5p) 43.8p
============================== ======== ============ ======== ======== =========== ========
Segmental reported results
The following table presents the segmental reported results,
prepared in accordance with IFRS.
52 weeks ended 52 weeks ended
25 March 2018 26 March 2017
=================================== ===================================
UKPIL GLS UKPIL GLS
(UK (Non-UK (UK (Non-UK
(GBPm) operations) operations) Group operations) operations) Group
========================= ============ ============ ======= ============ ============ =======
Revenue 7,615 2,557 10,172 7,658 2,118 9,776
People costs (5,366) (608) (5,974) (5,087) (489) (5,576)
Non-people costs (2,204) (1,758) (3,962) (2,245) (1,465) (3,710)
========================= ============ ============ ======= ============ ============ =======
Operating profit before
transformation costs 45 191 236 326 164 490
Transformation costs (113) - (113) (137) - (137)
========================= ============ ============ ======= ============ ============ =======
Operating profit after
transformation costs (68) 191 123 189 164 353
Operating specific
items: (43) (14) (57) (124) (10) (134)
Operating profit (111) 177 66 65 154 219
Non-operating specific
items: 71 - 71 11 1 12
Earnings before interest
and tax (40) 177 137 76 155 231
Net finance costs (12) (4) (16) (13) (3) (16)
Net pension interest
(non-operating specific
item) 91 - 91 120 - 120
========================= ============ ============ ======= ============ ============ =======
Profit before tax 39 173 212 183 152 335
Tax charge 93 (47) 46 (20) (42) (62)
========================= ============ ============ ======= ============ ============ =======
Profit for the period 132 126 258 163 110 273
========================= ============ ============ ======= ============ ============ =======
Alternative performance measures
Reported operating profit before and after transformation
costs
These measures are in accordance with IFRS and are a means by
which Management can understand the financial performance of the
Group, taking into account business as usual (BAU) costs e.g.
people, distribution and conveyance, infrastructure and other
operating costs excluding operating specific items. They are
presented before and after transformation costs, to provide
Management with a view of the ongoing impact of the costs of
transforming the business.
Reported operating profit
This measure is in accordance with IFRS and is a means by which
Management can understand the financial performance of the Group.
It is based on reported profit after transformation costs (see
above) including operating specific items.
Adjusted operating profit before and after transformation
costs
These measures are based on reported operating profit before and
after transformation costs (see above) further adjusted to exclude
the volatility of the pension charge to cash difference adjustment,
which Management considers to be a key adjustment in understanding
the underlying profit of the Group at this level.
Adjusted operating profit
This measure is based on reported operating profit (see above)
excluding the pension charge to cash difference adjustment and
operating specific items, which Management considers to be key
adjustments in understanding the underlying profit of the Group at
this level.
These adjusted measures are reconciled to the reported results
in the table in the paragraph entitled 'Consolidated reported and
adjusted results reconciliation'. Definitions of operating costs,
the pension charge to cash difference adjustment, transformation
costs and operating specific items are provided below.
Adjusted operating profit margin after transformation costs
This is a fundamental measure of performance that Management
uses to understand the efficiency of the business in generating
profit. It calculates 'adjusted operating profit after
transformation costs' as a proportion of revenue in percentage
terms.
Earnings before interest, tax, depreciation and amortisation
(EBITDA) before transformation costs
Reported EBITDA before transformation costs is reported
operating profit before transformation costs with depreciation,
amortisation and share of associate company profits added back.
Adjusted EBITDA before transformation costs is reported EBITDA
before transformation costs with the pension charge to cash
difference adjustment added back.
EBITDA is considered to be a useful measure of operating
performance because it approximates the underlying operating cash
flow by eliminating depreciation, amortisation and the performance
of associate companies.
The following table reconciles adjusted EBITDA before
transformation costs to reported operating profit before
transformation costs.
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
========================================= ========= =========
Reported operating profit before
transformation costs 236 490
Depreciation and amortisation 341 301
Share of post-tax profit from associates - 2
========================================= ========= =========
Reported EBITDA before transformation
costs 577 793
Pension charge to cash difference
adjustment 458 222
Adjusted EBITDA before transformation
costs 1,035 1,015
========================================= ========= =========
Adjusted earnings per share
Adjusted earnings per share is reported basic earnings per
share, excluding operating and non-operating specific items and the
pension charge to cash difference adjustment. A reconciliation of
this number to reported basic earnings per share is included in the
adjusted results table in the section entitled 'Presentation of
results'.
People costs
These are costs incurred in respect of the Group's employees and
comprise wages and salaries, pensions and social security
costs.
Distribution and conveyance costs
These costs relate to non-people costs incurred in transporting
and delivering mail by rail, road, sea and air including terminal
dues and driver sub-contractor costs.
Infrastructure costs
These are costs primarily relating to the day-to-day operation
of the delivery network and include depreciation and amortisation,
IT and property facilities management costs.
Other operating costs
These are any operating costs which do not fall into the
categories of people costs, distribution and conveyance costs or
infrastructure costs including for example, Post Office Limited
agency costs, consumables and training.
Transformation costs
These costs relate to the ongoing transformation of the
business, including management time and costs associated with the
cost avoidance programme, and other projects with the aim of making
our operations more efficient or improving our customer offering.
They also include voluntary redundancy and other termination
costs.
Pension charge to cash difference adjustment
This adjustment represents the difference between the IFRS
income statement pension charge rate of 41.1 per cent and the
actual cash payments into the RMPP at 17.1 per cent. Management
believes this adjustment is appropriate in order to eliminate the
volatility of the IAS 19 accounting charge and to include only the
true cash cost of the pension plans in the adjusted operating
profit of the Group.
Operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature relating to the operations of
the business that, in Management's opinion, require separate
identification. Management does not consider them to be reflective
of year-on-year operating performance. These include items that
have resulted from events that are non-recurring in nature, even
though related income/expense can be recognised in subsequent
periods.
Employee Free Shares charge
These relate to accounting charges arising from the granting of
free shares to employees upon the Government's sales of its stake
in the business (SIP 2013, 2014, 2015 and 2016) with no direct cash
impact on the Group.
Amortisation of intangible assets in acquisitions
These notional charges, which arise as a direct consequence of
IFRS business combination accounting requirements, are separately
identified as Management does not consider these costs to be
directly related to the trading performance of the Group.
Legacy/other costs
These costs relate either to unavoidable ongoing costs arising
from historic events (industrial diseases provision) or
restructuring costs (Romec integration).
Non-operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature which do not form part of the
Group's trading activity and in Management's opinion require
separate identification.
Profit/loss on disposal of property, plant and equipment
(PP&E)
Management separately identifies recurring profit/loss on
disposal of PP&E as these disposals are not part of the Group's
trading activity and are driven primarily by business strategy.
Profit/loss on disposal of business
These non-recurring events are excluded on the basis that by
their nature they are individually unique and therefore distort
comparison of year-on-year business performance.
Free cash flow
Free cash flow (FCF) is calculated as statutory (reported) net
cash flow before financing activities, adjusted to include finance
costs paid and exclude net cash from the purchase/sale of financial
asset investments. FCF represents the cash that the Group generates
after spending the money required to maintain or expand its asset
base.
In-year trading cash flow
In-year trading cash flow reflects the cash generated from the
trading activities of the Group. It is based on reported net cash
inflow from operating activities. It is adjusted to exclude other
working capital movements and the cash cost of operating specific
items and to include the cash cost of property, plant and equipment
and intangible asset acquisitions and net finance payments. Other
working capital movements include movements in GLS client cash held
and in deferred revenue from stamps purchased in prior periods.
In-year trading cash flow is used primarily by Management to show
cash being generated by operations less cash investment.
The following table reconciles in-year trading cash flow to the
nearest IFRS measure 'net cash inflow from operating
activities'.
Reported Reported
52 weeks 52 weeks
ended ended
25 March 26 March
(GBPm) 2018 2017
========================================= ========= =========
Net cash inflow from operating
activities 905 754
Adjustment for:
Other working capital movements 3 6
Cash cost of operating specific
items 12 61
Purchase of property, plant and
equipment (219) (230)
Purchase of intangible assets (software) (141) (157)
Net finance costs paid (15) (14)
In-year trading cash inflow 545 420
========================================= ========= =========
Net cash investment
Net cash investment is a measure of the cash utilised by the
Group in the period on investment activities netted off against
cash received on the disposal of property, plant and equipment. It
is a measure used by Management to monitor investment within the
Group. The items making up this balance in the statutory cash flow
are indicated in the section 'Condensed consolidated statement of
cash flows'.
