RMG.L Regulatory News (RMG)

Royal Mail plc

(Incorporated in England and Wales)

Company Number: 8680755

LSE Share Code: RMG

ISIN: GB00BDVZYZ77

LEI: 213800TCZZU84G8Z2M70

Royal Mail plc

19 May 2022

ROYAL MAIL plc

RESULTS FOR THE FULL YEAR ENDED 27 MARCH 2022

Highlights

· Group revenue performance driven by GLS; reported operating profit down 5.6% year-on-year; adjusted operating profit up 8.0% due to improved profitability in Royal Mail:

· Royal Mail revenue down 1.6% year-on-year reflecting changing consumer behaviour following removal of lockdown restrictions and lower international volumes, partially offset by growth in test kits; adjusted operating profit of £416 million, up 20.9%; adjusted operating margin up 90 basis points to 4.9%, due to benefits of restructuring and non-people cost saving programmes.

· GLS revenue up 4.4% year-on-year in Sterling (9.6% in Euros), driven by recovery in B2B volumes and freight, adjusted operating profit of €402 million, flat year-on-year (although down 4.5% in Sterling), with 8.1% adjusted operating margin (down 80 basis points), in line with expectations.

· Volume trends:

· Royal Mail: Domestic parcel volume (ex. international) up 31% vs. pre-pandemic period (2019-20); and down 7% year-on-year due to normalisation post lockdown restrictions. Test kits accounted for c.7% of total parcel volume in 2021-22. Addressed letters (ex. elections) volume grew 3% year-on-year following sharp declines last year; down 18% vs. pre-pandemic.

· GLS: Continued parcel volume growth of 4% year-on-year, driven by domestic and international, with a recovery in B2B volume.

· Royal Mail Transformation programme:

· £59 million benefits delivered from Pathway to Change agreement, low end of revised £55 - 80 million range; good performance in Processing; insufficient progress in Delivery.

· Achieved 50% parcel automation - North West hub on track to open in June 2022.

· Change agenda even more urgent and important: need to accelerate delivery and broaden scope.

· GLS: good progress in France and Canada, margin pressure in US. Addressing short term challenges to maintain trajectory: price & yield management, digitalisation and automation to drive efficiency. Generated c.€500 million free cash flow in first two years of Accelerate strategy vs. €1 billion target5 by 2024-25.

· Strong cash generation: £353 million in-year trading cash flow4 pre-IFRS 16 (2020-21: £614 million), including increase in capex of £257 million, mainly due to investment in vehicles, hubs and automation in Royal Mail:

· Royal Mail £178 million in-year trading cash flow pre-IFRS 16 (2020-21: £342 million).

· GLS £175 million in-year trading cash flow pre-IFRS 16 (2020-21: £272 million). 

· New Group-wide ESG Principles aligned with UNSDGs; the Group has set out to reduce its GHG emissions to zero by 2045.

· Final dividend: Board proposing 13.3 pence per share; full year ordinary dividend of 20 pence per share, in line with policy.

· £400 million return to shareholders via share buyback and special dividend completed.

· Outlook

· Royal Mail 2022-23: assuming pay deal can be agreed broadly in line with current offer, and without material industrial disruption, current adjusted operating profit consensus of £303 million (as at 18 May 2022)6 sits within range of potential outcomes, with downside risk. Cost savings in excess of £350 million identified to mitigate macro-economic pressures.

· GLS 2022-23: high single digit revenue growth and operating profit €370 - 410 million.

· GLS Accelerate: Assuming rebound in GDP growth in 2023-24, target of €500 million operating profit in 2024-25 and €1 billion accumulated free cash flow by 2024-25 can still be achieved.

Summary segmental results1,2

Keith Williams, Non-Executive Chair, commented:

"Whilst a difficult environment persisted over the last year, with operational challenges caused by Omicron and tight labour markets, we continued to see financial tailwinds from the pandemic, which are now dissipating. We also have clear headwinds as we enter 2022-23, such as weakening GDP and growing inflationary pressures. Whilst both GLS and Royal Mail face short term challenges, they also have longer term opportunities.

We are at a crossroads with the transformation of Royal Mail. We need to adapt our business to a post pandemic world and whilst we are making progress in some areas, more needs to be done in others. We need to accelerate and broaden the scope of change to meet the demands of our customers, deliver real efficiency savings with a financial benefit this year and beyond, and remain competitive to support sustainable growth and secure jobs for the future.

In GLS, we made good progress on our Accelerate strategy and we need to continue to harness growth opportunities in a profitable way. We are making good progress in France and Canada, but seeing margin pressure in the US. We are taking actions to address short term challenges, including price increases and accelerating efficiency opportunities, while still investing for the future. GLS can leverage its business model to become more global, digital and diverse."

Simon Thompson, Chief Executive, Royal Mail said:

"It has been a year of progress, but there is much more to do. Over 50% of parcels are now processed automatically, the delivery of two new parcel hubs are on track, and we are reinventing our services and digital experiences to make sending and receiving even easier in an online age.

"But as we emerge from the pandemic, the need to accelerate the transformation of our business - particularly in delivery - has become more urgent. Our future is as a parcels business, so we need to adapt old ways of working designed for letters and do it much more quickly to a world increasingly dominated by parcels.

"The last two years has shown us all how quickly customer needs can change. Our focus now is to work at pace with our people and our trade unions to reinvent this British icon for the next generations, so that we can give our customers what they want, grow our business sustainably and deliver long-term job security for our great team. We have no time to waste."

Martin Seidenberg, Chief Executive, GLS added:

"We delivered a good set of financial results and have made good progress executing our strategy over the past 12 months, despite the challenging market conditions. We further strengthened our international capabilities and invested in our networks and services to unlock further growth and maintain our high quality levels.

Whilst the war in Ukraine has brought about some short term uncertainty, we will continue to leverage our business model and logistics know-how to become more global, digital and diversified."

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. "n.m." is not meaningful.

4. Trading working capital movements and thus in-year trading cash flow have been re-presented to include deferred revenue movements (including Stamps In The Hands Of the Public (SITHOP)) which were previously presented in other working capital.

5. GLS Accelerate free cash flow is calculated as pre-IFRS 16 in-year trading cash flow plus disposal proceeds. Includes four months of Rosenau Transport.

6. Based on company collated consensus for Royal Mail adjusted operating profit in FY 2022-23 of £303m as at 18 May 2022; based on 10 analysts' estimates, all received after 25 January 2022.

7. Based on competitors' 2020 and 2021 published reports.

Results presentation

A results webcast presentation for analysts and institutional investors will be held at 9:00am today, Thursday 19 May 2022 at www.royalmailgroup.com/results.

Enquiries:

Investor Relations

John Crosse

Email: investorrelations@royalmail.com

Media Relations 

Jenny Hall

Phone: 07776 993 036

Email: jenny.hall@royalmail.com

Helen Reynoldson

Phone: 07483 302 245

Email: helen.reynoldson@royalmail.com

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

Company Secretary

Mark Amsden

Email: cosec@royalmail.com  

The person responsible for arranging the release of this announcement on behalf of Royal Mail Plc is Mark Amsden, Company Secretary.

Financial Calendar

*Subject to approval at AGM.

GROUP REVIEW: NON-EXECUTIVE CHAIRMAN, KEITH WILLIAMS

Overview

The past year has presented many challenges as the countries in which we operate emerged from COVID-19 pandemic restrictions and consumer behaviour continued to change. The pandemic has resulted in a step up in the level of parcel volumes compared to pre-pandemic levels. However, some of the tailwinds we experienced last year have subsided, and while we have seen a recovery in letter volumes in Royal Mail, parcel volumes and shifts in mix continue to be volatile.

The Board would like to thank again all of our colleagues across Royal Mail and GLS who have continued to work relentlessly to play a key role and for their unstinting efforts to keep people, businesses and countries connected.

In GLS we saw continued revenue growth, with a recovery in B2B volumes and freight revenues, albeit operating profit was flat in Euro terms, as expected given the absence of certain COVID-related one-off benefits this year and escalating inflationary pressures. At Royal Mail, our primary focus has been to provide our customers with essential services whilst providing a safe environment for our people. Whilst we made good progress in some areas, notably Processing, we need to accelerate the pace of change elsewhere to adapt our business to a post pandemic world, meet the ever-changing demands of our customers, and restore quality. 

Inflation rose throughout the second half of the year. Wage inflation in tight labour markets, sharp increases in energy and fuel costs, exacerbated by the war in Ukraine, and a cost of living squeeze in many countries are resulting in an uncertain outlook for GDP and consumer spending, creating significant headwinds as we enter 2022-23.

Given this environment it is more important than ever that we accelerate the transformation of Royal Mail to improve efficiency and continue to harness GLS' growth opportunities in a profitable way.

Financial performance

Group revenue grew by 0.6%, driven by GLS. Group operating profit was £577 million on a reported basis (2020-21: £611 million). Group adjusted operating profit was £758 million (2020-21: £702 million), driven by improved profitability at Royal Mail. GLS operating profit in Euros was flat year-on-year, although lower in Sterling terms due to adverse foreign exchange movements. Adjusted basic earnings per share was 60.0 pence (2020-21: 52.1 pence).

Strategy

Royal Mail's strategy is focused on transforming the business into a more efficient parcels-focused operation that meets our customers' changing needs. We are making progress in some areas, but more needs to be done in other areas to accelerate the transformation of Royal Mail.

During the year we continued to improve and simplify our customer offering, and launched a number of new products and services. We also retained the top spot for recipient customer net promoter score and have increased the gap between us and our second-place competitor. However, our quality of service was impacted by high levels of COVID-related absence. 

We made progress in our transformation programme, achieving the major milestone of 50% automation in parcel sortation and our first Hub in the North West is about to launch. We also delivered the planned savings in non-people costs. However, delivery of savings from our Pathway to Change agreement was below our initial target, and we will take the learnings from this year into next to improve execution.

We are now at a crossroads. We need to deliver the benefits from change more quickly to deliver sustainable growth. We have made significant operational change already, but this needs to translate into real efficiency savings which deliver a financial benefit next year and beyond. Delivery of our existing agreements and the successful transition into the next agreements, as part of the current negotiations with the CWU, will be key to future profitable growth. We have made a substantial pay offer to our people which will enable the change we need to remain competitive, grow and secure their jobs for the future. Our market is changing quickly, and agility in our response is key.

GLS continued to execute its Accelerate strategy successfully during the year cementing the gains achieved during 2020-21, generating c.€500 million of pre-IFRS 16 free cash flow5 in the first two years against our target of €1 billion by 2024-25.

