Annual Financial Report

RNS Number : 0680J

Royal Mail PLC

06 June 2014

 



Royal Mail plc

6 June 2014

Publication Announcement: Annual Report and Financial Statements 2013-14

In compliance with Listing Rule 9.6.1, the Company has today submitted a copy of the Annual Report and Financial Statements 2013-14 (the 'Annual Report') to the UK Listing Authority, which will shortly be available for inspection via the National Storage Mechanism which can be viewed at www.morningstar.co.uk/uk/NSM

In accordance with DTR 6.3.5(3) the Annual Report will be available to view on the Company's website: www.royalmailgroup.com/investor-centre/report-download-centre

A further announcement will be made for the Notice of 2014 Annual General Meeting and Form of Proxy.

In compliance with DTR 6.3.5(2), the following information is extracted from the Annual Report and should be read in conjunction with the Company's Preliminary Results announcement for the year ended 30 March 2014 issued on 22 May 2014.  Both documents are available at www.royalmailgroup.com/investor-centre/report-download-centre and together constitute the material required by DTR 6.3.5(2) to be communicated to the media in unedited full text through a Regulatory Information Service.  Page numbers and note references in the text refer to page numbers and notes in the Annual Report.  This material is not a substitute for reading the Annual Report in full.

Business Risks

The Corporate governance section describes in detail how the Group manages its risk from the Group Board level, its respective sub-Committees and through the organisation. Further details can be found on pages 53 to 54.

The table below details the principal business risks, their current status and how the Group mitigates these risks.

