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Share Name Share Symbol Market Type Share ISIN Share Description
Royal Mail Plc LSE:RMG London Ordinary Share GB00BDVZYZ77 Royal Mail Plc
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  -7.30 -1.72% 417.80 417.80 417.90 425.80 417.60 423.40 793,444 14:12:09
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Industrial Transportation 12,638.0 726.0 62.0 6.7 4,178

Royal Mail PLC Full Year Results 2020-21

20/05/2021 7:00am

UK Regulatory (RNS & others)


Royal Mail (LSE:RMG)
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From Apr 2021 to Oct 2021

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TIDMRMG

RNS Number : 2297Z

Royal Mail PLC

20 May 2021

Royal Mail plc

(Incorporated in England and Wales)

Company Number: 8680755

LSE Share Code: RMG

ISIN: GB00BDVZYZ77

LEI: 213800TCZZU84G8Z2M70

20 May 2021

ROYAL MAIL PLC

RESULTS FOR THE FULL YEARED 28 MARCH 2021

 
                                   52 weeks ended  52 weeks ended 
Reported measures (GBPm) (1)        March 2021      March 2020     Change(3) 
---------------------------------  --------------  ==============  ========= 
Revenue                            12,638          10,840          16.6% 
Operating profit                   611             55              n.m. 
Profit before tax                  726             180             n.m 
Basic earnings per share (pence)   62.0p           16.1p           45.9p 
 
Adjusted measures (GBPm) (1,2) 
---------------------------------  --------------  --------------  --------- 
Operating profit                   702             325             116.0% 
Operating margin (%)               5.6%            3.0%            260 bps 
Profit before tax                  664             275             n.m 
Basic earnings per share (pence)   52.1            19.6            32.5 
In-year trading cashflow(4)        762             556 
Net debt                           (457)           (1,132) 
Net cash / (debt) (ex. IFRS 16)    622             (46) 
---------------------------------  --------------  --------------  --------- 
 

Royal Mail and GLS summary(1,2)

 
                             Revenue                        Adjusted operating profit 
-----------  ========================================  ------------------------------------ 
                                 52 weeks                 52 weeks     52 weeks 
             52 weeks ended   ended March                    ended        ended 
(GBPm)           March 2021          2020   Change(3)   March 2021   March 2020   Change(3) 
===========  ==============  ============  ==========  ===========  ===========  ========== 
Royal Mail            8,649         7,720       12.0%          344          117      194.0% 
GLS                   4,040         3,161       27.8%          358          208       72.1% 
Intragroup             (51)          (41)       24.4%            -            -           - 
===========  ==============  ============  ==========  ===========  ===========  ========== 
Group                12,638        10,840       16.6%          702          325      116.0% 
-----------  --------------  ------------  ----------  -----------  -----------  ---------- 
 

Highlights

-- Full year performance well above initial expectations driven by strong parcel growth at both Royal Mail and GLS.

-- Group adjusted operating profit(2) up 116.0% with a broadly equal contribution from Royal Mail and GLS.

-- Royal Mail parcels revenue up 38.7%, partly offset by letters decline of 12.5%. Operating costs up 9.2%.

-- GLS adjusted operating margin increased 230 basis points to 8.9%. Improved performance in focus countries, Spain, France and the US.

-- April 2021 trading: Royal Mail revenue up 24.1%, GLS up 22.3% year on year. Royal Mail parcel volumes down 2% and addressed letters (excluding elections) volume up 25%. Parcel volume growth at GLS remained strong until mid-April, with a subsequent slowdown given the high volumes observed last year.

   --      Strong Group in-year trading cash flow of GBP762 million (2019-20: GBP556 million). 
   --      10p one-off final dividend proposed in respect of 2020-21. 

-- Progressive future dividend policy, with dividend for 2021-22 set at 20 pence per share. Subject to retaining a prudent capital structure, the Board will not retain excess capital which is unutilised under our capital allocation framework.

Keith Williams, Non-Executive Chair, commented:

"The Group has delivered a pleasing set of results in what has been an unprecedented year. This is in no small part thanks to the dedication of our colleagues across the Group who have played a key role keeping people and businesses connected. The Group has demonstrated that it can effectively harness market growth opportunities even in difficult circumstances and revenues previously forecast for three years' time have been delivered this year. However there is still much to do. We need to accelerate the transformation of Royal Mail and continue to build on GLS' strengths."

"As the outlook for 2021-22 contains a number of uncertainties that could significantly influence volumes and costs it is difficult to provide specific guidance for 2021-22 for Royal Mail. Instead we have provided information on costs and some sensitivities to assist in quantifying potential outcomes for the year ahead. GLS is expected to perform in line with the guidance given in March 2021. Despite this uncertainty, there are grounds for optimism. The opportunities are there. We must harness them."

Simon Thompson, Chief Executive, Royal Mail said:

"Last year stood out as one of remarkable change at Royal Mail. It has been challenging at times, but we have learnt that we can deliver results and change at lightning pace when we are united by a common purpose. From starting to deliver on Sundays through to trialling drones - We're changing. And it's working.

"Looking ahead, we must remain laser focused on accelerating the pace of change, being brilliant for our customers, and doing all this in an increasingly efficient way."

Martin Seidenberg, Chief Executive, GLS added:

"GLS has delivered a strong performance including an exceptional margin. Our 'Accelerate GLS' strategy, which builds on our strengths, has already delivered benefits in 2020-21 and will unlock further growth opportunities in the future."

1 Reported results are in accordance with International Financial Reporting Standards (IFRS). Adjusted results exclude the pension charge to cash difference adjustment and specific items, consistent with the way financial performance is measured by Management and reported to the Board.

2 For further details on Adjusted Group operating profit, reported results and Alternative Performance Measures (APMs) used, see section entitled 'Presentation of results and Alternative Performance Measures'.

3 All percentage changes reflect the movement between figures as presented, unless otherwise stated.

4 In-year trading cashflow is reported net cash inflow from operating activities, adjusted to exclude other working capital movements and the cash cost of operating specific items and to include the cash cost of property, plant and equipment and intangible asset acquisitions and net finance payments.

Results presentation

A results webcast presentation for analysts and institutional investors will be held at 9:00am today, Thursday 20 May 2021 at www.royalmailgroup.com/results .

Enquiries:

Investor Relations

John Crosse

Email: investorrelations@royalmail.com

Royal Mail investor relations line: 020 7449 8183

Media Relations

Jenny Hall

Phone: 07776 993 036

Email: jenny.hall@royalmail.com

Mark Street

Phone: 07515 924 344

Email: mark.street@royalmail.com

Royal Mail press office: press.office@royalmail.com

Company Secretary

Mark Amsden

Phone: 020 7449 8289

Email: cosec@royalmail.com

Financial Calendar

 
Q1 trading update       21 July 2021 
Annual General Meeting  21 July 2021 
Ex-dividend date*       29 July 2021 
Dividend record date*   30 July 2021 
Dividend payment date*  6 September 2021 
 

* subject to approval at AGM.

GROUP REVIEW: NON-EXECUTIVE CHAIR, KEITH WILLIAMS

The past year has brought unprecedented challenge for the Group. It has magnified our purpose and the unique contribution both Royal Mail and GLS make to society by connecting customers, companies and countries.

Our colleagues across the Group have responded magnificently to this challenge, and have worked relentlessly to play a key frontline role. On behalf of the Board I would like to thank each and every one of them for their dedication, and extend our deepest sympathies to the families and friends of our colleagues whose lives were lost to COVID-19.

Financial performance

Parcels now represent 72% of Group revenue. The pandemic has accelerated trends we have been seeing for years in our markets. Parcels, rather than letters, provided Royal Mail with the majority of its revenue for the first time in its five-century history. Similarly, in GLS over half of our volume came from B2C, while only five years ago two-thirds came from B2B. GLS has managed this shift successfully, delivering its highest margin in thirteen years.

Royal Mail delivered a full-year performance well above our initial expectations. Revenue grew by 12.0%, with adjusted operating profit increasing year on year by GBP227 million to GBP344 million. Similarly, in GLS our focus countries - Spain, France and the US - have emerged stronger and GLS revenue was up 27.8% year on year with adjusted operating profit up 72.1%. Overall Group revenue grew by 16.6%, and we delivered this year the GBP12 billion of Group revenue that we had previously forecast for 2023-24.

However, we incurred significant additional costs associated with COVID-19 across Royal Mail and GLS. In the UK, we also incurred additional costs associated with delivering more parcels and fewer letters and our UK management restructure.

Notwithstanding these increased costs, Group operating profit was GBP611 million on a reported basis (2019-20: GBP55 million) and, on an adjusted basis, GBP702 million (2019-20: GBP325 million), an increase of 116.0% year on year, with adjusted basic earnings per share of 52.1 pence (2019-20: 19.6 pence).

Strategy

While the Group faces many challenges it also has many opportunities. The past year has demonstrated that we can effectively harness market growth opportunities even in difficult circumstances. It has also demonstrated the strategic value of the Group's structure. While there is still much to do and the pace of change needs to accelerate, the financial contribution Royal Mail is capable of adding to the Group and the potential value two successful businesses can create is now clearly evident. In addition, market developments, including the growth in international and B2C volumes will benefit both Royal Mail and GLS, and create opportunities for future potential synergies through leveraging the capabilities of both businesses.

Recognising that Royal Mail and GLS have different market positions, strengths and opportunities, we have developed separate strategies to drive sustainable growth and meet changing customer needs. In Royal Mail we aim to grow our market share by creating a more agile parcels business that is laser focused on the customer. We have launched and are continuing to develop new services and are expanding into new areas, such as our parcel collection service 'Parcel Collect', Sunday parcel deliveries and the expansion of our pharmaceutical delivery services. We have also supported the national response to the pandemic by delivering test kits, PPE and vaccination letters.

I was delighted that the Communication Workers Union (CWU) showed its understanding of our potential by reaching agreement with management on operational change, pay and job security. However, effective execution and delivery of benefits for all our stakeholders will be the key measures of success of the agreement.

Given the significant changes we continue to see in the market - more parcels, fewer letters - we continue to believe the best way to ensure that the Universal Service continues to meet customers' needs is to rebalance our UK business model more towards parcels. We remain absolutely committed to the universal affordable, 'one price goes anywhere' nature of the Universal Service. But as customers change, so must we. This year, Royal Mail will simplify and improve its product offerings under a 'good', 'better', 'best' approach. As we develop this further we will engage with Government and Ofcom about the regulatory changes needed to allow us to adapt quickly to offer what customers want, and to ensure the Universal Service regains relevance and is sustainable.

In GLS we are building on the business's established strengths and focusing on the growth opportunities that will deliver the best return on our investment. Through implementation of our 'Accelerate GLS' strategy, we expect adjusted operating profit of EUR500 million in 2024-25 and EUR1 billion cumulative free cash flow(1) over the five years to 2024-25.

Responsible business

Our impact on society has always been central to our purpose, discussions and decisions. We seek to be an integral, trusted and valued part of every community, operating in a responsible and sustainable way simply because it is the right thing to do. And as customers demand more sustainable deliveries, effective management of our environmental, social and governance (ESG) issues can create significant benefits and competitive advantage. In response to this demand, delivering a sustainable network is embedded in both Royal Mail and GLS' strategies.

Capital allocation and dividend policy

Our balance sheet remains strong and we had good cash generation with GBP762 million in-year trading cash flow.

Following the Group's stronger than anticipated financial performance during the past year, the Board concluded that it was appropriate to propose a one-off final dividend of 10 pence per share in respect of 2020-21.

The Board has reviewed its approach to capital allocation and dividend. We have a clear capital allocation framework:

   --      invest in our business to support growth; 
   --      maintain our investment grade rating; 
   --      pay a sustainable dividend; 
   --      and retain flexibility for selective acquisitions. 

Following management changes and our focus on running the business through the pandemic, we will now start to evaluate further accretive business opportunities that would complement our existing business.

Given the uncertainty that still remains around the economic recovery from the pandemic, how consumer behaviour might change over the coming months and the ongoing investment needs of both Royal Mail and GLS, the Board considers that it remains important for the Group to retain a prudent capital structure. We will prioritise maintaining our investment grade credit rating, and given the high operational leverage in our business, we will continue to keep low levels of financial leverage. In the current risk environment, we believe running a Group net cash position on a pre-IFRS 16 basis is appropriate.

We are now confident - notwithstanding the ongoing uncertainty - that both our main businesses will independently generate cash sufficient for their own organic investment purposes. So whilst investment is expected to step up in the coming period, we do not anticipate the need for any cross subsidy.

1. Free cash flow represents cash flow after working capital, capital expenditure, tax, interest and IFRS 16 capital lease payments but before acquisitions.

The Board has taken an appropriately cautious stance on the future dividend policy. However, reflecting the progress that has been achieved within the business and our confidence in the future prospects of the Group, the Board will adopt a sustainable progressive divided policy and expects to propose a full year dividend for 2021-22 of 20 pence per share, to be paid one third (6.7 pence per share) as an interim, two thirds (13.3 pence per share) as a final dividend. From 2022-23 the interim dividend will be one third of the prior year's full year dividend.

The Board will review the Group's capital structure on a regular basis, taking into account the market environment, the cash flow generation of the Group and its capital allocation framework and will not retain excess capital which is unutilised under our capital allocation framework.

Board changes

During the year, the executive leadership of the Group has been reformed.

Martin Seidenberg, Chief Executive Officer of GLS, was appointed to the Board on 1 April 2021, reflecting the growing contribution and importance of GLS to the Group. Our Board discussions are already benefiting from Martin's detailed knowledge of the parcels sector and his Group role will become increasingly important as Royal Mail and GLS work more closely together.

Simon Thompson, previously one of our Non-Executive Directors, was appointed Chief Executive Officer of Royal Mail on 11 January 2021. Simon has a wealth of experience both in digital transformation and customer experience and is ideally placed to lead the business as it harnesses the opportunity to grow and expand our UK parcels business and continues to meet our customers' needs across both letters and parcels.

Mick Jeavons, Interim Chief Financial Officer for the Group since May 2020, was confirmed in this role and joined the Board as an Executive Director on 11 January 2021. Mick has been with the Group for 27 years and has served in a variety of senior positions, including as Deputy Group CFO and, before that, as Chief of Staff to the then Group CEO.

Having acted as Group Interim Executive Chair since Rico Back's departure as Group CEO in May 2020, I reverted to being Non-Executive Chair on 1 February 2021. Stuart Simpson, who had been acting as Interim Chief Executive of Royal Mail since May 2020, left Royal Mail at the end of January 2021. On behalf of the Board I would like to thank him for the significant contribution he made to the Group over the last 11 years and wish him well as he develops his career in the future.

There were also a number of changes to the Board's Committees. I re-joined the Remuneration Committee on 4 February 2021. With effect from the same date, Baroness Hogg was appointed to the Corporate Responsibility (CR) Committee and Maria da Cunha was appointed as the Designated Non-Executive Director for engagement with the workforce.

Outlook

Significant uncertainties with respect to public health and economic growth cloud the outlook for the year ahead. Our challenge is to build on the opportunities we now have in the markets in which Royal Mail and GLS operate. Royal Mail must intensify its customer focus, deliver its transformation programme and improve productivity. The corresponding challenge for GLS is to build on the achievements from this year and deliver the right balance of growth and profitability.

While the future holds a great deal of uncertainty, there are grounds for optimism. The opportunities are there. We must harness them.

Royal Mail

Context

The revenue windfall we have experienced in 2020-21 has given Royal Mail the breathing space to transform. Instead of the feared trajectory into material losses, the changing customer behaviours during the course of the pandemic have provided top line growth and profitability in 2020-21. But there is still much to do if we are to secure and improve on this position for the long term.

The margin trajectory in the short term is assisted by the cost reduction programmes launched in June 2020, the benefits of which flow into 2021-22, but we must now also make swift progress with the business fundamentals that will deliver a sustainably profitable and growing business in the UK.

Commercially we must adapt more quickly to the needs of customers and consumers, and finally deliver the long-promised changes on operational and cost transformation, including successfully leveraging the new deal with CWU to allow us to improve not only service and efficiency, but also to help us drive growth. Without these changes, we cannot be competitive into the future.

1. Revenue

2020-21 had quite different revenue outcomes between the two halves of the year. Parcel revenue growth was circa. 10% higher in the second half than it was in the first half of the year. And on letters, revenue decline was only 5% in the second half of the year, compared with a decline of over 20% in the first half.

April 2021 trading saw total revenue growth of 24.1%, benefitting from a better mix. We experienced year on year parcel revenue growth and letter revenue growth in the month. Parcel revenue grew by 20.0%, and total letter revenue by 29.6%, whilst parcel volumes declined 2% and letter volumes (excluding elections) grew by 25%. April 2021 demonstrates that, as we look forward into 2021-22, we face an unusual set of volume and revenue comparatives, which become increasingly difficult as the year unfolds. This could well lead to Q1 and even H1 performance in 2021-22 being reasonably strong. However, H2 is more difficult to call. The unwind from the impacts of the pandemic is likely to be just as volatile as when we entered it, is similarly difficult to forecast, and it may be some time before we know the true impact of the pandemic on the topline.

This significant short-term uncertainty means that we will not be issuing revenue guidance for 2021-22 at this stage. Changes in consumer behaviour as lockdown restrictions are progressively eased, and economic factors such as GDP growth and unemployment will impact on revenue development. The evolution of international volumes and the success of our commercial initiatives will also have an impact. In letters the underlying rate of e-substitution as we emerge from lockdown restrictions will also be an important driver.

That said, we expect that the COVID-19 crisis will have accelerated the long-term structural shifts in both parcel volume growth and letter volume decline. On parcels, the changes experienced in 2020-21 were extreme. A proportion of the growth will start to unwind as the lockdown restrictions are removed, although it also seems certain that a significant proportion will stick, as consumer behaviour and buying preferences switch online permanently.

On letters, whilst it is unlikely that business mail customers who have found an electronic alternative to mail during the pandemic will switch back to mail, we believe that advertising mail has an intrinsic value as a part of the marketing mix, so we could see a more positive recovery in that stream over time.

We intend to publish our parcel and letter volume metrics on a bi-monthly basis during 2021-22 in order to provide transparency as to the emerging trends.

2. Costs

 
GBPm Tailwind / (Headwind) from 2020-21      2021-22 
===========================================  ======= 
Management restructure (charge and saving)     208 
===========================================  ======= 
Non-people cost programme flow through         35 
===========================================  ======= 
Frontline pay award                           (110) 
===========================================  ======= 
Total                                          133 
===========================================  ======= 
 

We will benefit from the impacts of the cost reduction activities that were announced in June 2020, including the management restructure and the non-people cost programme.

The management restructure is now complete and will deliver GBP130 million of annualised benefit, with around GBP115 million realised in 2021-22 versus 2020-21. The GBP93 million voluntary redundancy charge will not repeat in 2021-22, giving a total tailwind of GBP208 million.

We will see a benefit of GBP35 million in non-people costs from the actions taken in 2020-21.

Following our agreement with the CWU from 1 April 2021, frontline staff received a pay award of 1% and a further hour of the shorter working week, linked to unit revision activity.

Including the frontline pay deal there is around a net GBP130 million tailwind on costs into 2021-22.

In relation to other costs:

 
GBPm Tailwind / (Headwind)                    2021-22 
============================================  ======= 
CWU Pathway to Change agreement                100+ 
============================================  ======= 
COVID-19 and International conveyance cost    c. 100 
 unwind 
============================================  ======= 
Non-people cost programme remainder            c. 75 
============================================  ======= 
Transformation and investment related spend   c. (60) 
============================================  ======= 
Service and convenience investment            c. (90) 
============================================  ======= 
Other cost pressures including inflation      c. (50) 
============================================  ======= 
 

We very much hope to make progress on change following the deal with CWU and we hope to be able to reduce the costs of dealing with COVID-19 (protective equipment, the impact of social distancing, and elevated absence rates) as restrictions are removed in our operations, as absence rates reduce and as the frontline return - where appropriate - to sharing delivery vehicles. However, it is possible that some of these costs may remain for longer than we estimate, for example where additional vehicles are required for social distancing, or where it is established that certain protective equipment should be maintained as standard.

The non-people cost reduction programme will complete. We will deliver the commitment we made in June 2020 for savings in non-people costs (circa GBP200 million) to keep flat compared to 2019-20, excluding volume related costs, which were higher than anticipated given the strong growth in parcel volumes which were above our initial expectations for 2020-21.

There are also cost pressures. As the transformation investment peaks, the associated operating expenditure will increase. We will also invest in improved service and convenience. Given the volatility and significant growth in parcel volume due to the pandemic, we fell short at times last year of our usual high standards on quality. We are focused on delivering pre-COVID quality in a COVID-19 world as soon as practical. We will also improve convenience, by delivering on Sundays and accepting parcels into our network later in the day.

Depending on performance in 2021-22, managers remuneration may also increase by around GBP60 million year on year.

3. Sensitivities

The pivot we have seen towards parcels means that we expect to grow the top line in the medium term, but the short term will no doubt be volatile. Short term volume uncertainty may impact significantly on profitability for 2021-22.

Below is an illustration of sensitivities showing the short term (<12 months) marginal impacts of a 1% revenue movement in letters and certain parcel revenue streams on profitability, on a ceteris paribus basis i.e. assuming constant product and channel mix. Material revenue mix changes within parcels or letters, or price changes, could lead to changes in sensitivities. The incremental cost impact range illustrates that costs will vary depending on product, channel and weight mix. Illustrative incremental costs use 2020-21 prices and ignore seasonal differences and therefore should not be taken in isolation.

 
1% movement in 2020-21    Revenue impact  Incremental cost  In-year contribution 
 revenue                                      impact(2)            impact 
 GBPm 
========================  ==============  ================  ==================== 
Domestic Parcels 
 excl PFW and export(1)         39             (5-15)              24-34 
========================  ==============  ================  ==================== 
Total letters                   35             (3-5)               30-32 
========================  ==============  ================  ==================== 
 

1. Domestic parcels excl. Parcelforce Worldwide (PFW) and export includes parcels sent and delivered in the UK (both account and consumer), and import parcels. PFW and export parcels are excluded and are subject to separate gearing ratios, which are not disclosed.

2. Domestic operational (people and network) costs associated with marginal changes in revenue, assuming constant product size and mix, excluding sales commissions and other cost of sales.

4. Investment in Royal Mail

The investment in transformation of the UK operation has been delayed since the programme was first announced in May 2019. 2021-22 includes a material increase in capital expenditure as the build programmes for both parcel hubs proceeds, plus investment in automation and technology to support productivity, with currently planned capital expenditure well above GBP400 million for 2021-22.

Work is ongoing in a number of areas that may lead to a requirement to invest further in the core operational network. Incremental investment would only be pursued if business performance supported the investment outlay and the investment generated sufficient shareholder return.

GLS

1. Revenue and adjusted operating margin

In line with the Accelerate GLS strategy presented in March 2021, from a 2020-21 revenue base of

GBP4,040 million, growth in 2021-22 is expected to be in the low single digit percent as COVID-19 tailwinds unwind, and adjusted operating margin is anticipated to be around 8%.

2. Investment in GLS

Capital expenditure in GLS is expected to increase in order to underpin the ongoing growth expected, with around GBP160 million (EUR180 million) expected in 2021-22, in line with its capital expenditure corridor of 3-4% of revenue.

OPERATING AND STRATEGIC REVIEW

ROYAL MAIL CEO REVIEW - SIMON THOMPSON

We're changing. And it's working.

Change. It can be daunting. But constantly changing to meet the needs of the customer is what all great companies do. Last year has stood out as one of remarkable change at Royal Mail. It has been challenging at times, but we are emerging stronger, leaner and have learnt that we can change at lightning pace when we are united by a common purpose. A worldwide pandemic. New ways of working. Designated as key workers. Tens of millions of COVID-19 test kits handled. Over 1.5 billion items of PPE delivered to schools, social care and healthcare providers. 30 million vaccination letters delivered. It has been quite a year.

Our people have been magnificent. On behalf of our customers and Royal Mail I would like to thank them for their Herculean effort and for everything they have done.

Our customers have been very supportive and at times very tolerant. At the beginning of the pandemic, we communicated to customers that service disruption was, despite our best efforts, likely. High levels of COVID-related absences including shielding, the introduction of social distancing in our operations, no shared vans, and the increase in parcel volumes means that at times our quality has not always been as we would have wished. We know the world has changed and the team is now focused on delivering pre-COVID-19 quality in a COVID-19 world as soon as we can.

Operating performance

This time last year we expected the UK business to be loss making. A lot has changed in a year. In 2020-21 Royal Mail revenue was GBP8,649 million, an increase of 12.0%, with parcel revenue growth more than offsetting the decline in letter revenue. Adjusted operating profit was GBP344 million (2019-20: GBP117 million) an increase of 194.0% year on year, and adjusted operating margin was 4.0%, up 250 basis points year on year.

Parcels

Parcel volumes grew strongly, particularly as people stayed at home and ordered online during the pandemic. Account parcel volumes grew by 48% and Tracked 24(R) / 48(R) and Tracked Returns(R) performed strongly with 79% growth. International parcel volumes grew in the first half of the year, driven by imports, but declined in the second half broadly as expected. This was due to reduced air freight capacity and increased conveyance costs, along with the transition to a new trade agreement with the European Union (EU) in January 2021, and the requirement for customs forms and/or taxes and duties to be paid for imports and exports to and from the EU. Despite the decline in volume, international revenue grew, as necessary price increases were required to cover higher conveyance costs and terminal dues.

Parcel revenue grew 38.7% year on year, with a positive price/mix as customers traded up to higher value tracked products. Consumer and small and medium-sized enterprise (SME) channels also strengthened throughout the year.

Letters

The impact of COVID-19 saw a significant reduction in letter volumes, with addressed letter volumes (excluding elections) 20% lower year on year. However, performance improved throughout the year as more business activity resumed; in the first quarter addressed letter volumes (excluding elections) fell by around a third, but improved to a 13% decline in the fourth quarter.

Business Mail, whilst also negatively impacted, was more resilient throughout the year. Advertising Mail saw volume reductions of almost two thirds during the first quarter of the year, recovering to a 23% decline in the fourth quarter. The Consumer and SME channels also saw volumes improve over the course of the year. Total letter revenue declined by 12.5% year on year.

Costs

Whilst the changes we have seen this year have driven year on year revenue growth, COVID-19 also introduced additional costs. The net cost of sorting more parcels, combined with the impact of reduced letter volumes was GBP327 million. Costs related to elevated absence levels, social distancing and protective equipment totalled GBP152 million. International conveyance costs were GBP69 million higher due to a reduction in airline cargo capacity.

As part of our agreement with CWU, we awarded CWU grade colleagues a 2.7% pay increase effective from April 2020, which was partially offset by a 2.1% productivity improvement in the year.

There was also a voluntary redundancy charge of GBP109 million, of which GBP93 million was related to the management restructure announced in June 2020. We have already delivered circa GBP90 million as part of our two-year non-people cost savings plan.

Owning trust at the doorstep: our competitive advantage

We have seen a big change in what our customers want: more things to and from people, 24/7, but still delivered by our postal workers, a relationship they continue to cherish. This is an exciting opportunity for Royal Mail and focusing on our customers is one of our key strategic priorities. We have always owned trust at the doorstep. It continues to be our competitive advantage, and we will never surrender this position.

We will continue to offer a range of sending options so that postage fits around our customers, not the other way around. We were pleased to sign a new long-term agreement with Post Office Limited in 2020. This means our customers will continue to benefit from being able to purchase a wide range of Royal Mail and Parcelforce Worldwide products through the Post Office's extensive branch network.

We are also introducing new convenient ways for people to send items. Over 1.6 million parcels have been collected from doorsteps since we launched our new Parcel Collect service in October 2020. As customers increasingly look for convenient and flexible solutions we suspect the opportunity for this service will continue to grow. Not everyone wants to travel to drop off their parcel. We have also now started Sunday parcel deliveries, and are experimenting with same day prescriptions deliveries, or 'instant pain relief' as we call it, by leveraging our hyper-local delivery capability combined with our trusted people. When you are not feeling great, do you really want to leave your home?

An increased focus on sustainability

When we have been speaking to our account customers, they have made it clear that the environmental impact of deliveries is a growing concern for their customers. In a year when the world was preoccupied with COVID-19, it would have been easy to take our foot off the pedal when it came to our environmental ambitions. But I am pleased to say the opposite has happened. Due to our 'feet on the street' delivery model, powered by more than 85,000 postwomen and men, Royal Mail already has the lowest reported(1) CO2e per parcel amongst major UK delivery companies. But this is not enough. We are continuing to trial and deploy new technology to reduce the environmental impact of our fleet, including telemetry, electric vans, dual fuel hydrogen vans and Bio-CNG trucks.

Network transformation and operational efficiency

Transforming our network to handle more parcels is a key part of our plan. It was important before, but the growth in parcels we have seen during the pandemic makes it even more so. We are making good progress on the construction of our first two parcel hubs. The new fully-automated parcel sorting system in the Midlands hub will have the capacity to sort over one million parcels a day when it is fully operational in 2023. Of equal importance, we are continuing to increase the number of parcels that are sorted through automation across our operation. The number of parcels successfully sorted at least once grew significantly from 356 million in 2019-20 to 652 million in 2020-21 - an 83% increase. However, our percentage of parcels sorted by machine was unchanged year on year by 33%. The industry benchmark is 90%.

The findings of our network review, which we have been conducting jointly with CWU, support the need for greater automation in the existing Mail Centre estate, as well as the need for additional hub capacity. We are now working with CWU to undertake more detailed future modelling and planning over the coming months. Dedicated van deliveries are becoming a reality in our operations following successful trials. We are refining our approach as part of our ongoing delivery revision activity.

Industrial relations

In December 2020 we agreed a ground-breaking agreement with the CWU. I would like to take this opportunity to thank all parties who were involved, it was an enormous effort and an excellent outcome for all stakeholders.