GLS further strengthened its international capabilities with the acquisition of Mid-Nite Sun Transportation Ltd (operating as Rosenau Transport), a freight business operating in Western Canada. Rosenau Transport complements our existing business and the combination gives us full national coverage, as well as connecting our US and Canadian networks. GLS will continue to look for selective bolt-on acquisitions to extend its current footprint, enhance its portfolio and exploit network synergies.

There are also signs of positive revenue progress in previously underperforming markets, France and US. However financial results in the US have been impacted by higher unit operational costs and strong inflationary pressures. As with Royal Mail, GLS has more to do particularly to combat competitive and inflationary pressures which we see ahead.

Responsible business

Being a responsible business and operating in a sustainable way is fundamental to our Purpose. This is the right thing to do and demonstrating leadership in our ESG (Environment, Social and Governance) agenda is also essential if we are to achieve competitive advantage, create value and deliver our strategy. During the year we introduced new Group-wide ESG Principles which are aligned with the UN Sustainable Development Goals, and which encapsulate our commitment to operate in a sustainable way.

In addition, Royal Mail has updated its environment strategy to target Net Zero by 2040, and GLS has launched its own strategy, tailored to its business of working with transport partners, to reduce its emissions to zero by 2045. Both plans include switching to renewable electricity, significantly increasing the use of low/zero emission transport vehicles, and offering customers sustainable delivery solutions.

Cash return to shareholders

In line with our capital allocation policy and the decision to reduce the Group's cash holdings, in November 2021, we announced a £400 million return of capital to shareholders, via a share buyback, and the payment of a special dividend. The special dividend was paid alongside the interim dividend in January 2022 and the share buyback completed in March 2022.

As announced in November 2021, provided our economic, commercial and industrial relations environment remains stable, over the next two years we would look to return to our historic position of a broadly net nil cash position (pre-IFRS 16). We will however keep this under review, taking into account any capital requirements for M&A.

Ordinary dividend

The Board is proposing a final dividend of 13.3 pence per share. Combined with the interim dividend of 6.7 pence per share paid in January 2022, this gives an ordinary dividend for FY 2021-22 of 20 pence per share, and is in line with our sustainable progressive dividend policy.

Board changes

Shashi Verma joined the Board as a Non-Executive Director on 29 September 2021 and became a member of the Nomination Committee and the ESG Committee at the same time. As announced on 1 February 2022, Rita Griffin will step down from the Board at the end of our forthcoming AGM. Rita, who has been a Non-Executive Director since December 2016, will also step down as Chair of the ESG Committee and a member of the Nomination Committee at the same time. On behalf of the Board, I would like to thank Rita for her valued contribution and wish her well for the future.

Lynne Peacock joined the ESG Committee on 1 February 2022. She will succeed Rita as Chair of the ESG Committee at the conclusion of our AGM and at the same time step down as Chair of the Remuneration Committee. Maria da Cunha, who is an existing member of the Remuneration Committee, will take over from Lynne Peacock as Chair of this Committee. Maria will continue in her role as Designated Non-Executive Director for engagement with the workforce.

As announced today, Jourik Hooghe will join the Board with effect from 1 June 2022 and become a member of the Nomination and Audit and Risk Committees.

Outlook

The trading environment is uncertain for both Royal Mail and GLS. All of our markets are impacted by the more challenging global economy, including increasingly high levels of inflation and expectations of lower future economic growth. Whilst the positive revenue impacts from COVID-19 such as growth in online retail and test kits are abating, we still have additional COVID-related cost and inefficiency in our networks.

Royal Mail

In Royal Mail, it is clear that the scale of both the revenue and cost headwinds we face now require an acceleration in pace and an extension in scope of our business transformation.

We expect revenue to decline in 2022-23, in particular the first half which has strong comparatives in the prior year, which included a period of lockdown. We anticipate a reduction in test kit volume, and the domestic parcels market in the UK is now expected to decline year-on-year. For addressed letter volumes excluding elections, our current models suggest a high single digit percentage decline.

Royal Mail will also incur costs associated with an increase in Employer National Insurance (c.£50 million per annum) and flow through costs associated with the 1 hour shorter working week, granted in the middle of 2021-22 (c.£40 million). In addition, we have pay deals to agree this year with both CWU and Unite, the impact of which is currently uncertain. The CWU pay deal is most material in terms of value, with 1% of pay equating to c.£45 million of cost inflation.

In order to offset the revenue and cost headwinds, we have identified a number of cost saving initiatives. Already in deployment, or associated with agreements already made with our trade unions, are initiatives totalling over £350 million. These include the benefits from our ongoing operational management restructuring (£30 million saving in 2022-23 and £40 million annualised, plus the non-recurrence of the £70 million restructuring charge), the next phase of productivity improvements from our Pathway to Change agreement with CWU, removal of residual costs from COVID-19, including rental vans and resource covering absence, and the next phase of non-people cost reduction.

Our three-year rolling hedging strategy for fuel and energy is also mitigating some of the energy cost inflation we are facing, which when combined with fuel surcharges introduced into some contract prices, means we should not see a negative impact year-on-year.

We are also looking to mitigate the above headwinds through price increases and growth initiatives. We have already increased domestic prices of our letter services by an average of c.7%, and parcel prices by an average of c.4%, in addition to the fuel surcharge.

Overall, assuming a pay deal for change can be agreed broadly in line with our current offer and without material industrial disruption, current analyst consensus of £303 million (as at 18 May 2022)6 is within our range of potential outcomes for the year, however the level of current headwinds presents risks to the downside. The first half will be more challenging, given the strong comparatives from last year when COVID-19 restrictions were still in force, and benefits from some transformation initiatives more second half weighted.

In the medium term, we still see potential for a 5%+ margin if we can complete our new pay deal with the union and successfully deliver our change agenda.

GLS

In GLS, there are similar inflationary pressures from fuel, energy and wages - in some of our markets (e.g. Germany) we are seeing material minimum wage increases. We also face a challenging GDP backdrop with decreasing consumer confidence and spending in many markets, with stronger comparator periods in the prior year, when lockdown restrictions were still in force. As a result, we expect a slowdown in volume growth and margin pressure in 2022-23.

To mitigate these pressures, we are looking to continuously evaluate pricing during the year ahead, including fuel surcharging, and to improve yield management, alongside the development of further automation and digital tools to optimise efficiency across both final mile and linehaul networks.

Revenue growth is expected to be a high single digit percent, with an operating profit between €370 million - €410 million.

We believe the €500 million 'Accelerate' operating profit target in 2024-25 is still achievable if there is a rebound in GDP growth in 2023-24 to pre-pandemic levels; though if the current challenging macro-economic conditions persist, it may require a longer timeframe to achieve the target.

ROYAL MAIL OPERATING AND STRATEGIC REVIEW: CHIEF EXECUTIVE, SIMON THOMPSON

Overview

We are focused on transforming Royal Mail into a more efficient parcels-focused business to reflect the changing needs of our customers. We will continue to own trust at the doorstep, compete on quality and cost whilst differentiating with our people and our low CO2/parcel. Whilst 2021-22 presented operational challenges, with Omicron and elevated levels of absence, we continued to benefit from pandemic tailwinds, which are now dissipating. During the year, we made progress on many of the six priorities we set ourselves. We have made many changes to our management capability and structures. We are laying the ground for the future of Royal Mail's network with our new state of the art North West hub, which will launch in June 2022, and with our strategy to be Net Zero by 2040.

However, whilst we delivered benefits from Pathway to Change in Processing, overall we did not make sufficient progress with our change programme. Performance in Delivery was disappointing. With growing inflationary pressures and a deteriorating macro-economic outlook, we must change how we work today, accelerate the pace of delivery and make sure we reflect the needs of the customers and align our workload with our labour.

We continue to work with Unite/CMA through our joint transformation agreement as we implement structural change. Whilst there was a recent threat of industrial action both parties in mid-May have reached agreement on some key principles and an agreed way forward. We have entered into pay discussions with CWU, and as part of these we have been informed CWU are making preparations for possible ballots for industrial action. This does not necessarily mean there will be industrial action. We want to reach agreement with CWU, but industrial action, or the threat of it, is damaging for our business and undermines the trust of our customers. It also makes delivery of our change programme more difficult and puts at risk our targets for 2022-23. We remain committed to working closely with both our unions to deliver the change we need to grow our business sustainably, and ensure long-term job security for our great team.

Operating Review

In 2021-22 Royal Mail revenue decreased 1.6% to £8,514 million. This was driven by a 6.5% decline in parcel revenue as a result of the strong comparative period which included several months of national and local lockdowns. This was partially offset by a 5.6% increase in letter revenue which had declined sharply during the pandemic. Revenue from parcels accounted for 56% of total Royal Mail revenue (2020-21: 59%). Adjusted operating profit was £416 million (2020-21: £344 million). Adjusted operating profit margin was 4.9%, up 90 basis points.

In-year trading cash inflow pre-IFRS 16 decreased by £164 million to £178 million. Gross capital expenditure increased by £231 million to £441 million largely driven by investment in our two new parcel hubs, increased parcel automation across our network, vehicles, including electric vehicles, and PDAs to support our frontline colleagues. Further detail is included in the Financial Review.

Parcels

Domestic parcel volumes (ex. international) decreased by 7% reflecting the lower levels of lockdown restrictions compared to the prior year. Domestic parcel revenue (ex. international) decreased by 2.4%, reflecting positive product/channel mix. Domestic parcel volumes (ex. international) increased by 31% compared to pre-pandemic levels, reinforcing our view that the pandemic has resulted in a step up in domestic parcel volumes driven by increased e-commerce activity. Volumes for our premium products, Tracked 24® / 48® and Tracked Returns®, continued to grow, by 17% in 2021-22 (2020-21: 79%). Excluding the effect of test kits Tracked 24® / 48® and Tracked Returns®, volume growth was flat (2020-21: 74% growth).

Royal Mail continued to support the Government's COVID-19 testing programme. We expanded capacity and prioritised delivery and collection of test kits in response to increased demand around Christmas due to Omicron. Over the year, test kits accounted for around 7% of total parcel volume. Q4 2021-22 saw the highest quarterly volume of tests kits; however there was a significant step down in the final weeks of the year, as expected, following the announcement of the withdrawal of free testing in England from 1 April 2022.

We believe that in 2021-22 we grew our revenue share of the domestic parcels market, based on our internal models.

