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Royal Mail Holdings plc Annual Report and Financial Statements 2011-12 Annual Report and Financial Statements 2011-12 Contents Overview Who we are 01 Where we want to be 04 Financial and business performance highlights 05 Chairman’s statement 07 Chief Executive Officer’s review 09 Our strategy 12 Strategy Be brilliant at the basics Build a commercial future Drive profitable growth Key performance indicators 14 Our strategy in action: parcels and marketing mail 16 Performance Our customers 18 Modernising Royal Mail 22 Our people 25 Regulation 28 Our businesses 31 UK Parcels, International & Letters (UKPIL) 32 Post Office Limited 34 General Logistics Systems (GLS) 36 Financial performance overview 38 Financial review 40 Business risk 50 Corporate responsibility 53 Transparency 57 Governance Our Board of Directors 60 Directors’ report 63 Corporate Governance 64 Directors’ remuneration report 72 Financial statements Consolidated income statement 83 Consolidated statement of comprehensive income 84 Consolidated statement of cash flows 85 Consolidated balance sheet 86 Consolidated statement of changes in equity 87 Notes to the Consolidated financial statements 89 Basis of preparation and significant accounting policies 133 Group five year summary (Unaudited) 143 Royal Mail Holdings plc – parent Company financial statements 2011-12 148 Pro-forma 2011-12 financial statements for Royal Mail Group excluding Post Office Limited (unaudited) 155 Other information Forward looking statements 162 Corporate information 163 Overview Who we are As the sole provider of the Universal Service in the UK, On 1 April 2012, Royal Mail Group Ltd Royal Mail Group reaches everyone. We deliver six days separated from Post Office Limited. References to “Royal Mail Group” or “the a week, to over 29 million addresses across the UK, at Group” with respect to the financial year affordable and competitive prices. ending 25 March 2012 (including financial information) include Post Office Limited The Group is a key component of the UK’s economic unless expressly stated. and social infrastructure, providing services to private In forward looking statements or individuals, companies and communities. In 2011-12, we comments, including those with regard to the business strategy, “Royal Mail Group” employed nearly 159,000 people in the UK, contributing or “the Group” excludes Post Office £5.3 billion to the economy in wages and other related Limited. See the diagrams on p3 for people costs, and a further £2.4 billion buying goods changes to the Group’s structure. and services. We are proud to deliver the Universal Service. A great deal remains to be done to secure But, it does require a high fixed-cost network. further profitable revenue growth and Our strategy aims to tackle the key challenges deliver the efficiencies required through the facing Royal Mail Group to build a sustainable, modernisation of our core network. This diversified business, secure the future report explains how we will seek to do so. provision of the Universal Service and attract Our modernisation programme – one of the external capital. largest ever undertaken in the UK – is about The Postal Services Act 2011 has set out the managing the structural decline in the steps the Group must take to secure external traditional letters market by making our investment. We have made good progress network more efficient and effective. restoring the Group to financial stability, To succeed in one of the most liberalised obtained significant deregulation and and competitive markets in the EU, we are secured European approval of the transfer adapting our network, which has traditionally of almost all of the Royal Mail Pension Plan’s focused on delivering letters, to also pension liabilities and pension assets to accommodate ever increasing parcel HM Government. volumes. This is a major strategic priority. Five year Group revenue (£m) 2012 2011 2010 2009 2008 9,532 9,156 9,349 9,560 9,388 Five year Group operating profit/(loss) after modernisation costs1 (£m) 2012 2011 2010 2009 2008 211 39 180 122 (482) Five year Group free cash inflow/(outflow) (£m) 2012 2011 2010 2009 2008 234 (213) (545) (678) 237 1 Before other operating exceptional items. Royal Mail Holdings plc Annual Report and Financial Statements 2011-12 01 Overview Who we are (continued) Our parcels businesses now account for 48 per cent of Group revenue (excluding Revenue by business and market (£m) Post Office Limited). They contributed Growth Traditional £4.2 billion of revenues to the Group in Letters & 2011-12, including £1.6 billion from our Business segment/ Marketing other Counter Other European logistics business, General Logistics product Parcels mail mail2 services services Total Systems (GLS). UK Parcels, Despite increasing parcel volumes, the core International & UK parcels network is loss-making. We are Letters (UKPIL) 2,592 1,063 3,509 – – 7,164 taking