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<p>Royal Mail Group Limited Annual Report and Financial Statements 2012-13 Royal M ail Group Lim ited Annual Report and Financial Statem ents 2012-13 i Basis of presentation Special purpose financial statements As previously announced, Post Office Limited was transferred from under the ownership of Royal Mail Group Limited to become a fellow subsidiary undertaking of Royal Mail Holdings plc on 1 April 2012, one week into the 2012-13 reporting year. Accordingly, to enable comparative analysis, special purpose consolidated financial statements for Royal Mail Group Limited excluding Post Office Limited have been prepared for 2012-13, 2011-12 and 2010-11. Adjusted 52 week basis The 2012-13 financial year was a 53 week year and to provide meaningful comparisons, revenue and operating costs are also presented on an adjusted 52 week basis. The adjustment removes the 53rd week’s revenue and incremental costs associated with that revenue. General Logistics Systems (GLS) reports results for a 52 week year ending 31 March. No adjustments have been made for GLS. Like-for-like revenue and cost growth In addition to the 52 week adjustment, the impact of translating GLS’s Euro results into Sterling using different average exchange rates has also been eliminated to permit revenue and cost growth rates to be calculated on a like-for-like basis. The average rates for 2012-13 are £1 = €1.2262 compared with £1 = €1.1572 for 2011-12 – a weakening in the Euro of six per cent. Had last year’s GLS revenue of €1,808 million (reported as £1,562 million) been translated at the 2012-13 average rate, it would have been reported as £1,474 million, or £88 million lower. The translational impact of foreign currency on UKPIL’s revenue is some £2 million, which is not material and therefore has not been included in the like-for-like calculations. The transactional cash impact of foreign currency is not eliminated. There are natural hedges in the Group to cover this exposure and the impact on operating profit is estimated as £3 million. Ultimate parent Royal Mail Holdings plc is the immediate and ultimate parent of Royal Mail Group Limited and consolidated financial statements for the 53 weeks ending 31 March 2013 will be prepared for Royal Mail Holdings plc. A summary of the Group structure at 31 March is shown below. Royal Mail Holdings plc Post Office Limited Royal Mail Group Limited* Royal Mail Investments Limited Royal Mail Estates Limited General Logistics Systems B.V. * Royal Mail Group Limited and its main subsidiaries. Annual Report and Financial Statements 2012-13 Contents Overview Who we are 01 Financial and business performance highlights 04 Chairman’s statement 05 Chief Executive Officer’s review 07 Strategy Our strategy 10 Key performance indicators 12 Performance Financial performance overview 14 Financial review 16 UK Parcels, International & Letters (UKPIL) 21 General Logistics Systems (GLS) 23 Business risks 24 Corporate responsibility 28 Governance Our Board of Directors 34 Directors’ report 37 Corporate Governance 38 Directors’ remuneration report 46 Financial statements Consolidated income statement 56 Consolidated statement of comprehensive income 57 Consolidated statement of cash flows 58 Consolidated balance sheet 59 Consolidated statement of changes in equity 60 Notes to the consolidated financial statements 61 Significant accounting policies 117 Group five year summary (unaudited) 124 Statement of Directors’ responsibilities in relation to the Group financial statements 125 Other information Forward looking statements 127 Corporate information 128 Go online for more information This icon is used to indicate reporting against a KPI throughout the document. Case studies Information key: 01 Overview Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Who we are As the sole provider of the Universal Service in the UK, Royal Mail Group delivers a six-days-a-week, one-price- goes-anywhere postal service to more than 29 million addresses across the UK. Royal Mail is the preferred delivery company in the UK. We are a vital link connecting communities, businesses and customers. In 2012-13, we collected and delivered more than one billion parcels and 14 billion addressed letters across the country. The transformation of Royal Mail Group is helping to ensure the sustainability of the Universal Service by putting our Company on a sound financial footing. Our strategy is to capitalise on our strength in delivery to grow our presence in the dynamic parcels market, thereby maintaining a financially viable Universal Service. Delivering increasing numbers of parcels through our combined UK network and capturing the benefits of the new regulatory regime will help us to mitigate the financial impacts of structural decline in the letters market. Addressed volumes have fallen from around 63 million items a day in 2011-12 to 58 million items in 2012-13. Achieving our strategic priorities, together with becoming a more customer-focused company, underpins our vision to be the most successful delivery company in the UK. Driving sustainable, profitable growth will allow us to obtain ongoing access to external capital, build a sustainable business and continue to provide as many good quality jobs as we can for our people. We are making good progress. However, more remains to be done to ensure we can complete the transformation of our business from one that predominantly handles letters, to one that handles an increasing number of parcels. Five year Group revenue (£m) Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 Reported 52 weeks 2011 Reported 52 weeks 2010 Reported 52 weeks 2009 9,279 9,146 8,764 8,415 8,547 8,695 Five year Group operating profit after transformation costs (£m) Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 Reported 52 weeks 2011 Reported 52 weeks 2010 Reported 52 weeks 2009 440 403 152 18 147 101 Five year Group free cash inflow/(outflow) (£m) Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 Reported 52 weeks 2011 Reported 52 weeks 2010 Reported 52 weeks 2009 334 334 154 (246) (390) (493) Overview 02 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Who we are (continued) UKPIL Royal Mail Group, through its core UK business, UK Parcels, International & Letters (UKPIL), is the UK’s sole provider of the Universal Service. It is also a leading UK provider of express parcels services through Parcelforce Worldwide. UKPIL provides letter and parcel services to and from countries around the world under reciprocal arrangements with other overseas postal administrations. It is also responsible for the design and production of the UK’s stamps and philatelic products. Through MarketReach, UKPIL provides a full-service marketing mail offering and helps businesses derive more value from their direct mail. UKPIL’s transformation programme is one of the largest undertaken in the UK in recent history. The programme is about making our combined UKPIL core network, which handles over 90 per cent of the parcels and all of the letters we deliver, more competitive and effective. We are delivering benefits. 