International parcel volumes, including import and export parcels for Royal Mail and Parcelforce Worldwide, were down 42% year-on-year, impacted by increased customs processing requirements into the EU, reduced air freight capacity and persistently higher conveyance costs compared to pre-pandemic. International parcel revenue decreased 23.3% reflecting management of price and mix - export volumes showed smaller declines than import volumes over the year, and we saw increases in average unit revenue for both import and export parcels.

Letters

Addressed letter volumes (excluding elections) were up 3%, partially recovering the significant decline in the prior year, but were down 18% compared to pre-pandemic, reflecting the continued structural decline in the letters market.

Advertising Mail recovered strongly, with volumes up 30% year-on-year. Business Mail volumes experienced a 1% decline due to continued e-substitution of more transactional mailings and tougher prior year comparators as the year progressed.

Total letter revenue, up 5.6%, benefitted from a positive price mix.

Costs

Total adjusted operating costs decreased 2.5% to £8,098 million (2020-21: £8,305 million).

Adjusted people costs were down 0.6%. The management restructure programme, which led to a £93 million one off restructuring charge in 2020-21, delivered a sustainable £115 million benefit year-on-year, as expected. The Pathway to Change agreement enabled us to implement the largest amount of change to our operation in a single year, with 87% of planned activities completed and around 1,800 revisions implemented (including 1,270 in Delivery). However, we delivered savings of £59 million, at the lower end of our revised guidance range and below our initial target of over £100 million. Whilst performance in our processing sites was good, in our delivery units performance was disappointing. We must do better. Going forward, the learnings - which include ensuring operational stability before implementing change, that we have the right leadership which involves our postmen and women, and that everyone is committed to making it work - will enable us to improve implementation in the future. We are committed to making up the shortfall in our performance in 2022-23.

COVID-19 people costs were down £18 million, a lower reduction than we had originally envisaged, due to an extended period of social distancing requirements and absence rates remaining elevated for longer than expected. The overall level of absence was 8.0% in 2021-22 (2020-21: 8.5%), and a peak of 12.1% on 5 January 2022, driven by the Omicron wave (2020-21 peak absence of 18.9%). This compares to pre-pandemic levels of 5-6%. This had a significant impact on our quality of service.

Pay costs increased by £122 million driven largely by the 1% pay award for frontline staff, costs for the 1-hour reduction associated with the shorter working week, along with costs related to working time regulation holiday pay and managerial pay awards.

Productivity in the year was down 0.2% year-on-year as the business was slower to take out costs in Delivery due to lower-than-expected volumes following a faster-than-expected reopening of the UK High Street and lower than anticipated benefits from Pathway to Change.

In January 2022 we announced a further restructuring programme to streamline operational management and improve focus on performance at a local level. This resulted in a one-off voluntary redundancy charge of £70 million in the fourth quarter. This programme is expected to deliver annualised benefits of £40 million, with £30 million in 2022-23.

Non-people costs decreased 6.4%. Our £200 million two-year non-people cost saving plan was delivered, with £112 million achieved in 2021-22. Distribution and conveyance costs decreased as a result of lower terminal dues. However, there were increased costs of vehicle hires and fuel as part of maintaining social distancing measures. Infrastructure costs decreased driven by lower depreciation and amortisation. Other operating costs decreased due to a reduction in COVID-19 related costs by £35 million and volume related savings.

Strategic update: Customer, Trust and Growth

Our mission is to own trust at the doorstep.

We believe that trust in our people, our brand, and our nationwide hyper-local network is a platform for profitable growth. 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 in front of us. At the same time as improving our efficiency, we are becoming a more agile, customer-focused business. We will compete on quality and cost, win with people and CO2, and once we have transformed and completed our new pay deal with the union, our ambition over the medium term is to deliver a sustainable 5%+ adjusted operating profit margin.

Performance in 2021-22 has highlighted the need for more wide-ranging change and to accelerate the pace of our transformation to adapt our business to a post pandemic world and deliver significant benefits to all our stakeholders. Our change agenda is now even more urgent and important than it was a year ago - this forms the basis of our pay discussions with CWU and we want to work together to deliver this change which will secure growth and jobs for the future. 

Our strategy has three key pillars:

· Customer: Improve and simplify our customer offering through great quality of service and easy to understand and simple to use products.

· Trust: Rebuilding trust with our people and unions.

· Growth: Grow our business, our share, and the market through greater capacity and new innovative products and services.

Productivity is also important and our "ticket to play", delivering the change that we need such as our new parcel delivery model and increasing our parcel automation, so we can compete on cost and quality.

Progress against strategic priorities this year

In May 2021 we outlined the following six strategic priorities for FY 2021-22:

· Achieve our quality of service targets and being number one on NPS (Net Promoter Score).

· Deliver the CWU agreement on time and realise £100+ million benefits.

· Continue to increase our own internal Trust score.

· Rapidly reduce managers' daily activities and policies.

· Achieve 50%+ parcel automation by the end of the financial year.

· Deliver £110 million of non-people cost savings.

Despite the operational challenges of the past year, we have achieved the majority of the targets we set ourselves. Royal Mail is number one in the industry for Net Promoter Scores. Our internal Trust Score has seen a significant increase from 62 to 68 in a year, with participation in the survey growing from 48% to 69%. Through our 'Day in the Life of' programme we have significantly reduced the number of policies for managers and repurposed 1.6 million hours of operational management time from daily administrative tasks, allowing them to focus on their teams and their customers. We reached 50% parcel automation as at end of March 2022, up from 33% a year earlier. And we have delivered £112 million of non-people cost savings, in line with our target of c.£110 million in 2021-22 and £200 million over two years.

I would like to thank our people for their continued hard work and dedication as we reinvent Royal Mail for the next generations. This was never going to be easy, but we can already see the benefits of many of the changes we have made.

However, there is much more to do and there were some areas where our performance last year was not as we would have wished, namely in delivering Pathway to Change efficiencies, and service quality.

Customer

The first pillar of our strategy is all about the Customer: simplifying and improving our customer offering, listening and adapting to what our customers need, and delivering a great service every day.

At the start of the year we set out plans to get back to consistently achieving our regulatory quality of service targets, which had been suspended for part of the pandemic in recognition of the challenges Royal Mail had to face with COVID-related absence, and the introduction of more social distancing across our operation. I am disappointed to say we have not achieved this. COVID-19 had a more prolonged impact on our business than we had expected, with high levels of absence during the 'pingdemic' in July and the rise of Omicron in particular later in the year. Further, we have faced challenges in recruitment due to a buoyant job market as well as coping with the change of traffic mix in our operation, with more parcels and fewer letters versus pre-pandemic.

At the peak of Omicron, absence levels were double what we would expect to see at that time of the year pre-pandemic, with over 15,000 people off sick in January 2022. Although we took immediate steps to restore a comprehensive service, which involved recruiting additional temporary staff and establishing a specialised dedicated Delivery task force to provide targeted support to the most impacted offices, our Full Year Quality of Service results were disappointing, at 81.8% for First Class mail and 95.4% for Second Class mail.

We are delivering a good service in most delivery offices, but there are a small number where the quality performance is disproportionately impacting overall numbers. We have over 1,200 delivery offices, and around 4% are responsible for around 23% of delayed items.

The experience of the past 12 months has shown that we need to change our model in Delivery. In recent months, we have reduced the leadership layers from eight to five to push decision making close to the customer so we can act with speed. This has reduced the maximum team size from 56 to 44, with two thirds of delivery offices having average team sizes under 35.

During the year we launched or improved a number of new products and services and scaled some of our existing ones:

· Parcel Collect: Demand for our doorstep collection service, Parcel Collect, continues to grow. We have collected around 5 million parcels since its launch in October 2020. During the year we launched enhancements including offering customers pre-printed labels and improving the booking process through the new and improved Royal Mail App to eight steps and less than 60 seconds.

· Improved Royal Mail App: On the upgraded app, customers can now easily track, send and collect items, and check the estimated carbon emissions from their deliveries. Products have been categorised into three tiers, making it easier for customers to find the right postage for their needs online. The number of users has grown from 4 million users to nearly 7 million (end of March 2021 to end of March 2022), and with an iOS rating of 4.7 on the app store, it ranked in the top three within the "Lifestyle" category.

· Sunday services: Demand from our major commercial retail customers for Sunday deliveries continues to grow. Around 75 of our major commercial retail customers now use this service, including Moonpig and Bloom & Wild, compared to 45 customers in November 2021, with an exit rate in 2021-22 of around 12 million items. We have set out plans to scale up our Sunday services so that all customers - including businesses large and small - can benefit from the e-commerce revolution.

· Barcoded stamps: As part of our modernisation drive, we are rolling out unique barcodes on stamps to facilitate operational efficiencies, enable the introduction of added security features and pave the way for innovative services for customers. The new barcoded stamps have a digital twin and the two are connected by the Royal Mail App. Barcoded stamps currently give customers the ability to watch and share exclusive videos by scanning the barcode in the Royal Mail App, and further developments are planned.

Accelerating our sustainability initiatives: We know when speaking with our customers that they are increasingly looking for less environmentally impacting delivery options. Thanks to our 'feet on the street' delivery model, powered by over 90,000 postwomen and men, Royal Mail already has the lowest reported CO2e grams per parcel amongst major UK parcel operators7. But there is much more to do and reflecting our sustainability commitment we have set an ambitious target for Royal Mail to reduce average emissions per parcel from 205g CO2e in 2021-22 to 50g CO2e on our journey to net zero. We now aim to be a net zero business by 2040, ten years earlier than our previous target date. In the past year we have announced plans to introduce around 3,000 additional electric vans, have introduced low emission gas powered trucks and trialled micro-electric vehicles in our network, and announced that all our employee company cars will be electric by 2030. We are also planning to significantly increase rail transportation and reduce our use of domestic flights to reduce our environmental impact further. 

Consumer workshops on the future of post and the Universal Service (USO): We are proud to deliver the Universal Service and remain committed to providing an affordable and sustainable 'one price goes anywhere' service to all households across the UK. But as customer needs change, so must we. The demand for parcels continues to increase, while letter volumes are down by more than 60% since their peak in 2004-05. Given these significant changes we continue to believe the best way to ensure that the Universal Service remains relevant and meets customers' needs is to rebalance more towards parcels. To inform our thinking, we ran a series of 15 consumer roadshows and a series of stakeholder roundtables throughout February and March to explore what people want from postal services in future. This showed that there is support for Royal Mail to deliver parcels seven days and - similarly to Ofcom's User Needs research in 2020 - that a five day a week letter service would meet the needs of most people. It also highlighted the importance of tracking, safeplaces and reducing the need for people to go to a Customer Service Point to pick up undelivered parcels. We are currently considering these findings, and look forward to working constructively with all our stakeholders to ensure the Universal Service remains relevant and sustainable for us all, now and in the future.

