Annual Report and Financial Statements 2019-20 and Financial Statements Annual Report ANNUAL REPORT AND FINANCIAL STATEMENTS 2019-20 Royal Mail plc 1 Annual Report and Financial Statements 2019–20 CONTENTS Strategic Report Financial Statements Report Strategic 02 Overview 159 Independent auditor’s report 04 Who we are 166 Consolidated income statement 06 Financial and operational highlights 2019-20 167 Consolidated statement 15 Interim Executive Chair’s statement of comprehensive income 18 Delivering throughout the COVID-19 pandemic 168 Consolidated balance sheet 19 Business review 2019-20 170 Consolidated statement of changes in equity Corporate Governance Corporate 26 Market overview 171 Consolidated statement of cash flows 28 Business model 173 Notes to the consolidated financial statements 30 Measuring our performance 233 Significant accounting policies 32 Financial review 247 Royal Mail plc – Parent Company financial statements 62 Principal risks and uncertainties 73 Viability statement Shareholder Information Financial Statements 74 Corporate responsibility 250 Group five year summary (unaudited) 86 Non-financial information statement 252 Shareholder information 253 Forward-looking statements Corporate Governance 88 Chair’s introduction 90 Group Board of Directors 92 Executive Board – Royal Mail Information Shareholder 94 Governance structure 96 Board in action 100 Board composition and diversity 101 Reporting against the 2018 Corporate Governance Code 102 Board induction programme 103 Annual evaluation of Board performance and effectiveness 104 Engaging with our stakeholders 110 The Board’s considerations to our stakeholders during the COVID-19 pandemic 112 Employee engagement 114 Nomination Committee 117 Audit and Risk Committee 126 Corporate Responsibility Committee 128 Directors’ Remuneration Report 154 Directors’ Report 157 Statement of Directors’ Responsibilities 2 Strategic Report OVERVIEW ROYAL MAIL (UKPIL) Our UK business has faced significant challenges for some years. Our heritage as a letters-focused business means we are not as well positioned as we would like to adapt to changing structural trends – fewer letters and more parcels. We have not always responded as quickly as we might have to these trends. Along with cost increases, this combination of factors drives financial pressures. COVID-19 presents new, fundamental, challenges to our business model – and to those of our customers. Securing a sustainable future and a contemporary USO requires us to respond to this unprecedented global crisis as we adapt to the changing realities of the marketplace. 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 Keith Williams change in the number of major initiatives we can successfully deliver in a short Interim Executive Chair period of time. Firstly, we will continue to address key challenges posed by COVID-19. We are implementing a range of immediate cost control activities and reviewing capital investment. But, to ensure our long-term success, we must do more. So, we are accelerating the delivery of our transformation plan to address the longstanding challenges we face, created by fundamental shifts in the way we communicate (fewer letters) and shop (more B2C parcels). Now, more than ever, we need to change. Finally, we are working with our unions, Government and the Regulator to ensure the USO is financially underpinned, in a sustainable way, and future-proofed to reflect changing customer needs and preferences. This will include working with stakeholders on the shape of a national USO for the 21st Century. GLS At GLS, our strategy is about capitalising on growth opportunities in key markets, while continuing to improve performance in some of the countries in which we operate. The trend towards B2C parcel deliveries in some markets offers 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. Together, these changes will add to the good cash generation which GLS has today. Our priority over the short term is to focus on these improvements, while looking at the longer-term opportunities for the business. OUR GROUP Royal Mail and GLS are two different businesses, with two different strategies. At Royal Mail, our focus is on transformation; at GLS we aim to optimise and continue to grow. In both cases, we are committed to fixing or exiting underperforming businesses. We have put in place a new management structure, where senior Royal Mail and GLS executives report directly to the Group Board. This is all about greater focus and accountability, given our strategic imperatives, In the short term, there are few synergies available between the two companies. In the medium term, an international presence is clearly important; the opportunity remains to create more value, and sustainable profits for shareholders. For more detail, see the interim Executive Chair’s Statement (pages 15-16) and the Business Review (pages 19-25). Keith Williams Interim Executive Chair Royal Mail plc 3 Annual