steps to reduce these losses and make General Logistics 1,562 – – – – 1,562 the network more efficient. At the same time, Systems (GLS) we are seeking to grow our profitable Post Office Limited – – – 801 – 801 networks like Parcelforce Worldwide. Other – – – – 5 5 Royal Mail Group is building its marketing mail business, which delivers promotional direct 4,154 1,063 3,509 801 5 9,532 marketing mail to UK homes and businesses, as well. It already accounts for more than £1 billion of our annual Group revenue. Percentage of revenue by market Working with a number of commercial Group revenues partners, we will provide to businesses, large Group revenues (Excluding Post Office Limited) and small, a “one stop shop” covering creative Parcels 44 per cent 48 per cent development, production, distribution and customer data management for advertising Letters & other mail2 37 per cent 40 per cent mail. This strategy is in the early stages of Marketing mail 11 per cent 12 per cent its delivery as we seek to add value for our customers at each point in the value chain. Counter services 8 per cent – Our business is changing We are embedding our strategy – and its delivery – across Royal Mail Group. Later in this document (p12), we set out the main elements of this strategy, the ways in which we will deliver it and the Key Performance Indicators (KPIs) we will use to track our progress. Royal Mail has obtained significant deregulation. Last year, more than 80 per cent of our revenues were subject to direct price regulation. Following the announcement of Ofcom’s new regulatory approach on 27 March 2012, direct price control now affects almost 10 per cent of Royal Mail’s revenues. Information key: Case studies Go online for 2 more information Includes traditional white letters, publishing, data and philatelic. Royal Mail Holdings plc 02 Annual Report and Financial Statements 2011-12 Overview To reflect Royal Mail Group Ltd’s separation from Post Office Limited on 1 April 2012, 25 March 2012 – pre-separation we are reporting our revenues including Diagram one and excluding Post Office Limited. We are Royal Mail Holdings plc also showing the contributions of traditional and growth revenue streams to our business. We will continue to consolidate Royal Mail Group Ltd3 Post Office Limited’s financial performance in future reports. Group legal structure Royal Mail Holdings plc is directly owned by Post Office Limited Royal Mail Investments Limited Royal Mail HM Government. It is the ultimate parent 3 company of Royal Mail Group Ltd. The Group Estates Limited primarily operates within the United Kingdom, including a number of subsidiaries, associates General Logistics Systems B.V. 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 1 April 2012 - post-separation transferred from under the ownership of Diagram two Royal Mail Group Ltd to become a direct subsidiary of Royal Mail Holdings plc. The Royal Mail Holdings plc revised Group structure at this date is as shown in Diagram two. Further details on the principal subsidiaries 3 are shown in note 28 to the Group Royal Mail Group Ltd Post Office Limited financial statements. Royal Mail Investments Limited Royal Mail Estates Limited3 General Logistics Systems B.V. 3 The UK Parcels, International & Letters (UKPIL) business unit is not a separate legal entity and is included within Royal Mail Group Ltd and Royal Mail Estates Limited. See p32 for details of the UKPIL business unit. Royal Mail Holdings plc Annual Report and Financial Statements 2011-12 03 Overview Where we want to be The UK postal services market has changed dramatically. Royal Mail Group’s revenues We have a strategy in place to deal with these changes: (excluding Post Office Limited) • We are adapting our core network, which has primarily 48% (£4,154m) delivered letters, to become more efficient and accommodate ever increasing parcel volumes; • We are diversifying our business model to secure a 40% (£3,514m) sustainable future for the Universal Service and to attract external capital; and • The recent significant deregulation by Ofcom means 12% (£1,063m) we have the opportunity to generate a reasonable rate of return on our products and services. Letters & other mail and other services Marketing mail Parcels Our strategy We are also adapting our core UK network to key partners to provide businesses with Our business strategy, outlined on accommodate the ever increasing number of a service covering creative development, pages 12-13, has three parts: parcels we deliver. production, distribution and customer • Be brilliant at the basics; Recent research suggests that online retailing data management. • Build a commercial future; and will account for 12.4 per cent of UK GDP in Our specialised sales team is targeting the • Drive profitable growth. 20162 – signifying the importance of online UK’s top 3,000 advertisers with our full retailing to future growth.

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