TIDMRMG
RNS Number : 0511R
Royal Mail PLC
25 June 2020
Royal Mail plc
(Incorporated in England and Wales)
Company Number: 8680755
LSE Share Code: RMG
ISIN: GB00BDVZYZ77
LEI: 213800TCZZU84G8Z2M70
This announcement contains inside information for the purpose of
Article 7 of the Market Abuse Regulation (EU) No 596/2014.
FINANCIAL RESULTS
25 June 2020
ROYAL MAIL PLC
RESULTS FOR THE FULL YEARED 29 MARCH 2020
Royal Mail plc (RMG.L) is today announcing its Results for the
full year ended 29 March 2020 and providing an update on trading
since the year end.
Keith Williams, interim Executive Chair, Royal Mail Group,
commented: "In recent years, our UK business has not adapted
quickly enough to the changes in our marketplace of more parcels
and fewer letters. COVID-19 has accelerated those trends,
presenting additional challenges.
"We are implementing a three-step plan. Firstly, we're taking
immediate action on costs, which will result in a GBP130 million
saving in people costs next year and flat non-people costs, along
with a reduction of around GBP300 million in capex across the Group
over the next two years, to address the immediate impact of
COVID-19. Regrettably, we are also proposing a management
restructure impacting around 2,000 roles. We are committed to
conducting the upcoming consultation process carefully and
sensitively. We will work closely with our managers and their
representatives during this difficult period, including supporting
them as they transition into the next stage in their careers.
"Secondly, we're accelerating the pace of operational change in
the UK to address long-standing challenges and be sustainable for
the long term. Thirdly, we're working with all stakeholders to
underpin the USO to ensure it reflects user needs and is modern,
contemporary and sustainable. We want to ensure Royal Mail remains
a key part of the UK economy, a good employer, and the nation's
delivery partner of choice.
"At GLS, we are capitalising on growth opportunities in parcels,
protecting margin in the short term with opportunities for margin
expansion in the future. At the same time, we are seeking to
improve performance in key markets. We will focus investment on
growing markets, and improve cashflow.
"Royal Mail and GLS are different businesses, with different
strategies. At Royal Mail, our focus is on a step change in
transformation; at GLS we aim to continue to grow. Our new
structure brings more focus and accountability and whilst there are
few synergies today between Royal Mail and GLS, in the medium term
an international presence is clearly important, and the opportunity
remains to create more value for shareholders. Given the challenges
of the current year, the Board does not intend to pay any dividend
in relation to 2020-21, but our ambition is to re-commence dividend
payments in 2021-22, supported by GLS.
"Finally, I'd like to offer my profound thanks to all my
colleagues across the Group. Our UK postmen and women are playing a
crucial role in mitigating the impact of the COVID-19 pandemic.
They are key workers on the frontline. Our GLS colleagues have also
gone the extra mile in the many countries in which they operate to
support their customers and communities."
Financial and operational highlights
Reported Group Financial summary(1,2)
Reported results (GBPm) 52 weeks 53 weeks
March March
2020 2019
---------------------------- -------- --------
Revenue 10,840 10,581
---------------------------- -------- --------
Operating profit before
specific items 217 341
---------------------------- -------- --------
Profit before tax 180 241
---------------------------- -------- --------
Ha Basic earnings per share
(pence) 16.1 17.5
---------------------------- -------- --------
Dividend per share (pence) 7.5 25.0
---------------------------- -------- --------
-- Group revenue increased by GBP259 million, or GBP396 million
after adjusting for the 53(rd) week in 2018-19.
-- Reported operating profit before specific items down GBP124 million, driven by lower UKPIL profitability.
-- Dividend per share of 7.5p reflects Board decision not to
recommend final dividend for 2019-20.
-- Total liquidity (including undrawn committed facilities) of
around GBP1.9 billion. Includes GBP925 million syndicated bank loan
facility of which GBP225 million is undrawn.
-- Operating specific items charge of GBP162 million, down GBP19
million. Includes GBP91 million non-cash impairment with respect to
Parcelforce Worldwide.
Adjusted Group Financial summary(1,2)
52 weeks 53 weeks 52 weeks Change
Adjusted results (GBPm) March 2020 March 2019 March 2019 3
----------------------------- ----------- ----------- ----------- --------
Revenue 10,840 10,581 10,444 3.8%
----------------------------- ----------- ----------- ----------- --------
Operating profit 325 411 376 (13.6%)
----------------------------- ----------- ----------- ----------- --------
Margin 3.0% 3.9% 3.6% (60 bps)
----------------------------- ----------- ----------- ----------- --------
Profit before tax 275 398
----------------------------- ----------- ----------- ----------- --------
Basic earnings per share
(pence) 19.6 30.5
----------------------------- ----------- ----------- ----------- --------
In-year trading cash flow(4) 556 117
----------------------------- ----------- ----------- ----------- --------
Net debt (1,132)* (300)**
----------------------------- ----------- ----------- ----------- --------
Net debt (excluding IFRS
16 impacts) (46)* (300)**
----------------------------- ----------- ----------- ----------- --------
* As at 29 March 2020; ** As at 31 March 2019
Group
-- Adjusted operating profit of GBP325 million, down 13.6 per
cent. GBP312 million excluding impact of IFRS 16, within forecast
range of GBP300-340 million.
-- Adjusted margin down 60 basis points, due primarily to significant cost headwinds in UKPIL.
-- In-year trading cash flow of GBP556 million, due to positive
impact of IFRS 16 (GBP141 million), working capital inflow and
lower capital expenditure.
-- Net debt increased to GBP1,132 million, mainly due to IFRS 16.
Business units(1,2)
GBPm Revenue Adjusted operating profit
------------------- ----------------------------------- -----------------------------------
52 weeks 52 weeks Change(3) 52 weeks 52 weeks Change(3)
March 2020 March 2019 March 2020 March 2019
------------------- ----------- ----------- --------- ----------- ----------- ---------
Royal Mail (UKPIL) 7,720 7,595 1.6% 117 199 (41.2%)
GLS 3,161 2,888 a9.5% 208 177 17.5%
Intragroup (41) (39) 5.1% - - -
=================== =========== =========== ========= =========== =========== =========
Group 10,840 10,444 3.8% 325 376 (13.6%)
Royal Mail (UKPIL)
-- Parcel volumes up 2 per cent, lower than expected, due to
threat of industrial action (Q3) and impact of COVID-19 on
international import volumes (Q4). Parcel revenue up 4.6 per cent,
due to targeted pricing actions.
-- Addressed letter volumes (excluding election mailings) down
eight per cent, in line with guidance provided in Q3 trading
update. Total letter revenue down 0.9 per cent, benefitting from
two elections in the period and targeted price increases.
-- GBP188 million of costs avoided, in line with guidance of GBP150-200 million.
-- Productivity improvement of 1.0 per cent, below our original
target of over 2 per cent. Due to necessary additional investment
to protect quality in Q3 and COVID-19.
-- Adjusted operating costs up 2.8 per cent, driven by increased
distribution and conveyance and people costs, including service
quality measures.
-- Adjusted operating profit margin of 1.5 per cent (down 110
basis points) reflects lower UKPIL profitability.
GLS
-- Volumes up 4 per cent excluding acquisitions, or 5 per cent
including acquisitions. Revenue grew 6.3 per cent excluding
acquisitions, or 9.5 per cent including acquisitions.
-- Adjusted operating profit including acquisitions of GBP208
million, up 17.5 per cent. Up 13.5 per cent excluding
acquisitions.
-- Adjusted operating profit margin of 6.6 per cent, up 50 basis
points compared with prior period. In line with 6-7 per cent annual
target range.
Current trading (first two months of 2020-21)
Royal Mail (UKPIL)
-- Revenue down GBP29 million, year-on-year. Excluding impact of
European Parliamentary Elections in prior year, revenue broadly
flat.
-- Addressed letter revenue down 23 per cent (excluding
elections); volumes (excluding elections) down 33 per cent.
Advertising mail volumes down 63 per cent, significantly impacted
by COVID-19. Business mail volumes more resilient; down 19 per
cent.
-- Parcel volume and revenue growth of 37 per cent and 28 per cent, respectively.
-- UK domestic account volumes (excluding Amazon) up 65 per
cent. Cumulative growth in tracked products, mainly consisting of
Tracked 24(R)/48(R) and Tracked Returns(R), of 76 per cent.
-- Total costs up GBP80 million, driven by overtime and agency
resource costs due to high levels of absence, social distancing
measures, protective equipment and parcel related volume costs.
-- Operating profit down GBP108 million, year on year (including
benefit of May 2019 election).
UK initiatives
-- Taking action on two initiatives (management restructure and
non-people costs) to deliver annual operating profit benefit in
2021-22 of GBP330 million.
-- Management restructure, subject to consultation, targeting a
reduction of c.2,000 roles out of a total population of c.9.700.
Largest reductions in senior executive roles and non-operational
functions. Expected to cost around GBP150 million, targeting annual
benefit of GBP130 million in 2021-22.
-- Targeting flat non-people costs, excluding depreciation, in
2021-22 versus 2019-20, with GBP200 million annual savings in
2021-22 offset by increases in parcel volume related costs.
-- We are seeking to open talks with CWU on the need for change,
future pay, and to address the issues raised in the ongoing
industrial dispute. We expect that any pay inflation will be funded
from productivity improvement cumulatively to March 2022.
-- Capital expenditure review and reprioritisation: GBP250
million reduction across 2020-21 and 2021-22. Investment continues
at higher than historical levels, including in parcel automation
and hubs.
-- Following the impairment of Parcelforce Worldwide assets, we
expect depreciation charges in the UK to be broadly flat in 2020-21
versus 2019-20.
-- No annual bonus for Executive Directors and Royal Mail executives in 2019-20.
GLS
-- Increased volatility - B2C volumes have grown in most markets
following onset of COVID-19. B2B volumes negatively impacted.
-- Revenue up 15 per cent including acquisitions, driven by growth in B2C.
-- Operating profit margin improvement of 1.4 per cent.
GLS initiatives
-- Shift from B2B to B2C brings cost pressures - adopting a local market by market approach
-- Implemented various measures to support network stability and
quality. Focus on pricing, productivity and digital tools.
-- Reviewing improvement plans for key focus markets.
Outlook 2020-21 and beyond
Financial outlook and scenarios
-- Unprecedented nature of pandemic means outlook is challenging and volatile.
-- Continue to expect Royal Mail (UKPIL) to be materially
loss-making in 2020-21. GLS profitability may potentially be
reduced.
-- Two scenarios for 2020-21 set out how the businesses could
perform under certain sets of assumptions, but these are not
guidance or forecasts.
-- Scenario 1: assumes a UK GDP decline of 10 per cent for
2020-21 and COVID-19 restrictions continue to ease post June. Royal
Mail (UKPIL) revenue GBP200 to GBP250 million lower year-on-year,
with GBP140 million of additional costs related to COVID-19 and
GBP110 million due to higher parcel volumes. GLS revenue growth 5-7
per cent, operating margin of around 6 per cent.
-- Scenario 2: assumes a deeper recession, with a UK GDP decline
of 15 per cent for 2020-21. Royal Mail (UKPIL) revenue GBP500 to
GBP600 million lower year-on-year, with GBP155 million of
additional COVID-19 related costs and GBP100 million of costs
associated with higher parcel volumes. GLS revenue growth of 0-2
per cent, operating margin of around 5 per cent.
Dividend and balance sheet
-- No final dividend recommended for 2019-20.
-- No dividend expected to be paid in respect of 2020-21.
Ambition to re-commence dividend payments in 2021-22, supported by
GLS.
-- Strong balance sheet: total liquidity, including undrawn
committed facilities, around GBP1.9 billion. Under both scenarios
above, balance sheet and liquidity would be robust, with access to
sufficient cash and unutilised facilities.
-- The Group will provide a further update at its AGM on 8 September 2020.
Results presentation
A results webcast presentation for analysts and institutional
investors will be held at 9:00am on Thursday 25 June 2020 at
www.royalmailgroup.com/results.
For further information, please contact:
Investor Relations
John Crosse
Phone: 020 7449 8183
Email: investorrelations@royalmail.com
Company Secretariat
Mark Amsden
Phone: 020 7449 8289
Email: cosec@royalmail.com
Media
Shane O'Riordain
Phone: 07770 544585
Email: shane.oriordain@royalmail.com
Beth Longcroft
Phone: 07435 768 549
Email: beth.longcroft@royalmail.com
Royal Mail press office out of hours: 020 7449 8246
Footnotes - Financial and Operational Highlights
1. Reported results are in accordance with International
Financial Reporting Standards (IFRS). Adjusted results exclude the
pension charge to cash difference adjustment (2019-20: GBP108
million; 2018-19: GBP70 million) and specific items (2019-20: GBP13
million credit; 2018-19: GBP87 million charge), consistent with the
way financial performance is measured by Management and reported to
the Board.
2. For further details of reported results, adjusted and
Alternative Performance Measures (APMs) used in the Financial
Review for the full year ended 29 March 2020, including
reconciliations to the
closest IFRS measures where appropriate, see the section
entitled 'Presentation of results and Alternative Performance
Measures'.
3. Comparisons with the prior year are against the adjusted 52
week results and are no longer presented on an underlying basis.
All percentage changes represent the movement between the results
as presented. Any factors having a material impact on year-on-year
comparisons are highlighted in the narrative to the results.
4. In-year trading cash flow reflects the cash generated from
the trading activities of the Group. It is based on reported net
cash inflow from operating activities, adjusted to exclude other
working capital movements and the cash cost of operating specific
items and to include the cash cost of property, plant and equipment
and intangible asset acquisitions and net finance payments.
UK management initiatives
We have a plan to ensure Royal Mail remains a key part of our
economy, a good employer, and the UK's delivery partner of choice.
Delivering it requires a step change in the number of major
initiatives we can successfully deliver in a short period of
time.
Our plan consists of three main strands:
-- Continuing to address the key challenges posed by COVID-19;
-- Accelerating the pace of change in the UK, working closely with our unions; and
-- Working with Ofcom and Government to ensure a
financially-sustainable USO for the 21(st) Century.
In this section, we address the first strand, which is about
tackling the impact of COVID-19.
Continuing to address the key challenges posed by COVID-19
We have already announced steps to underpin our financial
position. We have not recommended a final dividend for 2019-20. No
dividend is expected to be paid in respect of 2020-21. We are not
paying annual bonuses to Executive Directors and Royal Mail
executives for 2019-20.
Today, we are also announcing two new initiatives we expect to
collectively deliver an annual operating profit benefit in 2021-22
of GBP330 million. They are: i) a proposed UK management
restructure; and ii) a target of flat non people costs, excluding
depreciation, in 2021-22 versus 2019-20. A review of capital
expenditure has resulted in a reduction in Royal Mail (UKPIL)
planned expenditure of around GBP250 million across 2020-21 and
2021-22.
i) Management restructure
We have taken the difficult decision to consult Unite/CMA on a
proposal to reduce, on a phased basis, the number of UK management
roles by around 2,000 this financial year. As part of this, around
half of Royal Mail's senior leaders and most senior managers are
expected to leave the Company in the next few months. The majority
of overall impacted roles are expected to be in central and support
areas, rather than in our field operations. We were already talking
informally to Unite/CMA about these changes and will now start
formal consultation.
This necessary change is about making us a leaner, more focused
company. But, that does not detract from the fact that many hard
working, highly valued colleagues are expected to leave our
business. We are committed to conducting the consultation process
carefully and sensitively, working closely with our people and
their representatives. We will provide those leaving the business
with a package of support to help them transition to the next stage
in their career, including life beyond Royal Mail. This will
include outplacement services such as CV writing, interview
preparation, career choices and clarity on personal ambitions. This
proposal is expected to cost GBP150 million. Subject to
consultation, we expect to deliver annual benefits of GBP130
million in 2021-22.
ii) Flat non-people costs
We are targeting flat non-people costs, excluding depreciation,
in 2021-22 versus 2019-20, with GBP200 million annual savings in
2021-22 offset by increases in parcel volume related costs. This
will be achieved through a number of activities, focused on
procurement, administrative costs and demand management.
iii) Capital expenditure review
A comprehensive review of UK capital expenditure means we will
reduce spend in this area by around GBP250 million across 2020-21
and 2021-22. This will be through a combination of cancelling some
projects, and deferring others.
We remain committed to our UK transformation programme and a
substantial level of capital expenditure required to achieve it.
Alongside our continued focus on rolling out parcel automation, we
expect two new dedicated parcel hubs to service some of our
traffic. We will keep under review when we will need a third
hub.
Scenarios assessing the potential impacts of COVID-19 on trading
for the year ending 28 March 2021
Towards the end of 2019-20, COVID-19 meant we saw strong UK
parcel e-commerce volumes, offset by significant reductions in
letter volumes, especially advertising mail. Imports were heavily
impacted in our International parcels business. In addition, we
incurred costs in relation to overtime, social distancing and
protective equipment.
We have evaluated the possible implications for Royal Mail
(UKPIL) and GLS resulting from COVID-19 for the financial year
ending 28 March 2021. Since the crisis started, there have been
material changes in the volume trends for both letters and parcels
in the UK, and for parcels in GLS. Additionally, we now expect a
deep recession in the UK and internationally during 2020.
Given the unprecedented level of uncertainty, we are unable to
provide specific guidance for 2020-21. Instead, we have summarised
the impacts of COVID-19 on our business during the two-month period
to the end of May 2020, and we have quantified two future scenarios
for the financial year 2020-21 to illustrate a range of potential
impacts COVID-19 may have on our trading performance. These
scenarios do not represent Management's view or outlook and are
only provided for illustrative purposes.
1. Impacts of COVID-19 from 29 March 2020 to end of May 2020
Royal Mail (UKPIL)
In the UK, the country went into lockdown on 23 March 2020, one
week before our year end. The impacts on our business resulting
from COVID-19 are therefore most material in the period following
the year end date.
Laid out below are the principal impacts on our UKPIL trading
performance in April and May 2020, during lockdown.
2019-20 trend April 2020 May 2020 2 months to end May 2020
(%) (%) (%) (%)
------------------------------------------------------- ------------- ---------- -------- ------------------------
Addressed letter volume decline (excluding elections) (8) (33) (33) (33)
------------------------------------------------------- ------------- ---------- -------- ------------------------
Parcel volume growth +2 +31 +44 +37
------------------------------------------------------- ------------- ---------- -------- ------------------------
Below summarises the key income statement impacts of COVID-19 April 2020 May 2020 2 months to end May 2020
(GBPm) (GBPm) (GBPm)
---------------------------------------------------------------------- ---------- -------- ------------------------
Year on year UKPIL revenue change (22) (7)* (29)*
------------------------------------------------------- ------------- ---------- -------- ------------------------
Incremental overtime / agency costs, including social
distancing costs (25) (15) (40)
------------------------------------------------------- ------------- ---------- -------- ------------------------
Incremental protective equipment costs (8) (5) (13)
------------------------------------------------------- ------------- ---------- -------- ------------------------
UKPIL year on year operating profit deterioration (60) (48)* (108)*
------------------------------------------------------- ------------- ---------- -------- ------------------------
* May 2019 included the revenue and profits associated with the
European elections, and this has contributed to the year on year
impact. This is not adjusted in the figures reported above.
We exceeded our regulatory Quality of Service target for Second
Class mail in the 2019-20 financial year, but we missed our target
for First Class mail. Until 15 March 2020, we believe we were
meeting our First Class target, with a performance of 93.0 per
cent. During the fourth quarter of the financial year, our First
Class performance was 93.2 per cent, excluding COVID-19. However,
including the impact of COVID-19 it was 91.6 per cent. We have been
unable to measure our Quality of Service since lockdown began in
the UK.
GLS
In GLS, B2C volumes have grown materially in most markets
following the onset of COVID-19, whilst B2B volumes have been
negatively impacted as businesses were forced to close. Overall,
revenue and volume performance has remained good, and margins have
improved versus prior year. In the near term, a combination of the
recessionary environment and the higher unit costs of delivery
associated with B2C parcels may have negative implications for
margins.
Below summarises GLS trading performance in April and May
2020.
April 2020 (%) May 2020 (%) 2 months to end May 2020 (%)
----------------------------------------------------- -------------- ------------ ----------------------------
Year on year GLS revenue change +14 +16 +15
----------------------------------------------------- -------------- ------------ ----------------------------
Year on year GLS operating profit margin improvement +1.2 +1.5 +1.4
----------------------------------------------------- -------------- ------------ ----------------------------
2. 2020-21 Scenarios
We have evaluated the impacts that COVID-19 may have on 2020-21
trading under two scenarios.
Scenario 1: Lockdown in the UK continues to ease, with the
progressive re-opening of businesses, leisure activities and
schools in line with Government guidance. A material recession
results in GDP declining by 10 per cent for the financial year
2020-21, which disproportionately impacts advertising mail. In GLS,
parcel volume and revenue growth remains good, with impact to
margins effectively managed as the mix moves to a higher proportion
of B2C.
Scenario 2: Lockdown in the UK continues to ease, with the
progressive re-opening of businesses, leisure activities and
schools. A deeper, more protracted recession hits the global
economy (resulting in a GDP decline of 15 per cent in the UK in the
2020-21 financial year). A further lockdown is assumed during the
autumn / winter in the UK. Letter volumes are severely impacted
throughout the year, and whilst parcel volumes benefit from a
second lockdown period, the benefit is restricted due to network
capacity over the peak trading period and as a result of reduced
consumer spending power. In GLS, whilst revenue and volume
performance remains good, margins are impacted by a stepped
increase in B2C parcels, which carry a higher unit cost of
delivery.
Scenario 2 is consistent with the stress test applied in
assessing viability for the business, although the full viability
assessment also contemplated the impacts of industrial action in
the UK.
In assessing the financial impact of the scenarios, we have made
assumptions with respect to how the revenue trends and incremental
costs associated with COVID-19 may be impacted throughout the
year.
Royal Mail (UKPIL)
HY1 HY2 2020-21
----------------------------------------------------------------------------------- -------- -------- -------------
Scenario 1
----------------------------------------------------------------------------------------------------------------------
Letter revenue decline (22%) (11%) (16%)
----------------------------------------------------------------------------------- -------- -------- -------------
Parcel revenue growth 20% 5% 12%
----------------------------------------------------------------------------------- -------- -------- -------------
Domestic parcels revenue 24% 8% 15%
----------------------------------------------------------------------------------- -------- -------- -------------
International parcels revenue 2% (7%) (3%)
----------------------------------------------------------------------------------- -------- -------- -------------
UKPIL revenue decline* (GBP200-250m)
----------------------------------------------------------------------------------- -------- -------- -------------
Net costs of mix change from letters to parcels (GBP70m) (GBP40m) (GBP110m)
----------------------------------------------------------------------------------- -------- -------- -------------
Incremental costs of absence, social distancing, protective equipment and other
COVID-19 costs (GBP80m) (GBP60m) (GBP140m)
----------------------------------------------------------------------------------- -------- -------- -------------
*Not adjusted for the impact of elections in 2019-20
Full year letter revenue decline of 16 per cent, with the weighting of volume loss towards
lower average unit revenue advertising mail services. Letter volumes slowly recover through
the year, following the easing of lockdown. But, the recession that follows, coupled with
some customer behavioural change, means that the decline rate remains significantly higher
than the norm.
Parcel revenue growth of 12 per cent, with the weighting of volume growth towards lower average
unit revenue account parcels. The high account parcel growth experienced during lockdown reduces
through the year as high street retailers re-open, although volume growth remains higher than
normal as social distancing and consumer nervousness remains, with some permanent behavioural
change as online retail penetration accelerates. Total parcel revenue growth rate is negatively
impacted by revenue declines in International parcels, as the impacts of material price increases
on international delivery and increased friction following Brexit reduce traffic.
The accelerated growth in parcel volumes requires investment in additional manual sortation
resource and incremental logistics costs.
The 'one off' impacts of COVID-19, including higher than usual absence levels, the provision
of protective equipment, the higher costs associated with the deployment of social distancing
measures, together with increasing provision for bad debts, increases operational costs in
the year.
----------------------------------------------------------------------------------------------------------------------
HY1 HY2 2020-21
----------------------------------------------------------------------------------- -------- -------- -------------
Scenario 2
----------------------------------------------------------------------------------------------------------------------
Letter revenue decline (22%) (22%) (22%)
----------------------------------------------------------------------------------- -------- -------- -------------
Parcel revenue growth 17% 4% 10%
----------------------------------------------------------------------------------- -------- -------- -------------
Domestic parcels revenue 22% 9% 15%
----------------------------------------------------------------------------------- -------- -------- -------------
International parcels revenue 1% (11%) (6%)
----------------------------------------------------------------------------------- -------- -------- -------------
UKPIL revenue decline* (GBP500-600m)
----------------------------------------------------------------------------------- -------- -------- -------------
Net cost of mix change from letters to parcels (GBP65m) (GBP35m) (GBP100m)
----------------------------------------------------------------------------------- -------- -------- -------------
Incremental costs of absence, social distancing, additional protective equipment
and other
COVID-19 costs (GBP85m) (GBP70m) (GBP155m)
----------------------------------------------------------------------------------- -------- -------- -------------
*Not adjusted for the impact of elections in 2019-20
Letter revenue decline of 22 per cent, with the weighting of volume loss towards lower average
unit revenue advertising mail services. The combination of a severe recession and the impacts
of a second lockdown in the autumn / winter mean that letter volumes remain materially impacted
across the year.
Parcel revenue growth of 10 per cent due to weighting of volume growth towards lower average
unit revenue account parcels. The high account parcel growth experienced during lockdown reduces
as high street retailers re-open. A further lockdown in the autumn / winter does not drive
the same growth in volumes, as network capacity is restricted in our busiest trading period.
Volume growth remains higher than normal as social distancing and consumer nervousness remain,
with some permanent behavioural change as online retail penetration accelerates. Total parcel
volume growth rate is negatively impacted by volume declines in International parcels, as
the impacts of material price increases on international delivery and increased friction following
Brexit reduce traffic.
The accelerated growth in parcels volumes requires investment in additional manual sortation
resource and incremental logistics costs.
The 'one off' impacts of COVID-19, including higher than usual absence levels, the provision
of protective equipment and the higher costs associated with the deployment of social distancing
measures, increases the operational costs in the year.
----------------------------------------------------------------------------------------------------------------------
GLS
HY1 HY2 2020-21
-------------------------------------- ------------------ ------------------- ---------------
Scenario 1
------------------------------------------------------------------------------------------------
Revenue growth rate 8% to 12% Flat to 2% 5% to 7%
-------------------------------------- ------------------ ------------------- ---------------
Margin c. 6%
-------------------------------------- --------------------------------------- ---------------
The business is able to successfully respond to the swing in mix towards B2C and preserve
margins of around 6%.
------------------------------------------------------------------------------------------------
HY1 HY2 2020-21
------------------------------ ----------------- ------------------------- ---------------------
Scenario 2
---------------------------------------------------------------------------------------------------
Revenue change 7% to 9% Flat to (5%) Flat to 2%
------------------------------ ----------------- ------------------------- ---------------------
Margin c.5%
------------------------------ -------------------------------------------- ---------------------
A more significant impact driven by stronger volume decline, leading to higher cost and price
pressure.
---------------------------------------------------------------------------------------------------
Mitigating actions
In order to preserve cash, a number of short-term mitigating
actions have already been taken in response to the COVID-19
crisis.
Expected saving in 2020-21 (GBPm)
No dividend paid in 2020-21 150
---------------------------------
Capital programmes ceased or paused c.175
---------------------------------
Bonus cancelled for senior managers and reduced for other managers 30
---------------------------------
At the same time, we have concluded talks with our banks who
have agreed to relax the covenant restriction on our loan facility.
The previous covenants have been removed for the next three testing
dates (September 2020 and 2021, and March 2021) and replaced with a
basic liquidity covenant. The viability assessment and statement
has been made in the light of this amendment.
The cash which has been preserved will, subject to satisfactory
business performance in the coming period, be diverted into
investment in restructuring initiatives.
Interim Executive Chair's statement
On 15 May 2020, Keith Williams assumed the role of interim
Executive Chair, Royal Mail Group. This section deals with the
strategic challenges the Group is seeking to address. It also
covers the governance, market and societal changes that impacted
the Group during 2019-20. An update on our commercial, operating
and financial performance can be found in the Business review
2019-20.
Introduction
These are extraordinary times.
When I became Chair in May 2019, who could have predicted the
COVID-19 pandemic, which has impacted the markets in which we
operate, and countless people, communities and countries across the
globe, in such a short time? I would like to take this opportunity,
on behalf of the Board, to express our deepest condolences to the
families of those who have lost their lives to COVID-19, including
the families of some of our own employees.
In recent weeks, we have also announced Executive changes,
including the departure of Group CEO, Rico Back. We have
restructured our management to improve the position of our two main
businesses - Royal Mail (UKPIL) and GLS - recognising their
different market positions and strategies. This includes the
appointment of Stuart Simpson as interim CEO of Royal Mail. I have
assumed the role of interim Executive Chair to lead discussions
with stakeholders about an accelerated pace of change across the
business. I stepped down from our Remuneration Committee when I
took on this interim role.
We have today announced that Martin Seidenberg has been
appointed CEO of GLS, with immediate effect. Martin joined GLS in
2015 as CEO of GLS Germany. He became GLS Group Area Managing
Director, GLS Germany and Parcelforce Worldwide, in 2018. Prior to
joining the Group, Martin spent 15 years at Deutsche Post DHL,
where he held a variety of logistics and parcel business related
roles.
Martin will report directly to me in my role as interim
Executive Chair. To ensure greater focus, he will report directly
to the Board once I return to the Chair's role.
James Rietkerk has today stepped down as GLS Chief Executive
Officer. James has served as GLS Chief Executive Officer since June
2018. Prior to that, he was GLS Chief Financial Officer since April
2001. James has made a significant contribution to Royal Mail over
his 19 years with us. He has been instrumental in growing and
building GLS into the business that it is today. He leaves GLS in
excellent shape, having delivered record results in 2019-20, and a
strong start to 2020-21. On behalf of the Board, I would like to
extend my thanks to James and wish him well in the future.
The Board and I are cognisant of the requirements of the UK
Corporate Governance Code with respect to my current role. It is an
interim appointment, for a short time only. I expect to remain in
the Executive Chair role until a permanent CEO of Royal Mail is
appointed. And, of course, in the interim, Royal Mail Group is my
single biggest commitment.
Thank you
In a moment, I will deal with our key strategic themes. Before I
do, I want to say thank you to our stakeholders, during what has
been the most significant disruption to our lives, businesses and
the financial markets, since the Second World War.
First and foremost, I want to offer my profound thanks to all my
colleagues across the Group. Our UK postmen and women are playing a
crucial role in mitigating the impact of the pandemic. They are key
workers on the frontline. Our GLS colleagues have also gone the
extra mile in the many countries in which they operate to support
their customers and communities.
Simply put, the efforts of our people across the Group are
humbling. On behalf of the Board, I want to say thank you to each
and every one of them.
Strategic themes
As we have previously announced, we continue to expect Royal
Mail (UKPIL) to be materially loss-making in 2020-21. GLS
profitability may potentially be reduced in 2020-21.
Royal Mail (UKPIL)
In reality, our UK business has been facing significant
headwinds for some years. We have not always been as agile as we
might have liked when responding to change in the marketplace and
customer needs. Operationally, our heritage as a letters-focused
business means we are not as well positioned as we would like to
handle fewer letters and more parcels. These factors, alongside
cost increases, are driving significant financial pressures.
The COVID-19 pandemic presents new, fundamental, challenges to
our business model - and to those of our customers. Ensuring a
sustainable, contemporary Universal Service requires us to respond
to this unprecedented global crisis, as well as adapting to the
changing realities of our marketplace.
Clearly, the unprecedented nature of the COVID-19 pandemic means
the outlook is difficult and volatile. To assist our stakeholders,
we have introduced a scenario-based stress test. This is about
outlining what our business performance might look like against
certain base-case assumptions at a particular point in time. We
hope this is helpful; although it is not, of course, either a
specific forecast or guidance in its own right.
In response to the scenarios, we have a plan to ensure Royal
Mail remains a key part of the UK economy, a good employer, and the
nation's delivery partner of choice. Delivering it requires a step
change in the number of major initiatives we can successfully
deliver in a short period of time.
Firstly, we are going to continue to tackle the challenges posed
by COVID-19. We are implementing a range of immediate cost control
activities and reducing capital expenditure in a measured way.
Regrettably, one of these measures could see around 2,000 of our
managers leave our business. This is subject to consultation with
Unite/CMA. Change of this nature is never easy. But, we have a good
track record of managing these programmes carefully and
sensitively. We will provide anyone leaving the business with a
support package to help them transition to the next stage in their
career, including life beyond Royal Mail.
Secondly, we are accelerating the pace of change in the UK to
address the longstanding challenges we face, created by fundamental
shifts in the way we communicate (fewer letters) and shop (more B2C
parcels).
At the heart of this plan is our intention to move from being a
UK-focused letters business that also delivers parcels to an
international parcels business that delivers letters in the UK. The
rationale underpinning our strategy is, in fact, even more
compelling now that we are dealing with the consequences of
COVID-19. We believe it is very important to work with our unions
to bring about the urgent change needed to deliver our UK strategy.
We welcomed and appreciated CWU's statement that the COVID-19
crisis was not the time to take industrial action. We signed a
joint statement with the CWU on 15 May in which we awarded a GBP200
payment to our frontline employees to recognise their hard work to
keep services running throughout the current COVID-19 pandemic. We
continue to engage, on a regular basis and at a senior level, with
CWU and Unite/CMA on our plans for change. Our engagement with CWU
follows our recent Joint Statement with the union whereby both
parties committed to work on setting up a joint framework for talks
to seek to resolve our dispute.
Finally, we do not believe that the COVID-19 mitigation measures
and the delivery of our transformation plan will be enough, in
themselves, to ensure a sustainable future.
We are also working with the Regulator and Government on a
review of the USO. This is all about ensuring it is financially
underpinned, in a sustainable way, and future-proofed to reflect
changing customer needs and preferences. As Ofcom continues its
User Needs Review about the Universal Service, we will engage with
many stakeholders on the shape of a national USO for the 21st
Century. We look forward to the debate and engagement to come.
GLS
Turning to GLS, COVID-19 also presents significant challenges.
B2B volumes have been adversely impacted; companies have scaled
down their commercial activities. Conversely, we have seen a
significant increase in B2C activity. Almost half of GLS's volumes
(48 per cent) are now accounted for by B2C; we expect that to grow
to around 58 per cent by the end of 2020-21.
Fundamentally, our GLS strategy is about capitalising on growth
opportunities in its key markets, while continuing to improve
performance in some of the countries in which we operate. This
includes France, Spain and the United States, markets where
progress is taking longer to realise than initially anticipated.
Our aim is to fix performance issues. But, we will consider all
options, including exit, for underperforming businesses. The trend
towards B2C parcel deliveries in some markets offers us
opportunities, as we maintain margins through focused yield
management. We will focus investment on growing markets, strengthen
our last mile delivery network and broaden alternative delivery
options as appropriate.
If we can do all this, we will add to the good cash generation
GLS has today. We are focusing on these short term improvements,
while looking at longer-term opportunities for the business.