Report and Financial Statements 2019–20 READER’S NOTE – IMPACT OF COVID-19 PANDEMIC We are committed to providing thorough, appropriate updates This Report focuses on: i) 2019-20 performance against about how this unprecedented crisis is impacting our business. our strategic ambitions – management’s priority for the This Report reviews the year to 29 March 2020. Reflecting FRC overwhelming majority of the year; ii) the impact of the guidelines, we deferred publication of our Full Year Results pandemic since it was declared in mid-March 2020; and Report Strategic until 25 June 2020. We have issued two trading updates iii) how COVID-19 affects our view of our business model since year end. In this Report, we also provide an update on and future performance. trading for the first two months of the financial year. We have suspended guidance for 2020-21 and beyond. Our transformation We are the best employer in the UK delivery sector by some We are transforming from a UK-focused letters business margin. Our frontline employees have the best pay and terms Governance Corporate that delivers parcels, to a parcels-led, international business, and conditions in our industry. We have one of the largest delivering letters in the UK. We operate across 40 countries apprenticeship schemes in the country. At 6.7 per cent, our and nation states worldwide, including 36 in Europe. We are annual staff turnover is well below the 21 per cent UK average. a modern, digitally innovative brand, connecting customers, GLS employs around 19,000 people worldwide. It aims to companies and countries. continue being a reliable and responsible employer, whilst In common with many other companies, COVID-19 presents offering an optimum working environment. During the year, GLS new, fundamental challenges to our business model – and Denmark won a CSR People award on account of its inclusive to those of our customers. A key focus for us is a speedy and approach. GLS Germany won a ‘Best Recruiter’ award, ranking Financial Statements effective response to the challenges posed by the pandemic. fourth out of the top 100 companies in Germany. But, this will only take us so far. It may not be enough. Our customers Alongside these immediate actions, we must also continue As the UK’s sole designated Universal Service Provider3, we to change, to build a business that better reflects structural deliver a ‘one-price-goes-anywhere’ service on a range of shifts in the delivery market and the evolving demands of letters and parcels to nearly 31 million addresses across the our customers. We want to work with our unions on these country. We also provide a range of commercial services to necessary changes, and with Government and the Regulator consumers, sole traders, SMEs, large businesses and retailers, on a future-proofed and sustainable Universal Service. and other postal operators via our downstream network. Our ambition and purpose GLS provides a whole range of B2B and B2C services across Information Shareholder Our ambition is to build a parcels-led, more balanced, and more Europe and North America. B2B contributes just over half of diversified, international business. Our purpose is to connect total volume. GLS is strengthening its B2C position across customers, companies and countries. We have real strengths: Europe; for example in Denmark, Italy and Central and Eastern our brands; our heritage; our reach; and our people. We are Europe. Thanks to its extensive network, GLS is well positioned transforming to leverage them and become the pre-eminent to participate in cross-border parcel traffic growth. delivery company in all our key markets. Our shareholders Our people Royal Mail is one of the most widely held stocks in the UK. We employ around 160,000 people across our Group, of which One in four of our shares are in the hands of colleagues (who over 140,000 are in the UK. own around eight per cent of our shares as Free Shares) and retail investors. UK institutions represent 69 per cent of the We are one of the largest employers in the UK, providing one register. We have a proactive engagement programme, which in every 194 jobs1. Our ‘feet on the street’ network of around includes institutional investors in the UK and overseas and retail 90,000 postmen and women are part of local communities. shareholder associations. Thanks to them, Royal Mail is the UK’s most trusted and preferred delivery company2. We have a comprehensive, rolling programme of investor relations events and encourage open, two-way communication. Monthly reports are submitted to the Board, alongside analyst notes and summaries of market feedback. You can find out more on page 105. Our stakeholders Due to our unique role in UK life, and our geographic COVID-19 diversification, we have many diverse stakeholders. Royal Mail During the coronavirus crisis, our employees’ health has an active outreach programme to help us understand their and wellbeing is our first priority.