RMG.L Regulatory News (RMG)

Royal Mail plc

25 May 2017

Annual Report and Financial Statements 2016-17

and Disclosures required in accordance with DTR 6.3.5

Annual Report and Financial Statements 2016-17

Following the release by Royal Mail plc (the Company) on 18 May 2017 of the Company's final results announcement, the Company announces that it has today published its Annual Report and Financial Statements 2016-17 (Annual Report 2016-17) via Royal Mail's website: www.royalmailgroup.com/results.

The Company also announces that it will provide shareholders, by their chosen communication means, the Annual Report 2016-17 and Notice of Meeting for the 2017 Annual General Meeting on or around 13 June 2017.

In accordance with Listing Rule 9.6.1, a copy of the Annual Report 2016-17 is being uploaded today to the National Storage Mechanism and will be available shortly for viewing.

Disclosures required in accordance with DTR 6.3.5

Information on important events that have occurred during the financial year and their impact on the Annual Report 2016-17 were included in the results announcements released on 18 May 2017. This, together with the following information, which is extracted from the Financial report for the full year ended 26 March 2017 (Financial Report) and the Annual Report 2016-17, constitutes the information required by DTR 6.3.5 to be communicated in full, unedited text through a regulatory information service. This information is not a substitute for reading the full Annual Report 2016-17. Any page references in the Related party information and the Statement of Directors' Responsibilities in respect of the Annual Report 2016-17 and Financial Statements are to those in the Annual Report 2016-17. All other page and note references are to those in the Financial Report which is available on the Company's website: www.royalmailgroup.com/results.

Contacts:

Company SecretariatKulbinder DosanjhPhone: 020 7449 8133 Email: cosec@royalmail.com

Media RelationsAndrew MoysMobile: 07841 803 321Email: andrew.moys@royalmail.com

Investor RelationsCatherine NashPhone: 07436 560 910Email: investorrelations@royalmail.com

CONSOLIDATED INCOME STATEMENT

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

1 Reported - prepared in accordance with International Financial Reporting Standards (IFRS).

2 The sub-analysis of operating costs has been re-presented as stated in Note 2. Total operating costs remain unchanged.

3 Operating costs are stated before transformation costs, Employee Free Shares charge, Legacy/other (costs)/credit and amortisation of intangible assets in acquisitions.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

1 Includes net £4 million charge (2015-16: £2 million) in relation to tax liabilities (see Note 6).

CONSOLIDATED BALANCE SHEET

At 26 March 2017 and 27 March 2016

The financial statements were approved and authorised for issue by the Board of Directors on 17 May 2017 and were signed on its behalf by:

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

1 Excludes £5 million (2015-16: £6 million) National Insurance, charged to the income statement, included in provisions on the balance sheet.

2 Excludes £1 million (2015-16: £1 million) National Insurance, charged to the income statement, included in provisions on the balance sheet.

3 Purchases in respect of LTIP and Employee Free Shares schemes.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

1 Items comprise total investment 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) and listed on the London Stock Exchange. The UK is the Company's country of domicile.

The consolidated financial statements of the Company for the 52 weeks ended 26 March 2017 (2015-16: 52 weeks ended 27 March 2016) comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in its associate undertakings and joint venture.

Basis of preparation and accounting

(a) The Directors consider that the Group has adequate resources to continue in operational existence for a minimum of 12 months from the signing date of these financial statements and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements.

(b) The consolidated financial statements of the Group have been prepared in accordance with the Companies Act 2006 and applicable IFRS as adopted for use in the EU. The consolidated financial statements have been prepared in accordance with the accounting policies stated in the Group's Annual Report and Financial Statements for the reporting year ended 26 March 2017.

The financial information set out in this document does not constitute the Group's statutory financial statements for the reporting years ended 26 March 2017 or 27 March 2016, but is derived from those financial statements. The auditor's report on those statutory financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Statutory financial statements for the reporting year ended 27 March 2016 have been delivered to the Registrar of Companies. The statutory financial statements for the reporting year ended 26 March 2017 were approved by the Board of Directors on 17 May 2017 along with this Financial report, but will be delivered to the Registrar of Companies in due course.

The Annual Report and Financial Statements 2016-17, together with details of the Annual General Meeting (AGM), will be despatched to shareholders before the AGM. The AGM will take place on 20 July 2017.

Presentation of results and accounting policies

The Group's significant accounting policies, including details of new and amended accounting standards adopted in the reporting year, can be found in the Annual Report and Financial Statements 2016-17. Details of key sources of estimation uncertainty, are provided below.

