Royal Mail plc Annual Report and Financial Statements 2015-16 Celebrating 500 Years of Royal Mail Royal Mail has a rich and varied history, characterised by a tradition of service and innovation spanning 500 years. For five centuries, our postal network has been connecting families and friends, powering business and driving innovation across the country. In 1516, Henry VIII knighted Brian Tuke, the first Master of the Posts. This act was the catalyst for the creation of the Royal Mail postal service, as we know it today. Tuke had the influence and authority to establish key post towns across the country and set up a formal postal network. Since its royal beginnings, the postal service has continued to deliver the nation’s mail for 500 years, under 21 different monarchs and through two World Wars, employing hundreds of thousands of people along the way. To mark this momentous anniversary, Royal Mail has launched a special website featuring the people, objects and events that played a key role in the development of the world’s first national postal service. Visit: www.royalmailgroup.com/500years Within the pages of this report you will find ‘then and now’ image captions showcasing how Royal Mail has evolved over the last 500 years. Strategic report | Governance | Financial statements | Other information Welcome Strategic report Who we are ....................................................................................................................... 02 Financial and operating performance highlights .......................................................... 04 Chairman’s statement ...................................................................................................... 05 Chief Executive Officer’s review ...................................................................................... 07 Market overview................................................................................................................ 12 Our business model .......................................................................................................... 14 Our strategy ....................................................................................................................... 16 Key performance indicators ............................................................................................. 18 UK Parcels, International & Letters (UKPIL) .................................................................. 22 General Logistics Systems (GLS) .................................................................................... 24 Financial review................................................................................................................. 25 Principal risks .................................................................................................................... 32 Corporate responsibility ................................................................................................... 37 Governance Chairman’s introduction to corporate governance ....................................................... 42 Board of Directors ............................................................................................................ 43 Chief Executive’s Committee ........................................................................................... 47 Statement of corporate governance .............................................................................. 49 Directors’ remuneration report ....................................................................................... 60 Directors’ report ................................................................................................................ 81 Financial Independent Auditor’s Report to the members of Royal Mail plc. ............................. 86 statements Consolidated income statement ..................................................................................... 89 Consolidated statement of comprehensive income ..................................................... 90 Consolidated balance sheet ............................................................................................. 91 Consolidated statement of changes in equity ............................................................... 92 Consolidated statement of cash flows ........................................................................... 93 Notes to the consolidated financial statements ............................................................ 94 Significant accounting policies ......................................................................................138 Royal Mail plc parent Company financial statements ................................................148 Other Group five year summary (unaudited) .........................................................................151 information Shareholder information ................................................................................................153 Forward-looking statements .........................................................................................154 Annual Report and Financial Statements 2015-16 | 01 Royal Mail plc | Who we are We have made significant investments in our Who we are core business and to develop our IT capability. In the medium‑term, the faster areas of growth in the parcels market are expected to be: clothing and footwear7; returns7 and ‘same‑day'8. We are changing our 2016 marks 500 years of postal services in the UK. From a few UK operations so we can handle, where appropriate, larger parcels. We are royal messengers in Tudor times to more than 120,000 postmen becoming more flexible to accommodate the and women today, connecting people, communities and businesses developing needs of e‑retailers and online shoppers. This includes later acceptance is part of who we are. Royal Mail is the UK’s pre-eminent letters times and adding more products to our and parcels carrier. As the UK’s sole designated Universal Service weekend collections at Mail Centres and 1 Regional Distribution Centres (RDCs), and Provider , we are proud to deliver a ‘one-price-goes-anywhere’ making customer pick‑up and returns easier service on a range of letters and parcels to more than 29 million with our Local Collect network. addresses, across the UK, six-days-a-week. We are demonstrating the value of letters to our customers through product and Through UK Parcels, International & service innovations, such as Mailmark®. This Letters (UKPIL), we make a very significant Our position investment has helped us to achieve more Letters continue to be a very important part contribution to the wider UK economy. accurate billing. Campaigns like MAILMEN, of our business. They account for almost In 2015‑16, our impact, including key which features 22 leading executives in the 60 per cent of our UK revenue. We expect activities like employment and procurement, advertising industry, help demonstrate the continued declines in addressed letter totalled £10.8 billion in terms of value added. effectiveness of mail as part of a targeted and volumes (excluding elections) of around We made the fifth largest contribution to the integrated advertising campaign. 4‑6 per cent per annum in the medium‑term. UK economy of all UK corporations2. Through This means that delivering letters and parcels our pan‑European parcels delivery business, Against a backdrop of innovation and together is a key driver of efficiency and General Logistics Systems (GLS), we are one investment, we currently have around productivity in our Universal Service network. of the largest, ground‑based deferred parcel 70 projects that focus on cost avoidance delivery service providers in Europe. and efficiency. Becoming more efficient and Royal Mail is the largest parcel delivery productive allows us to be more competitive. operator in the UK. Home delivery is This, in turn, helps us to grow our existing Our people expected to remain customers’ preferred We employ around 156,000 people customer relationships and win new delivery option4. This is a significant across our Group. UKPIL employs around business. It helps to fund further investment opportunity for Royal Mail, as we are well 139,000 people and approximately 3,000 in our growth and to maintain our fair terms positioned to deliver to every doorstep in people work in our UK partially‑owned and conditions for our people. the UK. subsidiaries. On average, one in 175 employed people in the UK works for Royal Changing relationships between retailers Mail3. GLS employs around 14,000 people. and delivery operators, growing segments – such as ‘same‑day’ delivery – and disruptive Our shareholders technologies reflect an industry which is In 2015‑16, HM Government sold its undergoing profound change. Volume growth remaining shareholding in Royal Mail. To date, in our UK addressable parcel market5,6 is 11 per cent of Royal Mail shares have been dependent on the expansion of Amazon given to eligible employees, for free. A further Logistics. In addition, there is continued one per cent will be allocated in due course. capacity growth. These factors are putting This is one of the largest free employee pressure on prices across the industry. stakes of any major UK privatisation. We are proud to continue to have a large and diverse shareholder base, including a significant Our transformation We are changing from a letters company that proportion of retail shareholders. delivers parcels, to a parcels company that delivers letters. In an environment of rapid