79 per cent of letters are now sequenced to delivery point. We are progressing with delivery revisions, with modernisation underway or completed in 860 Delivery Offices since the programme began, representing more than half of walks. GLS General Logistics Systems (GLS) is one of the largest ground-based deferred parcel delivery service providers in Europe. It is a pan- European business, providing parcel and express services as well as logistics solutions. The GLS network covers 37 countries through wholly owned and partner companies, is globally connected through contractual agreements and acts as the Group’s gateway to Europe, opening up new opportunities. Revenue by business and market (£m) (adjusted 52 weeks 2013) Business segment/product Parcels Marketing mail Letters & other mail1 Total UK Parcels, International & Letters (UKPIL) 2,933 1,118 3,582 7,633 General Logistics Systems (GLS) 1,498 - - 1,498 Other - - 15 15 Group 4,431 1,118 3,597 9,146 Percentage of revenue by market (adjusted 52 weeks 2013) Group revenue (%) Parcels 48 Letters & other mail1 40 Marketing mail 12 1 Includes letters, publishing, data and philatelic. 03 Overview Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Group legal structure Royal Mail Holdings plc is directly owned by HM Government and is the ultimate parent company of Royal Mail Group Limited. The Group primarily operates within the United Kingdom, including a number of subsidiaries, associates and a joint venture. It also has a presence in most European countries, mainly through General Logistics Systems. The basic legal structure of the Group as at 25 March 2012 is shown in diagram one. On 1 April 2012, Post Office Limited was transferred from under the ownership of Royal Mail Group Limited to become a direct subsidiary of Royal Mail Holdings plc. The revised Group structure at this date is as shown in diagram two. Further details on the principal subsidiaries are shown in note 30 to the Group financial statements. 25 March 2012 – pre-separation Diagram one Royal Mail Holdings plc Royal Mail Group Limited Post Office Limited Royal Mail Estates Limited General Logistics Systems B.V. Royal Mail Investments Limited 1 April 2012 - post-separation Diagram two Royal Mail Holdings plc Royal Mail Group Limited Post Office Limited Royal Mail Estates Limited General Logistics Systems B.V. Royal Mail Investments Limited Overview 04 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Financial and business performance highlights Our financial performance Revenue and volume • Reported Group revenue was £9,279 million. On a like-for-like basis, it increased by five per cent. Reported Group parcel revenue increased to £4,477 million, with growth of nine per cent on a like-for-like basis. Parcels remain a major contributor to Group revenue, accounting for almost half (48 per cent). • UKPIL reported revenue was £7,766 million, up six per cent on a like-for-like basis. UKPIL parcel revenue increased by 13 per cent and volumes increased five per cent on a like-for-like basis. Reported parcel volumes were 1,081 million items, compared with 1,016 million items in 2012. 1 Marketing mail numbers are calculated using statistical analysis from surveys in order to estimate how our mail is being used. Data services and redirections were added into the marketing mail portfolio in 2012-13. Numbers have been restated accordingly. Key financial highlights Group Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 Revenue (£m) 9,279 9,146 8,764 Operating profit after transformation costs (£m) 440 403 152 Operating profit margin after transformation costs (%) 4.7 4.4 1.7 Free cash inflow (£m) 334 n/a 154 Net debt (£m) (906) n/a (1,186) Revenue (£m) Operating profit/(loss) after transformation costs (£m) Business unit Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 Reported 53 weeks 2013 Adjusted 52 weeks 2013 Reported 52 weeks 2012 UK Parcels, International & Letters (UKPIL) 7,766 7,633 7,189 331 294 33 General Logistics Systems (GLS) 1,498 1,498 1,562 101 101 128 Other businesses 15 15 13 8 8 (9) Group 9,279 9,146 8,764 440 403 152 Like-for-like growth rates (%) Revenue Addressed volumes Parcels 9 4 – UKPIL 13 5 – GLS 2 1 Letters 3 (8) • Within UKPIL, reported letter revenue grew to £4,787 million (including marketing mail). Like-for-like growth of three per cent was achieved. Addressed letter volumes declined eight per cent on a like-for-like basis, which was in line with expectations. Within letter revenue, reported marketing mail revenue was £1,135 million1. This was a two per cent increase on a like-for-like basis. • At GLS, reported revenue was four per cent lower at £1,498 million, due to the weakness of the Euro against the pound. However, on a like-for-like basis, revenue increased by two per cent to €1,837 million. Volumes increased one per cent on a like-for-like basis. Operating profits and margins after transformation costs • Reported Group operating profit increased to £440 million. The operating profit margin increased from 1.7 per cent to 4.4 per cent on a like-for-like basis. • UKPIL generated a reported operating profit of £331 million and its operating profit margin increased from 0.5 per cent to 3.9 per cent on a like-for-like basis. The UK business is now the biggest contributor to Group operating profit. Cash flow • EBITDA before transformation costs was £915 million. £665 million was invested back into the business, which was mainly transformation-related. • Free cash inflow of £334 million was generated, mainly due to our improved trading performance. As a result, net debt decreased by £280 million to £906 million. Modernisation • Delivery and processing productivity increased by 1.7 per cent across the core network. In addition, nine Mail Centres were closed in the year. In total, 25 Mail Centres have closed to date, while four have been opened since modernisation began, representing a 30 per cent net reduction. • 79 per cent of letters are now sequenced to delivery point. 05 Overview Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Chairman’s statement We have a clear strategy in place to meet successfully the challenges we face in our changing marketplace. Donald Brydon Chairman A year of further significant progress I wrote last year about the Company’s considerable improvement. I am pleased to announce a year of further progress. We have reported a stronger financial performance, helping to safeguard the continued delivery of the Universal Service, secure the provision of long-term, good quality employment and create new opportunities for the Group. We have a clear strategy in place to meet successfully the challenges we face in our changing marketplace. Moya Greene, our Chief Executive Officer, is leading the business with considerable energy and focus. Her commitment to deliver our business strategy and her determination to put the Company in a position where it is strong enough to access external capital is one of the key drivers of our continuing success. Our changing business We have delivered a robust financial and operational performance. Behind the numbers lies one of the largest transformation programmes in the UK in recent history. It is greatly to the credit of the senior management team and the union leadership that this transformation has been carried out with a limited impact on our Quality of Service – especially when the standards set for Royal Mail are the highest of any major European country. See page 29 for more information on our Quality of Service performance. The changing communications market has significant implications for our future. Letters will always be an important part of our business. However, it has been clear for some years that we need to diversify our revenue base to ensure the continued provision of the Universal Service. The vast majority of the letters we deliver are now sorted and sequenced automatically. Our delivery revisions programme is in place, ensuring colleagues are able to manage the demands of delivering increasing numbers of parcels as part of their daily rounds. Our progress is testament to the commitment of our people to delivering this difficult, wholesale change to the way they