Dividend and balance sheet strength
As previously announced, the Board has decided not to recommend
a final dividend for 2019-20.
Royal Mail is one of the most widely-held stocks in the FTSE,
with a quarter of our shares owned by retail shareholders, or our
colleagues. We recognise many shareholders rely on the income from
their shareholdings. We have taken this necessary action in the
interests of the longer-term sustainability of our business.
Taking into account the very challenging external environment,
the Board is today confirming that we do not expect dividends to be
paid in respect of 2020-21. Our ambition is to re-commence dividend
payments in 2021-22, supported by GLS.
We have also publicly announced that, as part of a series of
measures to maintain our strong financial position, the Board has
decided not to award an annual bonus to Executive Directors and
Royal Mail executives for 2019-20. In recognition of the role
played by our UK frontline staff, around GBP25 million has been set
aside to be paid as a cash bonus. Eligible colleagues received a
cash recognition award of up to GBP200 in June.
We believe the Group has a strong balance sheet and high levels
of liquidity. Our total liquidity, including undrawn committed
facilities, stands at around GBP1.9 billion. This includes a GBP925
million syndicated bank loan facility. Our existing covenants have
been waived until March 2022 and replaced with a basic liquidity
covenant. Under both our stress test scenarios, our balance sheet
and liquidity would be robust, with access to sufficient cash and
unutilised facilities. We also have the ability to access the UK
Government's COVID-19 Corporate Financing Facility if required.
Board changes
In May, we announced that the Board and Rico Back had agreed he
would step down as Group CEO and from the Board with immediate
effect, leaving Royal Mail on 15 August 2020. Prior to his
appointment as Group CEO, Rico was a senior Group Executive and led
the development and growth of GLS. On behalf of the Board, I would
like to again thank Rico for his contribution to our business.
As previously noted, Stuart Simpson has been appointed interim
CEO of Royal Mail. Stuart has spent over a decade at Royal Mail,
including three years as Chief Finance Officer and a Board member.
We will conduct a comprehensive internal and external search for a
permanent CEO of Royal Mail.
We have refreshed and strengthened the Board. Baroness Sarah
Hogg joined us in October 2019 as a Non-Executive Director and
Senior Independent Director. Sarah brings with her a wealth of
experience from the private and public sectors, including strategy,
public policy and governance. She is currently Senior Independent
Non-Executive Director of the Financial Conduct Authority, having
been Chair of 3i Group plc and a Non-Executive Director of other
companies, including BG Group Plc and GKN Plc.
Lynne Peacock joined us in November as a Non-Executive Director
and Chair of the Remuneration Committee, taking over from Simon
Thompson, who had assumed this role on an interim basis. Lynne has
had a distinguished career, including in regulated industries
undergoing extensive transformation. Lynne is currently a
Non-Executive Director of TSB Banking Group plc and a Non-Executive
Director of Serco Group plc., where she chairs the Remuneration
Committee.
Having joined us in May 2019, Michael Findlay and Maria da
Cunha's experience have already benefited the Board during a busy
and challenging time for the Company.
Finally, I want to pass on my thanks to Les Owen, who stepped
down as Chairman on 22 May 2019. Les stepped into the role at a
difficult time, showing integrity and leadership, and generously
sharing his knowledge and experience. He leaves with my thanks for
his considerable contribution; not just to the Board but to Royal
Mail as a whole, over many years.
Returning to my comments earlier, in relation to COVID-19, on
behalf of the Board, I would like to reiterate my profound thanks
to everyone at Royal Mail.
Their dedication, fortitude, and, most of all, their commitment
to delivering a little cheer alongside the daily post, has reminded
the public of the crucial role we play in a digital world.
Keith Williams
Interim Executive Chair
24 June 2020
Business review 2019-20
This section reviews our financial, commercial and operating
performance for the full year to 29 March 2020. Our reported
results are prepared in accordance with International Financial
Reporting Standards (IFRS) and are set out in the 'Group Results'
section of the Financial Review.
In addition to reported results, the Group's performance is also
explained through the use of Alternative Performance Measures that
are not defined under IFRS. Management is of the view that these
measures provide a meaningful basis on which to analyse business
performance.
We also provide updates about the impact of COVID-19 on our
business.
Review of 2019-20(1)
Looking back at the key elements of our financial performance
over a challenging year, we have achieved adjusted Group operating
profit of GBP325 million. Excluding the impact of IFRS 16, the
performance of GBP312 million was within our target range of
GBP300-340 million.
Group revenue was up 3.8 per cent, driven by: GLS revenue growth
of 9.5 per cent; UK parcel revenue growth of 4.6 per cent; and
better than expected UK letter revenue, due to targeted price
increases and the benefit of two elections.
The revenue performance did not offset other financial
pressures. Adjusted UKPIL operating costs were up 2.8 per cent, and
the same elections that benefited letter revenue meant increased
quality investment, contributing to a productivity improvement of
1.0 per cent, below our initial target of over two per cent.
Adjusted UKPIL operating profit was down 41.2 per cent.
Focused yield management activities at GLS, including positive
developments in average pricing, contributed to strong growth in
its adjusted operating profit to GBP208 million. But, adjusted
Group operating profit declined by 13.6 per cent.
In-year trading cash flow increased GBP439 million to GBP556
million, due to the positive impact of IFRS 16 (GBP141 million),
working capital inflow and lower capital expenditure. Including
undrawn committed funds, our total liquidity is around GBP1.9
billion. We have the ability to access the Covid Corporate
Financing Fund (CCFF) if required.
Progress against our strategic plan
In May 2019, we announced our plan to build a parcels-led, more
balanced, more diversified, international business.
Our plan is comprehensive. It seeks to address our challenges
through three strategic priorities:
- "Turnaround and grow" the UK;
- "Scale up and grow" GLS; and
- Enhancing our cross-border proposition.
1. Turnaround and grow the UK
Turnaround and grow the UK is at the heart of our transformation
plan. Our intention is to move from being a UK-focused letters
business that also delivers parcels, to an international parcels
business that delivers letters in the UK. As the interim Executive
Chair sets out in his statement, the strategic rationale
underpinning our transformation plan is even more compelling now we
are dealing with the consequences of COVID-19.
Combined, the impacts on our UK business of the pandemic and
changing structural trends - fewer letters; more parcels - mean a
step change is required in terms of the number of significant
change programmes we can deliver over a short period of time.
In 2019-20, UKPIL revenue increased by 1.6 per cent. This was
driven by a good performance in parcels, and lower than expected
letter revenue declines due to the benefit of a European
Parliamentary Election and a General Election in the period. We
have no reason to expect a similar benefit this financial year.
More broadly, UKPIL operating profit has fallen by more than 70 per
cent since its peak in 2014-15.
We are engaging with our unions on how we might accelerate the
pace of change in the UK, (see below). Over time, the successful
delivery of our plan should change the dynamics around the
contributions of letters and parcels.
COVID-19 has made this even more pressing. It poses a
fundamental challenge to our business model; we are delivering more
parcels and fewer letters than ever before. Pursuing our strategy
to automate parcel handling and fix our delivery network was
already the right thing to do. These developments underline the
need to transform the business even more quickly, working, as much
as possible, with our key stakeholders.
1a) Renewed focus on productivity and operational excellence
In this foundation year of our change programme, we sought to
improve efficiency and productivity. Despite increasing UKPIL
costs, in part driven by our three-year pay deal with CWU, we
achieved costs avoided of GBP188 million, within our forecast
range. Productivity improved by 1.0 per cent, lower than our
original target of over two per cent. This reflects necessary
additional investment to support quality and delays to local change
initiatives due to the industrial relations environment.
We sought to embed a range of digitally-enabled work tools to
improve efficiency and productivity. We have completed the
deployment of our route optimisation tool. It improves visibility
of changes to delivery routes and is used to undertake delivery
revisions.
We scaled up the use of PDA Outdoor Actuals. Alongside our
Resource Scheduler tool, it draws data from across the operation to
enable better alignment of duty sets and rosters to demand.
In January 2020, following the conclusion of our dispute
resolution procedures with CWU, we confirmed we were moving ahead
with key national and much-needed local change initiatives that had
been delayed, in some cases, by up to a year. That included
extending our trial of automated clocking in and out for frontline
colleagues at a small number of UK sites.
Handwritten signing-on sheets are the norm for most of our UK
employees. We want to move to "Automated Hours Data Capture" (AHDC)
to ensure that we resource adequately to the workload demand in all
our UK sites. The system also provides health and safety and
efficiency benefits. As well as rolling out AHDC to further sites,
we will be using data from PDA Outdoor Actuals to optimise resource
planning across the operation.
Growth of two per cent in UK parcel volumes continues to be
driven by online shopping. We are seeking to increase - quickly -
the number of parcels we sort automatically. We have installed a
further ten parcel machines, meaning we now have 20 machines at 16
Mail Centres. This has driven the percentage of parcels sorted by
machine to 33 per cent at year end, close to three times the
average number sorted automatically during 2018-19. We want to
increase the overall proportion to over 80 per cent by installing
automated machines in all Mail Centres and building two dedicated
parcel hubs by 2023-24.
The continued structural decline in UK letter volumes is driving
the removal of automated letter sorting machines in our Mail
Centres, with 79 machines - around 10 per cent of the total -
removed or decommissioned during the year.
1b) Network extension
A major part of our plan is the extension of the UK network,
specifically to handle larger and Next Day parcels. The structural
shift - not only in the UK delivery market, but across the globe -
towards Next Day or Same Day delivery means it is expected to be
the fastest growing delivery time category.
We began to build out our network during the year. In July 2019,
we said we had started work on the first of our state-of-the-art
parcel hubs. Located in Warrington, close to major shippers, it
will handle 40,000 items per hour when fully operational. We have
chosen the supplier for automation and have completed the fit out.
In February 2020, we signed a conditional agreement for a lease for
our second parcel hub in the Midlands. Once larger and Next Day
items have been processed at one of our hubs, they will be
transported to a number of our larger Delivery Offices. Some will
go out on a second daily van delivery.
In January 2020, we launched a van-based trial to test a
separate daily delivery of larger parcels and Next-Day items. The
trial began in Swindon and was expanded to a small number of
additional sites. These trials are ongoing. Once they are complete,
we will work through the outcomes with our people and their
unions.
Our enhanced network will usher in a major increase in delivery
frequency for consumers and SMEs. There will potentially be two
deliveries a day in many parts of the country from 2023 onwards.
Firstly, the usual combined delivery of letters and small parcels.
Secondly, the later daily delivery of large parcels that have been
ordered online, including in many instances the night before.
Turnaround and Grow: our progress
Renewed focus on productivity:
-- Put in place 73 delivery revisions. Well-developed plans for
three more waves, completing an additional 300 during 2020-21
-- 1.4 per cent reduction in core network hours
-- Productivity improvement of 1.0 per cent, reflecting investment to support quality.
T ransform our network :
-- Linehaul arrangements being updated and data shared with Mail
Centres for improvement opportunities.
-- 11 Mail Centre layouts - optimising flow and processing - approved.
1c) Letters and parcels
i. Parcels performance
Our performance in 2019-20 reflects the fundamental shift in the
way consumers and companies use delivery companies. Account parcel
volumes were up, with Tracked 24/48(R) and Tracked Returns(R) - our
key e-commerce products - delivering double-digit growth for the
12(th) consecutive year. We processed 2.6 million Tracked parcels
on our busiest day. This growth has been supported by the
introduction of our Age and ID Verification products, together with
successful propositions focused on the faster growing sectors and
customers.
We continued to improve customer convenience and flexibility
with a series of product and service enhancements. In April 2019,
we launched earlier customer notifications. They advise recipients
the day before of their delivery day and give an estimated delivery
time. Over time, customers will receive shorter estimated delivery
windows. Around a third (33 per cent) of online shoppers want to
receive information about their parcel the day before delivery,
according to Royal Mail's own research. Many competitor networks
only predict delivery times on the morning of delivery.
We rolled out a range of new features on our mobile app to help
senders and recipients manage their deliveries more effectively.
Senders can now check a price and buy one-off postage directly
through the app. Our UK "industry first" Augmented Reality Parcel
Sizer enables customers to work out the right postage. It will also
keep customers updated with automatic notifications as their parcel
moves through Royal Mail's network, so there is no need for them to
check for information and updates.
In June 2019, Parcelforce Worldwide launched a new Tariff Code
look up tool. Tariff Codes are an internationally recognised
standard which enable the easy identification of items by customs
authorities, regardless of language barriers. The tool enables
customers to easily and quickly search for the right product Tariff
codes for the item they wish to send. In September 2019, the
Parcelforce App was updated to include n ew and improved tracking
functionality, with the added ability to select a preferred Post
Office using a lookup map tool and address option. In addition, in
August 2019, Parcelforce Worldwide launched its new age
verification service. 'Challenge 25' ensures its catering supply
customers can continue to deliver bladed items, in preparation for
the pending legislation on the delivery of restricted items.
In October 2019, we completed the roll out of 1,400 Parcel
Postboxes, enabling 24-hour access for customers sending or
returning parcels. This is the first UK-wide network of parcel
posting boxes, and the biggest change to the postbox in its
160-year history.
We informed our colleagues in June 2020 that we are integrating
Parcelforce Worldwide and Royal Mail International more closely
into Royal Mail (UKPIL). Parcelforce Worldwide will retain its
brand identity and network. These changes will ensure that we have
one integrated domestic and international parcels strategy that
best serves the changing needs of the market and customers. We will
use our assets in a more integrated and efficient way.
Parcelforce Worldwide saw increased costs pressures last year,
as a result of: product mix; inflation and lower productivity; and,
in the fourth quarter, the impact of COVID-19. This has triggered
an impairment review of Parcelforce Worldwide assets, and
consequently a non cash impairment charge of GBP91 million in
respect of certain assets. For more detail see note 6.
ii. Letters performance
Addressed letter volumes (excluding election mailings) declined
eight per cent, within our expected revised range. Total letter
revenue was down 0.9 per cent, benefitting from two election
mailings and targeted price increases.
We are optimising our letters product portfolio and pricing
strategy. Business mail makes up the majority (c. 64 per cent) of
addressed mail volumes (excluding International and elections).
Advertising mail is around 27 per cent. Our range of products,
incentives and offers are designed to demonstrate how mail can help
their businesses. One example is our new Partially Addressed
product. Aimed at advertisers targeting new customers, it allows
them to reach recipients without using personal data. Customers can
access strictly non-personalised geo-demographic data, from fully
consented individuals. Another product, Late Bookings, for
unaddressed mail, enables customers to access additional postcode
sectors at a significant discount.
Sustainability is an increasingly important issue for our
customers. Organisations are beginning to replace plastic magazine
wrappings with biodegradable starch ones. Over time, we have
invested in upgrading our large letter sorting machines to enable
processing of unwrapped items. We are also working with a number of
customers and mail producers to test biodegradable wraps.
COVID-19 update: parcels and letters
During the pandemic, and the associated lockdown period, we have
seen very strong growth in B2C UK parcels. Domestic account volumes
(excluding Amazon) were up 65 per cent in the first two months of
2020-21. Our tracked products - mainly Tracked 24(R) /48(R) and
Tracked Returns(R) parcels, our key online retail products - are up
76 per cent. International import volumes improved during April and
May.
Addressed letter volumes (excluding the impact of elections)
have fallen 33 per cent as a consequence of the COVID-19 pandemic.
Advertising mail volumes are down 63 per cent, as businesses
mailings are postponed or cancelled. Business mail has been more
resilient, declining by 19 per cent.
Our people
i. Our managers
The contribution and dedication of our managers is central to
the performance of our business. In October 2019, we were pleased
to confirm that managers who are members of Unite/CMA, voted in
favour of a pay agreement recommended by the union. Managers
received a pay increase of 2.6 per cent, backdated to 1 September
2019, and will receive a pay increase of 2.7 per cent from 1
September 2020. They received an Annual Bonus advance in December
2019. In recognition of their continued contribution, we are paying
a flat rate bonus payment to all our managers (except our senior
leaders) for the entire year, adjusted for the December
advance.
ii. Frontline colleagues
Our ongoing dispute with CWU has been one of the defining issues
of 2019-20. In May 2019, CWU informed us it considered that we were
not honouring and deploying our 2018 Agreement.
We have honoured all our Agreements - including the 2018
Agreement - to the letter. We have awarded two pay increases (five
per cent in 2017 and two per cent in April 2019). We implemented
the first hour's reduction of the Shorter Working Week, although we
did not obtain all the cost saving measures to pay for it. This
amounted to a pay increase of 10 per cent in two years. We have
worked closely with CWU, and continue to do so, to lobby Government
to enable Collective Defined Contribution (CDC) pension schemes
under UK law, for the first time in the UK.
But, an analysis of the productivity and efficiency
opportunities in our Agreement found that, to fund it, there needed
to be a step change in the pace and focus of the initiatives within
it, and a greater focus on day-to-day operational excellence.
Industrial relations
i. Ballots for industrial action
Our Agreements are designed to support industrial stability.
Yet, in 2019-20, we saw six national ballots (Royal Mail and
Parcelforce Worldwide) for industrial action. On 15 October 2019,
CWU announced a vote in favour of industrial action amongst its
Royal Mail members. On 13 November 2019, the High Court granted an
interim injunction against this ballot. The Court of Appeal upheld
this decision, following a CWU challenge.
Employees within Parcelforce Worldwide are the subject of
separate ballot notices. We note that CWU did not achieve the 50
per cent turnout threshold with respect to its first Parcelforce
Worldwide ballot, which relates to honouring our Agreements with
CWU. The second ballot, which received a vote in favour of
industrial action, relates to our proposal to transfer Parcelforce
Worldwide into a new legal entity and TUPE Parcelforce Worldwide's
6,500 colleagues into the new company.
We never wanted to take legal action. We wrote to CWU setting
out the information on which our case was based. We asked CWU to
confirm it would refrain from taking industrial action, due to
clear evidence it had interfered with the ballot process. CWU
declined to do so.
We welcomed the High Court's decision, and the subsequent
support of that judgment by the Court of Appeal. Trade union
legislation is designed to safeguard democratic integrity by
ensuring union members can vote in the privacy of their own homes,
rather than in any public process. As is the case with any
electoral process, it is vital our colleagues can vote without any
constraint imposed on them by any other party.
We are disappointed with the outcome of CWU's subsequent ballot
for national industrial action. In February 2020, we offered a six
per cent, three-year pay proposal for our CWU-grade people at Royal
Mail. CWU did not accept this offer.
We welcomed and appreciated CWU's statement that the COVID-19
crisis was not the time to take industrial action. We signed a
joint statement with the CWU on 15 May in which we awarded a GBP200
payment to our frontline employees to recognise their hard work to
keep services running throughout the current COVID-19 pandemic. We
continue to engage, on a regular basis and at a senior level, with
CWU and Unite/CMA on our plans for change. Our engagement with CWU
follows our recent Joint Statement with the union whereby both
parties committed to work on setting up a joint framework for talks
to seek to resolve our dispute.
COVID-19 update: Our people's dedication, fortitude, and
commitment has reminded the public of the crucial role we play in a
digital world. Our UK postmen and women play a crucial role in
mitigating the impact of the pandemic. Our GLS colleagues have also
gone the extra mile in the many countries in which they operate to
support their customers and communities.
Protecting our people and the communities we serve has been our
top priority. We were one of the first delivery companies to
introduce contact free delivery. We changed standard ways of
working to ensure, wherever possible, colleagues stay two metres
apart. That includes a new rule so that only one person is in a
Royal Mail delivery vehicle at any one time.
In recognition of their contribution as designated key workers,
around GBP25 million has been set aside as a cash bonus for UK
frontline colleagues. Those who, since March, have been at work
throughout the crisis will receive a cash recognition award of up
to GBP200 each.
2. Scale up and grow GLS
GLS's 'scale up and grow' strategy to strengthen its position in
its core markets and build its business in higher growth areas is
helping increase our capacity, reach and expertise across our
Group. We are investing in our networks to take advantage of the
growth in the B2C market. We have increased the number of parcel
shops to support online shopping and customer convenience.
Revenue growth was achieved in the majority of GLS's developed
European markets. GLS Germany remains the largest GLS market by
revenue. Its revenue grew by 9.7 per cent, driven by higher volumes
and improved pricing. The German logistics market remains highly
competitive, including from Amazon rolling out its own delivery
service in most areas of the country.
There was continued strong volume and revenue growth in Europe
East as we continue to drive higher B2C volumes. Croatia and
Slovakia achieved the strongest revenue and profit growth in
Central and Eastern Europe. GLS Hungary also delivered a strong
performance, with double-digit revenue growth. Following the
expansion of capacity in its Budapest hub in 2018-19, GLS Hungary
has continued to expand its customer base.
GLS's presence in the western United States allows it to offer
shorter ground delivery times than its competitors. This, in turn,
is enabling it to win more business and benefit from growth in
interstate deliveries. Our programme to integrate Postal Express
and Golden State Overnight, and move to GLS' proven sub-contractor
model, has been completed. Losses have reduced during the
period.
During the year, we acquired Mountain Valley Express, a family
owned business that provides freight transportation services to a
broad range of customers across the Western United States. Dicom,
our Canadian business and one of our largest acquisitions in recent
years, performed in line with expectations for the year.
Following the acquisitions of Redyser and ASM in 2018 and 2016
respectively, we have now completed the integration of both
companies in GLS Spain. Efficiency will be further improved by the
rationalisation of a small number of network overlaps. Performance
in France remains behind plan. In September 2019, GLS France
announced the appointment of a new Managing Director and a
refreshed management team. Together, they are leading improvement
plans that focus on quality and targeting profitable segments.
Across the GLS network, a number of initiatives are being
introduced with customer convenience in mind. In the Netherlands,
GLS introduced a Saturday Service, to support B2C customers. In
Italy, GLS launched a returns service for easier customer returns.
ReturnService streamlines the returns process, giving the recipient
a link to a dedicated web page where they can organise their
return. The customer can then opt for home collection, drop-off
elsewhere, or delivery to one of over 150 GLS depots or to a GLS
Shop.
To deal with growing parcel volumes across the network, GLS has
invested in a number of new hubs and depots across Europe. In
Amsterdam, GLS has constructed a new depot, which doubles its
capacity for parcel processing. The new depot is also
environmentally efficient, with solar panels on the roof, supplying
the depot with electricity and heat pump heating to reduce
consumption and CO2 emissions. There are also charging stations for
electric vehicles. We are, similarly, enhancing depots and hubs
across Europe to enhance the GLS network and optimise the parcel
handling process.
Scale up and grow GLS: our progress
Customer-focused service improvements:
-- GLS Denmark extended ParcelShops service to receive parcels six days a week.
-- GLS Netherlands SaturdayService for online shoppers, for goods ordered on a Friday.
-- GLS Ireland customers will be able to post, collect or return
GLS parcels at c.400 service points in future.
New depots to increase capacity:
-- Styria, Austria: increasing handling capacity by 70% - handling 29,000 parcels a day.
-- Amsterdam: facility allows twice the number of parcels to be
handled compared to previous facility.
-- Essen, Germany: due to open Autumn 2020, depot will act as
regional distribution hub for other sites in the area, as well as a
European hub.
-- Horsens, Denmark: taking total number of facilities in the
country to 9. The 3,200 sq. m facility can handle 25,000 parcels a
day, with room for further expansion.
COVID-19 update - GLS
Many GLS countries have been affected by the pandemic, due to
factors including increased sickness absence, declining B2B volumes
and high B2C share. B2B volumes have been impacted by COVID-19, as
companies have scaled down their commercial activities. Conversely,
we have seen a significant increase in B2C activity in many of our
markets. Almost half of GLS's volumes are now accounted for by B2C
and we expect that to grow to around 58 per cent in 2020-21.
3. Enhancing our cross-border proposition
The large, and growing, cross-border market represents a growth
opportunity, predominantly centred on Europe, North America and
Asia. Revenue growth was achieved despite challenging trading
conditions.
The majority of cross-border volumes are deferred parcels
(including small parcels). While there are limited synergies to be
had in the short term, Royal Mail provides GLS with access to the
lightweight small parcel segment, where national postal operators
usually have a cost advantage, due to their final mile networks. By
combining the Royal Mail International and GLS network
propositions, we also aim to build our presence in the larger
export parcel market (above 2kg) - another growth area.
In July 2019, in collaboration with China Post, we launched a
new tracked and signed service to China. Customers can now track
their package, from arrival in a UK Mail Centre to arrival in
China, via Royal Mail. China is already the world's largest online
market with ecommerce experiencing exceptional year on year growth.
According to our Delivery Matters research, 90 per cent of online
shoppers in China would make purchases online more if there were a
wider range of delivery and tracking options.
Key external issues
i. Regulatory environment
There have been significant changes to how universal service
operators across the world charge each other for postal activity
under the auspices of the Universal Postal Union (UPU). These
changes were driven at the governmental level, and have
considerable relevance to US arrangements in particular. In
essence, the US will now be charging (with effect from 1 July 2020)
other countries a great deal more for delivery.
Royal Mail, unfortunately, will have to pass on these costs to
its customers, but will not profit in doing so. It is with regret
that we are making these USO parcel pricing changes. In doing so,
we have sought to minimise the impact on consumers and small
businesses sending parcels to the United States. In addition,
COVID-19 has meant we have had to use air freight rather than
scheduled, commercial, flights to ship mail to the US. This is
considerably more expensive, and for some months we have borne the
cost ourselves for most customers. From July, we will need to also
pass on this increased cost to all our customers.
Quality of Service is a key priority for us; we know how much
this matters to our customers. We devote significant resources to
delivering a high quality of service. We published our 2019-20
Quality of Service results in May 2020. We exceeded our annual
regulatory target of 98.5 per cent for Second Class mail,
delivering 98.7 per cent within three working days. We missed our
annual regulatory target for First Class mail, delivering 92.6 per
cent the next working day, against a target of 93.0 per cent. The
full year outcome for First Class mail was significantly impacted
by COVID-19. This led to high levels of coronavirus-related
absences during the tail end of the 2019-20 financial year. Up
until 15 March 2020, we were meeting our First Class target with a
performance of 93.0 per cent. We believe, if the 2019-20
performance was adjusted to take into account the impact of
coronavirus, we would have achieved our First Class target. We are
asking Ofcom to take these issues into consideration.
In May 2019, Ofcom announced the conclusion of its investigation
into our Quality of Service performance for 2017-18. It confirmed
that - in this specific circumstance - a financial penalty is not
appropriate. We welcome this decision. At the same time, it
announced that Ofcom had opened two further investigations in
relation to Royal Mail.
The first relates to our Quality of Service performance in
2018-19, in connection with First Class mail. We are disappointed
that our regulatory First Class Quality of Service performance for
2018-19 was 91.5 per cent, below the target to deliver 93 per cent
of this mail the next working day. Second Class Quality of Service
met the regulatory target. We delivered 98.6 per cent of this mail
within three working days, against a target of 98.5 per cent. We
take our commitment to delivering a high-quality service very
seriously.
The second investigation relates to the regulated Second Class
Safeguard Cap. We confirmed in February 2019 that, due to an error
on our part, our new Second Class stamp price of 61 pence was one
penny above the existing regulatory safeguard cap for seven days.
We apologised for this mistake as soon as we realised we had made
it. We sought to put it right by donating the revenue that we
expected to collect from the error - around GBP60,000 - to our
Charity of the Year, Action for Children.
On 14 August 2018, Ofcom published its decision following its
investigation into whether Royal Mail had breached competition law.
The investigation was launched in February 2014, following a
complaint brought by TNT Post UK (now Whistl). Ofcom found that
Royal Mail had abused its dominant position in the market for bulk
mail delivery services in the United Kingdom by issuing Contract
Change Notices on 10 January 2014 which introduced discriminatory
prices. It fined Royal Mail GBP50 million.
Royal Mail lodged an appeal with the Competition Appeal Tribunal
(CAT) on 12 October 2018 to have both Ofcom's decision and fine
overturned. On 12 November 2019, the CAT issued its judgment, which
upheld Ofcom's decision and fine (which is now payable). In January
2020, Royal Mail requested permission to appeal the CAT's judgment
to the Court of Appeal (CoA). On 30 March 2020, the CoA granted
Royal Mail permission and indicated that a hearing would be held
over one-to-two days in mid-2021.
In October 2018, Whistl filed a damages claim against Royal Mail
at the High Court relating to Ofcom's decision. Whistl's High Court
claim is on hold until after the completion of the appeal process.
Royal Mail believes Whistl's claim is without merit and will defend
it robustly if Whistl decides to pursue it.
ii. COVID-19 update
COVID-19 has generated a range of major challenges in relation
to the provision of regulated postal services. Understandably, our
UK absence level increased significantly and, while it has now
moderated, it remains much higher than normal. At the same time,
the Company has, rightly, put in place a number of important social
distancing measures (e.g. one person per van, etc.). These actions
are vital to protect the safety of our colleagues. But, they do
impact, in a material way, our ability to deliver to the requisite
regulatory requirements.
At the beginning of the pandemic, we clearly communicated to
customers that service disruption was, despite our best efforts,
likely. We subsequently announced a six-week temporary relaxation
of delivery frequency arrangements in relation to letters. This
means that, for the six weeks to 13 June 2020, letters were
delivered five days a week; we continued to deliver most parcels on
a six days a week basis.
It is clear that it will take some time now for the UK to return
to "normal". Accordingly, we expect that a range of social
distancing measures could remain in place, in one shape or another,
for some time. This may have a significant impact on our operations
even as we have also increased our investment in quality measures.
We are actively engaging with Ofcom on these issues.
iii. USO sustainability
The postal USO is a highly specified, longstanding UK Universal
Service. As the physical delivery arm of e-commerce in the UK, it
is a key part of the country's broadband economy. COVID-19 has
again demonstrated the key role that the USO is playing in
connecting companies, customers and communities across the nation.
The postal USO is also the Post Office's main customer and is
therefore key to ensuring its sustainability as well.
The unique structural circumstances relating to the USO,
however, remain very much in place. Ongoing, and significant,
structural decline in letters is coupled with intense competition
in parcels. The USO operates in a fragile ecosystem. There are
significant, and growing, risks to it, particularly with relation
to its financial sustainability. Royal Mail has noted these risks
before in a number of submissions to the Regulator and the
Government.
Providing the Universal Service means being able to deliver to
nearly 31 million addresses, six days a week. This requires high
volumes - and revenues - to fund doing so. But, given the decline
in letters, in the last ten years or so, the average number of
items per address has almost halved from two to nearly one. At the
same time, the ability of the regulated business to make profits to
sustain itself - the USO is entirely market funded, with no
Government funding - is coming under significant strain. In the
last five years, the profits made by the Reported Business have
fallen by about 95 per cent(2) .It is expected to be loss making in
2020-21.
Ofcom is continuing its User Needs Review about the Universal
Service. We believe that many of the key USO features are valued by
consumers and SMEs. They include uniformity, universality,
affordability and measurability. But, they all have to be paid for
at a time when COVID-19 has exacerbated the underlying problems
facing the USO. For example, since the beginning of this financial
year (2020-21) letter volumes have declined about 33%, around four
times the decline rate we saw in 2019-20.
For its part, Royal Mail has a stretching self-help programme in
place. This involves significant investment in the Universal
Service when our finances are under challenge; we expect to be
materially loss-making in the UK this year. In addition, we plan to
address the very specific challenges presented by COVID-19. We do
not believe, however, that successful delivery of our
transformation and COVID-19 mitigation plans will be enough in
themselves to underpin the long-term stability of the USO.
That is why, alongside engaging with our unions on our own plans
to put Royal Mail in a better position, we are working with the
Regulator and Government on the Universal Service. This is all
about ensuring it is financially underpinned, in a sustainable way,
and future-proofed to meet customers' changing priorities. Ofcom
will embark on a public consultation on the USO, and Royal Mail
will engage, at the same time, with many stakeholders on a USO for
the 21st century. From its own, detailed research, the Company
anticipates that many of the current features of the USO should
remain in place, subject to regulatory and Government approval. We
look forward to the debate and engagement to come, including
ensuring the Universal Service has the requisite financial
resources to sustain itself.
Footnotes - Business review 2019-20
1. All comparisons with the prior year are against the adjusted
52 week results.
2. "The Reported Business is the regulated entity, defined by
Ofcom, which delivers the USO. 2019-20 Reported Business EBIT
financeability margin is still subject to the Regulatory Audit
process'.
Financial Review
Reported results and Alternative Performance Measures (APMs)
Reported results are prepared in accordance with International
Financial Reporting Standards (IFRS) and are set out in the
sections entitled 'Presentation of results and Alternative
Performance Measures' (APMs) and 'Consolidated 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 is of the view 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 we use are explained in the section entitled
'Alternative Performance Measures' and reconciliations to the
closest measure prescribed under IFRS are provided where
appropriate.
Group, UKPIL and GLS reporting periods
The Group and UKPIL results are for the 52 week period to 29
March 2020. The GLS financial period is the 12 months to 31 March
2020.
Changes in disclosures and metrics used in external
reporting
We have made changes to our financial and non-financial
disclosures and metrics used in external reporting. This is to
improve transparency, accuracy and understanding and to eliminate
'underlying' movements. All numbers presented in this Financial
Review are on the new basis. A summary of the changes are set out
below:
1. UK letters and parcels revenue and volumes have been
allocated using a new methodology which reduces our reliance on
sampling by using Post Office traffic data. This change only
impacts the allocation of revenue between stamped letters and
parcels and some international export products. Total UKPIL revenue
remains unchanged;
2. Transformation costs are now incorporated within their
relevant operating cost categories within UKPIL operating
costs;
3. Comparisons with the prior year are no longer presented on an
'underlying basis'. From the 2019-20 financial year onwards no
underlying adjustments in respect of working days, foreign exchange
movements, acquisitions or any one-off items will be made to the
prior year. Any factors having a material impact on year on year
comparisons are highlighted in the narrative to the results.
The tables below and on the following pages reconcile the 52
weeks 2018-19 adjusted results presented in this Financial Review
to the 52 weeks 2018-19 adjusted results published previously. The
reconciliation of the 53 weeks 2018-19 adjusted results are shown
in the 'Presentation of Results and Alternative Performance
Measures (APMs)' section.