The agreement with CWU gives us a platform for future growth, and the means to achieve productivity benefits of 3% plus this year. In 2021-22, more than GBP100 million in benefits are linked to effective execution and delivery of benefits associated with the agreement.

I am pleased to say that all parties are working very well together, and deployment of the agreement is firmly on track. Deployment of revisions in all delivery offices and processing sites are due to take place by the end of October 2021, with more than 300 already underway. We have also started rolling out 'scan-in, scan-out' technology in our processing sites. This is replacing handwritten manual 'sign-in, sign-out' sheets and will provide meaningful data to allow our leadership teams to make better informed decisions.

And most importantly, we are changing our relationships and mindset. This has allowed us to move faster to make changes that will benefit our customers, including the provision of new services such as Sunday deliveries, something we have probably all known for some time needed to happen. We need to keep up this momentum.

1. Based on competitors' 2019 published reports

I would like to thank Terry Pullinger, the Deputy General Secretary (Postal) of the CWU, who is collaborating closely with me on a very regular basis to make sure we drive forward our joint change agenda. The team at CMA/Unite are also very proactive in supporting the change agenda.

Management restructure

We have had to take some really difficult decisions in the past year. Around 2,000 managerial roles have been removed as part of our management restructure. I would like to thank the colleagues who have left for their service to Royal Mail over many years. We have delivered on our commitment to make this change, which is on track to deliver annualised benefits of GBP130 million, with incremental benefits of GBP115 million in 2021-22.

This was an action that was not only about cost. It was also about simplifying our business. By removing management layers and committees we are already moving faster and starting to focus only on what matters.

Rebuilding trust with our people

Our people have a key role to play in delivering our strategic ambitions. Rebuilding their trust is our big unlock. As well as being on the Board for the last three years I spent one year as the Non-Executive Director for engagement with the workforce. I am continuing to spend a lot of time listening to our workforce at the front line of the business, and activating their insight. It is an invaluable opportunity to listen, learn and act.

Within weeks of me becoming CEO, we conducted a trust survey. It found that over 80% of our team feel proud to work for Royal Mail. However only 36% of our team felt valued and only 34% felt involved in decisions that impacted them. Based on a more recent survey, these key metrics are starting to improve, but we have a lot more to do.

We need to give our people the leadership they deserve, including freeing up our managers to lead their teams in a much more effective way. As part of a trial at our delivery office in Sale, our local leader is now empowered to decide what she feels she needs to do, rather than implement more than 200 policies we think should be adhered to. She is now spending around half of her time with her team and a third of her time with customers or focusing on customer-related issues. The business results are very encouraging. We can now see a way of reducing more than 200 policies to fewer than 20 whilst not increasing our risks. As the year moves on, I expect all of our delivery offices to be operating in a very new way.

April 2021 trading

Trading performance in the first month of 2021-22 remained strong. Revenue was up 24.1% and benefitted from a positive mix, with parcel volumes down 2% and addressed letter (excluding elections) volumes up 25%. As lockdown restrictions are further removed in the coming weeks we expect some volatility. With parcel volume declines and letter volume growth, April is an example of the unusual trends we can expect to see emerge during 2021-22.

The future

Looking ahead, we have much to do. We must remain laser focused on accelerating the pace of change so that we can be brilliant for our customers and put in place the building blocks to allow us to grow our market share. And we must do all of this in an increasingly efficient way. By doing so, we will ensure that we can serve the needs of all of our stakeholders.

We will only achieve this by having trusted relationships everywhere, trust is our big unlock.

We should deliver a 3% plus productivity benefit this year. In 2019 we said that Royal Mail would reach 5% adjusted operating profit margin in 2023-24. That would be at the low end of my expectation. And my early analysis suggests that we should get there sooner than 2024.

STRATEGY REVIEW: FOCUS ON CUSTOMER, TRUST, GROWTH

Our mission is to own trust at the doorstep.

We believe the trust in our people, our brand, and our nationwide hyper-local network is a platform for profitable growth.

In recent years we have focused on pivoting quickly from being a letters business, to a more parcels-focused one, reflecting the changing needs of our customers.

This year has accelerated the need to change quickly. Total letter volumes are down 25%. Parcel volumes are up 32%. Transforming our network and working practices to adapt to parcels was important before. It is vital now.

We are focused on transforming our network as quickly as possible to ensure we are operating efficiently, and profitably, to make the most of the opportunity we have right in front of us. Increasing our parcels automation and delivering the benefits associated with the agreement we reached with the CWU are key areas of focus over the coming year.

At the same time as improving our efficiency, we are becoming a more agile, customer-focused business. We are changing faster, and delivering more of what our customers need and want - such as Sunday deliveries, home collections of parcels through Parcel Collect, and trialling new services such as same day prescriptions, or as we call it 'instant pain relief'.

We will realise our mission and deliver sustainable growth by focusing on three key pillars: Customer, Trust and Growth. The three pillars are all underpinned by productivity improvements as we continue investing to deliver the transformation programme and the change we need.

Customer

All great companies put the customer first.

The first pillar of our strategy is therefore focused on improving and simplifying our customer offering through great quality of service every day and products that are easy to understand and simple to use. We will deliver more things, to and from people, 24/7. We will stay laser focused on delivering for our customers by:

-- Delivering pre-COVID-19 quality in a COVID-19 world: Restoring quality is the number one priority to keep our high levels of customer trust. Throughout 2021-22 we will continue to invest in additional resource to improve service levels in an ever-changing and uncertain environment. We are also using data to zero in on root causes faster and increasing the spread of best practice at pace.

-- Removing all friction from our services and simplifying our product range: We are simplifying our product range to an easy to understand 'good', 'better', 'best' structure. This will make it easier for customers to choose the products that perfectly meet their needs.

-- Increasing the proportion of our products that can be tracked: Customers increasingly expect richer services for their deliveries including tracking visibility. We continue to accelerate the migration to barcoded services to enable us to offer tracking on more items. 2021-22 will be another positive step towards 100% of parcels carrying a barcode.

-- Leverage our environmental advantage: Customers are increasingly looking for less environmentally impacting delivery options. Our 'feet on the street' delivery model, powered by more than 85,000 postwomen and men, means that Royal Mail already has the lowest reported CO2e per parcel amongst major UK delivery companies. But this is not enough. We will continue to trial and deploy new technology to reduce the environmental impact of our fleet, including rolling out more electric and alternative fuel vehicles across our fleet over the coming years.

-- Reimagining the stamp: Letters continue to be an important part of our business, and a service that many customers rely on. We will continue to innovate to make sure that letters deliver what our customers need in an increasingly digital world. As part of our modernisation drive, we are currently piloting unique barcodes on stamps. The unique barcodes are poised to pave the way for innovative customer services which we plan to share later in the year.

Trust

Our people are pivotal to the delivery of our mission to own trust at the doorstep. They are the people our customers see every day. Rebuilding their trust to implement changes to meet the ever-changing customer needs in an efficient way is our big unlock. We will:

-- Deliver a positive step change in our relationship with our people and unions: In our recent Big Trust Survey Royal Mail achieved a trust score index of 62% against an external benchmark of 74%. The score had increased from 59% in February, but there is more to do. We have set ourselves an ambition to significantly increase this score. This will require a step change in our mindset and attitude towards each other. We are working with our trade unions on a number of initiatives to positively change our culture and rebuild trust across the company. We will change how we work to allow managers to spend significant time with their teams by freeing them up from less important tasks and reducing the number of policies they need to adhere to from more than 200 to fewer than 20.

-- Deliver the CWU agreement on time, all benefits realised: Deployment of the ground-breaking agreement with the CWU is on track. This agreement gives us a platform for future growth, and the means to achieve productivity benefits of 3% plus in 2021-22, resulting in more than GBP100 million in benefits, linked to effective execution of the agreement.

-- Put in place the next generation of Royal Mail: We will shortly be launching a Postal Apprenticeship programme across the UK. In light of growing volumes, we are converting more part-time roles to full- time, and agency staff into employed roles. At management level, talent and succession planning is a key focus for us this year. We are strengthening our development and performance management processes to develop our managers and ensure we have the leadership we need to deliver our transformation.

-- Enable direct conversations between all our people: Building a genuine two-way conversation with our people is a key part of rebuilding trust. We have already put in place digital tools including a People App and Workplace by Facebook to ensure our people can access the information they need, share ideas and best practice and problem solve issues between teams. We have given all our people a voice; a voice we are already listening to and acting upon.

Growth

Going forward our goal is to grow our business, grow our share and grow the market. Our challenge is to win a greater share of business from more of our customers particularly in high-growth categories. We also need to transform our operations, at pace, to deliver more parcels and letters, more efficiently. We will:

-- Deliver 2024 capacity in 2021 and a step change in parcels automation: Delivering greater operational efficiency and transforming our operation to handle more parcels is key to our growth. The growth in parcels over the past year means we are now handling the volumes we were predicting for 2023-24. We will increase the number of parcel sorting machines in our operation from 20 currently to around 30 by the end of 2021-22. We are challenging ourselves to reach at least 50% of parcels sorted automatically by the end of 2021-22 - up from 33% currently. We are also making good progress on the construction of our first two parcel hubs. Our overall ambition is to achieve the benchmark of 90% in 2023-24.

-- Deploying tools for the job to support growth: During 2021-22, we will deploy new PDAs working closely with our frontline colleagues to ensure they provide the information and have the capabilities they need, and have placed an initial order of around 60,000 devices. We will introduce more reliable, less environmentally impacting larger vans in our fleet to accommodate growing parcel volumes.

-- Grow our international business: We have developed and are executing a robust plan to grow our international portfolio, including; a simplified set of international services; greater visibility of where items are for sender and recipient; and easy and free returns.

-- Innovate, introducing new services that will grow the market: Over the course of this year we will be expanding our Sunday delivery service, reflecting this growing customer need. We are also entering into same day prescriptions deliveries. We will expand and further promote our doorstep collection service, Parcel Collect, including estimated collection times and testing label-free options for customers who do not have a printer at home. We are also testing how drones can complement our core network for offshore or remote locations and are increasingly confident that this technology will make a positive contribution to service quality and operational economics.

GLS CEO REVIEW - MARTIN SEIDENBERG

We are committed to maximising GLS' potential and we are already executing our 'Accelerate GLS'

growth strategy.

I was delighted to be appointed CEO of GLS in June 2020. Having joined the business in 2015 I have a deep understanding of our markets, strengths and opportunities.

2020-21 has been an extremely difficult year for everyone around the world. No one could have predicted the COVID-19 pandemic and the global impact it would have. I would like to personally thank all our people, whose commitment and hard work despite the circumstances has allowed us to keep delivering throughout Europe and North America.

Despite challenges throughout the year, our network remained open and we have been able to keep customers, local communities and countries connected. And while multiple extended lockdowns have resulted in volatile volumes which have tested our network, our flexible business model has once again proven its resilience. In particular we were able to react quickly at the start of the pandemic, scale up our network where needed and quickly and effectively implement protective measures within GLS.

GLS is a scalable, asset-light business with an extensive international physical footprint that allows us to serve our customers with our own network. This network gives us full control over the parcel journey at every stage ensuring that high-quality levels are not compromised and we remain a reliable partner to our customers. Our strong international footprint, together with our differing positions in each market, adds balance and diversity to our operations. Our entrepreneurial operating model, which includes local management teams who have a high degree of commercial independence, enables us to stay close to our customers and tailor our strategy to local market needs.

The pandemic has had a significant, sustainable impact on the parcel delivery market. E-commerce has surged and we expect this to continue to grow strongly with B2C and international being the main growth drivers. At the same time the market is changing and our customers' expectations are changing as they put greater emphasis on convenient and flexible digital services, including tracking and re-routing of deliveries.

Accelerating GLS

Historically the majority of parcels across GLS have been B2B, but more recently, and accelerated by the pandemic, we have seen a marked shift, with B2C volumes growing from 37% of the total in 2016-17 to 57% in 2020-21. We now need to leverage our flexible business model and extensive international network, and continue to grow and develop the business.

Our 'Accelerate GLS' growth strategy, which builds on our strengths and addresses the growth opportunities in our various markets has three key objectives: strengthen GLS' top position in the cross-border deferred parcel segment; strongly position GLS in the 2C parcel market, whilst securing its leading position in the 2B segment; and inspire the market.

Operating performance

During the year trends in our markets accelerated as a result of the pandemic and we saw significant growth in parcel volumes across our footprint. Implementation of cost containment measures at the start of the pandemic, together with increased volumes, pricing opportunities in certain markets, and our ability to adapt quickly with final mile optimisation and more efficiencies in line haul, enabled us to deliver volume, revenue and profit margin growth. Volumes were up 26% in 2020-21. Within that, domestic and export volume growth was 25% and 36% respectively, significantly higher than the historical organic growth rates over the three-year period ended 2019-20 of 5% and 11% respectively.

Revenue increased by 27.8% to GBP4,040 million (2019 -- 20: GBP3,161 million). Revenue increased significantly in countries which already had a relatively high proportion of B2C volumes before the pandemic, including in Spain and Denmark and those in Eastern Europe.

Adjusted operating profit margin increased to 8.9% (2019-20: 6.6%) benefiting from scale effects, pricing initiatives in certain markets, cost containment and efficiency measures.

We believe that approximately 60% of the volume and revenue growth can be sustained post the pandemic, and around half of the adjusted operating profit improvement.

During the year, the impact of foreign exchange movements increased revenue by GBP81 million and operating costs by GBP74 million, resulting in an increase in operating profit of GBP7 million.

Market performance

We saw a material improvement in our focus countries of Spain, France and the US. Spain continued its positive trajectory with 59.6% revenue growth and good profit performance compared with a break-even result in the prior year. We effectively leveraged our leading B2C position in the Spanish market and further benefitted from yield management activities which resulted in margin improvement.

In France we remained fully operational during the initial lockdown period which enabled us to strengthen our market position and grow our customer base. As a result revenues grew by 23.5% and scale benefits resulted in a significant reduction in operating losses compared with the prior year. In addition, despite the challenging situation during the pandemic, we completed targeted investments to improve our capacity and optimise our network. The team in France is now focused on securing this positive momentum into the future.

US performance also improved and we delivered 25.2% organic revenue growth. Over the last two years to drive improvements we have focused on yield management activities, acquisition of new customers, streamlining back and head office functions, and achieving productivity improvements. The benefits of these initiatives are clearly evident in the US business's 2020-21 performance. We have also seen a strong increase in B2C volumes driven by a range of initiatives. We will continue to focus on enhancing the US business's product offering including freight capabilities similar to the Dicom business in Canada. The integration of Mountain Valley Express, a freight business we acquired in September 2019, is already delivering positive benefits.

In Canada, Dicom revenue was broadly flat with growth impacted by lower freight and B2B volumes. Nevertheless, adjusted operating margin improved as a result of initiatives focused on streamlining the cost base.

We continue to invest in growth opportunities. In 2020-21 capital expenditure increased 13.3% to GBP136 million (2019-20: GBP120 million).

April 2021 trading

April 2021 revenues grew 22.3% year on year. Volume growth until mid-April remained strong, with a subsequent slowdown principally due to the high volumes observed last year. During the course of 2021-22 we expect to see some volatility in volume growth rates as lockdown restrictions are lifted.

The future

To optimally position ourselves for future growth we expect capital expenditure will increase in 2021-22, including investment in new hubs to support our growth ambitions.

I am excited about the opportunities ahead of us. We are committed to maximising GLS' potential and we have already begun executing on our 'Accelerate GLS' strategic framework which has delivered benefits in 2020-21 and will unlock further growth opportunities in the future.

   STRATEGY REVIEW:   ACCELERATE GLS 

Unlocking future growth

At the end of March 2021 we announced our Accelerate GLS strategy. Building on a proven business model, key strengths and a solid track record of revenue and profit growth, Accelerate GLS is designed to unlock GLS' potential and drive growth. Our key strategic ambitions are:

-- Connect Europe: Strengthening GLS' top position in the cross-border deferred parcel segment. By 2024-25 we plan to outgrow the cross-border market growth rate of around 9%(1) and deliver 16% CAGR in volume terms from 2019-20. As a result, in the future around a quarter of GLS revenue will be generated in the cross-border segment.

-- Strengthen 2C parcel market position and lead in 2B : Strongly position ourselves in the 2C parcel market and secure our leading position in the 2B segment. In recent years GLS has grown from a predominantly B2B player to delivering 57% of parcel volume in the B2C segment in 2020-21. As a result our operations are already fully B2C and B2B enabled, providing a strong platform for future growth. By 2024-25 we plan to outgrow the B2C market growth rate of around 10%(2) and deliver a 17% CAGR in volume terms from 2019-20.

-- Inspire the market: Launch innovative digital and sustainable solutions that are centred around customer needs and provide the best 'delivery experience'. Innovation drives positive customer experiences and is essential if we are to enhance our competitive advantage, win in our growth markets and achieve our strategic ambitions.

Creating sustainable growth

To achieve each of our strategic ambitions, create sustainable growth and meet changing customer needs, we have developed and are executing clear strategic plans.

Connect Europe: We will strengthen our international capabilities by:

-- Upscaling our network: We have already started to significantly upscale our network capacity and footprint. Three new hubs are in development and further investment in additional strategic hubs is being planned.

-- Strengthening our network: We will serve more European cities with point-to-point direct lines which will further improve our pace of delivery and help support margin growth.

-- Expanding our international offering: We will enhance our international products and services to provide an international shipping experience. We will also drive more international volume from non-Europe based shippers by offering dedicated services covering import, customs clearance and delivery.

Strengthen 2C parcel market position and lead in 2B: We will position GLS as the customers parcel shipper of choice by:

-- Investing in capacity and capabilities . Across our international footprint we will invest in domestic network capacity and 2C capabilities.

-- Developing convenient 2C services and products. We will expand our customer offering to include convenient services and products that enhance our customers' experience, including expanding our parcelshop network which provides a convenient pick-up and drop-off option.

-- Continuing to deliver a high-quality service. Regardless of peaks in demand and volume volatility we will remain focused on customer satisfaction and providing a consistently high-quality service.

Inspire the market: We will deliver great customer experience by:

-- Developing digital solutions: We will focus on developing new convenient, mainly app driven, solutions that make parcel delivery a fun experience. We are increasingly providing more flexible and convenient services including live-tracking and in-flight re-routing of parcels and also dedicated B2C evening delivery options. As the customer experience is key we are increasingly asking for their immediate feedback.

-- Providing sustainable solutions: We are committed to providing sustainable solutions and we have already made some good progress. We have started our green flagship depot programme to ensure that all countries progress on electric vehicles, charging infrastructure, and city logistics concepts including inner-city carbon free delivery. Today, we already serve more than 60 inner cities with carbon free delivery methods, including e-bikes, e-vans and e-scooters. We will steadily increase our fleet of electric vehicles and city depots across Europe. Our EuropeanEcoHub in Essen, which is largely independent from external energy and water provision and features e-vans and electric bicycles for inner city deliveries, will serve as a blueprint for our next generation of facilities. In the Netherlands and Germany we have been very successful with the GLS ClimateProtect programme in which all CO2 emissions across the whole logistics value chain are compensated through certified projects.

As our customers continue to respond positively to these developments we will further develop and expand our sustainable business approach.

Given the benefits of being able to respond quickly to local market needs, each country within our network will tailor Accelerate GLS to ensure it serves local customer needs. Using the Accelerate GLS framework local management teams have developed clearly defined localised action plans. This 'bespoke strategic' approach differentiates GLS from its competitors and enables the business to respond quickly to evolving trends, capitalise on growth opportunities and enhance customers' experience.

Ambition

Accelerate GLS will enable us to deliver ambitious yet realistic financial results. The strategy has already delivered benefits contributing in part to our strong 2020-21 performance.

From FY2019-20 to FY2024-25, GLS expects to grow revenue at around 12% CAGR (from EUR3,614 million in FY2019-20), more than double operating profit to EUR500 million and generate EUR1 billion of free cash flow(3) . Capital expenditure over the period is expected to remain in the range of 3-4% of revenue.

Footnotes for STRATEGY REVIEW: ACCELERATE GLS section

1. Source: Market growth CAGR 2020 -2025 according to Forrester, Effigey (excl. UK).

2. Source: Market 2C growth CAGR 2020 -2025 according to Forrester, Effigey (excl. UK).

3. FY2020-21 to FY2024-25, including capital lease payments.

FINANCIAL REVIEW

GROUP CFO INTRODUCTION

I became Group Chief Financial Officer in January 2021, having held that role on an interim basis since May 2020. I have been with the Group for 27 years, and without a doubt the past 14 months have been unprecedented. The human cost of COVID-19 has been tragic, with the impact of the pandemic being felt across every part of our business. The response of our people has been tremendous, allowing us to cope with unprecedented volumes of parcels. This has ultimately resulted in a financial outcome far better than we originally anticipated and I would like to add my sincere thanks to everyone across the Group for all their efforts in very difficult circumstances.

In Royal Mail we originally anticipated that the additional costs from higher absence levels, social distancing and the rapid change in mix with more parcels and fewer letters would lead to the business making a material loss. However, the sustained growth in parcels and a partial recovery in letters in the second half meant the business delivered 12.0% top line growth, by far the strongest performance since IPO in 2013. Unfortunately, we were unable to make material progress with operational efficiency changes due to the pandemic, but the flexibility shown by our teams in responding positively to the very difficult circumstances was a major plus. Despite the additional costs associated with the pandemic, and restructuring charges, Royal Mail saw positive operating leverage with adjusted operating profit growing by 194.0% year on year and an adjusted operating profit margin of 4.0%.

In GLS, our challenge was to adapt a business that has historically predominantly delivered B2B parcels, to one capable of harnessing the strong growth in B2C, without diluting margin. Originally, we anticipated that the additional costs associated with B2C deliveries would put pressure on adjusted operating profit margin. However, the scale effects of strong parcel growth over the year, combined with pricing initiatives in certain markets, led to adjusted operating profit margin growing by 230 basis points on top line growth of 27.8%. We also saw an improved performance in our focus countries of Spain, France and the US.

As a result, Group revenue grew by 16.6%, with adjusted Group operating profit growing by GBP377 million to GBP702 million. On a reported basis Group operating profit was GBP611 million, the difference reflecting primarily the pension charge to cash difference adjustment, and also specific items.

In-year trading cash flow was GBP762 million (2019-20: GBP556 million) due to higher adjusted EBITDA offset by higher corporation tax paid and a smaller trading working capital inflow. Pre-IFRS 16, in-year trading cash flow would have been GBP156 million lower. Net debt was GBP457 million (2019-20: GBP1,132 million).

Reported results, Alternative Performance Measures (APMs) and reporting periods

Reported results are prepared in accordance with International Financial Reporting Standards (IFRS). In addition, the Group's performance is also explained through the use of APMs that are not defined under IFRS. Management is of the view that these measures provide a more meaningful basis on which to analyse business performance. They are also consistent with the way financial performance is measured by Management and reported to the Board.

The APMs used are explained at the end of this Financial Review in the section Alternative Performance Measures (APMs) and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

Group and Royal Mail results are for the 52-week period to 28 March 2021. The GLS financial performance is for the 12 months to 31 March 2021.

Group results

Summary reported results (GBPm)

 
                                                  Reported     Reported 
                                                  52 weeks     52 weeks 
                                                     March        March 
                                                      2021         2020 
                                                ==========  =========== 
 Revenue                                            12,638       10,840 
 Operating costs                                  (12,020)     (10,623) 
----------------------------------------------  ----------  =========== 
 Operating profit before specific items                618          217 
 Operating specific items                              (7)        (162) 
----------------------------------------------  ----------  =========== 
 Operating profit                                      611           55 
 Non-operating specific items                           36           89 
 Net finance costs                                    (38)         (50) 
 Net pension interest (non-operating specific 
  item)                                                117           86 
----------------------------------------------  ==========  =========== 
 Profit before tax                                     726          180 
----------------------------------------------  ----------  =========== 
 Earnings per share (basic)                          62.0p        16.1p 
==============================================  ==========  =========== 
 

The Group delivered results well above initial expectations due to changing customer behaviour, the growth in online shopping during the pandemic, and our increased focus on the customer. Revenue increased by GBP1,798 million, largely due to higher parcel revenue in Royal Mail and GLS, which more than offset the decline in Royal Mail letters revenue. Operating costs increased by GBP1,397 million, driven by COVID-19, the cost of mix change towards more expensive to handle parcels, volume and the previously announced management restructure in Royal Mail. This resulted in an operating profit before specific items of GBP618 million, GBP401 million higher than the prior year. Operating specific items were a cost of GBP7 million and non-operating specific items a credit of GBP36 million. See Specific items and pension charge to cash difference adjustment for further information.

A management restructuring cost of GBP93 million has not been treated as a specific item, in line with market guidance issued on 22 May 2019, where we communicated that transformation costs (which include project costs and voluntary redundancy costs) would be included in operating profit. The aim of this change was to simplify the measures reported externally.

Profit before tax of GBP726 million comprises a GBP398 million profit in Royal Mail (2019-20: GBPnil million) and a GBP328 million profit in GLS (2019-20: GBP180 million profit). Basic earnings per share increased to 62.0 pence. A full reconciliation of reported to adjusted results is set out at the end of this Financial Review in Presentation of results and Alternative Performance Measures (APMs).

Summary segmental results (GBPm)

 
                           52 weeks  52 weeks 
                              March     March 
Reported                       2021      2020   Change 
------------------------   ========  ========  ------- 
Royal Mail                    8,649     7,720    12.0% 
GLS                           4,040     3,161    27.8% 
Intragroup revenue             (51)      (41)    24.4% 
-------------------------  --------  --------  ------- 
Group revenue                12,638    10,840    16.6% 
=========================  ========  ========  ======= 
Adjusted (1) 
Royal Mail                  (8,305)   (7,603)     9.2% 
GLS                         (3,682)   (2,953)    24.7% 
Intragroup costs                 51        41    24.4% 
-------------------------  --------  --------  ------- 
Group operating costs      (11,936)  (10,515)    13.5% 
-------------------------  --------  --------  ------- 
Adjusted (1) 
Royal Mail                      344       117   194.0% 
GLS                             358       208    72.1% 
-------------------------  --------  --------  ------- 
Group operating profit          702       325   116.0% 
=========================  ========  ========  ======= 
Operating profit margin        5.6%      3.0%  260 bps 
=========================  ========  ========  ======= 
 

Group revenue grew by 16.6% in the year. Total parcel revenue continued to grow as a percentage of Group revenue, accounting for 72.2% in the year (2019-20: 62.9%).

Group operating costs increased by 13.5%.

Intragroup revenue and costs represent trading between Royal Mail and GLS, principally a result of Parcelforce Worldwide operating as GLS' partner in the UK.

Group operating profit margin was up 260 basis points, driven by improved profitability in both Royal Mail and GLS on the back of stronger than anticipated revenue growth.

The main factors impacting revenue and operating costs are described throughout this Financial review.

Specific items and pension charge to cash difference adjustment

 
                                                       52 weeks  52 weeks 
                                                          March     March 
(GBPm)                                                     2021      2020 
=====================================================  ========  ======== 
Pension charge to cash difference adjustment 
 (within people costs)                                     (84)     (108) 
Operating specific items 
 Regulatory fine                                            (1)      (51) 
 Legacy / other items                                        13      (92) 
 Amortisation of acquired intangible assets                (19)      (19) 
=====================================================  ========  ======== 
Total operating specific items                              (7)     (162) 
=====================================================  ========  ======== 
Non-operating specific items 
 Profit on disposal of property, plant and equipment         36        89 
 Net pension interest                                       117        86 
Total non-operating specific items                          153       175 
=====================================================  ========  ======== 
Total specific items and pensions adjustment 
 before tax                                                  62      (95) 
=====================================================  ========  ======== 
Total tax credit on specific items and pensions 
 adjustment                                                  37        60 
=====================================================  ========  ======== 
 

The pension charge to cash difference adjustment comprises the difference between the IAS 19 income statement pension charge rate of 19.5% for the Defined Benefit Cash Balance Scheme (DBCBS) from 30 March 2020 and the actual cash payments agreed with the Trustee of 15.6%. The charge was GBP84 million in the year (2019-20: GBP108 million), GBP24 million lower than in 2019-20. The decrease in the adjustment is largely due to a reduction in the IAS 19 pension charge rate for the DBCBS from 20.8% in 2019-20, to 19.5% in 2020-21.

The regulatory fine in the prior year relates to a provision for a fine of GBP50 million and associated interest, following a Competition Appeal Tribunal judgment on 12 November 2019.

The legacy items largely relate to a GBP16 million credit (2019-20: GBP2 million charge) in respect of Industrial Diseases Claims after the reassessment of provisions following updated guidance published by the Institute and Faculty of Actuaries' Asbestos Working Party. The prior year amount largely relates to the impairment of the Parcelforce Worldwide business.

Amortisation of acquired intangible assets of GBP19 million (2019-20: GBP19 million) relates to acquisitions in GLS.

The profit on disposal of property, plant and equipment of GBP36 million (2019-20: GBP89 million profit) primarily relates to the sale of two London Development Portfolio plots (Plot A at the Nine Elms development site and Calthorpe Street at the Mount Pleasant development site). The prior year profit largely relates to the land sale of plots B and D and C at Nine Elms. Further detail is provided in the London Development Portfolio Section below.

Net pension interest credit of GBP117 million (2019-20: GBP86 million) is calculated by reference to the pension surplus at the start of the financial year. The increase in the year of GBP31 million is as a result of a higher pension surplus position at 29 March 2020 compared with 31 March 2019.