These financial statements and associated Notes have been prepared in accordance with IFRS as adopted by the EU and as issued by the International Accounting Standards Board (IASB) (i.e. on a 'reported' basis). In some instances, Alternative Performance Measures (APMs) are used by the Group. This is because Management are 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 on page 22.

Key sources of estimation uncertainty and critical accounting judgements

The preparation of consolidated financial statements necessarily requires Management to make estimates and assumptions 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 assumptions and estimates are significant to the consolidated financial statements are disclosed below.

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 RMPP are included within Note 9.

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 valuation of this deferred revenue is based on a number of different estimation and sampling methods using external specialist resource as appropriate.

The majority of this balance is made up of stamps sold to the general public. For sales to the general public, estimates of stamp volumes held are made on the basis of monthly surveys performed by an independent third-party. In order to avoid over-estimation of the typical number of stamps held, Management applies a cap to the results to exclude what are considered to be abnormal stamp holdings from the estimate. The level at which holdings are capped is judgemental and is currently set at 99 of each stamp type per household. The impact of applying alternative capping values on the year end public stamp deferred revenue balance is shown in the table below.

The value of stamps and meter credits held by retail and business customers are more directly estimated through the analysis of sales volumes and monthly meter sampling. Further adjustments are also made for each type of sale to take into account volume purchasing of stamps when price changes are announced.

The results of the above procedures are reviewed by Management in order to make a judgement of the carrying amount of the accrual. The total accrual is held within current trade and other payables but a portion (which cannot be measured) will relate to stamps and meter credits used one year or more after the balance sheet date.

Provisions

Due to the nature of provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future. The industrial diseases claims provision is considered to be the area where the application of judgement has the most significant impact.

The industrial diseases claims provision arose as a result of a Court of Appeals judgement in 2010 and relates to individuals who were employed in the General Post Office Telecommunications division 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 as at the year end, which incorporates independent expert actuarial advice. The result of a 0.5 per cent decrease in the discount rate estimate would be a £6 million increase in the overall industrial diseases provision.

Business acquisitions

Identifiable assets acquired and liabilities and contingent liabilities assumed in business acquisitions are measured initially at their fair values at the acquisition date. The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Independent valuers were used to assist in the valuation of the Group's in-year acquisitions.

In determining the fair value of the intangible assets acquired, risk-adjusted future cash flows discounted using discount rates specific to the asset are generally used. In determining cash flows, a combination of historical data and estimates regarding revenue growth, profit margins and operating cash flows have been used.

The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded as goodwill. The Group has one year from the acquisition date to re-measure the fair values of the acquired assets and liabilities and the resulting goodwill if new information is obtained relating to conditions that existed at the acquisition date.

Acquisition related costs are expensed as incurred. The business acquisitions during the period are disclosed in Note 10.

Goodwill allocation and impairment testing

Goodwill recognised in a business combination is not amortised and, as such, must be tested annually for impairment in line with IAS 36 'Impairment of Assets'. In making assessments for impairment, assets that do not generate independent cash flows, such as goodwill, are allocated to an appropriate cash-generating unit (CGU), or group of CGUs, on the basis of whether those CGUs are expected to benefit from the synergies of the combination. Management necessarily applies judgement in allocating goodwill to CGUs. As at 26 March 2017 £299 million of the total goodwill balance of £316 million was allocated to the Group of CGUs making up the GLS reportable segment.

In assessing whether there has been any impairment of goodwill, Management determines whether the goodwill carrying value is higher than the recoverable amount of the underlying CGUs. The recoverable amount is the higher of a CGU's fair value less costs to sell (realisable value) and value-in-use. In the case of goodwill allocated to the GLS reportable segment the realisable value is estimated by applying an average share price/earnings ratios of quoted peers to the current year results of GLS. Judgement must be made by Management in choosing a suitable peer group against which to compare the realisable value of GLS.

Deferred tax

Assessment of the deferred tax asset requires an estimation of future profitability. Such estimation is inherently uncertain in a market subject to various competitive pressures. Should estimates of future profitability change in future years, the amount of deferred tax recognised will also change accordingly. Prior to recording deferred tax assets for tax losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits. The carrying values of the deferred tax assets and liabilities are included within Note 6.

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 Chief Executive's Committee and 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.