UKPIL Volumes 52 weeks Movement Re-presented
(m) March 2019 52 weeks
as previously March 2019
published
-------------------- -------------- -------- ------------
Parcels
Royal Mail 1,224 (36) 1,188
Parcelforce 99 - 99
-------------------- -------------- -------- ------------
Total parcel volume 1,323 (36) 1,287
-------------------- -------------- -------- ------------
Letters
Addressed 10,266 230 10,496
Unaddressed 2,880 - 2,880
-------------------- -------------- -------- ------------
Total letter volume 13,146 230 13,376
-------------------- -------------- -------- ------------
Adjusted
52 weeks Re-presented adjusted
UKPIL March 2019 UK letters and parcels Transformation 52 weeks
(GBPm) as previously published revenue costs March 2019
========================== ======================== ========================= ============== =====================
Revenue
========================== ======================== ========================= ============== =====================
Letters 3,903 154 - 4,057
Parcels 3,692 (154) - 3,538
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Total revenue 7,595 - - 7,595
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Operating costs
-------------------------- ------------------------ ------------------------- -------------- ---------------------
People costs (4,975) - (87) (5,062)
-------------------------- ------------------------ ------------------------- -------------- ---------------------
People costs (4,975) - (41) (5,016)
Voluntary redundancy
costs(1) - - (46) (46)
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Non-people costs (2,288) - (46) (2,334)
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Distribution and
conveyance costs (827) - - (827)
Infrastructure costs (819) - - (819)
Other operating costs (642) - (46) (688)
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Total operating costs (7,263) - (133) (7,396)
Adjusted operating profit
before transformation
costs 332 - - -
Transformation costs (133) - 133 -
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Adjusted operating profit 199 - - 199
-------------------------- ------------------------ ------------------------- -------------- ---------------------
Adjusted
52 weeks
March 2019 Re-presented adjusted
Group as previously Transformation 52 weeks
(GBPm) published costs March 2019
====================================================== ============== ============== =====================
Revenue 10,444 - 10,444
Operating costs
====================================================== ============== ============== =====================
People costs (5,642) (87) (5,729)
------------------------------------------------------ -------------- -------------- ---------------------
People costs (5,642) (41) (5,683)
Voluntary redundancy costs(1) - (46) (46)
------------------------------------------------------ -------------- -------------- ---------------------
Non-people costs (4,293) (46) (4,339)
------------------------------------------------------ -------------- -------------- ---------------------
Distribution and conveyance costs (2,591) - (2,591)
Infrastructure costs (988) - (988)
Other operating costs (714) (46) (760)
------------------------------------------------------ -------------- -------------- ---------------------
Total operating costs (9,935) (133) (10,068)
Adjusted operating profit before transformation costs 509 - -
Transformation costs (133) 133 -
------------------------------------------------------ -------------- -------------- ---------------------
Adjusted operating profit 376 - 376
------------------------------------------------------ -------------- -------------- ---------------------
Re-presented
53 weeks Transformation Voluntary redundancy 53 weeks
In-year trading cashflow (GBPm) March 2019 costs charge to cash difference(2) March 2019
-------------------------------------------- ----------- -------------- ----------------------------- ------------
Adjusted EBITDA 935 (133) - 802
Trading working capital movements (237) - 10 (227)
Share-based awards (SAYE, LTIP and DSBP)
charge adjustment 7 - - 7
Total investment(3) (487) 133 (10) (364)
Income tax paid (91) - - (91)
-------------------------------------------- ----------- -------------- ----------------------------- ------------
Research and development expenditure credit 2 - - 2
============================================ =========== ============== ============================= ============
Net finance costs paid (12) - - (12)
============================================ =========== ============== ============================= ============
In-year trading cashflow 117 - - 117
============================================ =========== ============== ============================= ============
Impact of IFRS 16
The Group adopted IFRS 16 which replaced IAS 17 with effect from
1 April 2019. The results for the full year ended 31 March 2019
have not been restated for the impact of IFRS 16.
IFRS 16 has a material impact on the Group as it requires the
recognition of assets and liabilities for the majority of leases.
Operating lease costs previously recognised in operating costs are
replaced by a depreciation charge on the 'right-of-use' assets and
finance costs on the lease liabilities. The total cash outflow for
lease payments does not change. However, the payments related to
the principal liabilities are now presented as cash outflows from
financing activities, as opposed to the previous treatment as cash
outflow from operating activities. The impact of IFRS 16 on the
2019-20 Full Year Results is set out below:
Impact on operating costs (GBPm) UKPIL GLS Group
---------------------------------------------------------------------- ---------- ---------- -----
Decrease in distribution and conveyance costs (operating lease costs) (18) (11) (29)
Increase in infrastructure costs 8 8 16
---------------------------------------------------------------------- ---------- ---------- -----
Property (operating lease costs) (92) (48) (140)
Depreciation charge 100 56 156
---------------------------------------------------------------------- ---------- ---------- -----
Net decrease in operating costs (10) (3) (13)
---------------------------------------------------------------------- ---------- ---------- -----
Net increase in operating profit 10 3 13
---------------------------------------------------------------------- ---------- ---------- -----
Impact on in-year trading cash flow (GBPm) Group
------------------------------------------- -----
Adjusted operating profit 13
Depreciation and amortisation 156
--------------------------------------------- -----
Adjusted EBITDA 169
Net finance costs paid (28)
--------------------------------------------- -----
Net increase in in-year trading cash flow 141
--------------------------------------------- -----
Impact on opening balance sheet (GBPm) Group
--------------------------------------- -------
Property, plant and equipment 1,045
Trade and other receivables (20)
----------------------------------------- -------
Total assets 1,025
----------------------------------------- -------
Current lease liabilities (118)
Other current liabilities 5
Non-current lease liabilities (944)
Other non-current liabilities 33
----------------------------------------- -------
Total liabilities (1,024)
----------------------------------------- -------
Net assets 1
----------------------------------------- -------
Footnotes for Financial Review - Introduction section
1. Voluntary redundancy costs of GBP46 million were previously
included in Transformation costs of GBP133 million. This is now
presented as a separate line.
2. The voluntary redundancy charge to cash difference represents
the timing difference between when the voluntary redundancy charge
is expensed to the income statement and when the cash payment is
made.
3. Re-presented investment of GBP364 million reflects total
gross capital expenditure.
Royal Mail (UKPIL)
Reported results
Re-presented(1)
Reported reported
52 weeks 53 weeks
Summary results (GBPm) March 2020 March 2019
------------------------- ----------- ---------------
Revenue 7,720 7,732
------------------------- ----------- ---------------
Operating costs (7,711) (7,568)
------------------------- ----------- ---------------
Operating profit before
specific items 9 164
------------------------- ----------- ---------------
Operating specific items (149) (92)
------------------------- ----------- ---------------
Operating (loss)/profit (140) 72
------------------------- ----------- ---------------
Operating (loss)/profit
margin (1.8%) 0.9%
------------------------- ----------- ---------------
The detailed reported results for UKPIL are set out in the
paragraph entitled 'Segmental reported results'. Reported revenue
was GBP12 million lower than the prior year, although the prior
year included GBP137 million of revenue relating to the 53(rd)
week. The current year includes GBP82 million of revenue from
mailings relating to the European Parliamentary election and UK
General Election.
Operating profit before specific items decreased to GBP9
million, driven by increased distribution, conveyance and people
costs, including a higher pension charge to cash difference
adjustment. Operating specific items were GBP149 million, largely
comprised of a GBP91 million impairment charge relating to
Parcelforce Worldwide assets, a provision for a regulatory fine of
GBP50 million and associated interest from Ofcom and the Employee
Free Shares Charge of GBP4 million. Operating specific items in the
prior year largely related to the accounting consequences of the
purchase of a further insurance policy for the Royal Mail Senior
Executives Pension Plan (RMSEPP), which resulted in a charge of
GBP64 million, and the Employee Free Shares charge of GBP22
million.
UKPIL generated an operating loss of GBP140 million for the
year, compared with an operating profit of GBP72 million in the
prior year, which included GBP35 million of operating profit in
relation to the 53(rd) week.
Adjusted results
The Group makes adjustments to reported results under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment as set out in the paragraph entitled
'Specific items and pension charge to cash difference
adjustment'.
Re-presented(1) Re-presented(1)
Adjusted adjusted adjusted
52 Weeks 53 weeks 52 weeks
Summary trading March March March
results (GBPm) 2020 2019 2019 Change(2)
--------------------- --------- --------------- --------------- ----------
Letters 4,021 4,136 4,057 (0.9%)
Parcels 3,699 3,596 3,538 4.6%
--------------------- --------- --------------- --------------- ----------
Revenue 7,720 7,732 7,595 1.6%
Operating costs (7,603) (7,498) (7,396) 2.8%
--------------------- --------- --------------- --------------- ----------
Operating profit 117 234 199 (41.2%)
--------------------- --------- --------------- --------------- ----------
Operating profit
margin 1.5% 3.0% 2.6% (110bps)
Letters volumes
(m)
Addressed letters 10,047 10,709 10,496 (4%)
Addressed letters
(excluding election
mailings) (8%)
Unaddressed
letters 2,603 2,928 2,880 (10%)
--------------------- --------- --------------- --------------- ----------
Total letters 12,650 13,637 13,376 (5%)
Parcels volumes
(m)
Royal Mail 1,211 1,210 1,188 2%
Parcelforce
Worldwide 101 100 99 2%
--------------------- --------- --------------- --------------- ----------
Total parcels 1,312 1,310 1,287 2%
--------------------- --------- --------------- --------------- ----------
Total revenue was up 1.6 per cent. Parcel revenue, up 4.6 per
cent, more than offset the letter revenue decline of 0.9 per cent.
See Financial Highlights for an update on the first two months of
2020-21.
Total parcel volumes increased by two per cent. Growth in
domestic account parcels was partially offset by weaker imports, a
result of lower Sterling and in particular the impact of COVID-19
in the fourth quarter. Royal Mail domestic account parcel volumes,
excluding Amazon, were up five per cent as we won new customers and
gained more traffic from existing customers. In the second half,
growth moderated due to the threat of industrial action. Royal Mail
Tracked 24(R)/48(R) and Tracked Returns(R) volumes, our key
e-commerce products, grew by 18 per cent. This growth has been
supported by the introduction of our Age and ID Verification
products together with some successful propositions focused on the
faster growing sectors and customers. We saw stronger e-commerce
volumes in the fourth quarter due to the initial impact of
COVID-19. This trend has continued into the new financial year.
Our international parcels business experienced revenue growth in
the year despite challenging trading conditions. Contract export
volumes have improved in the year, benefitting from significant new
customer wins. At the start of the year, weaker Sterling, driven by
Brexit uncertainty, resulted in lower import volumes outside of our
cross-border offering and compressed export margins. Trading
conditions in the third quarter showed improvements in import
volumes, with positive growth in cross-border performance. However,
the fourth quarter saw the onset of COVID-19 impacts in China and
latterly in the US and Europe. Imports saw a significant negative
impact due to reduced economic activity and air freight capacity
from China. Whilst, more recently, China import volumes have
improved, we have seen further impacts on international volumes due
to reduced activity and conveyance availability across Europe and
the US.
Parcelforce Worldwide volumes increased by two per cent,
compared with one per cent in 2018-19, largely due to growth from
our regional small and medium-sized enterprise customers and strong
import volumes from GLS.
Total parcel revenue increased by 4.6 per cent reflecting mix,
targeted pricing actions, and volume growth.
Total letter volume decline was five per cent. Excluding
political parties' election mailings, addressed letter volumes were
down eight per cent, in line with revised expectations. Letter
volumes were impacted by ongoing structural decline, weak economic
activity and ongoing business uncertainty.
In the final weeks of the year, the initial impact of the
COVID-19 pandemic resulted in a rapid and significant reduction in
advertising mail, as marketing campaigns were either delayed or
cancelled. In addition, meter traffic, mainly used by small and
medium-sized enterprises , has weakened significantly in the first
two months of 2020-21. However, stamp traffic, supported by social
customer mailings, and large customer business mailings have been
more resilient and impacted to a lesser extent.
Unaddressed letter volumes were down 10 per cent in 2019-20, due
to intense competition and high levels of uncertainty. COVID-19 and
resulting cancelled mailings have put further significant downward
pressure on volumes in the first two months of 2020-21.
Total letter revenue decreased by 0.9 per cent, benefitting from
mailings relating to the European Parliamentary election and UK
General Election of GBP82 million, and the introduction of targeted
price rises. Advertising letters revenue of GBP612 million (now
comprising only addressed and unaddressed advertising letters
products) was down 11.5 per cent, reflecting the impact of
competition and business uncertainty.
Adjusted operating costs
Re-presented(1) Re-presented(1)
Adjusted adjusted adjusted
52 weeks 53 weeks 52 weeks
March March March
(GBPm) 2020 2019 2019 Change(2)
============================= ========= =============== =============== ==========
People costs (5,234) (5,132) (5,062) 3.4%
============================== ========= =============== =============== ==========
People costs (5,206) (5,086) (5,016) 3.8%
Voluntary redundancy
costs (28) (46) (46) (39.1%)
------------------------------ --------- --------------- --------------- ----------
Non-people costs (2,369) (2,366) (2,334) 1.5%
------------------------------ --------- --------------- --------------- ----------
Distribution and conveyance
costs (867) (842) (827) 4.8%
Infrastructure costs (793) (826) (819) (3.2%)
Other operating costs (709) (698) (688) 3.1%
------------------------------ --------- --------------- --------------- ----------
Total (7,603) (7,498) (7,396) 2.8%
============================== ========= =============== =============== ==========
Total adjusted operating costs increased by 2.8 per cent. As a
result of adopting IFRS 16, there was a reduction in operating
lease costs of GBP110 million and an increase in the depreciation
charge of GBP100 million, i.e. there was a net reduction of GBP10
million in operating costs attributable to IFRS 16. Excluding this
impact, adjusted operating costs increased by 2.9 per cent. The
largest contributing factor was people costs pressures (including
frontline staff and managers' overall compensation), which were not
fully offset by productivity gains.
Parcelforce Worldwide saw increased costs pressures driven by
product mix, inflation, lower productivity and in Q4 the impact of
COVID-19. This has triggered an impairment review on Parcelforce
Worldwide assets, and consequently an impairment charge of GBP91m
has been recognised within specific items in respect of certain
assets of Parcelforce Worldwide (for more detail see note 6).
UKPIL adjusted people costs were 3.4 per cent higher, primarily
due to frontline staff and managers' overall compensation and the
cost of only partially absorbing the one hour reduction in the
working week introduced in October 2018. We also made additional
investment to underpin our Quality of Service and protect
deliveries over the UK General Election and Christmas, as well as
to maintain our services during the ongoing COVID-19 pandemic. More
recently, we have incurred additional costs, including increased
overtime to support services during high absence rates due to the
COVID-19 pandemic. Transformation costs of GBP74 million are
included in people costs, comprising GBP46 million of project costs
and GBP28 million of voluntary redundancy costs.
We saw a 1.0 per cent improvement in productivity in the year,
below our expectations, due to the impact of additional investment
to protect quality and the impact of COVID-19 in the second half .
We achieved a 1.4 per cent reduction in core network hours. There
was a net reduction of around 703 full-time equivalent employees
(FTE)(3) to around 146,445 (compared with March 2019) as we
decreased variable hours. Workload declined by 0.3 per cent as
growth in parcel volumes was offset by letter volume decline.
Non-people costs increased by 1.5 per cent (1.9 per cent
excluding the positive impact from adopting IFRS 16), reflecting
the impact of CPI and costs pressures.
Distribution and conveyance costs increased by 4.8 per cent.
This was largely driven by higher terminal dues and fuel costs,
partially offset by lower vehicle hire and maintenance costs.
Terminal dues were GBP14 million higher driven by higher export
volumes, contracted rate rises and adverse foreign exchange rate
movements. Total diesel and jet fuel costs increased to GBP168
million (2018-19: GBP156 million). We expect diesel and jet fuel
costs to be around GBP165 million in 2020-21 largely as a result of
our hedged position.
Infrastructure costs decreased by 3.2 per cent. Depreciation and
amortisation costs were GBP63 million higher, driven by an increase
of GBP100 million due to adopting IFRS 16. The previous year also
included one-off impairment costs. IT costs were also GBP13 million
lower in the year due to a one-off IT project cost in the prior
year.
Other operating costs increased by 3.1 per cent. The impact of
the UKPIL cost programme has been offset by a GBP32 million
increase in provisions for bad debt as a result of the
deteriorating economic environment and GBP5 million for the
purchase of protective equipment to safeguard our frontline
employees in response to the COVID-19 outbreak. Transformation
project costs of GBP56 million (2018-19: GBP46 million) are also
included in other operating costs.
Total transformation costs were GBP130 million in the year
(2018-19: GBP133 million), mainly relating to operations data
projects to support future productivity improvements and investment
to upgrade our IT and parcel systems.
The UKPIL cost programme delivered GBP188 million of costs
avoided in the year, comprising people costs of GBP99 million and
non-people costs of GBP89 million. This was largely driven by a
reduction in core network hours including the partial absorption of
the one hour reduction in the working week, management headcount
reduction arising from the organisational structure review at the
end of 2018-19, supplier contract renegotiations and the annual
linehaul review.
Adjusted operating profit
Adjusted operating profit of GBP117 million includes a GBP10
million positive impact from the adoption of IFRS 16. Adjusted
operating profit margin was 1.5 per cent, down 110 basis points
compared with 2018-19.
Footnotes for Financial Review - Royal Mail (UKPIL) section
1. 2018-19 Full Year results have been re-presented as described
in the section entitled 'Changes in disclosures and metrics used in
external reporting'.
2. Comparisons with the prior year are against the adjusted 52
week results, and are no longer presented on an underlying basis.
All percentage changes represent the movement between the results
as presented. Any factors having a material impact on year on year
comparisons are highlighted in the narrative to the results.
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 year. The current year
FTE is calculated on a 38 hour week basis.
General Logistics Systems (GLS)
Reported results
Reported Reported
March March
Summary results (GBPm) 2020 2019
Revenue 3,161 2,888
Operating costs (2,953) (2,711)
--------------------------------------- -------- --------
Operating profit before specific items 208 177
Operating specific items (13) (89)
--------------------------------------- -------- --------
Operating profit 195 88
Operating profit margin 6.2% 3.0%
--------------------------------------- -------- --------
The detailed reported results are set out in the paragraph
entitled 'Segmental reported results'. GLS reported revenue grew by
GBP273 million. Operating profit before specific items increased by
GBP31 million. Operating specific items represented a net charge of
GBP13 million, largely due to a GBP18 million charge for the
amortisation of acquired intangible assets, offset by a GBP5
million provision release that is no longer required. The prior
year included a charge of GBP68 million for the impairment of the
Golden State Overnight (GSO) and Postal Express businesses in the
US and GBP19 million for the amortisation of acquired intangible
assets. GLS operating profit was GBP107 million higher than in the
prior year.
Both the reported and the adjusted results for the full year
2019-20 include 12 months' of contribution from the acquisition of
Dicom. The prior year only includes seven months' contribution. The
current year also includes six months' contribution from the
acquisition of Mountain Valley Express (MVE) and Mountain Valley
Freight Solutions businesses.
Adjusted results
The Group makes adjustments to reported results under IFRS to
exclude specific items as set out in the paragraph entitled
'Specific items and pension charge to cash difference
adjustment'.
Adjusted Adjusted
Summary trading results March March
(GBPm) 2020 2019 Change(1)
------------------------ ======== ======== ----------
Revenue 3,161 2,888 9.5%
Operating costs (2,953) (2,711) 8.9%
------------------------ -------- -------- ----------
Operating profit 208 177 17.5%
Operating profit margin 6.6% 6.1% 50bps
(EURm)
------------------------ -------- -------- ----------
Revenue 3,614 3,274 10.4%
Operating costs (3,376) (3,073) 9.9%
------------------------ -------- -------- ----------
Operating profit 238 201 18.4%
Volumes (m) 667 634 5%
======================== ======== ======== ==========
The impact of COVID-19 on revenue and operating profit was not
material from an overall GLS perspective. See Financial Highlights
for an update on the first two months of 2020-21.
Volumes were up five per cent. Excluding acquisitions, volumes
were up four per cent. Volume growth moderated compared with the
prior year, reflecting the competitive environment and yield
management activities. We saw growth in both domestic and
international volumes in most markets.
More recently, volumes have been above expectation, driven by
higher B2C volumes as customers ordered more products online due to
the COVID-19 lockdown. It is too early to judge whether this trend
will continue for the remainder of the financial year.
In the year, the impact of foreign exchange movements increased
revenue by GBP26 million and operating costs by GBP24 million.
Consequently, there was no material foreign exchange impact on
adjusted operating profit in Sterling terms.
Revenue increased by 9.5 per cent. Excluding acquisitions,
revenue was up 6.3 per cent driven by a combination of higher
volumes, targeted price increases and customer mix effects. Revenue
growth was achieved in the majority of markets. The three major
markets (Germany, Italy and France) accounted for 54.6 per cent of
total GLS revenue (2018-19: 56.8 per cent), with the North America
markets contributing 10.0 per cent (2018-19: 7.4 per cent).
Germany
GLS Germany remains the largest GLS market by revenue. Revenue
grew by 9.7 per cent, driven by higher international and domestic
volumes, and improved pricing. The German logistics market remains
highly competitive, with other operators adding capacity to their
networks, including Amazon which is rolling out its own delivery
service in most areas of Germany. Operating profit margin improved
compared with the prior year, benefitting especially from better
pricing and good export volume development.
Italy
GLS Italy revenue grew by 2.7 per cent. Weak Italian GDP growth,
Amazon expanding its own delivery network, and the competitive
environment have impacted growth. The Italian government imposed
restrictions due to COVID-19 also impacted GLS Italy operations in
February and March, with parcel flows in and out of the Lombardy
and Venice regions particularly affected.
France
In GLS France revenue growth slowed to 1.4 per cent, due to weak
domestic volumes. Operating losses in the year were EUR21 million,
EUR3 million higher than the prior year.
A new management team is in place to lead the turnaround.
Turnaround plans in France are focused on improving quality to
secure new customers in more profitable segments. 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, and allowing GLS to provide a comprehensive
service across Europe.
Spain
GLS Spain revenue declined by 1.7 per cent in the year. Yield
management activities to exit low margin customers have impacted
growth. Profitability was above break even in 2019-20, which
represented an improvement from the EUR3 million loss reported in
the prior year. The integration of Redyser has been completed, with
the focus now on optimising the operations and growing volumes to
further improve margin.
North America
The GLS US business plan, initiated last year, is progressing
well. Revenue grew by 5.5 per cent excluding the impact of
acquisitions, driven by a combination of yield management
activities and cost optimisation measures.
We secured additional capability to offer less-than-truckload
(LTL) services in the states of California, Arizona and Nevada
through the acquisition of Mountain Valley Express (MVE) and
Mountain Valley Freight Solutions businesses on 30 September 2019.
LTL services are provided successfully by our Dicom business in
Canada. We plan to augment our product offering in the US with a
similar LTL capability. Operational synergies between MVE and the
existing GLS US businesses are expected to support the GLS business
plan.
Dicom's performance has been in line with our expectations with
revenue growth of 9.2 per cent on a like-for-like basis. We are
investing in the business to provide a platform for future growth.
Canada represents an attractive market and also provides geographic
diversification for the Group.
Other developed European markets (including Austria, Belgium,
Denmark, Ireland, Netherlands and Portugal)
Revenue growth was achieved in the majority of GLS' other
developed European markets. In particular, there was good volume
and revenue growth in Denmark and Belgium. In Denmark, higher B2C
volumes supported by investment in Parcel Shops is facilitating the
growth.
Other developing/emerging European markets (including Croatia,
Czech Republic, Hungary, Poland, Romania, Slovakia and
Slovenia)
We saw strong, double digit revenue growth in all
developing/emerging European markets. We continue to invest in our
network in these countries to take advantage of their growing
parcel markets.
Adjusted Adjusted
March March
Adjusted operating costs (GBPm) 2020 2019 Change(1)
----------------------------------- ======== ======== ---------
People costs (722) (667) 8.2%
Non-people costs (2,231) (2,044) 9.1%
----------------------------------- -------- -------- ---------
Distribution and conveyance costs (1,960) (1,803) 8.7%
Infrastructure costs (198) (169) 17.2%
Other operating costs (73) (72) 1.4%
----------------------------------- -------- -------- ---------
Total (2,953) (2,711) 8.9%
----------------------------------- -------- -------- ---------
Total adjusted operating costs increased by 8.9 per cent, or 5.8
per cent excluding acquisitions.
As a result of adopting IFRS 16, there was a reduction in
operating lease costs of GBP59 million and an increase in the
depreciation charge of GBP56 million, resulting in a net reduction
of GBP3 million in operating costs.
People costs increased by 8.2 per cent, or 4.0 per cent
excluding acquisitions. This was due to wage inflation in most
markets and higher semi-variable costs linked to volume growth.
Non-people costs increased by 9.1 per cent, or 6.5 per cent
excluding acquisitions. Distribution and conveyance costs increased
by 8.7 per cent, driven by volume growth and higher subcontractor
rates resulting from tight labour markets. Infrastructure costs
increased by 17.2 per cent. Higher property-related costs (such as
rent and rates, repairs and maintenance and utilities), together
with increased IT costs, were the principal drivers of the
increase. Other operating costs increased by 1.4 per cent, broadly
in line with the prior year.
Adjusted operating profit
Adjusted operating profit of GBP208 million includes a GBP3
million positive impact from the adoption of IFRS 16. There was no
material foreign exchange impact on operating profit in Sterling
terms. COVID-19 also did not have a material impact on operating
profits.
Adjusted operating profit margin of 6.6 per cent was 50 basis
points higher than the prior year.
Footnotes for Financial Review - GLS section
1. Comparisons with the prior year are no longer presented on an
underlying basis. All percentage changes represent the movement
between the results as presented. Any factors having a material
impact on year on year comparisons are highlighted in the narrative
to the results.
Group results
Reported results
Re-presented(1)
Reported reported
52 weeks 53 weeks
March March
Summary results (GBPm) 2020 2019
========= ================
Revenue 10,840 10,581
Operating costs (10,623) (10,240)
--------------------------------------------- --------- ================
Operating profit before specific items 217 341
Operating specific items (162) (181)
--------------------------------------------- --------- ================
Operating profit 55 160
Non-operating specific items 89 15
Net finance costs (50) (13)
Net pension interest (non-operating specific
item) 86 79
--------------------------------------------- ========= ================
Profit before tax 180 241
--------------------------------------------- --------- ================
Earnings per share (basic) 16.1p 17.5p
============================================= ========= ================
Group revenue increased by GBP259 million, or GBP396 million
after adjusting for the 53(rd) week in 2018-19. This was largely
due to higher parcel revenue in GLS and UKPIL, which more than
offset the decline in UKPIL letters revenue. GLS acquisitions have
also contributed to the revenue increase. Group operating profit
before specific items decreased by GBP124 million. This was
primarily due to higher operating costs. Operating specific items
of GBP162 million largely comprised a GBP91 million impairment
charge relating to Parcelforce Worldwide assets, a provision for a
regulatory fine of GBP50 million and associated interest from Ofcom
and a GBP19 million charge for the amortisation of acquired
intangible assets. The prior year included a GBP68 million
impairment relating to the GSO and Postal Express businesses in
GLS, a GBP64 million charge for the purchase of a further insurance
policy for the RMSEPP, a GBP22 million charge for the Employee Free
Shares and a GBP20 million charge for the amortisation of acquired
intangible assets. Non-operating specific items of GBP89 million
largely relate to the sale of Plots B and D and Plot C of Nine Elms
in the year.
Profit before tax decreased to GBP180 million, of which UKPIL
accounted for GBPnil million (2018-19: GBP160 million) and GLS
accounted for GBP180 million (2018-19: GBP81 million). Basic
earnings per share decreased to 16.1 pence. A full reconciliation
of reported to adjusted results is set out in the section entitled
'Presentation of results'.
Adjusted results
Group revenue
Adjusted Adjusted Adjusted
52 weeks 53 weeks 52 weeks
March March March
(GBPm) 2020 2019 2019 Change(2)
========= ========= =========
UKPIL 7,720 7,732 7,595 1.6%
GLS 3,161 2,888 2,888 9.5%
Intragroup revenue (41) (39) (39) 5.1%
-------------------- --------- --------- --------- ----------
Total 10,840 10,581 10,444 3.8%
==================== ========= ========= ========= ==========
Intragroup revenue represents revenue from trading between UKPIL
and GLS principally due to Parcelforce Worldwide operating as GLS's
partner in the UK.
Group revenue growth of 3.8 per cent was driven by parcel growth
in GLS and UKPIL, which more than offset the decline in UKPIL
letters revenue. Total parcel revenue continued to grow as a
percentage of Group revenue, accounting for 62.9 per cent (2018-19:
61.2(3) per cent). The main factors impacting revenue are described
in the sections entitled 'UK Parcels, International & Letters
(UKPIL)' and 'General Logistics Systems (GLS)'.
Group operating costs
Re-presented(1) Re-presented(1)
Adjusted adjusted adjusted
52 weeks 53 weeks 52 weeks
March March March
(GBPm) 2020 2019 2019 Change(2)
----------------------------- ========= =============== =============== ---------
People costs (5,956) (5,799) (5,729) 4.0%
------------------------------ --------- --------------- --------------- ---------
People costs (5,928) (5,753) (5,683) 4.3%
Voluntary redundancy costs (28) (46) (46) (39.1%)
------------------------------ --------- --------------- --------------- ---------
Non-people costs (4,559) (4,371) (4,339) 5.1%
------------------------------ --------- --------------- --------------- ---------
Distribution and conveyance
costs (2,786) (2,606) (2,591) 7.5%
Infrastructure costs (991) (995) (988) 0.3%
Other operating costs (782) (770) (760) 2.9%
------------------------------ --------- --------------- --------------- ---------
Total (10,515) (10,170) (10,068) 4.4%
============================== ========= =============== =============== =========
Group operating costs increased by 4.4 per cent. As a result of
adopting IFRS 16, there was a reduction in operating lease costs of
GBP169 million and an increase in the depreciation charge of GBP156
million. Overall, there was a net reduction of GBP13 million in
operating costs as a result of IFRS 16. Excluding this impact,
adjusted operating costs increased by 4.6 per cent. The increase in
Group operating costs was largely due to an increase in people
costs, as people cost pressures (including frontline staff and
managers' overall compensation) in the UK were not fully offset by
productivity gains. Distribution and conveyance costs were also
higher due to the impact of CPI, higher parcel volumes and the
acquisitions in GLS. The main factors impacting operating costs in
the year are described in the sections entitled 'UK Parcels,
International & Letters (UKPIL)' and 'General Logistics Systems
(GLS)'.
Distribution and conveyance costs include GBP41 million
(2018-19: GBP39 million) of intragroup costs from the trading
between UKPIL and GLS principally due to Parcelforce Worldwide
operating as GLS's partner in the UK.
Group operating profit
Adjusted Adjusted Adjusted
52 weeks 53 weeks 52 weeks
March March March
(GBPm) 2020 2019 2019
------------------------ ========= ========= =========
UKPIL 117 234 199
GLS 208 177 177
------------------------- --------- --------- ---------
Total 325 411 376
Operating profit margin 3.0% 3.9% 3.6%
========================= ========= ========= =========
Group operating profit margin was down 60 basis points, driven
by the lower level of profitability in UKPIL.
Specific items and pension charge to cash difference
adjustment
52 weeks 53 weeks
March March
(GBPm) 2020 2019
=================================================================== ======== ========
Pension charge to cash difference adjustment (within people costs) (108) (70)
Operating specific items
Regulatory fine (51) -
Impairment of assets (91) (68)
Accounting impact of RMSEPP settlement - (64)
Employee Free Shares charge (4) (22)
Amortisation of acquired intangible assets (19) (20)
Legacy/other credits/(costs) 3 (7)
=================================================================== ======== ========
Industrial diseases claim cost (2) -
Release of property tax provision 5 -
Other - (7)
=================================================================== ======== ========
Total operating specific items (162) (181)
=================================================================== ======== ========
Non-operating specific items
Profit on disposal of property, plant and equipment 89 15
Net pension interest 86 79
Total non-operating specific items 175 94
=================================================================== ======== ========
Total specific items and pensions adjustment before tax (95) (157)
=================================================================== ======== ========
Total tax credit on specific items and pensions adjustment 60 27
=================================================================== ======== ========
The difference between the pension charge and cash cost (pension
charge to cash difference adjustment) largely comprises the
difference between the IAS 19 income statement pension charge rate
of 20.8 per cent of pensionable pay for the Defined Benefit Cash
Balance Scheme (DBCBS) from 1 April 2019 and the actual employer
cash payments agreed with the Trustee of 15.6 per cent.
The pension charge to cash difference adjustment was GBP108
million in the year, GBP38 million higher than in 2018-19. This was
largely due to an increase in the pension charge rate for the DBCBS
from 18.9 per cent in 2018-19, to 20.8 per cent in 2019-20. The
rate is higher than the expected rate of 19.6 per cent for 2019-20
as a result of a change in how the estimated mean term of the DBCBS
has been derived.
Following the Competition Appeal Tribunal judgment of 12
November 2019, a provision has been made for a fine of GBP50
million and associated interest. Please see the "Principal Risks
and Uncertainties" section for further details.
Following an impairment review of the Parcelforce Worldwide CGU
it was identified that the carrying value of the assets exceeded
their value in use. This has resulted in a GBP91 million impairment
recorded within specific items. The prior year impairment charge
related to goodwill and assets from the acquisition of the GSO and
Postal Express businesses by GLS.
Operating specific items also include the Employee Free Shares
charge of GBP4 million (2018-19: GBP22 million). This was lower
than in the prior year because of the vesting of the SIP 2015
scheme in the prior year. The charge for Employee Free Shares is
not expected to be material in the future.
Amortisation of acquired intangible assets of GBP19 million
(2018-19: GBP20 million) largely relates to acquisitions in
GLS.
Operating specific items in the prior year included a GBP64
million charge in relation to the purchase of a further insurance
policy for the RMSEPP.
Non-operating specific items include the net pension interest
credit of GBP86 million (2018-19: GBP79 million), which was higher
than the prior year due to higher pension surplus position.
The profit on disposal of property, plant and equipment of GBP89
million (2018-19: GBP15 million) largely relates to the completion
of the sale of Plots B and D and Plot C of Nine Elms. The proceeds
from the sale of Plots B and D were received in June 2019 and Plot
C in July 2019.
The tax credit on specific items related largely to deferred tax
movements in relation to certain specific items.
Net finance costs
Reported net finance costs of GBP50 million (2018-19: GBP13
million) largely comprised interest on the EUR500 million bond of
GBP11 million (2018-19: GBP11 million), interest on the EUR550
million bond of GBP3 million (2018-19: GBPnil) and interest on
leases of GBP30 million (2018-19: GBP3 million). Interest on leases
increased as a result of leases capitalised under IFRS 16. The
syndicated bank loan facility was amended in September 2019 and its
maturity date extended to September 2024, with options to extend
for a further two years.
Facility Drawn Facility
Facility Rate (GBPm) (GBPm) end date
------------------------------ ----------- -------- ------- ---------
EUR500 million bond 2.5% 446 446 2024
EUR550 million bond 2.7% 489 489 2026
Syndicated bank loan facility LIBOR+0.70% 925 700 2024
------------------------------ ----------- -------- ------- ---------
Total 1,860 1,635
============================== =========== ======== ======= =========
On 8 October 2019, Royal Mail plc issued a EUR550 million bond
with a coupon of 1.25 per cent and maturity date of 8 October 2026.
The foreign exchange risk associated with this bond has been hedged
using a cross currency swap. The combined interest rate of the
coupon and the cross-currency swap is 2.7 per cent.
The interest rate on the syndicated bank loan facility is LIBOR
+ 0.70 per cent. This consists of a margin of 0.4 per cent and a
utilisation fee of 0.30 per cent as the facility was over two
thirds drawn at 29 March 2020. The utilisation fee is 0.075 per
cent when the facility is under one third drawn.
The blended interest rate on gross debt, including leases for
2019-20, was approximately 3 per cent. The retranslation impact of
the EUR500 million and EUR550 million bonds are accounted for in
equity.