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 work together to meet ever-changing customer needs in an efficient way is our big unlock.

· Delivering a positive step change in our relationship with our people: We operate a monthly listening programme that enables us to measure sentiment across our employee base. Feedback through the year showed we are making progress and we have seen trust scores improve across all our operational areas. In total, trust scores have improved by 6 points, from 62 in April 2021 to 68 in April 2022, with 69% now taking part in the survey compared with 48% a year ago. But there is still too much variation unit to unit and we are actively working on levelling performance up across our organisation.

· Enable direct conversations between all our people: Building a genuine two-way dialogue with our people is a key part of rebuilding trust. Over 45,000 colleagues are now on Workplace and are using it to recognise great work, share ideas and best practice, access information and problem solve issues. My Executive Board and I host a weekly Q&A and regular Live events, where we engage with employees directly on issues that really matter to them.

· Putting in place the next generation of apprentices: During the year we launched our Postal Apprenticeship programme. This is one of the largest programmes of its kind in the UK.

· Royal Mail Academy: A Royal Mail Academy has been set up to train and invest in managers, starting with frontline operational managers, by equipping them with the right suite of skills to do the job effectively.

· Driver Academy: Earlier this year we launched a new Driver Academy, in partnership with CWU, to train and develop future LGV and MGV drivers. The Driver Academy is comprised of four training pathways, including an apprenticeship scheme with an initial cohort of around 20 people, who will train to become road ready category C+E qualified drivers within 13 months.

· Strengthening our operational leadership team: In March 2022 Grant McPherson joined as Chief Operating Officer from Jaguar Land Rover where he was Executive Director of Global Manufacturing. At the same time Angela Noon was appointed as our new Chief Financial Officer, having joined from Siemens UK & Ireland where she was the CFO and Executive Director of Siemens plc and Siemens Holdings Group companies. Mark Briers joined earlier this year as Chief Analytics and Data Officer, a newly created role that underlines the importance of turning data into insight which can be used to improve our performance and drive growth in our business. Mark previously worked at the Alan Turing Institute, the UK's national institute for data science and artificial intelligence. Zareena Brown joined in October 2021 as our new Chief People Officer. Her prior role was at Britvic where she was Chief Human Resources Officer. Zareena's role focuses on scaling our trust agenda, engagement with our trade unions, championing diversity and inclusion, and training and support.

Industrial relations

We have entered into pay discussions with CWU and have tabled what we believe is a fair pay offer that recognises current inflationary pressures whilst enabling the transformational change which will secure growth and jobs for the future. Our total pay offer is worth up to 5.5% for CWU grade colleagues:

· 2% would be paid to all CWU grade colleagues as soon as an agreement is reached, and this would be backdated to April 2022;

· A further 1.5% would be paid from the date upon which we implement the changes agreed;

· In addition, a new 'above and beyond' bonus - worth up to 2% of salary.

This is the biggest pay offer we have made for many years. However, we need to ensure that any deal sets us up for tomorrow, and not just today. So as part of our negotiations we want to agree a series of changes to our delivery model and ways of working to ensure we can compete and adapt more quickly to changing customer needs.

CWU has rejected our offer, and has informed Royal Mail it is making preparations for a possible ballot for industrial action. We believe this is premature and have entered into our formal Dispute Resolution Procedures to try to secure agreement. This process was put in place to help deal with this kind of situation. We are going into it in good faith to try and reach an agreement and give our people a pay increase as soon as possible.

In January 2022, as part of our transformation programme we entered into a formal consultation with Unite/CMA to reorganise our operational management and reduce management layers from eight down to five. The proposals we put forward were designed to simplify and streamline our operational structures to ensure an improved focus on local performance and devolve more accountability and flexibility to frontline operational managers. Whilst there was a recent threat of industrial action both parties in mid-May have reached agreement on some key principles and an agreed way forward. Managers have now been informed of their new roles and the new structure will be in place by the end of May 2022.

We want to reach agreement with CWU and to continue to work with Unite/CMA as we implement structural change. Any industrial action, or the threat of it, would be damaging for our business and undermines the trust of our customers.

Delivering the Pathway to Change agreement

We implemented around 1,800 revisions across our operations; defined and rolled out a new productivity standard with a three-year flightpath to achieve in all units; introduced new Scan-in, Scan-Out technology at 43 sites, including all Mail Centres and Regional Distribution Centres to improve operational efficiency; rolled out our new delivery to specification technology, an algorithm to deliver mail as per the product specification and therefore reduce costs; and agreed a new dispute resolution process which has reduced the number of disagreements from 595 in November 2019, with an average resolution time of 80 days, to 151 disagreements as of the end of March, with an average resolution time of 36 days.

However, it was disappointing that we only delivered £59 million of benefits, at the low end of our revised guidance range and less than the £100+ million we had originally targeted. Following a pilot, the delivery resourcing technology was not as user friendly as expected so we are working to improve it. We plan to recommence trials of an enhanced tool in the second half of 2022-23. And on revisions, whilst we made good progress in Processing, in Delivery we fell short of our target. Whilst 886 table top revisions delivered 2.1% productivity, and 166 structural or major change revisions delivered 5.8% productivity, 203 structural revisions did not go well and had a negative productivity impact of 7.2%.

We have been working closely with CWU to understand lessons learnt into next year and beyond. There are three things that need to be in place to ensure revisions go well; the operation must be stable before deployment; leaders must be skilled at a revision and must involve the frontline in all of the change; and it is important that everyone is embracing the change and is committed to making it work from day one. Going forwards the learnings from last year will enable us to improve implementation.

Growth

Transforming our network

Transforming our network and working practices to adapt to parcels is key to our growth. We need to do this as quickly as possible to ensure we are operating efficiently, and profitably, to make the most of the opportunity we have in the market. 

· Two new hubs on their way: We are making great strides in transforming our network into a more modern, efficient and technology-enabled operation capable of handling larger parcels more efficiently. Our state-of-the-art North West Hub is on track to open in June 2022. The size of 4.5 football pitches, the new Warrington-based plant will have the capacity to sort over 800,000 parcels a day. Our Midlands Hub, based in Daventry, is on track to open in Summer 2023.

· A step change in parcel automation: In addition to the new hub, this year we have also installed five parcel sorting machines in mail centres across the country, including in Nottingham, Chester and Cardiff. As at 31 March 2022, the total number of machines in operation was 25. This number will increase to around 39 by the end of 2022-23. As a result of these initiatives we have achieved the major milestone of 50% automation in parcel sortation - the target we set last year. Furthermore, we are well on track to reach 70% automation in parcels sortation by 2022-23 and 90% by 2023-24.

· Expanding our healthcare offering: Royal Mail has played a key role during the pandemic supporting the delivery of test kits and Personal Protective Equipment (PPE) for the nation and already deliver the majority of prescriptions ordered online. We scaled our operation rapidly during the pandemic, and have built the expertise and capability to play a leading role in the growing market for online prescriptions and healthcare deliveries. We will capitalise on the growth in this market through a new dedicated healthcare offering, Royal Mail Health.

The future 

As we enter 2022-23, the financial tailwinds from COVID have receded. Wage inflation in tight labour markets, sharp increases in energy and fuel cost exacerbated by the war in Ukraine, and the cost of living squeeze are resulting in an uncertain outlook for GDP and consumer spending and creating significant headwinds. Against that backdrop, our focus is on delivering cost savings of over £350 million and continued investment in the business.

Ongoing investment in our network will be around £350 million, on hubs, technology advancements and best in class parcel processing.

In the medium term, we still see potential for a 5%+ adjusted operating profit margin if we can complete our new pay deal with the union and successfully deliver our change agenda.

But we must change how we work. Our change agenda is now urgent and important and it cannot happen fast enough.

GLS OPERATING AND STRATEGIC REVIEW: CHIEF EXECUTIVE, MARTIN SEIDENBERG

Overview

The demand for parcel services continued to grow in 2021-22, with the structural shift in demand for B2C services brought about by a change in consumer behaviour accelerated by the COVID-19 pandemic being confirmed. GLS continued to take advantage of these trends, although due to a recovery in B2B volumes during the year, the share of B2C volumes (55%) was marginally lower compared with the unusually high level of the prior year (57%). Nevertheless, this was still significantly higher than the pre-pandemic B2C share of 48% in 2019-20. We are continuing to pursue our Accelerate strategy, also targeting the B2C segment and further building on our already strong presence in the International and B2B segments. The war in Ukraine has brought about some short-term uncertainty. However, assuming there is an economic rebound in 2023-24, delivery of the Accelerate operating profit of €500 million in 2024-25 and €1 billion cumulative pre-IFRS 16 free cash flow5 (over the five-year period from 2020-21 to 2024-25) can still be achieved.

Operating Review

GLS performed well during the year with revenue growth of 4.4% to £4,219 million, driven by a combination of higher volumes, better pricing and the contribution from the Rosenau Transport business acquired in Canada. Adjusted operating margin declined by 80 basis points. Operating margin in the prior year benefited from some temporary positive effects related to the COVID-19 pandemic. During the year, the impact of foreign exchange movements adversely impacted revenue by £207 million and favourably impacted costs by £191 million, resulting in a reduction in operating profit of £16 million.

We continue to invest in growth, with capital expenditure of £162 million (2020-21: £136 million). In-year trading cash flow remained strong, at £239 million, compared with £330 million in the prior period. Further detail is included in the Financial Review.

Market performance

Similar to Royal Mail, there has been a structural shift in consumer behaviour driven by the COVID-19 pandemic, with parcel volume growth of 30% compared to pre-pandemic levels in 2019-20, and revenue growth of 33.5% (37.2% in Euro terms, of which 35.0% is organic) compared to the same period.

We saw revenue growth in almost all markets, driven by volume and price/mix, but with inflationary cost pressures which resulted in a decline in margin. GLS adjusted operating profit margin was 8.1% compared to 8.9% in the prior period, in line with expectations and reflecting temporary positive effects in the prior year which benefited margins, such as scale effects and pricing initiatives in certain markets.

Performance in our key markets is highlighted below, with revenue growth and cost development detailed in Euro terms.