In the year, following the acquisition of the minority shareholding (49 per cent) on 31 March 2016, Romec Limited, previously reported in athird operating segment in 2015-16, has been incorporated into the UKPIL segment. This is to better reflect how the segment's resources are managed and reported to the CODM. The 2015-16 comparative information has been restated accordingly. There has also been a re-presentation of £141 million costs between infrastructure costs and other operating costs in the Group income statement.

Of the residual businesses previously included in the 'Other' segment in 2015-16, the Group disposed of its 51 per cent shareholding in NDC 2000 Limited (NDC) on 24 April 2016 and the results of the Quadrant Catering Limited associate company do not materially impact Group results. A loss of £2 million has been recognised in the income statement for the disposal of NDC.

A key measure of segment performance is operating profit before transformation costs (used internally for the Corporate Balanced Scorecard). 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 APMs section on page 22). 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 arm's length/fair value on the basis of charges reached through negotiation between the relevant business units that form part of the segments. Trading between UKPIL and GLS is not material.

1 A £7 million credit for specific items and a £222 million charge for the pension charge to cash difference adjustment relate to UKPIL. A £9 million charge for specific items relates to GLS, comprising £10 million amortisation offset by £1 million profit on disposal of property, plant and equipment.

1 Specific items and pension charge to cash difference adjustment all relate to UKPIL.

The expenses and share of loss from associates and joint venture below are included within operating profit before transformation costs in the income statement.

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

2 Includes £11 million (2015-16: £nil) presented as an operating specific item in the income statement.

3. Operating costs

Operating profit before transformation costs is stated after charging the following operating costs:

1 Excludes £11 million (2015-16: £nil) amortisation of intangible assets in acquisitions, presented as an operating specific item in the income statement.

Research and development

During the year, the Group continued to develop products and services within the business. An indication of the nature of the activities performed will be provided in the Strategic Report in the Annual Report and Financial Statements 2016-17.

Regulatory body costs

The following disclosure is relevant in understanding the extent of costs in relation to the regulation of the Group.

Statutory audit costs

Disclosure of statutory audit costs is a requirement of the Companies Act 2006.

The 2016-17 fees relate to the services of the Group's appointed auditor KPMG LLP who, in addition to the above amounts, were paid by the respective Trustees, £88,000 for the audit of the Royal Mail Pension Plan (2015-16: £85,000) and £28,000 for the audit of the Royal Mail Defined Contribution Plan (2015-16: £31,000).

4. People information

People costs

People numbers

The number of people employed during the reporting year was as follows:

Directors' remuneration

1 Employer contribution rates are one per cent for employees in the entry level category and seven to nine per cent for those in the standard level category, depending on the employees' selected contribution rate.

2 These people numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the number of standard full-time working hours in the same year.

3 These amounts include any cash supplements received in lieu of pension.

5. Net finance costs

6. Taxation

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 26 March 2017 and 52 weeks ended 27 March 2016 is shown below.

Tax on specific items

The tax credit on specific items of £59 million (2015-16: £68 million) includes the tax impact of property transactions and certain tax-only adjustments, such as the impact of changes in tax law.

Current tax

The current tax charge for the Group is mainly in respect of GLS. UK taxable profits in 2016-17 are partially covered by a combination of brought forward losses and capital allowance claims. Accordingly, the current tax rate for the Group is 18 per cent (2015-16: 17 per cent).

Effective tax rate

The effective tax rate on reported profit is 19 per cent (2015-16: 17 per cent), comprising current tax due on reported profits and deferred tax in relation to temporary differences. This rate is below the UK statutory rate, principally due to changes to tax law detailed below, tax overprovided in previous years and no tax charge recognised in relation to property disposals3. The majority of the prior year overprovision is in relation to tax incentives in earlier years.

GLS pays tax in a number of territories, with the majority of its profits in the reporting year to 26 March 2017 earned in territories where the tax rate is above the UK statutory tax rate. Certain subsidiaries, notably GLS France, continue to not recognise deferred tax credits on losses made during the reporting year as it is not sufficiently certain of its capacity to utilise them in the future. These factors contribute to GLS having a higher effective tax rate for the year than the UK statutory rate.

1 The 2015-16 profit includes £31 million in respect of discontinued operations.

2 The 2015-16 charge includes £5 million in respect of discontinued operations.

3 No tax charge has been recognised on property disposals included in specific items, as no tax liability would be expected to crystallise on the grounds that, were the assets (into which the gains have been rolled over) to be sold at their residual values, no capital gain would arise.

Deferred tax