Taxation
52 weeks 53 weeks
March 2020 March 2019
---------------------- ------------------- -------------------
(GBPm) UKPIL GLS Group UKPIL GLS Group
====================== ===== ===== ===== ===== ===== =====
Reported
Profit before tax - 180 180 160 81 241
Tax credit / (charge) 31 (50) (19) (23) (43) (66)
Effective tax rate n/a 27.8% 10.6% 14.4% 53.1% 27.4%
Adjusted
Profit before tax 83 192 275 229 169 398
Tax charge (26) (53) (79) (40) (53) (93)
Effective tax rate 31.3% 27.6% 28.7% 17.5% 31.4% 23.4%
====================== ===== ===== ===== ===== ===== =====
The UK adjusted effective tax rate of 31.3 per cent (2018-19:
17.5 per cent) is higher than the prior year mainly due to an
increase in contingency provision against patent box claims. This
effective tax rate is higher than the UK statutory rate of 19 per
cent mainly as a result of the increase in contingency provision
described above and non-deductible expenditure, partially offset by
a one off, first time recognition of a deferred tax asset on
non-trading tax losses. The impact of these items is exaggerated
this year due to a lower adjusted UK profit before tax than in
prior years.
The GLS adjusted effective tax rate of 27.6 per cent (2018-19:
31.4 per cent) is lower than the prior year mainly because 2018-19
included the derecognition of deferred tax assets in GLS US.
The Group reported effective tax rate is 10.6 per cent (2018-19:
27.4 per cent). This effective rate is significantly impacted by
the UK reported tax credit of GBP31 million (2018-19: GBP23 million
charge) on a UK reported profit of GBPnil (2018-19: GBP160
million). The main drivers of this tax credit include the net
pension interest credit, on which there is no tax charge, profits
made on operational property disposals which are offset by
reinvestment relief, an increased recognition of a deferred tax
asset on the industrial disease provision, and the effect of
recalculating the deferred tax asset in the UK to 19 per cent. The
impact of these items on the effective tax rate was partially
offset by the Regulatory fine for which there is no tax credit.
Adjusted earnings per share (EPS)
Adjusted basic EPS was 19.6 pence compared with 30.5 pence in
the prior year reflecting the trading performance of the Group.
In-year trading cash flow
Re-presented(1)
52 weeks 53 weeks
March March
(GBPm) 2020 2019
-------------------------------------------- ======== ===============
Adjusted operating profit 325 411
Depreciation and amortisation 516 391
-------------------------------------------- -------- ---------------
Adjusted EBITDA 841 802
Trading working capital movements 155 (227)
Share-based awards (LTIP and DSBP) charge
adjustment 4 7
Gross capital expenditure (342) (364)
Net finance costs paid (47) (12)
Research and development expenditure credit 14 2
Income tax paid (69) (91)
In-year trading cash flow 556 117
============================================ ======== ===============
In-year trading cash inflow was GBP556 million, compared with
GBP117 million in the prior year. This was mainly due to trading
working capital inflow, lower capital expenditure, lower income tax
paid and the impact of adopting IFRS 16. Including the impact of
IFRS 16, the capital elements of lease payments of GBP141 million,
in-year trading cash inflow was GBP415 million.
Under IFRS 16, operating lease costs previously recognised in
operating costs are replaced by a depreciation charge on the assets
and finance charge on the liabilities. As a result of adopting IFRS
16, adjusted operating profit increased by GBP13 million. The
depreciation charge also increased by GBP156 million, resulting in
a GBP169 million increase in adjusted EBITDA. Net finance costs
increased by GBP28 million, reflecting the finance charge on
liabilities. The net impact of IFRS 16 on in-year trading cash flow
is an increase of GBP141 million. The GBP141 million outflow
appears in 'Payment of capital element of obligations under lease
contracts' in the consolidated statement of cash flows. As such,
there is no impact on overall cash flow from IFRS 16.
Trading working capital inflow of GBP155 million was GBP382
million higher than the prior year. The prior year included a
53(rd) week. Payroll and VAT payments of GBP47 million and GBP17
million respectively were made in that week, which were not made in
the current year. There was no bonus payment for managers in
2019-20, as we missed our threshold profitability level for
2018-19. 2018-19 also included a GBP101 million payment in relation
to the 2017-18 frontline pay award.
Income tax paid decreased by GBP22 million largely because tax
paid in 2018-19 was higher than normal as there was no tax relief
in 2018-19 on payments made to the pension escrow in 2017-18. The
increase in net finance costs paid of GBP35 million largely
comprised of interest on leases capitalised under IFRS 16 and a
GBP7 million loss in the market value of the RMPP pensions escrow
investments.
Gross capital expenditure
52 weeks 53 weeks
March March
(GBPm) 2020 2019
-------------------------------- ======== ========
Growth capital expenditure (209) (224)
Replacement capital expenditure (133) (140)
-------------------------------- -------- --------
Total (342) (364)
-------------------------------- -------- --------
Total gross capital expenditure was GBP342 million, of which GLS
spend was GBP120 million. Growth capital expenditure in GLS was
GBP7 million higher than the prior year. This is offset by lower
growth capital expenditure in UKPIL, reflecting delays to the
delivery of our transformation plan. Replacement capital
expenditure was broadly in line with prior year. We continue to
invest in strategic projects in UKPIL and GLS, including expanding
the GLS network, IT systems, activities supporting data projects,
and building our automated parcel hubs.
Net debt
A reconciliation of net debt is set out below.
52 weeks 53 weeks
March March
(GBPm) 2020 2019
---------------------------------------------------- ======== ========
Net (debt)/cash brought forward at 1 April
2019 and 26 March 2018 (300) 14
Capitalisation of leases under IFRS 16 (1,062) -
Free cash flow 653 (71)
---------------------------------------------------- -------- --------
In-year trading cash flow 556 117
Other working capital movements 7 6
Cash cost of operating specific items (2) (6)
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment 12 25
Acquisition of business interests (17) (220)
Cash flows relating to London Development Portfolio 97 7
---------------------------------------------------- -------- --------
Purchase of own shares (3) (10)
Employee exercise of SAYE options - 5
New lease obligation under IFRS 16 (non-cash) (156) -
Foreign currency exchange impact (20) 4
Dividends paid to equity holders of the parent
Company (244) (242)
---------------------------------------------------- -------- --------
Net (debt) carried forward (1,132) (300)
==================================================== ======== ========
Movements in GLS client cash are included within other working
capital. The amount held at 29 March 2020 was GBP21 million
(2018-19: GBP20 million). The cash cost of operating specific items
was an outflow of GBP2 million mainly consisting of industrial
disease settlements.
Proceeds from disposal of property (excluding the London
Development Portfolio), plant and equipment of GBP12 million relate
to the sale of the Plymouth MDEC site, Basildon Delivery Office,
Inverness Mail Centre, vehicle disposals and other small property
disposals.
Cash inflow relating to the London Development Portfolio was
GBP97 million. Receipts of GBP123 million in relation to the Nine
Elms site and GBP21 million in relation to the Mount Pleasant site
were offset by infrastructure and enabling works costs of GBP47
million.
Acquisition of business interests in the year largely related to
the acquisition of Mountain Valley Express (MVE) and Mountain
Valley Freight Solutions businesses, and deferred consideration on
prior year acquisitions. The acquisition of business interests in
the prior year related to the acquisition of Dicom by GLS.
Purchase of own shares relates to the Group purchasing its own
shares to meet Long Term Incentive Plan (LTIP) requirements.
New lease obligations under IFRS 16 of GBP156 million is a
result of adopting IFRS 16, and it relates to additional operating
lease commitments that were entered into during the year.
Net debt excluding the impact of IFRS 16 is GBP46 million.
2019-20 Approach to capital management
The Group had four key objectives for capital management during
2019-20. 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 2019-20 Update
----------------------------- ------------------------------------------- ------------------------------------------
Meet the Group's obligations Maintaining sufficient cash reserves At 29 March 2020, the Group had available
as they fall due and committed facilities to - resources of GBP1,874 million (2018-19(4)
* meet all obligations, including pensi : GBP1,266
ons; and million); made up of cash and cash
equivalents of GBP1,619 million (2018-19:
GBP216 million),
* manage future risks, including those current asset investments of GBP30 million
set out in the (2018-19: GBPnil), and undrawn committed
Principal Risks section syndicated
bank loan facilities of GBP225 million
(2018-19: GBP1,050 million).
At 29 March 2020, the Group met the loan
covenants and other obligations for its
syndicated
bank loan facility and EUR500 million and
EUR550 million bonds.
Existing covenants have been waived until
March 2022 and replaced with a basic
liquidity covenant.
As a result, the Directors have a
reasonable expectation that the Group will
continue to meet
its obligations as they fall due.
----------------------------- ------------------------------------------- ------------------------------------------
Support a progressive Generate sufficient in-year trading cash In the light of the current economic
dividend policy flow to cover the ordinary dividend. uncertainty, the Board believes it is
Maintain sufficient prudent not to
distributable reserves to sustain the recommend a final dividend for the
Group's dividend policy financial year 2019-20 and to suspend the
2020-21 dividend.
The dividend policy will be kept under
review and appropriate dividend payments
reinstated
as soon as economic conditions allow. Our
ambition is to re-commence dividend
payments in
2021-22, supported by GLS.
----------------------------- ------------------------------------------- ------------------------------------------
Reduce the cost of capital Target investment grade standard credit During the year, the Group maintained a
for the Group metrics i.e. no lower than BBB- under credit rating of BBB with a stable outlook
Standard & Poor's from Standard
rating methodology & Poor's.
----------------------------- ------------------------------------------- ------------------------------------------
Retain sufficient flexibility Funded by retained cash flows and During the year, the Group made total
to invest in the future of manageable levels of debt consistent gross capital investments of GBP342
the business with our target credit rating million (2018-19:
GBP364 million) and acquisition of
business interests of GBP17 million
(2018-19: GBP220 million)
while retaining sufficient capital
headroom.
============================= =========================================== ==========================================
Future approach to capital management
Our objective is to maintain a prudent financial policy. We
believe we need to retain prudent levels of financial gearing given
the high operational gearing inherent in our business. Balanced
against this is the imperative to invest in the long-term
sustainability of the Group. Our strategic plan requires a step up
in investment, predominantly in the UK, over the next five years.
This is a priority in our approach to capital management.
In the light of the current economic uncertainty, the Board
believes it is prudent not to recommend a final dividend for the
financial year 2019-20 and to suspend the 2020-21 dividend. The
dividend policy will be kept under review and appropriate dividend
payments reinstated as soon as economic conditions allow . Our
ambition is to re-commence dividend payments in 2021-22, supported
by GLS.
Pensions
A summary of the plans operated by Royal Mail plc and the
timelines in context of this Financial Review are as follows:
-- Closed in December 2012
-- Royal Mail Senior Executives Pension Plan (RMSEPP)
-- To 31 March 2018
-- Royal Mail Pension Plan (RMPP)
-- Royal Mail Defined Contribution Plan (RMDCP)
-- 1 April 2018 to 29 March 2020
-- Defined Benefit Cash Balance Scheme (DBCBS)
-- Enhanced Royal Mail Defined Contribution Plan (RMDCP)
-- Proposed future scheme
-- Collective Defined Contribution (CDC) together with a Defined Benefit Lump Sum Scheme (DBLSS)
The RMPP closed to future accrual in its previous form from 31
March 2018. The Group put in place transitional arrangements from 1
April 2018. It also implemented a new DBCBS within the RMPP and
improved the RMDCP.
Details of each of the plans operated by Royal Mail plc are set
out below.
Defined Benefit Cash Balance Scheme (DBCBS)
RMPP members automatically started building up DBCBS benefits
from 1 April 2018 (unless they opted to join the improved RMDCP
instead) together with eligible RMDCP members who opted to
join.
The DBCBS guarantees members a minimum lump sum at age 65. It is
therefore being accounted for as a defined benefit scheme in a
similar way to the RMPP. The DBCBS will aim to provide increases to
the lump sum each year, depending on investment performance. An
IAS19 deficit of GBP177 million (2018-19: GBP72 million) is shown
on the balance sheet. The scheme is not in funding deficit and it
is not anticipated that deficit payments will be required. The
DBCBS will be subject to triennial valuations from 2021.
An IAS 19 pension service charge of 20.8 per cent (2018-19: 18.9
per cent), equivalent to GBP388 million (2018-19: GBP362 million),
has been charged to the income statement for the DBCBS scheme. The
pension charge is greater than the cash contribution rate as the
assumed rate of future increases in benefits (3.8 per cent) is
greater than the assumed discount rate (2.2 per cent).
The Group has made contributions at 15.6 per cent (2019-20:
GBP288 million; 2018-19: GBP297 million) of DBCBS pensionable pay
in respect of the scheme. Members contribute six per cent
(including Pension Salary Exchange).
The IAS 19 pension service charge to cash difference adjustment
for 2019-20 was GBP108 million (2018-19: GBP70 million). Pension
interest for 2020-21, calculated on the assets and liabilities as
at 29 March 2020, will be a charge of GBP5 million.
Royal Mail Defined Contribution Plan (RMDCP)
Under the RMDCP, current and future RMDCP members in the
standard section will contribute at the highest contribution tier
(employee: six per cent; employer: ten per cent) unless they opt to
contribute at a lower level. The contribution rate for members not
in the standard section is employee: five per cent; employer: three
per cent)
Royal Mail Pension Plan (RMPP)
The RMPP closed to future accrual in its previous form from 31
March 2018. The pre-withholding tax accounting surplus of the RMPP
at 29 March 2020 was GBP5,550 million (31 March 2019: GBP3,696
million), comprising assets of GBP11,683 million (31 March 2019:
GBP10,458 million) and liabilities of GBP6,133 million (31 March
2019: GBP6,762 million). The pre-withholding tax accounting surplus
has increased by GBP1,854 million (31 March 2019: GBP434 million)
in the period, as the increase in the 'real' discount rate since
the prior year (the difference between RPI and the discount rate
based on corporate bond yields) has resulted in a lower value being
placed on scheme liabilities, whilst gilt yields have decreased in
the period, increasing the value of scheme assets. The scheme's
hedging arrangements are designed to reduce volatility in the
actuarial funding valuation, rather than in the accounting
valuation. After the withholding tax adjustment, the accounting
surplus of the RMPP was GBP3,608 million at 29 March 2020 (31 March
2019: GBP2,402 million). This is an accounting adjustment with no
cash benefit to the Group. For 2020-21, the pension interest will
be a credit of GBP122 million.
The triennial valuation of the RMPP at 31 March 2018 was agreed
on 19 July 2019. Based on this set of assumptions rolled forwards,
the RMPP actuarial surplus at 29 March 2020 was estimated to be
around GBP575 million (31 March 2019: GBP50 million).
Royal Mail Senior Executives Pension Plan (RMSEPP)
The RMSEPP closed in December 2012 to future accrual and the
Group makes no regular service contributions.
Following the purchase of an additional insurance policy in
September 2018 in respect of all remaining pensioners and deferred
members it was decided to proceed to buy-out and wind-up of the
Plan. As a result the purchase of the insurance policy was treated
as a settlement in the 2018-19 financial statements. The difference
between the IAS 19 surplus before and after the transaction
resulted in GBP64 million being charged to the income statement as
an operating specific item. Further progress towards buy-out and
winding-up of the Plan has been made in the current year, and the
target is to have the process completed in 2021. There is no charge
in the current year.
All benefit payments due from the RMSEPP remain unchanged. The
insurance policies held by the RMSEPP exactly match the value and
timing of the benefits payable to individual members and the fair
value of those policies are deemed to be the present value of the
related obligations. Further details can be found in the paragraph
entitled 'Royal Mail Senior Executive Plan (RMSEPP)' in Note 11 in
the notes to the consolidated financial statements.
Based on the rolled forward assumptions used for the RMSEPP
triennial valuation as at 31 March 2018 completed in the prior
year, the RMSEPP actuarial surplus at 31 March 2020 was estimated
to be GBP9 million (31 March 2019: GBP10 million).
In accordance with the updated Schedule of Contributions agreed
as part of that valuation, a final deficit payment of GBP1 million
was paid in 2018-19, together with GBP1 million in respect of
death-in-service lump sum benefits and administration expenses. In
accordance with the Schedule of Contributions signed on 25 March
2019, GBP500,000 has been paid in 2019-20 and is due to be paid per
annum for the period 1 April 2020 to 31 March 2025.
Pension schemes are now under an obligation to address the issue
of unequal Guaranteed Minimum Pensions (GMP). From the Group's
perspective, the transfer of RMPP's historical pension liabilities
to HM Government in 2012, in accordance with the Postal Services
Act 2011, included all of the plan's GMP liabilities. The
requirement to remove the inequality in former RMPP benefits
deriving from GMPs therefore rests with Government.
RMSEPP, however, does still hold its GMP liabilities and will be
required to take action to equalise benefits. The Trustees are
considering the approach to be taken to address the issue of
unequal Guaranteed Minimum Pensions (GMPs) in respect of the RMSEPP
scheme but estimate that the cost of this will not be material.
Collective Defined Contribution (CDC) scheme and Defined Benefit
Lump Sum Scheme (DBLSS)
We have, for some time, been working closely with the CWU and
other stakeholders to make CDC a reality for Royal Mail and its
people.
The Pension Schemes Bill, which will enable CDC pension schemes
for the first time under UK law, is now currently progressing
through Parliament. Once complete, and after any further
legislative and regulatory changes have been made, Royal Mail aims
to set up the first scheme of this kind in the UK.
Based on current expectations, the CDC scheme will be accounted
for as a defined contribution scheme. The DBLSS will be accounted
for as a defined benefit scheme with the accounting treatment
expected to be similar to the transitional DBCBS. The new
arrangements will have fixed employer contributions of 13.6 per
cent and employee contributions of six per cent.
In 2020-21, the employer and employee contributions are expected
to be around GBP400 million in respect of all UK pension
schemes.
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 2019-20. The forecast
diesel and jet commodity exposures in UKPIL are set out below
together with the sensitivity of 2020-21 operating profit to
changes in commodity prices and fuel duty.
Impact
Impact on
on 2020-21
Fuel Residual 2020-21 operating
duty/other Underlying unhedged operating profit
costs (incl commodity underlying profit of a further
irrecoverable exposure Underlying commodity of a further 10% increase
Forecast VAT) - (incl irrecoverable commodity exposure 10% increase in fuel
total not hedged VAT) volume (incl irrecoverable in commodity duty/other
2020-21 cost 2020-21 2020-21 hedged VAT) price cost
Exposure GBPm GBPm GBPm % GBPm GBPm GBPm
----------- -------- ------------- ------------------- ---------- ------------------- ------------ ------------
Diesel 156 100 56 88 4 - 10
Jet fuel 9 2 7 82 1 - -
----------- -------- ------------- ------------------- ---------- ------------------- ------------ ------------
Total 165 102 63 87 5 - 10
=========== ======== ============= =================== ========== =================== ============ ============
As a result of hedging, it is anticipated that the diesel and
jet fuel commodity cost for 2020-21 will be similar to 2019-20.
Without hedging, the associated cost would be around GBP23 million
lower (based upon closing fuel prices at 29 March 2020).
The Group is exposed to foreign currency exchange risk in
relation 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 foreign currency exchange risk
to revenue, costs and operating profit. The EUR550 million bond,
issued in October 2019 is fully hedged by a cross currency swap
with no residual exposure to foreign currency or interest rate
risk.
The average exchange rate between Sterling and the Euro was
GBP1:EUR1.14, (2018-19: GBP1:EUR1.13). The impact of exchange rates
on GLS' reported operating profit before tax in 2019-20 was not
material. The impact of foreign exchange transactions in the UK was
not material in 2019-20. The net impact on Group operating profit
before tax was not material.
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 29 March 2020, all the
gross debt of GBP2,823 million was at fixed rates.
Property
We invested a total of GBP47 million in the year on works to
separate the retained operational sites from the development plots
at Mount Pleasant and infrastructure works at Nine Elms.
Mount Pleasant
In the year, we received GBP21 million cash proceeds. Further
cash proceeds are to be paid in contractually agreed staged
payments in 2020-21, with the final balance of consideration to be
paid in 2024. All proceeds received up to 2020-21, in aggregate,
are expected to cover Royal Mail's outgoings on the separation and
enabling works up to that point.
Nine Elms
In the year, we received GBP101 million (2018-19: GBPnil) cash
proceeds on formal completion of the sale of Plots B and D on Nine
Elms. We have committed to reinvesting around GBP30 million for
infrastructure works associated with these plots.
We have also received GBP22 million cash proceeds on formal
completion of the sale of Plot C at the Nine Elms site to Galliard
Homes.
Further investment will be required in relation to
infrastructure and Linear Park for the remaining plots.
Dividends
The final dividend of 17.0 pence per share in respect of the
2018-19 financial year was paid on 4 September 2019, following
shareholder approval.
The interim dividend of 7.5 pence per share in respect of the
2019-20 financial year was paid on 15 January 2020, following
shareholder approval, to shareholders on the register at the close
of business on 6 December 2019
Dividend in respect of 2019-20
In the light of the current economic uncertainty, the Board
believes it is prudent not to recommend a final dividend for the
financial year 2019-20. The dividend policy will be kept under
review and appropriate dividend payments reinstated as soon as
economic conditions allow. Our ambition is to re-commence dividend
payments in 2021-22, supported by GLS.
Footnotes for Financial Review - Group section
1. 2018-19 full year results have been re-presented as described
in the section entitled 'Changes in disclosures and metrics used in
external reporting'.
2. Comparisons with the prior year are against the adjusted 52
week results, and are no longer presented on an underlying basis.
All percentage changes represent the movement between the results
as presented. Any factors having a material impact on year on year
comparisons are highlighted in the narrative to the results.
3. On a 52 week basis and reflects the new revenue allocation
methodology as described in the section entitled 'Changes in
disclosures and metrics used in external reporting'.
4. Re-presented to exclude GLS client cash of GBP20 million.
Presentation of Results and Alternative Performance Measures
(APMs)
Re-presented(1)
52 weeks 53 weeks
March 2020 March 2019
================================== ==================================
Reported Specific Adjusted Reported Specific Adjusted
items and items and
pension pension
(GBPm) adjustment(2) adjustment(2)
============================= ======== ============== ======== ======== ============== ========
Revenue 10,840 - 10,840 10,581 - 10,581
Operating costs (10,623) (108) (10,515) (10,240) (70) (10,170)
People costs (6,064) (108) (5,956) (5,869) (70) (5,799)
----------------------------- -------- -------------- -------- -------- -------------- --------
People costs (6,036) (108) (5,928) (5,823) (70) (5,753)
Voluntary redundancy (28) - (28) (46) - (46)
----------------------------- -------- -------------- -------- -------- -------------- --------
Non-people costs (4,559) - (4,559) (4,371) - (4,371)
----------------------------- -------- -------------- -------- -------- -------------- --------
Distribution and conveyance
costs (2,786) - (2,786) (2,606) - (2,606)
Infrastructure costs (991) - (991) (995) - (995)
Other operating costs (782) - (782) (770) - (770)
----------------------------- -------- -------------- -------- -------- -------------- --------
Operating profit before
specific items 217 (108) 325 341 (70) 411
Operating specific
items:
Impairment of assets (91) (91) - (68) (68) -
Accounting impact of
RMSEPP settlement - - - (64) (64) -
Regulatory fine (51) (51) - - - -
Employee Free Shares
charge (4) (4) - (22) (22) -
Amortisation of intangible
assets in acquisitions (19) (19) - (20) (20) -
Legacy/other credits/(costs) 3 3 - (7) (7) -
Operating profit /
(loss) 55 (270) 325 160 (251) 411
Non-operating specific
items:
Profit on disposal
of property, plant
and equipment 89 89 - 15 15 -
Earnings before interest
and tax 144 (181) 325 175 (236) 411
Finance costs (56) - (56) (18) - (18)
Finance income 6 - 6 5 - 5
Net pension interest
(non-operating specific
item) 86 86 - 79 79 -
============================= ======== ============== ======== ======== ============== ========
Profit before tax 180 (95) 275 241 (157) 398
Tax (charge)/credit (19) 60 (79) (66) 27 (93)
============================= ======== ============== ======== ======== ============== ========
Profit for the period 161 (35) 196 175 (130) 305
============================= ======== ============== ======== ======== ============== ========
Earnings per share
Basic 16.1p (3.5p) 19.6p 17.5p (13.0p) 30.5p
Diluted 16.1p (3.5p) 19.6p 17.5p (13.0p) 30.5p
============================= ======== ============== ======== ======== ============== ========
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 by
Management, who 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.
A full list of APMs used are set out in the section entitled
'Alternative Performance Measures (APMs)'.
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 Group. Management has reviewed the long-term
differences between reported and adjusted profit after tax.
Cumulative reported profit after taxation for the five years ended
29 March 2020 was GBP1,089 million compared with cumulative
adjusted profit after tax of GBP1,813 million. Annual reported
profit after tax showed a range of GBP161 million to GBP273
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'.
Presentation of results
Consolidated reported and adjusted results
The following table reconciles the consolidated reported
results, prepared in accordance with IFRS, to the consolidated 52
week adjusted results.
2018-19 adjusted results
2018-19 was a 53 week period. The table below reconciles the
2018-19 consolidated 53 week adjusted results to the 52 week
consolidated results as previously reported. The table also
reconciles the 2018-19 adjusted 52 week results presented in this
Financial Review to the full year 2018-19 adjusted results
published previously. More details can be found in the section
called "Changes in disclosures and metrics used in external
reporting".
Adjusted Adjusted
53 weeks 53(rd) 52 weeks Re-presented(1)
March week March Adjusted
2019 revenue 2019 52 weeks
as previously and as previously Transformation(1) March
(GBPm) published costs published costs 2019
======================================= ============== ======== ============== ================= ===============
Revenue 10,581 (137) 10,444 - 10,444
Operating costs (10,037) 102 (9,935) (133) (10,068)
People costs (5,712) 70 (5,642) (87) (5,729)
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
People costs (5,712) 70 (5,642) (41) (5,683)
Voluntary redundancy(2) - - - (46) (46)
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Non-people costs (4,325) 32 (4,293) (46) (4,339)
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Distribution and conveyance
costs (2,606) 15 (2,591) - (2,591)
Infrastructure costs (995) 7 (988) - (988)
Other operating costs (724) 10 (714) (46) (760)
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Operating profit before transformation
costs 544 (35) 509 - -
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Transformation costs (133) - (133) 133 -
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Adjusted operating profit 411 (35) 376 - 376
--------------------------------------- -------------- -------- -------------- ----------------- ---------------
Segmental reported results
The following table presents the segmental reported results,
prepared in accordance with IFRS.
52 weeks Re-presented(1) 53 weeks
March 2020 March 2019
--------------------------------------------------- ---------------------------------------------------
GLS GLS
UKPIL (Non-UK Intragroup UKPIL (Non-UK Intragroup
(GBPm) (UK operations) operations) Eliminations Group (UK operations) operations) Eliminations Group
---------------- --------------- ----------- ------------ ------- --------------- ----------- ------------ -------
Revenue 7,720 3,161 (41) 10,840 7,732 2,888 (39) 10,581
People costs (5,342) (722) - (6,064) (5,202) (667) - (5,869)
Non-people costs (2,369) (2,231) 41 (4,559) (2,366) (2,044) 39 (4,371)
--------------- ----------- ------------ ------- --------------- ----------- ------------ -------
Operating profit
before
specific items 9 208 - 217 164 177 - 341
Operating
specific
items (149) (13) - (162) (92) (89) - (181)
Operating
(loss)/profit (140) 195 - 55 72 88 - 160
Non-operating
specific
items(2) 88 1 - 89 14 1 - 15
(Loss)/earnings
before
interest and
tax (52) 196 - 144 86 89 - 175
Net finance
costs (34) (16) - (50) (5) (8) - (13)
Net pension
interest
(non-operating
specific
item) 86 - - 86 79 - - 79
---------------- --------------- ----------- ------------ ------- --------------- ----------- ------------ -------
Profit before
tax - 180 - 180 160 81 - 241
---------------- --------------- ----------- ------------ ------- --------------- ----------- ------------ -------
Tax
credit/(charge) 31 (50) - (19) (23) (43) - (66)
---------------- --------------- ----------- ------------ ------- --------------- ----------- ------------ -------
Profit for the
period 31 130 - 161 137 38 - 175
================ =============== =========== ============ ======= =============== =========== ============ =======
Footnotes for Financial Review - Presentation of Results and
Alternative Performance Measures section
1. 2018-19 full year results have been re-presented as described
in the section entitled 'Changes in disclosures and metrics used in
external reporting'. The impacts are the same for the 53 weeks
March 2019 results.
2. Details of specific items in the pension adjustment can be
found under 'Specific items and pension charge to cash difference
adjustment' in the Group Results section.
Alternative Performance Measures (APMs)
This section lists the definitions of the various APMs disclosed
throughout the Annual Report and Accounts and Financial Review.
They are used by Management, who consider them to be an important
means of comparing performance year on year and are key measures
used within the business for assessing Business performance.
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, and operating
specific items are provided below.
Adjusted operating profit margin
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' as a proportion
of revenue in percentage terms.
Earnings before interest, tax, depreciation and amortisation
(EBITDA) before specific items
EBITDA is reported operating profit before specific items with
depreciation and amortisation and share of associate company
profits added back.
Adjusted EBITDA is EBITDA before specific items 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 to reported
operating profit before specific items.
52 weeks 53 weeks
March March
(GBPm) 2020 2019
============================================= ======== ========
Reported operating profit before specific
items 217 341
Depreciation and amortisation 516 391
EBITDA 733 732
Pension charge to cash difference adjustment 108 70
============================================= ======== ========
Adjusted EBITDA 841 802
============================================= ======== ========
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, temporary resource, pensions and
social security costs. People costs relating to projects and
voluntary redundancy costs are also included.
Distribution and conveyance costs
These costs relate to non-people costs incurred in transporting
and delivering mail by rail, road, sea and air, together with costs
incurred by international mail carriers, Parcelforce Worldwide
delivery operators and GLS.
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. Non-people costs relating
to projects are included. Other operating costs exclude operating
specific items.
Pension charge to cash difference adjustment
This adjustment represents the difference between the IAS 19
income statement pension charge and the actual cash payments.
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.
For the DBCBS, applicable from 1 April 2019, this represents the
difference between the IAS 19 income statement pension charge rate
of 20.8 per cent (2018-19 18.9 per cent) and the actual cash
payments of 15.6 per cent.
The prior year adjustment also included an adjustment for one
week in respect of the RMPP which closed on 31 March 2018. This
represented the difference between the IAS 19 income statement
pension charge rate of 41.0 per cent to 31 March 2018 and the
actual cash payments agreed with the RMPP Trustee of 17.1 per cent
of pensionable pay to 31 March 2018.
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.
Regulatory fine
Following the Competition Appeal Tribunal judgment of 12
November 2019, a provision has been made for a fine of GBP50
million and associated interest. Please see the Principal Risks and
Uncertainties section for further details.
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 2016), as well as partnership and matching
shares, with no direct cash impact on the Group.
Accounting impact of RMSEPP settlement
These costs relate to the purchase of insurance policies for the
RMSEPP. This involves purchasing an insurance policy that provides
cash flows that exactly match the value and timing of the benefits
payable to the members it covers. These are accounting adjustments
in relation to the write off of the closing surplus as a result of
the purchase of the policy and have no cash impact to 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/credits
These costs/credits relate either to unavoidable ongoing costs
arising from historic events (industrial diseases provision),
restructuring costs, or historic provisions not utilised.
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 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.
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, 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 years.
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 53 weeks
March March
(GBPm) 2020 2019
========================================== ========= =========
Net cash inflow from operating activities 950 493
Adjustment for:
Other working capital movements (7) (6)
Cash cost of operating specific items 2 6
Purchase of property, plant and equipment (265) (264)
Purchase of intangible assets (software) (77) (100)
Net finance costs paid (47) (12)
========================================== ========= =========
In-year trading cashflow 556 117
========================================== ========= =========
Gross capital expenditure
Gross capital expenditure is a measure of the cash utilised by
the Group in the year on capital investment activities. It is a
measure used by Management to monitor capital investment within the
Group. The items making up this balance in the statutory cash flow
are indicated in the section 'Consolidated statement of cash
flows'.
Net debt
Net 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 debt does not necessarily mean that the cash
included in the net debt calculation is available to settle the
liabilities included in this measure. Details of the borrowing
facilities in place and the amounts drawn can be found in the
section titled 'Net finance costs'.
A reconciliation of net debt to reported balance sheet line
items is shown below.
At 29 March At 31 March
(GBPm) 2020 2019
========================== =========== ===========
Loans/bonds (1,635) (431)
Leases (1,188) (125)
Cash and cash equivalents 1,640 236
Investments 30 -
Client cash 21 20
Pension escrow (RMSEPP) 21 20
========================== =========== ===========
Net debt (1,132) (300)
========================== =========== ===========
Leases have increased due to the capitalisation of leases as a
result of adopting IFRS 16. The Group recognised a 'right of use'
asset and a corresponding lease liability based on the leases held
on transition. Additions and modifications to leases since
transition are also captured within this balance.
Cash and cash equivalents increased by GBP1,403 million largely
as a result of free cash flow of GBP653 million (2018-19: GBP71
million outflow), proceeds from the EUR550 million bond issue of
GBP489 million and drawings of GBP700 million on the syndicated
bank loan facility, offset by dividends paid of GBP244 million
(2018-19: GBP242 million) and payment of capital element of
obligations under lease contracts of GBP172 million (2018-19: GBP56
million).
The short term deposit of GBP30 million represents a short term
cash deposit with a relationship bank which matures in July
2020.
Net debt excludes GBP180 million (2018-19: GBP187 million)
related to the RMPP pension scheme of the total GBP201 million
(2018-19: GBP207 million) pension escrow investments on the balance
sheet which is not considered to fall within the definition of net
debt.
The RMPP escrow agreement specifies that the funds must be used
for the benefit of members, on a basis to be agreed between the
Plan Trustee and the company. The funds are therefore not available
to management for corporate purposes (outside of pension
arrangements) and so the RMPP escrow is excluded from net debt.
The RMSEPP escrow agreement specifies that the funds will be
returned to the Company once they are no longer required for
security purposes and therefore the RMSEPP escrow is included
within net debt.
Adjusted effective tax rate
The adjusted effective tax rate is the adjusted tax charge or
credit for the year 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 year. It approximates the tax
rate on the underlying trading business through the exclusion of
specific items and the pension charge to cash difference
adjustment.
Principal Risks and Uncertainties
Principal risk Status How we are mitigating the risk
Transformation and the risk of industrial action
There is extensive trade union recognition in respect of our workforce in the UK, with strong
and active trade unions. As Royal Mail Group continues to transform in order to remain competitive
in the letters and parcels markets, including delivering its 'turnaround and grow' plan in
the UK, there remains a risk of industrial action.