Principal risk	Status	Mitigation	Link to Strategy
Changes in customer preferences
The letter and parcel markets are becoming more competitive, customer behaviours are constantly evolving and our competitors are responding quickly to these changing demands:			Managing the decline in letters Being a successful parcels business Being customer focused Managing the business successfully
Customer behaviour and Royal Mail's responsiveness to market: Changes in customer behaviour, and changes to the markets in which the Group sells its products and services, could result in reduced demand for the Group's products and services and impact our forecast rates of decline and growth of letter and parcel volumes respectively. There is a risk that our product offerings, and the customer experience we provide, may not adequately meet evolving customer needs or that we are unable to innovate or adapt our commercial and operational activities fast enough to respond to changes in the market.	No change - as volumes are broadly consistent with expectations.	We are piloting Sunday afternoon opening at around 100 Delivery Offices later this summer, when we will also trial Sunday parcel deliveries to home addresses within the M25; Parcelforce Worldwide will also launch a Sunday delivery service in June 2014 for online shoppers; We launched Mailmark™ barcode technology for our large business mail customers. This increases our ability to track addressed letters through our network for these customers; We continue to focus on our advertising mail offering, both on its own and in combination with other media, to ensure sustainable revenue streams through customer retention and acquisition; We are working with the Keep Me Posted campaign to protect the rights of consumers to choose, without penalty, to receive communications such as bills and statements by post; We continue to focus on meeting or exceeding our Quality of Service targets, and internal performance targets (such as composite parcel delivery performance); Through our continued transformation programme, we are seeking to improve first time delivery rates. This includes an emphasis on consistency and standardisation of key initiatives like Delivery to Neighbour across our operations; We continue to invest in technology to improve our service. In April 2013, we introduced our tracked returns service. We have also introduced enhanced delivery information for our Special Delivery and Tracked offerings and we have introduced Local Collect, our own click and collect service, in Post Offices; and We have extended our network operating hours for parcels processing for some of our business customers.
Economic environment: Historically, there has been a correlation between economic conditions in the UK and Europe and the level of letter and parcel volumes. There is a risk that flat or adverse economic conditions could impact our ability to stay profitable, either by reducing letter and parcel volumes or by encouraging customers to adopt cheaper service options for sending letters and parcels.	No change - the economic environment is improving in line with expectations.	We have robust econometric models in place to provide early warnings of changes to overall volumes and the profile of letter and parcel volumes. We continually review and upgrade these models to better anticipate the impact of price rises and reflect the increasingly deregulated market; and We continually review our cost base to ensure we are as efficient as possible.
Cost management and business transformation
Royal Mail must continuously become more efficient and flexible in order to compete effectively in the letter and parcel markets:			Managing the business successfully
Cost management: The success of the business strategy relies on effective control of costs, and the delivery of efficiency and other benefits from our transformation programme, whilst maintaining Quality of Service, safety, and employee engagement.	No change - due to effective management of non-people costs. People costs growth mitigated by productivity improvements. Non-people costs reduced due to tight cost control.	The initial phase of our transformation programme, which included the modernisation of all of our Delivery Offices, the automation of letters sorting and a revision of all delivery walks, is now largely complete; and We track progress and outcomes of all transformational revisions to operational practice on a weekly basis to ensure completion to time and the sharing of good practice and lessons learned. Quality of Service is a fundamental consideration prior to any change.
Employee awareness and engagement: Lack of employee engagement in relation to transformation and understanding of the need for change could mean that we, or CWU, are unable to execute the efficiency changes enabled by the pay deal.	Reduced risk - due to the award of Free Shares and the new CWU agreement.	Our recent agreement with the CWU includes an Agenda for Growth to deliver change at the right pace and to ensure we are working together towards agreed goals.
Retaining and attracting senior management: Any failure by the Group to retain or attract Directors and highly skilled personnel could have a material adverse effect on its ability to manage its costs and transform the business.	Risk remains in place.	The Directors' remuneration report sets out the Group's overarching approach to remuneration in its policy (pages 59 to 63). The policy sets out that the overall remuneration package should be sufficiently competitive to attract, retain and motivate executives with the commercial experience to run a large, complex business in a highly challenging context. There is a risk if it is not.
IT transformation: Our current IT estate requires significant investment and the IT transformation programme is complex and will take several years to complete. Failure to improve our IT systems or successfully implement the IT transformation programme would increase the risk of security breaches and attacks, a material adverse effect on the Group's operations, and the risk that the IT systems might not be able to support the business plan.	No change - as the programme is progressing as expected.	We are actively progressing and monitoring the IT transformation programme. This remains high risk due to the significant scale and complexity of change, and the ongoing requirement for effective management of the transition.
Regulatory and legislative environment, including direct delivery
The business operates in a regulated environment. Changes in legal and regulatory requirements could impact our ability to meet our targets and goals:			Managing the decline in letters
Direct delivery and the Universal Service: In our liberalised postal market, other operators are able to offer direct delivery services by cherry picking easy-to-serve urban areas, without having to adhere to the same high delivery requirements and quality standards as Royal Mail. The combination of mandated access, unfettered rollout of direct delivery and structural decline in letters, poses a serious risk to the economics of the USO in the UK. Any failure or delay by Ofcom in undertaking a review of direct delivery in the future, or any failure or delay in introducing appropriate regulatory safeguards to protect the Universal Postal Service, would be likely to undermine the Group's future ability to earn revenue necessary to ensure the sustainable provision of the USO.	Increased risk - due to unfettered rollout of direct delivery competition and Ofcom not bringing forward a review of the impact of direct delivery on the USO.	We have proposed changes to our access contracts to help secure the provision of the Universal Service. Certain of these proposed changes are subject to a Competition Act investigation by Ofcom. Under the terms of Royal Mail's access contracts, the price changes subject to the investigation are suspended pending the outcome of that investigation; and We are preparing a regulatory submission calling for Ofcom to bring forward its full review of direct delivery competition in the UK and how it will protect the Universal Service from the serious risk this presents.
VAT exemption: Mandated Network Access services provided by Royal Mail are currently exempt from Value Added Tax (VAT). This VAT exemption is currently the subject of judicial review proceedings. There is a risk that the VAT exemption on access services could be lost as a result of these proceedings, thus increasing the cost to those customers who cannot reclaim VAT. In this case, end-users that use such network access services for distribution of their letters may accelerate their adoption of e-substitution or alternative means of communicating with their customers or switch to competing third party direct delivery services.	No change - outcome of judicial review proceedings pending.	We consider that HM Revenue & Customs (HMRC) has correctly implemented VAT legislation in compliance with European law and we are continuing to support HMRC in defending the claim.
Employment legislation: Changes to laws and regulations relating to employment (including the interpretation and enforcement of those laws and regulations) could, directly or indirectly, increase the Group's labour costs, which, given the size of the Group's workforce, could have an adverse effect on the Group. There is emerging European case law which may provide new guidance in relation to the interpretation of the Working Time Directive, which subsequently would need to be considered by the English courts in relation to the implementation of that directive through the Working Time Regulations 1998 and UK employers' compliance with it.	Increased risk - due to evolution of case law.	We have processes and controls to ensure that we pay all of our people correctly. If the law is changed or elements relevant to the particular circumstances of Royal Mail are reinterpreted by English courts, then we will need to adapt to these as appropriate.	Managing the business successfully
Industrial relations
There is extensive trade union recognition in respect of our workforce in the UK:			Managing the business successfully
Industrial action: There is a risk that one or more material disagreements or disputes between the Group and its trade unions could result in widespread localised or national industrial action. Widespread localised or national industrial action would cause material disruption to our business in the UK and would be likely to result in an immediate and potentially ongoing significant loss of revenue for the Group. Widespread localised or national industrial action may cause Royal Mail to fail to meet the Quality of Service targets prescribed by Ofcom, leading to enforcement action and fines.	Reduced risk - due to the new CWU agreement.	We have reached an agreement with the CWU on an Agenda for Growth, including a new legally binding agreement, to promote industrial stability and provide employee protections. The agreement represents a joint aspiration to radically improve industrial relations and create a can-do culture in the interests of customers, employees and the Company; and We continue to engage with both Unite and the CWU at all levels across the business, and there is constant visibility of issues, action taken and potential risks.