Net cash/(debt)
Net cash/(debt) is calculated by netting the value of financial
liabilities (excluding derivatives) against cash and other liquid
assets. It is a measure of the Group's net indebtedness that
provides an indicator of the overall balance sheet strength. It is
also a single measure that can be used to assess the combined
impact of the Group's indebtedness and its cash position. The use
of the term net cash/(debt) does not necessarily mean that the cash
included in the net debt calculation is available to settle the
liabilities included in this measure.
A reconciliation of net cash/(debt) to reported balance sheet
line items is shown below.
At 25 March At 26 March
(GBPm) 2018 2017
========================== =========== ===========
Loans/bonds (437) (463)
Finance leases (169) (194)
Cash and cash equivalents 600 299
Pension escrow (RMSEPP) 20 20
Net cash/(debt) 14 (338)
========================== =========== ===========
Net cash/(debt) excludes GBP178 million (2016-17: GBPnil)
related to the RMPP pension scheme of the total GBP198 million
(2016-17: GBP20 million) pension escrow investments on the balance
sheet which is not considered to fall within the definition of net
cash/debt.
Adjusted effective tax rate
The adjusted effective tax rate is the adjusted tax charge or
credit for the period expressed as a proportion of adjusted profit
before tax. Adjusted effective tax rate is considered to be a
useful measure of tax impact for the period. It approximates the
tax rate on the underlying trading business through the exclusion
of specific items and the pension charge to cash difference
adjustment.
Underlying change adjustments
Movements in volumes, revenue, costs, profits and margins are
shown on an underlying basis. We have made adjustments for working
days in UKPIL (2017-18: 305.0; 2016-17: 305.6) and movements in
foreign exchange in GLS (2017-18: GBP1:EUR1.13; 2016-17:
GBP1:EUR1.19). We have also made adjustments for the first year
impact of acquisitions and changes in legislation such as the
Apprenticeship Levy.
UKPIL will report a 53-week period (310.0 working days) in
2018-19. We will present adjusted results and underlying movements
on a 52-week basis. Our working week consists of 5.5 days.
Therefore, the adjusted UKPIL working days for 2018-19 will be
304.5 days with an estimated revenue and profit decrease of around
GBP15 million.
Adjusted Adjusted Underlying
52 weeks 52 weeks 52 weeks
ended ended ended
25 March 26 March Working Wage Foreign 26 March Underlying
(GBPm) 18 17 days legislation exchange Acquisitions 17 change
======================= ========= ========= ======= ============ ========= ============ ========== ==========
Revenue
======================= ========= ========= ======= ============ ========= ============ ========== ==========
UKPIL 7,615 7,658 (15) - - - 7,643 Flat
GLS 2,557 2,118 - - 106 105 2,329 10%
========= ========= ======= ============ ========= ============ ========== ==========
Group 10,172 9,776 (15) - 106 105 9,972 2%
Costs
======================= ========= ========= ======= ============ ========= ============ ========== ==========
UKPIL
People (4,908) (4,865) - (20) - - (4,885) Flat
Non-people costs (2,204) (2,245) - - - - (2,245) (2%)
======================= ========= ========= ======= ============ ========= ============ ========== ==========
Distribution
and conveyance
costs (798) (828) - - - - (828) (4%)
Infrastructure
costs (751) (740) - - - - (740) 1%
Other operating
costs (655) (677) - - - - (677) (3%)
======================= ========= ========= ======= ============ ========= ============ ========== ==========
Operating costs
before transformation
costs (7,112) (7,110) - (20) - - (7,130) Flat
GLS
Operating costs (2,366) (1,954) - - (97) (105) (2,156) 10%
Group
People (5,516) (5,354) - (20) (24) (49) (5,447) 1%
Non-people costs (3,962) (3,710) - - (73) (56) (3,839) 3%
======================= ========= ========= ======= ============ ========= ============ ========== ==========
Distribution
and conveyance
costs (2,356) (2,106) - - (64) (44) (2,214) 6%
Infrastructure
costs (899) (868) - - (6) (7) (881) 2%
Other operating
costs (707) (736) - - (3) (5) (744) (5%)
======================= ========= ========= ======= ============ ========= ============ ========== ==========
Operating costs
before transformation
costs (9,478) (9,064) - (20) (97) (105) (9,286) 2%
Profit, margins and
EPS
================================== ========= ======= ============ ========= ============ ========== ==========
UKPIL
Operating profit
before transformation
costs 503 548 (15) (20) - - 513 (2%)
Transformation
costs (113) (137) - - - - (137) (17%)
========= ========= ======= ============ ========= ============ ========== ==========
Operating profit
after transformation
costs 390 411 (15) (20) - - 376 4%
Margin 5.1% 5.4% 4.9% 20bps
GLS
Operating profit 191 164 - - 9 - 173 10%
Margin 7.5% 7.7% 7.4% 10bps
Group
Operating profit
before transformation
costs 694 712 (15) (20) 9 - 686 1%
Transformation
costs (113) (137) - - - - (137) (17%)
========= ========= ======= ============ ========= ============ ========== ==========
Operating profit
after transformation
costs 581 575 (15) (20) 9 - 549 6%
Margin 5.7% 5.9% 5.5% 20bps
Profit before
tax 565 559 (15) (20) 9 - 533 6%
========= ========= ======= ============ ========= ============ ========== ==========
Tax (111) (121)
Profit for the
period 454 438
Profit attributable
to equity holders
of the parent
Company 455 437
Basic earnings
per share (pence) 45.5 44.1
======================= ========= ========= ======= ============ ========= ============ ========== ==========
PRINCIPAL RISKS
Statement of Principal Risks
We have reviewed our risk profile as set out in the 2018 Annual
Report and considered the risks facing the Group in the coming
year. The key risks are currently identified as:
-- New arrangements and the risk of industrial action
-- Pension arrangements
-- Efficiency
-- Changes in market conditions and customer behaviour
-- Economic and political environment
-- Growing in new areas
-- Regulatory and legislative environment
-- Competition Act investigation
-- Employment legislation and regulation
-- Health, safety and wellbeing
-- Major breach of information security (as the result of a
cyber-attack) or data protection regulation
-- Attracting and retaining senior management
Further information is available on pages 40 to 45 of the 2018
Annual Report which will be available on our website at
www.royalmailgroup.com
Viability Statement
The Directors have assessed the viability of the Group as part
of their ongoing risk management and monitoring processes. The
Directors have considered their stewardship responsibilities,
previous viability statements, the nature of the business and its
investment and planning periods when making this assessment.
The key factors affecting the Group's prospects are:
-- Strategic focus on costs
-- Technology and innovation
-- An engaged and motivated workforce
While the Directors have no reason to believe that the Group
will not be viable over the longer term, they consider the three
financial years to March 2021 to be an appropriate planning time
horizon to assess Royal Mail's viability and to determine the
probability and impact of our principal risks. This is the same
time frame as our existing medium term planning cycle and therefore
a period over which planning assumptions and the impact of
strategic initiatives are scrutinised. This period also aligns with
the performance criteria in our long term incentive plans
(LTIP).
Business divisions prepare detailed annual forecasts for a 12
month period and project performance over three years with
reference to economic assumptions and strategic initiatives.
The key assumptions within the Group's financial forecasts
include:
-- Parcels revenue continues to grow in line with the
addressable UK parcels market.
-- Addressed letter volumes continue to decline by between four
and six per cent per annum.
-- No change in stated dividend policy.
-- No change in capital structure given the Group has a EUR500
million bond which expires in 2024 and a revolving credit facility,
the majority of which expires in 2022.
Assessment of viability
The key assumptions within the projections were stress-tested
with reference to risks set out in the Principal Risks section on
page 31 but focused on those that could have a plausible and severe
financial impact over the plan horizon.
This year, the Directors considered:
(i) the potential impact of industrial action; (Principal risk:
Industrial Action)
(ii) deteriorating economic and market conditions which could
result in letters volume decline greater than our projected four to
six per cent range (Principal risk: Economic and Political
Environment) and
(iii) increased competition in the UK parcels sector. (Principal
risk: Customer expectations and Royal Mail's responsiveness to
market changes)
These risks were quantified to create a downside scenario that
took into account the levels of committed capital and expenditure,
as well as other short term cost and cash actions which could
mitigate the impact of the risks. Mitigating actions included:
(i) reducing variable hours and cost of sales
(ii) removing discretionary pay
(iii) reducing our internal investment
(iv) suspending our acquisition programme
Consideration was also given to the large fixed cost base
required to deliver the Universal Service Obligation in its current
form. The downside scenario was tested to determine whether the
Group would remain solvent.
We are pleased to have reached a ground-breaking agreement with
the CWU on pay, pensions and a number of customer-focused
operational changes. The Royal Mail Pension Plan (RMPP) closed to
future accrual in its previous Defined Benefit form from 31 March
2018 and Royal Mail and the CWU have committed to work towards the
introduction of a Collective Defined Contribution (CDC) scheme for
all employees. This will be subject to necessary legislative
changes being enacted. A Defined Benefit Lump Sum Scheme will sit
alongside it. Transitional pension arrangements commenced on 1
April 2018 and will continue until a CDC scheme can be established.