Germany revenues grew by 8.1% driven by a combination of volume growth and better pricing, but due to inflationary impacts on costs, operating profit year-on-year was lower. In Italy revenues grew by 8.8%, benefitting from a recovery in B2B volumes and better pricing, and with the resulting operating profit ahead of the prior year.

We are pleased with our performance in France where revenues grew by 8.8%, driven by a recovery in B2B volumes and building on customer wins achieved during the COVID-19 pandemic. Operating losses narrowed further during 2021-22 in France, building on the strong improvement delivered in the prior year, which showed a significant reduction in losses compared with 2019-20.

Spain continued to perform well, with revenue growth of 7.7%. Operating profit was slightly below the prior year, with some margin compression resulting from higher operational costs.

The US reported revenue growth of 11.1%, driven by higher B2C volumes and increasing freight revenues. However, higher unit operational costs, driven by a shortage of drivers, which impacted final mile and line-haul costs, and strong inflationary pressures impacting the general cost base, resulted in a deterioration in profit versus the prior year and an overall loss. Measures focussing on improving unit costs and increasing the scale and quality of revenues are underway.

Organic revenue growth in Canada was 16.7%, benefitting from good growth in parcel volumes and a recovery in freight revenues, as well as improved pricing. The business continues to perform well, delivering margins above the group average. The acquisition of Rosenau Transport, which was completed on 1 December 2021, is performing in line with expectations. Initiatives to integrate Rosenau Transport with the pre-existing business in Canada to secure synergies are underway.

In our businesses in Eastern Europe we saw continued strong growth in revenues driven by higher B2C volumes, with particularly good performances in Hungary, Czech Republic and Croatia.

Strategic update: Accelerating GLS

Our 'Accelerate GLS' strategy, which builds on our distinctive and proven business model is focused on:

· Strengthening GLS' top position in the cross border deferred parcel segment.

· Strongly positioning GLS in the 2C parcel market, whilst securing its leading position in the 2B segment.

· Inspiring the market through innovative digital and sustainable customer-focused solutions.

We have made good progress executing this strategy at the same time as delivering a good set of financial results, despite the challenging market conditions described in the Operating Review.

Strengthening our top position in the cross border deferred parcel segment

During the year we have further strengthened our international capabilities. Our network capacity and footprint has been significantly upscaled. This fiscal year we have been investing in building, extending and upgrading over 100 hubs and depots. We are increasing capacity as well as investing in new sorters, dim-weight scanners and other equipment to increase efficiency. These investments will help us to unlock further growth and maintain our high-quality levels.

We have also expanded our offering to include more convenient services and products that enhance our customers' experience. With our growing fine meshed network of alternative pick-up points (parcel shops and parcel lockers), we provide a good omni-channel mix of last mile delivery solutions to our customers.

In December 2021 we completed the acquisition of Rosenau Transport, a freight business operating in Western Canada. Rosenau Transport complements our existing business in Canada and the combination gives us full national coverage, as well as connecting our US and Canadian networks.

Our scalable and flexible business model, together with our proven track record of successfully integrating our network in new markets, positions us well to further grow our international footprint. We continue to consider a number of opportunities capable of delivering long term sustainable value.

In February 2022, Saadi Al-Soudani, our Group Area Managing Director for North America, Iberia and Nordics and Managing Director International, also took on the role of Chief International Officer. This newly created role reflects the strategic importance of our international network expansion strategy. Saadi joined GLS in 1993 and has held a number of senior management positions across the business.

Strongly positioning in 2C market and securing position in 2B segment / Inspiring the market

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.

We are continuing to strengthen our connection with our customers through expansion of our digital offering. During the year we launched new customer apps in a number of markets including Spain and Denmark. These digital solutions make parcel delivery more convenient, for example through real time tracking, and enable us to engage directly with our customers and gather valuable immediate feedback about their delivery experience. 

We have also strengthened our market positioning through our rebranding initiatives which helped to increase brand awareness and position GLS as a new, modern and fresh brand.

In response to customer demand for more sustainable solutions we are intensifying our efforts to make all aspects of our business more sustainable. We have added over 1,200 low or zero emission vehicles to our existing fleet and as of January 2022, over 80% of GLS operated sites are using green electricity. We have also rolled out our Climate Protect programme across our European footprint, now compensating all CO2 emissions across our entire European logistics value chain through certified projects. Looking further ahead our ambition is to reduce our emissions to zero by 2045.

The future

Uncertainty brought about by the war in Ukraine is expected to have a negative impact on the macro-economic environment, global GDP and parcel growth. Therefore the 2022-23 operating profit is forecasted to be in the range of €370 million to €410 million.

To remain on our long-term growth trajectory, we want to leverage our business model and logistics know-how beyond our current setup. We will push further to become more global, digital and diverse. To achieve this, we will expand the network and our sustainable delivery model and we will further digitalize and diversify the GLS portfolio. 

Our 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 seek to mitigate these risks is also explained below.

Key: change in risk score during the year

· Increasing risk - Low to Moderate / Moderate to High risk

· Decreasing risk - Moderate to Low / High to Moderate risk

· Stable risk - No change

Financial Review

Summary results (£m)1

1. Reported results are prepared in accordance with IFRS. In addition, the Group's performance is 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 in the section entitled 'Presentation of results and Alternative Performance Measures.'

2. The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment. A full reconciliation of reported to adjusted results is explained in the section entitled 'Presentation of results and Alternative Performance Measures.'

3. 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 results

Group and Royal Mail results are for the 52-week period to 27 March 2022. GLS results are for the 12 months to 31 March 2022.

Year-on-year Group revenue grew despite the unusually strong performance seen in the prior year. As we emerged from COVID-19 restrictions, Group parcel revenue declined marginally as non-essential retail reopened. However, parcel revenue is still significantly higher than prior to the pandemic due to an acceleration in customer behaviour towards e-commerce.

In Royal Mail, letter revenue has recovered from the deterioration experienced during the pandemic, albeit this market is still in structural decline with revenue down 7.6% versus the pre-pandemic year.

The pandemic has continued to impact the Group over the last year. At times we experienced elevated absence rates along with inefficiencies whilst social distancing rules were maintained. This impacted our ability to deliver our UK targets on both service quality and the full benefits from operational change activity. We also faced some additional challenges including rising pay costs, labour shortages, the ongoing weakness in the international market and the emergence of the cost of living crisis.

Against this challenging backdrop, reported operating profit before specific items was £584 million (2020-21: £618 million), £34 million lower than the prior year. Operating specific items were a cost of £7 million (2020-21: £7 million) and non-operating specific items were a credit of £136 million (2020-21: credit of £153 million).

On a reported basis the Group operating profit margin reduced by 30bps to 4.5%, largely due to the increased pension charge to cash difference adjustment.

Adjusted Group operating profit improved by £56 million to £758 million (2020-21: £702 million) mainly driven by profit improvement in Royal Mail. Adjusted Group operating profit margin improved by 40bps to 6.0%. GLS experienced margin compression primarily as a result of the economic environment. The GLS prior year margin was unusually strong due to lockdowns. Royal Mail delivered margin improvement despite several cost headwinds. These headwinds were more than offset by cost saving initiatives including the successful completion of the management restructure (announced in June 2020).

Reported profit before tax of £662 million (2020-21: £726 million) comprises a £346 million profit in Royal Mail (2020-21: £398 million profit) and a £316 million profit in GLS (2020-21: £328 million profit). Basic reported earnings per share decreased to 61.7 pence (2020-21: 62.0 pence).

4. The prior years' letter and parcel revenue split has been re-presented to reflect a reallocation of international revenue between letters and parcels.

5. Royal Mail and GLS revenue does not equal Group revenue due to the elimination of intragroup trading (2021-22: £21 million, 2020-21: £51 million, 2019-20: £41 million).

6. Domestic Parcels excludes import and export for both Royal Mail and Parcelforce Worldwide.

7. International includes import and export for Royal Mail and Parcelforce Worldwide.

8. The results for the full year 2021-22 include four months of contribution from the acquisition of Rosenau Transport on 1 December 2021. The prior year does not include any contribution.

Group revenue grew by 0.6% in the year with parcel revenue accounting for 71% of total revenue (2020-21: 72%), a slight reduction to the prior year due to the recovery of letter revenue and the decline in Royal Mail parcel revenue as a result of the strong comparative. Compared with the pre-pandemic year (2019-20), Group revenue grew by 17.3%.

Segment - Royal Mail

Royal Mail adjusted operating profit improved 20.9% to £416 million (2020-21: £344 million). Adjusted operating profit margin was 4.9%, a 90 bps improvement on the prior year primarily due to the delivery of a number of cost saving initiatives which offset some of the headwinds experienced in the year. Reported operating profit was £250 million (2020-21: £271 million), the deterioration was largely due to an increase in the pension charge to cash difference adjustment.

Revenue

Overall, Royal Mail revenue reduced slightly on the prior year (1.6%) as pandemic restrictions were relaxed and our traffic mix adjusted.

Parcels revenue represented 56% of total Royal Mail revenue, compared with 59% in the prior year, driven by the recovery of letter revenue in the year.

Parcels

Total parcel revenue was down year-on-year by 6.5% with volumes down 13%; however, the comparative year was unusually strong as it included several months of national and local lockdowns when non-essential retail was closed. This drove e-commerce activity and parcel volumes. During the current year, non-essential retail was closed for just two weeks. Revenue benefitted from a positive price mix which partially mitigated the decline in volumes.

Domestic parcels (excluding international) volumes were down 7% driven by the relaxation of pandemic restrictions. Domestic parcels (excluding international) revenue was down 2.4% at a lower rate than volumes due to positive product/channel mix.

We saw a significant year-on-year increase in COVID-19 test kit revenue. COVID-19 test kits accounted for around 7% of total parcel volumes.

Royal Mail's premium products, Tracked 24®/48® and Tracked Returns® performed well with volumes growing 17% (2020-21: 79% growth). Excluding the effect of test kits, Tracked 24®/48® and Tracked Returns®, volume growth was flat (2020-21: 74% growth).

As previously disclosed, International has seen significant headwinds with volumes down 42% year-on-year. In the main, this decline has been driven by external factors including reduced air freight capacity and the transition to a new trade deal with the European Union.

Parcelforce Worldwide revenue, which is included in the domestic and international lines above, reduced as a result of the reopening of non-essential retail. The impact of Britain's withdrawal from the European Union also impacted cross-border volumes.

Letters

Total letter revenue grew 5.6% versus the prior year, with volumes for addressed letters excluding elections up 3%. These increases are against a prior year base which included sharp declines seen at the start of the pandemic.