work. Royal Mail is adapting to keep pace with this competitive market. We need ongoing access to external capital. I am confident that our Company is capable of rising to the challenge. Some key developments The last two years have seen some of the most important legislative and regulatory changes with respect to postal services in the Group’s history. In April 2012, Ofcom implemented a new regulatory framework. We welcomed this change. It recognises that the Universal Service Provider must be able to earn a reasonable commercial rate of return. We are harnessing the benefits of the new framework to secure our financial future. Today, approximately five per cent of Royal Mail revenue is subject to direct price control. Ofcom has recently concluded its Review of Postal Users’ Needs, in which it ruled out the need for any major changes to the Universal Service. We also welcomed the recent clarification by the Regulator of the circumstances in which it would be minded to intervene in direct delivery competition in order to protect the viability of the one-price- goes-anywhere service. The pension transfer in April 2012 gave our colleagues who are members of the Royal Mail Pension Plan considerably more security with respect to the pension benefits they had earned up until 31 March 2012. It also immediately removed the obligation to make cash payments of around £300 million every year to address the pension deficit. Of course, the cost of continuing to provide one of the largest defined benefit pension schemes in the UK is material and growing. See page 75 for more information. At the same time as the pension transfer, Post Office Limited formally separated from Royal Mail Group Limited. Royal Mail and the Post Office have signed a long-term commercial agreement to ensure the two companies will continue to work together in the future. With its extensive network and its important place in rural communities, the Post Office is a natural partner for Royal Mail as we serve communities across the UK. Overview 06 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Chairman’s statement (continued) Safety We have made progress on tackling the threat dangerous dogs pose to our people. Last year, I announced the launch of an independent, judge-led inquiry to gather evidence on this issue and make recommendations for action. In 2012, Sir Gordon Langley published his report, making clear the necessity for Government action and proposals to protect postmen and women from this unacceptable hazard. In February 2013, I welcomed the Government’s announcement that it is planning to extend legal protection over dog attacks to cover those that take place on private property. Since the year end, this legislation has been put firmly on the agenda through the announcement of the Anti-social Behaviour, Crime and Policing Bill in the Queen’s Speech in May 2013. Following the Langley report’s recommendations, we are establishing a process where attacks on our people are more likely to be the subject of legal action. In addition, we will take a more robust approach to the suspension of deliveries where dogs pose a danger to our postmen and women. Our Board The Board was pleased to welcome two new non-executives to Royal Mail during the year. John Allan was appointed a Non Executive Director of the Company in January 2013. John brings a wealth of strategic, financial and marketing experience, including an in-depth knowledge of the postal sector. In March 2013, we announced the appointment of Jan Babiak as a Non Executive Director. Jan’s extensive IT and regulatory experience will further strengthen our Board. In September 2012, Dame Jane Newell OBE stepped down as Chair of Royal Mail Pension Trustees Limited after eight years in the role. All involved in the Pension Fund have cause to be grateful to her. We welcomed her successor, Joanna Matthews, earlier in the year and are delighted to see someone with such a wealth of experience and knowledge take on this important role. Our role in the community The business has continued to develop and maintain its role in national culture and heritage. Last year I confirmed that Royal Mail had granted a lease to give the British Postal Museum and Archive (BPMA) a new home in Calthorpe House. The new exhibition centre on this site continues to progress. I congratulate the BPMA team on securing National Lottery funding to support the creation of their brand new ‘mail rail’ visitor attraction, which will help bring Royal Mail’s historic role in the life of the capital to a wider national and international audience. Our place in serving the community goes beyond delivering the Universal Service. Across the UK, our people play a crucial role, both in support of their communities and charitable organisations. This year, our colleagues chose to appoint Prostate Cancer UK as the Group’s charity partner. Through our colleagues’ fundraising activities and matched funding from the Company, we have already raised approximately £800,000 for this very important cause. We hope to raise at least £2 million during our two-year partnership. Royal Mail played an important role in helping the UK to support the London 2012 Olympic and Paralympic Games. The Games saw Royal Mail at its best, enhancing our reputation and position in UK culture. Our operational teams, especially in London, faced severe challenges in delivering to our customers but, with careful planning and dedication, continued to deliver to our high service standards. Our gold post boxes provided a means for local communities to mark the success of their athletes. So too did the wonderful Olympic and Paralympic stamps, which proved very popular with the public and the philatelic community. Thank you We have delivered a great deal. The year ahead is an important one for Royal Mail and I believe we are now in a good position to build on our substantial achievements. I join our Chief Executive Officer in expressing my gratitude to the Secretary of State for Business, Innovation & Skills, Vince Cable, Minister of State for Business and Enterprise, Michael Fallon and all their colleagues in Government for their continued support. Most of all, I would like to pay tribute to all my colleagues for their loyalty, commitment and conscientiousness. Donald Brydon Chairman Royal Mail Group Limited 31 July 2013 Overview 07 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Chief Executive Officer’s review Our vision is to be the most successful delivery company in the UK. Moya Greene Chief Executive Officer We are reporting a strong financial performance. Our strategy is delivering. The transformation of Royal Mail is well underway. Our key metrics are moving in the right direction. Reported Group operating profit after transformation costs grew from £152 million to £440 million due to cost control and improved revenue generated by parcel volume and letter revenue growth. Our operating profit margin after transformation costs increased to 4.4 per cent on a like-for-like basis. Free cash inflow increased from £154 million to £334 million, mainly generated by trading. Parcels continue to be a major contributor to Group revenue at 48 per cent. Just over three years ago, our core UK business had significant cash outflows. Now, despite the challenging UK economic conditions, UKPIL contributes the majority of Group operating profit; its reported operating profit margin after transformation costs has increased to 3.9 per cent on a like-for-like basis. As the transformation of UKPIL gathers pace, we are harnessing the benefits of the new regulatory framework, introduced in the UK in April 2012. Today, approximately five per