It is anticipated that the ongoing annual cash cost of pensions to
the Company will continue to be around GBP400 million. In making
their assessment of viability, the Directors have assumed that
future cash pension contributions remain around this level.
Viability statement
Based on the results of their analysis, the Directors have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period
to March 2021.
RESPONSIBILITY STATEMENT OF THE DIRECTORS
The Directors confirm that, to the best of their knowledge:
-- the financial statements, prepared in accordance with the
relevant financial reporting framework, 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;
-- the Strategic Report (which includes the management 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; and
-- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
This responsibility statement is approved by the Board of
Directors and is signed on its behalf by:
Moya Greene Stuart Simpson
Chief Executive Officer Chief Finance Officer
CONSOLIDATED INCOME STATEMENT
For the 52 weeks ended 25 March 2018 and 52 weeks ended 26 March
2017
Reported Reported
52 weeks 52 weeks
2018 2017
Notes GBPm GBPm
======================================== ===== ========= =========
Continuing operations
Revenue 2 10,172 9,776
Operating costs(1) 3/4 (9,936) (9,286)
======================================== ===== ========= =========
People costs (5,974) (5,576)
Distribution and conveyance costs (2,356) (2,106)
Infrastructure costs (899) (868)
Other operating costs (707) (736)
======================================== ===== ========= =========
Operating profit before transformation
costs(2) 236 490
Transformation costs (113) (137)
======================================== ===== ========= =========
Operating profit after transformation
costs(2) 123 353
Operating specific items
Employee Free Shares charge (33) (105)
Legacy/other costs (8) (18)
Amortisation of intangible assets in
acquisitions (16) (11)
======================================== ===== ========= =========
Operating profit 66 219
Non-operating specific items
Profit on disposal of property, plant
and equipment 71 14
Loss on disposal of business - (2)
======================================== ===== ========= =========
Earnings before interest and tax 137 231
Finance costs 5 (19) (18)
Finance income 5 3 2
Net pension interest (non-operating
specific item) 9(c) 91 120
======================================== ===== ========= =========
Profit before tax 212 335
Tax credit/(charge) 6 46 (62)
======================================== ===== ========= =========
Profit for the year 258 273
======================================== ===== ========= =========
Profit for the year attributable to:
Equity holders of the parent Company 259 272
Non-controlling interests (1) 1
======================================== ===== ========= =========
Earnings per share
Basic 7 25.9p 27.5p
Diluted 7 25.7p 27.3p
======================================== ===== ========= =========
(1) Operating costs are stated before transformation costs,
Employee Free Shares charge, legacy/other costs and amortisation of
intangible assets in acquisitions.
(2) These measures of performance are both before operating
specific items.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the 52 weeks ended 25 March 2018 and 52 weeks ended 26 March
2017
Notes Reported Reported
52 weeks 52 weeks
2018 2017
GBPm GBPm
================================================= ====== ========= ===========
Profit for the year 258 273
Other comprehensive (expense)/income
for the year from continuing operations:
Items that will not be subsequently
reclassified to profit or loss:
Amounts relating to pensions accounting (658) 405
================================================= ====== ========= ===========
IFRIC 14 adjustment relating to defined
benefit surplus 9 (1,144) 113
Remeasurement gains of the defined benefit
surplus 9(c) 10 399
Deferred tax 6 476 (107)
================================================= ====== ========= ===========
Items that may be subsequently reclassified
to profit or loss:
Foreign exchange translation differences (4) 18
================================================= ====== ========= ===========
Exchange differences on translation
of foreign operations (GLS) 1 63
Net loss on hedge of a net investment
(EUR500 million bond) (5) (38)
Net loss on hedge of a net investment
(Euro-denominated finance lease payables) - (3)
Tax on above items 6 - (4)
================================================= ====== ========= ===========
Designated cash flow hedges 2 32
================================================= ====== ========= ===========
Gains on cash flow hedges deferred into
equity 11 22
(Gains)/losses on cash flow hedges released
from equity to income (7) 16
Gains on cash flow hedges released from
equity to the carrying amount of non-financial
assets (1) (1)
Tax on above items 6 (1) (5)
================================================= ====== ========= ===========
Total other comprehensive (expense)/income
for the year (660) 455
================================================= ====== ========= ===========
Total comprehensive (expense)/income
for the year (402) 728
================================================= ====== ========= ===========
Total comprehensive (expense)/income
for the year attributable to:
Equity holders of the parent Company (401) 727
Non-controlling interests (1) 1
================================================= ====== ========= ===========
CONSOLIDATED BALANCE SHEET
At 25 March 2018 and 26 March 2017
Notes Reported Reported
at 25 at 26
March March
2018 2017
GBPm GBPm
======================================== ===== ======== ========
Non-current assets
Property, plant and equipment 2,016 2,062
Goodwill 324 316
Intangible assets 608 567
Investments in associates and joint
venture 5 7
Financial assets
Pension escrow investments 198 20
Derivatives 5 4
Retirement benefit surplus - net of
IFRIC 14 adjustment 9 2,163 3,839
Other receivables 13 13
Deferred tax assets 6 72 15
======================================== ===== ======== ========
5,404 6,843
Assets held for sale 50 37
======================================== ===== ======== ========
Current assets
Inventories 25 23
Trade and other receivables 1,160 1,117
Income tax receivable 3 7
Financial assets
Derivatives 15 8
Cash and cash equivalents 600 299
======================================== ===== ======== ========
1,803 1,454
======================================== ===== ======== ========
Total assets 7,257 8,334
======================================== ===== ======== ========
Current liabilities
Trade and other payables (1,927) (1,810)
Financial liabilities
Interest-bearing loans and borrowings (1) (33)
Obligations under finance leases (59) (64)
Derivatives (3) (9)
Income tax payable (33) (12)
Provisions (59) (88)
======================================== ===== ======== ========
(2,082) (2,016)
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings (436) (430)
Obligations under finance leases (110) (130)
Derivatives (4) (2)
Provisions (103) (108)
Other payables (41) (47)
Deferred tax liabilities 6 (45) (603)
======================================== ===== ======== ========
(739) (1,320)
Total liabilities (2,821) (3,336)
======================================== ===== ======== ========
Net assets 4,436 4,998
======================================== ===== ======== ========
Equity
Share capital 10 10
Retained earnings 4,381 4,940
Other reserves 45 47
======================================== ===== ======== ========
Equity attributable to parent Company 4,436 4,997
Non-controlling interests - 1
======================================== ===== ======== ========
Total equity 4,436 4,998
======================================== ===== ======== ========
The financial statements were approved and authorised for issue
by the Board of Directors on 16 May 2018 and were signed on its
behalf by:
Moya Greene Stuart Simpson
Chief Executive Officer Chief Finance Officer
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the 52 weeks ended 25 March 2018 and 52 weeks ended 26 March
2017
Share Retained Foreign Hedging Equity Non-controlling Total
capital earnings currency reserve holders interests equity
GBPm GBPm translation GBPm of GBPm GBPm
reserve the parent
GBPm GBPm
================================== ======== ========= ============ ======== =========== =============== =======
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
================================== ======== ========= ============ ======== =========== =============== =======
Profit for the year - 259 - - 259 (1) 258
Other comprehensive
income for the year - (658) (4) 2 (660) - (660)
================================== ======== ========= ============ ======== =========== =============== =======
Total comprehensive
income for the year - (399) (4) 2 (401) (1) (402)
Transactions with owners
of the Company, recognised
directly in equity
Dividend paid to equity
holders of the parent
Company - (231) - - (231) - (231)
Share-based payments
Employee Free Shares
issue(1) - 35 - - 35 - 35
Save As You Earn (SAYE)
scheme - 1 - - 1 - 1
Long--Term Incentive
Plan (LTIP)(2) - 3 - - 3 - 3
Deferred Share Bonus
Plan (DSBP) - 2 - - 2 2
Employee exercise of
SAYE options - 28 - - 28 - 28
Deferred tax on share-based
payments - 5 - - 5 - 5
Settlement of LTIP 2014 - (3) - - (3) - (3)
================================== ======== ========= ============ ======== =========== =============== =======
Reported at 25 March
2018 10 4,381 36 9 4,436 - 4,436
================================== ======== ========= ============ ======== =========== =============== =======
(1) Excludes GBP2 million credit (2016-17: GBP5 million charge)
for National Insurance, recognised in the income statement,
included in provisions on the balance sheet.
(2) Excludes GBP1 million charge (2016-17: GBP1 million charge)
for National Insurance, recognised in the income statement,
included in provisions on the balance sheet.