The pandemic particularly impacted Advertising Mail. The recovery in Advertising Mail volumes in the current year was therefore more pronounced, with growth of 30%. This was partially offset by a marginal decline in Business mail volumes (down 1%) as they reverted to their pattern of structural decline experienced prior to the pandemic. Business mail revenue benefitted from positive pricing actions.

Comparison with pre-pandemic year (2019-20)

Parcels

Total parcel revenue was up 29.7% versus the pre-pandemic year with volumes up 16%. This has been driven by the acceleration in customer behaviour to e-commerce. The current year also includes the delivery of COVID-19 test kits; there were no test kit volumes included in 2019-20.

Compared with 2019-20, domestic parcels (excluding international) revenue increased by 42.0% with volumes up by 31%.

International volumes have decreased significantly versus the pre-pandemic year, down 44%. In the main this has been driven by the external factors outlined previously.

Letters

Total letter revenue is down 7.6% versus the pre-pandemic year with volumes for addressed letters excluding elections down 18% in the same period. This is reflective of the ongoing structural decline in the letters market. The 2019-20 year also included the European Parliamentary election and the UK General election; if the effects of the elections are removed then the decline in letter revenue is significantly reduced.

Advertising mail volumes declined 12% versus 2019-20 with low AUR unaddressed advertising letter volumes, down 9%, driven by the impact of the pandemic and ongoing e-substitution.

Business mail volumes were lower than 2019-20 levels by 17%.

Adjusted operating costs2

2. The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash difference adjustment. A full reconciliation of reported to adjusted results is explained in the section entitled 'Presentation of results and Alternative Performance Measures.'

Total adjusted operating costs decreased by 2.5% year-on-year. We estimate that total COVID-19 related costs reduced by £53 million to £92 million. Pay inflation and other operational cost increases were more than offset by cost saving initiatives including the successful completion of our management restructure (announced in June 2020) and non-people related cost reduction programmes. These initiatives, in addition to the benefits derived from our Pathway to Change agreement, delivered cost savings of c.£285 million in the year.

People costs

People costs excluding voluntary redundancy costs were broadly flat, with the decline in voluntary redundancy costs mainly due to a £93 million charge in the prior year for the management restructure announced in June 2020 compared with £70 million in the current year for a further restructuring announced in January 2022. This programme looks to streamline operational management and improve focus on performance at a local level.

Transformation costs declined by £6 million.

The management restructure programme (announced in June 2020) delivered in line with our expectations, with sustainable benefits of £115 million in the year.

We delivered £59 million of efficiencies from the Pathway to Change agreement. This was at the lower end of the revised guidance provided on 25 January 2022. Although this was disappointing against the initial expectation of over £100 million, the shortfall was almost entirely driven by the challenges in the delivery function. Changes implemented in Processing and Logistics were successful.

Despite higher absence rates during the peak period (November 2021 to January 2022) when the Omicron variant was prevalent and during the 'Ping-demic' in July, COVID-19 people costs were down £18 million year-on-year to £62 million. The reduction is due to prior year absence rates being particularly high when the pandemic began. Non-COVID absences were up year-on-year. In the current year the average total absence rate was 8.0% compared with 8.5% in the prior year. The highest single day of absence was 12.1% in the current year compared with 18.9% in the prior year.

Pay costs increased by £122 million year-on-year. This includes the cost of the frontline 1% pay award, effective from the start of FY 2021-22, costs for the one hour reduction in the working week, which was largely implemented in the second half of the year, along with costs associated with working time regulation holiday pay, and costs associated with managerial pay awards.

Productivity was down 0.2% year-on-year as the business was slower to take out costs following the reopening of the UK High Street. The reopening occurred more rapidly than we anticipated and had a more immediate impact on parcel volumes. Additionally we failed to deliver all the targeted operational benefits from Pathway to Change. These factors offset the cost saving initiatives, resulting in broadly flat people costs.

Non-people costs

Non-people costs decreased by 6.4% versus the prior year.

Our two-year non-people cost savings plan, which aimed to maintain flat non-people costs, excluding depreciation and volume related costs, delivered in full, with £112 million of benefits delivered in 2021-22.

Within non-people costs, we estimate the costs associated with the pandemic to be £30 million (2020-21: £65 million). The prior year COVID-19 non-people costs mainly related to the purchase of protective equipment to safeguard our frontline employees. In the current year, costs have been incurred in order to maintain social distancing measures, including investment in additional vehicle hires and fuel to support the increased number of fleet.

Distribution and conveyance costs decreased by 7.9% driven by lower international volumes. As a result, terminal dues were £72 million lower, year-on-year. This decrease has been partially offset by the additional costs outlined above. Total diesel and jet fuel costs increased to £191 million (2020-21: £187 million) due to the impact of the unhedged volume, which is subject to spot prices.

Infrastructure costs decreased year-on-year, of which depreciation and amortisation costs were c.£20 million lower. This was driven by the comparative including accelerated depreciation and amortisation following a review of our investment portfolio. Before these adjustments, underlying depreciation was broadly flat.

Other operating costs decreased by 8.1%, largely driven by the decrease in COVID-19 costs discussed above. Transformation programme costs of £58 million (2020-21: £45 million) are also included in other operating costs.

Segment - GLS8

8. The results for the full year 2021-22 include four months of contribution from the acquisition of Rosenau Transport on 1 December 2021. The prior year does not include any contribution.

9. 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'. As the pension charge to cash difference is not applicable to GLS, the operating profit before specific items is the same on a reported and adjusted basis, and thus no separate adjusted measures have been presented.

Operating profit before specific items in Euro terms was broadly flat despite revenue growth. Margin deteriorated by 80 bps, to 8.1%, due to operational cost pressures including general inflation and driver shortages across most markets. Unusually strong profits were also made in the prior year during the initial lockdown period.

In Sterling terms, operating profit before specific items was £342 million (2020-21: £358 million). Foreign exchange movements adversely impacted revenue by £207 million and favourably impacted costs by £191 million resulting in a net reduction to operating profit of £16 million.

Revenue

Revenue increased by 4.4% in Sterling terms (9.6% in Euro terms). Excluding acquisitions, revenue was up 3.3%, in Sterling terms, driven by growth in domestic and international volumes, higher freight revenue and better pricing. Revenue grew despite the unusually strong performance in the previous year. Revenue growth was achieved in almost all markets, with good performances in Eastern Europe, the US, Canada, Italy, France, Germany and Spain. GLS' European markets represented 89.6% of total revenue (2020-21: 90.8%), with the North American market contributing 10.4% (2020-21: 9.2%).

Volumes were up 4%, driven by recovery of B2B volumes, with B2C volumes also higher but with a lower growth rate than the prior year. B2C volume share was 55% compared with 57% in the prior year. GLS domestic and international volumes grew by 4% and 5% respectively. International volume growth was impacted by Britain's withdrawal from the European Union, which led to reduced parcel flows between Europe and the UK. Excluding UK traffic, export volume growth was double-digit.

Operating costs

Total reported operating costs in Sterling terms increased by 5.3%, or 4.2% excluding acquisitions. Cost increases in Euro terms were around 500 bps higher than the reported increases in Sterling due to the strengthening of Sterling during the year.

Costs were impacted by significant increases in inflation rates during the year in the markets in which GLS operates. A combination of higher fuel costs, wage inflation and driver shortages all contributed to increases in subcontractor costs for collection, delivery and line-haul services. The impact from higher minimum wages (for example in Germany) and rising utility costs also resulted in an increase in the GLS cost base. The reported increase in Euro terms is presented below.

People costs

People costs increased by 11.8%, or 9.6% excluding acquisitions, due to a combination of factors including 4% higher volumes, higher unit operational labour costs driven by wage inflation across GLS' markets, and further investments in the organisation to support the rollout of our Accelerate strategy.

Non-people costs

Non-people costs increased by 10.1%, or 9.3% excluding acquisitions. Distribution and conveyance costs were up 10.3%, or 9.7% higher excluding acquisitions, driven by the 4% increase in volumes and higher sub-contractor rates for collection, delivery and line-haul services due to inflationary effects. Infrastructure and other operating costs increased by 8.2% and 8.8% respectively (5.4% and 7.9% respectively excluding acquisitions), principally due to higher marketing costs related to initiatives to raise awareness of the GLS brand and higher depreciation associated with increased capital expenditure.

Country overview

The following individual market summaries detail revenue growth in Euro terms.

In Germany, the largest GLS market by revenue, revenue grew by 8.1%, driven by a combination of better pricing and higher volumes. Operating profit decreased due to the operational cost pressures. Minimum wage increases of 25% will be phased in between 1 January 2022 and 1 October 2022, and as a result we implemented strong price increases on 1 January 2022 to help mitigate cost pressures.

GLS Italy revenue grew by 8.8%, driven by higher volumes and better pricing. Prices benefited from a recovery in B2B volumes with a higher average weight. Operating profit improved compared with the prior year, which represented a strong performance.

GLS Spain revenue grew by 7.7%, driven by higher domestic volumes. Operating profit was slightly below the prior year, with some margin compression resulting from higher unit operational costs.

GLS France revenue grew by 8.8%, benefiting from higher domestic volumes and better pricing. Volume growth was driven by higher B2B volumes, which compensated for a decline in B2C. Losses narrowed further in 2021-22, demonstrating that the strong progress achieved in reducing losses in the prior year has been cemented.

There was continued strong performance in Eastern Europe, with revenues up 13.3% and good growth in B2C volumes.

In the US, revenue grew by 11.1% driven by higher B2C volumes, better pricing and higher freight revenues. Higher unit operational costs, driven by a shortage of drivers which impacted final-mile and line-haul costs, and inflationary pressures, impacting the general cost base, resulted in financial performance below the prior year and an overall loss. Measures focused on improving unit operational costs and the quality of revenue, including yield management activities, are underway.

In Canada, the acquisition of Rosenau Transport was completed on 1 December 2021, increasing significantly the scale of our operations in North America. The integration of Rosenau with our pre-existing business Dicom to secure synergies is underway. Rosenau Transport to date is performing in line with expectation. GLS Canada revenue increased by 16.7% on an organic basis, benefiting from good growth in parcel volumes, higher freight revenues as well as improved pricing. The business continues to perform well, delivering margins above the group average.

Revenue growth in GLS' other developed European markets was 3.9%. Performance was negatively impacted by lower volumes due to Britain's withdrawal from the European Union and the highly competitive nature of these mature markets.