Industrial action Ø High severity
Ø Increasing risk
Ø Fast speed
There is a risk that one or more During the year, the threat of We are working with CWU during the
material disagreements or disputes industrial action has impacted our UK COVID-19 pandemic to ensure we
between the Group and business: achieve our objectives to:
its trade unions could result in - our UK 'turnaround and grow' plan i) safeguard the health and wellbeing
widespread localised or national is behind schedule, in part due to of our people and the communities we
industrial action. the industrial relations serve; and ii)
The absence of major industrial environment. continue to deliver the best possible
action is a key assumption - additional investment was required service to our customers during this
underpinning the 'turnaround and to protect service quality to manage unprecedented crisis.
grow' plan in the UK. The plan the impact of the This has led to the temporary
requires a high level of operational threat of industrial action on introduction of enhanced sick absence
change in an increasingly Christmas and the December 2019 UK terms, and changes to
competitive market. This has already General Election, which ways of working.
put additional strain on the has impacted productivity for We welcomed and appreciated CWU's
stability of our industrial 2019-20. statement that the COVID-19 crisis
relations. - a small number of customers moved was not the time to take
Widespread localised or national volumes to other carriers due to the industrial action. We continue to
industrial action would cause threat of industrial engage, on a regular basis and at a
material disruption to our action in December 2019. senior level, with CWU
business in the UK. It would likely Following the High Court ruling that and Unite/CMA on our plans for
to result in an immediate and the CWU's October 2019 ballot for change. Our engagement with CWU
potentially ongoing significant industrial action was follows our recent Joint Statement
loss of revenue for the Group. It may unlawful and void, we approached CWU with the union whereby both parties
also cause Royal Mail to fail to meet in January 2020 to offer mutual committed to work on setting up a
the Quality of interest talks. CWU withdrew joint framework for
Service targets prescribed by Ofcom, from those talks. talks to seek to resolve our dispute.
which may lead to enforcement action On 4 February 2020, CWU announced a We have honoured all our Agreements
and fines. timeline for a further ballot for with CWU. This includes two pay
industrial action. On awards and an hour's reduction
17 March 2020, it confirmed 94.5 per in the working week, amounting to an
cent of Royal Mail members who voted effective pay increase of around 10
were in favour of per cent over two
industrial action. CWU has stated its years. All the appropriate dispute
intention to defer industrial action resolution procedures have been
as we prioritise followed and completed.
dealing with the COVID-19 pandemic Our Agenda for Growth agreement with
and protecting our people and CWU provides a joint commitment to
customers. improved industrial
When we offered talks at the relations and to resolving disputes
beginning of the year, we were clear at pace in a way that is beneficial
we needed to proceed with to both employees
key national trials and local and Royal Mail. There is a prescribed
operational improvements. All have resolution process for disputes. The
been delayed by the industrial Agreement has legally
relations environment, in some cases, binding protections for the workforce
by well over a year. Since then, we in respect of future job security and
have made progress our employment
with trials of automated clocking in model. These can be rescinded in
and out and separate van delivery of certain circumstances, including in
larger and Next the event of national
Day parcels. We have also commenced a industrial action.
small number of local change
initiatives.
-------------------------------------- --------------------------------------
Pension arrangements Ø Low severity
Ø Stable
Ø Fast speed
We recognise pension benefits are The Royal Mail Pension Plan closed to We are continuing to work with CWU
important. We will continue to future accrual in its Defined Benefit and Government to introduce the
provide sustainable and affordable form on 31 March necessary legislative and
pensions arrangements for our people. 2018. A new Defined Benefit Cash regulatory changes so that we can
There is a risk that we may be unable Balance Scheme was put in place from introduce our proposed CDC pension
to obtain the necessary legislative 1 April 2018. scheme as soon as possible.
changes to enable The overall ongoing cash cost of the
us to implement the UK's first transitional arrangements and the
Collective Defined Contribution (CDC) proposed CDC scheme
pension scheme, as agreed is expected to continue to be around
with the CWU. GBP400 million a year.
The Pension Schemes Bill, of which
CDC is a part, was tabled on 7
January 2020 and has started
its progress through Parliament. The
passage of the Bill depends on
factors including the
amount of parliamentary time made
available.
-------------------------------------- --------------------------------------
Efficiency Ø High severity
Ø Increasing
risk
Ø Fast speed
Royal Mail must become UK profits have declined Following the onset of the COVID-19 pandemic, we are
more efficient and more than 70 per cent prioritising the protection of our people
flexible to compete since 2014-15, while costs and customers, whilst keeping mail and parcels moving. We
effectively in the parcel have increased. have already committed around GBP40
and Prior to COVID-19, the million on buying equipment such as hand sanitiser,
letter markets. industrial relations disposable gloves and other additional
The success of our environment was slowing protective measures to keep our people safe.
strategy relies on the the rate of change in The outlook for our UK business is challenging. Before the
effective control of costs the UK operation. Our COVID-19 pandemic took hold, our
across all areas of the productivity improvement UK transformation was behind schedule. But, we had made
business and the delivery for the year was 1.0 per progress in key areas relating to
of efficiency benefits. cent, lower than our improving productivity. This included:
We continue to operate a initial forecast of over 2 Seeking to embed a range of digitally-enabled work tools to
tight balance between per cent. improve efficiency and productivity.
achieving efficiency The 'turnaround and grow' We completed the deployment of our route optimisation tool
improvements and plan focuses on efficiency in March 2020, improving visibility
delivering and productivity in our UK of changes to delivery routes and this has been used to
high service levels. This network through deliver our first phase of delivery
requires careful a range of new, digitally revisions.
management of efficiency enabled work tools, We are scaling up trials for Resource Scheduler, which
and Quality of Service. operational excellence and draws together data from across the
In May 2019, Royal Mail targeted investments. operation to enable better alignment of duty sets and
launched its 'turnaround It maximises the benefits, rosters to demand.
and grow' plan in the UK, particularly in delivery In January 2020, following the conclusion of our dispute
with a range of and processing, of joint resolution procedures with CWU, we
financial and operating letter and parcel confirmed we were moving ahead with key national and
ambitions. There is a risk delivery, and facilitates much-needed local change initiatives
we will not be able to our transition to a that had been delayed, in some cases, by up to a year. That
deliver our transformation parcels-led business where includes extending our successful
programme and meet our UK letters are important. trial of automated clocking in and out for frontline
required cost avoidance Our 'turnaround and grow' colleagues at a small number of UK sites.
and productivity plan in the UK is behind We installed a further 10 parcel machines, meaning we now
improvement targets during schedule. Combined with have 20 machines at 16 Mail Centres.
the life of the plan. the impact of the This has driven the percentage of parcels sorted by machine
COVID-19 has meant we, COVID-19 pandemic, we to 33 per cent, close to three
rightly, have had to believe it will now take times the average number sorted automatically during
introduce a range of longer to achieve the 2018-19. Work has started on the next
social distancing measures targets we have set, phase of this automation programme, which will add further
in our processing and at a time when we need to machines into parcel sorting operations.
delivery operations (e.g. be accelerating the pace We want to increase the overall proportion to over 80 per
changing standard ways of of change in the UK. cent by installing automated machines
working including Our UK costs are in all Mail Centres by 2023-24 and building dedicated
one person per van). These increasing as we make parcel hubs.
arrangements may continue necessary investment in Work continues on the parcel hubs. We have chosen the
for some time. In turn, quality measures and supplier for automation and have completed
they may have protective the fit out for the North West hub. We have signed a
an adverse impact on equipment for our people. conditional agreement for a lease for
productivity. This makes it even more our second parcel hub in the Midlands.
important that we increase We are implementing a range of immediate cost control
our efficiency. activities and reducing capital expenditure
in a measured way:
* Management restructure, subject to consultation,
targeting a reduction of c.2,000 roles out of a total
population of c.9.700.
* GBP250 million capital expenditure reduction across
2020-21 and 2021-22. Investment continues at higher
than historical levels, including in parcel
automation and hubs.
* Targeting flat non-people costs, excluding
depreciation, in 2021-22 versus 2019-20, with GBP200
million annual savings in 2021-22 offset by increases
in parcel volume related costs.
--------------------------- ------------------------------------------------------------
Customer expectations and Royal Mail's responsiveness to market changes
The industry sectors in which we operate remain highly competitive, with customers demanding
more and our competitors responding quickly to these changing demands.
Customer expectations and Royal Ø High severity
Mail's responsiveness to market Ø Increasing risk
changes Ø Medium speed
Changes in customer expectations, and Addressed letter volumes (excluding We are transforming from a UK-focused
in the markets in which the Group elections) did not show the expected letters business that delivers
operates, could impact level of recovery parcels, to a parcels-led,
the demand for products and services. in the second half. Advertising mail international business. Letters will
Given the major cultural shift in particular has been significantly remain an important part of our
underway in UK society - more impacted by COVID-19, business.
e-commerce and therefore fewer as marketing campaigns are delayed or We will continue to deliver customer
letters and more parcels - it is very cancelled and moved to digital focused enhancements enabled by our
important Royal Mail changes too. platforms. While B2C 'turnaround and grow'
While we expect to handle many more mail volumes have been more plan. This includes leveraging parcel
parcels in the years to come, we resilient, restrictions on technology investments to bring to
think UK letter volumes individuals and businesses have market new features
will continue to decline. This adversely to improve convenience and customer
structural decline is driven by impacted unsorted and stamped mail. control in the UK and
e-substitution, lower GDP, Due to the highly uncertain external internationally, such as in-flight
the impact of GDPR and business environment we are unable to provide redirections, predicted day of
uncertainty. We expect it to specific letter delivery / shorter delivery windows,
accelerate this year, due to volume market guidance. However, we parcel post-boxes and
the impact of COVID-19. do expect letter volumes to decline doorstep collections.
There is a high degree of uncertainty substantially this We will continue with our UK network
about letter volumes due to the year. See our stress test Scenarios transformation and increasing
effect of COVID-19 and for more information. automation to a) maximise
any subsequent economic slowdown. In The UK domestic and international the benefits of delivering letters
addition, we may see a paradigm-shift parcels markets are highly and small parcels together and b)
as online retailing competitive, with innovative handle more Next Day
activity accelerates, driving more delivery solutions including and larger parcels more efficiently.
parcel growth. At GLS, B2C volumes convenient, reliable delivery and This will facilitate e-commerce
have increased significantly return options, and improved growth and increase demand
in recent years as part of our tracking services. for our services.
strategy. The pandemic is During the COVID-19 pandemic, UK This year we will focus on winning
accelerating a shift from B2B to e-commerce growth has significantly and retaining as much of the current
B2C, although the relative outpaced the wider UK exceptional parcel
proportions vary from market to retail market, resulting in very growth as possible, with an emphasis
market. strong B2C volumes; initially we saw on those customers and sectors that
Our focus on productivity, through the strongest growth represent long term
operational excellence and key work in sectors providing goods associated growth opportunities. We will
tools, is vital to with the lock down, and while these continue to support this with regular
remaining competitive in the UK continue to be strong service feature developments
parcels market - one of the most all other major sectors have now and continuous enhancements to our
developed e-commerce markets recovered. International import and digital access and service channels
in the world. So too is our network export parcel traffic such as the Royal Mail
redesign, which, in combination with had been adversely affected by the App.
productivity gains, COVID-19 pandemic. Our range of letter products,
should protect UK business, to some Our network provides strong incentives and offers are designed to
extent, from changes in customer economics, particularly in the demonstrate how mail can
demand. combined delivery of letters and help businesses. We will deploy a
small parcels. It is not currently range of appropriate incentives to
optimised for the anticipated encourage customers to
increase in Next Day and reconnect with using mail. New
larger parcels. initiatives will also follow,
At GLS, we are focused on delivering designed to contemporise key
a range of consumer-led solutions as product segments like consumer mail.
we deliver more We will also continue to promote the
B2C parcels. At the same time, yield value of mail, including
management is a key focus for us, to as and when the lockdown is lifted
ensure profitable over time.
growth. As announced in June 2020, we are
integrating Parcelforce Worldwide and
Royal Mail International
more closely into Royal Mail. These
changes will ensure that we have one
integrated domestic
and international parcels strategy
that best serves the changing needs
of the market and customers.
-------------------------------------- --------------------------------------
Economic and political environment Ø High severity
Ø Increasing risk
Ø Fast speed
Historically, there has been a The Board continues to monitor the Macroeconomic risk assessments are
correlation between economic economic and wider external embedded within our letters
conditions and the level of letter environment in the UK and our forecasting processes. In addition,
and B2B parcel volumes. Low rates of other markets. Specific areas of a set of economic scenarios have been
economic growth could impact our focus include: constructed to inform a range of
ability to maintain - Business uncertainty, alongside the scenarios that could
and grow revenue, either by reducing recent slowdown in economic activity be associated with COVID-19. These
volumes or encouraging customers to due to the COVID-19 are being revised regularly as more
adopt cheaper products pandemic, which is impacting letter information is obtained.
or formats for sending letters and volumes, including business and The Group has the following
parcels. advertising mail. strategies in place:
We are entering a period of - In the UK, B2C parcel volumes have - Maintaining a strong liquidity
significant uncertainty. The COVID-19 remained strong, supported by an position, with good levels of cash,
pandemic is taking us into increase in e-commerce limited financial debt
uncharted territory and the extent to as people shop more online. In the UK and retaining access to a GBP925
which UK and global economic activity and some EU markets, international million syndicated bank loan
will decline over import and export facility.
the next few months is expected to be parcel traffic has been adversely - Existing covenants have been waived
steeper than the financial crisis of affected but is now in recovery. until March 2022 and replaced with a
2008-09. - In the overseas market in which GLS basic liquidity
How the economy will fare in three to operates, B2B volumes have fallen covenant.
six months is equally unclear and whilst B2C volumes - A cost avoidance programme to
there is a risk that have increased. effectively manage cash and spending.
there may be additional spikes in The extent to which these trends will - Business initiatives to respond to
COVID-19 infection rates. Economic be sustained depends in part on the fluid competitive pressures.
forecasters are divided evolution of the - A measured reduction in investment
over how long the crisis will last response to the pandemic in each in the short term to underpin our
and what a recovery will look like. country. financial position.
These are matters we - For 2020-21, there will almost - The Group has the ability to access
are unable to predict with any certainly be a sharp and sustained the Covid Corporate Financing
certainty. economic downturn in our Facility (CCFF), if required.
In addition, while the UK has left core markets. As in the UK, economic Internal procedures are also in place
the EU and entered a transition growth in the Eurozone is expected to to monitor and manage ongoing risks
period which runs to 31 slow down sharply associated with
December 2020, it is not clear in the short-term. The medium-term the UK leaving the EU. Material risks
whether this deadline will continue outlook is highly uncertain. are reported to and handled through a
to hold, or what the outcome Royal Mail's letters business Brexit steering
will mean for future UK and EU performance remains closely aligned group which is comprised of senior
trading arrangements. to UK economic growth. We executives.
therefore expect significant We believe the immediate risk to our
incremental rates of decline in the domestic operations is low. The
short term. Thereafter, the impact on cross-border
outlook for letters will be highly parcel volumes will depend on the
dependent on how the crisis evolves nature of the UK's future trading
and Government's public relationships, and what
policy response. the future EU/UK customs and VAT
As previously announced, due to these arrangements will be. At the end of
factors, we expect Royal Mail (UKPIL) the transition period,
to be materially we expect the rules which apply to
loss-making in 2020-21; while GLS non-EU imports to be extended to EU
profitability may potentially be items. Similarly, we
reduced. would expect the EU to treat UK
In addition, over the medium to long imports as it does non-EU imports
term, both our letters and parcels today.
business outlook will Strategies to address these risks
be shaped by events relating to the include:
future trading relationship between - Accelerating the pace of change in
the UK and the EU, the UK to deliver the requisite
which remain unclear. It is not efficiency benefits.
possible to predict with any degree - Arrangements are in place to manage
of accuracy the impact the expected impact of changes to
the UK's departure from the EU could customs processing.
have on the Group. - Working closely with Government to
put in place systems to ensure the
movement of cross-border
parcels continues to operate
effectively.
Royal Mail regularly engages with
politicians and policy makers, and
closely monitors the
potential impact of political and
policy changes on the Company. The
Company runs an extensive
public affairs programme with
politicians and policy makers.
-------------------------------------- --------------------------------------
Scale up and Grow GLS Ø Medium severity
Ø Increasing risk
Ø Medium speed
Our success in growing in new areas Royal Mail Group is well positioned Our five-year plan aims to build a
of business is dependent on such to grow through its subsidiary, GLS. parcels-led, more balanced, more
factors as our continued It has a replicable diversified business.
ability to identify new profitable and scalable business model founded This includes increasing the
and sustainable areas of business, on the development of strong regional proportion of Group revenue generated
implementing appropriate businesses. by parcels through our
investments, and having in place Our GLS strategy is about growing the 'scale up and grow' plan for GLS and
suitable structures to support business. It remains very well cross-border parcels.
continued transformation of positioned as a deferred Our strategy is designed to ensure
the business. delivery business with good market GLS builds on its strong, 30-year
positions in many countries. GLS is track record and makes
an important source a major contribution to the Group's
of cash flow generation and revenue product and geographical
diversification for the Royal Mail diversification. The focus will
Group. In the short be on profitable revenue growth,
term, there are few synergies including focused yield management.
available between Royal Mail and GLS. The acceleration of the shift from
In the medium term, an B2B to B2C will be addressed through
international presence is clearly initiatives to improve
important. last mile productivity to offset cost
The large, and growing, cross-border pressures.
market represents a growth We are conducting a review of recent
opportunity. The majority acquisitions and implementing
of cross-border volumes are deferred improvement plans in key
parcels (including small parcels); markets.
express parcels account
for less than a quarter of volumes.
This is a growth area for the Group.
-------------------------------------- --------------------------------------
Regulatory and legislative environment; and operational risks
The UK business operates in a regulated environment. GLS entities
operate in a number of different jurisdictions and are subject to
various national laws and regulations. Changes in legal and regulatory
requirements could impact our ability to meet our targets and goals.
Our UK regulatory Ø Medium severity
framework Ø Increasing risk
Ø Medium speed
USO finances are fragile. Ofcom will continue A key aim of our 'turnaround
There are significant, to be focused on monitoring and grow' plan for
and growing, risks Royal Mail's efficiency. our UK business is
to the USO's financial It will complete its to underpin the sustainability
sustainability. Given bottom-up cost model of the Universal Service.
the continuing structural of our operations and The plan will be challenging
decline in addressed a review of our efficiency. to execute. We will
letter volumes, and It is also conducting continue to ask Ofcom
broader changes in research on user needs for its support, wherever
the parcels market, to assess whether the possible, to facilitate
Ofcom is continuing postal services market its delivery. In doing
its monitoring of is meeting the reasonable so, we will note that
Royal Mail. It has needs of postal users. our transformation
brought forward some The Universal Service, is designed to help
of the work it plans as we have stressed us become even more
to undertake as part to Ofcom and Government, efficient and better
of its next review needs to meet the 21st placed to respond to
of the regulation century requirements changing customer demands.
of Royal Mail, which, of consumers and SMEs. We will stress the
overall, will be completed In short, a contemporary power and economic
in 2022. Ofcom's review USO is required. We value of the Universal
of the regulatory have also noted the Service as it makes
framework could lead importance of considering commerce happen across
to further intervention the revenue pools needed the UK and connects
which could undermine to sustain the Universal customers, companies
the financial sustainability Service, alongside and countries.
of the Universal Service. the legitimate needs Ofcom is conducting
of consumers and SMEs. a User Needs Review
Given that the USO about the Universal
has high, fixed costs, Service. We believe
irrespective of volume, that many of key USO
it is also crucial features are valued
to focus on underpinning by consumers and SMEs.
USO and non-USO revenue They include uniformity,
pools to fund it. universality, affordability
As a result of the and measurability.
COVID-19 pandemic, But, they all have
we initially indicated to be paid for at a
that there could be time when COVID-19
some service disruption has exacerbated the
across the country. underlying problems
We subsequently announced facing the USO. For
a six-week temporary example, since the
relaxation of delivery beginning of this financial
frequency arrangements year (2020-21) letter
in relation to letters. volumes have declined
For that period, letters about 33%, around four
were delivered five times the decline rate
days a week; we continued we saw in 2019-20.
to deliver most parcels For its part, Royal
on a six days a week Mail has a stretching
basis. Normal services self-help programme
resumed on 13 June in place. This involves
2020. significant investment
We welcomed Ofcom's in the Universal Service
statement that it would when our finances are
take a pragmatic approach under challenge; we
to any changes to our expect to be materially
regulated services loss-making in the
during this unprecedented UK this year. In addition,
crisis. we plan to address
the very specific challenges
presented by COVID-19.
We do not believe,
however, that successful
delivery of our transformation
and COVID-19 mitigation
plans will be enough
in themselves to underpin
the long-term stability
of the USO.
That is why, alongside
engaging with our unions
on our own plans to
put Royal Mail in a
better position, we
are working with the
Regulator and Government
on the Universal Service.
This is all about ensuring
it is financially underpinned,
in a sustainable way,
and future-proofed
to reflect changing
consumer and SME needs
and preferences. Ofcom
will embark on a public
consultation on the
USO, and Royal Mail
will engage, at the
same time, with many
stakeholders on a USO
for the 21st century.
From its own, detailed
research, the Company
anticipates that many
of the current features
of the USO should remain
in place, subject to
regulatory and Government
approval. We look forward
to the debate and engagement
to come, including
ensuring the Universal
Service has the requisite
financial resources
to sustain itself.
----------------------------- --------------------------------
Competition Act investigation Ø High severity
Ø Increasing risk
Ø Slow speed
On 14 August 2018, The Group robustly Royal Mail's appeal
Ofcom published its defended its conduct of the CAT's judgment
decision following in written and oral will be heard by the
its investigation representations made CoA in mid-2021.
into whether Royal to Ofcom during the Whistl's High Court
Mail had breached investigation and lodged claim is on hold until
competition law. The an appeal with the after the completion
investigation was Competition Appeal of the appeal process.
launched in February Tribunal (CAT) on 12
2014, following a October 2018 to have
complaint brought both Ofcom's decision
by TNT Post UK (now and fine overturned.
Whistl). Ofcom found The main hearing for
that Royal Mail had the appeal to the CAT
abused its dominant took place in June
position in the market and July 2019. On 12
for bulk mail delivery November 2019 the CAT
services in the United handed down its judgment
Kingdom by issuing on RMG's appeal, which
Contract Change Notices upheld Ofcom's decision
on 10 January 2014 and the GBP50 million
which introduced discriminatory fine. As a result,
prices. It fined Royal Royal Mail has made
Mail GBP50 million. a provision for the
In October 2018, Whistl fine, which is now
filed a damages claim payable to Ofcom.
against Royal Mail In January 2020, Royal
at the High Court Mail requested permission
relating to Ofcom's to appeal the CAT's
decision. judgment to the Court
of Appeal (CoA). On
30 March 2020, the
CoA granted Royal Mail
permission and indicated
that a hearing would
be held over 1-2 days
in mid-2021.
----------------------------- --------------------------------
Capability - Talent Ø Medium severity
and strategic workforce Ø Stable
planning Ø Medium speed
This risk brings together Voluntary turnover Executive search activity
our risks of "Strategic in senior management has continued to bring
workforce planning" is at similar levels in external hires
and "Talent and capability" to prior years but with key capabilities.
that were previously remains a business We operate an internal
presented separately. risk. Executive talent review
Our performance, operating As our workforce ages, and succession planning
results and future it may be incapable process and have in
growth depend on our of fulfilling physically place leadership development
ability to attract demanding roles. We programmes.
and retain talent are developing a strategy Leadership initiatives
with the appropriate to attract and retain to aid the transformation
level of expertise. younger workers, which agenda are in design;
The capability, experience means we need to review along with our approach
and cohesion of senior our employment proposition. for increasing diversity
management is integral Our transformation, across this population,
to our transformation. including implementation including 2024 targets
Workforce planning of our Enterprise strategy agreed with the Inclusive
could be adversely and increased automation, Action Steering Group.
impacted by an ageing will change the nature Resources, delivery
workforce, and a reduction of some roles, requiring methods and timescales
in available workforce new and different skills. for these and other
due to the impacts We need to be able activities in development
of demographic change, to upskill our existing are being impacted
Brexit and increasing workforce to develop as a result of COVID-19.
automation. these skills and ensure We are monitoring
we can attract and the demographic profile
retain people with of our workforce and
the right skills for tracking key external
our organisation. metrics such as the
The impact of Brexit employment rate and
on the employment market demographics. We undertake
is largely still unknown. market research and
It may influence the analysis and we perform
availability of workers, industry benchmarking.
particularly if freedom A Strategic Workforce
of movement is at risk. Plan has been developed
The medium and long-term during 2019-20 and
impact of COVID-19 will be reviewed once
on Royal Mail is unknown. the impact of COVID-19
However, the mail mix/profile, is more clearly understood.
and the economy generally,
is likely to be quite
different coming out
of the crisis, for
which scenarios are
currently being modelled.
-------------------------------- ------------------------------
Health, safety and Ø Low severity
wellbeing Ø Stable
Ø Fast speed
The health, safety The business has a We will continue to
and wellbeing of our large number of employees review SHEMS to identify
employees, contractors, including seasonal any further opportunities
agency workers and staff and agency workers. for streamlining and
members of the public It also operates a simplification. We
is of the utmost importance. very large fleet, employs are investing in improved
There is a risk that a large number of contractors technology so risk
a health and safety and interacts extensively assessment processes
incident or global with members of the can be completed more
health crisis could public. A large proportion easily by managers
result in serious of our employees spend and better meet business
injury, ill health most of their time needs.
or death of employees, working outdoors, on Operational implementation
contractors, agency foot or driving, where of SHEMS is monitored
workers or members the environment is via an annual audit
of the public. more difficult to control. programme. A professional
An incident may lead Due to this wide reach and independent SHE
to criminal prosecution and the number of people function provides
or fines by the enforcing affected by the business' advice, support and
authority or civil undertakings, the risk guidance on the implementation
action by the injured of serious harm to of standards.
party resulting in people cannot be totally There is an annual
large financial losses mitigated. We acknowledge SHE initiative and
and reputational damage that every health and communications plan
for the Group. safety incident has in place. This is
Similarly, failure a human impact. informed by a review
to manage the health An integrated Safety, of compliance data,
and wellbeing of our Health and Environment risk data, KPI performance
employees could also Management System (SHEMS) and legislative requirements.
lead to financial is in place to manage Employees have access
losses and reputational our risks and achieve to health and wellbeing
damage through increased legal compliance; ongoing assistance through
sickness absence, maintenance addresses our Feeling First
lower productivity, any emerging compliance Class website, First
failure to deliver gaps or risk controls. Class Support helpline
our USO obligations, We continue to identify and Occupational Health
civil action or criminal opportunities for simplification provision.
prosecution. to make the SHEMS more SHE performance is
accessible for managers. discussed and reviewed
The COVID-19 pandemic by the Board. Senior
poses a new and increased leaders are committed
risk to public health. to driving full compliance
Our employees are classified to SHEMS.
as key workers as we We have taken action
form part of the country's to mitigate the risks
essential infrastructure. to our employees and
We have an important customers posed by
role to play in keeping the COVID-19 pandemic,
letters and parcels including enhancing
moving during the pandemic. our sick pay policy
This means that the and updating our operating
effectiveness of our procedures to limit
controls and processes contact between colleagues
to protect our employees and customers.
are even more important. We have implemented
PHE and WHO instructions
and guidance through
the development of
internal policies,
procedures, risk assessments,
instructions and guidance.
These arrangements
have been communicated
to employees through
a dedicated, comprehensive
multi-media communications
campaign.
---------------------------------- --------------------------------
Major breach of information Ø High severity
security, data protection Ø Stable
regulation and/or Ø Fast speed
cyber attack
We collect, process Given the evolving As external threats
and store confidential nature, sophistication become more sophisticated,
business and sensitive and prevalence of these and the potential
personal information threats, including impact of service
due to the nature those presented by disruption increases,
of our operations. the current COVID-19 we continue to invest
As a result, we are pandemic and our - in security enhancement
subject to a range still growing - reliance and data protection
of laws, regulations on technology and data in response to the
and contractual obligations for operational and changing threats we
around the governance strategic purposes, face. We continue
and protection of this continues to be to support the education
various classes of a principal risk. of our employees and
data to protect our stress the importance
customers, suppliers of maintaining vigilance
and employees. across the business,
In common with all whilst recognising
major organisations, that we cannot provide
we are the potential absolute mitigation
target of cyber-attacks against the risks.
that could threaten This is especially
the confidentiality, imperative during
integrity and availability altered ways of working
of data and trigger due to COVID-19. As
material service and a result of the pandemic,
/ or operational interruption. changes have been
A major breach of required to our operational
information security, processes and to working
data protection laws, practices, including
regulations and / those of third-party
or cyber-attack could suppliers who process
adversely impact our our data.
reputation, result
in financial loss,
regulatory action,
business disruption
and loss of stakeholder
confidence.
---------------------------------- --------------------------------
Environment and sustainability Ø Medium severity
Ø Increasing risk
Ø Slow speed
Climate change and With the UK's largest We are launching our
regulatory actions 'Feet on the Street' new environmental
designed to mitigate network of around 90,000 strategy in 2020-21.
its impact may have postmen and women, It has three key pillars:
adverse operational, Royal Mail plays a emissions reduction,
financial and reputational key role in keeping cleaner air, and resource
consequences. carbon emissions low. efficiency. Our target
The cost of operations We have a requirement is for our operations
could increase as to maintain a large to be net zero by
a result of actions fleet of vehicles. 2050.
to mitigate and adapt Growth in parcels is We are increasing
to climate change. also driving up our the number of electric
These include the energy demand. We recognise and alternative fuel
introduction of Clean our responsibility vehicles in our fleet
Air Zones, the future to reduce our environmental to reduce emissions
ban of petrol and impacts. and improve air quality.
diesel vehicles, and Our environmental programmes We are investing in
net zero emission have already reduced innovative technologies,
targets for towns our UK emissions by such as telemetry,
and cities. 31.9 per cent since and driver training
An increase in the 2004-05. The GLS 'ThinkGreen' programmes, to reduce
frequency of extreme initiative delivers the amount of fuel
weather events may targeted measures on we use. We also continually
result in disruption key environmental issues. work to optimise our
to our operations. These include a reduction transport network,
It may also impact in emissions and the to ensure it is as
our ability to meet responsible handling efficient as possible.
USO or other contractual of resources across GLS continues to expand
requirements. We may areas of transport, urban logistics projects,
also see price rises buildings and business such as emission-free
as a result of resource travel. delivery cities, and
scarcity, such as We continue to invest grow its alternative-fuel
water shortages, and and implement changes vehicle fleet.
increased costs associated to improve the efficiency We are also taking
with insurance premiums, of our operations. proactive steps to
investment in equipment This includes investment reduce our energy
to protect the business in zero- and low-emission and water consumption,
from extreme weather vehicles and the installation and reduce the amount
events, and any associated of efficient equipment of waste we send to
repairs. across our property landfill. For example,
In common with all estate. we have invested in
major organisations, We engage our people new boilers and energy
there could also be in our efforts to become efficient lighting.
a risk of reputational more efficient and
damage - impacting reduce our use of natural
our 'licence to operate' resources.
- if the business
is perceived to not
be responding appropriately
to stakeholder expectations
for action on climate
change.
------------------------------- -----------------------------
Business Continuity Ø Medium severity Following the onset
and crisis management Ø New risk of the COVID-19 pandemic,
We have a responsibility Ø Fast speed we are prioritising
to provide sustained The outbreak of the the protection of
and continued postal virus COVID-19 has our people, the country
services under the been declared a pandemic and our customers,
Universal Service. by the World Health whilst keeping mail
There is a risk that Organisation and now and parcels moving.
we may fail to successfully presents an unprecedented We are actively monitoring
respond to, recover global crisis. Governments the rapidly evolving
from, or reduce the worldwide have imposed COVID-19 threat and
impact of a major restrictions on the have invoked a comprehensive
threat or disruptive movement of people business continuity
incident that could and imposed necessary and crisis management
cause widespread operational measures which have response across the
disruption and financial had, and continue to Group in line with
loss to the Group. have, a significant our framework.
Previously this risk effect on our UK and We are engaging closely
was monitored at business International businesses. with the Government,
unit and functional Royal Mail staff are public health authorities,
level but was not recognised by Government Ofcom, and customers
considered a principal as key workers, essential to implement necessary
risk due to the modular to keeping the country changes in response
and geographically connected during this to government, PHE
diverse nature of time. We are adapting and WHO advice. For
our operations providing and responding to the example, limiting
natural mitigation. rapidly evolving risks contact between colleagues
The widespread and accordingly, in line in our operations,
enduring nature of with our already existing with customers on
the current global Business Continuity delivery and at Customer
pandemic has increased Management Framework. Service Points. Steps
the likelihood of have been taken to
the inherent risk minimise the impact
materialising, and on services as much
as such this is now as possible.
being recognised as The pandemic has brought
a principal risk to together all functions
the Group. across the Business
in a cohesive response.
We have established
Gold, Silver and Bronze
response teams which
have Executive, Director
and Senior Management
leadership, providing
regular reports to
the Plc Board.
Daily communications
are cascaded to all
employees to keep
them informed of current
developments. We are
in regular dialogue
with Government officials,
key stakeholders and
suppliers.
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 continue to
relate to the successful deployment of the key elements of the
Journey 2024 plan communicated in May 2019, namely:
-- Transforming and growing our UK business;
-- Scaling up and growing GLS; and
-- Enhancing our cross-border proposition.
Further details on these factors can be found in the Business
Review and the Principal Risks sections.
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 2023 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 matches our
business planning cycle, which allows financial modelling to be
supported by the budget and business plan approved by the
Board.
Given the recent economic uncertainty arising from COVID-19, we
expect to see significant volatility in the short term reducing our
expected performance for 2020-21. This includes significant impacts
on:
-- advertising mail and addressed letter volumes within Letters in the UK;
-- Tracked returns and Post Office volumes within Parcels in the UK;
-- Business to Business volumes in GLS; and
-- additional costs of taking necessary measures to protect the
health and safety of customers and employees and of temporary
resource to cover increased absence levels.
We believe that trading conditions will partially recover as we
move through into 2021-22.
The key assumptions within the Group's financial forecasts are
as follows:
-- A three-month lockdown in the UK, resulting in a GDP decline
of 10 per cent in FY21 followed by recovery from FY22 onwards
-- UKPIL Letter revenue to suffer a material decline in FY21 due
to adverse impacts in advertising mail and addressed letter
volumes, with the decline decelerating in FY22 and FY23.
-- UKPIL Parcel revenue expected to continue to grow, primarily
driven by an upsurge in online shopping.
-- GLS parcel volume and revenue growth remains good, with
impact to margins effectively managed as the mix moves to a higher
proportion of B2C growth.
-- People costs reflect an extensive set of operational
initiatives with phased implementation.
-- COVID-19 related one-off charges of cGBP140million are included within the plan.
-- The current Regulatory Framework was extended in March 2017
through to March 2022. It is therefore assumed that there is no
change in the Regulatory Framework over this period.
Assessment of Viability
The key assumptions within the projections were stress-tested
with reference to risks set out in the Principal Risks section but
focused on those that could have a plausible and severe financial
impact over the plan horizon.
This year, the Directors considered:
(i) A second wave of COVID-19 in the UK resulting in a further
three-month lock-down between October and December 2020; (Principal
risk: Business Continuity and crisis management)
(ii) deteriorating economic and market conditions which could
result in letters volume decline greater than our projected range
(Principal risk: Economic and Political Environment);
(iii) the Brexit transition period ending without a trade deal
having been reached, which could cause economic conditions to
deteriorate further (Principal risk: Economic and Political
Environment);
(iv) increased competition in the UK parcels sector. (Principal
risk: Customer expectations and Royal Mail's responsiveness to
market changes);
(v) the potential impact of industrial action (Principal risk: Industrial Action); and
(vi) delays to our UKPIL transformation plan (Principal risk: Efficiency).