Net finance costs

Reported net finance costs of GBP38 million (2019-20: GBP50 million) largely comprised interest on bonds (including cross-currency swaps) of GBP24 million (2019-20: GBP17 million), interest on the bank syndicate loan facility of GBP3 million (2019-20: GBPnil), and interest on leases of GBP27 million (2019-20: GBP30 million). This is offset by interest income of GBP17 million (2019-20: GBP6 million). The bank syndicate loan facility was extended by one year to September 2025 with the option to extend for a further one year.

 
                                             Facility    Drawn   Facility 
Facility                               Rate    (GBPm)   (GBPm)   end date 
-----------------------------  ------------  --------  -------  --------- 
EUR500 million bond                    2.5%       427      427       2024 
EUR550 million bond                    2.7%       468      468       2026 
Bank syndicate loan facility   LIBOR+0.475%       925        -       2025 
-----------------------------  ------------  --------  -------  --------- 
Total                                           1,820      895 
=============================  ============  ========  =======  ========= 
 

The blended interest rate on gross debt, including leases for 2020-21, is approximately 3%. The impact of retranslating the EUR500 million and EUR550 million bonds is accounted for in equity.

Taxation

 
                                      52 weeks                  52 weeks 
                                    March 2021                March 2020 
--------------------  ------------------------  ------------------------ 
(GBPm)                Royal Mail    GLS  Group  Royal Mail    GLS  Group 
====================  ==========  =====  =====  ==========  =====  ===== 
Reported 
Profit before tax            398    328    726           -    180    180 
Tax (charge)/credit         (30)   (76)  (106)          31   (50)   (19) 
Effective tax rate          7.5%  23.2%  14.6%         N/A  27.8%  10.6% 
Adjusted 
Profit before tax            316    348    664          83    192    275 
Tax charge                  (62)   (81)  (143)        (26)   (53)   (79) 
Effective tax rate         19.6%  23.3%  21.5%       31.3%  27.6%  28.7% 
====================  ==========  =====  =====  ==========  =====  ===== 
 

The Royal Mail adjusted effective tax rate of 19.6% (2019-20: 31.3%) is lower than the prior year mainly because 2019-20 included an increase in the uncertain tax provision in respect of patent box claims, the effect of which was amplified by lower profits. The effective tax rate for the current year is broadly in line with the UK statutory rate of 19%.

The GLS adjusted effective tax rate of 23.3% (2019-20: 27.6%) is lower than the prior year mainly due to the improved performance of GLS US and GLS France and the resulting reduction in the non-recognition of deferred tax assets on losses.

The Group reported effective tax rate is 14.6% (2019-20: 10.6%). This effective tax rate is impacted by the net pension interest credit, on which there is no tax charge, and profits made on operational property disposals which are offset by reinvestment relief.

Earnings per share (EPS)

Reported basic EPS was 62.0 pence (2019-20: 16.1 pence) and adjusted basic EPS was 52.1 pence (2019-20: 19.6 pence), reflecting the improved trading performance of the Group.

In-year trading cash flow

 
                                                       52 weeks  52 weeks 
                                                          March     March 
(GBPm)                                                     2021      2020 
-----------------------------------------------------  ========  ======== 
Adjusted operating profit                                   702       325 
Depreciation and amortisation                               554       516 
-----------------------------------------------------  --------  -------- 
Adjusted EBITDA                                           1,256       841 
Trading working capital movements                            13       155 
Share-based awards (LTIP and DSBP) charge adjustment          4         4 
Gross capital expenditure                                 (346)     (342) 
Net finance costs paid                                     (41)      (47) 
Research and development expenditure credit                   1        14 
Corporation tax paid                                      (125)      (69) 
In-year trading cash flow                                   762       556 
-----------------------------------------------------  --------  -------- 
Capital element of operating lease repayments(2)          (156)     (141) 
-----------------------------------------------------  --------  -------- 
Pre-IFRS 16 in-year trading cash flow                       606       415 
-----------------------------------------------------  --------  -------- 
 
Attributable to Royal Mail                                  334       319 
-----------------------------------------------------  --------  -------- 
Attributable to GLS                                         272        96 
-----------------------------------------------------  --------  -------- 
Royal Mail Group                                            606       415 
=====================================================  ========  ======== 
 

In-year trading cash inflow was GBP762 million, compared with GBP556 million in the prior year. This was mainly due to higher adjusted EBITDA offset by higher corporation tax paid and a smaller trading working capital inflow.

GLS in-year trading cash flow (pre-IFRS 16) was GBP272 million (2019-20: GBP96 million), or EUR301 million (2019-20: EUR112 million).

Trading working capital inflow of GBP13 million was GBP142 million lower than in the prior year which had benefitted from having only 11 monthly salary and VAT payments and the prior year saw an increase in the bonus accrual creditor compared to 2018-19. In Royal Mail, the net outflow was GBP39 million as higher revenue pushed up trade debtors which was partially offset by increased trade creditors and other payables. In GLS, the net inflow was GBP52 million as working capital inflows were driven by good control over trade receivables, including some positive effect from higher customer payments in the run up to Easter.

Corporation tax paid increased by GBP56 million, largely due to an increase in profits versus prior year.

The capital element of operating lease repayments of GBP156 million reflects the net impact on in-year trading cash flow as a result of adopting IFRS 16. Excluding the impact of this, in-year trading cash flow was GBP606 million.

Gross capital expenditure

 
                                                52 weeks  52 weeks 
                                                   March     March 
(GBPm)                                              2021      2020 
----------------------------------------------  ========  ======== 
GLS total capital expenditure                      (136)     (120) 
Royal Mail transformation capital expenditure       (62)      (29) 
----------------------------------------------  --------  -------- 
Royal Mail maintenance capital expenditure         (148)     (193) 
----------------------------------------------  --------  -------- 
Royal Mail Group                                   (346)     (342) 
----------------------------------------------  --------  -------- 
 

Total gross capital expenditure was GBP346 million, of which GLS spend was GBP136 million. Royal Mail capital expenditure was GBP210m in total, of which GBP62m was transformational spend, including investment in parcel hubs.

Net debt

A reconciliation of net debt is set out below .

 
                                                      52 weeks  52 weeks 
                                                         March     March 
(GBPm)                                                    2021      2020 
----------------------------------------------------  ========  ======== 
Net (debt) brought forward at 30 March 2020 and 
 1 April 2019                                          (1,132)     (300) 
Capitalisation of leases under IFRS 16                       -   (1,062) 
Free cash flow                                             800       653 
----------------------------------------------------  --------  -------- 
In-year trading cash flow                                  762       556 
Other working capital movements                             28         7 
Cash cost of operating specific items                      (4)       (2) 
Proceeds from disposal of property (excluding 
 London Development Portfolio), plant and equipment          5        12 
Acquisition of business interests                          (4)      (17) 
Cash flows relating to London Development Portfolio         13        97 
----------------------------------------------------  --------  -------- 
Purchase of own shares                                       -       (3) 
New or increased lease obligations under IFRS 
 16 (non-cash)                                           (173)     (156) 
Foreign currency exchange impact                            48      (20) 
Dividends paid to equity holders of the Parent 
 Company                                                     -     (244) 
----------------------------------------------------  --------  -------- 
Net debt carried forward                                 (457)   (1,132) 
----------------------------------------------------  --------  -------- 
Operating leases                                         1,079     1,086 
----------------------------------------------------  --------  -------- 
Pre IFRS 16 Net cash / (debt)                              622      (46) 
====================================================  ========  ======== 
 

Movements in GLS client cash are included within other working capital movements. The amount held at 28 March 2021 was GBP41 million (2019-20: GBP21 million). The cash cost of operating specific items was an outflow of GBP4 million consisting mainly of industrial diseases claims and National Insurance related to employee free share payments.

Acquisition of business interests of GBP4 million relates to deferred consideration paid following the acquisition of Mountain Valley Express (MVE) and Mountain Valley Freight Solutions businesses in the prior year.

The net cash flows relating to the London Development Portfolio were GBP13 million, consisting of receipts of GBP31 million for Mount Pleasant and GBP10 million for Nine Elms, offset by the cost of enabling works of GBP25 million at Mount Pleasant and GBP3 million at Nine Elms.

New or increased lease obligations under IFRS 16 of GBP173 million relates to additional lease commitments that were entered into during the year.

Approach to capital management

The Group had four key objectives for capital management during 2020-21 listed below. The Board monitors the Group's capital management policy to ensure that capital is allocated to support the Group's strategies to deliver sustainable shareholder value. Management proposes actions which reflect the Group's investment plans and risk characteristics as well as the macro-economic conditions in which we operate.

 
  Objectives               Enablers                                            2020-21 update 
-----------------------  --------------------------------------------------  ----------------------------------------- 
  Meet the Group's         Maintaining sufficient                              At 28 March 2021, the Group 
   obligations             cash reserves                                        had available resources of GBP2,457 
   as they fall due.       and committed facilities                             million (2019-20: GBP1,874 million) 
                           to:                                                  made up of cash and cash equivalents 
                                                                                of GBP1,532 million (2019-20: 
                            *    Meet all obligations, including pensions.      GBP1,619 million), current asset 
                                                                                investments of GBPnil (2019-20: 
                                                                                GBP30 million) and an undrawn 
                            *    Manage future risks, including the princip     committed bank syndicate loan 
                           al risks.                                            facility of GBP925 million (2019-20: 
                                                                                GBP225 million). 
                                                                                Existing banking covenants have 
                                                                                been waived until March 2022 
                                                                                and replaced with a basic liquidity 
                                                                                covenant. 
 
                                                                                At 28 March 2021, the Group 
                                                                                met the loan covenants and other 
                                                                                obligations for its bank syndicate 
                                                                                loan facility and EUR500 million 
                                                                                and EUR550 million bonds. 
 
                                                                                The Directors have a reasonable 
                                                                                expectation that the Group will 
                                                                                continue to meet its obligations 
                                                                                as they fall due. 
-----------------------  --------------------------------------------------  ----------------------------------------- 
  Support a progressive    Generate sufficient                                 The Group reported GBP762 million 
   dividend policy.         cash flow to cover                                  of in-year trading cash flow 
                            the ordinary dividend.                              (2019-20: GBP556 million), sufficient 
                            Maintain sufficient                                 to cover the one-off final dividend 
                            distributable reserves                              of 10.0 pence per share (2019-20: 
                            to sustain the Group's                              7.5 pence). 
                            dividend policy.                                    Capital managed by the Group, 
                                                                                excluding the net assets of 
                                                                                the pension scheme, is GBP2,416 
                                                                                million at 28 March 2021 (2019-20: 
                                                                                GBP2,007 million). 
                                                                                The Group had retained earnings 
                                                                                of GBP4,802 million at 28 March 
                                                                                2021 (2019-20: GBP5,625 million). 
                                                                                The Group considers it has a 
                                                                                maximum level of distributable 
                                                                                reserves of around GBP2 billion, 
                                                                                which excludes the impact of 
                                                                                the pension surplus on retained 
                                                                                earnings, more than sufficient 
                                                                                to cover the dividend. 
 
                                                                                The Board has reviewed the performance 
                                                                                of the Group during the past 
                                                                                year and concluded that it is 
                                                                                appropriate to pay a one-off 
                                                                                final dividend of 10 pence per 
                                                                                share in respect of FY 2020-21, 
                                                                                subject to approval at the 2021 
                                                                                AGM. 
-----------------------  --------------------------------------------------  ----------------------------------------- 
  Reduce the cost          Target investment                                   During the year, the Group maintained 
   of capital               grade standard credit                               a credit rating of BBB with 
   for the Group.           metrics i.e. no lower                               Standard & Poor's but the outlook 
                            than BBB- under Standard                            was revised from stable to negative 
                            & Poor's rating methodology.                        as a result of their assessment 
                                                                                of 
                                                                                COVID-19 related challenges. 
-----------------------  --------------------------------------------------  ----------------------------------------- 
  Retain sufficient        Funded by retained                                  During the year, the Group made 
   flexibility              cash flows and manageable                           total gross capital investments 
   to invest in the         levels of debt consistent                           of GBP346 million (2019-20: 
   future of                with our target credit                              GBP342 million) and acquisition 
   the business.            rating.                                             of business interests of GBP4 
                                                                                million (2019-20: GBP17 million) 
                                                                                while retaining sufficient capital 
                                                                                headroom. 
=======================  ==================================================  ========================================= 
 

Future approach to capital management

The Board has reviewed its approach to capital allocation and dividend. We have a clear capital allocation framework: invest in our business to support growth, maintain our investment grade rating, pay a sustainable dividend and retain flexibility for selective acquisitions. Given the high operational leverage in our business, we will continue to keep low levels of financial leverage. In the current risk environment, we believe running a Group net cash position on a pre-IFRS 16 basis is appropriate. We are confident - notwithstanding the ongoing uncertainty - that both our main businesses will independently generate cash sufficient for their own organic investment purposes, so whilst investment is expected to step up in the coming period, we do not anticipate the need for any cross subsidy. The Board will adopt a sustainable progressive divided policy and expects to propose a full year dividend for 2021-22 of 20 pence per share, to be paid one third as an interim, two thirds as a final dividend. The Board will review the Group's capital structure on a regular basis, taking into account the market environment, the cash flow generation of the Group and its capital allocation framework and will not retain excess capital which is unutilised under our capital allocation framework.

Pensions

Details of each of the plans operated by Royal Mail are set out below.

Defined Benefit Cash Balance Scheme (DBCBS)

An IAS 19 deficit of GBP394 million (2019-20: GBP177 million) is shown on the balance sheet. The scheme is not in funding deficit and it is not anticipated that deficit payments will be required. The DBCBS will be subject to triennial valuations from 2021.

An IAS 19 pension service charge of 19.5% (2019-20: 20.8%), equivalent to GBP360 million (2019-20: GBP388 million), has been charged to the income statement for the DBCBS scheme. The pension charge is greater than the cash contribution rate as the assumed rate of future increases in benefits (4.8%) is greater than the assumed discount rate (1.9%).

The Group has made contributions at 15.6% (2020-21: GBP285 million; 2019-20: GBP288 million) of DBCBS pensionable pay in respect of the scheme. Members contribute at 6.0%.

The IAS 19 pension service charge to cash difference adjustment for 2020-21 was GBP84 million (2019-20: GBP108 million). Pension interest for 2021-22, calculated on the assets and liabilities as at 28 March 2021, is estimated to be a charge of GBP9 million.

Royal Mail Defined Contribution Plan (RMDCP)

Under the RMDCP, current and future RMDCP members in the standard section will contribute at the highest contribution tier (employee: 6.0%; employer: 10.0%) unless they opt to contribute at a lower level. The contribution rate for members not in the standard section is employee: 5.0%; employer: 3.0%).

Royal Mail Pension Plan (RMPP)

The RMPP closed to future accrual in its previous form from 31 March 2018. The pre-withholding tax accounting surplus of the RMPP at 28 March 2021 was GBP3,666 million (29 March 2020: GBP5,550 million), comprising assets of GBP11,441 million (29 March 2020: GBP11,683 million) and liabilities of GBP7,775 million (29 March 2020: GBP6,133 million). The pre-withholding tax accounting surplus has decreased by GBP1,884 million (29 March 2020: GBP1,854 million increase) in the year, as gilt yields have increased in the year, decreasing the value of scheme assets whilst the decrease in the 'real' discount rate since the prior year (the difference between RPI and the discount rate based on corporate bond yields) has resulted in an increase in the valuation of scheme liabilities. After the withholding tax adjustment, the accounting surplus of the RMPP was GBP2,383 million at 28 March 2021 (29 March 2020: GBP3,608 million). This is an accounting adjustment with no cash benefit to the Group. For 2021-22, the pension interest will be a credit of GBP73 million.

The triennial valuation of the RMPP at 31 March 2018 was agreed on 19 July 2019. Based on this set of assumptions rolled forward, the RMPP actuarial surplus at 31 March 2021 was estimated to be around GBP163 million (31 March 2020: GBP575 million).

Royal Mail Senior Executives Pension Plan (RMSEPP)

The RMSEPP closed in December 2012 to future accrual and the Group makes no regular service contributions.

Following the purchase of an additional insurance policy in September 2018 in respect of all remaining pensioners and deferred members, it was subsequently decided to proceed to buy out and wind up the Plan. As a result the purchase of the insurance policy was treated as a settlement in the 2018-19 Financial Statements. The difference between the IAS 19 surplus before and after the transaction resulted in GBP64 million being charged to the income statement as an operating specific item. The process to buy out and wind up the RMSEPP had previously been expected to complete in 2020-21; however, it was delayed by the need for further clarity over the approach to Guaranteed Minimum Pensions (GMP) equalisation. The Trustees currently expect this to complete in 2022. There is no charge in the current year.

All benefit payments due from the RMSEPP remain unchanged. The insurance policies held by the RMSEPP exactly match the value and timing of the benefits payable to individual members and the fair value of those policies are deemed to be the present value of the related obligations. Further details can be found in the paragraph entitled 'Royal Mail Senior Executives Pension Plan (RMSEPP)' in Note 6 to the Consolidated Financial Statements.

Based on the rolled forward assumptions used for the RMSEPP triennial valuation as at 31 March 2018 completed in the prior year, the RMSEPP actuarial surplus at 31 March 2021 was estimated to be GBP9 million (31 March 2020: GBP9 million). The pre-withholding tax accounting surplus at 28 March 2021 was GBP9 million (29 March 2020: GBP10 million).

In accordance with the Schedule of Contributions agreed as part of the 2018 triennial valuation, around GBP500,000 a year is to be paid for the period 1 April 2018 to 31 March 2025 in respect of death-in-service lump sum benefits and administration expenses.

Guaranteed Minimum Pensions (GMP)

Pension schemes are now under an obligation to address the issue of unequal GMP. The transfer of the RMPP's historic pension liabilities to HM Government in 2012, in accordance with the Postal Services Act 2011, included all of the plan's GMP liabilities. The requirement to remove the inequality in former RMPP benefits deriving from GMPs therefore rests with Government.

However, RMSEPP still holds its GMP liabilities and will be required to take action to equalise benefits. The Trustees are considering the approach to be taken to address the issue of unequal GMPs in respect of the RMSEPP scheme but estimate that the cost of this will not be material.

Collective Defined Contribution (CDC) scheme and Defined Benefit Lump Sum Scheme (DBLSS)

We have, for some time, been working closely with the CWU and other stakeholders to make CDC a reality for Royal Mail and its people.

The Pension Schemes Act, which became law in February 2021, legislates for the creation of CDC pension schemes for the first time under UK law. Royal Mail aims to set up the first scheme of this kind in the UK.

Based on current expectations, it is anticipated that the CDC scheme will be accounted for as a defined contribution scheme. It is anticipated the DBLSS will be accounted for as a defined benefit scheme with the accounting treatment expected to be similar to the transitional DBCBS. The new arrangements will have fixed employer contributions of 13.6% and employee contributions of 6.0%.

During 2020-21, the Group contributed around GBP405 million, excluding Pension Salary Exchange (PSE), in respect of all UK pension schemes. In 2021-22 the Group expects to contribute around GBP400 million in respect of all UK pension schemes.

Financial risks and related hedging

The Group is exposed to commodity price and currency risk. The Group operates hedging policies which are stated in the Annual Report and Accounts.

The forecast diesel and jet commodity exposures in Royal Mail are set out below together with the sensitivity of 2021-22 operating profit to changes in commodity prices and fuel duty. As GLS relies on the use of subcontractors, responsible for purchasing their own fuel, GLS has no direct exposure to diesel costs.

 
                                                                                                                Impact 
                                                                                                Impact              on 
                                                                                                    on         2021-22 
                                     Fuel                                     Residual         2021-22       operating 
                               duty/other      Underlying                     unhedged       operating          profit 
                                    costs       commodity                   underlying          profit            of a 
                                    (incl        exposure                    commodity            of a         further 
                            irrecoverable           (incl   Underlying        exposure         further    10% increase 
                 Forecast          VAT) -   irrecoverable    commodity           (incl    10% increase         in fuel 
                    total      not hedged            VAT)       volume   irrecoverable    in commodity      duty/other 
 2021-22             cost         2021-22         2021-22       hedged            VAT)           price            cost 
 exposure            GBPm            GBPm            GBPm            %            GBPm            GBPm            GBPm 
--------------  ---------  --------------  --------------  -----------  --------------  --------------  -------------- 
 Diesel               178             118              60           74              15               2              12 
 Jet fuel               9               2               7           86               1               -               - 
--------------  ---------  --------------  --------------  -----------  --------------  --------------  -------------- 
 Total                187             120              67           75              16               2              12 
==============  =========  ==============  ==============  ===========  ==============  ==============  ============== 
 

Without hedging, diesel and jet fuel costs for 2021-22 would be around GBP7 million higher (based upon closing fuel prices at 28 March 2021).

The Group is exposed to foreign currency exchange risk in relation to interest payments on the EUR500 million bond, certain obligations under Euro denominated finance leases, trading with overseas postal administrations and various purchase contracts denominated in foreign currency. GLS' functional currency is the Euro which results in translational foreign currency exchange risk to revenue, costs and operating profit. The EUR550 million bond, issued in October 2019, is fully hedged by a cross-currency interest rate swap with no residual exposure to foreign currency or interest rate risk.

The average exchange rate between Sterling and the Euro was GBP1:EUR1.12 (2019-20: GBP1:EUR1.14). This resulted in a GBP7 million increase in GLS' reported operating profit before tax in 2020-21. The impact of foreign exchange transactions in the UK was not material in 2020-21. The net impact on Group operating profit before tax was GBP7 million.

The Group manages its interest rate risk through a combination of fixed rate loans and leasing, floating rate loans/facilities and floating rate financial investments. At 28 March 2021, all the gross debt of GBP2,051 million was at fixed rates.

London Development Portfolio

1) Mount Pleasant

This development site includes the sale of 6.25 acres to develop circa 680 residential units. In 2017 an agreement was reached with Taylor Wimpey UK Ltd ('Taylor Wimpey') for the sale of the Calthorpe Street development site, subject to specific separation and enabling works for the site being completed. The sale was completed and the site handed over to Taylor Wimpey in March 2021, following the successful completion of the separation and enabling works. The combined proceeds for the Calthorpe Street site, and the adjacent Phoenix Place site (sold to Taylor Wimpey in 2017-18) was GBP193.5 million (including GBP3.5 million non-cash consideration). For accounting purposes, GBP39.5 million of the proceeds were allocated to Phoenix Place and GBP154 million to Calthorpe Street. GBP115 million of the total combined cash proceeds for both sites have been received as at 28 March 2021 (with circa GBP31 million received in 2020-21). The remainder of the cash is due to be received through a stage payment in 2023-24 and a final payment in 2024-25.

The costs of the completed enabling works of circa GBP100 million were incurred over a three and a half year period (2017-18 to 2020-21). The costs incurred in 2020-21 were circa GBP25 million. All proceeds received up to 2020-21, in aggregate, cover Royal Mail's outgoings on the separation and enabling works. The profit on disposal of the Calthorpe Street site amounted to GBP29 million, recognised as a specific item in the income statement.

2) Nine Elms

This site covers the sale of 13.9 acres with planning consent to develop 1,911 residential units, split into various plots:

   --     Plots B/D sale completed June 2019 for GBP101 million to Greystar Real Estate Partners, LLC. 
   --     Plot C1 sale completed June 2019 for GBP22.2 million to Galliard Homes. 
   --     Plot A sale completed December 2020. 

We remain engaged in a disposal process for Plots E, F and G. Further investment will be required in relation to infrastructure for the remaining plots, subject to future sales.

3) Investment

In total we have invested GBP28 million in the year on works to separate the retained operational sites from the development plots at Mount Pleasant and infrastructure works at Nine Elms.

Dividends

No interim dividend was paid for FY2020-21.

The Board has reviewed the performance of the Group during the past year and concluded that it is appropriate to pay a one-off final dividend of 10 pence per share in respect of FY2020-21, payable on 6 September 2021 to shareholders on the register at 30 July 2021, subject to approval at the 2021 AGM on 21 July 2021.

Footnotes for Financial Review - Group section

1. The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment as set out in the section entitled 'Specific items and pension charge to cash difference adjustment'.

2. The capital element of lease payments of GBP188 million (2019-20: GBP172 million) is made up of the capital element of operating lease payments of GBP156 million (2019-20: GBP141 million) and the capital element of finance lease payments of GBP32 million (2019-20: GBP31 million).

Royal Mail

Reported summary results (GBPm)

 
                                          Reported   Reported 
                                          52 weeks   52 weeks 
                                             March      March 
                                              2021       2020 
=======================================  =========  ========= 
Revenue                                      8,649      7,720 
Operating costs                            (8,389)    (7,711) 
=======================================  =========  ========= 
Operating profit before specific items         260          9 
Operating specific items                        11      (149) 
=======================================  =========  ========= 
Operating profit/(loss)                        271      (140) 
=======================================  =========  ========= 
Operating profit/(loss) margin                3.1%     (1.8%) 
=======================================  =========  ========= 
 

Revenue was GBP929 million higher than the prior year, driven by strong parcels growth. The prior year benefitted from the European Parliamentary and UK general election mailings. Royal Mail has seen a substantial shift in revenue mix from letters to parcels, driven largely by COVID-19. As parcels revenues have continued to grow at a rate that has outpaced letter decline, the business has also benefitted this year from positive operational gearing.

Operating costs increased by GBP678 million, driven by increased people, distribution and conveyance costs. This is a result of the mix change from letters to parcels, the impact of the COVID-19 pandemic and management restructuring costs. This resulted in an operating profit before specific items of GBP260 million. Operating specific items of GBP11 million largely related to a GBP16 million release of the provision for industrial disease claims, offset by the employee free shares charge of GBP2 million.

Adjusted(1) trading results (GBPm)

 
                                          Adjusted   Adjusted 
                                          52 weeks   52 weeks 
                                             March      March 
                                              2021       2020   Change 
--------------------------------------   ---------  ---------  ------- 
Parcels                                      5,131      3,699    38.7% 
Letters                                      3,518      4,021  (12.5%) 
Revenue                                      8,649      7,720    12.0% 
Operating costs                            (8,305)    (7,603)     9.2% 
---------------------------------------  ---------  ---------  ------- 
Operating profit                               344        117   194.0% 
---------------------------------------  ---------  ---------  ------- 
Operating profit margin                       4.0%       1.5%   250bps 
---------------------------------------  ---------  ---------  ------- 
 
Parcels volumes (m units) 
Domestic                                     1,496      1,054      42% 
International                                  239        258     (7%) 
---------------------------------------  ---------  ---------  ------- 
Total parcels                                1,735      1,312      32% 
---------------------------------------  ---------  ---------  ------- 
 
Letters volumes (m units) 
Addressed letters                            7,727     10,047    (23%) 
Addressed letters (excluding election 
 mailings)                                                       (20%) 
Unaddressed letters                          1,784      2,603    (31%) 
---------------------------------------  ---------  ---------  ------- 
Total letters                                9,511     12,650    (25%) 
---------------------------------------  ---------  ---------  ------- 
 
 

The pace of revenue growth in the second half of 2020-21 increased, with Royal Mail total revenues up 12.0% at the full year versus 4.9% in H1.

Parcels

Total parcel revenue was up 38.7% at the full year versus 33.2% in H1. This growth more than offset the letter revenue decline of 12.5% in the year.

Throughout the year there was a substantial shift in revenue mix. Parcels revenue represented 59% of total Royal Mail revenue (2019-20: 48%).

Parcel volumes grew 32% compared to 2% in the prior year. Account parcel volumes were up 48%, driven by increased e-commerce sales as retail spending moved online following a series of full and phased lockdowns in the UK. Account parcel volumes also include the COVID test kits delivered on behalf of the Government. Royal Mail Tracked 24(R) /48(R) and Tracked Returns(R) volumes, our key e-commerce products, grew by 79%. During the year, we also launched our suite of In-flight Delivery Options, the number one ask from account sending customers.

Parcelforce Worldwide total volumes increased by 16%, due to increased volumes from B2C customers resulting from COVID-19, together with some new business wins.

The international parcels business experienced revenue growth in the year despite challenging trading conditions. Export revenues were higher than the prior year despite a fall in volumes. This was largely due to an increase in prices, driven by cost pressures in overseas delivery and a shortage in airline conveyance capacity, which increased the cost of exporting parcels. Import revenue was also higher despite lower volume due to fewer items from lower average unit revenue countries, in particular China, and exceptional Terminal Dues price rises.

The total parcel revenue increase reflects the impact of the COVID-19 pandemic on mix and volume growth. For account customers, higher average unit revenue (AUR) tracked products grew faster than their untracked equivalents as customers traded up to more premium products. Volumes in Consumer and SME channels also strengthened throughout the year.

Letters

Letter performance saw some recovery in H2 after the significant declines we experienced in H1. Total letter volumes declined by 25% over the year, an improvement compared with the 33% decline seen in H1. Addressed letter volumes excluding election mailings were down 20% for the full year. In addition to ongoing structural decline, letter volume decline has been accelerated by the impact of the pandemic, which has negatively impacted economic activity and ongoing business uncertainty.

The pandemic significantly impacted Advertising Mail and Meter volumes. Advertising Mail revenue of GBP407 million was down 33.6%, with a more robust performance in the second half as some business activity resumed and price rises in January 2021. Business Mail was also heavily impacted, although less so than Advertising Mail, and similarly had a more robust performance in the second half. Volumes in Consumer and SME channels also strengthened throughout the year.

Total letter revenue decreased by 12.5%.