cent of Royal Mail revenue is subject to direct price control. In short, we are delivering a stronger commercial performance, and our prices are now closer to the European median. GLS, our ground-based European parcels carrier, delivered a resilient performance. Difficult trading conditions in Germany and France were mitigated to some extent by improved trading performance in other countries. Delivering our strategy Our vision is to be the most successful delivery company in the UK. Royal Mail is already a market leader by revenue in both the UK parcels and letters markets. GLS is an established, ground-based parcels player in all its markets. This means we are well positioned to deliver our strategic priorities: 1. being a successful parcels business; 2. managing the decline in letters; and 3. being customer-focused. We are creating a commercial, customer- focused company, offsetting addressed letter declines with revenue growth from parcels, which is expected to drive profitable growth. With the continued support and engagement of our people, we can deliver these objectives to help to ensure that we are financially successful and able to access the capital needed to deliver the ongoing transformation of our business. Being a successful parcels business We operate in a dynamic and growing parcels market. During the year, we handled a reported total of 1,461 million parcels (2012 1,391 million) through our three parcel networks in the UK and continental Europe. For more information on our parcels strategy, see page 21. We remain well positioned to benefit from significant growth in online retailing in the UK, where Royal Mail is the biggest overall parcel delivery player by revenue. A recent survey1 found that 76 per cent of people in the UK are more likely to use a particular online retailer again if they deliver through Royal Mail. Over 90 per cent of the UKPIL parcels that we handle, including Universal Service Obligation (USO) parcels, are delivered by our core UK network, through which we also handle letters. In the last financial year, this combined network handled reported volumes of 1,010 million parcels (2012 950 million), with quality being a key consideration. This focus on quality is important in a market where businesses and consumers rightly demand high service standards. Parcelforce Worldwide, our UK express parcels delivery business, handled reported volumes of 71 million items during the year (2012 66 million), about seven per cent of our UKPIL parcel volumes. It benefits from a very high quality of service performance and is poised to deliver a significant increase in the volumes it handles in the years to come. In October 2012, we announced a £75 million, four-year investment programme for Parcelforce Worldwide, as we expand our position in the UK express parcels market. GLS carried 380 million parcels in 2012-13 (2012 375 million). Its parcel volumes grew by one per cent during the year, with growth in both domestic and international volumes. 1 Hall & Partners, Delivery Matters 2013. Overview 08 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Chief Executive Officer’s review (continued) Managing the decline in letters UKPIL’s letters business is key to our financial success, generating £4,787 million (including marketing mail) in reported revenue during the year. However, as I have said in my previous reports, addressed letter volumes have been in structural decline for a number of years. In 2011-12, we handled 63 million addressed items every day. Today, this has fallen to 58 million. For more detail on our letters strategy, see page 21. Our letter revenue, including marketing mail, increased by three per cent on a like-for-like basis. Addressed letter volumes decreased by eight per cent on a like-for-like basis, in line with our expectations. Following price increases, we are making a profit on Access Mail – the mail other postal operators place in our downstream network for us to deliver on their behalf. This is a significant step forward as it accounts for approximately half of our addressed letter volumes. Access Mail also makes a considerable contribution to the cost of funding the USO network. Marketing mail remains a significant contributor to letter revenue2. MarketReach, an initiative we launched in July 2012 to help companies and their agencies derive more value from mail, is focused on helping to mitigate the impact of the letters decline. The advertising market has shown little growth during the year. Despite this, marketing mail revenue increased by two per cent on a like-for-like basis. As I have also reported in previous years, our transformation programme, one of the largest of its kind in UK industry, is improving our productivity. 79 per cent of letters are now sequenced to delivery point. Our delivery revisions programme is well underway, as we roll out new methods, processes and equipment to help our colleagues manage the fundamental shift in our traffic towards parcels. In March 2013, Ofcom published guidance setting out its regulatory approach to protect the Universal Service from growing direct delivery (end-to-end) competition. We welcome Ofcom’s acknowledgement in its guidance of its duty, powers and willingness to act to protect the Universal Service if direct delivery competition threatened its sustainability. We are also pleased to note Ofcom’s commitment to actively monitor all direct delivery market participants and track developments and any prospective risks to the Universal Service. Being customer focused In a recent survey of adults in Great Britain3, Royal Mail was the most favourably viewed company of all the participating organisations. Our own research shows that our mean business customer satisfaction score is 74, an increase of four points on last year. But we are aware that our customers have many options. To be their first choice, we must get the basics right and be easy to do business with. We gather customer feedback extensively across our business and use this insight to increase customer satisfaction, reduce customer complaints and improve the whole customer experience. For example, last year we launched a monthly customer report, which focuses on a number of key metrics, including benchmarking our performance against our peers and how likely our customers are to recommend Royal Mail. Assessing all the information available to us, including social media activity and inputs from our sales teams, provides a holistic view of how we are meeting customer needs, and where we need to take action. A number of important customer initiatives were implemented during the year. In April 2013, just after the financial year end, we streamlined our consumer First Class parcels offering from 15 to seven weight bands and introduced two parcel categories – small and medium. This simplified our product range, making it easier for customers to understand and make informed choices. We know the areas where we need to improve our service. Over 60 per cent of all our complaints are caused by four issues – P739 ‘Something for you’ cards, redelivery, redirection and misdelivery. We have made good progress on redirection, redelivery and misdelivery, where complaints have reduced since 2009. For example, we offer a free redelivery service, where customers can have an item redelivered to their address on a day of their choosing, or select an alternative address in the same postcode area. We want to give recipients of parcels more control. Having secured regulatory approval from Ofcom, we rolled out our Delivery to Neighbour programme across the UK in September 2012. Our postmen and women can now leave parcels with a