(3) Shares required for employee share schemes.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the 52 weeks ended 25 March 2018 and 52 weeks ended 26 March
2017
Reported Reported
52 weeks 52 weeks
2018 2017
Notes GBPm GBPm
===================================================== ===== ========= =========
Cash flow from operating activities
Profit before tax 212 335
Adjustment for:
Net pension interest (91) (120)
Net finance costs 16 16
Profit on disposal of property, plant and
equipment (71) (14)
Loss on disposal of business - 2
Legacy/other costs 8 18
Amortisation of intangible assets in acquisitions 16 11
Employee Free Shares charge 33 105
Transformation costs 113 137
===================================================== ===== ========= =========
Operating profit before transformation
costs(1) 236 490
Adjustment for:
Depreciation and amortisation 341 301
Share of post-tax loss from associates
and joint venture - 2
===================================================== ===== ========= =========
EBITDA before transformation costs(1) 577 793
Working capital movements 71 (9)
===================================================== ===== ========= =========
Increase in inventories (2) (2)
Increase in receivables (7) (40)
Increase in payables 89 56
Net (increase)/decrease in derivative assets (9) 2
Decrease in provisions (non-specific items) - (25)
===================================================== ===== ========= =========
Pension charge to cash difference adjustment 458 222
Share-based awards (SAYE, LTIP and DSBP)
charge 6 11
Cash cost of transformation operating expenditure(2) (125) (142)
Cash cost of operating specific items (12) (61)
===================================================== ===== ========= =========
Cash inflow from operations 975 814
Income tax paid (75) (60)
Research and development expenditure credit 5 -
===================================================== ===== ========= =========
Net cash inflow from operating activities 905 754
===================================================== ===== ========= =========
Cash flow from investing activities
Finance income received 3 3
Proceeds from disposal of property (excluding
London Development Portfolio), plant and
equipment (non-operating specific item) 40 37
London Development Portfolio net proceeds/(costs)
(non-operating specific item) 10 (34)
Disposal of business (non-operating specific
item) - (3)
Purchase of property, plant and equipment(2) (219) (230)
Acquisition of business interests, net
of cash acquired (16) (122)
Purchase of intangible assets (software)(2) (141) (157)
Payment of deferred consideration in respect
of prior years' acquisitions (2) (4)
Net cash outflow from investing activities (325) (510)
===================================================== ===== ========= =========
Net cash inflow before financing activities 580 244
===================================================== ===== ========= =========
Cash flow from financing activities
Finance costs paid (18) (17)
Acquisition of non-controlling interests - (18)
Purchase of own shares - (53)
Employee exercise of SAYE options 28 -
Payment of capital element of obligations
under finance lease contracts (63) (74)
Cash received on sale and leasebacks 35 41
Drawdown of loan facility - 31
Repayment of loans and borrowings (32) (7)
Dividends paid to equity holders of the
parent Company 8 (231) (222)
Dividend paid to non-controlling interests - (8)
===================================================== ===== ========= =========
Net cash outflow from financing activities (281) (327)
===================================================== ===== ========= =========
Net increase/(decrease) in cash and cash
equivalents 299 (83)
Effect of foreign currency exchange rates
on cash and cash equivalents 2 14
Cash and cash equivalents at the beginning
of the year 299 368
===================================================== ===== ========= =========
Cash and cash equivalents at the end of
the year 600 299
===================================================== ===== ========= =========
(1) See APMs section for a definition of these measures
(2) Items comprise total gross 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 25 March 2018 (2016-17: 52 weeks ended 26 March 2017)
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 25 March 2018.
The financial information set out in this document does not
constitute the Group's statutory financial statements for the
reporting years ended 25 March 2018 or 26 March 2017, but is
derived from those financial statements. Statutory financial
statements for the reporting year ended 26 March 2017 have been
delivered to the Registrar of Companies. The statutory financial
statements for the reporting year ended 25 March 2018 were approved
by the Board of Directors on 16 May 2018 along with this Financial
report, but will be delivered to the Registrar of Companies in due
course. The auditor has reported on those statutory financial
statements; their reports were (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
The Annual Report and Financial Statements 2017-18, together
with details of the Annual General Meeting (AGM), will be
despatched to shareholders before the AGM. The AGM will take place
on 19 July 2018.
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
2017-18. Details of key sources of estimation uncertainty and
critical accounting judgements 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 in the Financial Review.
Key sources of estimation uncertainty and critical accounting
judgements
The preparation of consolidated financial statements necessarily
requires Management to make certain estimates and judgements 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 there is thought to be a significant
risk of a material adjustment to the consolidated financial
statements within the next financial year as a result of the
estimation uncertainty are disclosed below.
Key sources of estimation uncertainty
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.
Defined benefit pension plan assets are measured at fair value.
Where these assets cannot be valued directly from quoted market
prices, the Group applies judgement in selecting an appropriate
valuation method, after discussion with an expert fund manager. The
assumptions used in valuing unquoted investments are affected by
current market conditions and trends, which could result in changes
to the fair value after the measurement date. Details of the
carrying value of the unquoted pension plan asset classes can be
found in Note 9.
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. Any income statement movements arising from
changes in accounting estimates are disclosed as an operating
specific item.
Critical accounting judgements
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 class of stamp
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
Public stamp holdings value (GBPm) 30 99 300
=================================== === ========
At 25 March 2018 154 179 188 188
=================================== === =========== === ========
At 26 March 2017 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.
Allocation of costs for sale of Mount Pleasant
Contracts were exchanged on 30 August 2017 for the sale of 6.25
acres of Royal Mail's Mount Pleasant site (comprising the Phoenix
Place and Calthorpe Street plots) for a total gross consideration
of GBP193.5 million. The consideration is made up of GBP190 million
in cash and the fair value of the parking facilities provided to
Royal Mail of GBP3.5 million. The sale of the Phoenix Place plot
has been recognised in the current accounting year whereas the sale
of the Calthorpe Street site will be recognised upon completion of
certain enabling works.
Management have applied judgement in allocating the transaction
proceeds between the two plots on a different basis to the schedule
of cash receipts agreed with the purchaser. This is to more
accurately reflect the commercial substance of the transaction,
which is that some of the proceeds of the Phoenix Place sale would
be used to fund the Calthorpe Street enabling works. The allocation
of total contract proceeds has been carried out according to the
relative fair value method described in IFRIC 15 'Agreements for
the Construction of Real Estate'. In applying this method proceeds
which can be directly attributed to funding completion of the
enabling works have been allocated to the Calthorpe Street plot
proceeds, with the remaining proceeds being allocated
proportionately according to the final residential development area
of the two sites.
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.
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). 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 an 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.
Specific
items
and pension
52 weeks 2018 Adjusted adjustment(1) Reported
==================================== ============================== ======= ============== ========
GLS
UKPIL (Non-UK
(UK operations) operations) Group Group
Continuing operations GBPm GBPm GBPm GBPm GBPm
====================================== ================ ============ ======= -------------- --------
Revenue 7,615 2,557 10,172 - 10,172
People costs (4,908) (608) (5,516) (458) (5,974)
Non-people costs (2,204) (1,758) (3,962) - (3,962)
====================================== ================ ============ ======= ============== ========
Operating profit before
transformation costs 503 191 694 (458) 236
Transformation costs (113) - (113) - (113)
====================================== ================ ============ ======= ============== ========
Operating profit after
transformation costs 390 191 581 (458) 123
Operating specific items
Employee Free Shares charge - - - (33) (33)
Legacy/other costs - - - (8) (8)
Amortisation of intangible
assets in acquisitions - - - (16) (16)
Operating profit 390 191 581 (515) 66
Non-operating specific
items
Profit on disposal of property,
plant and equipment - - - 71 71
Earnings before interest
and tax 390 191 581 (444) 137
Finance costs (18) (1) (19) - (19)
Finance income 1 2 3 - 3
Inter-segment interest 5 (5) - - -
Net pension interest (non-operating
specific item) - - - 91 91
====================================== ================ ============ ======= ============== ========
Profit before tax 378 187 565 (353) 212
====================================== ================ ============ ======= ============== ========
Specific
items
and pension
52 weeks 2017 Adjusted adjustment(2) Reported
===================================== ============================== ======= ============== ========
GLS
UKPIL (Non-UK
(UK operations) operations) Group Group
Continuing 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
Finance costs (17) (1) (18) - (18)
Finance income 1 1 2 - 2
Inter-segment interest 3 (3) - - -
Net pension interest (non-operating
specific item) - - - 120 120
======================================= ================ ============ ======= ============== ========
Profit before tax 398 161 559 (224) 335
======================================= ================ ============ ======= ============== ========
The depreciation and amortisation 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.
(1) A GBP119 million credit for specific items and a GBP458
million charge for the pension charge to cash difference adjustment
relate to UKPIL. A GBP14 million charge for specific items relates
to GLS.