Other developing markets, where GLS has a high exposure to B2C, continued to grow strongly with overall revenue growth of 13.3% in the year. Particularly good growth rates were achieved in Hungary, the Czech Republic and Croatia.

Other Group financial performance measures

Specific items and pension charge to cash difference adjustment

The pension charge to cash difference adjustment largely comprises the difference between the IAS 19 income statement pension charge rate of 24.6% (2020-21: 19.5%) for the Defined Benefit Cash Balance Scheme (DBCBS) from 29 March 2021 and the actual cash payments agreed with the Trustee of 15.6% (2020-21: 15.6%). The charge was £174 million in the year (2020-21: £84 million), £90 million higher than in 2020-21. The increase in the IAS 19 pension charge rate is due to the decrease in the net discount rate (versus CPI) between March 2020 and March 2021.

The legacy items largely relate to an £11 million credit (2020-21: £16 million credit) in respect of Industrial Diseases claims as a result of the use of updated models issued by the Institute and Faculty of Actuaries' Asbestos Working Party in late 2021, along with an increase in the discount rate versus the prior year. The prior year amount largely related to a partial release of the Industrial Diseases provision after it was re-assessed following indicative guidance published by the Institute and Faculty of Actuaries' Asbestos Working Party in advance of their full update.

Amortisation of acquired intangible assets of £16 million (2020-21: £19 million) largely relates to acquisitions made by GLS in recent years in Canada, Spain, the US and Italy.

The profit on disposal of property, plant and equipment of £72 million (2020-21: £36 million) primarily relates to the sale of Plots E, F and G at the Nine Elms development site. The prior year profit largely related 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).

Net pension interest credit of £64 million (2020-21: £117 million) is calculated by reference to the net pension surplus at the start of the financial year. The decrease in the year of £53 million is as a result of a lower overall pension surplus and lower discount rate used at 28 March 2021, compared with 29 March 2020.

The tax credit of £62 million (2020-21: £37 million) includes a net credit of £30 million (2020-21: £37 million) in relation to the tax effect of certain specific items and the pension charge to cash difference. The balance also includes a net credit of £32 million (2020-21: £nil) in relation to the remeasurement of certain UK deferred tax assets and liabilities to the future UK corporation tax rate of 25%.

Net finance costs

Reported net finance costs of £51 million (2020-21: £38 million) comprise interest on bonds (including cross-currency swaps) of £24 million (2020-21: £24 million), interest/fees on the bank syndicate loan facility of £2 million (2020-21: £6 million), interest on leases of £29 million (2020-21: £26 million) and other net interest payable of £2 million (2020-21: £1 million receivable). This is offset by interest income of £6 million (2020-21: £17 million) which includes £1 million (2020-21: £12 million) interest on the Royal Mail Pension Plan (RMPP) escrow investments. The value of these investments bounced back in 2020-21 from a sharp fall at the end of 2019-20, causing the high interest income figure in 2020-21.

The bank syndicate loan facility was extended by one year to September 2026; there are no further extension options in the agreement. In the year, the interest reference rate was amended from LIBOR to SONIA10 (SOFR11 for any drawings in US Dollars).Interest is compounded daily and a credit adjustment spread (CAS) of between 0.0% and 0.3% is added using the ISDA12 published five-year historical mean on fixing date (5 March 2021).

The blended interest rate on gross debt, including leases for 2021-22, is approximately 3%. The impact of retranslating the €500 million and €550 million bonds is accounted for in equity. 

10. SONIA - Sterling OverNight Indexed Average.

11. SOFR - Secured Overnight Financing Rate.

12. ISDA - International Swaps and Derivatives Association.

Taxation

The Group's reported effective tax rate is 7.6% (2020-21: 14.6%). This is 11.4% lower than the UK statutory rate of 19%. The difference is mainly due to the remeasurement of deferred tax balances to the future UK statutory rate of 25%, which reduces the effective rate by 4.8%; net pension interest credit, on which there is no tax charge, which reduces the rate by 2.1% and the reduction in uncertain tax provision mainly in respect of patent box claims due to progress in ongoing discussions with UK authorities, which reduces the rate by 3.3%. The effective tax rate is further reduced by 3.6% in relation to profits on operational property disposals which have no tax charge as the profits qualify for reinvestment relief and a Super-deduction capital allowances claim which creates an enhanced credit for qualifying capital expenditure. These amounts are partially offset by higher overseas tax rates in relation to the GLS business, and other items that are not allowable for tax purposes.

The GLS adjusted effective tax rate of 23.6% (20-21: 23.3%), is reflective of higher statutory tax rates in the more profitable GLS countries and is broadly in line with the prior year.

The Royal Mail adjusted effective tax rate of 9.0% (2020-21: 19.6%), is lower than both the prior year and the UK statutory rate mainly due to the reduction in the uncertain tax provision in relation to the patent box claims and the Super-deduction capital allowances claim.

Earnings per share (EPS)

Reported basic EPS was 61.7 pence (2020-21: 62.0 pence) and adjusted basic EPS was 60.0 pence (2020-21: 52.1 pence).

In-year trading cash flow1

1. Reported results are prepared in accordance with IFRS. In addition, the Group's performance is 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 in the section entitled 'Presentation of results and Alternative Performance Measures.'

13. Trading working capital movements and thus in-year trading cash flow have been re-presented to include deferred revenue movements (including Stamps In The Hands Of the Public (SITHOP)) which were previously presented in other working capital.

14. The capital element of lease payments of £192 million (2020-21: £188 million) shown in the statutory cash flow is made up of the capital element of operating lease payments of £166 million (2020-21: £156 million) and the capital element of finance lease payments of £26 million (2020-21: £32 million).

In-year trading cash flow

In-year trading cash inflow was £519 million, compared with £770 million in the prior year. This decrease was mainly due to higher capital expenditure in Royal Mail.

In Royal Mail, the current year includes a provision for the management restructure to further streamline operations; however, the majority of the associated cash payments have not been paid and thus the working capital position has benefitted year-on-year. By excluding the effect of the current and prior year restructures (both the cash paid and the provisions raised), the year-on-year working capital movement would be £59 million outflow. During the current year deferred revenue on stamps purchased in prior year fell by £44 million (2020-21: £8 million increase) resulting in a £52 million year-on-year outflow which explains the majority of the movement. The reduction in deferred revenue was largely as a result of customer stamp holdings falling back to pre-pandemic trends.

GLS trading working capital inflow reduced by £40 million year-on-year. Prior year working capital development benefited positively from higher than normal customer payments in advance of the Easter weekend in March 2021, part of which unwound during 2021-22.

Total gross capital expenditure was £603 million (2020-21: £346 million), of which GLS spend was £162 million (2020-21: £136 million). Royal Mail capital expenditure was £441 million in total (2020-21: £210 million), of which £205 million (2020-21: £91 million15) was transformational spend. Transformational spend increased as we invested in parcel hubs and automation. Royal Mail maintenance spend increased by £117 million to £236 million (2020-21: £119 million15). This additional spend predominantly relates to vehicle purchases, including £74 million in relation to electric vehicles. We are continuing our commitment to invest in Royal Mail infrastructure, road to net zero and innovative product portfolio.

Income tax paid decreased by £17 million. Royal Mail income tax paid of £23 million was £31 million lower than the prior year, mainly due to the effect of the Super-deduction enhanced capital allowances claims. GLS income tax paid of £85 million was £14 million higher than the prior year as tax assessments relating to the higher profits in the previous year were received.

The capital element of operating lease repayments of £166 million (2020-21: £156 million) reflects the net impact on in-year trading cash flow as a result of adopting IFRS 16. The increase is due to new leases in the year, notably the Midlands Hub. Excluding the impact of this, in-year trading cash flow was £353 million (2020-21: £614 million).

15. The comparative transformation and maintenance spend has been re-presented to reflect the reallocation of certain projects from maintenance to transformation following a review of the portfolio.

Net debt1

A reconciliation of net debt is set out below.

1. Reported results are prepared in accordance with IFRS. In addition, the Group's performance is 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 in the section entitled 'Presentation of results and Alternative Performance Measures.'

16. In-year trading cash flow has been re-presented following the re-allocation of deferred revenue (including SITHOP) from other working capital to trading working capital to reflect the trading nature of this balance. GLS client cash movements, which were previously disclosed in other working capital are now presented separately outside of free cash flow.

17. GLS client cash movements are presented as part of the working capital movements line in the statutory cashflow.

18. This amount represents leases that would not have been recognised on the Balance Sheet prior to the adoption of IFRS 16.

19. This measure is considered as the Group's banking covenants are calculated on a pre-IFRS 16 basis.

The cash cost of operating specific items was an outflow of £4 million (2020-21: £4 million) consisting mainly of Industrial Diseases claims and National Insurance related to employee free share payments.

Acquisition of business interests of £204 million relates mainly to the acquisition of Rosenau Transport. The prior year balance of £4 million related to deferred consideration in relation to prior period acquisitions of Mountain Valley Express (MVE) and Mountain Valley Freight Solutions.

The net cash inflows relating to the London Development Portfolio were £99 million (2020-21: £13 million).

The amount of GLS client cash held at 27 March 2022 was £36 million (2020-21: £41 million).

New or increased lease obligations under IFRS 16 of £380 million (2020-21: £173 million) relate to additional lease commitments that were entered into during the year. Property lease additions, modifications and acquisitions totalled £335 million (2020-21: £121 million), of which £81 million relates to the Midlands hub; £148 million relates to 243 Royal Mail property rent reviews, lease regears and renewals (a larger amount than previous years due to the phasing of lease contracts); £24 million is for property leases taken on as part of the Rosenau acquisition; and £82 million relates to a number of other GLS properties reflecting capacity increases, rent reviews and renewals/extensions. Lease obligations have also increased by £45 million (2020-21: £52 million) as a result of Royal Mail vehicle and plant and machinery additions and modifications.

Approach to capital management

The Group has 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. As announced at the half year end, in the current risk environment, we believe running a Group net nil cash position on a pre-IFRS 16 basis is appropriate. The net cash position (pre-IFRS 16) at 27 March 2022 was £307 million (2020-21: £622 million). We currently do not propose to pay any further special dividends. We expect both Royal Mail and GLS to be independently cash generative businesses. In line with this framework, the Group's key 2021-22 capital management objectives are detailed below together with a progress update.

Financial risks and related hedging

The Group is exposed to commodity price and currency risk.