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) suspending the dividend;
(ii) reducing variable hours and cost of sales;
(iii) removing discretionary pay;
(iv) reducing our internal investment; and
(v) reducing our one off projects.
Consideration was also given to the large fixed cost base
required to deliver the Universal Service Obligation in its current
form. The downside scenarios were tested to determine whether the
Group would remain solvent.
Unprecedented uncertainty exists in respect of the potential
impact of COVID-19 in 2020-21. We have made our assessment based on
our best view of the severe but plausible downside scenarios that
we might face. If outcomes are significantly worse, the Directors
would need to consider what additional mitigating actions were
needed, for example assessing the value of our asset base to
support liquidity. Consequently, the Directors have concluded that
to stress test a level of increased severity (beyond the downside
scenario) which may cast doubt about the Group's ability to
continue to be viable over the three year assessment period is not
currently reasonable.
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, meet its liabilities as they fall due, retain sufficient
available cash and not breach any covenants under any drawn
facility over the period to March 2023.
Financial Statements
Consolidated income statement
For the 52 weeks ended 29 March 2020 and 53 weeks ended 31 March
2019
Re-presented(1)
Reported reported
52 weeks 53 weeks
2020 2019
Notes GBPm GBPm
---------------------------------------------------- ----- --------- ---------------
Continuing operations
Revenue 3 10,840 10,581
Operating costs(2) 4/5 (10,623) (10,240)
---------------------------------------------------- ----- --------- ---------------
People costs (6,064) (5,869)
Distribution and conveyance costs (2,786) (2,606)
Infrastructure costs (991) (995)
Other operating costs (782) (770)
---------------------------------------------------- ----- --------- ---------------
Operating profit before specific items(3) 217 341
Operating specific items
Regulatory fine 6/16 (51) -
RMSEPP settlement 10(c) - (64)
Employee Free Shares charge 6 (4) (22)
Impairment of assets 6 (91) (68)
Legacy/other credits/(costs) 6 3 (7)
Amortisation of intangible assets in acquisitions 6 (19) (20)
---------------------------------------------------- ----- --------- ---------------
Operating profit 55 160
Profit on disposal of property, plant and equipment
(non-operating specific item(3) ) 6 89 15
---------------------------------------------------- ----- --------- ---------------
Profit before interest and tax 144 175
Finance costs (56) (18)
Finance income 6 5
Net pension interest (non-operating specific item) 10(c) 86 79
---------------------------------------------------- ----- --------- ---------------
Profit before tax 180 241
Tax charge 7 (19) (66)
---------------------------------------------------- ----- --------- ---------------
Profit for the year 161 175
---------------------------------------------------- ----- --------- ---------------
Earnings per share
Basic 8 16.1p 17.5p
Diluted 8 16.1p 17.5p
---------------------------------------------------- ----- --------- ---------------
1 Operating costs include GBP130 million which would previously
have been reported as 'Transformation costs'. These costs are now
incorporated within their relevant operating cost categories, which
better reflects the ongoing costs of the business. The comparative
period costs of GBP133 million have therefore been
re-presented.
2 Operating costs are stated before operating specific Items
which Include; the Regulatory fine, RMSEPP settlement, Employee
Free Shares charge, Impairment of assets, Legacy/other costs and
Amortisation of intangible assets in acquisitions.
3 For further details on Alternative Performance Measures (APMs)
used, see the section of the Financial Review entitled
'Presentation of Results and Alternative Performance Measures'.
Consolidated statement of comprehensive income
For the 52 weeks ended 29 March 2020 and 53 weeks ended 31 March
2019
Reported Reported
52 weeks 2020 53 weeks 2019
Notes GBPm GBPm
---------------------------------------------------------------- ----- ---------------- --------------
Profit for the year 161 175
Other comprehensive income/(expense) for the year
from continuing operations:
Items that will not be subsequently reclassified
to profit or loss:
Amounts relating to pensions accounting 1,122 239
---------------------------------------------------------------- ----- ---------------- --------------
Withholding tax payable on distribution of RMPP
and RMSEPP surplus 10 (648) (138)
Remeasurement gains of the defined benefit surplus
in RMPP and RMSEPP 10(c) 1,773 383
Remeasurement losses of the defined benefit deficit
in DBCBS 10(d) (3) (8)
Deferred tax associated with DBCBS 7 - 2
---------------------------------------------------------------- ----- ---------------- --------------
Items that may be subsequently reclassified to
profit or loss:
Foreign exchange translation differences 3 (9)
---------------------------------------------------------------- ----- ---------------- --------------
Exchange differences on translation of foreign
operations (GLS) 20 (16)
Net (loss)/gain on hedge of a net investment (EUR500
million bond) (15) 5
Net (loss)/gain on hedge of a net investment (Euro-denominated
lease payables) (2) 1
Tax on above items 7 - 1
---------------------------------------------------------------- ----- ---------------- --------------
Designated cash flow hedges (49) (3)
---------------------------------------------------------------- ----- ---------------- --------------
(Losses)/gains on cash flow hedges deferred into
equity (46) 14
Gains on cash flow hedges released from equity
to income (1) (17)
Gains on cash flow hedges released from equity
to the carrying amount of
non-financial assets - (1)
Loss on cross currency swap cash flow hedge deferred
into equity (21) -
Loss on cross currency swap cash flow hedge released
from equity to income - interest payable 3 -
Gain on cost of hedging deferred into equity 6 -
Gain on cost of hedging released from equity to
income - interest payable (1) -
Tax on above items 7 11 1
---------------------------------------------------------------- ----- ---------------- --------------
Total other comprehensive income for the year 1,076 227
---------------------------------------------------------------- ----- ---------------- --------------
Total comprehensive income for the year 1,237 402
---------------------------------------------------------------- ----- ---------------- --------------
Consolidated balance sheet
At 29 March 2020 and 31 March 2019
Reported Reported
at at
29 March 31 March
2020 2019
Notes GBPm GBPm
------------------------------------------------ ----- --------- ---------
Non-current assets
Property, plant and equipment 3,120 2,066
Goodwill 13 390 380
Intangible assets 558 631
Investments in associates 5 5
Financial assets
Pension escrow investments 201 207
Derivatives - 4
RMPP/RMSEPP retirement benefit surplus - net of
withholding tax payable 10 3,614 2,408
Other receivables 12 12
Deferred tax assets 7 110 64
------------------------------------------------ ----- --------- ---------
8,010 5,777
------------------------------------------------ ----- --------- ---------
Assets held for sale 25 36
------------------------------------------------ ----- --------- ---------
Current assets
Inventories 19 27
Trade and other receivables 1,282 1,310
Income tax receivable 6 7
Financial assets
Investments 30 -
Derivatives 5 8
Cash and cash equivalents 14 1,640 236
------------------------------------------------ ----- --------- ---------
2,982 1,588
------------------------------------------------ ----- --------- ---------
Total assets 11,017 7,401
------------------------------------------------ ----- --------- ---------
Current liabilities
Trade and other payables (2,041) (1,883)
Financial liabilities
Interest-bearing loans and borrowings 15 (700) -
Lease liabilities 12 (201) (37)
Derivatives (35) (3)
Income tax payable (5) (8)
Provisions 16 (113) (58)
------------------------------------------------ ----- --------- ---------
(3,095) (1,989)
------------------------------------------------ ----- --------- ---------
Reported Reported
at at
29 March 31 March
2020 2019
Notes GBPm GBPm
------------------------------------------------ ----- --------- ---------
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings 15 (935) (431)
Lease liabilities 12 (987) (88)
Derivatives (32) (2)
DBCBS retirement benefit deficit 10 (177) (72)
Provisions 16 (112) (104)
Other payables (4) (41)
Deferred tax liabilities 7 (54) (55)
------------------------------------------------ ----- --------- ---------
(2,301) (793)
------------------------------------------------ ----- --------- ---------
Total liabilities (5,396) (2,782)
------------------------------------------------ ----- --------- ---------
Net assets 5,621 4,619
------------------------------------------------ ----- --------- -----------
Equity
Share capital 10 10
Retained earnings 5,625 4,576
Other reserves (14) 33
------------------------------------------------ ----- --------- -----------
Total equity attributable to Parent Company 5,621 4,619
------------------------------------------------ ----- --------- -----------
The financial statements were approved and authorised for issue
by the Board of Directors on 24 June 2020 and were signed on its
behalf by:
Keith Williams Stuart Simpson
Interim Executive Chair Interim Chief Executive Officer Royal Mail
Consolidated statement of changes in equity
For the 52 weeks ended 29 March 2020 and 53 weeks ended 31 March
2019
Foreign
currency
Share Retained translation Hedging Total
capital earnings reserve reserve equity
GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- -------- --------- ------------ -------- -------
Reported at 25 March 2018 10 4,381 36 9 4,436
--------------------------------------------- -------- --------- ------------ -------- -------
Profit for the year - 175 - - 175
Other comprehensive income/(expense)
for the year - 239 (9) (3) 227
--------------------------------------------- -------- --------- ------------ -------- -------
Total comprehensive income/(expense)
for the year - 414 (9) (3) 402
Transactions with owners of the Company,
recognised directly in equity
Dividend paid to equity holders of
the Parent Company - (242) - - (242)
Reversal of put options for non-controlling
interests - 2 - - 2
Share-based payments
Employee Free Shares issue - 23 - - 23
Long--Term Incentive Plan (LTIP) - 4 - - 4
Deferred Share Bonus Plan (DSBP) - 3 - - 3
Purchase of own shares(1) - (10) - - (10)
Employee exercise of SAYE options - 5 - - 5
Deferred tax on share-based payments - (1) - - (1)
Settlement of LTIP 2015 - (3) - - (3)
--------------------------------------------- -------- --------- ------------ -------- -------
Reported at 31 March 2019 10 4,576 27 6 4,619
--------------------------------------------- -------- --------- ------------ -------- -------
IFRS 16 transition adjustment - 1 - - 1
--------------------------------------------- -------- --------- ------------ -------- -------
Reported at 1 April 2019 on transition
to IFRS 16 10 4,577 27 6 4,620
--------------------------------------------- -------- --------- ------------ -------- -------
Profit for the year - 161 - - 161
Other comprehensive income/(expense)
for the year - 1,122 3 (49) 1,076
--------------------------------------------- -------- --------- ------------ -------- -------
Total comprehensive income/(expense)
for the year - 1,283 3 (49) 1,237
Transactions with owners of the Company,
recognised directly in equity
Gains on cash flow hedges released
from equity to the carrying amount
of non-financial assets - - - (1) (1)
Dividend paid to equity holders of
the Parent Company - (244) - - (244)
Share-based payments
Employee Free Shares issue - 7 - - 7
Long--Term Incentive Plan (LTIP) - 2 - - 2
Deferred Share Bonus Plan (DSBP) - 2 - - 2
Purchase of own shares(1) - (3) - - (3)
Deferred tax on share-based payments - 1 - - 1
--------------------------------------------- -------- --------- ------------ -------- -------
Reported at 29 March 2020 10 5,625 30 (44) 5,621
--------------------------------------------- -------- --------- ------------ -------- -------
1 Shares required for employee share schemes.
Consolidated statement of cash flows
For the 52 weeks ended 29 March 2020 and 53 weeks ended 31 March
2019
Re-presented(1)
Reported reported
52 weeks 53 weeks
2020 2019
Notes GBPm GBPm
------------------------------------------------------------ ----- --------- ---------------
Cash flow from operating activities
Profit before tax 180 241
Adjustment for:
Net pension interest 10(c) (86) (79)
Net finance costs 50 13
Profit on disposal of property, plant and equipment (89) (15)
Regulatory fine 51 -
RMSEPP settlement 10(c) - 64
Employee Free Shares charge 4 22
Impairment of assets 91 68
Legacy/other (credits)/costs (3) 7
Amortisation of intangible assets in acquisitions 19 20
------------------------------------------------------------ ----- --------- ---------------
Operating profit before specific items(2) 217 341
Adjustment for:
Depreciation and amortisation 516 391
------------------------------------------------------------ ----- --------- ---------------
EBITDA before specific items(2) 733 732
Working capital movements 162 (221)
------------------------------------------------------------ ----- --------- ---------------
Increase in inventories (1) (2)
Decrease/(increase) in receivables 13 (176)
Increase/(decrease) in payables 126 (51)
Net decrease in derivative assets 19 2
Increase in provisions (non-specific items) 5 6
------------------------------------------------------------ ----- --------- ---------------
Pension charge to cash difference adjustment 10 108 70
Share-based awards (LTIP and DSBP) charge 4 7
Cash cost of operating specific items (2) (6)
------------------------------------------------------------ ----- --------- ---------------
Cash inflow from operations 1,005 582
Income tax paid (69) (91)
Research and development expenditure credit 14 2
------------------------------------------------------------ ----- --------- ---------------
Net cash inflow from operating activities 950 493
------------------------------------------------------------ ----- --------- ---------------
Cash flow from investing activities
Finance income received 6 5
Proceeds from disposal of property (excluding London
Development Portfolio), plant and equipment (non-operating
specific item) 12 25
London Development Portfolio net proceeds (non-operating
specific item) 97 7
Purchase of property, plant and equipment(3) (265) (264)
Acquisition of business interests, net of cash
acquired (15) (212)
Purchase of intangible assets (software)(3) (77) (100)
Payment of deferred consideration in respect of
prior years' acquisitions (2) (4)
Purchase of financial asset investments (30) -
------------------------------------------------------------ ----- --------- ---------------
Net cash outflow from investing activities (274) (543)
------------------------------------------------------------ ----- --------- ---------------
Net cash inflow/(outflow) before financing activities 676 (50)
------------------------------------------------------------ ----- --------- ---------------
Consolidated statement of cash flows (continued)
For the 52 weeks ended 29 March 2020 and 53 weeks ended 31 March
2019
Re-presented
Reported reported
52 weeks 53 weeks
2020 2019
Notes GBPm GBPm
----------------------------------------------------- ----- --------- ------------
Cash flow from financing activities
Finance costs paid (53) (17)
Acquisition of non-controlling interests - (4)
Purchase of own shares (3) (10)
Employee exercise of SAYE options - 5
Payment of capital element of obligations under
lease contracts (172) (56)
Cash received on sale and leasebacks 6 13
Proceeds from loans and borrowings 1,189 -
Repayment of loans and borrowings (1) (1)
Dividends paid to equity holders of the Parent
Company 9 (244) (242)
----------------------------------------------------- ----- --------- ------------
Net cash inflow/(outflow) from financing activities 722 (312)
----------------------------------------------------- ----- --------- ------------
Net increase/(decrease) in cash and cash equivalents 1,398 (362)
Effect of foreign currency exchange rates on cash
and cash equivalents 6 (2)
Cash and cash equivalents at the beginning of the
year 14 236 600
----------------------------------------------------- ----- --------- ------------
Cash and cash equivalents at the end of the year 14 1,640 236
----------------------------------------------------- ----- --------- ------------
1 Transformation costs are no longer presented as a separate
line item and are included in 'operating profit before specific
items'. The transformation costs to cash difference is now
presented in working capital (provisions). The comparative period
cash flows have therefore been re-presented on this basis.
2 For further details on Alternative Performance Measures (APMs)
used, see the section of the Financial Review entitled
'Presentation of Results and Alternative Performance Measures'.
3 Items comprise total gross capital expenditure 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 29 March 2020 (2018-19: 53 weeks ended 31 March 2019)
comprise the Company and its subsidiaries (together referred to as
'the Group') and the Group's interest in its associate
undertakings.
Basis of preparation and accounting
(a) Going concern
In assessing the going concern status of the Group, the
Directors are required to look forward a minimum of 12 months from
the date of approval of these financial statements to consider
whether it is appropriate to prepare the financial statements on a
going concern basis.
The Directors have prepared business projections which are
consistent with a lifting of the current COVID-19 lockdown
restrictions from early July 2020, but with a GDP decline of 10 per
cent in the 2020-21 reporting year, followed by a recovery
thereafter, affecting both the UK business and GLS.
The Directors have also considered a severe, yet plausible,
downside scenario that assumes a second wave of COVID-19 in the UK
resulting in a further three-month lockdown during the
autumn/winter in the UK, and a further deterioration in economic
conditions impacting the UK and GLS. Whilst letter volumes could
decline at a faster rate under this scenario, parcel volumes would
be expected to remain broadly flat, or slightly ahead and overall
margin would decline. This downside also assumes the potential
impact of industrial action and continued spend on Protective
Equipment and social distancing measures to protect our workforce.
The scenario also takes into account the mitigating actions that
are in the control of the Directors, such as suspending the
dividend or reducing variable hours and cost of sales.
The Directors have reviewed both the business projections
consistent with a lifting of the current COVID-19 lockdown
restrictions from early July 2020 and the downside scenario
business projections and assessed these against committed and
undrawn funding facilities of GBP225 million at 29 March 2020
through the syndicated bank loan facility and other liquid
resources available to the Group (cash at bank GBP209 million and
cash equivalent/current asset investments of GBP1,440 million at 29
March 2020). The Directors have obtained a covenant waiver from its
syndicate bank which removes the syndicated bank loan facility net
debt/EBITDA and EBITDA/interest covenant tests for September 2020,
March 2021 and September 2021, but which are replaced by a minimum
liquidity covenant of GBP250 million. The Directors have also
received approval from the Bank of England for the COVID Corporate
Financing Facility (the 'CCFF') of up to GBP600 million. The CCFF
can be drawn by the Group up to March 2021, and is available for a
period of up to 12 months from the draw down date.
The downside case indicates that the Group would not need to
draw on both the CCFF and the syndicated bank loan facility at the
same time in order to maintain sufficient liquidity.
The Directors are satisfied that these facilities, coupled with
business projections, show that the Group will continue to operate
for a minimum of twelve months from the date of approval of these
financial statements.
The financial statements do not include any adjustments that
would result from the going concern basis of preparation being
inappropriate.
(b) Basis of preparation
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 29 March 2020.
The financial information set out in this document does not
constitute the Group's statutory financial statements for the
reporting years ended 29 March 2020 or 31 March 2019, but is
derived from those financial statements. Statutory financial
statements for the reporting year ended 31 March 2019 have been
delivered to the Registrar of Companies. The statutory financial
statements for the reporting year ended 29 March 2020 were approved
by the Board of Directors on 24 June 2020 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 2019-20, together
with details of the Annual General Meeting (AGM), will be
despatched to shareholders before the AGM. The AGM will take place
on 8 September 2020.
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
2019-20. 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
is 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.
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 judgment 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 the RMPP and DBCBS are
included within Note 10.
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. For
the main classes of assets:
-- Equities listed on recognised stock exchanges are valued at
closing bid price, or the last traded price, depending on the
convention of the stock exchange on which they are quoted;
-- Bonds are measured using a combination of broker quotes and
pricing models making assumptions for credit risk, market risk and
market yield curves;
-- Pooled investment vehicles are valued using published prices
or the latest information from investment managers which includes
any necessary fair value adjustments; and
-- Properties are valued on the basis of open market value as at
the year end date, in accordance with RICS Valuations Standards. As
a result of the current situation with regards the COVID-19
pandemic, we have been advised by our valuers that conditions exist
in the real estate markets that may result in uncertainty in the
reliability of these valuations. Nonetheless, these represent the
best estimate of the current valuation at the year end date and
have been adjusted by our valuers to account for the expected
impact of COVID-19, based on the information available at the time
that the valuation was prepared.
For exchange-traded derivatives that are assets, fair value is
based on bid prices. For exchange-traded derivatives that are
liabilities, fair value is based on offer prices.
Non-exchange traded derivatives are valued as follows:
-- Open forward foreign currency contracts at the balance sheet
date are over the counter contracts and are valued using forward
currency rates at that point. The unrealised appreciation or
depreciation of open foreign currency contracts is calculated as
the difference between the contracted rate and the rate to close
out the contract;
-- Open option contracts at the balance sheet date are over the
counter contracts and fair value is calculated taking into account
the strike price, maturity date and the underlying asset of the
option. The unrealised appreciation or depreciation of open option
contracts is calculated as the difference between the premiums paid
for the options and the price to close out the options; and
-- Interest rate and credit default swaps are over the counter
contracts and fair value is the current value of the future
expected net cash flows, taking into account the time value of
money and market data at year end.
The value of the RMSEPP insurance policies held by the Group are
equal to the accounting defined benefit obligation of the scheme as
at the year end date.
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 10.
It is not currently practical to provide a quantitative estimate
of the impact of Covid-19 on the Group's schemes. The schemes'
assets are invested across multiple sectors and locations and
accordingly returns will vary due to these factors and the specific
nature of the underlying asset. Scheme assets that could be
significantly impacted include equities, bonds, property and pooled
investments. The Trustees of the pension schemes have designed and
implemented investment strategies taking a long-term view and have
built in resilience to withstand short-term fluctuations that may
impact the schemes.
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 majority of this balance is made up of stamps sold to the
general public. To determine the amount of sales to defer,
previously, an estimate of stamp volumes held by the general public
at the year-end was made on the basis of monthly surveys performed
by an independent third party. As surveys of this nature are
inherently subjective and rely on the number and demographic
profile of respondents, Management have adopted a modified approach
utilising a number of different data sources to calculate the
estimated deferred revenue liability given that stamps can be held
and used for varying time periods.
At 29 March 2020 the Group recognised GBP185 million (2018-19:
GBP188 million) deferred revenue in respect of stamps sold to the
general public but not used at the balance sheet date. The primary
sources of data used to derive this estimate are as follows:
-- Revenue data related to stamp sales through the Post Office
network;
-- Historic trends of deferred revenue balances;
-- Changes in the number of working days during the period;
and
-- Adjustments to reflect posting patterns around key events
close to the reporting year end e.g. Mothering Sunday, Easter
Analysis has been undertaken to understand the sensitivity of
the reported deferred revenue balance to the methodology by which
it is calculated. This analysis has shown that the amount reported
is unlikely to fall outside a range of +/- GBP20 million (2018-19:
+/- GBP22 million). This sensitivity arises because of Management's
judgment in applying a weighting to the component parts of the data
sources. Average stamp holding days has remained consistent
year-on-year at 43 days (2018-19: 44 days).
Management are of the view that this new process will remove the
reliance on a single data source, allow the timely close of
critical period ends, and improve the accuracy of the estimated
result.
Impairment test for goodwill and CGUs
In assessing whether there has been an impairment of goodwill,
CGU or in some instances a specific asset, Management determines
whether the carrying value is higher than the recoverable amount.
The recoverable amount is the higher of a CGU or asset's fair value
less costs to sell (realisable value) and value in use. The value
in use of the CGU/asset is calculated based on its discounted
cashflows. The key estimates that can impact the value in use
calculations are changes to the growth rates applied to derive the
terminal value, the adjusted EBITDA figure, excluding one-off
uncommitted transformation expenditure and benefits, or a movement
in the discount rate applied to the future cash flows.
These are key estimates as they are subjective in nature and
significant assumptions are required. Any changes to assumptions
may lead to impairment charges being recognised. For the annual
impairment test for goodwill, the Group has considered the impact
of the assumptions used in the GLS CGU tests and has conducted
sensitivity analysis on the impairment tests as disclosed in Note
13.
Royal Mail UK CGU
During the reporting period this CGU was tested for impairment.
At 29 March 2020 the carrying value of this CGU was GBP1,313
million. The recoverable amount, assessed as being the 'value in
use' is calculated based on the Board's three year forecast free
cash flows, with the assumption that the subsequent years will be
in line with the performance of year three. Cash flows into
perpetuity are assumed to have a growth rate of nil.
Cash flows have been discounted at the Group's pre-tax WACC of
9.0 per cent to reflect current market assessments of the time
value of money and the risks specific to the CGU. The headroom of
the CGU is GBP478 million. The Group has conducted sensitivity
analysis on the impairment test for each of the key assumptions.
The assumptions used and the impact of sensitivities on these
assumptions are shown below.
The perpetuity growth rate included in the impairment model is
nil. If the perpetuity rate decreased to a decline of 4.53 per cent
into perpetuity the headroom of the Royal Mail UK CGU would be
eroded to nil. The pre-tax discount rate for the Royal Mail UK CGU
is 9.0 per cent. An increase in the pre-tax discount rate to 11.7
per cent would result in no headroom.
A key sensitivity in the Royal Mail UK impairment model is
adjusted EBITDA excluding one-off uncommitted transformation
expenditure and benefits. If each year in the plan was to decrease
by 8.1 per cent the CGU would have no headroom.
Parcelforce Worldwide CGU
As a result of delays in the transformation of the Parcelforce
Worldwide business, an impairment review of the Parcelforce
Worldwide CGU was undertaken during the reporting period. This
impairment assessment identified that the carrying value of the CGU
was in excess of its recoverable amount which resulted in a GBP91
million impairment charge reported as a specific item within the
UKPIL segment.
The recoverable amount of the CGU was calculated as the value in
use and considered cash flows for the business forecasted for five
years. The cash flows were discounted to present value at the
pre-tax WACC of 9.0 per cent. As a result of the recoverable amount
being significantly lower than the carrying value, all non-monetary
assets were written off, this consisted of GBP58 million tangible
assets and GBP33 million intangible assets.
GLS Canada CGU
In assessing whether there has been any impairment of goodwill,
Management determines whether the CGU carrying value is higher than
the recoverable amount of the underlying CGU. The recoverable
amount is the higher of a CGU's fair value less costs to sell
(realisable value) and value in use. In the case of goodwill
allocated to the GLS Canada CGU, the realisable value is estimated
using five year forecast cash flows. Details of the impairment
review of the CGU and the relevant estimates and assumptions are
included in Note 13.
Critical accounting judgments
Provisions - Industrial diseases
Due to the nature of provisions, a significant part of their
determination is based upon estimates and/or judgments 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 Appeal 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. A 500bps decrease to the 0.7 per cent discount rate used at
29 March 2020 would result in a GBP6 million increase in the
overall provision. If the number and value of expected claims per
annum increased/decreased by 10 per cent, the provision would
increase/decrease by GBP6 million. Any income statement movements
arising from changes in accounting estimates are disclosed as an
operating specific item. The carrying value of this provision is
included within Note 16.
IFRS 16 - Incremental borrowing rates (IBR)
Under IFRS 16, lease liabilities are initially recognised at the
commencement date at the present value of future lease payments
discounted at the rate inherent in the lease or, where this is not
readily determinable, an appropriate IBR. In practice, the rate
inherent in the lease is not readily determinable for the majority
of leases previously classed as operating leases under IAS 17 and
so an IBR is used. These leases primarily relate to property and
motor vehicles. In addition, an IBR has also been applied when
calculating the opening transition lease liability balances.
The IBR is the rate of interest that a lessee would have to pay
to borrow, over a similar term, and with a similar security, the
funds necessary to obtain an asset of a similar value to the
right-of-use asset in a similar economic environment. The
methodology used to obtain these rates and how they are applied to
assets with different lease terms, is an area of significant
judgement.
In considering the appropriate IBR to apply, the Group has
adopted a three-step approach. This approach begins with an
appropriate risk-free base rate; adjusts this rate to reflect the
cost of company specific unsecured borrowing; and, finally,
considers the need to adjust the rate determined to reflect the
underlying leased asset acting as collateral.
From the evidence obtained, Management have concluded that for
the UKPIL business, lenders do not make adjustments to the
borrowing rates offered on lending, based upon the underlying asset
to be obtained. The key factors in the borrowing rates available to
UKPIL are judged to be the current credit rating of the Group (BBB)
and the length of the borrowing term required.
On the basis of the work performed, UKPIL has treated assets
being held for a similar length of time as having a similarly
calculated IBR, with assets being grouped according to lease
length, both at transition and in the future. By grouping assets in
this way, a rate card has been produced, to be updated
periodically, which can be applied to all future leases requiring
an IBR. UKPIL have based IBR rates on UK BBB corporate bond yields,
adjusted to reflect the different payment profile between a bond
and a lease.
The GLS business has followed a similar methodology and grouping
by lease length to that used in UKPIL. However, instead of basing
the yields on corporate bond yield curves, which are not readily
obtainable for all GLS currencies, a sovereign bond yield curve for
the relevant country has been used as the starting point and an
appropriate margin applied to this based upon consideration of
consolidated GLS quantitative and qualitative information.
The weighted average lessee's incremental borrowing rate applied
to lease liabilities recognised on the balance sheet at the date of
initial application is three per cent in UKPIL and two per cent in
GLS. Sensitivity analysis performed as part of the IFRS 16
implementation work, identified that a movement of 100 bps in the
incremental borrowing rate would lead to a movement in lease
liabilities recognised of around four per cent.
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
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
specific items (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.
Specific items,
and pension adjustment
52 weeks 2020 Adjusted in people costs Reported
================== ======================================================== ------------------------------ --------
GLS GLS
UKPIL (Non-UK UKPIL (Non-UK
Continuing (UK operations) operations) Eliminations(1) Group (UK operations) operations) Group
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Revenue 7,720 3,161 (41) 10,840 - - 10,840
People costs (5,234) (722) - (5,956) (108) (6,064)
Non-people costs (2,369) (2,231) 41 (4,559) - - (4,559)
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Operating profit
before specific
items 117 208 - 325 (108) - 217
Operating specific
items
Regulatory fine - - - - (51) - (51)
Employee Free
Shares charge - - - - (4) - (4)
Impairment of
assets - - - - (91) - (91)
Legacy/other
(costs)/credits - - - - (2) 5 3
Amortisation of
intangible
assets in
acquisitions - - - - (1) (18) (19)
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Operating profit 117 208 - 325 (257) (13) 55
Profit on disposal
of property,
plant and
equipment
(non-operating
specific item) - - - - 88 1 89
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Profit before
interest and tax 117 208 - 325 (169) (12) 144
Finance costs (49) (18) 11 (56) - - (56)
Finance income 15 2 (11) 6 - - 6
Net pension
interest
(non-operating
specific item) - - - - 86 - 86
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Profit before tax 83 192 - 275 (83) (12) 180
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
1 Revenue and non-people costs eliminations relate to intragroup
trading between UKPIL and GLS, due to Parcelforce Worldwide being
GLS' partner in the UK. Finance costs/income eliminations relate to
intragroup loans between UKPIL and GLS.
Re-presented(2)
Specific items,
and pension adjustment
53 weeks 2019 Adjusted in people costs Reported
================== ======================================================== ------------------------------ --------
GLS GLS
UKPIL (Non-UK UKPIL (Non-UK
Continuing (UK operations) operations) Eliminations(3) Group (UK operations) operations) Group
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Revenue 7,732 2,888 (39) 10,581 - - 10,581
People costs (5,132) (667) - (5,799) (70) - (5,869)
Non-people costs (2,366) (2,044) 39 (4,371) - - (4,371)
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Operating profit
before
specific items 234 177 - 411 (70) - 341
Operating specific
items
RMSEPP settlement - - - - (64) - (64)
Employee Free
Shares
charge - - - - (22) - (22)
Impairment of
assets - - - - - (68) (68)
Legacy/other
costs - - - - (5) (2) (7)
Amortisation of
intangible
assets in
acquisitions - - - - (1) (19) (20)
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Operating profit 234 177 - 411 (162) (89) 160
Profit on
disposal of
property, plant
and
equipment
(non-operating
specific item) - - - - 15 - 15
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Profit before
interest
and tax 234 177 - 411 (147) (89) 175
Finance costs (17) (10) 9 (18) - - (18)
Finance income 12 2 (9) 5 - - 5
Net pension
interest
(non-operating
specific
item) - - - - 79 - 79
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
Profit before tax 229 169 - 398 (68) (89) 241
------------------ ---------------- ------------ --------------- ------- ---------------- ------------ --------
2 The comparative period has been re-presented to incorporate
changes to the presentation of costs (see the income statement for
more details).
3 Revenue and non-people costs eliminations relate to intragroup
trading between UKPIL and GLS, due to Parcelforce Worldwide being
GLS' partner in the UK. Finance costs/income eliminations relate to
intragroup loans between UKPIL and GLS.
The depreciation and amortisation below are included within
'operating profit before specific items' in the income
statement.
The non-current assets below exclude financial assets,
retirement benefit surplus and deferred tax and are included within
non-current assets on the balance sheet.
GLS
UKPIL (Non-UK
(UK operations) Operations) Total
52 weeks 2020 GBPm GBPm GBPm
---------------------------------------------------- ---------------- ------------ -----
Depreciation(4) (306) (106) (412)
Amortisation of intangible assets (mainly software) (90) (14) (104)
---------------------------------------------------- ---------------- ------------ -----
Non-current assets 2,695 1,390 4,085
---------------------------------------------------- ---------------- ------------ -----
4 Includes GBP156 million resulting from the adoption of IFRS 16.
GLS
UKPIL (Non-UK
(UK operations) Operations) Total
53 weeks 2019 GBPm GBPm GBPm
---------------------------------------------------- ---------------- ------------ -----
Depreciation (213) (45) (258)
Amortisation of intangible assets (mainly software) (120) (13) (133)
---------------------------------------------------- ---------------- ------------ -----
Non-current assets 2,103 991 3,094
---------------------------------------------------- ---------------- ------------ -----
3. Revenue
Intragroup
UKPIL GLS revenue(1) Group
52 weeks 2020 GBPm GBPm GBPm GBPm
-------------------------- ----- ----- ----------- ------
Letters and other revenue 3,409 - - 3,409
Advertising Letters 612 - - 612
Parcels 3,699 3,161 (41) 6,819
-------------------------- ----- ----- ----------- ------
Total 7,720 3,161 (41) 10,840
-------------------------- ----- ----- ----------- ------
Intragroup
Re-presented(2) UKPIL GLS revenue(1) Group
53 weeks 2019 GBPm GBPm GBPm GBPm
========================== ====== ====== =========== ======
Letters and other revenue 3,431 - - 3,431
Advertising Letters 705 - - 705
Parcels 3,596 2,888 (39) 6,445
-------------------------- ------ ------ ----------- ------
Total 7,732 2,888 (39) 10,581
-------------------------- ------ ------ ----------- ------
1 Eliminations relate to intragroup revenue from trading between
UKPIL and GLS. This is due to Parcelforce Worldwide being GLS'
partner in the UK.
2 UK letters and parcels revenue and volumes have been allocated
using a new methodology which reduces our reliance on sampling by
using Post Office traffic data. This change only impacts the
allocation of revenue between stamped letters and parcels and some
international export products. Total UKPIL revenue remains
unchanged.
During the year, around GBP290 million (2018-19: GBP280 million)
of revenue was recognised which was previously held as a deferred
revenue balance at 31 March 2019 (2018-19: 25 March 2018). This
balance mainly relates to stamps held and not yet used by customers
and is recognised as 'advance customer payments' within 'current
trade and other payables' in the Annual Report and Financial
Statements.