Revenue and volume profiles, split between first half and second half, are provided below:

 
                        52 weeks March 2021    52 weeks March 2020      Change (%) 
------------------  -----------------------  -----------------------  --------------- 
Parcel volumes (m                                               Full             Full 
 units)                H1    H2   Full Year      H1     H2      Year   H1   H2   Year 
------------------  -----  ----  ----------  ------  -----  --------  ---  ---  ----- 
Total Parcels         806   929       1,735     613    699     1,312  31%  33%    32% 
------------------  -----  ----  ----------  ------  -----  --------  ---  ---  ----- 
 
 
                                  52 weeks March 2021      52 weeks March 2020      Change (%) 
------------------------------  -----------------------  -----------------------  --------------- 
                                                                            Full             Full 
Parcel revenue (GBPm)              H1     H2  Full year       H1      H2    year   H1   H2   year 
------------------------------  -----  -----  ---------  -------  ------  ------  ---  ---  ----- 
Domestic parcels 
 excl PFW and International 
 export                         1,738  2,167      3,905    1,234   1,428   2,662  41%  52%    47% 
PFW Domestic & Import             278    311        589      244     260     504  14%  20%    17% 
Export Parcels (International 
 and PFW)                         283    354        637      248     285     533  14%  24%    20% 
Total Parcels                   2,299  2,832      5,131    1,726   1,973   3,699  33%  44%    39% 
------------------------------  -----  -----  ---------  -------  ------  ------  ---  ---  ----- 
 
 
                           52 weeks March 2021       52 weeks March 2020        Change (%) 
----------------------  -------------------------  -----------------------  ------------------- 
Letter volumes (m                                                     Full                 Full 
 units)                     H1      H2  Full year      H1      H2     year     H1     H2   year 
----------------------  ------  ------  ---------  ------  ------  -------  -----  -----  ----- 
Advertising              1,349   2,133      3,482   2,535   2,618    5,153  (47%)  (19%)  (32%) 
Business Mail            2,010   2,232      4,242   2,498   2,556    5,054  (20%)  (13%)  (16%) 
Consumer & Small 
 Business                  618     874      1,492     788     974    1,762  (22%)  (10%)  (15%) 
International Export 
 Letters                    47      61        108      57      71      128  (18%)  (14%)  (16%) 
International Import 
 Letters                    84      93        177      92     107      199   (9%)  (13%)  (11%) 
Other                        1       9         10     186     168      354  (99%)  (95%)  (97%) 
Total Letters            4,109   5,402      9,511   6,156   6,494   12,650  (33%)  (17%)  (25%) 
----------------------  ------  ------  ---------  ------  ------  -------  -----  -----  ----- 
 
 
                            52 weeks March 2021      52 weeks March 2020         Change (%) 
----------------------  -------------------------  -----------------------  ------------------- 
                                                                      Full                 Full 
Letter revenue (GBPm)       H1      H2  Full year      H1      H2     year     H1     H2   year 
----------------------  ------  ------  ---------  ------  ------  -------  -----  -----  ----- 
Advertising                160     247        407     306     307      613  (48%)  (20%)  (34%) 
Business Mail              644     762      1,406     780     804    1,584  (17%)   (5%)  (11%) 
Consumer & Small 
 Business                  474     680      1,154     533     653    1,186  (11%)     4%   (3%) 
International Export 
 Letters                    77     113        190      81     109      190   (5%)     4%      - 
International Import 
 Letters                    38      45         83      43      50       93  (12%)  (10%)  (11%) 
Other                      136     142        278     180     175      355  (24%)  (19%)  (22%) 
Total Letters            1,529   1,989      3,518   1,923   2,098    4,021  (20%)   (5%)  (13%) 
----------------------  ------  ------  ---------  ------  ------  -------  -----  -----  ----- 
 

Adjusted operating costs

 
                                      Adjusted   Adjusted 
                                      52 weeks   52 weeks 
                                         March      March 
(GBPm)                                    2021       2020  Change 
==================================   =========  =========  ====== 
People costs                           (5,619)    (5,234)    7.4% 
===================================  =========  =========  ====== 
 People costs excluding voluntary 
  redundancy                           (5,510)    (5,206)    5.8% 
 Voluntary redundancy costs              (109)       (28)  289.3% 
-----------------------------------  ---------  ---------  ------ 
Non-people costs                       (2,686)    (2,369)   13.4% 
-----------------------------------  ---------  ---------  ------ 
 Distribution and conveyance 
  costs                                (1,054)      (867)   21.6% 
 Infrastructure costs                    (825)      (793)    4.0% 
 Other operating costs                   (807)      (709)   13.8% 
-----------------------------------  ---------  ---------  ------ 
Total                                 ( 8,305)    (7,603)    9.2% 
===================================  =========  =========  ====== 
 

Total adjusted operating costs increased by 9.2%.

Royal Mail adjusted people costs were 7.4% higher, primarily due to the growth in parcel volumes, higher sick absence and temporary labour costs, the cost of social distancing as a result of the COVID-19 pandemic, and the frontline pay award. Within people costs, we estimate the cost of mix change to be GBP253 million and costs as a result of the pandemic to be GBP87 million. Some of these cost pressures were offset through savings initiatives including the management restructure. Transformation costs of GBP149 million are included in people costs, comprising GBP40 million of project costs and GBP109 million of redundancy costs. This includes redundancy costs of GBP93 million for the management restructure announced in June 2020.

Workload increased by 7.3% as growth in parcel volumes more than offset letter volume decline. Core network hours increased by 5.1% as we invested in our network to cope with increased workload, higher sick absence and social distancing. Average absence levels increased to circa 8.5%. Reported year-on-year productivity improved by 2.1% but has been impacted by changes to the operation to support social distancing as well as heightened absence levels. It is not possible to quantify the impact of these on the productivity measure.

Non-people costs increased by 13.4%, reflecting the impact of higher volumes, the pandemic and inflationary cost pressures. We delivered circa GBP90 million of non-people cost savings in the year, as part of our two-year non-people cost savings plan. Also within non-people costs, we estimate the cost of mix change to be GBP74 million (mainly in distribution and conveyance) and the costs associated with the COVID-19 pandemic to be GBP65 million (mainly the purchase of protective equipment to safeguard our frontline employees and the cost of social distancing in vehicles). We have also faced cost pressures in international conveyance of GBP69 million, driven by the shortage in airline conveyance capacity as a result of COVID-19.

Distribution and conveyance costs increased by 21.6%, largely driven by higher domestic and international conveyance costs due to volume growth and the impact of the pandemic. Terminal dues were GBP17 million lower, driven by lower export volumes which were partially offset by contracted rate rises. Total diesel and jet fuel costs increased to GBP187 million (2019-20: GBP168 million), mainly as a result of volume-related network growth and inefficiencies driven by the impact of social distancing on our operations. We expect diesel and jet fuel costs to be around GBP187 million in 2021-22 as these impacts continue.

Infrastructure costs increased by 4.0%. Depreciation and amortisation costs were GBP19 million higher than the prior year, driven mainly by accelerated depreciation and amortisation following a review of our investment portfolio. Before these adjustments, underlying depreciation was broadly flat. Property costs were GBP7 million higher, driven largely by one-off costs associated with exiting some of our sites. IT costs were GBP6 million higher in the year, driven by the growth in tracked parcels volumes.

Other operating costs increased by 13.8%, driven by the purchase of protective equipment to safeguard frontline employees in response to the COVID-19 pandemic (circa GBP40 million). This year, we have purchased 21.6 million face masks, 47.1 million pairs of gloves, 3.7 million packets of wipes and 3.6 million bottles of hand sanitiser. Post Office Limited costs have increased by GBP54 million, driven by parcel volume growth. Transformation project costs of GBP45 million (2019-20: GBP56 million) are also included in other operating costs.

Adjusted operating profit

Adjusted operating profit was GBP344 million (2019-20: GBP117 million). Adjusted operating profit margin of 4.0% was up 250 basis points compared with 2019-20.

Footnotes for Financial Review - Royal Mail section

1. The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment as set out in the section entitled 'Specific items and pension charge to cash difference adjustment' .

GLS(1)

Reported summary results (GBPm)

 
                                         Reported  Reported 
                                            March     March 
Summary results (GBPm)                       2021      2020 
Revenue                                     4,040     3,161 
Operating costs                           (3,682)   (2,953) 
---------------------------------------  --------  -------- 
Operating profit before specific items        358       208 
Operating specific items                     (18)      (13) 
---------------------------------------  --------  -------- 
Operating profit                              340       195 
Operating profit margin                      8.4%      6.2% 
---------------------------------------  --------  -------- 
 

GLS revenue grew by GBP879 million. Operating profit before specific items increased by GBP150 million. The operating specific items charge of GBP18 million was largely due to the amortisation of acquired intangible assets. The prior year charge largely related to the amortisation of acquired intangible assets, partially offset by a GBP5 million provision release. GLS operating profit was GBP145 million higher than in the prior year.

Adjusted(2) summary trading results (GBPm)

 
                          Adjusted  Adjusted 
                             March     March 
                              2021      2020   Change 
------------------------  ========  ========  ------- 
Revenue                      4,040     3,161    27.8% 
Operating costs            (3,682)   (2,953)    24.7% 
------------------------  --------  --------  ------- 
Operating profit               358       208    72.1% 
Operating profit margin       8.9%      6.6%   230bps 
 
(EURm) 
------------------------  --------  --------  ------- 
Revenue                      4,525     3,614    25.2% 
Operating costs            (4,124)   (3,376)    22.2% 
------------------------  --------  --------  ------- 
Operating profit               401       238    68.5% 
 
Volumes (m)                    838       667      26% 
========================  ========  ========  ======= 
 

Volumes were up 26% as GLS continued to benefit from increased B2C parcel deliveries as customers ordered more products online during the pandemic. B2C volume share increased by nine percentage points to 57%. GLS domestic and international volumes grew in all markets.

During the year, the impact of foreign exchange movements increased revenue by GBP81 million and operating costs by GBP74 million, resulting in an increase in operating profit of GBP7 million.

Revenue increased by 27.8%. Excluding acquisitions, revenue was up 27.0%, driven by growth in B2C and international volumes, including increased volume as a result of lockdown restrictions across GLS' geographic footprint. Revenue growth was achieved in all markets, with significant growth in those markets with a high pre-existing B2C exposure such as Spain, Eastern Europe and Denmark. GLS' European markets represented 90.8% of total revenue (2019-20: 90.0%), with the North American market contributing 9.2% (2019-20: 10.0%).

Germany

In Germany, the largest GLS market by revenue, turnover grew by 26.4%, driven by a combination of strong domestic and export volume growth and better pricing. Operating profit increased due to the benefit from higher revenues and scale effects in costs which resulted in improved margins.

Italy

GLS Italy revenue grew by 23.4%, driven by higher volumes, but with some pressure on pricing due to a decline in average parcel weights resulting from an increasing proportion of B2C volumes. Operating margin declined slightly due to price pressure, which was not fully compensated by lower unit costs.

Spain

GLS Spain performed well during the year, with revenue growth of 59.6%, driven by strong growth in B2C volumes and yield management activities. Operating profit improved significantly compared with breakeven in the prior year. The turnaround of the GLS Spain business is considered secured.

France

GLS France revenue grew by 23.5%, benefiting from higher volumes, including new customer acquisitions and better pricing. Operating losses were reduced significantly compared with the prior year. The results include some positive effects, particularly during the first half of the year, when GLS France remained fully operational during the initial lockdown period. Initiatives to try and 'lock in' the improvements visible during the year are being pursued.

North America

In the US, reported revenue grew by 36.8%. Excluding the impact of acquisitions and on a constant currency basis revenue growth was 25.2%. Financial performance continued to improve, benefiting from the contribution of the acquired MVE business and synergies from integration. Optimisation of the operational set-up to secure additional synergies and further develop the hybrid parcel/freight offering in the US are planned.

GLS Canada revenue was broadly flat, or an increase of 2.3% on a constant currency basis. GLS Canada, being a more heavily B2B and freight-focused business, was more significantly impacted by the COVID-19 pandemic than the pure parcel operations in most other GLS markets. Nevertheless, operating profit and margin improved compared with the prior year as a result of measures introduced to streamline the cost base in response to the crisis.

Other developed European markets (including Austria, Belgium, Denmark, Ireland, Netherlands and Portugal)

Revenue growth was achieved in all GLS' other developed European markets. In particular, there was good volume and revenue growth in Denmark and the Netherlands.

Other developing/emerging European markets (including Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia)

Other developing markets, where GLS has a high exposure to B2C, continued to grow strongly with overall revenue growth of 36.8% in the year.

Adjusted operating costs (GBPm)

 
                                     Adjusted  Adjusted 
                                        March     March 
(GBPm)                                   2021      2020   Change 
-----------------------------------  ========  ========  ------- 
People costs                            (851)     (722)    17.9% 
Non-people costs                      (2,831)   (2,231)    26.9% 
-----------------------------------  --------  --------  ------- 
 Distribution and conveyance costs    (2,480)   (1,960)    26.5% 
 Infrastructure costs                   (249)     (198)    25.8% 
 Other operating costs                  (102)      (73)    39.7% 
-----------------------------------  --------  --------  ------- 
Total                                 (3,682)   (2,953)    24.7% 
-----------------------------------  --------  --------  ------- 
 

Total adjusted operating costs increased by 24.7%, or 24.0% excluding acquisitions.

People costs increased by 17.9%, or 16.5% excluding acquisitions.

Non-people costs increased by 26.9%, or 26.4% excluding acquisitions. Distribution and conveyance costs grew broadly in line with volume, increasing by 26.5%. Infrastructure and other operating costs increased by 25.8% and 39.7% respectively, due to higher depreciation, increased repairs and maintenance costs, and costs for protective equipment.

Adjusted operating profit

Adjusted operating profit was GBP358 million, with favourable foreign exchange movements contributing GBP7 million. Adjusted operating profit margin of 8.9% was 230 basis points higher than the prior year.

Footnotes for Financial Review - GLS section

1. Both the reported and the adjusted result for the full year 2020-21 include 12 months of contribution from the acquisition of Mountain Valley Express (MVE) and Mountain Valley Freight Solutions businesses on 30 September 2019. The prior year includes only six months' contribution.

2. The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment as set out in the section entitled 'Specific items and pension charge to cash difference adjustment'.

Presentation of results and Alternative Performance Measures (APMs)

The Group uses certain APMs in its financial reporting that are not defined under IFRS, the Generally Accepted Accounting Principles (GAAP) under which the Group produces its statutory financial information. These APMs are not a substitute, or superior to, any IFRS measures of performance. They are used by Management, who considers them to be an important means of comparing performance year-on-year and are key measures used within the business for assessing performance.

APMs should not be considered in isolation from, or as a substitute to, financial information presented in compliance with GAAP. Where appropriate, reconciliations to the nearest GAAP measure have been provided. The APMs used may not be directly comparable with similarly titled APMs used by other companies.

A full list of APMs used are set out in the section entitled 'Alternative Performance Measures'.

Reported to adjusted results

The Group makes adjustments to results reported under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment (see definitions in the paragraph entitled 'Alternative Performance Measures'). Management believes this is a more meaningful basis upon which to analyse the business performance (in particular given the volatile nature of the IAS 19 charge) and is consistent with the way financial performance is reported to the Board.

IFRS can have the impact of causing high levels of volatility in reported earnings which do not relate to changes in the operational performance of the Group. Management has reviewed the long-term differences between reported and adjusted profit after tax. Cumulative reported profit after tax for the five years ended 28 March 2021 was GBP1,487 million compared with cumulative adjusted profit after tax of GBP1,914 million. Annual reported profit after tax showed a range of GBP161 million to GBP620 million. The principal cause of the difference and volatility is pension-related accounting.

Further details on specific items excluded from adjusted operating profit are included in the paragraph 'Specific items and pension charge to cash difference adjustment' in the Group results section. A reconciliation showing the adjustments made between reported and adjusted Group results can be found in the paragraph 'Consolidated reported and adjusted results'.

Presentation of results

Consolidated reported and adjusted results

The following table reconciles the consolidated reported results, prepared in accordance with IFRS, to the consolidated 52 week adjusted results:

 
                                                        52 weeks                            52 weeks 
                                                      March 2021                          March 2020 
                              ==================================  ================================== 
                              Reported        Specific  Adjusted  Reported        Specific  Adjusted 
                                             items and                           items and 
                                               pension                             pension 
Group (GBPm)                             adjustment(1)                       adjustment(1) 
============================  ========  ==============  ========  ========  ==============  ======== 
Revenue                         12,638               -    12,638    10,840               -    10,840 
Operating costs               (12,020)            (84)  (11,936)  (10,623)           (108)  (10,515) 
People costs                   (6,554)            (84)   (6,470)   (6,064)           (108)   (5,956) 
----------------------------  --------  --------------  --------  --------  --------------  -------- 
People costs                   (6,445)            (84)   (6,361)   (6,036)           (108)   (5,928) 
Voluntary redundancy             (109)               -     (109)      (28)               -      (28) 
----------------------------  --------  --------------  --------  --------  --------------  -------- 
Non-people costs               (5,466)               -   (5,466)   (4,559)               -   (4,559) 
----------------------------  --------  --------------  --------  --------  --------------  -------- 
Distribution and conveyance 
 costs                         (3,483)               -   (3,483)   (2,786)               -   (2,786) 
Infrastructure costs           (1,074)               -   (1,074)     (991)               -     (991) 
Other operating costs            (909)               -     (909)     (782)               -     (782) 
----------------------------  --------  --------------  --------  --------  --------------  -------- 
Operating profit before 
 specific items                    618            (84)       702       217           (108)       325 
Operating specific 
 items: 
Regulatory fine                    (1)             (1)         -      (51)            (51)         - 
Legacy / other items 
 and impairments                    13              13         -      (92)            (92)         - 
Amortisation of intangible 
 assets in acquisitions           (19)            (19)         -      (19)            (19)         - 
Operating profit                   611            (91)       702        55           (270)       325 
Non-operating specific 
 items: 
Profit on disposal 
 of property, plant 
 and equipment                      36              36         -        89              89         - 
Profit before interest 
 and tax                           647            (55)       702       144           (181)       325 
Finance costs                     (55)               -      (55)      (56)               -      (56) 
Finance income                      17               -        17         6               -         6 
Net pension interest 
 (non-operating specific 
 item)                             117             117         -        86              86         - 
============================  ========  ==============  ========  ========  ==============  ======== 
Profit before tax                  726              62       664       180            (95)       275 
Tax charge                       (106)              37     (143)      (19)              60      (79) 
============================  ========  ==============  ========  ========  ==============  ======== 
Profit for the year                620              99       521       161            (35)       196 
============================  ========  ==============  ========  ========  ==============  ======== 
Earnings per share 
Basic                            62.0p            9.9p     52.1p     16.1p          (3.5p)     19.6p 
Diluted                          61.8p            9.9p     51.9p     16.1p          (3.5p)     19.6p 
============================  ========  ==============  ========  ========  ==============  ======== 
 

Segmental reported results

The following table presents the segmental reported results, prepared in accordance with IFRS:

 
                                                           52 weeks                                    52 weeks 
                                                         March 2021                                  March 2020 
                           ----------------------------------------  ------------------------------------------ 
                             Royal              Intragroup             Royal              Intragroup 
(GBPm)                        Mail      GLS   eliminations    Group     Mail      GLS   eliminations    Group 
-------------------------  -------  -------  -------------  -------  -------  -------  -------------  ------- 
Revenue                      8,649    4,040           (51)   12,638    7,720    3,161           (41)   10,840 
People costs               (5,703)    (851)              -  (6,554)  (5,342)    (722)              -  (6,064) 
Non-people costs           (2,686)  (2,831)             51  (5,466)  (2,369)  (2,231)             41  (4,559) 
                           -------  -------  -------------  -------  -------  -------  -------------  ------- 
Operating profit before 
 specific items                260      358              -      618        9      208              -      217 
Operating specific 
 items(1)                       11     (18)              -      (7)    (149)     (13)              -    (162) 
Operating profit               271      340              -      611    (140)      195              -       55 
Non-operating specific 
 items(1)                       38      (2)              -       36       88        1              -       89 
Earnings / loss before 
 interest and tax              309      338              -      647     (52)      196              -      144 
Net finance costs             (28)     (10)              -     (38)     (34)     (16)              -     (50) 
Net pension interest 
 (non-operating specific 
 item)                         117        -              -      117       86        -              -       86 
-------------------------  -------  -------  -------------  -------  -------  -------  -------------  ------- 
Profit before tax              398      328              -      726        -      180              -      180 
-------------------------  -------  -------  -------------  -------  -------  -------  -------------  ------- 
Tax (charge) / credit         (30)     (76)              -    (106)       31     (50)              -     (19) 
-------------------------  -------  -------  -------------  -------  -------  -------  -------------  ------- 
Profit for the year            368      252              -      620       31      130              -      161 
=========================  =======  =======  =============  =======  =======  =======  =============  ======= 
 
 

Footnotes for Financial Review - Presentation of Results and Alternative Performance Measures section

1. Details of specific items and the pension adjustment can be found under 'Specific items and pension charge to cash difference adjustment' in the Group results section.

Alternative Performance Measures (APMs)

This section lists the definitions of the various APMs disclosed throughout the Annual Report and Financial Statements. They are used by Management, which considers them to be an important means of comparing performance year-on-year and are key measures used within the business for assessing performance.

Adjusted operating profit

This measure is based on reported operating profit (see above) excluding the pension charge to cash difference adjustment and operating specific items, which Management considers to be key adjustments in understanding the underlying profit of the Group at this level.

These adjusted measures are reconciled to the reported results in the table in the paragraph 'Consolidated reported and adjusted results'. Definitions of operating costs, the pension charge to cash difference adjustment, and operating specific items are provided below.

Adjusted operating profit margin

This is a measure of performance that Management uses to understand the efficiency of the business in generating profit. It calculates 'adjusted operating profit' as a proportion of revenue in percentage terms.

Earnings before interest, tax, depreciation and amortisation (EBITDA) before specific items

EBITDA is reported operating profit before specific items with depreciation and amortisation and share of associate company profits added back.

Adjusted EBITDA is EBITDA before specific items with the pension charge to cash difference adjustment added back.

The following table reconciles adjusted EBITDA to reported operating profit before specific items.

 
                                                  52 weeks  52 weeks 
                                                     March     March 
(GBPm)                                                2021      2020 
================================================  ========  ======== 
Reported operating profit before specific items        618       217 
Depreciation and amortisation                          554       516 
EBITDA                                               1,172       733 
Pension charge to cash difference adjustment            84       108 
================================================  ========  ======== 
Adjusted EBITDA                                      1,256       841 
================================================  ========  ======== 
 

Adjusted earnings per share

Adjusted earnings per share is reported basic earnings per share, excluding operating and non-operating specific items and the pension charge to cash difference adjustment. A reconciliation of this number to reported basic earnings per share is included in the adjusted results table in the section 'Presentation of results'.

People costs

These are costs incurred in respect of the Group's employees and comprise wages and salaries, temporary resource, pensions and social security costs. People costs relating to projects and voluntary redundancy costs are also included.

Pension charge to cash difference adjustment

This adjustment represents the difference between the IAS 19 income statement pension charge and the actual cash payments. Management believes this adjustment is appropriate in order to eliminate the volatility of the IAS 19 accounting charge and to include only the true cash cost of the pension plans in the adjusted operating profit of the Group.

For the DBCBS this represents the difference between the IAS 19 income statement pension charge rate of 19.5% (2019-20: 20.8%) and the actual cash payments of 15.6%.

Operating specific items

These are recurring or non-recurring items of income or expense of a particular size and/or nature relating to the operations of the business that, in Management's opinion, require separate identification. Management does not consider them to be reflective of year-on-year operating performance. These include items that have resulted from events that are non-recurring in nature, even though related income/expense can be recognised in subsequent periods.

Regulatory fine

In light of the Competition Appeal Tribunal judgment of 12 November 2019, a provision was made in 2019-20 for a fine of GBP50 million and associated interest. In January 2020, Royal Mail requested permission to appeal the Competition Appeal Tribunal's judgment to the Court of Appeal (CoA) in respect of the Ofcom fine. On 30 March 2020, the CoA granted Royal Mail permission, and the hearing took place on 20-21 April 2021 and on 7 May 2021, the CoA dismissed the appeal. Royal Mail is considering its options, including an appeal to the Supreme Court. Please see the Principal Risks and Uncertainties section below for further details.

Employee Free Shares charge

These relate to accounting charges arising from the granting of free shares to employees upon the Government's sales of its stake in the business (SIP 2016), as well as partnership and matching shares, with no direct cash impact on the Group.

Amortisation of intangible assets in acquisitions

These notional charges, which arise as a direct consequence of IFRS business combination accounting requirements, are separately identified as Management does not consider these costs to be directly related to the trading performance of the Group.

Legacy/other items and impairments

These costs/credits relate either to unavoidable ongoing costs arising from historic events (such as the industrial diseases provision) or historic provisions not utilised. They also include any adjustments arising from asset impairment.

Non-operating specific items

These are recurring or non-recurring items of income or expense of a particular size and/or nature which do not form part of the Group's trading activity and in Management's opinion require separate identification.

Profit/loss on disposal of property, plant and equipment (PP&E)

Management separately identifies the profit/loss on disposal of PP&E as these disposals are not part of the Group's trading activity and are driven primarily by business strategy.

Free cash flow

Free cash flow (FCF) is calculated as statutory (reported) net cash flow before financing activities, adjusted to include finance costs paid and exclude net cash from the purchase/sale of financial asset investments. FCF represents the cash that the Group generates after spending the money required to maintain or expand its asset base. Free cash flow is also shown on a pre-IFRS 16 basis as it is used to support dividend cover analysis, taking into account all cashflows related to the operating businesses.

The following table reconciles free cash flow to the nearest IFRS measure 'net cash inflow before financing activities'.

 
                                                  Reported   Reported 
                                                  52 weeks   52 weeks 
                                                     March      March 
(GBPm)                                                2021       2020 
===============================================  =========  ========= 
Net cash inflow before financing activities            887        676 
Adjustments for: 
Finance costs paid                                    (57)       (53) 
(Sale)/purchase of financial asset investments        (30)         30 
Free cash flow                                         800        653 
===============================================  =========  ========= 
Capital element of operating lease repayments        (156)      (141) 
===============================================  =========  ========= 
Pre-IFRS 16 free cash flow                             644        512 
===============================================  =========  ========= 
 

In-year trading cash flow

In-year trading cash flow reflects the cash generated from the trading activities of the Group. It is based on reported net cash inflow from operating activities, adjusted to exclude other working capital movements and the cash cost of operating specific items and to include the cash cost of property, plant and equipment and intangible asset acquisitions and net finance payments. Other working capital movements include movements in GLS client cash held and in deferred revenue from stamps purchased in prior years. In-year trading cash flow is used primarily by Management to show cash being generated by operations less cash investment. In-year trading cash flow is also shown on a pre-IFRS 16 basis as it is used to support dividend cover analysis, taking into account all cashflows related to the operating businesses.

The following table reconciles in-year trading cash flow to the nearest IFRS measure 'net cash inflow from operating activities'.

 
                                                 Reported   Reported 
                                                 52 weeks   52 weeks 
                                                    March      March 
(GBPm)                                               2021       2020 
==============================================  =========  ========= 
Net cash inflow from operating activities           1,173        950 
Adjustments for: 
Other working capital movements                      (28)        (7) 
Cash cost of operating specific items                   4          2 
Purchase of property, plant and equipment           (289)      (265) 
Purchase of intangible assets                        (57)       (77) 
Net finance costs paid                               (41)       (47) 
==============================================  =========  ========= 
In-year trading cash flow                             762        556 
==============================================  =========  ========= 
Capital element of operating lease repayments       (156)      (141) 
==============================================  =========  ========= 
Pre-IFRS 16 in-year trading cash flow                 606        415 
==============================================  =========  ========= 
 

Net debt

Net debt is calculated by netting the value of financial liabilities (excluding derivatives) against cash and other liquid assets. It is a measure of the Group's net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single measure that can be used to assess the combined impact of the Group's indebtedness and its cash position. The use of the term net debt does not necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure. Details of the borrowing facilities in place and the amounts drawn can be found in the section titled 'Net finance costs'. Net debt is also shown on a pre-IFRS 16 basis as the banking covenants are calculated on a pre-IFRS 16 basis.

A reconciliation of net debt to reported balance sheet line items is shown below.

 
                                At 28 March  At 29 March 
(GBPm)                                 2021         2020 
==============================  ===========  =========== 
Loans/bonds                           (895)      (1,635) 
Leases                              (1,156)      (1,188) 
Cash and cash equivalents             1,532        1,619 
Investments                               -           30 
Client cash                              41           21 
Pension escrow (RMSEPP)                  21           21 
==============================  ===========  =========== 
Net debt                              (457)      (1,132) 
==============================  ===========  =========== 
Operating leases                      1,079        1,086 
==============================  ===========  =========== 
Pre-IFRS 16 net cash / (debt)           622         (46) 
==============================  ===========  =========== 
 

Loans and bonds decreased by GBP740 million largely as a result of the repayment in June 2020 of GBP700 million drawn on the bank syndicate loan facility in March 2020, and GBP40 million favourable exchange rate movements on the value of bonds.

Cash and cash equivalents (including Investments) decreased by GBP117 million largely as a result of the repayment of the bank syndicate loan facility drawdown of GBP700 million offset by increased free cash inflow of GBP800 million (2019-20: GBP653 million inflow). No dividends were paid in 2020-21 (2019-20: GBP244 million).

Net debt excludes GBP191 million (2019-20: GBP180 million) related to the RMPP pension scheme of the total GBP212 million (2019-20: GBP201 million) pension escrow investments on the balance sheet which is not considered to fall within the definition of net debt.

Adjusted effective tax rate

The adjusted effective tax rate is the adjusted tax charge or credit for the year expressed as a proportion of adjusted profit before tax. Adjusted effective tax rate is considered to be a useful measure of tax impact for the year. It approximates the tax rate on the underlying trading business through the exclusion of specific items and the pension charge to cash difference adjustment.

PRINCIPAL RISKS AND UNCERTAINTIES

Detailed below are the principal risks we consider could threaten our business model, the execution of our strategy, and the preservation and creation of sustainable value for shareholders and other stakeholders. How we mitigate these risks is also explained below. These risks are ordered on a net risk basis which takes into account the magnitude of potential impact and the probability of occurrence.