(2) 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.
GLS
UKPIL (Non-UK
(UK operations) Operations) Total
52 weeks 2018 GBPm GBPm GBPm
======================================= ================ ============ =====
Depreciation (207) (39) (246)
Amortisation of intangible assets
(mainly software)(3) (83) (28) (111)
Share of post-tax loss from associates
and joint venture - - -
======================================= ================ ============ =====
Non-current assets 2,160 806 2,966
========================================= ================ ============ =====
GLS
UKPIL (Non-UK
(UK operations) Operations) Total
52 weeks 2017 GBPm GBPm GBPm
======================================= ================ ============ =====
Depreciation (198) (37) (235)
Amortisation of intangible assets
(mainly software)(3) (56) (21) (77)
Share of post-tax loss from associates
and joint venture (1) (1) (2)
========================================= ================ ============ =====
Non-current assets 2,199 766 2,965
========================================= ================ ============ =====
(3) Includes GBP16 million (2016-17: GBP11 million) 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
2018 2017
GBPm GBPm
=============================================== ======== ========
People costs (see Note 4) (5,974) (5,576)
Distribution and conveyance costs
Charges from overseas postal administrations (342) (356)
Fuel costs (147) (159)
Operating lease costs - vehicles (21) (17)
Short-term vehicle hire (28) (32)
Infrastructure costs
Depreciation and amortisation (341) (301)
=============================================== ======== ========
Depreciation of property, plant and equipment (246) (235)
Amortisation of intangible assets(1) (95) (66)
=============================================== ======== ========
Other operating costs
Post Office Limited charges (341) (343)
Inventory expensed (35) (49)
Operating lease costs - property, plant and
equipment (152) (143)
=============================================== ======== ========
Research and development (R&D)
During the year, the Group continued to develop products and
services within the business. See the Strategic Report in the
Annual Report and Financial Statements for more details.
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
2018 2017
GBPm GBPm
============================================== ======== ========
Ofcom administrative charge (3) (4)
Citizens Advice/Consumer Council for Northern
Ireland (2) (3)
============================================== ======== ========
Total (5) (7)
============================================== ======== ========
(1) Excludes GBP16 million (2016-17: GBP11 million) amortisation
of intangible assets in acquisitions, presented as an operating
specific item in the income statement.
Statutory audit costs
Disclosure of statutory audit costs is a requirement of the
Companies Act 2006.
52 weeks 52 weeks
2018 2017
Auditor's fees GBP000 GBP000
============================================== ======== ========
Audit of Group statutory financial statements (2,146) (2,178)
Other fees to Auditor:
Regulatory audit (125) (122)
Other assurance (72) (44)
Other non-audit services - (342)
Total (2,343) (2,686)
============================================== ======== ========
The 2017-18 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, GBP98,000 for the audit of the Royal
Mail Pension Plan (2016-17: GBP88,000) and GBP31,000 for the audit
of the Royal Mail Defined Contribution Plan (2016-17:
GBP28,000).
4. People information
People costs
52 weeks 52 weeks
2018 2017
GBPm GBPm
============================================= ======== ========
Wages and salaries (4,506) (4,371)
============================================= ======== ========
UK-based (3,976) (3,949)
GLS (530) (422)
============================================= ======== ========
Pensions (see Note 9) (1,006) (776)
============================================= ======== ========
Defined benefit UK (791) (568)
Defined contribution UK (57) (51)
UK defined benefit and defined contribution
Pension Salary Exchange (PSE) (151) (151)
GLS (7) (6)
============================================= ======== ========
Social security (462) (429)
============================================= ======== ========
UK-based (391) (368)
GLS (71) (61)
============================================= ======== ========
Total people costs (5,974) (5,576)
============================================= ======== ========
Defined benefit pension plan rates:
Income statement 41.1% 28.8%
Cash flow 17.1% 17.1%
Defined contribution pension plan average
rate:
Income statement and cash flow(1) 6.3% 6.0%
============================================= ======== ========
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 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks
2018 2017 2018 2017 2018 2017 2018 2017
==================== ======== ============ ======== ============ ======== ======== ======== ========
UKPIL 147,985 148,170 149,281 151,601 141,162 141,819 141,034 142,579
GLS - continuing
operations 13,866 12,966 13,694 12,617 17,955 17,136 17,812 16,912
Total 161,851 161,136 162,975 164,218 159,117 158,955 158,846 159,491
==================== ======== ============ ======== ============ ======== ======== ======== ========
Directors' remuneration
52 weeks 52 weeks
2018 2017
GBP000 GBP000
============================================ ======== ========
Directors' remuneration(3) (3,257) (3,345)
============================================ ======== ========
Amounts earned under Long--Term Incentive
Plans (LTIP) (356) (440)
============================================ ======== ========
Number of Directors accruing benefits under - -
defined benefit plans
============================================ ======== ========
Number of Directors accruing benefits under
defined contribution plans 2 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. Details of the highest paid Director are included in
the Directors' remuneration report.
5. Net finance costs
52 weeks 52 weeks
2018 2017
GBPm GBPm
================================================== ======== ========
Unwinding of discount relating to industrial
diseases claims provision (2) (2)
Interest payable on financial liabilities (17) (16)
================================================== ======== ========
Syndicated bank loan facility
Loans and borrowings - (1)
Unused facility fees (2) (2)
Arrangement fees (1) (1)
EUR500 million bond - 2.375% Senior Fixed
Rate Notes due July 2024 (11) (11)
Finance leases (4) (4)
Capitalisation of borrowing costs on specific
qualifying assets 3 4
Other finance costs (2) (1)
================================================== ======== ========
Finance costs (19) (18)
================================================== ======== ========
Finance income - interest receivable on financial
assets 3 2
================================================== ======== ========
Net finance costs (16) (16)
================================================== ======== ========
6. Taxation
52 weeks 52 weeks
2018 2017
GBPm GBPm
-------------------------------------------------- -------- --------
Tax (charged)/credited in the income statement
Current income tax:
Current UK income tax charge (45) (16)
Foreign tax (51) (45)
-------------------------------------------------- -------- --------
Current income tax charge (96) (61)
Amounts overprovided in previous years - 1
-------------------------------------------------- -------- --------
Total current income tax charge (96) (60)
Deferred income tax:
Effect of change in tax rates (4) 9
Relating to origination and reversal of temporary
differences 133 (20)
Amounts overprovided in previous years 13 9
-------------------------------------------------- -------- --------
Total deferred income tax credit/(charge) 142 (2)
-------------------------------------------------- -------- --------
Tax credit/(charge) in the consolidated income
statement 46 (62)
-------------------------------------------------- -------- --------
Tax credited/(charged) to other comprehensive
income
Current tax:
================================================== ======== ========
Tax credit on foreign currency translation - 1
================================================== ======== ========
Deferred tax:
Tax charge in relation to remeasurement gains
of the defined benefit pension surplus (2) (42)
Tax credit/(charge) in relation to the change
in manner of recovery of the defined benefit
pension surplus 478 (65)
Tax charge on revaluation of cash flow hedges (1) (5)
Tax charge on foreign currency translation - (5)
-------------------------------------------------- -------- --------
Total deferred income tax credit/(charge) 475 (117)
-------------------------------------------------- -------- --------
Total credit/(charge) in the consolidated
statement of other comprehensive income 475 (116)
-------------------------------------------------- -------- --------
In addition to the amount charged to the income statement and
other comprehensive income, the following amount relating to tax
has been recognised directly in equity:
52 weeks 52 weeks
2018 2017
GBPm GBPm
============================================ ======== ========
Deferred tax:
Change in estimated excess tax deductions
related to share-based payments 5 -
Total deferred income tax credit recognised
directly in equity 5 -
-------------------------------------------- -------- --------
Reconciliation of the total tax credit/(charge)
A reconciliation of the tax credit/(charge) in the income
statement and the UK rate of corporation tax applied to accounting
profit for the 52 weeks ended 25 March 2018 and 52 weeks ended 26
March 2017 is shown below.