neighbour if the recipient is not at home. Feedback from people in the areas where we trialled Delivery to Neighbour revealed that 92 per cent4 of customers whose items were left with a neighbour were satisfied with the overall experience. In addition, we work with mailing customers on forecasting delivery volumes in order to ensure extra temporary operational capacity is available to cope with seasonal peaks and that we can continue to deliver a high quality of service. This approach ensured we had the capacity required to manage increased parcel volumes over the Christmas period, through the installation of eight temporary parcel sort centres. Our people Our people are key to our transformation and, in particular, the successful delivery of our strategic priorities. In a recent survey, eight out of ten Royal Mail customers were pleased about the helpfulness of our postmen and women5. They are our ambassadors and a credit to Royal Mail. The safety of our colleagues in the workplace and on their rounds continues to be of paramount importance. Over the course of the year, the lost time accident frequency rate reduced by 20 per cent. Our World Class Mail programme – designed to promote continuous improvement across safety and productivity – continues to be embedded across the organisation. In 2012, we reintroduced a full employee engagement survey for 150,000 colleagues across the UK, following a benchmark survey in autumn 2011. Almost two-thirds of our colleagues are proud to work for Royal Mail. Three-quarters (76 per cent) have a clear understanding of what customers want. We are redoubling our efforts to communicate with our people about the challenges we face and our strategy to address them. We have 2 Marketing mail numbers are calculated using statistical analysis from surveys in order to estimate how our mail is being used. Data services and redirections were added into the marketing mail portfolio in 2012-13. Numbers have been restated accordingly. 3 Ipsos MORI, Corporate Image Survey, December 2012. 4 Illuminas research: 720 telephone interviews with trial participants. 5 Ipsos MORI, Corporate Image Survey, December 2012. Overview 09 Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 provided managers with tools and support to help with action planning, allowing members of teams to feel more engaged in the business’ future. Alongside our broader engagement programme, we are undertaking a series of ‘town hall’ events, where members of our senior management team will address as many as 1,000 colleagues at a time. We are in ongoing discussions with our trade unions on a number of issues. In these discussions, we have reached agreement on some key issues. The Company has extended until April 2014 its existing voluntary redundancy terms for those impacted by modernisation and renewed its commitment to maintaining a predominantly full-time workforce. We separately confirmed that a change in Royal Mail’s ownership structure will not affect colleagues’ contracts of employment. In last year’s Report I confirmed that, just after the end of the financial year, almost all of the liabilities and assets in the Royal Mail Pension Plan (RMPP) were transferred to HM Government. This transfer could not address the ongoing costs of such a large Plan (with approximately 112,000 active members), which are material. For more information, please see page 75. Our role in society London 2012 was a major highlight for Royal Mail. We delivered 1.6 million envelopes enclosing approximately 7.5 million tickets to customers, with over 98 per cent of them arriving first time, on time. We were the first postal administration to paint its post boxes gold in the communities that gold medal- winning British athletes are associated with, the first to pay Olympians and Paralympians the same financial consideration for their image rights, and the first to produce a stamp in honour of every British Olympic and Paralympic gold medal athlete. In this very special year for the UK, we were touched by the very positive response we received from members of the public as we celebrated the achievements of Team GB and ParalympicsGB. We have a long heritage of contributing to our communities. We connect millions of customers, companies and communities, including those in the most remote rural areas, making commerce happen in the process. Our contribution to the UK at this difficult time for the economy is significant. For the 2011-12 financial year, research from the Centre for Economics and Business Research (CEBR) estimated that: i) in terms of ‘value added’ from UK operations of companies, our core UK business ranked as the eighth highest in the UK; ii) we contributed 0.4 per cent to the UK’s total Gross Domestic Product (GDP), rising to 0.7 per cent when our wider economic impacts were included and; iii) for every £1 we paid in wages, an estimated additional 57p in wages was generated in the wider economy through indirect and induced impacts. Obtaining ongoing access to external capital As we said at the Interim Report stage, ongoing access to external capital is a key part of the transformation process. We believe that Royal Mail will combine the best of the public and private sectors. We are the provider of the one-price-goes-anywhere, six-days-a-week Universal Service Obligation. We are honoured to provide the Universal Service to more than 29 million addresses across the UK. The service is enshrined in the Postal Services Act 2011. The Act sets out clear and specific minimum requirements, which can only be changed by a vote in both Houses of Parliament. We are pleased that Ofcom found recently that nine out of ten residential and business customers consider our current level of service meets their core needs and there is no need for change. Our Quality of Service standard specifications are the highest of any major European country, and will continue to apply. Our societal obligations would also remain in place and, again, we are very proud to deliver them. For example, our free Articles for the Blind6 service is enshrined in the Postal Services Act 2011. Demonstrating that Royal Mail can attract external capital will pave the way for continued investment in our Company. It also represents a further opportunity to increase the alignment that already exists between Royal Mail and its people. Outlook We are well positioned to continue to benefit from the structural change to e-retailing, which is driving increases in parcel volumes, and to manage the decline in letters. In the early weeks of 2013-14, we have seen similar trends to those seen in 2012-13. In this year’s Report, I must again thank our Shareholder, HM Government, for its continued support. In particular, I wish to thank the Secretary of State for Business, Innovation & Skills, Vince Cable, Minister of State for Business and Enterprise, Michael Fallon and their officials. I also wish to thank Dame Jane Newell OBE, until September 2012 the Chair of Royal Mail Pension Trustees Limited, and her successor, Joanna Matthews, for their counsel and support. Most importantly, I would like to extend my thanks to my colleagues. These are times of significant change and we are asking a lot of our people. I continue to be grateful for their hard work, dedication and support. As the ambassadors of this cherished Company, I know that they will continue to drive our business forward as we seek to realise our collective objectives. Moya Greene Chief Executive Officer Royal Mail Group Limited 31 July 2013 6 A free-of-charge service for people sending items specifically designed for blind and visually impaired people within the UK and overseas. 