4. Operating costs
Operating profit before specific items is stated after charging
the following operating costs:
Re-presented(1)
reported
52 weeks 53 weeks
2020 2019
GBPm GBPm
--------------------------------------------- -------- ---------------
People costs (see Note 5) (6,064) (5,869)
Distribution and conveyance costs
Charges from overseas postal administrations (361) (348)
Fuel costs (183) (156)
Infrastructure costs
Depreciation, amortisation and impairment (516) (391)
--------------------------------------------- -------- ---------------
Charge for property, plant and equipment (412) (258)
Charge for intangible assets (104) (133)
--------------------------------------------- -------- ---------------
1 The comparative period has been re-presented to incorporate
changes to the presentation of costs (see the income statement for
more details).
Other operating costs
Post Office Limited charges (351) (354)
Inventory expensed (41) (34)
Regulatory body costs
The following disclosure is relevant in understanding the extent
of ongoing compliance costs in relation to the regulation of the
Group.
52 weeks 53 weeks
2020 2019
GBPm GBPm
---------------------------------------------------------- -------- --------
Ofcom administrative charge (5) (3)
Citizens Advice/Citizens Advice Scotland/Consumer Council
for Northern Ireland (1) (2)
---------------------------------------------------------- -------- --------
Total (6) (5)
---------------------------------------------------------- -------- --------
Statutory audit costs
Disclosure of statutory audit costs is a requirement of the
Companies Act 2006.
52 weeks 53 weeks
2020 2019
Auditor's fees GBP000 GBP000
---------------------------------------------- -------- --------
Audit of Group statutory financial statements (1,247) (988)
Other fees to Auditor:
Audit of the accounts of subsidiaries (1,453) (1,396)
Review of the interim financial information (219) (215)
Regulatory audit (128) (125)
Other assurance (100) -
---------------------------------------------- -------- --------
Total (3,147) (2,724)
---------------------------------------------- -------- --------
The 2019-20 fees relate to the services of the Group's appointed
auditor KPMG LLP. In addition to the above amounts, KPMG LLP was
paid by the respective Trustees, GBP102,500 for the audit of the
Royal Mail Pension Plan (2018-19: GBP165,000) and GBP29,000 for the
audit of the Royal Mail Defined Contribution Plan (RMDCP) (2018-19:
GBP35,000).
5. People information
Re-presented(1)
52 weeks reported
2020 53 weeks 2019
People costs GBPm GBPm
--------------------------------------------------------- -------- ---------------
Wages and salaries (4,904) (4,753)
--------------------------------------------------------- -------- ---------------
UKPIL (4,267) (4,173)
GLS (637) (580)
--------------------------------------------------------- -------- ---------------
Pensions (see Note 10) (679) (635)
--------------------------------------------------------- -------- ---------------
Defined benefit UK (397) (374)
Defined contribution UK (97) (82)
Defined benefit and defined contribution Pension Salary
Exchange (PSE) UK (178) (172)
GLS (7) (7)
--------------------------------------------------------- -------- ---------------
Social security (481) (481)
--------------------------------------------------------- -------- ---------------
UKPIL (403) (401)
GLS (78) (80)
--------------------------------------------------------- -------- ---------------
Total people costs (6,064) (5,869)
--------------------------------------------------------- -------- ---------------
Defined benefit pension plan rates:
Income statement - RMPP - 41.0%
- DBCBS 20.8% 18.9%
Cash flow - RMPP - 17.1%
- DBCBS 15.6% 15.6%
Defined contribution pension plan average rate:
Income statement and cash flow(2) 8.6% 8.0%
--------------------------------------------------------- -------- ---------------
1 The comparative period has been re-presented to incorporate
changes to the presentation of costs (see the income statement for
more details).
2 Employer contribution rates are three per cent for employees
in the entry level category and ten per cent for the majority of
those in the standard level category. For the remaining standard
level employees, the employer contribution is either eight or nine
per cent, depending on the employees' selected contribution
rate.
People numbers
The number of people employed, expressed as both full-time
equivalents and headcount, during the reporting year was as
follows:
Full-time equivalents(3) Headcount(4)
-------------------------------------- --------------------------------------
Year end Average Year end Average
------------------ ------------------ ------------------ ------------------
52 weeks 53 weeks 52 weeks 53 weeks 52 weeks 53 weeks 52 weeks 53 weeks
2020 2019 2020 2019 2020 2019 2020 2019
------ -------- -------- -------- -------- -------- -------- -------- --------
UKPIL 146,445 147,148 149,351 149,212 141,466 142,757 142,444 141,792
GLS 15,818 14,969 15,721 14,954 19,306 19,221 19,191 19,198
------ -------- -------- -------- -------- -------- -------- -------- --------
Total 162,263 162,117 165,072 164,166 160,772 161,978 161,635 160,990
------ -------- -------- -------- -------- -------- -------- -------- --------
3 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.
4 These people numbers are based on permanent employees.
Directors' remuneration
52 weeks 53 weeks
2020 2019
GBP000 GBP000
----------------------------------------------------------------- -------- --------
Directors' remuneration(5) (1,964) (2,300)
----------------------------------------------------------------- -------- --------
Amounts earned under Long--Term Incentive Plans (LTIP) (91) -
----------------------------------------------------------------- -------- --------
Number of Directors accruing benefits under defined contribution
plans 1 2
----------------------------------------------------------------- -------- --------
5 These amounts include any cash supplements received in lieu of
pension, details of the pension contributions are included in the
Single Figure Tables of the Director's Remuneration Report in the
Annual Report and Financial Statements. Details of the highest paid
Director details are also included in the Single Figure Tables of
the Directors' Remuneration Report.
6. Specific items and pension cost to cash difference
adjustment
52 weeks 53 weeks
2020 2019
GBPm GBPm
------------------------------------------------------------ -------- --------
Pension charge to cash difference adjustment (within People
costs) (108) (70)
------------------------------------------------------------ -------- --------
Operating specific items:
Impairment of assets (91) (68)
Legacy/other credits/(costs) 3 (7)
Regulatory fine (51) -
Amortisation of intangible assets in acquisitions (19) (20)
Employee Free Shares charge (4) (22)
RMSEPP settlement - (64)
------------------------------------------------------------ -------- --------
Total operating specific items (162) (181)
Non-operating specific items:
Profit on disposal of property, plant and equipment 89 15
Net pension interest 86 79
------------------------------------------------------------ -------- --------
Total non-operating specific items 175 94
------------------------------------------------------------ -------- --------
Total specific items 13 (87)
------------------------------------------------------------ -------- --------
Tax credit on certain specific items and the pension charge
to cash difference 60 27
------------------------------------------------------------ -------- --------
The difference between the pension charge and cash cost (pension
charge to cash difference adjustment) largely comprises the
difference between the IAS 19 income statement pension charge rate
of 20.8 per cent of pensionable pay for the Defined Benefit Cash
Balance Scheme (DBCBS) from 1 April 2019 and the actual employer
cash payments agreed with the Trustee of 15.6 per cent.
An impairment review of the Parcelforce Worldwide business
identified that the carrying value of the assets exceeded their
value in use, resulting in a GBP91 million impairment (see 'Key
sources of estimation uncertainty' in Note 1 for more details).
Following the Competition Appeal Tribunal judgment of 12
November 2019, a provision for a fine from Ofcom of GBP50 million
and GBP1 million associated interest has been made in the financial
statements.
7. Taxation
52 weeks 53 weeks
2020 2019
GBPm GBPm
-------------------------------------------------------------- -------- --------
Tax charged in the income statement
Current income tax:
Current UK income tax charge (5) (21)
Foreign tax (55) (48)
-------------------------------------------------------------- -------- --------
Current income tax charge (60) (69)
Amounts over-provided in previous years 5 5
-------------------------------------------------------------- -------- --------
Total current income tax charge (55) (64)
Deferred income tax:
Effect of change in tax rates 6 -
Relating to origination and reversal of temporary differences 35 3
Amounts under-provided in previous years (5) (5)
-------------------------------------------------------------- -------- --------
Total deferred income tax credit/(charge) 36 (2)
-------------------------------------------------------------- -------- --------
Tax charge in the consolidated income statement (19) (66)
-------------------------------------------------------------- -------- --------
Tax credited to other comprehensive income
Current tax:
-------------------------------------------------------------- -------- --------
Tax credit on foreign currency translation - 1
-------------------------------------------------------------- -------- --------
Deferred tax:
Tax credit in relation to remeasurement gains of the defined
benefit pension schemes - 2
Tax credit on revaluation of cash flow hedges 11 1
-------------------------------------------------------------- -------- --------
Total deferred income tax credit 11 3
-------------------------------------------------------------- -------- --------
Total tax credit in the consolidated statement of other
comprehensive income 11 4
-------------------------------------------------------------- -------- --------
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 53 weeks
2020 2019
GBPm GBPm
----------------------------------------------------------------- -------- --------
Deferred tax:
Change in estimated excess tax deductions related to share-based
payments 1 (1)
----------------------------------------------------------------- -------- --------
Total deferred income tax credit/(charge) recognised directly
in equity 1 (1)
----------------------------------------------------------------- -------- --------
Reconciliation of the total tax charge
A reconciliation of the tax charge in the income statement and
the UK rate of corporation tax applied to accounting profit for the
52 weeks ended 29 March 2020 and 53 weeks ended 31 March 2019 is
shown below.
52 weeks 53 weeks
2020 2019
GBPm GBPm
===================================================================== ======== ========
Profit before tax 180 241
--------------------------------------------------------------------- -------- --------
At UK statutory rate of corporation tax of 19% (2018-19:
19%) (34) (46)
Effect of different tax rates on non-UK profits and losses (5) 3
Tax under-provided in previous years(1) - (3)
Non-deductible expenses (4) (6)
Impairment of goodwill - (13)
Tax reliefs and incentives (including previous years)
(2) (13) 6
Tax effect of property disposals (including previous years) 21 5
Tax effect of closure of RMPP to future accrual (2) (2)
Net pension interest credit 17 15
Insurance policy settlement for the RMSEPP - (12)
Regulatory fine (10) -
Net decrease/(increase) in tax charge resulting from non-recognition
of certain deferred tax assets and liabilities 6 (8)
Share-based payments - deferred tax-only adjustments (1) (5)
Effect of change in tax rates 6 -
--------------------------------------------------------------------- -------- --------
Tax charge in the consolidated income statement (19) (66)
--------------------------------------------------------------------- -------- --------
1 In 2018-19 the tax under-provided of GBP3 million is different
to the total tax underprovided in the income statement of GBP5
million as certain items have been disaggregated, specifically, tax
overprovided of GBP2 million related to tax reliefs and incentives
and tax overprovided of GBP1 million relating to the tax effect of
property disposals.
2 Tax reliefs and incentives of GBP(13) million includes GBP(16)
million in relation to an increase in an uncertain tax provision
for tax relief claimed in prior years.
Deferred tax
(Charged)/ Credited
credited to Credited Charged
At to other to to foreign Jurisdictional At
Deferred tax by balance 1 April income comprehensive changes exchange right of 29 March
sheet category 52 2019 statement income in equity reserve offset 2020
weeks 2020 GBPm GBPm GBPm GBPm GBPm(3) GBPm GBPm
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
Liabilities
Accelerated capital
allowances (6) (2) - - - - (8)
Employee share schemes (1) - - 1 - - -
Intangible assets (57) 4 - - (1) - (54)
Hedging derivatives
temporary differences (1) - 1 - - - -
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
(65) 2 1 1 (1) - (62)
Jurisdictional right
of offset 10 - - - - (2) 8
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
Deferred tax liabilities (55) 2 1 1 (1) (2) (54)
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
Assets
Deferred capital
allowances 6 8 - - - - 14
Pensions temporary
differences 13 20 - - - - 33
Provisions and other 18 7 - - - - 25
Losses available
for offset against
future taxable income 35 (1) - - - - 34
R&D expenditure credit 2 - - - - - 2
Hedging derivative
temporary differences - - 10 - - - 10
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
74 34 10 - - - 118
Jurisdictional right
of offset (10) - - - - 2 (8)
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
Deferred tax assets 64 34 10 - - 2 110
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
Net deferred tax
asset 9 36 11 1 (1) - 56
------------------------- -------- ---------- -------------- ---------- ----------- -------------- ---------
3 Included in foreign exchange translation differences -
exchange differences on translation of foreign operations within
Other comprehensive income.
(Charged)/ Credited
credited to
At to other Charged At
Deferred tax by balance 26 March income comprehensive directly Acquisition 31 March
sheet category 2018 statement income to equity of subsidiaries 2019
53 weeks 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Liabilities
Accelerated capital allowances (3) - - - (3) (6)
Pensions temporary differences (1) 1 - - - -
Employee share schemes (1) 1 - (1) - (1)
Intangible assets (48) 6 - - (15) (57)
Hedging derivatives temporary
differences (2) - 1 - - (1)
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
(55) 8 1 (1) (18) (65)
Jurisdictional right of
offset 10 - - - - 10
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Deferred tax liabilities (45) 8 1 (1) (18) (55)
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Assets
Deferred capital allowances 14 (8) - - - 6
Pensions temporary differences - 11 2 - - 13
Provisions and other 19 (1) - - - 18
Losses available for offset
against
future taxable income 48 (13) - - - 35
R&D expenditure credit 1 1 - - - 2
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
82 (10) 2 - - 74
Jurisdictional right of
offset (10) - - - - (10)
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Deferred tax assets 72 (10) 2 - - 64
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Net deferred tax asset 27 (2) 3 (1) (18) 9
------------------------------- --------- ---------- -------------- ---------- ---------------- ---------
Deferred tax assets and liabilities are offset within the same
jurisdiction where the Group has a legally enforceable right to do
so. The following is the analysis of the deferred tax balances
(after offset) for balance sheet presentation purposes.
At 29 At 31
March March
2020 2019
Deferred tax - balance sheet presentation GBPm GBPm
------------------------------------------ ------ ------
Liabilities
GLS group (54) (55)
------------------------------------------ ------ ------
Deferred tax liabilities (54) (55)
------------------------------------------ ------ ------
Assets
GLS group 8 7
Net UK position 102 57
------------------------------------------ ------ ------
Deferred tax assets 110 64
------------------------------------------ ------ ------
Net deferred tax asset 56 9
------------------------------------------ ------ ------
The deferred tax position shows an increased overall asset in
the reporting year to 29 March 2020. This is primarily due to the
increase in accounting deficit of the DBCBS pension scheme, the
effect of the increased UK corporation tax rate from 17 per cent to
19 per cent and the deferred tax asset recognition from losses on
derivatives used for hedging.
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
Canada and Spain.
At 29 March 2020, the Group had unrecognised tax losses and
temporary differences of GBP278 million (2018-19: GBP333 million)
with a tax value of GBP80 million (2018-19: GBP85 million).
Unrecognised deferred tax in relation to tax losses comprises GBP73
million (2018-19: GBP63 million) relating to losses of GBP249
million (2018-19: GBP215 million) in GLS, that are available for
offset against future profits if generated in the relevant GLS
companies, and GBP1 million (2018-19: GBP9 million) in relation to
GBP7 million (2018-19: GBP51 million) of historical UK non-trading
and capital losses carried forward. Other unrecognised amounts
comprise GBP6 million (2018-19: GBP5 million) relating to GLS other
temporary differences of GBP22 million (2018-19: GBP18 million) and
GBPnil (2018-19: GBP8 million) relating to UK other temporary
differences of GBPnil (2018-19: GBP49 million). 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 GBP187
million (2018-19: GBP191 million) of capital losses, the tax effect
of which is GBP35 million (2018-19: GBP32 million) in respect of
assets previously qualifying for industrial buildings allowances.
Further temporary differences exist in relation to GBP388 million
(2018-19: GBP421 million) of gains for which rollover relief has
been claimed, the tax effect of which is GBP74 million (2018-19:
GBP72 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 is 19 per cent. The previously
announced reduction to 17 per cent has been redacted following the
Budget 2020. In accordance with accounting standards the deferred
tax balances in these financial statements have been adjusted to
effect this change.
8. Earnings per share
52 weeks 2020 53 weeks 2019
---------------------------------- ------------------------------------------- --------
Specific Specific
items and items and
pension pension
Reported adjustment(1) Adjusted Reported adjustment(1) Adjusted
------------------------- -------- -------------- -------- ---------------- ------------------------- --------
Profit for the year
(GBPmillion) 161 (35) 196 175 (130) 305
------------------------- -------- -------------- -------- ---------------- ------------------------- --------
Weighted average number
of shares issued
(million) 999 n/a 999 1,000 n/a 1,000
------------------------- -------- -------------- -------- ---------------- ------------------------- --------
Basic earnings per
share (pence) 16.1 n/a 19.6 17.5 n/a 30.5
------------------------- -------- -------------- -------- ---------------- ------------------------- --------
Diluted earnings per
share (pence) 16.1 n/a 19.6 17.5 n/a 30.5
------------------------- -------- -------------- -------- ---------------- ------------------------- --------
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 29 March 2020
is based on a weighted average number of shares of 1,001,079,845
(2018-19: 1,000,375,291) to take account of the potential issue of
658,250 (2018-19: 445,534) ordinary shares resulting from the
Deferred Share Bonus Plans (DSBP) and 1,451,301 (2018-19: nil)
ordinary shares resulting from the Long Term Incentive Plans
(LTIP).
No ordinary shares (2018-19: 88) were issued in respect of the
Save As You Earn (SAYE) scheme which ceased in the prior year.
The 1,029,706 (2018-19: 70,331) shares held in an Employee
Benefit Trust for the settlement of options and awards to current
and former employees are treated as treasury shares for accounting
purposes. The Company, however, does not hold any shares in
treasury.
9. Dividends
52 weeks 53 weeks
2020 2019 52 weeks 53 weeks
Pence Pence 2020 2019
Dividends on ordinary shares per share per share GBPm GBPm
----------------------------- ---------- ---------- -------- --------
Final dividends paid 17.0 16.3 169 162
Interim dividends paid 7.5 8.0 75 80
----------------------------- ---------- ---------- -------- --------
Total dividends paid 24.5 24.3 244 242
----------------------------- ---------- ---------- -------- --------
In view of the current economic uncertainty, the Board believes
it is prudent not to recommend a final dividend for the financial
year ended 29 March 2020 (31 March 2019: 17.0 pence per share).
10. Retirement benefit plans
Summary pension information
52 weeks 53 weeks
2020 2019
GBPm GBPm
------------------------------------------------------------- -------- --------
Ongoing UK pension service costs
UK defined benefit plans (including administration costs)(1) (397) (374)
UK defined contribution plan (97) (82)
UK defined benefit and defined contribution plans' Pension
Salary Exchange (PSE) employer contributions(2) (178) (172)
------------------------------------------------------------- -------- --------
Total UK ongoing pension service costs (672) (628)
GLS pension costs accounted for on a defined contribution
basis (7) (7)
------------------------------------------------------------- -------- --------
Total Group ongoing pension service costs (679) (635)
------------------------------------------------------------- -------- --------
Cash flows relating to ongoing pension service costs
UK defined benefit plans' employer contributions(3) (288) (304)
Defined contribution plans' employer contributions (104) (89)
UK defined benefit and defined contribution plans' PSE
employer contributions (178) (172)
------------------------------------------------------------- -------- --------
Total Group cash flows relating to ongoing pension service
costs (570) (565)
------------------------------------------------------------- -------- --------
RMSEPP death in service and administration expenses (1) (2)
Pension-related accruals (timing difference) - 2
------------------------------------------------------------- -------- --------
Pension charge to cash difference adjustment (108) (70)
------------------------------------------------------------- -------- --------
At 29 At 31
March March
2020 2019
'000 '000
---------------------------------- ------ ------
UK pension plans - active members
UK defined benefit plan 79 83
UK defined contribution plan 54 51
---------------------------------- ------ ------
Total 133 134
---------------------------------- ------ ------
1 These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 20.8 per cent (2018-19: 41.0 per cent for the RMPP until
31 March 2018 and 18.9 per cent for the DBCBS from 1 April 2018) 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 RMPP of
GBP9 million (2018-19: GBP8 million) and the DBCBS of GBP4 million
(2018-19: GBP2 million) continue to be included within the Group's
ongoing UK pension service costs.
2 Eligible employees who are enrolled into Pension Salary
Exchange (PSE) opt out of making employee contributions to their
pension and the Group makes additional contributions in return for
a reduction in basic pay.
3 The employer contribution cash flow rate of 15.6 per cent
forms part of the payroll expense and is paid in respect of the
DBCBS (2018-19 contributions included RMPP contributions of 17.1
per cent to 31 March 2018 and DBCBS contributions of 15.6 per cent
from 1 April 2018). These contribution rates are set following each
actuarial funding valuation, usually every three years. These
actuarial valuations are required to be carried out on assumptions
determined by the Trustee and agreed by Royal Mail, and will be
required in respect of the DBCBS, the first full valuation for this
will be performed as at 31 March 2021.
In the period, the Group operated the following plans.
UK Defined Contribution plan
Royal Mail Group Limited, the Group'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
GBP135 million in 2018-19 to GBP169 million (including GBP72
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 8.0 per cent in 2018-19 to 8.6 per cent in
2019-20. This increase is largely as a result of members electing
to transfer to the standard section which is subject to higher
Group contribution rates, following a Government-mandated increase
in contribution rates for members not in the standard section from
3 per cent to 5 per cent on 6 April 2019.
UK Defined Benefit plans
Royal Mail Pension Plan (RMPP)(4)
The RMPP is funded by the payment of contributions to separate
trustee administered funds. The RMPP includes sections A, B and C,
each with different terms and conditions.
-- Section A is for members (or beneficiaries of members) who
joined before 1 December 1971;
-- Section B is for members (or beneficiaries of members) who
joined on or after 1 December 1971 and before 1 April 1987, or for
members of Section A who chose to receive Section B benefits;
and
-- Section C is for members (or beneficiaries of members) who
joined on or after 1 April 1987 and before 1 April 2008.
Section A/B members built up a pension of 1/80th of pensionable
salary plus a tax-free lump sum of 3/80ths of pensionable salary
for each year of pensionable service, until 31 March 2018.
Section C members built up a pension of 1/60th of pensionable
salary for each year of pensionable service, until 31 March 2018.
If they want to take a tax-free lump sum at retirement they do so
by exchanging some of their pension.
From 1 April 2018, Section A/B and C members began building up
benefits on a DBCBS basis.
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.
No RMPP service contributions were made during 2019-20. One week
of 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 2018 valuation continued to show the scheme in
surplus, no deficit correction payments are expected to be
made.
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 Group more flexibility over how these
assets are best used for the benefit of members in future. These
contributions are not considered to be Plan assets as the Trustee
does not have control over the assets. This balance is included
within non-current financial assets.
4 Any references to the RMPP relate to the scheme's defined
pension liabilities built up to 31 March 2018. Members built up
DBCBS benefits from 1 April 2018.
Defined Benefit Cash Balance Scheme (DBCBS)
A Defined Benefit Cash Balance Scheme (DBCBS) has been in place
since 1 April 2018. This is a transitional arrangement until the
proposed Collective Defined Contribution (CDC) scheme can be
established. Active former Section A/B and C members are accruing
benefits under the DBCBS from 1 April 2018. Section F of the RMPP
is for active former RMDCP members who became eligible to join the
RMPP and have accrued DBCBS benefits from 1 April 2018.
DBCBS members build up a guaranteed lump sum benefit of 19.6 per
cent of their pensionable pay each year. Although there are no
guaranteed increases to this lump sum the aim is to provide above
inflation increases, and the Trustee invests the scheme assets
accordingly. If the value of the DBCBS assets were to fall below
the value of the members' guaranteed lump sum benefits then no
increases would be awarded until asset values had recovered as the
Group has a legal obligation to prevent a decrease in the asset
value. From an assessment of announcements and internal
communications made to members of the scheme to date and taking
into account the first increase granted in March 2020, Management
is of the view that there is a constructive obligation to provide
an increase to the lump sum, as scheme members would have a
reasonable expectation of returns of CPI plus two per cent.
The Group signed a Schedule of Contributions on 19 July 2019.
This covers a period of five years from the date of certification
of the schedule i.e. until July 2024. In accordance with this
schedule, the Group is required to make payments totalling 15.6 per
cent per annum of pensionable payroll in respect of DBCBS.
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. In accordance with the Schedule of
Contributions agreed as part of the 2018 triennial valuation, a
final deficit payment of GBP1 million was paid in 2018-19, together
with GBP1 million in respect of death-in-service lump sum benefits
and administration expenses. In accordance with the new Schedule of
Contributions signed on 25 March 2019, GBP500,000 has been paid in
2019-20 and is due to be paid per annum for the period 1 April 2020
to 31 March 2025.
Following the purchase of an additional insurance policy in
September 2018 in respect of all remaining pensioners and deferred
members it was decided to proceed to buy-out and wind-up the Plan.
As a result, the purchase of the insurance policy was treated as a
settlement in the 2018-19 financial statements. The difference
between the IAS 19 surplus before and after the transaction
resulted in GBP64 million being charged to the income statement as
an operating specific item. Further progress towards buy-out and
winding-up of the Plan has been made in the current year, and the
target is to have the process completed in 2021.
All benefit payments due from the RMSEPP remain unchanged. The
insurance policies held by the RMSEPP exactly match the value and
timing of the benefits payable to individual members and the fair
value is deemed to be the present value of the related obligations.
The total value of the buy-in annuity policies in place is GBP296
million (31 March 2019: GBP335 million) and is included as a
pension asset and a pension liability at 29 March 2020(5) .
A liability of GBP2 million (2018-19: GBP2 million) has been
recognised for future payment of pension benefits to a past
Director.
Accounting and actuarial funding surplus position (RMPP, RMSEPP
and DBCBS)
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 the
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 and the actuarial funding valuation
uses gilt yields. As the accounting discount rate is higher than
the actuarial funding discount rate, this leads to a lower computed
liability.
The triennial valuation of RMPP at 31 March 2018 was agreed on
19 July 2019. Based on this set of assumptions rolled forward, the
RMPP actuarial surplus at 29 March 2020 was estimated to be around
GBP575 million. The DBCBS will be subject to triennial actuarial
valuations in the future and the first full valuation for this will
be performed as at 31 March 2021. A draft DBCBS funding position
has however been calculated based on the assumption that the
funding surplus is equal to the amount held in respect of the risk
reserve. Under this method, the DBCBS actuarial surplus was
estimated to be around GBP18 million.
Below is a summary of the combined plans' assets and liabilities
on an accounting (IAS 19) and actuarial funding basis.
5 In accordance with IAS 19.
DBCBS DBCBS RMPP and RMSEPP
Accounting (IAS Actuarial Accounting (IAS RMPP and RMSEPP
19) funding 19) Actuarial funding
----------------------- ------------------ -------------- ------------------ --------------------
At 29 At 31 At 31 At 31 At 29 At 31 At 31 At 31
March March March March March March March March
2020 2019 2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------- -------- ------ ------ -------- -------- --------- ---------
Fair value of
plans' assets
(11(b) below)(6) 730 402 735 402 11,989 10,803 11,700 10,877
Present value
of plans' liabilities (907) (474) (717) (393) (6,429) (7,097) (11,116) (10,818)
----------------------- -------- -------- ------ ------ -------- -------- --------- ---------
(Deficit)/surplus
in plans (pre
withholding tax
payable)(7) (177) (72) 18 9 5,560 3,706 584 59
Withholding tax
payable n/a n/a n/a n/a (1,946) (1,298) n/a n/a
----------------------- -------- -------- ------ ------ -------- -------- --------- ---------
(Deficit)/surplus
in plans(8) (177) (72) 18 9 3,614 2,408 584 59
----------------------- -------- -------- ------ ------ -------- -------- --------- ---------
6 The difference between accounting and actuarial funding asset
fair values on 29 and 31 March 2020 arises from the different year
end dates used for the valuation of the assets, and in both years
due to the valuation of the RMSEPP buy-in assets under both
methods.
7 Any reference to a withholding tax adjustment relates to
withholding tax payable on distribution of a pension surplus.
8 On an actuarial funding basis, the excess of DBCBS assets over
liabilities is as a result of the risk reserve.
There is no element of the present value of the plans'
liabilities above that arises from plans that are wholly
unfunded.
Having taken legal advice with regard to the rights of the Group
under the Trust deeds and rules, the Directors believe there is a
right to recognise a pension surplus on an accounting basis. The
Directors do not believe that the surplus in the RMPP on an
accounting basis will result in a surplus on an actuarial funding
basis. However, the Directors are required to account for the plans
based on the Group's 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 in the RMPP and RMSEPP, under IAS 19 and
IFRIC 14, it must recognise the economic benefit it considers 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 Group's decision to close the RMPP, however any
surplus is no longer considered to be recoverable as a reduction to
future employer contributions. Therefore the surplus is considered
to be available as a refund. This surplus is presented net of a
withholding tax adjustment of GBP1,942 million (at 31 March 2019:
GBP1,294 million) on the balance sheet, which represents the tax
that would be withheld on the surplus amount.
Included in the IAS 19 figures in the table above is a RMSEPP
surplus at 29 March 2020 of GBP10 million (pre-withholding tax
payable) (at 31 March 2019: GBP10 million 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.
As the RMSEPP is also closed to future accrual, the surplus is
considered to be available as a refund as per IFRIC 14 and, as
such, is shown net of a withholding tax adjustment of GBP4 million
(at 31 March 2019: GBP4 million) on the balance sheet, which
represents the tax that would be withheld on the surplus
amount.
The Group does not currently expect that the total cash
contribution rate for all of the schemes as a percentage of
pensionable pay will materially change over the next five years nor
does it expect any deficit payments to be required.
Guaranteed Minimum Pensions (GMP)
Pension schemes are now under an obligation to address the issue
of unequal Guaranteed Minimum Pensions (GMP). From Royal Mail's
perspective, the transfer of RMPP's historical pension liabilities
to HM Government in 2012, in accordance with the Postal Services
Act 2011, included all of the Plan's GMP liabilities. The
requirement to remove the inequality in former RMPP benefits
deriving from GMPs therefore rests with Government.
The RMSEPP, however, does still have its GMP liabilities and
will be required to take action to equalise benefits. The Trustees'
actuaries estimate that the cost of GMP equalisation will be less
than GBP0.5 million. This is still subject to further legal
clarification on exact equalisation requirements, and also to the
actual equalisation approach adopted.
The following disclosures relate to the major assumptions,
sensitivities, assets and liabilities in the RMPP, RMSEPP and
DBCBS.
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. The 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 29 March At 31 March
2020 2019
----------------------------------------------- ----------- -----------
Retail Price Index (RPI) 2.5% 3.2%
Consumer Price Index (CPI) 1.7% 2.2%
Discount rate - RMPP/RMSEPP(9)
- nominal 2.2% 2.4%
- real (nominal less RPI) (0.3%) (0.8%)
Discount rate - DBCBS(10)
- nominal 2.2% 2.2%
- real (nominal less RPI) (0.4%) (1.0%)
Rate of increase in pensionable salaries(11) RPI-0.1% RPI-0.1%
Rate of increase for deferred pensions CPI CPI
Rate of pension increases - RMPP Sections A/B CPI CPI
Rate of pension increases - RMPP Section C(11) RPI-0.1% RPI-0.1%
Rate of pension increases - RMSEPP members
transferred from Section A or B of RMPP CPI CPI
Rate of pension increases - RMSEPP all other
members(11) RPI-0.1% RPI-0.1%
Rate of pension increases - DBCBS benefits CPI+2.0% CPI+2.0%
Life expectancy from age 60 - for a current
40/60 year old male RMPP member 28/26 years 28/26 years
Life expectancy from age 60 - for a current
40/60 year old female RMPP member 30/28 years 29/27 years
----------------------------------------------- ----------- -----------
9 The discount rate reflects the average duration of the RMPP benefits of around 27 years
10 The discount rate reflects the average duration of the DBCBS
benefits of 15 years. The pension service cost applicable from 1
April 2019 is based on 31 March 2019 assumptions.
11 The rate of increase in salaries, and the rate of pension
increase for Section C members (who joined the 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.
Retail Price Index
Historically the Group's calculations have been based on an
assumed gap of 100bps between RPI and CPI rates. The UK Statistics
Authority and HM Treasury are however currently jointly consulting
on reforming the methodology of the Retail Price Index (RPI) with a
view to abolishing this measure and replacing this with something
close to CPI as a universal measure of inflation. As a result, the
market appears to be pricing in a narrower gap between RPI and CPI,
particularly after 2030. The Group has therefore adjusted its
assumption for this measure to an 80bps gap, being the weighted
average of the expected gap over the duration of the liabilities.
The impact of this adjustment is approximately GBP65 million for
RMPP and GBP25 million for DBCBS. It is expected that the RPI CPI
gap will continue to decrease in future periods.
Mortality
The RMPP assumptions are based on the latest Self-Administered
Pension Scheme (SAPS) S2 mortality tables with appropriate scaling
factors (118 per cent for male pensioners (2018-19: 118 per cent)
and 116 per cent for female pensioners (2018-19: 116 per cent)).
Future improvements are based on the CMI 2017 core projections
(smoothing factor 8.0 (2018-19: 8.0)) with a long-term trend of 1.5
per cent per annum (2018-19: 1.5 per cent). These assumptions were
adopted following a mortality study undertaken as part of the March
18 actuarial valuation.
Sensitivity analysis for RMPP and DBCBS liabilities
The RMPP and DBCBS liabilities are sensitive to changes in key
assumptions. The potential impact of the largest sensitivities on
the RMPP and DBCBS liabilities is as follows:
Potential Potential
increase increase
in in
DBCBS RMPP
liabilities liabilities
Key assumption change GBPm GBPm
------------------------------------------------------------- ------------ ------------
Additional one year of life expectancy - 230
Increase in inflation rate (both RPI and CPI simultaneously)
of 0.1% p.a. 13 155
Decrease in discount rate of 0.1% p.a. 13 155
Increase in CPI assumption (assuming RPI remains constant)
of 0.1% p.a. 13 30
Increase in constructive obligation of 0.1% p.a. 13 -
Increase in inflation rate (both RPI and CPI simultaneously)
of 0.5% p.a. 70 780
Decrease in discount rate of 0.5% p.a. 65 680
Increase in CPI assumption (assuming RPI remains constant)
of 0.5% p.a. 70 170
------------------------------------------------------------- ------------ ------------
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. The discount rate and RPI
sensitivities are calculated using the mean term of the relevant
section to derive the impact of a 0.1 per cent / 0.5 per cent
change in assumption. For the RPI/CPI gap, the approach is the same
for DBCBS, but for legacy RMPP, the liabilities as at 31 March 2019
are considered to derive an accurate impact in percentage terms.
This percentage is then applied to the liabilities at March 2020.
This approach is unchanged from the prior year, although any change
in mean terms will impact the sensitivities. Changes inverse to
those in the table (e.g. an increase in discount rate) would have
the opposite effect on liabilities.