52 weeks 52 weeks
2018 2017
GBPm GBPm
----------------------------------------------- -------- --------
Profit before tax 212 335
----------------------------------------------- -------- --------
At UK statutory rate of corporation tax of
19% (2016-17: 20%) (40) (67)
Effect of higher taxes on overseas earnings (7) (9)
Tax overprovided in previous years - 10
Non-deductible expenses (7) (5)
Tax effect of property disposals 17 5
Release of deferred tax liability resulting
from closure of Royal Mail Pension Plan to
future accrual 78 -
Uncertain current tax positions (2) -
Tax reliefs and incentives (including previous
years) 12 -
Net increase in tax charge resulting from
non-recognition of deferred tax assets and
liabilities (1) (5)
Effect of change in tax rates (4) 9
----------------------------------------------- -------- --------
Tax credit/(charge) in the income statement 46 (62)
----------------------------------------------- -------- --------
Tax on specific items and pension adjustment
52 weeks 52 weeks
2018 2017
GBPm GBPm
----------------------------------------------- -------- --------
Continuing operations 157 59
Total tax credit on specific items and pension
adjustment 157 59
----------------------------------------------- -------- --------
The tax credit on specific items of GBP157 million (2016-17:
GBP59 million) comprises tax at statutory rates on certain specific
items and the pension adjustment of GBP81 million credit (2016-17:
GBP48 million credit), plus certain tax-only adjustments of GBP76
million credit (2016-17: GBP11 million credit). The tax-only
adjustments comprise; the impact of the closure of the RMPP to
future accrual from 31 March 2018 of GBP78 million credit (2016-17:
GBPnil million); the impact of property transactions of GBP2
million credit (2016-17: GBP2 million credit); and the impact of
changes in tax law of GBP4 million charge (2016-17: GBP9 million
credit).
Effective tax rate
The Group reported tax in the income statement was a credit of
GBP46 million on a reported profit of GBP212 million. This arises
mainly due to the one-off deferred tax credit of GBP78 million
related to the closure of the RMPP to future accrual after 31 March
2018.
GLS pays tax in a number of territories. The majority of its
profits in the reporting year to 25 March 2018 were 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
they are not sufficiently certain of their 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.
Deferred tax
(Charged)/
credited
(Charged)/credited to (Charged)/
Deferred tax by At to other credited At
balance 27 March income comprehensive directly Acquisition R&D 25 March
sheet category 2017 statement income to equity of subsidiaries credit 2018
52 weeks 2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- --------- ------------------ -------------- ---------- ---------------- ------- ----------
Liabilities
Accelerated capital
allowances (16) 13 - - - - (3)
Pensions temporary
differences (647) 170 476 - - - (1)
Employee share
schemes (11) 5 - 5 - - (1)
Intangible assets (36) (9) - - (3) - (48)
Hedging derivatives
temporary
differences (1) - (1) - - - (2)
-------------------- --------- ------------------ -------------- ---------- ---------------- ------- ----------
Deferred tax
liabilities (711) 179 475 5 (3) - (55)
-------------------- --------- ------------------ -------------- ---------- ---------------- ------- ----------
Assets
Deferred capital
allowances 37 (23) - - - - 14
Provisions and other 20 (1) - - - - 19
Losses available for
offset against
future
taxable income 62 (14) - - - - 48
R&D expenditure
credit 4 1 - - - (4) 1
Deferred tax assets 123 (37) - - - (4) 82
-------------------- --------- ------------------ -------------- ---------- ---------------- ------- ----------
Net deferred tax
asset (588) 142 475 5 (3) (4) 27
-------------------- --------- ------------------ -------------- ---------- ---------------- ------- ----------
(Charged)/
(Charged)/ credited
credited to (Charged)/
At to other credited At
Deferred tax by balance 28 March income comprehensive directly Acquisition R&D 26 March
sheet category 2016 statement income to equity of subsidiaries credit 2017
52 weeks 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ---------- -------------- ---------- ---------------- ------- ----------
Liabilities
Accelerated capital
allowances (1) (13) (2) - - - (16)
Pensions temporary
differences (565) 25 (107) - - - (647)
Employee share schemes (25) 15 - (1) - - (11)
Intangible assets (33) 17 (3) - (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)
---------------------------- --------- ---------- -------------- ---------- ---------------- ------- ----------
At 25 At 26
March March
2018 2017
Deferred tax - balance sheet presentation GBPm GBPm
------------------------------------------ ------ ------
Liabilities
GLS group (45) (50)
Net UK position - (553)
------------------------------------------ ------ ------
Deferred tax liabilities (45) (603)
------------------------------------------ ------ ------
Assets
GLS group 11 15
Net UK position 61 -
------------------------------------------ ------ ------
Deferred tax assets 72 15
------------------------------------------ ------ ------
Net deferred tax asset/(liability) 27 (588)
------------------------------------------ ------ ------
The deferred tax position shows a decreased overall liability in
the reporting year to 25 March 2018. This decrease in the liability
is primarily as a result of the closure of the RMPP to future
accrual after 31 March 2018.
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 intangible assets
in GLS Germany, for which the Group has already taken tax
deductions, and intangible assets in relation to acquisitions in
Spain and the US.
At 25 March 2018, the Group had unrecognised deferred tax assets
of GBP83 million (2016-17: GBP73 million) comprising GBP78 million
(2016-17: GBP68 million) relating to tax losses of GBP300 million
(2016-17: GBP259 million), mainly in GLS, that are available for
offset against future profits if generated in the relevant GLS
companies, and GBP5 million (2016-17: GBP5 million) in relation to
GBP29 million (2016-17: 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 GBP202
million (2016-17: GBP211 million) of capital losses, the tax effect
of which is GBP34 million (2016-17: GBP36 million) in respect of
assets previously qualifying for industrial buildings allowances.
Further temporary differences exist in relation to GBP406 million
(2016-17: GBP212 million) of gains for which rollover relief has
been claimed, the tax effect of which is GBP69 million (2016-17:
GBP36 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
The UK corporation tax rate reduced from 20 per cent to 19 per
cent on 1 April 2017 and it will reduce to 17 per cent on 1 April
2020. In the 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 2018 52 weeks 2017
================================== ==================================
Specific Specific
items items
and pension and pension
Reported adjustment(1) Adjusted Reported adjustment(1) Adjusted
================================== ======== ============== ======== ======== ============== ========
Attributable to equity
holders of the parent Company
Profit for the year (GBPmillion) 259 (196) 455 272 (165) 437
Weighted average number
of shares issued (million) 999 n/a 999 990 n/a 990
Basic earnings per share
(pence) 25.9 n/a 45.5 27.5 n/a 44.1
Diluted earnings per share
(pence) 25.7 n/a 45.2 27.3 n/a 43.8
================================== ======== ============== ======== ======== ============== ========
(1) Further details of the specific items and pension adjustment
total can be found in the Financial Review.
The diluted earnings per share for the year ended 25 March 2018
is based on a weighted average number of shares of 1,005,852,049
(2016-17: 996,593,330) to take account of the potential issue of
5,762,572 ordinary shares resulting from the Long--Term Incentive
Plans (LTIP) for certain senior management, 133,961 ordinary shares
resulting from the Deferred Share Bonus Plans (DSBP) for certain
senior management and 468,746 ordinary shares resulting from the
Save As You Earn (SAYE) scheme.
The 513,230 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.
8. Dividends
52 weeks 52 weeks 52 weeks 52 weeks
2018 2017 2018 2017
Dividends on ordinary Pence per Pence per GBPm GBPm
shares share share
======================= ========= ========= ======== ========
Final dividends paid 15.6 15.1 154 149
Interim dividends paid 7.7 7.4 77 73
======================= ========= ========= ======== ========
Total dividends paid 23.3 22.5 231 222
======================= ========= ========= ======== ========
In addition to the above dividends paid, the Directors are
proposing a final dividend for the year ending 25 March 2018 of
16.3 pence per share, equivalent to GBP163 million. This dividend
will be paid to shareholders on 31 August 2018 subject to approval
at the AGM to be held on 19 July 2018.
9. Retirement benefit plans
Summary pension information
52 weeks 52 weeks
2018 2017
GBPm GBPm
=================================================== ======== ========
Ongoing UK pension service costs
UK defined benefit plan (including administration
costs)(1) (791) (568)
UK defined contribution plan (57) (51)
UK defined benefit and defined contribution
plans' Pension Salary Exchange (PSE) employer
contributions (151) (151)
=================================================== ======== ========
Total UK ongoing pension service costs (999) (770)
GLS defined contribution type plan costs (7) (6)
=================================================== ======== ========
Total Group ongoing pension service costs (1,006) (776)
=================================================== ======== ========
Cash flows relating to ongoing pension service
costs
UK defined benefit plan employer contributions(2) (321) (336)
Defined contribution plans' employer contributions (64) (57)
UK defined benefit and defined contribution
plans' PSE employer contributions (151) (151)
=================================================== ======== ========
Total Group cash flows relating to ongoing
pension service costs (536) (544)
=================================================== ======== ========
RMSEPP deficit correction payments (10) (10)
Pension related accruals (timing difference) (2) -
=================================================== ======== ========
Pension charge to cash difference adjustment (458) (222)
=================================================== ======== ========
At 25 At 26
March March
2018 2017
'000 '000
================================== ====== ======
UK pension plans - active members
UK defined benefit plan 83 88
UK defined contribution plan 47 45
================================== ====== ======
Total 130 133
================================== ====== ======
(1) These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 41.1 per cent (2016-17: 28.8 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 GBP7 million (2016-17: GBP5 million) continue to be
included within the Group's ongoing UK pension service costs.