 
 Risk                              Status                             Actions to mitigate 
 1. Efficiency                     We are working with                We have a number of 
  Royal Mail must become            CWU at a senior level              initiatives in place 
  more efficient and                on the implementation              to drive efficiency 
  flexible to compete               of the Pathway to                  benefits across our 
  effectively in the                Change Agreement and               business including: 
  parcel and letter                 the operational change 
  markets.                          programme to drive                 - Transforming our 
                                    productivity.                      business from a UK-focused 
  The success of our                                                   letters business that 
  strategy relies on                While our network                  delivers parcels to 
  the effective control             provides strong economics,         a parcels-led more 
  of costs and delivery             particularly in the                balanced and diverse 
  of efficiency and                 combined delivery                  international business. 
  productivity benefits             of letters and small               Letters will remain 
  across all areas of               parcels, it is not                 an important part 
  the business.                     currently optimised                of the business. 
                                    for the increased 
  Failure to effectively            demand for later acceptance        - Embedding a range 
  control costs while               times and larger parcels.          of digitally enabled 
  at the same time delivering                                          work tools to improve 
  high-quality services             Our UK costs are increasing        efficiency and productivity, 
  could result in a                 as we continue to                  including the deployment 
  loss of customers,                make necessary investment          of our route optimisation 
  market share and revenue.         in quality measures                tool which has improved 
                                    and protective equipment           visibility of changes 
                                    for our people. This               to delivery routes. 
                                    makes it even more 
                                    important that we                  - Building dedicated 
                                    increase our efficiency.           parcel hubs in the 
                                                                       UK and the ongoing 
                                    The continuation of                roll-out of our automated 
                                    tighter COVID-19 restrictions,     parcel sorting machines 
                                    including changing                 into the rest of the 
                                    standard ways of working           estate with additional 
                                    to allow social distancing,        machines being installed. 
                                    has added costs and 
                                    has impacted our processing        - Simplifying products 
                                    and delivery operations.           and services. 
 
                                    These arrangements                 Our improved working 
                                    may continue for some              relationship with 
                                    time. In turn, they                the CWU will allow 
                                    may have an adverse                us to move faster 
                                    impact on cost control             and make changes that 
                                    and productivity.                  will deliver the benefits 
                                                                       associated with the 
                                    High severity, Stable,             Pathway to Change 
                                    Fast speed                         Agreement. 
                                  ---------------------------------  -------------------------------- 
 2. Economic and political         The Board continues                We have a multitude 
  environment                       to monitor the economic,           of mitigations across 
  Macro-economic conditions         political and wider                our business which 
  (including Brexit                 external environment               include: 
  and COVID-19) and/or              in the UK and our 
  the political environment         other markets. Particular          - Embedded macro-economic 
  across all our markets            areas of focus include:            risk assessments within 
  may adversely affect                                                 our letters forecasting 
  the Group's ability               - Economic downturn                processes. 
  to maintain and grow              as a result of the 
  revenue by reducing               pandemic and business              - Regular review and 
  volumes or driving                sentiment, including               update of a set of 
  customers to adopt                e-substitution, which              economic scenarios 
  cheaper products or               has negatively impacted            that have been constructed 
  formats for sending               letter volumes.                    to inform a range 
  letters and parcels.                                                 of medium and long-term 
                                    - Parcel volumes,                  economic outcomes. 
                                    which to some extent 
                                    are also impacted                  - Maintaining a strong 
                                    by economic conditions.            liquidity position, 
                                    Whilst any negative                with good levels of 
                                    impact has been more               cash and limited financial 
                                    than offset by the                 debt. 
                                    substantial increase 
                                    in e-commerce across               - Implementing a rigorous 
                                    our markets for this               cost programme to 
                                    financial year, and                effectively manage 
                                    the significant shift              cash and spending, 
                                    towards B2C volumes                including a management 
                                    in GLS, macro-economic             restructure and a 
                                    and political issues               detailed review of 
                                    continue to be challenging.        all non-people expenditure. 
 
                                    During the year, there             - Accelerating the 
                                    was a sharp economic               pace of change in 
                                    downturn in our core               the UK to deliver 
                                    markets. As in the                 the requisite efficiency 
                                    UK, economic growth                benefits and address 
                                    in the Eurozone slowed             changing needs due 
                                    down sharply in the                to the significant 
                                    short term.                        rise in parcel volumes. 
 
                                    The extent to which                - Introducing new 
                                    these trends will                  arrangements to ensure 
                                    be sustained depends               the movement of cross-border 
                                    on underlying structural           parcels. 
                                    changes in consumer 
                                    behaviour, and the                 - Ongoing monitoring 
                                    evolution of the response          of political and policy 
                                    to the pandemic in                 changes and regular 
                                    each country.                      engagement with politicians 
                                                                       and policy makers. 
                                    The medium-term outlook, 
                                    including the impact 
                                    of COVID-19 and Brexit 
                                    is highly uncertain. 
                                    Governments are likely 
                                    to raise taxes to 
                                    pay for the economic 
                                    impact that COVID-19 
                                    has had, which could 
                                    increase our costs 
                                    or impact revenue 
                                    and volumes due to 
                                    reduced consumer spending. 
 
                                    High severity, Stable, 
                                    Fast speed 
                                  ---------------------------------  -------------------------------- 
 3. Major breach of                Given the evolving                 We are: 
  information security,             nature, sophistication             - Continuing to invest 
  data protection regulation        and prevalence of                  in ensuring cyber 
  and/or cyber-attack               these threats, including           resilience, enhancing 
  Due to the nature                 those presented by                 our capabilities to 
  of our business, we               the current COVID-19               integrate cybercontrols 
  collect, process and              pandemic and increasing            into our operational 
  store confidential                reliance on technology             processes to protect 
  business and personal             and data for operational           our assets. 
  information (including            and strategic purposes, 
  sensitive personal                this continues to                  - Continuing to communicate 
  information).                     be a principal risk.               to our workforce and 
                                                                       stress the importance 
  As a result, we are               We also recognise                  of maintaining vigilance 
  subject to a range                that in a business                 across the business, 
  of laws, regulations              with more than 160,000             in relation to both 
  and contractual obligations       people and large quantities        cyber security and 
  around the governance             of documentation,                  data privacy. We run 
  and protection of                 there is a prospect                regular and active 
  various classes of                of human error in                  campaigns reminding 
  data to protect our               the protection of                  people of the correct 
  customers, employees,             data.                              behaviours and how 
  shareholders and suppliers.                                          to respond to threats 
                                    High severity, Stable,             such as phishing and, 
  In common with all                Fast speed                         given the increase 
  major organisations,                                                 in home working during 
  we are the potential                                                 the pandemic, we have 
  target of cyber-attacks                                              also heightened training 
  that could threaten                                                  and awareness to help 
  the confidentiality,                                                 our people work more 
  integrity and availability                                           securely from home. 
  of data and trigger 
  material service and/or                                              - Encouraging an open 
  operational interruption.                                            and prompt culture 
                                                                       of reporting so that 
  Also, a major breach                                                 if a mistake does 
  of information security,                                             happen, it is reported 
  data protection laws,                                                quickly, and the business 
  regulations and/or                                                   can take the appropriate 
  cyber-attack could                                                   remedial action. 
  adversely impact our 
  reputation, result 
  in financial loss, 
  regulatory action, 
  business disruption 
  and loss of stakeholder 
  confidence. 
                                  ---------------------------------  -------------------------------- 
 4. Customer expectations          There has been a paradigm          We have a number of 
  and our responsiveness            shift in online retail             programmes and initiatives 
  to market changes                 activity during the                across the business 
  Changes in customer               past year with a sharp             focused on customer 
  needs, expectations               increase in parcel                 expectations and our 
  and structural trends             volumes, at the same               responsiveness to 
  in our markets could              time as an initial                 market changes, including: 
  impact the demand                 sharp decline in addressed 
  for our products and              letter volumes (excluding          - Implementing changes 
  services.                         elections).                        to the way we operate 
                                                                       both to protect the 
  The acceleration of               Advertising mail has               health and safety 
  structural changes                recovered more rapidly             of our employees and 
  to the markets in                 following the initial              customers during the 
  which we operate over             hit to volumes.                    COVID-19 pandemic 
  the last year (notably                                               and in response to 
  the shift to e-commerce           While business mail                changes in customer 
  and e-substitution)               volumes were more                  demand by delivering 
  makes it essential                resilient to the initial           customer-facing enhancements, 
  that we evolve our                economic slump, they               feature developments 
  business model and                are taking longer                  and digital access. 
  strategy to meet customer         to recover. 
  needs now and in the                                                 - Continuing to implement 
  future and adapt to               Stamp traffic has                  productivity improvements 
  harness growth trends.            performed well as                  and customer-focused 
                                    social distancing                  enhancements in order 
  Our success at growing            boosted the use of                 to build on our trusted 
  new areas of business             greeting cards, and                position in the community, 
  is dependent on identifying       e-retail growth has                meet customer needs, 
  profitable and sustainable        driven volumes of                  remain competitive 
  areas of growth and               large letters in fulfilment        and generate long-term 
  having in place appropriate       mail.                              growth to consolidate 
  structures to support                                                our position as the 
  transformation.                   Parcel volumes have                UK's premier parcel 
                                    been comparable to                 carrier. 
                                    peak season continuously 
                                    since March 2020,                  - Deploying a range 
                                    with Christmas itself              of appropriate incentives 
                                    being by far the biggest           to encourage customers 
                                    ever in terms of online            to reconnect with 
                                    shopping. International            using mail. 
                                    parcel volumes grew 
                                    in the first half                  - Delivering our Accelerate 
                                    of the year but declined           GLS strategy. 
                                    in the second half 
                                    broadly as expected.               - Growing new areas 
                                                                       of business through 
                                    B2C will remain a                  innovation and expanding 
                                    major area of growth               service offerings. 
                                    going forward for 
                                    GLS whilst continuing 
                                    to serve our B2B customer 
                                    base. 
 
                                    High severity, Stable, 
                                    Medium speed 
                                  ---------------------------------  -------------------------------- 
 5. Competition Act                The Group robustly                 Whistl's High Court 
  investigation                     defended its conduct               claim is on hold until 
  On 14 August 2018,                in written and oral                after the completion 
  Ofcom published its               representations made               of the appeal process. 
  decision following                to Ofcom during the 
  its investigation                 investigation and                  We have in place policies, 
  into whether Royal                lodged an appeal with              training and guidance 
  Mail had breached                 the Competition Appeal             around our obligations 
  competition law. The              Tribunal (CAT) on                  in addition to a team 
  investigation was                 12 October 2018 to                 of competition lawyers 
  launched in February              have both Ofcom's                  advising on such matters. 
  2014, following a                 decision and fine 
  complaint brought                 overturned. 
  by TNT Post UK (now 
  Whistl). Ofcom found              This appeal was heard 
  that Royal Mail had               in June and July 2019 
  abused its dominant               and in November 2019 
  position in the market            the CAT upheld Ofcom's 
  for bulk mail delivery            decision and the GBP50 
  services in the UK                million fine. As a 
  by issuing Contract               result, Royal Mail 
  Change Notices on                 has made a provision 
  10 January 2014 which             for the fine plus 
  introduced discriminatory         interest, which is 
  prices. It fined Royal            now payable to Ofcom. 
  Mail GBP50 million. 
                                    In January 2020, Royal 
  In October 2018, Whistl           Mail requested permission 
  filed a damages claim             to appeal the CAT's 
  against Royal Mail                judgment to the Court 
  at the High Court                 of Appeal (CoA). This 
  relating to Ofcom's               permission was granted 
  decision.                         on 30 March 2020, 
                                    a hearing was held 
                                    in April 2021 and 
                                    on 7 May 2021 the 
                                    CoA dismissed our 
                                    appeal. We are disappointed 
                                    by the CoA's judgment 
                                    and are considering 
                                    our options, including 
                                    an appeal to the Supreme 
                                    Court. 
 
                                    High severity, Stable, 
                                    Slow speed 
                                  ---------------------------------  -------------------------------- 
 6. Industrial action              On 3 February 2021                 We are: 
  There is extensive                the CWU voted in favour            - Continuing to engage 
  trade union recognition           of the 2020 Pathway                with the CWU at a 
  across our UK workforce,          to Change Agreement                senior level, on the 
  with strong and active            which established                  implementation of 
  trade unions.                     a basis for an improved            the Pathway to Change 
                                    Royal Mail and CWU                 Agreement. 
  One or more material              relationship and the 
  disagreements or disputes         operational change                 - Continuing to engage 
  could result in widespread        programme to drive                 with Unite/CMA to 
  localised or national             productivity.                      rebuild relationships 
  industrial action.                                                   following the conclusion 
                                    Our 2020 management                of the management 
  This would cause material         restructuring programme            restructuring programme. 
  disruption to our                 has put pressure on 
  UK business and likely            the relationship with              - Continuing to build 
  result in an immediate            Unite/CMA whose core               trust with our employees 
  and potentially ongoing           membership are the                 and to support them 
  significant loss of               frontline managers                 in the delivery of 
  Group revenue.                    tasked with delivering             the business goals. 
                                    the business transformation 
  It may also cause                 goals that form part 
  Royal Mail to fail                of the Pathway to 
  to meet the Quality               Change Agreement. 
  of Service targets 
  prescribed by Ofcom,              Medium severity, Decreasing 
  which may lead to                 risk, Fast speed 
  enforcement action 
  and fines and loss 
  of customers. 
                                  ---------------------------------  -------------------------------- 
 7. Capability - talent            The transformation                 Talent and strategic 
  and strategic workforce           of our UK business,                workforce planning 
  planning                          together with the                  is a key part of our 
  Our performance, operating        shift in mail mix/profile          overall focus as a 
  results and future                as a result of COVID-19,           Company and is addressed 
  growth depend on our              will change the nature             in multiple ways, 
  ability to attract                of some roles, requiring           including: 
  and retain talent                 new and different 
  with the appropriate              skills.                            - Undertaking regular 
  level of expertise.                                                  senior management 
  The capability, experience        We need to be able                 talent reviews and 
  and cohesion of senior            to upskill and develop             succession planning 
  management are integral           our existing workforce.            processes. 
  to our transformation.            We also need to attract 
                                    and retain people                  - Introducing leadership 
  Workforce planning                with the right skills,             development programmes 
  could be adversely                capabilities and behaviours        to support the transformation 
  impacted by an ageing             for our organisation.              agenda and specific 
  workforce, and a reduction                                           initiatives and targets 
  in available workforce            Trust and engagement               to accelerate diversity 
  due to the impacts                levels across the                  across our teams. 
  of demographic change,            business are currently 
  Brexit and increasing             not as high as we                  - Proper and effective 
  automation.                       would like, and this               application of performance 
                                    is an urgent area                  management. 
  In addition, we believe           of focus for us. 
  that good trust and                                                  - Recruiting external 
  engagement levels                 Medium severity, Stable,           hires with key skills 
  between all employees             Medium speed                       where required. 
  across the organisation 
  are key foundations                                                  - Maintaining and 
  to deliver the business                                              implementing a workforce 
  strategy - if they                                                   plan that is aligned 
  are not in place then                                                with the strategy 
  it risks the successful                                              and emerging commercial 
  performance of the                                                   outlook. 
  business. 
                                                                       - Monitoring and benchmarking 
                                                                       the demographic profile 
                                                                       of our workforce. 
 
                                                                       - Undertaking regular 
                                                                       trust and engagement 
                                                                       surveys to identify 
                                                                       areas to be addressed 
                                                                       and take decisive 
                                                                       actions to resolve. 
                                  ---------------------------------  -------------------------------- 
 8. Our UK regulatory              Ofcom is undertaking               We have a number of 
  framework                         a review of postal                 activities focusing 
  The continuing structural         regulation.                        on the future of the 
  decline in addressed                                                 Universal Service 
  letter volumes, and               It published its User              Obligation, including: 
  broader changes in                Needs Review in November 
  the parcels market                2020 and then issued               - Working with Ofcom, 
  poses significant                 a 'Call for Inputs'                Government and the 
  risks to the financial            in March 2021.                     unions more broadly 
  sustainability of                                                    to ensure that the 
  the Universal Service             Ofcom plans to consult             business is financially 
  Obligation.                       in Q3 2021-22 and                  underpinned in a sustainable 
                                    introduce a new regulatory         way, and future-proofed 
  There is a further                framework in 2022.                 to reflect changing 
  risk that Ofcom changes                                              customer needs and 
  the current regulatory            Ofcom believe the                  preferences. 
  framework in a way                current approach has 
  which impacts our                 worked well to date                - Engaging fully with 
  customer strategy                 but in this period                 Ofcom and other stakeholders 
  or is commercially                of significant change              during its review 
  disadvantageous to                in postal markets,                 of postal regulation. 
  Royal Mail.                       it is considering                  We will submit a detailed, 
                                    whether the regulatory             evidence-based submission 
                                    framework remains                  in response to Ofcom's 
                                    fit for purpose or                 'Call for Inputs'. 
                                    whether any changes                This will set out 
                                    are needed. It is                  clearly that we need 
                                    considering financial              a flexible regulatory 
                                    sustainability and                 framework that provides 
                                    efficiency, letters                commercial flexibility, 
                                    and the universal                  enabling Royal Mail 
                                    service, the parcels               to innovate and grow. 
                                    market including consumer          Further, there is 
                                    protections and its                no need for Access 
                                    approach to Access                 regulation to be widened 
                                    and bulk mail, including           to include parcels. 
                                    whether the current                The parcels market 
                                    scope of Access regulation         in the UK is highly 
                                    remains appropriate                competitive and working 
                                    or should be changed.              well. 
 
                                    Royal Mail's performance           - Developing a plan 
                                    will be an important               as part of our UK 
                                    factor in the regulatory           transformation to 
                                    review.                            underpin the sustainability 
                                                                       of the Universal Service 
                                    Medium severity, Increasing        Obligation. This will 
                                    risk, Medium speed                 help us become even 
                                                                       more efficient and 
                                                                       better placed to respond 
                                                                       to changing customer 
                                                                       demands. 
 
                                                                       - Executing a stretching 
                                                                       self-help programme 
                                                                       that involves significant 
                                                                       investment in the 
                                                                       Universal Service 
                                                                       when our finances 
                                                                       are under challenge. 
                                  ---------------------------------  -------------------------------- 
 9. Environmental and              We recognise our responsibility    We have clear market 
  sustainability                    to reduce our environmental        strategies and business 
  As our customers and              impacts and consume                plans to address risks 
  stakeholders seek                 fewer non -- renewable             and opportunities 
  to adapt to climate               resources.                         relating to the environment 
  change, demand is                                                    and sustainability, 
  increasing for more               We have a requirement              including: 
  sustainable products              to maintain a large 
  and services.                     fleet of vehicles                  - Executing our environmental 
                                    across Royal Mail                  strategy which is 
  The cost of operations            and GLS. Growth in                 targeting net zero 
  could increase as                 parcels is also driving            by 2050 for our UK 
  a result of actions               up our energy demand.              operations. 
  to mitigate and adapt 
  to climate change,                Medium severity, Increasing        - Continuing to invest 
  and/or regulatory                 risk, Slow speed                   and implement changes 
  changes, such as the                                                 to improve the efficiency 
  introduction of Clean                                                of our operations 
  Air Zones, the future                                                through zero and low-emission 
  ban of petrol and                                                    vehicles and the installation 
  diesel vehicles, and                                                 of efficient equipment 
  net zero emission                                                    across our property 
  and air quality targets                                              estate to reduce missions 
  for towns and cities.                                                and improve air quality. 
 
  An increase in the                                                   - Investing in innovative 
  frequency of extreme                                                 technologies, such 
  weather events may                                                   as telemetry, and 
  result in disruption                                                 driver training programmes, 
  to our operations                                                    to reduce the amount 
  and impact our ability                                               of fuel we use and 
  to meet customer expectations,                                       optimising our transport 
  the Universal Service                                                network, to ensure 
  Obligation or other                                                  that it is as efficient 
  contractual requirements.                                            as possible. 
  We may also see price 
  rises as a result                                                    - Strengthening the 
  of resource scarcity                                                 sustainability footprint 
  such as water shortages,                                             in GLS with carbon-neutral 
  increased insurance                                                  delivery, roll-out 
  premiums and required                                                of EcoHubs with renewable 
  investment to protect                                                energy generation 
  the business from                                                    and implementation 
  extreme weather events                                               of sustainable solutions. 
  and any associated 
  repairs.                                                             - Engaging our people 
                                                                       in our efforts to 
  We may also see price                                                become more efficient 
  rises as a result                                                    and reduce our use 
  of resource scarcity,                                                of natural resources. 
  such as water shortages, 
  increased insurance                                                  - Reducing our energy 
  premiums and required                                                and water consumption 
  investment to protect                                                and reducing the amount 
  the business from                                                    of waste we generate. 
  extreme weather events 
  and any associated 
  repairs. 
 
  In common with all 
  major organisations, 
  there could also be 
  a risk of reputational 
  damage and/or loss 
  in revenue if we do 
  not meet stakeholder 
  and customer expectations 
  for action on environmental 
  matters and climate 
  change. 
                                  ---------------------------------  -------------------------------- 
 10. Business continuity           Since the onset of                 We have a number of 
  and crisis management             the COVID-19 pandemic,             mitigations across 
  We may fail to successfully       Governments worldwide              the Group, which include: 
  respond to, recover               have imposed restrictions 
  from, or reduce the               on the movement of                 - Maintaining a comprehensive 
  impact of a major                 people and imposed                 business continuity 
  threat or disruptive              necessary measures                 and crisis management 
  incident that could               which have had, and                response across the 
  cause widespread operational      continue to have,                  Group and at a functional 
  disruption and financial          a significant effect               level. 
  loss to the Group,                on our UK and International 
  its customers and                 businesses. The pandemic           - Established response 
  its supply chain.                 has been a robust                  teams comprising of 
  This could also impact            test of our business               Executive Director 
  on the ability of                 continuity arrangements.           and senior management 
  Royal Mail to meet                                                   leadership, who report 
  its Universal Service             Royal Mail has a responsibility    regularly to the Board. 
  Obligations.                      to provide sustained 
                                    and continued postal               In relation to COVID-19, 
                                    services under the                 we are: 
                                    Universal Service. 
                                    Ofcom has acknowledged             - Continuing to engage 
                                    the impact of COVID-19             closely with the Government, 
                                    and recognised the                 public health authorities, 
                                    pandemic as an emergency           Ofcom, and customers 
                                    situation since March              to implement necessary 
                                    2020, which has allowed            changes in response 
                                    some temporary relaxation          to Government, Public 
                                    of Universal Service               Health England (PHE) 
                                    requirements.                      and World Health Organisation 
                                                                       (WHO) advice. 
                                    Royal Mail staff are 
                                    recognised by Government           - Cascading regular 
                                    as key workers, essential          communications to 
                                    to keeping the country             all employees to keep 
                                    connected during this              them informed of current 
                                    time. Our priority                 developments. 
                                    continues to be the 
                                    protection of our                  - Continuing with 
                                    people, our society                ongoing dialogue with 
                                    and our customers,                 key stakeholders and 
                                    whilst keeping mail                suppliers. 
                                    and parcels moving. 
                                                                       - Continuing to respond 
                                    Medium severity, Stable,           by adapting operational 
                                    Fast speed                         processes and procedures 
                                                                       to minimise disruption 
                                                                       whilst keeping our 
                                                                       people and customers 
                                                                       safe. 
                                  ---------------------------------  -------------------------------- 
 11. Health, safety                The health, safety                 We have a number of 
  and wellbeing                     and wellbeing of our               programmes and initiatives 
  A health and safety               people, customers                  across the Group to 
  incident or global                and members of the                 address this risk, 
  health crisis could               public is of paramount             which include: 
  result in the serious             importance. 
  injury, ill health                                                   - Providing appropriate 
  or death of our people            The business has a                 policies, procedures, 
  or members of the                 large number of employees          systems and tools, 
  public. An incident               including seasonal                 supported by training 
  may lead to criminal              staff and agency workers.          programmes, to engage 
  prosecution or fines              It also operates a                 our people in safety 
  by the enforcing authority        very large fleet,                  improvement. 
  or civil action by                employs a large number 
  the injured party                 of contractors and                 - Implementing a programme 
  resulting in large                interacts extensively              to manage and monitor 
  financial losses and/or           with members of the                our risks and ensure 
  reputational damage.              public.                            compliance with laws 
                                                                       and regulations. 
  With significant and              A large proportion 
  increasing numbers                of our people spend                - Continuing to streamline 
  of subcontractors                 most of their time                 and simplify the various 
  utilised across the               working outdoors,                  health and safety 
  business, there is                on foot or driving,                systems in place to 
  a heightened exposure             where the environment              enhance their effectiveness. 
  to health and safety              is unpredictable and 
  incidents.                        more difficult to                  - Monitoring compliance 
                                    control.                           via an annual integrated 
  Similarly, failure                                                   audit programme. A 
  to manage the health              Due to this wide reach             professional and independent 
  and wellbeing of our              and the number of                  team also provides 
  people could also                 people affected by                 advice, support and 
  lead to reputational              the business' undertakings,        guidance on the implementation 
  damage, loss of employee          the risk of serious                of standards. 
  goodwill and financial            harm to people cannot 
  losses through increased          be totally mitigated.              - Providing a Group-wide 
  sickness absence,                                                    annual risk update 
  lower productivity,               We acknowledge that                to all employees which 
  and failure to deliver            every health and safety            is based on the outputs 
  the Universal Service             incident has a human               of a detailed risk 
  Obligation, civil                 impact.                            assessment highlighting 
  action or criminal                                                   areas for improvement. 
  prosecution.                      The COVID-19 pandemic 
                                    continues to pose                  - Operating extensive 
                                    an increased risk                  employee health and 
                                    to public health.                  wellbeing programmes. 
                                    The effectiveness 
                                    of the controls and                We also enhanced our 
                                    processes we operate               sick pay provision 
                                    to protect our workforce,          and updated our operating 
                                    who are key workers,               procedures in line 
                                    is critically important.           with PHE and WHO instructions 
                                                                       and guidance to limit 
                                    Low severity, Stable,              contact between colleagues 
                                    Fast speed                         and customers during 
                                                                       the pandemic. 
 
                                                                       These arrangements 
                                                                       have been communicated 
                                                                       to employees through 
                                                                       a dedicated, comprehensive 
                                                                       multi -- media communications 
                                                                       campaign. 
                                  ---------------------------------  -------------------------------- 
 12. Pension arrangements          We recognise that                  We have a dedicated 
  We may be unable to               pension benefits are               team working to establish 
  obtain the necessary              important. We will                 the CDC pension scheme. 
  legislative changes               continue to provide                We continue to work 
  to enable us to implement         sustainable and affordable         with the CWU and Government 
  the UK's first Collective         pensions arrangements              to introduce the necessary 
  Defined Contribution              for our people.                    legislative and regulatory 
  (CDC) pension scheme,                                                changes so that we 
  as agreed with the                The Royal Mail Pension             can introduce our 
  CWU.                              Plan closed to future              proposed CDC pension 
                                    accrual in its Defined             scheme as soon as 
                                    Benefit form on 31                 possible. 
                                    March 2018. A new 
                                    Defined Benefit Cash 
                                    Balance Scheme was 
                                    put in place from 
                                    1 April 2018. 
 
                                    The Pension Schemes 
                                    Bill, of which CDC 
                                    is a part, received 
                                    Royal Assent in February 
                                    2021 and CDC schemes 
                                    are now allowed by 
                                    law. However, detailed 
                                    secondary legislation 
                                    and tax changes will 
                                    have to be introduced 
                                    by Government before 
                                    our scheme can be 
                                    established, and it 
                                    will also require 
                                    authorisation from 
                                    The Pensions Regulator 
                                    before it can begin 
                                    accepting contributions. 
 
                                    Low severity, Stable, 
                                    Medium speed 
                                  ---------------------------------  -------------------------------- 
 

VIABILITY STATEMENT

The Directors have assessed the prospects of the Group and its viability over the longer term as part of their ongoing risk management and monitoring processes.

Assessment of viability

While the Directors have no reason to believe that the Group will not be viable over the longer term, they consider the three financial years to March 2024 (the Viability Period) to be an appropriate planning time horizon to assess the Group's viability and to determine the probability and impact of our principal risks. This time period matches our business planning cycle.

Process, key factors and assumptions

The Group's viability is assessed as part of our regular strategy and budget reviews, financial forecasting and ongoing risk management.

The key factors affecting the Directors' viability assessment included:

- Marketplace trends and dynamics.

- The Royal Mail and GLS strategies to deliver long-term sustainable growth.

- The Group's principal risks and the robust measures in place to mitigate those risks.

The key assumptions used in relation to the forecast that supports the viability assessment are as follows:

- A rebound in GDP growth of 9% in 2021-22 following the gradual lifting of lockdown restrictions and no further lockdowns announced in 2021-22.

- Modest growth in letter revenues following the significant decline in 2020-21 as advertising and business mail recovers.

- Our ability to strengthen GLS' top position in the cross-border deferred parcel segment, strongly position the business in the 2C parcel market while continuing to secure its leading position in the 2B segment.

- People costs reflect an extensive set of operational initiatives with a phased implementation.

- Flat parcel growth as lockdown restrictions are relaxed.

- COVID-19 related one-off charges of circa GBP120 million are included within the plan.

Scenario modelling

The key assumptions within the projections were stress tested by modelling the severe but plausible downside scenarios detailed below and taking into account those of the Group's principal risks that could have a financial impact over the Viability Period. The scenarios were evaluated in aggregate and were tested to determine whether the Group would be able to sustain its operations over the Viability Period.