Related party information

This note provides details of amounts owed to and from related parties, which include the Royal Mail Pension Plan (RMPP), the Group's associate companies, and payments to key management personnel. Details of the Group's principal subsidiaries and associates are also provided.

Related party transactions

During the reporting year the Group entered into transactions with related parties. The transactions were in the ordinary course of business and included administration and investment services recharged to the Group's pension plans by Royal Mail Pension Trustees Limited of £6 million (2013 £5 million) and services charged to the Group by its associate company, Quadrant Catering Limited (Quadrant) of £22 million (2013 £26 million). Amounts owed by the Group to Quadrant at 30 March 2014 were £2 million (at 31 March 2013 £1 million owed by Quadrant to the Group).

The Group also trades with numerous HM Government bodies on an arm's length basis. HM Government has retained a c.30 per cent stake in Royal Mail plc on the Company's stock market flotation. HM Government still owns 100 per cent of Post Office Limited through its Postal Services Holding Company Limited entity. Transactions with HM Government entities, including Post Office Limited, are not disclosed owing to the significant volume of transactions that are conducted.

The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured, interest free and settlement is made by cash.

Key management compensation

	52 weeks 2014 Reported £000	53 weeks 2013 Reported £000
Short-term employee benefits	(3,173)	(3,753)
Post-employment benefits	-	-
Other long-term benefits1	(2,654)	-
Total compensation earned by key management	(5,827)	(3,753)

¹           The 2014 other long-term benefits amount consists of £1,327,000 for each of the 2010 and 2011 LTIP awards that vested at 30 March 2014.

Key management comprises Executive and Non-Executive Directors of Royal Mail plc at 30 March 2014.

The ultimate parent and principal subsidiaries

Royal Mail plc is the ultimate parent Company of the Group. The consolidated financial statements include the financial results of Royal Mail Group Limited and the other principal subsidiaries listed below:

Company	Principal activities	Country of incorporation	% equity interest 2014	% equity interest 2013
General Logistics Systems B.V.	Parcel services holding company	Netherlands	100	100
Royal Mail Estates Limited	Property holdings	United Kingdom	100	100
Royal Mail Investments Limited	Holding company	United Kingdom	100	100
Romec Limited	Facilities management	United Kingdom	51	51

Associates

Company	Principal activities	Country of incorporation	% ownership 2014	% ownership 2013
Quadrant Catering Limited	Catering services	United Kingdom	51	51
G3 Worldwide Mail N.V. (Spring)	Mail services	Netherlands	32.45	32.45

The majority of Board membership and voting power in Quadrant Catering Limited is held by the other investor company, hence it is not a subsidiary.

The investment in Quadrant Catering Limited is held by Royal Mail Group Limited, the investment in G3 Worldwide Mail N.V. (Spring) was held by Royal Mail Investments Limited until its disposal on 2 April 2013.

The Company has taken advantage of the exemption under section 410 of the Companies Act 2006, a schedule of interests in all undertakings will be filed with the Annual Return.

Directors' Responsibility Statement

Each of the Directors, whose names and functions are disclosed on page 38, confirms that, to the best of their knowledge:

• The financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities,        financial position and profit of the Company and the Group taken as a whole; and

• The Management report, which is incorporated into the Strategic report, and the Directors' report includes a fair review of the development and performance of the business and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

In addition, the Board considers that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Royal Mail plc Media Beth Longcroft Phone: [phone] Email: [e-mail] Royal Mail press office out of hours: 0203 338 1007 Investor relations Catherine Nash Phone: [phone] Email: [e-mail]

 

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