10 Strategy Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Our strategy Royal Mail Group has a clear vision to be the most successful delivery company in the UK. This is underpinned by three priorities: capitalising on growth in online retailing to grow our parcels businesses; continuing to mitigate structural decline in the letters market by maximising the value of mail; and by being customer-focused. By doing this, we believe we can drive sustainable, profitable growth that will enable us to obtain ongoing access to external capital and secure a sustainable future for our Company. Our corporate strategy has three priorities: Firstly, being a successful parcels business. The UK parcels market has shown continued growth, thanks to the growth of online retailing. In 2012-13, parcels accounted for 48 per cent of Group revenue. We are investing in our three main parcels networks and our tracking technology to meet customer needs. A long-term investment programme in our core, combined UK network will ensure we have the capability we need to accommodate the changing traffic mix from letters to parcels. Our second strategic priority focuses on managing the decline in letters. We have already transformed how we sort letters, automating the handling process in our Mail Centres. 79 per cent of letters are now sequenced to delivery point. We are pressing on with our programme of delivery revisions, changing the way we deliver to more than 29 million addresses across the UK. This also allows us to effectively manage growth in parcel volumes and at the same time improve our productivity. Changes in the regulatory framework last year have given us greater commercial freedoms. These enable us to respond better to market changes. We have already taken steps to simplify and improve many of our propositions. Marketing mail is one of the most successful ways to reach out to customers. We launched MarketReach last year to transform our direct marketing offering. We are now developing ways to help our customers to derive more value from all the mail they send. Thirdly, we need to continue to be a customer- focused company. In this competitive market, our customers have a choice. We are developing the services we offer to ensure they meet our customers’ needs. We are investing in technology to provide the tracking services our customers expect. We are working with our customers to anticipate times of peak demand and ensure we can deliver the high quality service they need. Our strategic priorities and how we achieve them are central to our internal communications programme, so our colleagues understand their role in delivering our strategy. We have achieved a great deal. But more remains to be done to safeguard the sustainability of the Universal Service and ensure we can continue to provide high quality jobs for our people. 11 Strategy Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Priority one — Being a successful parcels business Definition To leverage our network reach and our strong brand to ensure we can capture increasing parcel volumes as a result of the growing popularity of online retailing in the UK. To use our new regulatory freedom for parcels to develop new offerings and compete more effectively in the marketplace. To ensure our combined core UK network can accommodate increasing parcel volumes and meet customer needs through the completion of our modernisation programme. Key initiatives • Investing in our technology: from how customers access our networks through to tracking and management information; • Progressing our core UK network transformation: improving safety, customer service, quality and productivity to deliver parcels effectively and efficiently; • Enhancing products and services: expanding services, such as Delivery to Neighbour, to give parcel recipients more choice and convenience; • Expanding Parcelforce Worldwide: increasing the capacity of the network to meet customer needs; and • Strengthening our competitive position in the countries where GLS operates. Priority two — Managing the decline in letters Definition To manage the structural decline in the letters market by becoming more productive and effective, and ensuring we remain the carrier of choice for delivery of letters in the UK. Harnessing the new regulatory freedoms we have won to ensure we make a reasonable, commercial return for the letters we deliver. Making marketing and business mail more valuable to our customers by increasing the data and insight they can gather. Key initiatives • Continuing to focus on improving operational productivity through the automation of the sequencing and sorting process and completing our programme of delivery revisions; • Demonstrating to customers the value of mail in customer retention and when used in conjunction with other media; • Building on the successful launch of MarketReach last year to develop new ways to prove the value of mail in a digital world and enable businesses to take advantage of it; and • Investing in barcode tracking services to provide far greater information and value for bulk mail customers. Priority three — Being customer-focused Definition Putting the customer at the heart of everything we do to ensure that we continue to be the delivery partner of choice. Being easy to do business with, and building new propositions that truly meet customer needs. Key initiatives • Extending and enhancing our services: launching the UK’s largest ‘click & collect’ network; working with the Post Office as it lengthens opening hours in many branches; simplifying our international product portfolio; • Tackling the root causes of complaints: focusing on the four areas that cause most dissatisfaction – ‘Something for you’ cards, redelivery, redirection and misdelivery; and • Transforming our digital channels to serve customers better. We are creating a commercial, customer-focused company, capitalising on parcels growth, while successfully managing the decline in letters. We are changing from a letters company that carries parcels to a parcels company that also brilliantly delivers letters. CU ST OMER CUSTO M ER FOC US 12 Strategy Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Key performance indicators KPI Measured by Key activities in the year Strategic links More information People People Safety Lost Time Accident Frequency Rate: the number of UKPIL employee, work-related accidents resulting in an absence on a subsequent day or shift per 100,000 hours worked. We continue the roll-out of our Walk Risk Assessment Programme. This identifies key risks on every walk so that our people are aware of potential hazards and we can take action to reduce risk where appropriate. Our Zero Accidents Programme continues, focusing on road safety and ensuring that our people have the training they need to operate safely on their round and in the yard. See ‘Corporate responsibility’ on pages 28-33 Engagement An annual survey by Ipsos MORI measuring involvement, alignment and loyalty of colleagues through a number of questions, including: what our people think about Royal Mail, their understanding of our strategy and their place in achieving our strategic objectives. We produced a Corporate Action Plan in response to the 2012 Engagement Survey, developed with the involvement of both unions and an Employee Panel. One of the actions within this Plan was continued communication with our colleagues. As part of our ‘town hall’ events, members of our senior management team including the Chief Executive Officer have addressed as many as 1,000 colleagues at a time at more than 20 meetings. Following the survey, we also used a specialised planning tool to develop and monitor actions being taken across the organisation to improve engagement. Over 90 per cent of managers are involved in action planning to improve local engagement. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer focus An annual survey by Ipsos MORI measuring how focused our people are on delivering improvements in customer service. Through the Corporate Action Plan, we have focused on raising awareness of the key causes of customer complaints and working with colleagues to bring the number of complaints down. We rolled out our Delivery to Neighbour programme across the UK from 1 October 2012. We delivered 1.6 million envelopes, enclosing approximately 7.5 million tickets for London 2012, with over 98 per cent arriving on time, first time. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer Customer First Class Quality of Service An independent, audited measure of Quality of Service for First Class retail products, adjusted for force majeure1. Through our modernisation programme, we are driving improvements in the pipeline to be more productive and effective. For example, 79 per cent of letters are now sequenced to delivery point. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Second Class Quality of Service An independent, audited measure of Quality of Service for Second Class retail products, adjusted for force majeure1. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer satisfaction Average business customer satisfaction scores on a number of issues, including price, service quality and customer experience. A customer satisfaction questionnaire is completed by a sample of business customers every month, helping us to identify key areas for action. In response to customer needs, we opened eight parcels hubs at Christmas to manage anticipated increases in volumes. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer complaints Number of complaints captured by our Customer Service team2. We continue to take action to focus on redelivery, misdelivery, ‘Something for you’ cards and redirections, which account for more than 60 per cent of complaints. We have made considerable progress in redelivery, misdelivery and redirection since 2009. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Performance Performance Group revenue Group revenue. Revenue increases were driven by a five per cent like-for-like increase in UKPIL parcel volumes and price increases during the year. The Group is also successfully harnessing the benefits of the new regulatory framework, helping us to ensure we can generate a reasonable commercial rate of return for the services we offer. See ‘Financial performance overview’ on page 14 Delivery hours reduction Percentage year-on-year reduction in the gross hours spent on delivery and collection activities. Delivery transformation continues and is providing our people with tools to manage the changing mail mix with fewer letters and more parcels. While we have reduced the gross hours spent on delivering mail and improved productivity, factors including the changing traffic mix are impacting our progress. See ‘Corporate responsibility’ on pages 28-33 Delivery Offices fully modernised Number of Delivery Offices that have been modernised. We are more than halfway through our Delivery Revisions programme, which is changing every aspect of the way our postmen and women work. This will ensure we are more productive and effective and can manage the changing traffic mix. See ‘Corporate responsibility’ on pages 28-33 Financial Financial Total expenditure Total expenditure for UK businesses, excluding all exceptional items. UK costs have been held in line with inflation. Increases in non-people costs in UKPIL were partially offset by a programme of procurement savings. See ‘Financial review’ on pages 16-20 Group operating profit Group operating profit before exceptional items. Price increases as a result of the introduction of a new regulatory framework are a key driver of revenue increases that have supported an increase in Group operating profit. This has been supported by tight controls, which have ensured costs increased in line with inflation. See ‘Financial review’ on pages 16-20 Free cash flow Free cash flow. This year, free cash flow has principally been generated by trading performance. See ‘Financial performance overview’ on page 14 The four sections below (People, Customer, Performance and Financial) and their respective KPIs reflect the four quadrants of our Corporate Balanced Scorecard for the year 2012-13. We said last year that as the business changes, we may adapt our KPIs. This year we have added Second Class Quality of Service, replaced process sequencing (which has been completed) with a broader KPI on Delivery Office modernisation and replaced RIDDORs with Lost Time Accident Frequency Rate. 13 Strategy Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 KPI Measured by Key activities in the year Strategic links More information People People Safety Lost Time Accident Frequency Rate: the number of UKPIL employee, work-related accidents resulting in an absence on a subsequent day or shift per 100,000 hours worked. We continue the roll-out of our Walk Risk Assessment Programme. This identifies key risks on every walk so that our people are aware of potential hazards and we can take action to reduce risk where appropriate. Our Zero Accidents Programme continues, focusing on road safety and ensuring that our people have the training they need to operate safely on their round and in the yard. See ‘Corporate responsibility’ on pages 28-33 Engagement An annual survey by Ipsos MORI measuring involvement, alignment and loyalty of colleagues through a number of questions, including: what our people think about Royal Mail, their understanding of our strategy and their place in achieving our strategic objectives. We produced a Corporate Action Plan in response to the 2012 Engagement Survey, developed with the involvement of both unions and an Employee Panel. One of the actions within this Plan was continued communication with our colleagues. As part of our ‘town hall’ events, members of our senior management team including the Chief Executive Officer have addressed as many as 1,000 colleagues at a time at more than 20 meetings. Following the survey, we also used a specialised planning tool to develop and monitor actions being taken across the organisation to improve engagement. Over 90 per cent of managers are involved in action planning to improve local engagement. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer focus An annual survey by Ipsos MORI measuring how focused our people are on delivering improvements in customer service. Through the Corporate Action Plan, we have focused on raising awareness of the key causes of customer complaints and working with colleagues to bring the number of complaints down. We rolled out our Delivery to Neighbour programme across the UK from 1 October 2012. We delivered 1.6 million envelopes, enclosing approximately 7.5 million tickets for London 2012, with over 98 per cent arriving on time, first time. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer Customer First Class Quality of Service An independent, audited measure of Quality of Service for First Class retail products, adjusted for force majeure1. Through our modernisation programme, we are driving improvements in the pipeline to be more productive and effective. For example, 79 per cent of letters are now sequenced to delivery point. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Second Class Quality of Service An independent, audited measure of Quality of Service for Second Class retail products, adjusted for force majeure1. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer satisfaction Average business customer satisfaction scores on a number of issues, including price, service quality and customer experience. A customer satisfaction questionnaire is completed by a sample of business customers every month, helping us to identify key areas for action. In response to customer needs, we opened eight parcels hubs at Christmas to manage anticipated increases in volumes. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Customer complaints Number of complaints captured by our Customer Service team2. We continue to take action to focus on redelivery, misdelivery, ‘Something for you’ cards and redirections, which account for more than 60 per cent of complaints. We have made considerable progress in redelivery, misdelivery and redirection since 2009. CU ST OMER CUSTO M ER FOC US See ‘Corporate responsibility’ on pages 28-33 Performance Performance Group revenue Group revenue. Revenue increases were driven by a five per cent like-for-like increase in UKPIL parcel volumes and price increases during the year. The Group is also successfully harnessing the benefits of the new regulatory framework, helping us to ensure we can generate a reasonable commercial rate of return for the services we offer. See ‘Financial performance overview’ on page 14 Delivery hours reduction Percentage year-on-year reduction in the gross hours spent on delivery and collection activities. Delivery transformation continues and is providing our people with tools to manage the changing mail mix with fewer letters and more parcels. While we have reduced the gross hours spent on delivering mail and improved productivity, factors including the changing traffic mix are impacting our progress. See ‘Corporate responsibility’ on pages 28-33 Delivery Offices fully modernised Number of Delivery Offices that have been modernised. We are more than halfway through our Delivery Revisions programme, which is changing every aspect of the way our postmen and women work. This will ensure we are more productive and effective and can manage the changing traffic mix. See ‘Corporate responsibility’ on pages 28-33 Financial Financial Total expenditure Total expenditure for UK businesses, excluding all exceptional items. UK costs have been held in line with inflation. Increases in non-people costs in UKPIL were partially offset by a programme of procurement savings. See ‘Financial review’ on pages 16-20 Group operating profit Group operating profit before exceptional items. Price increases as a result of the introduction of a new regulatory framework are a key driver of revenue increases that have supported an increase in Group operating profit. This has been supported by tight controls, which have ensured costs increased in line with inflation. See ‘Financial review’ on pages 16-20 Free cash flow Free cash flow. This year, free cash flow has principally been generated by trading performance. See ‘Financial performance overview’ on page 14 Strategic links key Being a successful parcels business To leverage our network reach and our strong brand to ensure we can capture increasing parcel volumes as a result of the growing popularity of online retailing in the UK. To use our new regulatory freedom for parcels to develop new offerings and compete more effectively in the marketplace. To ensure our combined UK network can accommodate increasing parcel volumes and meet customer needs through the completion of our modernisation programme. Managing the decline in letters To manage the structural decline in the letters market by becoming more productive and effective, and ensuring we remain the carrier of choice for the delivery of letters in the UK. Harnessing the new regulatory freedoms we have won to ensure we make a reasonable, commercial return for the letters we deliver. Making marketing and business mail more valuable to our customers by increasing the data and insight they can gather. CU ST OMER CUSTO M ER FOC US Being customer-focused Putting the customer at the heart of everything we do to ensure that we continue to be the delivery partner of choice. Being easy to do business with, and building new propositions that truly meet customer needs. This icon is used to indicate reporting against a KPI throughout the document. 1 This accounts for the impact of factors which are beyond Royal Mail’s control, such as weather and the logistical impact of the London 2012 Olympic and Paralympic Games. 2 We also provide detailed annual disclosure on customer complaints to our regulator, which is publicly available. 14 Performance Royal Mail Group Limited Annual Report and special purpose Financial Statements for the year ended 31 March 2013 Financial performance overview Reported Group revenue was £9,279 million. See KPIs pages 12-13 Group revenue increased by five per cent on a like-for-like basis with the key performance drivers being: – Letters revenue up three per cent. – UKPIL parcel revenue up 13 per cent. – GLS Euro revenue up two per cent. • Operating costs have increased by three per cent on a like-for-like basis, benefiting from productivity improvements and tight cost management. • Operating profit after transformation costs before other exceptional items of £403 million is £251 million higher than last year, mainly due to revenue growth. • Other net exceptional items comprise profit from property disposals (last year saw significant profit on disposals), property write-offs, industrial diseases provisions, Postal Services Act related costs and IT costs relating to the separation of Post Office Limited. • The current year taxation charge effective rate of 12 per cent is due to the charge on current year profit being partly offset by past years’ losses. • The Group has recognised a deferred taxation asset, primarily in respect of taxation losses carried forward and decelerated capital allowances. This is a result of an improved profit outlook for the Group. Profit and loss summary, see page 56 for more details Reported 53 weeks 2013 £m Adjusted 52 weeks 2013 £m Reported 52 weeks 2012 £m Revenue 9,279 9,146 8,764 Operating costs (8,644) (8,548) (8,383) Transformation exceptional costs (195) (195) (229) Operating profit after transformation costs1 440 403 152 Other net exceptional items (73) 125 Earnings before interest and taxation (EBIT) 367 not 277 Net finance costs and pension interest (43) adjusted (76) Taxation - current charge (38) at this (36) - deferred credit/(charge) 284 level (15) Profit for the period 570 150 Operating profit after transformation costs margin (%) n/m 4.4 1.7 Free cash flow summary, see page 58 for more details Reported 53 weeks 2013 £m Reported 52 weeks 2012 £m EBITDA before transformation costs – 52 weeks 878 681 – 53rd week 37 – EBITDA before transformation costs (see page 15) 915 681 Working capital 142 (19) Other pension payments (3) (45) Investment costs (665) (579) Other (taxation, interest, dividends from associates) (81) (87) Other exceptional items (26) (37) Disposal of property and business 52 240 Free cash inflow for the period 334 154 Balance sheet summary, see page 59 for more details As at 31 March 2013 £m As at 25 March 2012 £m Net operating assets 1,397 1,456 Net debt (906) (1,186) Operating assets less net debt 491 270 Net deferred taxation assets/(liabilities) 89 (9) Retirement benefit asset/(liabilities) 825 (2,716) Net assets/(liabilities) 1,405 (2,455) 1 Before other exceptional items. Net debt has reduced by £280 million, mainly as a result of free cash flow generation of £334 million. • A £98 million increase in net deferred taxation assets has resulted from the recog</p>
