Shareholder Executive

Royal Mail

Purpose

Royal Mail is the leading postal service operator in the UK, providing national and international distribution of mail and parcels, operating under a licence from the regulator, Postcomm. In addition to its regulated Royal Mail branded mails business, its operating units are Post Office Limited (POL), providing mail, Government, financial and retail services through its network of branches (see separate section on Post Office Limited); Parcelforce Worldwide (PFW), its domestic and international parcels business; and General Logistics Systems (GLS), its parcels business in 36 European countries.

Legal Status and Ownership details

The Government owns 100% of Royal Mail Holdings plc’s shares.The Secretary of State for BIS owns 50,004 ordinary shares plus one special share and the Treasury Solicitor holds one ordinary share.The special share relates to areas where special shareholder consent is required, including major transactions, board appointments/remuneration and borrowing.

Government's Objectives

• to ensure provision of the universal postal service in the UK
• to ensure the publicly owned Royal Mail Group is fully restored to good health, providing market leading quality of service to customers and rewarding employment to its people
• Royal Mail to be best-in-class postal service provider with robust, sustainable business health
• delivery of Government and other services effectively through an efficient and appropriately structured post office network.

Financial Performance

£m	2009	2008	2007
Turnover	9,560	9,388	9,179
Operating Profit	274	115	194
Profit/(Loss) for the year	(232)	135	286
Net Cash flow	(373)	209	35
Net Operating Assets	3,390	3,199	3,275
RONA	8.1%	3.6%	5.9%
Shareholders' Funds - Liabilities	(4,656)	(241)	(2,264)
Dividends	-	-	-

Dividend policy

The dividend policy has been suspended since 2002 while Royal Mail undertook its renewal plan and while it continues with its transformation.

Performance targets

Targets are based on profits, financial return on assets, quality of service and progress towards becoming a modernised postal operator.

Commentary

In the year to March 2009, the Royal Mail group of companies saw an increase in operating profit to £321m (including joint ventures) and revenues increased by 2% to £9,560. However, the Royal Mail Letters business continues to suffer from the unprecedented fall in mail volumes (down 5.5% in 2008-09) which saw revenues fall by £123m despite a 5% increase in prices during the year. Profit for the £6.7bn turnover Letters business was £58m.

Volumes are expected to decrease by 10% in 2009-10 which could see a potential loss of £700m in revenue. The accounting deficit on the Royal Mail Pension Plan has more than doubled to £6.8bn. GLS and Parcelforce increased operating profit to £124m and £12m respectively. GLS’s revenue and profit benefited from the strengthening of the euro against sterling, but underlying profit declined by £10m from the previous year. Parcelforce margins remain under severe pressure in a tough, competitive market. Royal Mail met or exceeded the majority of its regulatory quality of service targets. Post Office Limited’s performance is described in a separate section of this report.

The Government’s intention was to implement the recommendations of the Independent Review of the Postal Sector, chaired by Richard Hooper, published in December 2008. Unfortunately, it became clear in July that market conditions were not right to identify a partner on terms which the Government can be confident would secure value for the taxpayer. The Government remains convinced that Hooper’s combined package offers the best chance of securing the universal postal service, while protecting Royal Mail’s pensions – and when market conditions change, the Government will return to the issue.

In the meantime, Royal Mail has to press ahead with its modernisation plans.As identified by the Hooper Review, poor industrial relations in the company are hindering this process.The Government wants to see the unions and management resolve the existing disputes and to work together to secure Royal Mail’s future. Industrial action leads to more customers migrating from post to other forms of communications media, and further accelerates mail volume decline.

During the year Royal Mail’s Chair,Allan Leighton, left the company and was succeeded by Donald Brydon who joined the Board as a Non-Executive Director in February and became Chair on 26 March.