The scenarios took into account the levels of committed capital and expenditure. Consideration was also given to the large fixed cost base required to deliver the Universal Service Obligation in its current form. The Group has a EUR500m bond that matures in July 2024, which is outside of the three-year viability assessment period. It is assumed in the modelling for viability assessment purposes that this would be refinanced. In the very unlikely event that this is not possible, then other options could be considered to ensure this obligation is met, including using capital generated through the business plan period, reducing investment, or reviewing dividend payments.

The scenarios also took into account the actions currently undertaken by the Group to manage and mitigate its principal risks. A number of short-term cost and cash saving actions available to the Group were also considered including:

- Reducing variable hours and cost of sales in response to lower revenue.

- Reducing discretionary pay.

- Reducing one-off projects.

We have made our assessment based on our best view of the severe but plausible downside scenarios that we might face. If outcomes are significantly worse, the Directors would need to consider what additional mitigating actions were needed, for example reducing capital expenditure, reviewing dividend payments, or assessing the value of our asset base to support liquidity. Consequently, the Directors have concluded that to stress test a level of increased severity (beyond the downside scenario) which may cast doubt on the Group's ability to continue to be viable over the three-year assessment period is not currently reasonable.

 
 Scenarios                                 Principal risks 
 Deteriorating economic and market         Economic and political environment 
  conditions which could result in          Customer expectations and our responsiveness 
  letters volume decline greater than       to market changes 
  the projected range.                      Business continuity and crisis management 
                                          ---------------------------------------------- 
 Potential impact of lower international   Economic and political environment 
  and cross-border volume partly related 
  to Brexit. 
                                          ---------------------------------------------- 
 Increased competition in the UK           Customer expectations and our responsiveness 
  parcels sector including changes          to market changes 
  in consumer expectations and/or 
  market disruption. 
                                          ---------------------------------------------- 
 Potential impact of industrial action     Industrial action 
  or incurring costs to avoid it.           Efficiency 
                                            Customer expectations and our responsiveness 
                                            to market changes 
                                          ---------------------------------------------- 
 Delays in relation to the Royal           Efficiency 
  Mail transformation plan. 
                                          ---------------------------------------------- 
 Review of the regulatory framework        Our UK regulatory framework 
  is expected to be concluded in 2022. 
  There is a risk that changes may 
  impact our customer strategy or 
  are commercially disadvantageous 
  to Royal Mail. 
                                          ---------------------------------------------- 
 

Going Concern Statement

The consolidated Financial Statements have been prepared on a going concern basis. The financial performance and position of the Group, its cash flows and its approach to capital management are set out in the Financial Review. The Board reviewed the Group's projections for the next 12 months and after due consideration, considered it appropriate to continue to adopt the going concern basis of accounting.

Viability Statement

Based on the results of their analysis, including a number of severe but plausible scenarios assessed in aggregate, the Directors have a reasonable expectation that the Group will be able to continue in operation, meet its liabilities as they fall due, retain sufficient available cash and not breach any covenants under any drawn or undrawn facility over the three financial years to March 2024.

Consolidated Income Statement

For the 52 weeks ended 28 March 2021 and 52 weeks ended 29 March 2020

 
                                                                                               Reported   Reported 
                                                                                               52 weeks   52 weeks 
                                                                                                   2021       2020 
                                                                                       Notes       GBPm       GBPm 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
Continuing operations 
Revenue                                                                                          12,638     10,840 
Operating costs(1)                                                                             (12,020)   (10,623) 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
People costs                                                                                    (6,554)    (6,064) 
Distribution and conveyance costs                                                               (3,483)    (2,786) 
Infrastructure costs                                                                            (1,074)      (991) 
Other operating costs                                                                             (909)      (782) 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
 
Operating profit before specific items(2)                                                           618        217 
Operating specific items 
Regulatory fine                                                                            8        (1)       (51) 
Legacy/other items and impairments                                                                   13       (92) 
Amortisation of intangible assets in acquisitions                                                  (19)       (19) 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
Operating profit                                                                                    611         55 
Profit on disposal of property, plant and equipment (non-operating specific item)(2)                 36         89 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
Profit before interest and tax                                                                      647        144 
Finance costs                                                                                      (55)       (56) 
Finance income                                                                                       17          6 
Net pension interest (non-operating specific item)(2)                                      6        117         86 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
Profit before tax                                                                                   726        180 
Tax charge                                                                                 3      (106)       (19) 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
Profit for the year                                                                                 620        161 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
 
Earnings per share 
Basic                                                                                      4      62.0p      16.1p 
Diluted                                                                                    4      61.8p      16.1p 
-------------------------------------------------------------------------------------  -----  ---------  --------- 
 

1 Operating costs are stated before operating specific items which Include: the regulatory fine, legacy/other Items, impairments and amortisation of intangible assets in acquisitions.

   2   For further details on Alternative Performance Measures (APMs) used, see the Financial Review. 

Consolidated Statement of Comprehensive Income

For the 52 weeks ended 28 March 2021 and 52 weeks ended 29 March 2020

 
                                                                                                   Reported   Reported 
                                                                                                   52 weeks   52 weeks 
                                                                                                       2021       2020 
                                                                                           Notes       GBPm       GBPm 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Profit for the year                                                                                     620        161 
Other comprehensive (expense)/income for the year from continuing operations: 
Items that will not be subsequently reclassified to profit or loss: 
Amounts relating to pensions accounting                                                             (1,448)      1,122 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Withholding tax receivable/(payable) on distribution of RMPP and RMSEPP surplus                6        660      (648) 
Remeasurement (losses)/gains of the defined benefit surplus in RMPP and RMSEPP              6(c)    (1,998)      1,773 
Remeasurement losses of the defined benefit deficit in DBCBS                                6(d)      (136)        (3) 
Deferred tax associated with DBCBS                                                             3         26          - 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Items that may be subsequently reclassified to profit or loss: 
Foreign exchange translation differences                                                               (23)          3 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Exchange differences on translation of foreign operations (GLS)                                        (45)         20 
Net gain/(loss) on hedge of a net investment (EUR500 million bond)                                       20       (15) 
Net gain/(loss) on hedge of a net investment (Euro-denominated lease payables)                            2        (2) 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Designated cash flow hedges                                                                              30       (49) 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Gains/(losses) on cash flow hedges deferred into equity                                                  11       (46) 
Losses/(gains) on cash flow hedges released from equity to income                                        23        (1) 
Loss on cross-currency swap cash flow hedge deferred into equity                                        (2)       (21) 
Loss on cross-currency swap cash flow hedge released from equity to income - interest 
 payable                                                                                                  8          3 
(Loss)/gain on cost of hedging deferred into equity                                                     (2)          6 
Gain on cost of hedging released from equity to income - interest payable                               (1)        (1) 
Tax on above items                                                                             3        (7)         11 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Total other comprehensive (expense)/income for the year                                             (1,441)      1,076 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
Total comprehensive (expense)/income for the year                                                     (821)      1,237 
-----------------------------------------------------------------------------------------  -----  ---------  --------- 
 

Consolidated Balance Sheet

At 28 March 2021 and 29 March 2020

 
                                                          Reported   Reported 
                                                                at         at 
                                                          28 March   29 March 
                                                              2021       2020 
                                                  Notes       GBPm       GBPm 
------------------------------------------------  -----  ---------  --------- 
Non-current assets 
Property, plant and equipment                                3,007      3,120 
Goodwill                                                       378        390 
Intangible assets                                              468        558 
Investments in associates                                        5          5 
Financial assets 
Pension escrow investments                                     212        201 
Derivatives                                                      5          - 
RMPP/RMSEPP retirement benefit surplus - net of 
 withholding tax payable                              6      2,389      3,614 
Other receivables                                              100         12 
Deferred tax assets                                   3        153        110 
------------------------------------------------  -----  ---------  --------- 
                                                             6,717      8,010 
------------------------------------------------  -----  ---------  --------- 
Assets held for sale                                            26         25 
------------------------------------------------  -----  ---------  --------- 
Current assets 
Inventories                                                     18         19 
Trade and other receivables                                  1,640      1,282 
Income tax receivable                                            9          6 
Financial assets 
Investments                                                      -         30 
Derivatives                                                      2          5 
Cash and cash equivalents                                    1,573      1,640 
------------------------------------------------  -----  ---------  --------- 
                                                             3,242      2,982 
------------------------------------------------  -----  ---------  --------- 
Total assets                                                 9,985     11,017 
------------------------------------------------  -----  ---------  --------- 
Current liabilities 
Trade and other payables                                   (2,377)    (2,041) 
Financial liabilities 
Interest-bearing loans and borrowings                            -      (700) 
Lease liabilities                                     7      (197)      (201) 
Derivatives                                                   (12)       (35) 
Income tax payable                                            (15)        (5) 
Provisions                                            8      (124)      (113) 
------------------------------------------------  -----  ---------  --------- 
                                                           (2,725)    (3,095) 
------------------------------------------------  -----  ---------  --------- 
Non-current liabilities 
Financial liabilities 
Interest-bearing loans and borrowings                        (895)      (935) 
Lease liabilities                                     7      (959)      (987) 
Derivatives                                                   (36)       (32) 
DBCBS retirement benefit deficit                      6      (394)      (177) 
Provisions                                            8      (105)      (112) 
Other payables                                                (18)        (4) 
Deferred tax liabilities                              3       (48)       (54) 
------------------------------------------------  -----  ---------  --------- 
                                                           (2,455)    (2,301) 
------------------------------------------------  -----  ---------  --------- 
Total liabilities                                          (5,180)    (5,396) 
------------------------------------------------  -----  ---------  --------- 
Net assets                                                   4,805      5,621 
------------------------------------------------  -----  ---------  --------- 
Equity 
Share capital                                                   10         10 
Retained earnings                                            4,802      5,625 
Other reserves                                                 (7)       (14) 
------------------------------------------------  -----  ---------  --------- 
Total equity                                                 4,805      5,621 
------------------------------------------------  -----  ---------  --------- 
 

The Financial Statements were approved and authorised for issue by the Board of Directors on 19 May 2021 and were signed on its behalf by:

   Keith Williams                                                   Mick Jeavons 
   Non-Executive Chair                                         Group Chief Financial Officer 

Consolidated Statement of Changes in Equity

For the 52 weeks ended 28 March 2021 and 52 weeks ended 29 March 2020

 
                                                                                            Foreign 
                                                                                           currency 
                                                                     Share   Retained   translation   Hedging    Total 
                                                                   capital   earnings       reserve   reserve   equity 
                                                                      GBPm       GBPm          GBPm      GBPm     GBPm 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Reported at 31 March 2019                                               10      4,576            27         6    4,619 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
IFRS 16 transition adjustment                                            -          1             -         -        1 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Reported at 1 April 2019 on transition to IFRS 16                       10      4,577            27         6    4,620 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Profit for the year                                                      -        161             -         -      161 
Other comprehensive income/(expense) for the year                        -      1,122             3      (49)    1,076 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Total comprehensive income/(expense) for the year                        -      1,283             3      (49)    1,237 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Transactions with owners of the Company, recognised directly in 
equity 
Gains on cash flow hedges released from equity to the 
 carrying amount of non-financial assets                                 -          -             -       (1)      (1) 
Dividend paid to equity holders of the Parent Company                    -      (244)             -         -    (244) 
Share-based payments 
Employee Free Shares issue                                               -          7             -         -        7 
Long--Term Incentive Plan (LTIP)                                         -          2             -         -        2 
Deferred Share Bonus Plan (DSBP)                                         -          2             -         -        2 
Purchase of own shares(1)                                                -        (3)             -         -      (3) 
Deferred tax on share-based payments                                     -          1             -         -        1 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Reported at 29 March 2020                                               10      5,625            30      (44)    5,621 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Profit for the year                                                      -        620             -         -      620 
Other comprehensive (expense)/income for the year                        -    (1,448)          (23)        30  (1,441) 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Total comprehensive (expense)/income for the year                        -      (828)          (23)        30    (821) 
Transactions with owners of the Company, recognised directly in 
equity 
Share-based payments 
Employee Free Shares issue                                               -          1             -         -        1 
Long-Term Incentive Plan (LTIP)                                          -          1             -         -        1 
Deferred Share Bonus Plan (DSBP)                                         -          3             -         -        3 
Deferred tax on share-based payments                                     -          1             -         -        1 
Settlement of DSBP                                                       -        (1)             -         -      (1) 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
Reported at 28 March 2021                                               10      4,802             7      (14)    4,805 
----------------------------------------------------------------  --------  ---------  ------------  --------  ------- 
 
   1   Shares required for employee share schemes. 

Consolidated Statement of Cash Flows

For the 52 weeks ended 28 March 2021 and 52 weeks ended 29 March 2020

 
                                                                                              Reported        Reported 
                                                                                         52 weeks 2021   52 weeks 2020 
                                                                                 Notes            GBPm            GBPm 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Cash flow from operating activities 
Profit before tax                                                                                  726             180 
Adjustment for: 
Net pension interest                                                                 6           (117)            (86) 
Net finance costs                                                                                   38              50 
Profit on disposal of property, plant and equipment                                               (36)            (89) 
Regulatory fine                                                                                      1              51 
Legacy/other items and impairments                                                                (13)              92 
Amortisation of intangible assets in acquisitions                                                   19              19 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Operating profit before specific items(1)                                                          618             217 
Adjustment for: 
Depreciation and amortisation                                                                      554             516 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
EBITDA before specific items(1)                                                                  1,172             733 
Working capital movements                                                                           41             162 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Increase in inventories                                                                              -             (1) 
(Increase)/decrease in receivables                                                               (376)              13 
Increase in payables                                                                               375             126 
Net decrease in derivative assets                                                                   16              19 
Increase in provisions (non-specific items)                                                         26               5 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Pension charge to cash difference adjustment                                                        84             108 
Share-based awards (LTIP and DSBP) charge                                                            4               4 
Cash cost of operating specific items                                                              (4)             (2) 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Cash inflow from operations                                                                      1,297           1,005 
Income tax paid                                                                                  (125)            (69) 
Research and development expenditure credit                                                          1              14 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Net cash inflow from operating activities                                                        1,173             950 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Cash flow from investing activities 
Finance income received                                                                             16               6 
Proceeds from disposal of property (excluding London Development Portfolio), 
 plant and equipment 
 (non-operating specific item)                                                                       5              12 
London Development Portfolio net proceeds (non-operating specific item)                             13              97 
Purchase of property, plant and equipment(2)                                                     (289)           (265) 
Acquisition of business interests, net of cash acquired                                              -            (15) 
Purchase of intangible assets (software)(2)                                                       (57)            (77) 
Payment of deferred consideration in respect of prior years' acquisitions                          (4)             (2) 
Sale/(purchase) of financial asset investments                                                      30            (30) 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Net cash outflow from investing activities                                                       (286)           (274) 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Net cash inflow before financing activities                                                        887             676 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Cash flow from financing activities 
Finance costs paid                                                                                (57)            (53) 
Purchase of own shares                                                                               -             (3) 
Payment of capital element of obligations under lease contracts                                  (188)           (172) 
Cash received on sale and leasebacks                                                                 1               6 
Proceeds from loans and borrowings                                                                   -           1,189 
Repayment of loans and borrowings                                                                (700)             (1) 
Dividends paid to equity holders of the Parent Company                               5               -           (244) 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Net cash (outflow)/inflow from financing activities                                              (944)             722 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Net (decrease)/increase in cash and cash equivalents                                              (57)           1,398 
Effect of foreign currency exchange rates on cash and cash equivalents                            (10)               6 
Cash and cash equivalents at the beginning of the year                                           1,640             236 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
Cash and cash equivalents at the end of the year                                                 1,573           1,640 
-------------------------------------------------------------------------------  -----  --------------  -------------- 
 
   1   For further details on APMs used, see the Financial Review. 

2 Items comprise total gross capital expenditure within 'in-year trading cash flow' measure (see Financial Review).

Notes to the Consolidated Financial Statements

1. Basis of preparation

General information

Royal Mail plc (the Company) is incorporated in the United Kingdom (UK). The Consolidated Financial Statements are produced in accordance with applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 (Adopted IFRSs) and prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Basis of preparation and accounting

The Consolidated Financial Statements of the Company for the 52 weeks ended 28 March 2021 (2019-20: 52 weeks ended 29 March 2020) comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in its associate undertakings.

The Consolidated Financial Statements are presented in Sterling (GBP) as that is the currency of the primary economic environment in which the Group operates. All values are rounded to the nearest whole GBPmillion except where otherwise indicated. The Consolidated Financial Statements have been prepared on an historic cost basis, except for pension assets and derivative financial instruments which are measured at fair value.

The Group's financial reporting year ends on the last Sunday in March and, accordingly, these Financial Statements are prepared for the 52 weeks ended 28 March 2021 (2019-20: 52 weeks ended 29 March 2020). GLS' reporting year-end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group's reporting year-end date of the last Sunday in March, a full year of GLS results is consolidated into the Group.

The financial information set out in this document does not constitute the Group's statutory Financial Statements for the reporting years ended 28 March 2021 or 29 March 2020 but is derived from those Financial Statements. Statutory Financial Statements for the reporting year ended 29 March 2020 have been delivered to the Registrar of Companies. The statutory Financial Statements for the reporting year ended 28 March 2021 were approved by the Board of Directors on 19 May 2021 along with this Financial Report but will be delivered to the Registrar of Companies in due course. The auditor has reported on those statutory Financial Statements; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Presentation of results and accounting policies

As stated above, the Consolidated Financial Statements and associated Notes have been prepared in accordance with applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 (Adopted IFRSs) and prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, i.e. on a 'reported' basis. In some instances, Alternative Performance Measures (APMs) are used by the Group to provide 'adjusted' results. This is because Management is of the view that these APMs provide a more meaningful basis on which to analyse business performance and are consistent with the way that financial performance is measured by Management and reported to the Board. Details of the APMs used by the Group are provided In the Financial Review.

Going concern

In assessing the going concern status of the Group, the Directors are required to look forward a minimum of 12 months from the date of approval of these Financial Statements to consider whether it is appropriate to prepare the Financial Statements on a going concern basis.

The Directors have reviewed both the current business projections and a severe but plausible downside scenario and assessed these against cash and cash equivalents of GBP1,532 million at 28 March 2021 and the undrawn bank syndicate loan facility of GBP925 million. The downside scenario included a consideration of deteriorating economic and market conditions, increased competition in the UK parcels sector and a slower pace of transformation in the UK business.

These risks were quantified to create a downside scenario that took into account the levels of committed capital and expenditure, as well as other short-term cost and cash actions which could mitigate the impact of the risks. Mitigating actions included: reducing variable hours and cost of sales; reducing discretionary pay; reducing internal investment; and reducing one-off projects.

The severe but plausible downside case indicates that the Group would not need to draw on the bank syndicate loan facility in order to maintain sufficient liquidity and would not breach any of its covenants.

The Directors are of the view that there are sufficient cash and committed undrawn facilities in place ('headroom') to meet obligations over the period to May 2022. In the event of a severe but plausible downside, prepared in line with the viability scenarios included within this Report, cash/liquidity headroom is expected to remain above GBP2 billion.

Consequently, the Directors are confident that the Group will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the Financial Statements and therefore have prepared the Financial Statements on a going concern basis.

The Group's Viability Statement can be found above, immediately before the Consolidated Financial Statements.

Basis of consolidation

The Consolidated Financial Statements comprise the Financial Statements of the Company and its subsidiary undertakings. The Financial Statements of the major subsidiaries are prepared for the same reporting year as the Company, using consistent accounting policies.

All intragroup balances and transactions, including unrealised profits arising from intragroup transactions, have been eliminated in full. Transfer prices between business segments are set at arm's length/fair value on the basis of charges reached through negotiation with the respective businesses.

Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is no longer held by the Group. Where the Group ceases to hold control of a subsidiary, the Consolidated Financial Statements include the results for the part of the reporting year during which the Group held control.

Changes in accounting policy and disclosures

The accounting policies applied in the preparation of these Financial Statements are consistent with those in the Annual Report and Financial Statements for the year ended 29 March 2020, along with the adoption of new and amended accounting standards with effect from 30 March 2020 as detailed below:

New and amended accounting standards adopted in 2020-21

Interest Rate Benchmark Reform - Phase 1 (amendments to IFRS 9, IAS 39 and IFRS 7)

The Group has adopted Phase 1 of the Interest Rate Benchmark Reform with effect from 30 March 2020. This is a first reaction to the potential effects the LIBOR reform could have on financial reporting. The amendments do not have an effect on the Group as it does not hold any hedges of interest rates, nor does it have any financial assets or liabilities that reference LIBOR. The bank syndicate loan facility is undrawn at year end and therefore is unaffected by the amendment in the current year. In 2021-22 the bank syndicate loan facility will be amended to calculate interest payable on drawn loans using appropriate replacement interest rates.

Amendments to References to Conceptual Framework in IFRS

The revised Framework is more comprehensive, with the aim to provide the Board with the full set of tools for standard setting. It covers all aspects of standard setting from the objective of financial reporting, to presentation and disclosures. The Group has applied the amendments from 30 March 2020. The amendments do not have a material impact on the financial performance or position of the Group.

Definition of Material (amendments to IAS 1 and IAS 8)

The new amendment clarifies the definition of material to align the conceptual framework with the standards. The Group does not consider the amendment to change the level of disclosures made in the Financial Statements.

Definition of a Business (amendments to IFRS 3)

The new amendment aims to provide clarity as to whether an entity acquires a business or a group of assets. The Group has applied the amendment from 30 March 2020. As the Group has not made any acquisitions since this date, the amendment has not had an impact on the Group.

Accounting standards issued but not yet applied

The following new and amended accounting standards are relevant to the Group and are in issue but were not effective at the balance sheet date:

IFRS 16 (Amended) - COVID-19 - Related Rent Concessions

Interest Rate Benchmark Reform - Phase 2 (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)

IAS 37 (Amended) - Onerous Contracts - Cost of Fulfilling a Contract

Annual improvements to IFRS Standards 2018-2020

IAS 16 (Amended) - Property, Plant and Equipment: Proceeds Before Intended Use

IFRS 3 (Amended) - Reference to Conceptual Framework

IAS 1 (Amended) - Classification of Liabilities as Current or Non-current

IFRS 17 - Insurance Contracts

The Directors do not expect that the adoption of the amendments, interpretations and annual improvements listed above (which the Group does not expect to early adopt) will have a material impact on the financial performance or position of the Group in future periods.

Sources of estimation uncertainty

The preparation of Consolidated Financial Statements necessarily requires Management to make certain estimates and judgements that can have a significant impact on the financial statements. These estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas involving a higher degree of judgement or complexity, or areas where there is thought to be a significant risk of a material adjustment to the Consolidated Financial Statements within the next financial year as a result of the estimation uncertainty are disclosed below.

Key sources of estimation uncertainty

Pensions

The value of defined benefit pension plan liabilities and assessment of pension plan costs are determined by long-term actuarial assumptions. These assumptions include discount rates (which are based on the long-term yield of high-quality corporate bonds), inflation rates and mortality rates. Differences arising from actual experience or future changes in assumptions will be reflected in the Group's consolidated statement of comprehensive income. The Group exercises its judgement in determining the assumptions to be adopted, after discussion with a qualified actuary. Details of the key actuarial assumptions used and of the sensitivity of these assumptions for the RMPP and DBCBS are included within Note 6.

Defined benefit pension plan assets are measured at fair value. Where these assets cannot be valued directly from quoted market prices, the Group applies judgement in selecting an appropriate valuation method, after discussion with an expert fund manager. For the main classes of assets:

-- Equities listed on recognised stock exchanges are valued at the closing bid price, or the last traded price, depending on the convention of the stock exchange on which they are quoted.

-- Bonds are measured using a combination of broker quotes and pricing models making assumptions for credit risk, market risk and market yield curves.

-- Pooled investment vehicles are valued using published prices or the latest information from investment managers, which includes any necessary fair value adjustments.

-- Properties are valued on the basis of open market value as at the year-end date, in accordance with RICS Valuations Standards. As a result of the current situation with regards the COVID-19 pandemic, property valuations have the potential to change rapidly as market conditions fluctuate. The Group has been advised by its valuers that enough market evidence exists on which to base opinions of value however it is highlighted that these valuations are only appropriate at the year-end date.

-- For exchange-traded derivatives that are assets, fair value is based on bid prices. For exchange-traded derivatives that are liabilities, fair value is based on offer prices.

Non-exchange traded derivatives are valued as follows:

-- Open forward foreign currency contracts at the balance sheet date are over the counter contracts and are valued using forward currency rates at that point. The unrealised appreciation or depreciation of open foreign currency contracts is calculated by the difference between the contracted rate and the rate to close out the contract.

-- Open option contracts at the balance sheet date are over the counter contracts and fair value is calculated taking into account the strike price, maturity date and the underlying asset of the option. The unrealised appreciation or depreciation of open option contracts is calculated as the difference between the premiums paid for the options and the price to close out the options.

-- Interest rate and credit default swaps are over the counter contracts and fair value is the current value of the future expected net cash flows, taking into account the time value of money and market data at the year end.

The value of the RMSEPP insurance policies held by the Group is equal to the accounting defined benefit obligation of the scheme as at the year-end date.

The assumptions used in valuing unquoted investments are affected by current market conditions and trends, which could result in changes to the fair value after the measurement date. Details of the carrying value of the unquoted pension plan asset classes can be found in Note 6.

Deferred revenue

The Group recognises advance customer payments on its balance sheet, predominantly relating to stamps and meter credits purchased by customers but not yet used at the balance sheet date.

The majority of this balance is made up of stamps sold to the general public. Management utilise a number of different data sources to calculate the estimated deferred revenue liability given that stamps can be held and used for varying time periods.

At 28 March 2021 the Group recognised GBP218 million (2019-20: GBP185 million) deferred revenue in respect of stamps sold to the general public but not used at the balance sheet date. In 2020-21 stamp sales increased as a consequence of COVID-19 which has led to increased stamp holdings versus the previous year. The primary sources of data used to derive this estimate are as follows:

-- Revenue data related to stamp sales through the Post Office network.

-- Historic trends of deferred revenue balances.

-- Changes in the number of working days during the period.

-- Price rises.

-- Adjustments to reflect posting patterns around key events close to the reporting year end, e.g. Mothering Sunday, Easter.

Average stamp holding days has remained broadly consistent year-on-year at 40 days (2019-20: 43 days).

Other estimates

Provisions - industrial diseases

The Group has a potential liability for industrial diseases claims relating to individuals who were employed in the General Post Office Telecommunications division and whose employment ceased prior to October 1981.

The provision requires estimates to be made of the likely volume and cost of future claims, as well as the discount rate to be applied to these, and is based on the best information available at the year-end date, which incorporates independent expert actuarial advice.

The Institute and Faculty of Actuaries (UK Asbestos Working Party (AWP)), on whose modelling actuaries rely for their calculations for asbestos-related ill-health claims, issued revised guidance in February 2021, based on one of several different models it maintains. This new guidance indicates a significant reduction in future liabilities for such claims.

It has been widely acknowledged in business that this guidance is the best information available and should be acted upon for recognising asbestos-related claims reserves. The final publication from the AWP is imminent and is expected to confirm the forecast reduction in liabilities in line with their February 2021 guidance.

In view of the above factors, Management has applied a consistent approach to that of previous years and recognised the provision at 28 March 2021 between the medium and high estimates provided by the actuarial consultant. This has resulted in a release of GBP16 million of the provision balance, recognised in the income statement as an operating specific item.

This full year 2020-21 position will be reassessed at the half year ended 26 September 2021, by which time the full AWP report is expected to have been published.

A 50 basis points decrease to the 1.24% discount rate used at 28 March 2021 would result in a GBP5 million increase in the overall provision. Any income statement movements arising from a change in accounting estimate are disclosed as an operating specific item. The carrying value of this provision is included within Note 8.

2. Segment information

The Group's operating segments are based on geographic business units whose primary services and products relate to the delivery of parcels and letters. These segments are evaluated regularly by the Royal Mail plc Board - the Chief Operating Decision Maker (CODM) as defined by IFRS 8 'Operating Segments' - in deciding how to allocate resources and assess performance.

A key measure of segment performance is operating profit before specific items. This measure of performance is disclosed on an 'adjusted' basis, a non-IFRS measure, excluding specific items and the pension charge to cash difference adjustment (see the APMs section in the Financial Review). This is consistent with how financial performance is measured internally and reported to the CODM.

Segment revenues have been attributed to the respective countries based on the primary location of the service performed. Transfer prices between segments are set at an arm's length/fair value on the basis of charges reached through negotiation between the relevant business units that form part of the segments.

 
                                                                                             Specific items, 
                                                                                      and pension adjustment 
52 weeks 2021                               Adjusted                                         in people costs  Reported 
------------------  --------------------------------------------------------  ------------------------------  -------- 
                               Royal           GLS                                       Royal           GLS 
                                Mail       (Non-UK                                        Mail       (Non-UK 
Continuing           (UK operations)   operations)  Eliminations(1)    Group   (UK operations)   operations)     Group 
operations                      GBPm          GBPm             GBPm     GBPm              GBPm          GBPm      GBPm 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Revenue                        8,649         4,040             (51)   12,638                 -             -    12,638 
People costs                 (5,619)         (851)                -  (6,470)              (84)             -   (6,554) 
Non-people costs             (2,686)       (2,831)               51  (5,466)                 -             -   (5,466) 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Operating profit 
 before specific 
 items                           344           358                -      702              (84)             -       618 
Operating specific 
items 
Regulatory fine                    -             -                -        -               (1)             -       (1) 
Legacy/other items                 -             -                -        -                13             -        13 
Amortisation of 
 intangible assets 
 in acquisitions                   -             -                -        -               (1)          (18)      (19) 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Operating profit                 344           358                -      702              (73)          (18)       611 
Profit on disposal 
 of property, 
 plant and 
 equipment 
 (non-operating 
 specific item)                    -             -                -        -                38           (2)        36 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Profit before 
 interest and tax                344           358                -      702              (35)          (20)       647 
Finance costs                   (49)          (13)                7     (55)                 -             -      (55) 
Finance income                    21             3              (7)       17                 -             -        17 
Net pension 
 interest 
 (non-operating 
 specific item)                    -             -                -        -               117             -       117 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Profit before tax                316           348                -      664                82          (20)       726 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
 

1 Revenue and non-people costs eliminations relate to intragroup trading between Royal Mail and GLS, due to Parcelforce Worldwide being GLS' partner in the UK. Finance costs/income eliminations relate to intragroup loans between Royal Mail and GLS.

