With State Aid approval, a more flexible regulatory framework in place, and an improved financial position, Royal Mail Group is making progress on the path to a sustainable financial future and potential private ownership.
Chairman's Annual Statement: 2012
When I joined Royal Mail Group as Chairman in March 2009, it was very clear to me that a great deal needed to be accomplished. Years of restrictive regulation, a declining traditional letters market and out of date technology had all taken their toll on the business.
To deal with these challenges, the Board was rebuilt and oversaw the creation of a new, reinvigorated executive management team. We were delighted to appoint Moya Greene, formerly head of Canada Post, to the role of Chief Executive Officer in July 2010. Moya had a strong track record in her previous roles as Chief Executive Officer and President of Canada Post. Royal Mail Group has benefited from her vast expertise and experience in a number of key areas, including the establishment of our business strategy.
Many of the strategic milestones of the past year, such as the successful achievement of State Aid authorisation and securing an improved regulatory structure, would not have been achieved without her unwavering determination.
The Last Year
We have delivered improved financial results in what is a very challenging economic climate. I am pleased to be able to report a free cash inflow for the Group for the first time in four years. Overall revenues were four per cent higher than the previous year and are returning to similar levels to those last seen in 2008-09.
Group operating profit 1 also improved to £211 million, after modernisation costs of £231 million, with UK Parcels, International & Letters (UKPIL) moving from an operating loss of £120 million to an operating profit of £23 million, and both General Logistics Systems (GLS) and Post Office Limited recording growth in revenues and operating profits.
The Group has further opportunities for improved efficiency and continues to face real challenges. The cost of delivering the Universal Service is significant: traditional letter volumes are falling, as the number of households and businesses to which we must deliver increases.
Management is committed to press on with one of the most complex modernisation programmes ever undertaken in the UK.
Legislative and regulatory change
The past twelve months have marked an important transitional phase for the Group. One of the most significant achievements this year has been the successful passage through Parliament of the Postal Services Act 2011, which received Royal Assent in June 2011. We are very grateful to both the Department for Business, Innovation and Skills (BIS) and, in particular, the then Parliamentary Under-Secretary of State for Postal Affairs, Edward Davey, for their role in the successful passing of this important legislation.
On 1 April 2012, after the reporting date, almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan (RMPP) were transferred to HM Government. This will improve our future cash generation, as we complete our modernisation programme, reducing costs and improving the efficiency of the network.
We are again grateful to BIS for the delivery of this crucial element of our strategic plan. Jane Newell, Chair of the Trustee of the Royal Mail Pension Plan, has also worked tirelessly to secure a more certain future for our people. Jane has announced her intention to step down, and I would like to take this opportunity to thank her, on behalf of all our people, for her commitment and counsel.
Just after the year end, we welcomed the introduction of a new regulatory regime by Ofcom. Royal Mail now has the freedom – already enjoyed by most other companies – to decide the price of most of the services it provides.
We know how hard it is for businesses and households in the current economic climate. It has been necessary, however, to raise prices. But, we have thought very carefully about the impact of price rises on our customers and our business.
I have also established an independent inquiry, to be led by Sir Gordon Langley, into the prevalence of dog attacks on our postmen and women. It is an offence to decency that good people should suffer these attacks when carrying out their daily jobs and serving the public. This is an important issue for our people, upon which we are working closely with the Communication Workers Union.
Change continues at pace
Progress continues on the modernisation of the business. When complete, we will have delivered a complete overhaul of our entire delivery operations, and the way in which our people work. The process is complex and affects over 127,000 frontline colleagues employed in the UKPIL business.
It is akin to changing a car engine at 70mph on the motorway without stopping. There are inevitably challenges along the way. We are disappointed that the introduction of new delivery routes and practices has caused us to just miss our Quality of Service target in some areas. We will strive to maintain our standards, which are amongst the highest in Europe.
We are focused on finding alternative sources of growth in a structurally declining mail market. Our unique position in the UK market gives us some very significant opportunities for development.
One of our strategic focuses will be our strong and growing parcels businesses. No other operator can match our network and reach in this growing market. In addition, our European coverage through GLS leaves us perfectly placed to capture growth in overseas markets.
Revenues generated outside the UK from GLS and UKPIL currently represent approximately 20 per cent 2 of our annual revenues3. They will continue to be valued contributors to the Group’s success in years to come.
Moya Greene and her team are to be commended for the steps that they have taken to reshape our relationship with our union colleagues. Against a backdrop of such change and uncertainty, it is to the credit of our trade unions, the Group and, of course, our hardworking colleagues that we are managing so many complex changes so effectively. The Board is delighted to see this important relationship evolving positively.
I am also delighted to report plans for a new home for The British Postal Museum & Archive (BPMA). The new site will be Calthorpe House, on London’s Mount Pleasant site, where the country’s oldest mail centre is located. It will allow the BPMA to once again exhibit objects from its fascinating museum collection, which is currently held in storage.
On 1 April 2012, Post Office Limited and Royal Mail Group became sister companies, to facilitate operational independence and appropriate governance. At this point, all the Directors of Royal Mail Holdings plc, became Directors of Royal Mail Group Ltd, with the exception of Paula Vennells, now Chief Executive Officer of Post Office Limited.
I remain Chairman of the Board of Royal Mail Holdings plc, and continue as Chairman of the Board of Royal Mail Group Ltd. I was delighted to appoint Alice Perkins as the Chair of the Post Office Limited Board.
Her government and private sector experience will be an excellent addition to Post Office Limited. Alice joins me on the Board of Royal Mail Holdings plc, the parent company of both Royal Mail Group Ltd and Post Office Limited. I very much look forward to working with her.
Moya and I are both proud of what Royal Mail Group has delivered as a business in the past year, and we are acutely aware of the role of all our colleagues in this achievement. As the wholesale changes to the structure and culture of the business continue, we will be relying on our people to continue to support the delivery of our change programme.
I would like to offer my sincere thanks to all of my colleagues, not only for what we have achieved to date, but for the commitment and diligence I know they will demonstrate in the future.
1 After modernisation costs before other operating exceptional items
2Comprises GLS (£1.6 billion) and UKPIL Royal Mail International (£0.2 billion)
3Excludes Post Office Limited revenue
Registered Office Royal Mail Group Ltd, 100 Victoria Embankment, London, EC4Y 0HQ
© Royal Mail Group Limited 2013