(2) 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 in respect of the RMPP. This includes payments into
RMPP pension escrow investments. The contribution rate is set
following each actuarial funding valuation, usually every three
years. These actuarial funding valuations are required to be
carried out on assumptions determined by the Trustee and agreed by
Royal Mail.
In the period, the Group operated the following plans.
UK Defined Contribution plan
Royal Mail Group Limited, the Company's main operating
subsidiary, operates the Royal Mail Defined Contribution Plan
(RMDCP). This plan 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
GBP82 million in 2016-17 to GBP93 million (including GBP36 million
PSE costs). This is mainly due to the continued increase in plan
membership and an increase in the average employer's contribution
rate from 6.0 per cent in 2016-17 to 6.3 per cent in 2017-18.
UK Defined Benefit plans
Royal Mail Pension Plan (RMPP)
The RMPP is funded by the payment of contributions to separate
trustee administered funds. RMPP includes sections A, B and C, each
with different terms and conditions. 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. They
provide day--to--day plan management, advise the Trustee on its
responsibilities and ensure 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 invests the member and
employer contributions in a mix of equities, bonds, property and
other investments including derivatives. It holds the contributions
and investments on behalf of the members; and
-- keeping members informed - the Trustee sends active members
an annual benefit illustration together with a summary of the
RMPP's annual report and accounts.
Royal Mail Senior Executives Pension Plan (RMSEPP)
Royal Mail Group Limited also contributes to a smaller defined
benefit plan for executives: RMSEPP. This closed in December 2012
to future accrual, therefore the Group makes no regular future
service contributions. Under the February 2013 Funding Agreement
with the Trustee, the Group agreed to make deficit correction
payments of GBP10 million per annum until at least the date on
which the 2018 valuation is completed. Deficit correction payments
in 2017-18 were GBP10 million (2016-17: GBP10 million). The Group
has now agreed a new Funding Agreement dated 27 March 2018.
Consistent with that, a new Schedule of Contributions was agreed
for the period 29 March 2018 to 31 March 2025. No further deficit
payments will be paid in respect of the period after 31 March 2018.
Payments of GBP1 million per annum will be paid for the period 1
April 2018 to 31 March 2025 in respect of the continued provision
of death-in-service lump sum benefits and expenses of administering
the Plan.
In April 2016, the RMSEPP Trustee purchased a 'buy-in' policy of
insurance in respect of pensions in payment to 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). The fair value is deemed to be the present value
of the related obligation. The buy-in policy valued at GBP148
million is included as a pension asset and a pension liability at
25 March 2018.
A liability of GBP2 million (2016-17: GBP2 million) has been
recognised for future payment of pension benefits to a past
Director.
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. It
therefore made the decision to close the RMPP(3) to future accrual
in its current form on 31 March 2018.
On 8 May 2017, after the 2016-17 balance sheet date, agreement
was reached between the Company and the RMPP Trustee on the March
2015 actuarial funding valuation and a revised Schedule of
Contributions. In accordance with this Schedule of Contributions,
the service contribution rate for 2017-18 remained at 17.1 per
cent. The March 2015 valuation continued to show the plan in
surplus and therefore no deficit correction payments were
required.
An agreement has been made with the Pension Trustee to ringfence
certain employer contributions in an escrow arrangement in order to
give the Trustee and the Company more flexibility over how these
assets are best used for the benefit of members in future.
One week of RMPP service contributions was paid during 2018-19
up to when the scheme closed on 31 March 2018. This payment was
paid at 17.1 per cent in accordance with the 8 May 2017 Schedule of
Contributions. As the March 2015 valuation continued to show the
scheme in surplus, no deficit correction payments are expected to
be made.
Future pension arrangements
A new Defined Benefit Cash Balance Scheme (DBCBS) has been put
in place from 1 April 2018. This is a transitional arrangement
until the proposed Collective Defined Contribution (CDC) scheme can
be established. Improvements to the RMDCP are also being made.
Further details can be found in the Financial Review.
The Company signed a new Schedule of Contributions on 27 March
2018. This covers the period of five years from the date of
certification of the schedule i.e. until March 2023. In accordance
with this schedule, the Company is required to make payments
totalling 15.6 per cent per annum in respect of DBCBS.
(3) The decision was made to close Sections B and C of the RMPP
to future defined benefit pension accrual. Section A of the Plan
which has a small number of active members remains open to future
accrual.
In 2018-19 the Company expects to contribute around GBP400
million in respect of all UK pension schemes. This amount comprises
GBP350 million in respect of RMPP, RMSEPP and DBCBS and GBP50
million in respect of RMDCP. Employees are expected to contribute
around GBP135 million, including through PSE.
Accounting and actuarial funding surplus position (RMPP and
RMSEPP)
In addition to the accounting valuations calculated in
accordance with IAS 19, actuarial funding valuations are carried
out every three years by actuaries commissioned by trustees for
purposes of calculating contributions and funding requirements. The
main difference between the accounting and actuarial funding
valuations is that different rates are used to discount the
projected scheme liabilities. The accounting valuation uses yields
on high quality corporate bonds. The actuarial funding valuation
uses gilt yields. The combined plans' assets and liabilities on an
accounting (IAS 19) basis and on an actuarial funding basis (based
on an approximate update of the principles and assumptions relevant
to the 2015 actuarial funding valuation) are shown below.
Accounting Actuarial
(IAS 19) funding
=========================================== ================ =================
At 25 At 26 At 31 At 31
March March March March
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
=========================================== ======= ======= ======== =======
Fair value of plans' assets (9(b)
below)(4) 10,361 9,847 10,461 10,066
Present value of plans' liabilities (7,038) (5,992) (10,318) (8,984)
=========================================== ======= ======= ======== =======
Surplus in plans (pre IFRIC 14 adjustment) 3,323 3,855 143 1,082
IFRIC 14 adjustment (1,160) (16) n/a n/a
=========================================== ======= ======= ======== =======
Surplus in plans 2,163 3,839 143 1,082
=========================================== ======= ======= ======== =======
There is no element of the present value of the plans'
liabilities above that arises from plans that are wholly
unfunded.
The Directors do not believe that the current excess of plans'
assets over the liabilities on an accounting basis will result in
an excess of pension assets on an actuarial funding basis. However,
the Directors are required to account for the plans based on their
legal right to benefit from a surplus, using long-term actuarial
funding assumptions current at the reporting date, as required by
IFRS. As the Group has a legal right to benefit from a surplus,
under IAS 19 and IFRIC 14, it must recognise the economic benefit
assumed to arise from either a reduction to its future
contributions or a refund of the surplus. This is a technical
adjustment made on an accounting basis. There is no cash benefit
from the surplus.
The legal right to benefit from a surplus has not changed as a
result of the Company's decision to close the RMPP from 31 March
2018. However, after that date, any surplus will no longer be
assumed to be recoverable as a reduction to future employer
contributions. Therefore, at 25 March 2018 only one week of
economic benefit is recoverable as a reduction to future employer
contributions. The remaining surplus is assumed to be available as
a refund. This surplus is presented net of an IFRIC 14 adjustment
of GBP1,134 million (2016-17: GBPnil million) on the balance sheet,
which represents the taxation that would be withheld on the surplus
amount.
Included in the IAS 19 figures in the table above is an RMSEPP
surplus at 25 March 2018 of GBP73 million (pre IFRIC 14) (2016-17:
GBP47 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 following disclosures relate to the major assumptions,
sensitivities, assets and liabilities in the RMPP and RMSEPP and
DBCBS assumptions.
a) Major long-term assumptions used for accounting (IAS 19)
purposes - RMPP, RMSEPP and DBCBS
IAS 19 assumptions will be derived separately for the legacy
RMPP and DBCBS, in particular taking into account the different
weighted durations of the future benefit payments. RMSEPP will
continue in line with legacy RMPP benefits.
The major assumptions used to calculate the accounting position
of the pension plans are as follows:
At 25 At 26 March
March 2017
2018
============================================= ======== ============
Retail Price Index (RPI) 3.1% 3.2%
Consumer Price Index (CPI) 2.1% 2.2%
Discount rate(5)
- nominal 2.4% 2.5%
- real (nominal less RPI) (0.7%) (0.7%)
Rate of increase in pensionable salaries(6) 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(6)
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(6)
Rate of pension increases - DBCBS benefits CPI+2.0% -
Life expectancy from age 60 - for a current 28/26 28/26 years
40/60 year old male RMPP member years
Life expectancy from age 60 - for a current 31/29 31/29 years
40/60 year old female RMPP member years
============================================= ======== ============
(4) Difference between accounting and actuarial funding asset
fair values arises from the different year end dates used for the
valuation of the assets under both methods.