 
                                                                                             Specific items, 
                                                                                      and pension adjustment 
52 weeks 2020                               Adjusted                                         in people costs  Reported 
------------------  --------------------------------------------------------  ------------------------------  -------- 
                               Royal           GLS                                       Royal           GLS 
                                Mail       (Non-UK                                        Mail       (Non-UK 
Continuing           (UK operations)   operations)  Eliminations(1)    Group   (UK operations)   operations)     Group 
operations                      GBPm          GBPm             GBPm     GBPm              GBPm          GBPm      GBPm 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Revenue                        7,720         3,161             (41)   10,840                 -             -    10,840 
People costs                 (5,234)         (722)                -  (5,956)             (108)             -   (6,064) 
Non-people costs             (2,369)       (2,231)               41  (4,559)                 -             -   (4,559) 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Operating profit 
 before 
 specific items                  117           208                -      325             (108)             -       217 
Operating specific 
items 
Regulatory fine                    -             -                -        -              (51)             -      (51) 
Legacy/other items 
 and 
 impairments                       -             -                -        -              (97)             5      (92) 
Amortisation of 
 intangible 
 assets 
 in acquisitions                   -             -                -        -               (1)          (18)      (19) 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Operating profit                 117           208                -      325             (257)          (13)        55 
Profit on disposal 
 of 
 property, plant 
 and 
 equipment 
 (non-operating 
 specific item)                    -             -                -        -                88             1        89 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Profit before 
 interest 
 and tax                         117           208                -      325             (169)          (12)       144 
Finance costs                   (49)          (18)               11     (56)                 -             -      (56) 
Finance income                    15             2             (11)        6                 -             -         6 
Net pension 
 interest 
 (non-operating 
 specific 
 item)                             -             -                -        -                86             -        86 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
Profit before tax                 83           192                -      275              (83)          (12)       180 
------------------  ----------------  ------------  ---------------  -------  ----------------  ------------  -------- 
 

1 Revenue and non-people costs eliminations relate to intragroup trading between Royal Mail and GLS, due to Parcelforce Worldwide being GLS' partner in the UK. Finance costs/income eliminations relate to intragroup loans between Royal Mail and GLS.

The depreciation and amortisation below are included within 'operating profit before specific items' in the income statement.

The non-current assets below exclude financial assets, retirement benefit surplus and deferred tax, and are included within non-current assets on the balance sheet.

 
                                                                 Royal           GLS 
                                                                  Mail       (Non-UK 
                                                       (UK operations)   operations)  Total 
52 weeks 2021                                                     GBPm          GBPm   GBPm 
----------------------------------------------------  ----------------  ------------  ----- 
Depreciation                                                     (308)         (124)  (432) 
----------------------------------------------------  ----------------  ------------  ----- 
Amortisation of intangible assets (mainly software)              (107)          (15)  (122) 
----------------------------------------------------  ----------------  ------------  ----- 
 
Non-current assets                                               2,596         1,362  3,958 
----------------------------------------------------  ----------------  ------------  ----- 
 
 
                                                                 Royal           GLS 
                                                                  Mail       (Non-UK 
                                                       (UK operations)   operations)  Total 
52 weeks 2020                                                     GBPm          GBPm   GBPm 
----------------------------------------------------  ----------------  ------------  ----- 
Depreciation                                                     (306)         (106)  (412) 
----------------------------------------------------  ----------------  ------------  ----- 
Amortisation of intangible assets (mainly software)               (90)          (14)  (104) 
----------------------------------------------------  ----------------  ------------  ----- 
 
Non-current assets                                               2,695         1,390  4,085 
----------------------------------------------------  ----------------  ------------  ----- 
 

3. Taxation

 
                                                                52 weeks  52 weeks 
                                                                    2021      2020 
                                                                    GBPm      GBPm 
--------------------------------------------------------------  --------  -------- 
Tax charged in the income statement 
Current income tax: 
Current UK income tax charge                                        (48)       (5) 
Foreign tax                                                         (82)      (55) 
--------------------------------------------------------------  --------  -------- 
Current income tax charge                                          (130)      (60) 
Amounts (under)/over-provided in previous years                      (4)         5 
--------------------------------------------------------------  --------  -------- 
Total current income tax charge                                    (134)      (55) 
Deferred income tax: 
Effect of change in tax rates                                          -         6 
Relating to origination and reversal of temporary differences         25        35 
Amounts over/(under)-provided in previous years                        3       (5) 
--------------------------------------------------------------  --------  -------- 
Total deferred income tax credit                                      28        36 
--------------------------------------------------------------  --------  -------- 
Tax charge in the consolidated income statement                    (106)      (19) 
--------------------------------------------------------------  --------  -------- 
 
Tax credited/(charged) to other comprehensive income 
Deferred tax: 
Tax credit in relation to remeasurement gains of the defined 
 benefit pension schemes                                              26         - 
Tax (charge)/credit on revaluation of cash flow hedges               (7)        11 
--------------------------------------------------------------  --------  -------- 
Total deferred income tax credit                                      19        11 
--------------------------------------------------------------  --------  -------- 
Total tax credit in the consolidated statement of other 
 comprehensive income                                                 19        11 
--------------------------------------------------------------  --------  -------- 
 

In addition to the amount charged to the income statement and other comprehensive income, the following amount relating to tax has been recognised directly in equity:

 
                                                                   52 weeks  52 weeks 
                                                                       2021      2020 
                                                                       GBPm      GBPm 
-----------------------------------------------------------------  --------  -------- 
Deferred tax: 
Change in estimated excess tax deductions related to share-based 
 payments                                                                 1         1 
-----------------------------------------------------------------  --------  -------- 
Total deferred income tax credit recognised directly in 
 equity                                                                   1         1 
-----------------------------------------------------------------  --------  -------- 
 

Reconciliation of the total tax charge

A reconciliation of the tax charge in the income statement and the UK rate of corporation tax applied to accounting profit for the 52 weeks ended 28 March 2021 and 52 weeks ended 29 March 2020 is shown below.

 
                                                             52 weeks  52 weeks 
                                                                 2021      2020 
                                                                 GBPm      GBPm 
-----------------------------------------------------------  --------  -------- 
Profit before tax                                                 726       180 
-----------------------------------------------------------  --------  -------- 
At UK statutory rate of corporation tax of 19% (2019-20: 
 19%)                                                           (138)      (34) 
Effect of different tax rates on non-UK profits and losses       (12)       (5) 
Tax under-provided in previous years                              (1)         - 
Non-deductible expenses                                           (6)       (4) 
Tax reliefs and incentives                                          4         3 
Uncertain tax positions                                           (2)      (16) 
Tax effect of property disposals                                   26        21 
Tax effect of closure of RMPP to future accrual                   (2)       (2) 
Net pension interest credit                                        23        17 
Regulatory fine                                                     -      (10) 
Net decrease in tax charge resulting from non-recognition 
 of certain deferred tax assets and liabilities                     1         6 
Share-based payments - deferred tax-only adjustments                1       (1) 
Effect of change in tax rates                                       -         6 
-----------------------------------------------------------  --------  -------- 
Tax charge in the consolidated income statement                 (106)      (19) 
-----------------------------------------------------------  --------  -------- 
 

Deferred tax

 
                                                 Credited/                        Credited/ 
                                 Credited/    (charged) to                     (charged) to 
Deferred tax by         At    (charged) to           other         Credited         foreign  Jurisdictional         At 
balance sheet     30 March          income   comprehensive      directly in        exchange        right of   28 March 
category              2020       statement          income           equity         reserve          offset       2021 
52 weeks 2021         GBPm            GBPm            GBPm             GBPm            GBPm            GBPm       GBPm 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
Liabilities 
Accelerated 
 capital 
 allowances            (8)               1               -                -               -               -        (7) 
Intangible 
 assets               (54)               2               -                -               2               -       (50) 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
                      (62)               3               -                -               2               -       (57) 
Jurisdictional 
 right of 
 offset                  8               -               -                -               -               1          9 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
Deferred tax 
 liabilities          (54)               3               -                -               2               1       (48) 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
Assets 
Deferred 
 capital 
 allowances             14              19               -                -               -               -         33 
Pensions 
 temporary 
 differences            33              16              26                -               -               -         75 
Provisions and 
 other                  25               8               -                -             (1)               -         32 
Employee share 
 schemes                 -               2               -                1               -               -          3 
Losses 
 available for 
 offset against 
 future taxable 
 income                 34            (19)               -                -               -               -         15 
R&D expenditure 
 credit                  2             (1)               -                -               -               -          1 
Hedging 
 derivative 
 temporary 
 differences            10               -             (7)                -               -               -          3 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
                       118              25              19                1             (1)               -        162 
Jurisdictional 
 right of 
 offset                (8)               -               -                -               -             (1)        (9) 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
Deferred tax 
 assets                110              25              19                1             (1)             (1)        153 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
 
Net deferred 
 tax asset              56              28              19                1               1               -        105 
---------------  ---------  --------------  --------------  ---------------  --------------  --------------  --------- 
 
 
 
                                        (Charged)/        Credited 
                                          credited              to                  Charged  Jurisdictional 
                                    At          to           other    Credited   to foreign           right         At 
Deferred tax by balance        1 April      income   comprehensive    directly     exchange              of   29 March 
 sheet category                   2019   statement          income   in equity      reserve          offset       2020 
 52 weeks 2020                    GBPm        GBPm            GBPm        GBPm         GBPm            GBPm       GBPm 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
Liabilities 
Accelerated capital 
 allowances                        (6)         (2)               -           -            -               -        (8) 
Employee share schemes             (1)           -               -           1            -               -          - 
Intangible assets                 (57)           4               -           -          (1)               -       (54) 
Hedging derivatives 
 temporary 
 differences                       (1)           -               1           -            -               -          - 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
                                  (65)           2               1           1          (1)               -       (62) 
Jurisdictional right of 
 offset                             10           -               -           -            -             (2)          8 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
Deferred tax liabilities          (55)           2               1           1          (1)             (2)       (54) 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
Assets 
Deferred capital allowances          6           8               -           -            -               -         14 
Pensions temporary 
 differences                        13          20               -           -            -               -         33 
Provisions and other                18           7               -           -            -               -         25 
Losses available for offset 
 against 
 future taxable income              35         (1)               -           -            -               -         34 
R&D expenditure credit               2           -               -           -            -               -          2 
Hedging derivative temporary 
 differences                         -           -              10           -            -               -         10 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
                                    74          34              10           -            -               -        118 
Jurisdictional right of 
 offset                           (10)           -               -           -            -               2        (8) 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
Deferred tax assets                 64          34              10           -            -               2        110 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
 
Net deferred tax asset               9          36              11           1          (1)               -         56 
----------------------------  --------  ----------  --------------  ----------  -----------  --------------  --------- 
 

Deferred tax assets and liabilities are offset within the same jurisdiction where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for balance sheet presentation purposes.

 
                                             At 28   At 29 
                                             March   March 
                                              2021    2020 
Deferred tax - balance sheet presentation     GBPm    GBPm 
------------------------------------------  ------  ------ 
Liabilities 
GLS group                                     (48)    (54) 
------------------------------------------  ------  ------ 
Deferred tax liabilities                      (48)    (54) 
------------------------------------------  ------  ------ 
Assets 
GLS group                                       10       8 
Net UK position                                143     102 
------------------------------------------  ------  ------ 
Deferred tax assets                            153     110 
------------------------------------------  ------  ------ 
Net deferred tax asset                         105      56 
------------------------------------------  ------  ------ 
 

The deferred tax position shows an increased overall asset in the reporting year to 28 March 2021. This is primarily due to the increase in accounting deficit of the DBCBS pension scheme.

GLS has deferred tax assets and liabilities in various jurisdictions which cannot be offset against one another. The main elements of the liability relate to goodwill and intangible assets in GLS Germany, for which the Group has already taken tax deductions, and intangible assets in relation to acquisitions in Canada and Spain.

At 28 March 2021, the Group had unrecognised tax losses and temporary differences of GBP263 million (2019-20: GBP278 million) with a tax value of GBP73 million (2019-20: GBP80 million). Unrecognised deferred tax in relation to tax losses comprises GBP70 million (2019-20: GBP73 million) relating to losses of GBP236 million (2019-20: GBP249 million) in GLS that are available for offset against future profits if generated in the relevant GLS companies, and GBP1 million (2019-20: GBP1 million) in relation to GBP6 million (2019-20: GBP7 million) of historical UK non-trading and capital losses carried forward. Other unrecognised amounts comprise GBP2 million (2019-20: GBP6 million) relating to GLS other temporary differences of GBP21 million (2019-20: GBP22 million). The Group has not recognised these deferred tax assets on the basis that it is not sufficiently certain of its capacity to utilise them in the future.

The Group also has temporary differences in respect of GBP186 million (2019-20: GBP187 million) of capital losses, the tax effect of which is GBP35 million (2019-20: GBP35 million) in respect of assets previously qualifying for industrial buildings allowances. Further temporary differences exist in relation to GBP383 million (2019-20: GBP388 million) of gains for which rollover relief has been claimed, the tax effect of which is GBP73 million (2019-20: GBP74 million). No tax liability would be expected to crystallise on the basis that, were the assets (into which the gains have been rolled over) to be sold at their residual values, no capital gain would arise.

Changes to UK corporation tax rate

The UK Government has announced that the corporation tax rate will rise to 25% from April 2023. This announcement had not been substantively enacted at the balance sheet date and therefore the effect of this planned change has not been reflected in the deferred tax balances. The impact of this change in rate, based on the current balance sheet position, would have led to an increase in the net deferred tax asset of GBP45 million, with a GBP10 million deferred tax credit recognised through other comprehensive income and GBP35 million recognised through the income statement.

4. Earnings per share

 
                                             52 weeks 2021                       52 weeks 2020 
                                   ----------------------------------  ---------------------------------- 
                                                   Specific                            Specific 
                                                      items                               items 
                                                and pension                         and pension 
                                   Reported   adjustment(1)  Adjusted  Reported   adjustment(1)  Adjusted 
---------------------------------  --------  --------------  --------  --------  --------------  -------- 
Profit for the year (GBPmillion)        620              99       521       161            (35)         196 
Weighted average number of 
 shares issued (million)                999             n/a       999       999             n/a         999 
Basic earnings per share (pence)       62.0             n/a      52.1      16.1             n/a        19.6 
Diluted earnings per share 
 (pence)                               61.8             n/a      51.9      16.1             n/a      19.6 
---------------------------------  --------  --------------  --------  --------  --------------  -------- 
 

1 Further details of the specific items and pension adjustment total can be found in the Financial Review.

The diluted earnings per share for the year ended 28 March 2021 is based on a weighted average number of shares of 1,003,489,831 (2019-20: 1,001,079,845) to take account of the potential issue of 2,020,587 (2019-20: 658,250) ordinary shares resulting from the Deferred Share Bonus Plans and 2,042,060 (2019-20: 1,451,301) ordinary shares resulting from the Long Term Incentive Plans.

The 572,816 (2019-20: 1,029,706) shares held in an Employee Benefit Trust for the settlement of options and awards to current and former employees are treated as treasury shares for accounting purposes. The Company, however, does not hold any shares in treasury.

5. Dividends

 
                                 52 weeks    52 weeks 
                                     2021        2020  52 weeks  52 weeks 
                                    Pence       Pence      2021      2020 
Dividends on ordinary shares    per share   per share      GBPm      GBPm 
-----------------------------  ----------  ----------  --------  -------- 
Final dividends paid                    -        17.0         -       169 
Interim dividends paid                  -         7.5         -        75 
-----------------------------  ----------  ----------  --------  -------- 
Total dividends paid                    -        24.5         -       244 
-----------------------------  ----------  ----------  --------  -------- 
 

The Board has reviewed the performance of the Group during the 2020--21 reporting year and concluded that it is appropriate to pay a one--off final dividend of 10p per share, payable on 6 September 2021 to shareholders on the register at 30 July 2021, subject to approval at the 2021 AGM (2019-20: no final dividend).

6. Retirement benefit plans

Summary pension information

 
                                                               52 weeks  52 weeks 
                                                                   2021      2020 
                                                                   GBPm      GBPm 
-------------------------------------------------------------  --------  -------- 
Ongoing UK pension service costs 
UK defined benefit plans (including administration costs)(1)      (369)       (397) 
UK defined contribution plan                                      (111)        (97) 
UK defined benefit and defined contribution plans' Pension 
 Salary Exchange (PSE) employer contributions(2)                  (194)     (178) 
-------------------------------------------------------------  --------  -------- 
Total UK ongoing pension service costs                            (674)     (672) 
GLS pension costs accounted for on a defined contribution 
 basis                                                              (9)       (7) 
-------------------------------------------------------------  --------  -------- 
Total Group ongoing pension service costs                         (683)     (679) 
-------------------------------------------------------------  --------  -------- 
Cash flows relating to ongoing pension service costs 
UK defined benefit plans' employer contributions(3)               (285)       (288) 
Defined contribution plans' employer contributions                (120)       (104) 
UK defined benefit and defined contribution plans' PSE 
 employer contributions                                           (194)     (178) 
-------------------------------------------------------------  --------  -------- 
Total Group cash flows relating to ongoing pension service 
 costs                                                            (599)     (570) 
-------------------------------------------------------------  --------  -------- 
Royal Mail Senior Executives Pension Plan (RMSEPP) death 
 in service and administration expenses                               -       (1) 
-------------------------------------------------------------  --------  -------- 
Pension charge to cash difference adjustment                       (84)     (108) 
-------------------------------------------------------------  --------  -------- 
 
 
                                     At 28   At 29 
                                     March   March 
                                      2021    2020 
                                      '000    '000 
----------------------------------  ------  ------ 
UK pension plans - active members 
UK defined benefit plan                 75      79 
UK defined contribution plan            53      54 
----------------------------------  ------  ------ 
Total                                  128     133 
----------------------------------  ------  ------ 
 

1 These pension service costs are charged to the income statement. They represent the cost (as a percentage of pensionable payroll - 19.5% (2019-20: 20.8%) of the increase in the defined benefit obligation due to members earning one more years' worth of pension benefits. They are calculated in accordance with IAS 19 and are based on market yields (high-quality corporate bonds and inflation) at the beginning of the reporting year. Pensions administration costs for the Royal Mail Pension Plan (RMPP) of GBP9 million (2019-20: GBP9 million) and the Defined Benefit Cash Balance Scheme (DBCBS) of GBP5 million (2019-20: GBP4 million) continue to be included within the Group's ongoing UK pension service costs.

2 Eligible employees who are enrolled into PSE opt out of making employee contributions to their pension and the Group makes additional contributions in return for a reduction in basic pay.

3 The employer contribution cash flow rate of 15.6% forms part of the payroll expense and is paid in respect of the DBCBS (2019-20 15.6%). These contribution rates are set following each actuarial funding valuation, usually every three years. These actuarial valuations are required to be carried out on assumptions determined by the Trustee and agreed by Royal Mail, and will be required in respect of the DBCBS, the first full valuation for this will be performed as at 31 March 2021.

In the period, the Group operated the following plans:

UK Defined Contribution plan

Royal Mail Group Limited, the Group's main operating subsidiary, operates the Royal Mail Defined Contribution Plan (RMDCP). This plan was launched in April 2009 and is open to employees who joined the Group from 31 March 2008, following closure of the RMPP to new members.

Ongoing UK defined contribution plan costs have increased from GBP169 million in 2019-20 (including GBP72 million PSE costs) to GBP199 million (including GBP88 million PSE costs). This is due to an increase in the average employer's contribution rate from 8.6% in 2019-20 to 9.3% in 2020-21.

UK defined benefit plans

Royal Mail Pension Plan (RMPP)(4)

The RMPP is funded by the payment of contributions to separate Trustee administered funds. The RMPP includes sections A, B and C, each with different terms and conditions.

 
                        Section A             Section B                     Section C 
Joining date        Before 1 December  On or after 1 December   On or after 1 April 1987 
 for members         1971               1971 and before 1        and before 1 April 2008 
 (or beneficiaries                      April 1987 
 of members)                            or 
                                        for members of Section 
                                        A who chose to receive 
                                        Section B benefits. 
                    -----------------  -----------------------  ---------------------------------- 
Terms               Pension of 1/80th of pensionable            Pension of 1/60th of pensionable 
                     salary plus a tax-free lump sum             salary 
                     of 3/80ths of pensionable salary            for each year of pensionable 
                     for each year of pensionable service,       service, 
                     until 31 March 2018.                        until 31 March 2018. 
                                                                 Members wishing to take 
                                                                 a tax free lump sum on retirement 
                                                                 do so in exchange for a 
                                                                 reduced pension. 
                    ------------------------------------------  ---------------------------------- 
 

4 Any references to the RMPP relate to the scheme's defined pension liabilities built up to 31 March 2018. From 1 April 2018 members began building up DBCBS benefits.

Governance and management

Royal Mail Pensions Trustees Limited acts as the corporate Trustee to the RMPP. There are currently eight Trustee Directors that sit on the Trustee Board. There is a vacancy for an employer-nominated Trustee Director. The Trustee Board is supported by an executive team of pension management professionals. They provide day-to-day Plan management, advise the Trustee Board on its responsibilities and ensure that decisions are fully implemented.

The Trustee Board is responsible for:

 
Monitoring the covenant   To help protect benefits, the Trustee Board monitors the 
 of the participating      financial strength of the participating employers 
 employers 
------------------------  --------------------------------------------------------------- 
Investing contributions   The Trustee Board invests the member and employer contributions 
                           in a mix of equities, bonds, property and other investments 
                           including derivatives. It holds the contributions and 
                           investments on behalf of the members. 
------------------------  --------------------------------------------------------------- 
Keeping members informed  The Trustee Board sends active members an annual benefit 
                           illustration together with a summary of the RMPP's annual 
                           report and accounts. 
------------------------  --------------------------------------------------------------- 
Acting in the best        The Trustee Board must pay all benefits as they fall due 
 interests of all RMPP     under the Trust Deed and Rules 
 beneficiaries 
------------------------  --------------------------------------------------------------- 
 

An agreement has been made with the Pension Trustee to ringfence certain employer contributions in an escrow arrangement. These contributions are not considered to be Plan assets as the Trustee does not have control over the assets. This balance is included within non-current financial assets.

Defined Benefit Cash Balance Scheme (DBCBS)

The DBCBS has been in place since 1 April 2018. This is a transitional arrangement until the proposed Collective Defined Contribution (CDC) scheme can be established.

DBCBS members build up a guaranteed lump sum benefit of 19.5% of their pensionable pay each year. Although there are no guaranteed increases to this lump sum the aim is to provide above inflation increases, and the Trustee invests the scheme assets accordingly. If the value of the DBCBS assets were to fall below the value of the members' guaranteed lump sum benefits, then no increases would be awarded until asset values had recovered as the Group has a legal obligation to prevent a decrease in the lump sum amount. From an assessment of announcements and internal communications made to members of the scheme to date and taking into account the first increase granted in March 2020, Management is of the view that there is a constructive obligation to provide an increase to the lump sum. The increase awarded for the current year was CPI plus 1.2%. Future liabilities of the scheme have been calculated assuming increases of CPI plus 2%, although the nature of the scheme means that actual increases could be lower or higher than this amount.

The Group signed a Schedule of Contributions on 19 July 2019. This covers a period of five years from the date of certification of the schedule i.e. until July 2024. In accordance with this schedule, the Group is required to make payments totalling 15.6% per annum of pensionable payroll in respect of DBCBS.

Royal Mail Senior Executives Pension Plan (RMSEPP)

This scheme for executives closed in December 2012 to future accrual, therefore the Group makes no regular future service contributions. The last triennial valuation was performed in 2018. In accordance with the Schedule of Contributions signed on 25 March 2019, around GBP500,000 has been paid in 2020-21 and is due to be paid per annum until 31 March 2025.

In September 2018 an insurance policy was purchased in respect of all remaining pensioners and deferred members, following which it was decided to proceed to buy out and wind up the Plan. The wind-up of RMSEPP had previously been expected to complete in 2020-21, however it was delayed by the need for further clarity over the approach to GMP equalisation. The Trustees now expect this to complete in 2022.

All benefit payments due from the RMSEPP remain unchanged. The insurance policies held by the RMSEPP exactly match the value and timing of the benefits payable to individual members and the fair value is deemed to be the present value of the related obligations. The total value of the buy-in annuity policies in place is GBP364 million (29 March 2020: GBP296 million) and is included as a pension asset and a pension liability at 28 March 2021(5) .

Unfunded pension

A liability of GBP2 million (2019-20: GBP2 million) has been recognised for future payment of pension benefits to a past Director.

Accounting and actuarial funding surplus position (RMPP, RMSEPP and DBCBS)

In addition to the accounting valuations calculated in accordance with IAS 19, actuarial funding valuations are carried out every three years by actuaries commissioned by the Trustees for the purposes of calculating contributions and funding requirements. The main difference between the accounting and actuarial funding valuations is that different rates are used to discount the projected scheme liabilities. The accounting valuation uses yields on high quality corporate bonds and the actuarial funding valuation uses gilt yields. As the accounting discount rate is higher than the actuarial funding discount rate, this leads to a lower computed liability.

The results of the most recent triennial valuations are shown below.

 
                                 RMPP                                    DBCBS 
-----------------  --------------------------------  ---------------------------------------------- 
Date of valuation  31 March 2018 (agreed on 19         The first full valuation will be performed 
                    July 2019)                          as at 31 March 2021 (the valuation will 
                                                        be completed in 2021-22). 
-----------------  ----------------------------------  -------------------------------------------- 
Valuation          Based on this set of assumptions    A draft funding position has been calculated 
                    rolled forward, the actuarial       based on the assumption that the funding 
                    surplus at 31 March 2021 was        surplus is equal to the amount held 
                    estimated to                        in respect of the risk reserve. Under 
                    be around GBP163 million (31        this method, the DBCBS actuarial surplus 
                    March 2020: GBP575 million).        was estimated to be around GBP29 million 
                                                        at 31 March 2021 (31 March 2020: GBP18 
                                                        million). 
-----------------  ----------------------------------  -------------------------------------------- 
 
 
   5   In accordance with IAS 19. 

Below is a summary of the combined plans' assets and liabilities on an accounting (IAS 19) and actuarial funding basis.

 
                               DBCBS                                RMPP and RMSEPP 
                           Accounting (IAS          DBCBS            Accounting (IAS     RMPP and RMSEPP 
                                 19)           Actuarial funding           19)           Actuarial funding 
                         ------------------  --------------------  ------------------  -------------------- 
                             At 28    At 29       At 31     At 31     At 28     At 29      At 31      At 31 
                             March    March       March     March     March     March      March      March 
                              2021     2020        2021      2020      2021      2020       2021       2020 
                              GBPm     GBPm        GBPm      GBPm      GBPm      GBPm       GBPm       GBPm 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
Fair value of 
 plans' assets 
 (6(b) below)(6)             1,192      730       1,182       735    11,814    11,989     11,566     11,700 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
Present value 
 of plans' liabilities     (1,586)    (907)     (1,153)     (717)   (8,139)   (6,429)   (11,394)   (11,116) 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
(Deficit)/surplus 
 in plans (pre 
 withholding tax 
 payable)(7)                 (394)    (177)          29        18     3,675     5,560        172        584 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
Withholding tax 
 payable                       n/a      n/a         n/a       n/a   (1,286)   (1,946)        n/a        n/a 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
(Deficit)/surplus 
 in plans (8)                (394)    (177)          29        18     2,389     3,614        172        584 
-----------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
 

6 The difference between accounting and actuarial funding asset fair values on 28 and 31 March 2021 arises from the different year-end dates used for the valuation of the assets, and in both years due to the valuation of the RMSEPP buy-in assets under both methods.

7 Any reference to a withholding tax adjustment relates to withholding tax payable on distribution of a pension surplus.

8 On an actuarial funding basis, the excess of DBCBS assets over liabilities is as a result of the risk reserve.

There is no element of the present value of the plans' liabilities above that arises from plans that are wholly unfunded.

Having taken legal advice with regard to the rights of the Group under the Trust deeds and rules, the Directors believe there is an obligation to recognise a pension surplus on an accounting basis. The Directors do not believe that the surplus in the RMPP on an accounting basis is a useful measure of the scheme's funding position. However, the Directors are required to account for the plans based on the Group's legal right to benefit from a surplus, using long-term accounting assumptions current at the reporting date, as required by IFRS. As the Group has a legal right to benefit from a surplus in the RMPP and RMSEPP, under IAS 19 and IFRIC 14, it must recognise the economic benefit it considers to arise from either a reduction to its future contributions or a refund of the surplus. This is a technical adjustment made on an accounting basis. There is no cash benefit from the surplus. Under the terms of the DBCBS scheme, any surplus would be repaid into the Trust and therefore under IAS 19 the Directors believe that they would not be able to recognise an accounting surplus even if one arose.

This surplus is presented on the balance sheet net of a withholding tax adjustment of GBP1,283 million (at 29 March 2020: GBP1,942 million), which represents the tax that would be withheld on the surplus amount. Any actuarial surplus will remain in the RMPP for the benefit of members until the point at which all benefits have been paid out or secured.