As a result of the current COVID-19 pandemic, there has been
significant volatility in these assumptions in recent months. At
the end of May corporate bond yields had fallen significantly and
as a result the discount rate was 100 basis points lower than the
rate at the year end date for the DBCBS scheme and 90 basis points
lower than the rate at year end for the RMPP scheme. The majority
of the scheme's liabilities are however, hedged with government
gilts, and yields in these have decreased from 2.35 per cent to
1.52 per cent in the same period.
b) RMPP, RMSEPP and DBCBS assets
At 29 March 2020 At 31 March 2019
------------------------ ---------------------------
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------ -------- ------ ------- -------- --------
Equities
UK - 21 21 10 - 10
Overseas 21 33 54 319 74 393
Bonds
Fixed interest - UK 292 18 310 268 69 337
- Overseas 137 82 219 56 394 450
Pooled investments
Absolute return - 496 496 - 649 649
Equity - 86 86 - 152 152
Private equity - 163 163 - 80 80
Fixed interest - 402 402 - 501 501
Private debt - 455 455 - 202 202
Property - 59 59 - 52 52
Liability-driven investments(12) 9,104 234 9,338 7,126 270 7,396
Property (UK) - 343 343 - 295 295
Cash and cash equivalents 468 - 468 385 - 385
Other 3 - 3 1 (6) (5)
Derivatives - 6 6 (7) (20) (27)
RMSEPP buy-in annuity policies - 296 296 - 335 335
---------------------------------- ------ -------- ------ ------- -------- --------
Total plans' assets 10,024 2,695 12,719 8,158 3,047 11,205
---------------------------------- ------ -------- ------ ------- -------- --------
12 A portfolio of largely gilt and swap contracts that is
designed to hedge the majority of the interest rate and inflation
risk associated with the Plans' obligations. At 29 March 2020 it
included GBP9.3 billion of index-linked gilts, GBP353 million in
short-term money market funds and GBP132 million of swaps, offset
by negative fair value investments of GBP505 million of repurchase
agreements and GBP77 million of cash and similar instruments.
There were no open equity futures or options derivatives within
this portfolio at 29 March 2020 (2018-19: GBPnil). GBP8.8 billion
(2018-19: GBP7 billion) of HM Government bonds are primarily
included in the liability-driven investments balance above. The
plans' assets do not include property or assets used by the Group
or shares of Royal Mail plc at 29 March 2020 (2018-19: GBPnil).
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.
The 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 liability-driven investments
providing economic exposure to gilts and swap rates. The nature of
risks and their mitigation process are similar for the DBCBS.
The change in value of the liability-hedging assets is
predominantly reflected in the liability-driven investment values,
which have increased from GBP7,396 million at 31 March 2019 to
GBP9,338 million at 29 March 2020.
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 29 March 2020 was GBP2.4 billion (2018-19: GBP2.4
billion). The notional value covered by the interest rate swaps at
29 March 2020 was GBP0.3 billion (2018-19: GBP1.5 billion).
The equity exposure of the 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 has a market value as at 29 March 2020 of GBP9
million (2018-19: GBP(20) million) included in the derivative
values above. The TRS economically offsets GBP62 million at 29
March 2020 (2018-19: GBP303 million) of the Plan's global equity
market exposure.
The RMPP's liabilities are impacted by longer than expected life
expectancy resulting in higher than expected payout levels.
Although this risk is not hedged, mortality studies are undertaken
as part of actuarial funding valuations and where appropriate
updated assumptions are adopted for accounting valuations.
A fall in yields on AA- rated corporate bonds, used to set the
IAS 19 discount rates, will lead to an increase in the IAS 19
liabilities. The RMPP's assets included corporate bonds, HM
Government bonds and interest rate derivatives that are expected to
partly offset the impact of movements in the discount rate.
However, yields on these assets may diverge compared with the
discount rate in some scenarios.
In the pension schemes, many of the Inflation linked increases
that apply are restricted to a maximum increase of five per cent in
any year. Therefore, the pension schemes give some protection from
this risk of significantly higher levels of inflation (i.e. above
five per cent a year), as many of the increases in the schemes
would be restricted to five per cent in this scenario.
The spread of investments continues to balance security and
growth in order to pay the RMPP benefits when they become due.
In addition to property and cash, the RMSEPP holds two buy-in
annuity policies totalling GBP296 million at 29 March 2020
(2018-19: GBP335 million) to match its liabilities.
Further details on key sources of estimation uncertainty
relating to pension assets can be found in the significant
accounting policies section, 'Sources of estimation uncertainty and
critical accounting judgments', including details on how the assets
have been valued.
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 benefit Defined benefit Net defined benefit
asset liability surplus
----------------- ----------------- ---------------------
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Retirement benefit surplus
(before withholding tax payable)
at 1 April 2019 and 26 March
2018 10,803 10,361 (7,097) (7,038) 3,706 3,323
Amounts included in the income
statement:
Ongoing UK defined benefit
pension plan and administration
costs (included in people costs) (9) (8) - (5) (9) (13)
RMSEPP settlement - operating
specific item - (64) - - - (64)
Pension interest income/(cost)(13) 258 247 (169) (168) 89 79
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total included in profit before
tax 249 175 (169) (173) 80 2
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising
from:
Financial assumptions - - 751 (197) 751 (197)
Demographic assumptions - - (17) 169 (17) 169
Experience assumptions - - 19 67 19 67
Return on plans' assets (excluding
interest income) 1,020 344 - - 1,020 344
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total remeasurement gains of
the defined benefit surplus 1,020 344 753 39 1,773 383
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Other
Employer contributions(14) 1 3 - - 1 3
Employee contributions - - - - - -
Benefits paid (84) (78) 84 78 - -
Curtailment costs - - - - - -
Movement in pension-related
accruals - (2) - (3) - (5)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total other movements (83) (77) 84 75 1 (2)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Retirement benefit surplus
(before withholding tax payable)
at 29 March 2020 and 31 March
2019 11,989 10,803 (6,429) (7,097) 5,560 3,706
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Withholding tax payable n/a n/a n/a n/a (1,946) (1,298)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Retirement benefit surplus
(net of withholding tax payable)
at 29 March 2020 and 31 March
2019 n/a n/a n/a n/a 3,614 2,408
---------------------------------------- -------- ------- -------- ------- ---------- ---------
13 Pension interest income results from applying the plans'
discount rate at 31 March 2019 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 31 March 2019 to the plans' liabilities
at that date.
14 Excludes payments into pension escrow investments of GBPnil
(2018-19: GBP7 million) but includes PSE contributions of GBPnil
(2018-19: GBP1 million).
d) Movement in DBCBS 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 deficit
since the start of the scheme on 1 April 2018 are analysed as
follows:
Defined benefit Defined benefit Net defined benefit
asset liability deficit
---------------------------------------- ----------------- ----------------- ---------------------
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Retirement benefit at 1 April
2019 and
26 March 2018 402 - (474) - (72) -
Amounts included in the income
statement
Ongoing UK defined benefit
pension plan and administration
costs (included in People costs) (4) (2) (485) (465) (489) (467)
Pension interest income/(cost)(15) 13 - (16) - (3) -
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total included in profit before
tax 9 (2) (501) (465) (492) (467)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Amounts included in other comprehensive
income - remeasurement losses
Actuarial gain/(loss) arising
from:
Financial assumptions - - 49 (16) 49 (16)
Experience assumptions - - (1) - (1) -
Return on plan assets (51) 8 - - (51) 8
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total remeasurement (losses)/gains
of the defined benefit deficit (51) 8 48 (16) (3) (8)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Other
Employer contributions(16) 390 403 - - 390 403
Employee contributions 4 4 (4) (4) - -
Benefits paid (24) (11) 24 11 - -
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Total other movements 370 396 20 7 390 403
---------------------------------------- -------- ------- -------- ------- ---------- ---------
Retirement benefit deficit
at 29 March 2020
and 31 March 2019 730 402 (907) (474) (177) (72)
---------------------------------------- -------- ------- -------- ------- ---------- ---------
15 Pension interest income results from applying the plans'
discount rate at 31 March 2019 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 31 March 2019 to the plans' liabilities
at that date.
16 Includes PSE contributions of GBP106 million (2018-19 GBP110 million).
11. Acquisition of businesses
On 30 September 2019, General Logistics Systems North America
Inc., a subsidiary of General Logistics Systems (GLS), acquired MVE
and MVFS, leading overnight and second day freight service
providers based in California. This information includes the fair
value of the identifiable assets and liabilities recognised as at
the date of acquisition. Costs related to this acquisition
recognised as an expense within other operating costs in the income
statement amounted to GBP0.4 million.
MVE and MVFS
Total
GBPm
-------------------------------------------- ------------
Tangible assets acquired 17
Intangible assets recognised on acquisition 7
Trade and other receivables 5
Cash and cash equivalents 2
Goodwill recognised on acquisition 2
-------------------------------------------- ------------
Total assets acquired 33
Trade and other payables (3)
Loans and leases (10)
-------------------------------------------- ------------
Net assets acquired 20
-------------------------------------------- ------------
Cash paid during the year 17
Consideration deferred 3
-------------------------------------------- ------------
Total consideration 20
-------------------------------------------- ------------
The fair value of trade debtors is equal to the gross
contractual amounts receivable. A review of trade debtors did not
indicate any recoverability issues.
The intangible assets recognised relate to customer lists and
brands. The goodwill of GBP2 million arising on this acquisition is
non-tax deductible.
No material fair value adjustments have been identified in
respect of the remaining assets and liabilities acquired in the
year.
Revenue generated from these entities since the date of
acquisition is GBP22 million and profit is GBP1 million. If these
combinations had taken place at the beginning of the financial
year, revenue generated would have been GBP47 million and the
profit would have been GBP3 million.
There are no non-controlling interests in relation to this
acquisition.
12. Leases
The adoption of IFRS 16 significantly impacts the Group balance
sheet at the 1 April 2019 transition date, ROU assets have been
recognised as 'property, plant and equipment' along with the
associated lease liabilities. Certain prepayment, onerous lease
provision and rent incentive balances have also been impacted. The
table below shows the line by line impact on the balance sheet.
IFRS 16 transition impact on the Group balance sheet
Reported Reported
at at
31 March IFRS 16 1 April
2019 impact 2019
GBPm GBPm GBPm
------------------------------ --------- ------- --------
Non-current assets
Property, plant and equipment 2,066 1,045 3,111
Deferred tax assets 64 - 64
Other non-current assets 3,647 - 3,647
------------------------------ --------- ------- --------
5,777 1,045 6,822
Assets held for sale 36 - 36
------------------------------ --------- ------- --------
Current assets
Trade and other receivables 1,310 (20) 1,290
Other current assets 278 - 278
------------------------------ --------- ------- --------
1,588 (20) 1,568
------------------------------ --------- ------- --------
Total assets 7,401 1,025 8,426
------------------------------ --------- ------- --------
Current liabilities
Trade and other payables (1,883) 4 (1,879)
Lease liabilities (37) (118) (155)
Provisions (58) 1 (57)
Other current liabilities (11) - (11)
------------------------------ --------- ------- --------
(1,989) (113) (2,102)
Non-current liabilities
Lease liabilities (88) (944) (1,032)
Deferred tax liabilities (55) - (55)
Provisions (104) 1 (103)
Other non-current liabilities (546) 32 (514)
------------------------------ --------- ------- --------
(793) (911) (1,704)
------------------------------ --------- ------- --------
Total liabilities (2,782) (1,024) (3,806)
------------------------------ --------- ------- --------
Net assets 4,619 1 4,620
------------------------------ --------- ------- --------
Equity
Retained earnings 4,576 1 4,577
Other equity 43 - 43
------------------------------ --------- ------- --------
Total equity 4,619 1 4,620
------------------------------ --------- ------- --------
Reconciliation of operating lease commitments to the equivalent
IFRS 16 lease liabilities at 31 March 2019
GBPm
----------------------------------------------------------------- -------
Undiscounted operating lease future minimum lease payments at 31
March 2019 (1,327)
Irrecoverable VAT included in future minimum lease payments at
31 March 2019(1) 88
Impact of discounting(2) 182
Short-term/low-value leases(3) 18
Other reconciling items (net) (23)
----------------------------------------------------------------- -------
IAS 17 operating lease liabilities at 31 March 2019 in scope for
IFRS 16 (1,062)
----------------------------------------------------------------- -------
1 Irrecoverable VAT was included in the operating lease
commitments at 31 March 2019, under IFRS 16 this irrecoverable VAT
is not included in the lease liability.
2 The previously disclosed lease commitments are undiscounted,
whilst the IFRS 16 obligations have been discounted using RMG's
incremental borrowing rate.
3 The Group has elected to apply the exemption from recognising
leases for short-term and low value assets on the balance
sheet.
The Group primarily leases office buildings and letter and
parcel processing facilities. At 29 March 2020 the Group held
approximately 1,110 land and building leases (994 at 1 April 2019
on transition to IFRS 16). The Group also has leases for some of
its vehicle fleet and plant and equipment used in the operation.
Leases are negotiated on an individual basis and may include
extension or termination options.
The lease liabilities are reported as follows in the balance
sheet:
At 29 At 31
March March
2020 2019
--------- ---------
Present Present
value value
of of
lease lease
payments payments
Lease liabilities GBPm GBPm
------------------------------------------------- --------- ---------
Current liabilities
Lease liabilities due within one year (201) (37)
Non-current liabilities
Lease liabilities due between one and five years (575) (74)
Lease liabilities due beyond five years (412) (14)
------------------------------------------------- --------- ---------
The right of use assets resulting from lease agreements are
detailed below.
Plant
Land and and Motor Fixtures
Buildings machinery vehicles and equipment Total
Right of use assets GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ---------- ---------- --------- -------------- -----
At 29 March 2020
Cost 1,096 195 504 4 1,799
Additions 109 3 29 - 141
Accumulated depreciation and impairment
losses (133) (125) (275) (1) (534)
Deprecation charge (128) (25) (55) (1) (209)
---------------------------------------- ---------- ---------- --------- -------------- -----
Carrying amount 963 70 229 3 1,265
---------------------------------------- ---------- ---------- --------- -------------- -----
Leases in the income statement
Leases are presented in the income statement as detailed
below.
52 weeks
2020
GBPm
----------------------------------------------------------------- --------
Other operating income
Sublease income 3
Material expenses
Expenses from short-term/low-value leases (44)
Variable lease payments not included in the measurement of lease
liabilities (10)
Depreciation and impairment losses
Depreciation of right-of-use assets (209)
Net finance costs
Interest expense on lease liabilities (30)
----------------------------------------------------------------- --------
The Group engages in sale and leaseback transactions for plant
and machinery and vehicles, cash received from these transactions
in the year was GBP6 million (2018-19: GBP13 million).
The Group has GBP6 million of lease liabilities and right of use
assets that are unrecognised at 29 March 2020 resulting from leases
that have been signed but are yet to commence.
At 29 March 2020, the Group have signed a conditional agreement
for a lease. Subject to discharge of the conditions, the intention
is to complete the lease during the 2021-22 financial year. When
completed, the lease liability and right of use asset to be
recognised is expected to be circa GBP80 million.
13. Goodwill
2020 2019
GBPm GBPm
====================================== ===== =====
Cost
At 1 April 2019 and 26 March 2018 821 715
Exchange rate movements 25 (7)
Acquisition of businesses 2 113
-------------------------------------- ----- -----
At 29 March 2020 and 31 March 2019 848 821
-------------------------------------- ----- -----
Impairment
At 1 April 2019 and 26 March 2018 441 391
Exchange rate movements 17 (3)
Impairments (Operating specific item) - 53
-------------------------------------- ----- -----
At 29 March 2020 and 31 March 2019 458 441
-------------------------------------- ----- -----
Net book value:
-------------------------------------- ----- -----
At 29 March 2020 and 31 March 2019 390 380
-------------------------------------- ----- -----
At 31 March 2019 and 25 March 2018 380 324
-------------------------------------- ----- -----
GLS Europe
The carrying value of goodwill of GBP390 million (2018-19:
GBP380 million) at the balance sheet date includes GBP270 million
(2018-19: GBP257 million) in relation to GLS' European network (GLS
Europe CGU - cash generating unit). The carrying value of the GLS
European network, is GBP787 million. The CGU has been assessed for
impairment by comparing the carrying value of the CGU to its
recoverable amount, being the CGU's value in use. The value in use
has been calculated by discounting cash flows for a five year
period with the period beyond five years assumed to have a
perpetuity growth rate of 0.4 per cent. All cash flows of the CGU
have been discounted to present value at the CGU's post-tax WACC of
9.0 per cent. The pre-tax discount rate was 10.0 per cent. The
recoverable amount was deemed to be significantly in excess of the
carrying value of the CGU.
GLS US excluding Mountain Valley Express (MVE)
The GLS US businesses represent two separate CGUs, comprising
the US West coast operations (Golden State Overnight Delivery
Services Inc. (GSO) and Postal Express Inc. (PEX)), and the newly
acquired Mountain Valley Express and Mountain Valley Freight
Solutions businesses. In the prior year, all the goodwill in the
GSO/PEX CGU was fully impaired, along with other tangible and
intangible fixed assets. The GLS US turnaround plan, initiated last
year, is progressing well with losses in GSO and PEX reduced by
GBP7m during the year.
Mountain Valley Express (MVE)
During the reporting year, GLS acquired Mountain Valley Express
and Mountain Valley Freight Solutions (together 'MVE') which
resulted in the recognition of GBP2 million goodwill. An impairment
review was performed comparing the carrying amount of the MVE CGU
of GBP20 million, to its recoverable amount. The recoverable amount
has been calculated by discounting cash flows for a five year
period with the period beyond five years assumed to have a
perpetuity growth rate of 0.7 per cent. All cash flows of the CGU
have been discounted to present value at the CGU's post-tax WACC of
13.0 per cent. The pre-tax discount rate was 18.0 per cent. This
impairment assessment identified that the CGU has headroom of GBP9
million.
GLS Canada
In the prior reporting year, GLS acquired Dicom Canada which
resulted in the recognition of GBP110 million goodwill. The value
of the goodwill at 29 March 2020 is GBP106 million. The carrying
value of this CGU is GBP211 million.
To assess the CGU for impairment, the carrying amount has been
compared to its value in use which has been calculated by
discounting cash flows covering a period of five years with the
period beyond five years assumed to have a perpetuity growth rate
of 1.4 per cent. All cash flows have been discounted to present
value using a post-tax discount rate of 10.0 per cent. The pre-tax
discount rate was 13.0 per cent. Based on these assumptions the CGU
has a headroom of GBP29 million.
For the MVE and GLS Canada CGUs, sensitivity analysis has been
conducted on the impairment tests for each of the key assumptions.
The assumptions used and the impact of sensitivities on these
assumptions are shown below.
Used in impairment Rate required
assessment to erode headroom
====================== =====================
Discount Discount
rate Perpetuity rate Perpetuity
Carrying Value (post growth (post (decline)
value Goodwill in use tax) rate tax) rate
CGU GBPm GBPm GBPm % % % %
======================== ========= ========= ======== ========= =========== ========= ==========
Mountain Valley Express
(MVE) 20 2 29 13.0 0.7 17.4 (8.3)
GLS Canada 211 106 240 10.0 1.4 11.1 (0.1)
------------------------ --------- --------- -------- --------- ----------- --------- ----------
The remaining goodwill of GBP13 million (2018-19: GBP13 million)
arising from an aggregation of goodwill on business acquisitions,
each being a separate CGU within the UKPIL segment, is supportable
but not material in the context of the Group's total goodwill.
14. Cash and cash equivalents
At 29 At 31
March March
2020 2019
GBPm GBPm
======================================================= ====== ======
Cash at bank and in hand 209 141
Client cash 21 20
Cash equivalent investments: Short-term bank and money
market fund investments 1,410 75
------------------------------------------------------- ------ ------
Total 1,640 236
------------------------------------------------------- ------ --------
Cash and cash equivalents comprise amounts held physically in
cash, bank balances available on demand and deposits for three
months or less, dependent on the immediate cash requirements of the
Group. Where interest is earned, this is either at floating or
short-term fixed rates based upon bank deposit rates.
Client cash is cash collected from consignees by GLS on behalf
of its posting customers. It is maintained in separate bank
accounts to the cash of the business so it can be tracked and
reconciled.
15. Loans and borrowings
At 29 March 2020
============================================================================================
Average
Average maturity Average
interest date maturity
Further rate of of loan date
Loans and committed loan drawn Basis of drawn of loan
borrowings facility Total facility down interest down facility
GBPm GBPm GBPm % rate chargeable Year Year
====================== =========== ========== ============== =========== ================ ========= =========
Syndicated bank LIBOR plus
loan facilities 700 225 925 0.9 0.70%(1) 2020 2024
EUR500 million
bond - 2.375% Senior Fixed at
Fixed Rate Notes 446 - 446 2.5 2.5% 2024 2024
EUR550 million
bond - 1.25% Senior Fixed at
Fixed Rate Notes 489 - 489 2.7(2) 2.7%(2) 2026 2026
---------------------- ----------- ---------- -------------- ----------- ---------------- --------- ---------
Total 1,635 225 1,860 1.9 2023 2025
---------------------- ----------- ---------- -------------- ----------- ---------------- --------- ---------
1 The total margin over LIBOR consists of a 0.40 per cent margin
and a utilisation fee of 0.30% (as the facility was over two thirds
drawn at 29 March 2020, the utilisation fee is 0.075 per cent when
the facility is under one third drawn).
2 On 8 October 2019, Royal Mail plc issued a EUR550 million bond
with coupon of 1.25 per cent and maturity date of 8 October 2026.
To hedge the foreign exchange risk, Royal Mail chose to take out a
cross currency swap. The combined interest rate of the coupon and
the cross currency swap is 2.7 per cent.
At 31 March 2019
============================================================================================
Average
Average maturity Average
interest date maturity
Further rate of of loan date
Loans and committed loan drawn Basis of drawn of loan
borrowings facility Total facility down interest down facility
GBPm GBPm GBPm % rate chargeable Year Year
====================== =========== ========== ============== =========== ================ ========= =========
Syndicated bank LIBOR plus
loan facilities - 1,050 1,050 n/a 0.55% n/a 2022
EUR500 million
bond - 2.375% Senior Fixed at
Fixed Rate Notes 430 - 430 2.5 2.5% 2024 2024
Loans in overseas Fixed at
subsidiaries 1 - 1 0.9 0.9% 2022 2022
---------------------- ----------- ---------- -------------- ----------- ---------------- --------- ---------
Total 431 1,050 1,481 2.5 2024 2022
---------------------- ----------- ---------- -------------- ----------- ---------------- --------- ---------
The EUR500 million bond, issued in July 2014, is shown net of
issue discount and fees and at a closing spot rate of GBP1/EUR1.118
(2018-19: GBP1/EUR1.158). The effective interest rate on the bond
of 2.5 per cent (2018-19: 2.5 per cent) consists of the interest
coupon of 2.375 per cent (2018-19: 2.375 per cent) plus the
unwinding of the discount and fees on issuing the bond of 0.08 per
cent (2018-19: 0.08 per cent). The bond is designated as a hedge of
the net investment in GLS, which has the Euro as its functional
currency. During the year, a loss of GBP15 million (2018-19: GBP5
million gain) on the retranslation of this borrowing was
transferred to other comprehensive income, which offsets the gains
on translation of the net investment in GLS. There was no hedge
ineffectiveness in the current or comparative reporting years.
On 8 October 2019, Royal Mail plc issued a EUR550 million bond
with coupon of 1.25 per cent and maturity date of 8 October 2026.
To hedge the foreign exchange risk, Royal Mail chose to take out a
cross currency swap. The combined interest rate of the coupon and
the cross currency swap is 2.7 per cent. The EUR550 million bond is
shown net of issue discount and fees and at a closing spot rate of
GBP1/EUR1.118. The effective interest rate on the bond plus the
cross currency swap (2.7 per cent) consists of the interest coupon
of 1.25 per cent plus the effects of the cross currency swap (1.00
per cent) and the unwinding of the discount and fees on issuing the
bond (0.40 per cent). The revaluation of the bond is hedged by the
cross currency swap. The exchange rate on the Bond on issue in
October 2019 of GBP1/EUR1.120 was similar to the closing spot rate
of GBP1/EUR1.118, meaning that there was no material loss on the
retranslation of this borrowing and no corresponding movements on
the cross currency swap. There was no hedge ineffectiveness in the
current year.
The syndicated bank loan facility can be cancelled and any loans
drawn under the facility can become repayable immediately on the
occurrence of an event of default under the loan agreements. These
events of default include non-payment, insolvency and breach of
covenants. On 24 June 2020, a covenant amendment was agreed that
waived the financial covenants relating to interest (excluding
arrangement fees), adjusted net debt and EBITDA until March 2022,
replacing them with a quarterly minimum liquidity covenant. It is
not anticipated that the Group is at risk of breaching any of these
amended obligations.
The existing financial covenants require the Group to maintain
the (leverage) ratio of adjusted net debt to EBITDA below 3.5:1 and
EBITDA to interest (excluding certain arrangement fees) above
3.5:1. The covenant ratios are calculated on an IAS 17 basis for
leases. Adjusted net debt consists of net debt less leases
capitalised under IFRS 16, plus Letters of Credit (contingent
liabilities in respect of the UKPIL insurance programme, where the
possibility of an outflow of economic benefits is considered
remote) and is adjusted for exchange rate movements during the
year. EBITDA is adjusted to deduct operating lease expense on
leases capitalised under IFRS 16 and to remove transformation costs
and certain specific items (the pension charge to cash difference
is not removed). Interest is adjusted to remove interest on leases
capitalised under IFRS 16. The Group's leverage ratio at 29 March
2020 is 0.2:1 (2018-19: 0.5:1). The Group's ratio of EBITDA to
interest at 29 March 2020 is 36.0:1 (2018-19: 72.8:1). Accordingly,
the Group comfortably meets the covenants tests within its
syndicated bank loan facilities agreement. The minimum liquidity
covenant requires the Group to maintain at least GBP250 million of
liquidity defined as cash, cash equivalent, current asset
investments and undrawn, committed facilities (excluding the Covid
Corporate Financing Facility).
The interest rate chargeable on the syndicated bank loan
facility would increase if more than one third of the facility was
drawn and also if the Group's leverage ratio exceeded 1:1. Under
the loan agreement, the maximum interest rate chargeable would be
LIBOR plus 2.05 per cent. The EUR500 million bond and the EUR550
million bond become repayable immediately on the occurrence of an
event of default under the bond agreements. These events of default
include non-payment and insolvency. It is not anticipated that the
Group is at risk of breaching any of these obligations.
The undrawn committed facilities, in respect of which all
conditions precedent had been met at the balance sheet date, were
GBP225 million maturing in September 2024 (2018-19: GBP1,050
million of which GBP952 million maturing in March 2020 and GBP98
million maturing in March 2020).
There is no security in place under the syndicated bank loan
facilities or the bonds.
The syndicated bank loan facility contains provision on a change
of control of the Group for negotiation of the continuation of the
agreement or cancellation by a lender. The EUR500 million bond and
the EUR550 million bond both contain provisions such that, on a
change of control that is combined with a credit rating downgrade
in certain circumstances, the noteholders may require the Group to
redeem or, at the Group's option, purchase the notes for their
principal amount, together with interest accrued to (but excluding)
the date of redemption or repurchase.
16. Provisions
Specific
items Other Total
GBPm GBPm GBPm
=================================================== ======== ===== =====
Reported at 31 March 2019 (100) (62) (162)
IFRS 16 opening adjustments - 2 2
--------------------------------------------------- -------- ----- -----
Reported at 1 April 2019 on transition to IFRS
16 (100) (60) (160)
Arising during the year:
Charged in operating specific items (45) - (45)
Charged in other operating costs - (62) (62)
Amounts reclassified in the period(1) - (16) (16)
Utilised in the year 2 57 59
Unwinding of discount - industrial diseases claims (1) - (1)
--------------------------------------------------- -------- ----- -----
At 29 March 2020 (144) (81) (225)
--------------------------------------------------- -------- ----- -----
Disclosed as:
Current (57) (56) (113)
Non-current (87) (25) (112)
--------------------------------------------------- -------- ----- -----
At 29 March 2020 (144) (81) (225)
--------------------------------------------------- -------- ----- -----
Disclosed as:
Current (9) (49) (58)
Non-current (91) (13) (104)
--------------------------------------------------- -------- ----- -----
At 31 March 2019 (100) (62) (162)
--------------------------------------------------- -------- ----- -----
Specific
items Other Total
GBPm GBPm GBPm
=================================================== ======== ===== =====
At 26 March 2018 (106) (56) (162)
Arising during the year:
Charged in operating specific items (1) - (1)
Charged in other operating costs - (73) (73)
Unused amounts released 3 4 7
Utilised in the year 6 63 69
Unwinding of discount - industrial diseases claims (2) - (2)
--------------------------------------------------- -------- ----- -----
At 31 March 2019 (100) (62) (162)
--------------------------------------------------- -------- ----- -----
Disclosed as:
Current (9) (49) (58)
Non-current (91) (13) (104)
--------------------------------------------------- -------- ----- -----
At 31 March 2019 (100) (62) (162)
--------------------------------------------------- -------- ----- -----
Disclosed as:
Current (13) (46) (59)
Non-current (93) (10) (103)
--------------------------------------------------- -------- ----- -----
At 25 March 2018 (106) (56) (162)
--------------------------------------------------- -------- ----- -----
1 GBP16 million was reclassified to Other provisions during the
period (previously presented within accruals) in respect of GLS
liabilities, mainly in respect of employee benefits and litigation
claims.
Below is a summary of the ageing profile of specific items and
other provisions.
At 29 March 2020 At 31 March 2019
------------------------------------------------- -------------------------------------------------
Expected period of settlement Expected period of settlement
------------------------------------------------- -------------------------------------------------
Two to After Two to After
Within One to five five Within One to five five
one year two years years years Total one year two years years years Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================ ========= ========= ========= ========= ===== ========= ========= ========= ========= =====
Specific items
Industrial
diseases
claims (5) (3) (9) (68) (85) (3) (3) (9) (68) (83)
German property
tax - - - - - - (5) - - (5)
Employee Free
Shares - NI - - - - - (4) - - - (4)
Legacy property
costs - - (1) (6) (7) - - (1) (5) (6)
Regulatory fine (51) - - - (51) - - - - -
Other (1) - - - (1) (2) - - - (2)
---------------- --------- --------- --------- --------- ----- --------- --------- --------- --------- -----
Total (57) (3) (10) (74) (144) (9) (8) (10) (73) (100)
---------------- --------- --------- --------- --------- ----- --------- --------- --------- --------- -----
Other
Voluntary
redundancy (12) - - - (12) (11) - - - (11)
Property
decommissioning
obligations (3) (2) (5) (4) (14) (5) (3) (3) (5) (16)
Litigation
claims (38) (2) - - (40) (30) (1) - - (31)
LTIP - NI - (1) - - (1) - (1) - - (1)
Employee
benefits (2) (1) (7) - (10) - - - - -
Other (1) - (3) - (4) (3) - - - (3)
---------------- --------- --------- --------- --------- ----- --------- --------- --------- --------- -----
Total (56) (6) (15) (4) (81) (49) (5) (3) (5) (62)
---------------- --------- --------- --------- --------- ----- --------- --------- --------- --------- -----
On 14 August 2018, Ofcom published its decision following its
investigation into whether Royal Mail had breached competition law.
The investigation was launched in February 2014, following a
complaint brought by TNT Post UK (now Whistl). Ofcom found that
Royal Mail had abused its dominant position in the market for bulk
mail delivery services in the United Kingdom by issuing Contract
Change Notices on 10 January 2014 which introduced discriminatory
prices. It fined Royal Mail GBP50 million. Royal Mail lodged an
appeal with the Competition Appeal Tribunal (CAT) on 12 October
2018 to have both Ofcom's decision and fine overturned. On 12
November 2019, the CAT issued its judgment, which upheld Ofcom's
decision and fine. In light of the CAT judgment, a provision has
been made for GBP51 million, charged to operating specific items,
representing the fine and associated interest.
In January 2020, RMG requested permission to appeal the CAT's
judgment to the Court of Appeal (CoA). On 30 March 2020, the CoA
granted Royal Mail permission and indicated that a hearing would be
held over one-to-two days in mid-2021.
The potential liability for industrial diseases claims relating
to both current and former employees of the Group arose in 2010 as
a result of a Court of Appeal judgement that held the Group liable
for diseases claims brought by individuals who were employed in the
General Post Office Telecommunications division and whose
employment ceased prior to October 1981. Consequently, a provision
was first recognised in 2010-11. The Group has derived its current
provision by using estimates and ranges calculated by its actuarial
adviser, which are based on current experience of claims, and an
assessment of potential future claims, the majority of which are
expected to be received over the next 25 to 30 years. The Group has
a rigorous process of ensuring that only valid claims are
accepted.
Provisions for litigation claims mainly comprise outstanding
liabilities in relation to road traffic accident and personal
injury claims.
17. Contingent liabilities
In October 2018, Whistl filed a damages claim against Royal Mail
at the High Court relating to Ofcom's decision of 14 August 2018,
which found that Royal Mail had abused its dominant position (see
Note 16). Whistl's High Court claim is on hold until after the
completion of any further appeal process. Royal Mail believe
Whistl's claim is without merit and will defend it robustly if
Whistl decides to pursue it.
18. Events after the reporting period
Covid Corporate Financing Facility
On 30 April 2020 the Bank of England approved Royal Mail plc's
application for the Covid Corporate Financing Facility. This
provides a GBP600 million facility in line with other corporates of
the same credit rating. There have been no drawings of this
facility since the balance sheet date.
Management changes
On 15 May 2020 the Royal Mail plc Board and Rico Back agreed
that he would step down as Group CEO and from the Board with
immediate effect and leave Royal Mail on 15 August 2020.
Keith Williams assumed the role, with immediate effect, of
interim Executive Chair to lead discussions with stakeholders about
an accelerated pace of change across the business. He is expected
to remain in this executive role until a permanent CEO of Royal
Mail is appointed. Stuart Simpson has been appointed interim CEO of
Royal Mail. This is a Board appointment. Michael Jeavons was
appointed as interim Group CFO.
A comprehensive internal and external search for a permanent CEO
of Royal Mail will be undertaken. In order to ensure greater focus,
this permanent CEO of Royal Mail will report directly to the Board
once Keith Williams returns to the role of non-executive
Chairman.
Loan covenant amendment
On 24 June 2020, a covenant amendment was agreed that waived the
financial covenants relating to interest (excluding arrangement
fees), adjusted net debt and EBITDA until March 2022, replacing
them with a quarterly minimum liquidity covenant.
Statement of Directors' responsibilities in respect of the
Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report
and the Group and Parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year in accordance
with applicable law and regulations. Under that law they are
required to prepare the Group financial statements in accordance
with International Financial Reporting Standards as adopted by the
European Union (IFRSs as adopted by the EU) and applicable law and
have elected to prepare the Parent Company financial statements in
accordance with UK accounting standards, including FRS 101 Reduced
Disclosure Framework.
Under Company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company and of
their profit or loss for that period. In preparing each of the
Group and Parent Company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant, reliable and prudent;
-- for the Group financial statements, state whether they have
been prepared in accordance with IFRSs as adopted by the EU;
-- for the Parent Company financial statements, state whether
applicable UK accounting standards have been followed, subject to
any material departures disclosed and explained in the parent
company financial statements;
-- assess the Group and Parent Company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the Parent Company or to cease
operations or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Parent Company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
which complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
annual financial report.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole; and
-- the Directors' Report and the Strategic Report includes a
fair review of the development and performance of the business and
the position of the issuer and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
-- We consider the Annual Report and Financial Statements, taken
as a whole, are fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group'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:
Keith Williams
Interim Executive Chair
24 June 2020
Stuart Simpson
Interim Chief Executive Officer Royal Mail
24 June 2020
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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EAAKSADLEEEA
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