(5) The discount rate reflects the long average duration of the
RMPP of around 30 years. Whilst DBCBS benefits have a significantly
shorter average duration (11 1/2 years), the same discount rate is
justified.
(6) 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 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 240
Increase in inflation rate (both RPI and CPI simultaneously)
of 0.1% p.a. 180
Decrease in discount rate of 0.1% p.a. 180
Increase in CPI assumption (assuming RPI remains
constant) of 0.1% p.a. 35
============================================================= ============
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 (2016-17: 30 years).
b) RMPP and RMSEPP assets
At 25 March 2018 At 26 March 2017
======================== ========================
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ====== ======= ======== =====
Equities
UK 15 106 121 22 126 148
Overseas 411 25 436 561 27 588
Bonds
Fixed interest - UK 336 12 348 306 11 317
- Overseas 600 67 667 938 14 952
Index linked - UK 175 148 323 26 151 177
Pooled investments
Managed funds 1,149 - 1,149 1,018 - 1,018
Unit Trusts 6,682 - 6,682 6,004 - 6,004
Property (UK) 28 271 299 26 317 343
Cash and cash equivalents 426 - 426 320 - 320
Other 2 - 2 5 - 5
Derivatives (92) - (92) (25) - (25)
============================ ====== ======== ====== ======= ======== =====
Total plans' assets 9,732 629 10,361 9,201 646 9,847
============================ ====== ======== ====== ======= ======== =====
There were no open equity futures or options derivatives within
this portfolio at 25 March 2018 (2016-17: GBP1 million). GBP6
billion (2016-17: GBP5 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 GBP84,000
at 25 March 2018 (2016-17: GBP21,000).
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. Investments
are inevitably exposed to risks. The 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,
from time to time) 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 seeks to
balance these requirements.
RMPP's liabilities and assets are impacted by movements in
interest rates and inflation. In order to reduce the risk of
movements in these rates driving the RMPP into a funding deficit,
the RMPP Trustee has hedged the funding liabilities which it was
estimated would be built up by March 2018. It has done this
predominantly through investment in index-linked gilts and
derivatives (interest rate and inflation rate swaps and Gilt
repurchase agreements) held in Unit Trust pooled investments
providing economic exposure to gilts and swap rates.
The change in value of the liability-hedging assets is
predominantly reflected in the Unit Trust values above, which have
increased from GBP6,004 million at 26 March 2017 to GBP6,682
million at 25 March 2018.
The notional value covered by the inflation 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 25 March 2018 was GBP2.4 billion (2016-17: GBP2.3
billion). The notional value covered by the interest rate swaps at
25 March 2018 was GBP3.2 billion (2016-17: GBP1.9 billion).
The equity exposure of RMPP has been reduced by means of a short
Total Return Swap (TRS). This is 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 reduce
downside risk whilst broadly maintaining the existing expected
returns. The TRS have a market value as at 25 March 2018 of GBP21
million (2016-17: GBP(17) million included in the derivative values
above. The TRS economically offset GBP257 million as at 25 March
2018 (2016-17: GBP260 million) of the Plan's global equity market
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 GBP175 million (2016-17: GBP26
million) and the buy-in annuity policy of GBP148 million at 25
March 2018 (2016-17: GBP151 million) to match its liabilities. In
order to increase the level of interest rate and inflation hedging,
RMSEPP has borrowed GBP115 million (2016-17: GBPnil million) of the
UK Government Bonds it holds via Gilt repurchase agreements. These
are included in the derivative values above.
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
========================================= ============== ================ ================
At 25 At At At At 25 At 26
March 26 25 26 March March
2018 March March March 2018 2017
GBPm 2017 2018 2017 GBPm GBPm
GBPm GBPm GBPm
========================================= ====== ====== ======= ======= ======= =======
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 27 March
2017 and 28 March 2016 9,847 7,374 (5,992) (3,815) 3,855 3,559
Amounts included in the income
statement
Ongoing UK defined benefit pension
plan and administration costs (included
in people costs) (7) (5) (899) (683) (906) (688)
Pension interest income/(cost)(7) 251 265 (160) (145) 91 120
========================================= ====== ====== ======= ======= ======= =======
Total included in profit before
tax 244 260 (1,059) (828) (815) (568)
========================================= ====== ====== ======= ======= ======= =======
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial (loss)/gain arising from:
Financial assumptions - - (53) (1,711) (53) (1,711)
Demographic assumptions - - - 243 - 243
Experience assumptions - - 1 76 1 76
Return on plans' assets (excluding
interest income) 62 1,791 - - 62 1,791
========================================= ====== ====== ======= ======= ======= =======
Total remeasurement gains/(losses)
of the defined benefit surplus 62 1,791 (52) (1,392) 10 399
========================================= ====== ====== ======= ======= ======= =======
Other
Employer contributions(8) 272 476 - - 272 476
Employee contributions 5 6 (5) (6) - -
Benefits paid (70) (55) 70 55 - -
Curtailment costs - - (3) (5) (3) (5)
Movement in pension-related accruals 1 (5) 3 (1) 4 (6)
========================================= ====== ====== ======= ======= ======= =======
Total other movements 208 422 65 43 273 465
========================================= ====== ====== ======= ======= ======= =======
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 25 March
2018 and
26 March 2017 10,361 9,847 (7,038) (5,992) 3,323 3,855
========================================= ====== ====== ======= ======= ======= =======
IFRIC 14 adjustment n/a n/a n/a n/a (1,160) (16)
========================================= ====== ====== ======= ======= ======= =======
Retirement benefit surplus (net
of IFRIC 14 adjustment) at 25 March
2018 and
26 March 2017 n/a n/a n/a n/a 2,163 3,839
========================================= ====== ====== ======= ======= ======= =======
In addition to the above items which affect the net defined
benefit surplus, estimated curtailment costs of GBPnil million
(2016-17: GBP4 million) have been provided for in transformation
costs in the income statement, along with the associated redundancy
costs.
(7) Pension interest income results from applying the plans'
discount rate at 26 March 2017 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 26 March 2017 to the plans' liabilities
at that date.
(8) Excludes payments into pension escrow investments of GBP178
million (2016-17: GBPnil million).
Financial Calendar
Trading update - 17 July
2018
==========================
Annual General Meeting -
19 July 2018
==========================
Ex-dividend date - 26 July
2018
==========================
Record date - 27 July 2018
==========================
Payment date - 31 August
2018
==========================
FORWARD-LOOKING STATEMENTS
Disclaimers
This document contains certain forward looking statements
concerning the Group's business, financial condition, results of
operations and certain of the Group's plans, objectives,
assumptions, projections, expectations or beliefs with respect to
these items. Forward looking statements are sometimes, but not
always, identified by their use of a date in the future or such
words as 'anticipates', 'aims', 'due', 'could', 'may', 'will',
'should', 'expects', 'believes', 'intends', 'plans', 'potential',
'targets', 'goal' or 'estimates'.
Forward looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the Group's actual
financial condition, performance and results to differ materially
from the plans, goals, objectives and expectations set out in the
forward looking statements included in this document. Accordingly,
readers are cautioned not to place undue reliance on forward
looking statements.
By their nature, forward looking statements relate to events and
depend on circumstances that will occur in the future and are
inherently unpredictable. Such forward looking statements should,
therefore, be considered in light of various important factors that
could cause actual results and developments to differ materially
from those expressed or implied by these forward looking
statements. These factors include, among other things: changes in
the economies and markets in which the Group operates; changes in
the regulatory regime within which the Group operates; changes in
interest and exchange rates; the impact of competitive products and
pricing; the occurrence of major operational problems; the loss of
major customers; undertakings and guarantees relating to pension
funds; contingent liabilities; the impact of legal or other
proceedings against, or which otherwise affect, the Group; and
risks associated with the Group's overseas operations.
All written or verbal forward looking statements, made in this
document or made subsequently, which are attributable to the Group
or any persons acting on their behalf are expressly qualified in
their entirety by the factors referred to above. No assurance can
be given that the forward looking statements in this document will
be realised; actual events or results may differ materially as a
result of risks and uncertainties facing the Group. Subject to
compliance with applicable law and regulation, the Company does not
intend to update the forward looking statements in this document to
reflect events or circumstances after the date of this document,
and does not undertake any obligation to do so.
Royal Mail, the cruciform, Parcelforce Worldwide and the
Parcelforce Worldwide logo are trade marks of Royal Mail Group
Limited. The GLS arrow logo is a trade mark of General Logistics
Systems Germany GmbH & Co. OHG. Annual Report 2017-18 (c) Royal
Mail Group Limited 2018. All rights reserved.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LFFIFEAIRLIT
(END) Dow Jones Newswires
May 17, 2018 02:01 ET (06:01 GMT)
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