Included in the IAS 19 figures in the table above is a RMSEPP surplus at 28 March 2021 of GBP9 million (at 29 March 2020: GBP10 million surplus) (pre-withholding tax payable). As the RMSEPP is also closed to future accrual, the surplus is considered to be available as a refund as per IFRIC 14 and, as such, is shown on the balance sheet net of a withholding tax adjustment of GBP3 million (at 29 March 2020: GBP4 million), which represents the tax that would be withheld on the surplus amount.

In 2021-22 the Group expects to contribute around GBP400 million in respect of all UK pension schemes (2019-20: around GBP400 million).

Guaranteed Minimum Pensions (GMP)

Pension schemes are now under an obligation to address the issue of unequal GMP. The transfer of RMPP's historical pension liabilities to HM Government in 2012, in accordance with the Postal Services Act 2011, included all of the plan's GMP liabilities. The requirement to remove the inequality in former RMPP benefits deriving from GMPs therefore rests with Government.

The RMSEPP, however, does still have its GMP liabilities and will be required to take action to equalise benefits. The Trustees' actuaries estimate that the cost of GMP equalisation will not be material.

The following disclosures relate to the major assumptions, sensitivities, assets and liabilities in the RMPP, RMSEPP and DBCBS.

a) Major long-term assumptions used for accounting (IAS 19) purposes - RMPP, RMSEPP and DBCBS

IAS 19 assumptions will be derived separately for the legacy RMPP and DBCBS, in particular taking into account the different weighted durations of the future benefit payments. The RMSEPP will continue in line with legacy RMPP benefits.

The major assumptions used to calculate the accounting position of the pension plans are as follows:

 
                                                           At 28 March    At 29 March 
                                                                  2021           2020 
---------------------------------------------------------  -----------  ------------- 
Retail Price Index (RPI) - RMPP/RMSEPP                            3.2%           2.5% 
Retail Price Index (RPI) - DBCBS                                  3.3%           2.6% 
Consumer Price Index (CPI) - RMPP/RMSEPP                          2.9%         1.7% 
Consumer Price Index (CPI) - DBCBS                                2.8%         1.8% 
Discount rate - RMPP/RMSEPP(9) 
- nominal                                                         2.0%         2.2% 
- real (nominal less RPI)                                       (1.2%)       (0.3%) 
Discount rate - DBCBS(10) 
- nominal                                                         1.9%         2.2% 
- real (nominal less RPI)                                       (1.4%)       (0.4%) 
Rate of increase in pensionable salaries(11)                RPI - 0.1%     RPI-0.1% 
Rate of increase for deferred pensions - RMPP                      CPI          CPI 
Rate of pension increases - RMPP Sections A/B                      CPI          CPI 
Rate of pension increases - RMPP Section C(11)              RPI - 0.1%     RPI-0.1% 
Rate of pension increases - RMSEPP members transferred 
 from Section A or B of RMPP                                       CPI          CPI 
Rate of pension increases - RMSEPP all other members(11)    RPI - 0.1%     RPI-0.1% 
Rate of pension increases - DBCBS benefits                    CPI+2.0%     CPI+2.0% 
Life expectancy from age 60 - for a current 40/60 year 
 old male RMPP member                                      28/26 years  28/26 years 
Life expectancy from age 60 - for a current 40/60 year 
 old female RMPP member                                    30/28 years    30/28 years 
---------------------------------------------------------  -----------  ------------- 
 

9 The discount rate reflects the average duration of the RMPP benefits of around 25 years (2019-20: 27 years).

10 The discount rate reflects the average duration of the DBCBS benefits of 14.5 years (2019-20: 15 years). The pension service cost applicable from 30 March 2020 is based on 29 March 2020 assumptions.

11 The rate of increase in salaries, and the rate of pension increase for Section C members (who joined the RMPP on or after April 1987) and RMSEPP 'all other members', is capped at 5.0%, which results in the average long-term pension increase assumption being 10 basis points lower than the RPI long-term assumption.

Mortality

The RMPP assumptions are based on the latest Self-Administered Pension Scheme (SAPS) S2 mortality tables with appropriate scaling factors (118% for male pensioners (2019-20: 118%) and 116% for female pensioners (2019-20: 116%)). Future improvements are based on the CMI 2017 core projections (smoothing factor 8.0 (2019-20: 8.0)) with a long-term trend of 1.5% per annum (2019-20: 1.5%). These assumptions were adopted following a mortality study undertaken as part of the March 18 actuarial valuation. No adjustments have been made to mortality assumptions at year end to reflect the potential effects of COVID-19 as the actual Plan experience is not yet available and it is too soon to make a judgement on the impact of the pandemic on future mortality improvements. For RMPP and RMSEPP, the mortality experience analysis will be carried out later in the year as part of the 31 March 2021 formal valuation.

Sensitivity analysis for RMPP and DBCBS liabilities

The RMPP and DBCBS liabilities are sensitive to changes in key assumptions. The potential impact of the largest sensitivities on the RMPP and DBCBS liabilities is as follows:

 
                                                                      At 28 March 
                                                                          2021                  At 29 March 2020 
                                                               --------------------------  -------------------------- 
                                                                  Potential     Potential     Potential     Potential 
                                                                   increase      increase      increase      increase 
                                                                         in            in            in            in 
                                                                      DBCBS          RMPP         DBCBS          RMPP 
                                                                liabilities   liabilities   liabilities   liabilities 
Key assumption change                                                  GBPm          GBPm          GBPm          GBPm 
-------------------------------------------------------------  ------------  ------------  ------------  ------------ 
Additional one year of life expectancy                                    -           320             -           230 
Increase in inflation rate (both RPI and CPI simultaneously) 
 of 0.1% per annum                                                       25           190            13           155 
Decrease in discount rate of 0.1% per annum                              25           190            13           155 
Increase in CPI assumption (assuming RPI remains 
 constant) of 0.1% per annum                                             25            45            13            30 
Increase in constructive obligation of 0.1% per annum                    25             -            13             - 
-------------------------------------------------------------  ------------  ------------  ------------  ------------ 
 

This sensitivity analysis has been determined based on a method that assesses the impact on the defined benefit obligation, resulting from reasonable changes in key assumptions occurring at the end of the reporting year. The discount rate and RPI sensitivities are calculated using the mean term of the relevant section to derive the impact of a 0.1% change in assumption. For the RPI/CPI gap, the approach is the same for DBCBS, but for legacy RMPP, the liabilities as at 29 March 2020 are considered to derive an accurate impact in percentage terms. This percentage is then applied to the liabilities at March 2021. This approach is unchanged from the prior year, although any change in mean terms will impact the sensitivities. Changes inverse to those in the table (e.g. an increase in discount rate) would have the opposite effect on liabilities.

b) RMPP, RMSEPP and DBCBS assets

 
                                       At 28 March 2021           At 29 March 2020 
                                   ------------------------  --------------------------- 
                                   Quoted  Unquoted   Total   Quoted  Unquoted   Total 
                                     GBPm      GBPm    GBPm     GBPm      GBPm    GBPm 
---------------------------------  ------  --------  ------  -------  --------  ------ 
Equities 
UK                                      2        21      23        -        21      21 
Overseas                               43        31      74       21        33      54 
Bonds 
Fixed interest - UK                   303        20     323      292        18     310 
      - Overseas                      231       113     344      137        82     219 
Pooled investments 
Absolute return                         -       412     412        -       496     496 
Equity                                121         -     121        -        86      86 
Private equity                          -       208     208        -       163     163 
Fixed interest                        347       146     493        -       402     402 
Private debt                            -       463     463        -       455     455 
Property                                -        54      54        -        59      59 
Liability-driven investments(12)    9,247      (16)   9,231    9,104       234   9,338 
Property (UK)                           -       459     459        -       343     343 
Cash and cash equivalents             444         -     444      468         -     468 
Other                                 (3)         -     (3)        3         -       3 
Derivatives                           (1)       (3)     (4)        -         6       6 
RMSEPP buy-in annuity policies          -       364     364        -       296     296 
---------------------------------  ------  --------  ------  -------  --------  ------ 
Total plans' assets                10,734     2,272  13,006   10,025     2,694  12,719 
---------------------------------  ------  --------  ------  -------  --------  ------ 
 

12 This portfolio comprises gilt and swap contracts that is designed to hedge the majority of the interest rate and inflation risk associated with the Plans' obligations. At 28 March 2021 it included GBP9,068 million (29 March 2020: GBP9,332 million) of index-linked gilts, GBP454 million (29 March 2020: GBP201 million) of bonds, GBP157 million (29 March 2020: GBP353 million) in short-term money market funds and GBP27 million (29 March 2020: GBP95 million negative investment) of cash and similar instruments, offset by negative fair value investments of GBP457 million (29 March 2020: GBP587 million) of repurchase agreements and GBP18 million (29 March 2020: GBP134 million positive investment) of swaps.

There were no open equity futures or options derivatives within this portfolio at 28 March 2021 (29 March 2020: GBPnil). GBP9.1 billion (29 March 2020: GBP8.8 billion) of HM Government bonds are primarily included in the liability-driven investments balance above. The plans' assets do not include property or other assets used by the Group or shares of Royal Mail plc at 28 March 2021 (29 March 2020: GBPnil).

Risk exposure and investment strategy

The Group's defined benefit schemes face similar risks to other UK defined benefit schemes. Some of the key financial risks and mitigating actions are set out in the table below.

 
Investment market movements                      The risks inherent in the investment markets are partially mitigated 
                                                 by pursuing a widely 
                                                 diversified approach across asset classes and investment managers. 
                                                 The RMPP uses derivatives 
                                                 (such as swaps, forwards and options), from time to time to reduce 
                                                 risks whilst maintaining 
                                                 expected investment returns. 
                                                 In addition to property and cash, the RMSEPP holds two buy-in annuity 
                                                 policies totalling GBP364 
                                                 million at 28 March 2021 (29 March 2020: GBP296 million) to match its 
                                                 liabilities. 
-----------------------------------------------  --------------------------------------------------------------------- 
Interest rates and inflation changes             The RMPP's liabilities and assets are impacted by movements in 
                                                 interest rates and inflation. 
                                                 In order to reduce the risk of movements in these rates driving the 
                                                 RMPP into a funding deficit, 
                                                 the RMPP Trustee has hedged the funding liabilities. It has done this 
                                                 predominantly through 
                                                 investment in index-linked gilts and derivatives. 
                                                 The nature of the risks and their mitigation are similar for the 
                                                 DBCBS, although the level 
                                                 of hedging is less than the RMPP. 
                                                 In the pension schemes, many of the inflation linked increases that 
                                                 apply are restricted to 
                                                 a maximum increase of 5% in any year. The pension schemes' rules 
                                                 therefore give some protection 
                                                 from the risk of significantly high levels of inflation. 
-----------------------------------------------  --------------------------------------------------------------------- 
Equity exposure                                  The equity exposure of the RMPP has been reduced by means of a short 
                                                 Total Return Swap (TRS). 
                                                 This is a derivative that can be used to reduce exposure to a 
                                                 particular asset class without 
                                                 selling the physical assets held. 
                                                 The TRS has a negative market value as at 28 March 2021 of GBP2 
                                                 million (29 March 2020: positive 
                                                 GBP9 million) included in the derivative values above. The TRS 
                                                 economically offsets GBP60 
                                                 million of the Plan's global equity market exposure at 28 March 2021 
                                                 (29 March 2020: GBP62 
                                                 million). 
-----------------------------------------------  --------------------------------------------------------------------- 
Changes in life expectancy                       The RMPP's liabilities are impacted by longer than expected life 
                                                 expectancy, resulting in 
                                                 higher than expected payout levels. 
                                                 Although this risk is not hedged, mortality studies are undertaken as 
                                                 part of actuarial funding 
                                                 valuations and where appropriate updated assumptions are adopted for 
                                                 accounting valuations. 
-----------------------------------------------  --------------------------------------------------------------------- 
Changes in corporate and Government bond yields  A fall in yields on AA rated corporate bonds, used to set the IAS 19 
                                                 discount rates, will 
                                                 lead to an increase in the IAS 19 liabilities. 
                                                 The RMPP's assets included corporate bonds, HM Government bonds and 
                                                 interest rate derivatives 
                                                 that are expected to partly offset the impact of movements in the 
                                                 discount rate. The scheme 
                                                 is hedged against gilt movements to limit the impact on funding (and 
                                                 therefore cash) but, 
                                                 to the extent that gilts move differently to corporate bonds, the 
                                                 accounting liability is 
                                                 more exposed. 
-----------------------------------------------  --------------------------------------------------------------------- 
Change in estimates (IAS 8)                      On 25 November 2020, the UK Government and UK Statistics Authority 
                                                 published a formal response 
                                                 on the future of RPI, confirming that RPI will be aligned with CPIH 
                                                 from February 2030. CPIH 
                                                 is calculated as CPI plus owner occupiers' housing costs. 
                                                 As a result, the Group has adjusted the RPI/CPI gap assumption for 
                                                 the RMPP/RMSEPP and DBCBS 
                                                 schemes. The single equivalent RPI/CPI gap assumption as at the end 
                                                 of March 2021 now reflects 
                                                 an RPI/CPI gap of 1% per annum to 2030 and 0% per annum thereafter. 
                                                 For RMPP/RMSEPP this results 
                                                 in a single equivalent RPI/CPI gap of 0.3% per annum (29 March 2020: 
                                                 0.8% per annum). This 
                                                 leads to an approximate GBP200 million increase in the defined 
                                                 benefit obligation for the 
                                                 RMPP and an approximate GBP25 million increase in the defined benefit 
                                                 obligation for RMSEPP 
                                                 at 28 March 2021. 
                                                 For the DBCBS, the RPI/CPI gap has been set at 0.5% per annum (29 
                                                 March 2020: 0.8%). The DBCBS 
                                                 gap is higher than that of the RMPP/RMSEPP to reflect the shorter 
                                                 duration or this scheme, 
                                                 meaning more of the liability relates to pre-2030 increases. The 
                                                 impact of the reduction in 
                                                 the gap from the prior year is approximately a GBP70 million increase 
                                                 in the defined benefit 
                                                 obligation at 28 March 2021. 
                                                 The discount rate setting methodology, used by the Group's actuary, 
                                                 has been revised in the 
                                                 current year, in particular, the method used to decide which 
                                                 individual bonds are included 
                                                 in the model that is used to set the assumption. The impact as at 28 
                                                 March 2021 is an increase 
                                                 in the discount rate of 10 basis points for all schemes. This results 
                                                 in a GBP190 million 
                                                 decrease in the defined benefit obligation for the RMPP, a GBP7 
                                                 million decrease in the defined 
                                                 benefit obligation for the RMSEPP and a GBP25 million decrease in the 
                                                 defined benefit obligation 
                                                 at 28 March 2021. 
-----------------------------------------------  --------------------------------------------------------------------- 
 

Further details on key sources of estimation uncertainty relating to pension assets can be found in Note 1, including details on how the assets have been valued.

c) Movement in RMPP and RMSEPP assets, liabilities and net position

Changes in the value of the defined benefit pension liabilities, fair value of the plans' assets and the net defined benefit surplus are analysed as follows:

 
                                           Defined benefit    Defined benefit    Net defined benefit 
                                                asset            liability             surplus 
                                          -----------------  -----------------  --------------------- 
                                              2021     2020      2021     2020        2021       2020 
                                              GBPm     GBPm      GBPm     GBPm        GBPm       GBPm 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Retirement benefit surplus 
 (before withholding tax payable) 
 at 30 March 2020 and 1 April 
 2019                                       11,989   10,803   (6,429)  (7,097)       5,560      3,706 
Amounts included in the income 
 statement: 
Ongoing UK defined benefit 
 pension plan and administration 
 costs (included in people costs)              (9)      (9)         -        -         (9)        (9) 
Pension interest income/(cost)(13)             262      258     (140)    (169)         122         89 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Total included in profit before 
 tax                                           253      249     (140)    (169)         113         80 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Amounts included in other comprehensive 
 income - remeasurement gains/(losses) 
Actuarial (loss)/gain arising 
 from: 
Financial assumptions                            -        -   (1,748)      751     (1,748)        751 
Demographic assumptions                          -        -         -     (17)           -       (17) 
Experience assumptions                           -        -        97       19          97         19 
Return on plans' assets (excluding 
 interest income)                            (347)    1,020         -        -       (347)      1,020 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Total remeasurement (losses)/gains 
 of the defined benefit surplus              (347)    1,020   (1,651)      753     (1,998)      1,773 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Other 
Employer contributions                           -        1         -        -           -          1 
Benefits paid                                 (81)     (84)        81       84           -          - 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Total other movements                         (81)     (83)        81       84           -          1 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Retirement benefit surplus 
 (before withholding tax payable) 
 at 28 March 2021 and 29 March 
 2020                                       11,814   11,989   (8,139)  (6,429)       3,675      5,560 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Withholding tax payable                        n/a      n/a       n/a      n/a     (1,286)    (1,946) 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
Retirement benefit surplus 
 (net of withholding tax payable) 
 at 28 March 2021 and 29 March 
 2020                                          n/a      n/a       n/a      n/a       2,389      3,614 
----------------------------------------  --------  -------  --------  -------  ----------  --------- 
 

13 Pension interest income results from applying the plans' discount rate at 29 March 2020 to the plans' assets at that date. Similarly, the pension interest cost results from applying the plans' discount rate as at 29 March 2020 to the plans' liabilities at that date.

d) Movement in DBCBS assets, liabilities and net position

Changes in the value of the defined benefit pension liabilities, fair value of the plans' assets and the net defined benefit deficit during the reporting year are analysed as follows:

 
                                           Defined benefit    Defined benefit    Net defined benefit 
                                                asset            liability             deficit 
                                          -----------------  -----------------  --------------------- 
                                              2021     2020       2021    2020        2021       2020 
                                              GBPm     GBPm       GBPm    GBPm        GBPm       GBPm 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Retirement benefit at 30 March 
 2020 and 
 1 April 2019                                  730      402      (907)   (474)       (177)       (72) 
Amounts included in the income 
 statement 
Ongoing UK defined benefit 
 pension plan and administration 
 costs (included in People costs)              (5)      (4)      (455)   (485)       (460)      (489) 
Pension interest income/(cost)(14)              20       13       (25)    (16)         (5)        (3) 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Total included in profit before 
 tax                                            15        9      (480)   (501)       (465)      (492) 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Amounts included in other comprehensive 
 income - remeasurement losses 
Actuarial (loss)/gain arising 
 from: 
Financial assumptions                            -        -      (271)      49       (271)         49 
Experience assumptions                           -        -         32     (1)          32        (1) 
Return on plan assets                          103     (51)          -       -         103       (51) 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Total remeasurement gains/(losses) 
 of the defined benefit deficit                103     (51)      (239)      48       (136)        (3) 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Other 
Employer contributions(15)                     384      390          -       -         384        390 
Employee contributions                           4        4        (4)     (4)           -          - 
Benefits paid                                 (44)     (24)         44      24           -          - 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Total other movements                          344      370         40      20         384        390 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
Retirement benefit deficit 
 at 28 March 2021 and 29 March 
 2020                                        1,192      730    (1,586)   (907)       (394)      (177) 
----------------------------------------  --------  -------  ---------  ------  ----------  --------- 
 

14 Pension interest income results from applying the plans' discount rate at 29 March 2020 to the plans' assets at that date. Similarly, the pension interest cost results from applying the plans' discount rate as at 29 March 2020 to the plans' liabilities at that date.

15 Includes PSE contributions of GBP106 million (2019-20: GBP106 million).

7. Leases

The Group primarily leases office buildings and letter and parcel processing facilities. At 28 March 2021 the Group held approximately 1,039 land and building leases (2019-20: 1,110). The Group also has leases for some of its vehicle fleet and plant and equipment used in operations. Leases are negotiated on an individual basis and may include extension or termination options.

The lease liabilities are reported as follows in the balance sheet:

 
                                                       At 28      At 29 
                                                       March      March 
                                                        2021       2020 
                                                   ---------  --------- 
                                                     Present    Present 
                                                       value      value 
                                                          of         of 
                                                       lease      lease 
                                                    payments   payments 
Lease liabilities                                       GBPm       GBPm 
-------------------------------------------------  ---------  --------- 
Current liabilities 
Lease liabilities due within one year                  (197)      (201) 
Non-current liabilities 
Lease liabilities due between one and five years       (560)      (575) 
Lease liabilities due beyond five years                (399)      (412) 
-------------------------------------------------  ---------  --------- 
 

The right of use assets resulting from lease agreements are detailed below:

 
                                            Plant 
                             Land and         and      Motor        Fixtures 
                            buildings   machinery   vehicles   and equipment  Total 
Right of use assets              GBPm        GBPm       GBPm            GBPm   GBPm 
-------------------------  ----------  ----------  ---------  --------------  ----- 
At 28 March 2021 
Cost                            1,193         188        519               5  1,905 
of which additions                 73           3         31               1    108 
Accumulated depreciation        (258)       (137)      (296)             (3)  (694) 
Deprecation charge              (136)        (22)       (52)             (2)  (212) 
-------------------------  ----------  ----------  ---------  --------------  ----- 
Total                             935          51        223               2  1,211 
-------------------------  ----------  ----------  ---------  --------------  ----- 
 
 
                                            Plant 
                             Land and         and      Motor        Fixtures 
                            buildings   machinery   vehicles   and equipment  Total 
Right of use assets              GBPm        GBPm       GBPm            GBPm   GBPm 
-------------------------  ----------  ----------  ---------  --------------  ----- 
At 29 March 2020 
Cost                            1,096         195        504               4  1,799 
of which additions                109           3         29               -    141 
Accumulated depreciation        (133)       (125)      (275)             (1)  (534) 
Deprecation charge              (128)        (25)       (55)             (1)  (209) 
-------------------------  ----------  ----------  ---------  --------------  ----- 
Total                             963          70        229               3  1,265 
-------------------------  ----------  ----------  ---------  --------------  ----- 
 

Leases in the income statement

Leases are recognised in the income statement as detailed below:

 
                                            52 weeks  52 weeks 
                                                2021      2020 
                                                GBPm      GBPm 
------------------------------------------  --------  -------- 
Other operating income 
Sublease income                                    5         3 
Material expenses 
Expenses from short-term/low-value leases       (42)      (44) 
Depreciation 
Depreciation of right of use assets            (212)     (209) 
Net finance costs 
Interest expense on lease liabilities           (27)      (30) 
------------------------------------------  --------  -------- 
 

The Group enters into sale and leaseback transactions for plant and machinery and vehicles. Cash received from these transactions in the year was GBP1 million (2019-20: GBP6 million).

8. Provisions

 
                          Charged as specific items                   Charged in operating costs 
                     -----------------------------------  --------------------------------------------------- 
                        Industrial     Regulatory            Voluntary         Property     Litigation 
                          diseases           fine  Other    redundancy  decommissioning         claims  Other  Total 
                              GBPm           GBPm   GBPm          GBPm             GBPm           GBPm   GBPm   GBPm 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
At 30 March 2020              (85)           (51)    (8)          (12)             (14)           (40)   (15)  (225) 
Released/(charged)              16            (1)    (1)         (109)              (8)           (41)    (6)  (150) 
Reclassifications                -              -      -             -              (3)              7      -      4 
Utilised                         1              -      2           107                2             27      2    141 
Forex adjustment                 -              -      -             -                -              -      2      2 
Unwinding of 
 discount                      (1)              -      -             -                -              -      -    (1) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
At 28 March 2021              (69)           (52)    (7)          (14)             (23)           (47)   (17)  (229) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
Disclosed as: 
Current                        (6)           (52)    (1)          (14)              (3)           (44)    (4)  (124) 
Non-current                   (63)              -    (6)             -             (20)            (3)   (13)  (105) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
At 28 March 2021              (69)           (52)    (7)          (14)             (23)           (47)   (17)  (229) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
Disclosed as: 
Current                        (5)           (51)    (1)          (12)              (3)           (38)    (3)  (113) 
Non-current                   (80)              -    (7)             -             (11)            (2)   (12)  (112) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
At 29 March 2020              (85)           (51)    (8)          (12)             (14)           (40)   (15)  (225) 
-------------------  -------------  -------------  -----  ------------  ---------------  -------------  -----  ----- 
 

Specific items provisions

The Group has a potential liability for industrial diseases claims relating to individuals who were employed in the General Post Office Telecommunications division and whose employment ceased prior to October 1981. The provision is derived using estimates and ranges calculated by its actuarial adviser, based on current experience of claims, and an assessment of potential future claims, the majority of which are expected to be received over the next 25 to 30 years. The Group has a rigorous process for ensuring that only valid claims are accepted.

The Institute and Faculty of Actuaries (UK Asbestos Working Party), on whose modelling actuaries rely for their calculations for asbestos-related ill-health claims, issued revised guidance in February 2021, based on one of several different models it maintains. This new guidance indicates a significant reduction in future liabilities for such claims. Management has considered this guidance and, based on the view by business that this is the best information available, released GBP16 million of the provision balance, recognised as an operating specific item in the income statement.

In January 2020, Royal Mail requested permission to appeal the Competition Appeal Tribunal's judgment to the Court of Appeal (CoA) in respect of the Ofcom fine. On 30 March 2020, the CoA granted Royal Mail permission and the hearing took place on 20 and 21 April 2021. On 7 May 2021 the CoA dismissed the appeal. Royal Mail is considering its options, including an appeal to the Supreme Court. A further GBP1 million interest has been provided in the year in respect of the original fine, recognised as an operating specific item in the income statement.

Operating costs provisions

On 25 June 2020 Royal Mail announced a management restructure, subject to consultation with Unite/CMA, with the expectation of a reduction of circa 2,000 roles out of a total population of circa 9,700 roles in 2020-21. Following that announcement, a provision was recognised for GBP140 million at the half year ended 27 September 2020, representing voluntary redundancy compensation and associated costs. Subsequent extensive work to shape the new organisational design resulted in a revised provision of GBP93 million. This project, along with other ad-hoc projects, resulted in an overall charge of GBP109 million for voluntary redundancy costs for the full year.

Property decommissioning obligations represent an estimate of the costs of removing fixtures and fittings and restoring the leased property to its original condition.

Provisions for litigation claims, based on best estimates as advised by external legal experts, mainly comprise outstanding liabilities in relation to road traffic accident and personal injury claims.

Below is a summary of the ageing profile of specific items and provisions.

 
                                     At 28 March 2021                          At 29 March 2020 
                       --------------------------------------------  ------------------------------------- 
                              Expected period of settlement              Expected period of settlement 
                       --------------------------------------------  ------------------------------------- 
                                              Two to   After         Within  One to  Two to   After 
                          Within      One to    five    five            one     two    five    five 
                        one year   two years   years   years  Total    year   years   years   years  Total 
                            GBPm        GBPm    GBPm    GBPm   GBPm    GBPm    GBPm    GBPm    GBPm   GBPm 
---------------------  ---------  ----------  ------  ------  -----  ------  ------  ------  ------  ----- 
Specific items 
Industrial disease 
 claims                      (6)         (3)     (9)    (51)   (69)     (5)     (3)     (9)    (68)   (85) 
Employee Free 
 Shares - 
 NI                          (1)           -       -       -    (1)       -       -       -       -      - 
Legacy property 
 costs                         -           -       -     (6)    (6)       -       -     (1)     (6)    (7) 
Regulatory fine             (52)           -       -       -   (52)    (51)       -       -       -   (51) 
Other                          -           -       -       -      -     (1)       -       -       -    (1) 
---------------------  ---------  ----------  ------  ------  -----  ------  ------  ------  ------  ----- 
Total                       (59)         (3)     (9)    (57)  (128)    (57)     (3)    (10)    (74)  (144) 
---------------------  ---------  ----------  ------  ------  -----  ------  ------  ------  ------  ----- 
Operating costs 
Voluntary redundancy        (14)           -       -       -   (14)    (12)       -       -       -   (12) 
Property 
 decommissioning 
 obligations                 (3)         (6)     (8)     (6)   (23)     (3)     (2)     (5)     (4)   (14) 
Litigation claims           (44)         (2)     (1)       -   (47)    (38)     (2)       -       -   (40) 
LTIP - NI                      -         (2)       -       -    (2)       -     (1)       -       -    (1) 
Employee benefits            (2)         (2)     (1)     (5)   (10)     (2)     (1)     (7)       -   (10) 
Other                        (2)         (2)     (1)       -    (5)     (1)       -     (3)       -    (4) 
---------------------  ---------  ----------  ------  ------  -----  ------  ------  ------  ------  ----- 
Total                       (65)        (14)    (11)    (11)  (101)    (56)     (6)    (15)     (4)   (81) 
---------------------  ---------  ----------  ------  ------  -----  ------  ------  ------  ------  ----- 
 

9. Contingent liabilities

In October 2018, Whistl filed a damages claim against Royal Mail at the High Court relating to Ofcom's decision of 14 August 2018, which found that Royal Mail had abused its dominant position (see regulatory fine in Note 8). Whistl's High Court claim is on hold until after the completion of any further appeal process. Royal Mail believes Whistl's claim is without merit and will defend it robustly if Whistl decides to pursue it.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements concerning the Group's business, financial condition, results of operations and certain Group's plans, objectives, assumptions, projections, expectations or beliefs with respect to these items. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends', 'plans', 'potential', 'targets', 'goal', 'forecasts' or 'estimates' or similar expressions or negatives thereof.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group's actual financial condition, performance and results to differ materially from the plans, goals, objectives and expectations set out in the forward-looking statements included in this document.

All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Group or any persons acting on its behalf are expressly qualified in their entirety by the factors referred to above. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. No assurance can be given that the forward-looking statements in this document will be realised; actual events or results may differ materially as a result of risks and uncertainties facing the Group. Subject to compliance with applicable law and regulation, the Group does not intend to update the forward-looking statements in this document to reflect events or circumstances after the date of this document, and does not undertake any obligation to do so.

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END

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