Royal Mail operates a three-year layered rolling hedging strategy for fuel and energy. Royal Mail has hedges in place for 92% of total underlying commodity costs for 2022-23; as a result, a further 10% increase in underlying commodity costs would reduce operating profit by just £2 million. However, a 10% increase in fuel duty/other additional costs would reduce operating profit by £15 million.

GLS generally out-sources its collection, delivery and line-haul activities to sub-contractors, and therefore is not significantly directly exposed to higher fuel costs. Nevertheless, there is an indirect exposure, as increasing fuel costs for sub-contractors lead to higher rates for their services as they seek to pass on the higher fuel costs incurred.

GLS has very limited direct exposure to diesel costs. GLS does not hedge exposure to energy costs, a further 10% increase in energy costs would increase energy costs by £4 million.

The Group is exposed to foreign currency exchange risk in relation to interest payments on the €500 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 €550 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 £1:€1.18 (2020-21: £1:€1.12). This resulted in a £16 million decrease in GLS' reported operating profit before tax in 2021-22 (2020-21: £7 million increase). The net impact on Group operating profit before tax was a £16 million decrease (2020-21: £7 million increase).

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 27 March 2022, all the gross debt of £2,213 million (2020-21: £2,051 million) was at fixed rates.

London Development Portfolio

The current year net cash inflows relating to the London Development Portfolio were £99 million, consisting of receipts of £111 million for Nine Elms, offset by the cost of enabling works of £4 million at Mount Pleasant and £8 million at Nine Elms.

In total we have invested £12 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.

1) Mount Pleasant

This development site includes the sale of 6.25 acres to develop c.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 £193.5 million (including £3.5 million non-cash consideration). For accounting purposes, £39.5 million of the proceeds were allocated to Phoenix Place and £154 million to Calthorpe Street. £115 million of the total combined cash proceeds for both sites has been received as at 27 March 2022 (no proceeds were received in the current year). The remainder of the cash is due to be received through a stage payment in 2023-24 (£66 million) and a final payment in 2024-25 (£9 million).

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 and D sale completed June 2019 for £101 million to Greystar Real Estate Partners, LLC.

·  Plot C1 sale completed June 2019 for £22.2 million to Galliard Homes.

·  Plot A sale completed December 2020.

·  Plots E, F and G sale completed January 2022 for £111.2 million to London Square Developments Ltd.

Further investment by Royal Mail will be required in relation to infrastructure obligations.

Pensions

Royal Mail makes contributions to two main schemes in the UK; the Royal Mail Defined Contribution Plan (RMDCP), and the DBCBS of the Royal Mail Pension Plan.

The Group also operates two additional UK defined benefit schemes which are closed to future accrual, the legacy section of the RMPP, and the Royal Mail Senior Executives Pension Plan (RMSEPP).

Royal Mail aims to introduce a new pension scheme, the RMCPP, in the second half of the next financial year, subject to the necessary legislative changes and regulatory approvals being obtained. This will replace the existing DBCBS and the RMDCP, and will comprise a Defined Benefit Lump Sum (DBLS) Section, similar to the existing DBCBS, and a Collective Defined Contribution (CDC) Section - the first CDC scheme in the UK.

The CDC Section will be accounted for as a defined contribution scheme and the DBLS Section as a defined benefit scheme with the accounting treatment expected to be similar to the DBCBS. The new arrangements will have fixed employer contributions of 13.6%, plus an additional 1.0% for employees who choose to save for an additional lump sum payment. Standard employee contributions will be 6.0%.

Cash pension costs

The Group's cash pension costs in respect of all UK pension schemes were £395 million in the 2021-22 financial year, excluding Pension Salary Exchange (PSE).20

When the design of the RMCPP was agreed in 2018, the fixed employer contribution rate of 13.6% of pensionable pay was designed to be affordable and sustainable for Royal Mail. The expected cost of RMCPP based on pensionable payroll at that time was approximately the same as the cost of the existing schemes, at around £400 million per year. The new RMCPP is expected to increase cash pension costs by c.£30 million per annum, based on current payroll, when it is introduced. The main reason for the increase is that although the estimated cost of the RMCPP as a percentage of pensionable pay will remain broadly the same as in 2018, payroll costs have increased. In addition, since the RMPP closed to accrual in 2018, the cost of existing plans has been reducing over time relative to overall pay costs, as DBCBS members leave and are replaced by new employees who join the RMDCP, at a lower employer contribution rate.

20. Includes £12 million insurance premium costs which are reported within wages and salary costs.

Defined benefit schemes - balance sheet position

An IAS 19 deficit of £390 million (2020-21: £394 million) is shown on the balance sheet in respect of the DBCBS; however, the scheme is not in funding deficit and it is not anticipated that deficit payments will be required.

The RMPP scheme closed to future accrual in its previous form from 31 March 2018. The pre-withholding tax accounting surplus of the RMPP at 27 March 2022 was £4,182 million (28 March 2021: £3,666 million). The pre-withholding tax accounting surplus has increased by £516 million (28 March 2021: £1,884 million decrease) in the year, largely as a result of a significant increase in the 'real' discount rate (the difference between RPI and the discount rate based on corporate bond yields), which has significantly reduced liabilities. This has been offset by a decrease in the value of the RMPP assets as a result of a large increase in index-linked gilt yields, against which the assets are hedged.

The RMSEPP closed in December 2012 to future accrual and the Group makes no regular service contributions. The Scheme's liabilities are now substantially covered by buy-in insurance policies and the scheme is expected to be wound up imminently. The pre-withholding tax accounting surplus at 27 March 2022 was £8 million (28 March 2021: £9 million).

Further details of all the Group's pension arrangements can be found in note 8.

Dividends

On 12 January 2022, an interim dividend of 6.7 pence per share was paid to shareholders on the register at the close of business on 3 December 2021. On the same date, a special dividend of £199 million was paid. The Board is recommending the payment of a final dividend of 13.3 pence per share in respect of 2021-22. This dividend will be paid on 6 September 2022 to shareholders on the register as at 29 July 2022, subject to approval at the 2022 AGM.

VIABILITY STATEMENT

Viability Statement

This Viability Statement should be read in conjunction with the Group's business strategy as set out in the Royal Mail and GLS strategic updates.

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 period

While the Directors have no reason to believe that the Group will not be viable over the longer term, they have assessed the viability of the Group over a three-year period to March 2025 (the Viability Period) taking into account the Group's current financial position and the potential impact of our principal risks. This time period is considered appropriate as it aligns with the Group's three-year business planning cycle (Business Plan) and is consistent with the time horizon used to determine the probability and likely impact of our principal risks. A three-year period is also the most appropriate time horizon over which to assess the commercial and economic environment across the Group's letter and parcel markets. Forecasting beyond three years is considered too long given the uncertainties created by the evolving economic and competitive market dynamics.

Process, key factors and assumptions

The Group's viability is assessed as part of our regular strategy and budget reviews, financial forecasting, capital structure and ongoing risk management. The assessment takes into account a number of matters including:

· The Group's strategic priorities and Business Plan. Financial planning and forecasting processes covering the Group's profitability, cash flows and other key financial metrics underpin the Business Plan, which comprises a budget for the next financial year (based on a detailed commercial and operational assessment) together with a projection for the following two years.

· The large fixed cost base required to deliver the Universal Service Obligation in its current form.

· The Group's principal risks and the measures in place to mitigate those risks. (See Principal Risks and Uncertainties).

· The Group's capital structure and the allocation of capital to support Royal Mail and GLS' respective growth strategies (see Approach to Capital Management). This includes capital investment, liquidity position (including liquidity available from the syndicated loan facility, debt maturity profile, credit rating and dividend policy.

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

· No further lockdowns expected however increased macro-economic pressures impacting letters and parcels for both Royal Mail and GLS.

· Royal Mail: Addressed letter volume (excluding elections) decline high single digit percentage in 2022-23, increase National Insurance contributions of around £50 million, reduced test kit volumes and inflationary pressures on pay agreement - assume agreement is reached with both CWU and Unite/CMA without prolonged industrial dispute.

· GLS: High single digit revenue growth in 2022-23, increasing cost pressure due to driver and labour shortages and higher minimum wages in key markets (e.g. Germany). Operating profit for 2022-23 in the range of €370 - €410 million.

· GLS €500 million 'Accelerate' operating profit target in 2024-25 (assuming economic rebound in 2023-24).

· Cost mitigations to help offset headwinds include operations management restructuring, ongoing and flow through Pathway to Change savings, reduction in absence and removal of residual costs from COVID-19, next phase of non-people cost reduction and further automation of parcel sortation in both Royal Mail and GLS.

· See outlook in Group Review by Non-Executive Chairman for further information.

Scenario modelling

The Business Plan projections were stress tested by modelling multiple downside scenarios which have the greatest potential to threaten the Business Plan. The scenarios, which are detailed below, take account of the Group's principal risks, and analyse financial impact over the Viability Period. The scenarios were tested in aggregate 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 required to support Royal Mail and GLS' respective growth strategies.

· The Group's €500 million bond which matures in July 2024, within the Viability Period. The Business Plan assumes this facility would be refinanced on similar commercial terms. However, in the very unlikely event that this is not possible, to ensure that the obligation is satisfied, other options could be considered including using capital generated, reducing investment or reviewing dividend payments.

· The actions undertaken to manage and mitigate the Group's principal risks (see Principal Risks and Uncertainties).

· Short-term cost and cash saving actions available to the Group including:

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

· Reducing discretionary pay.

· Reducing one-off projects.

· Reducing internal investment.

· Reviewing dividend policy.

Based on our best view of the severe but plausible downside scenarios and the outcome of the assessments undertaken, the Directors have concluded that the Group has reasonable

expectation to remain viable supported by:

· Short-term cost and cash saving actions.

· Sufficient liquidity available to meet obligations.

· The syndicated loan facility.

· Continued access to the debt markets.

The outcome of the assessments has also confirmed the importance of maintaining a conservative balance sheet, including a net cash position on a pre-IFRS 16 basis. See our Approach to Capital Managment for further information.

If outcomes are significantly worse, the Directors would need to consider what additional mitigating actions were needed including 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 scenarios) which may cast doubt on the Group's ability to continue to be viable over the Viability Period is not currently reasonable.

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 in conjunction with the downside scenarios used to stress test the Viability Period. There were no material uncertainties causing doubt in relation to the Group's ability to continue as a going concern. Accordingly, the Board concluded that it was appropriate to continue to adopt the going concern basis of accounting. For further information, see Note 1 to the consolidated Financial Statements.

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 2025.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Income Statement

For the 52 weeks ended 27 March 2022 and 52 weeks ended 28 March 2021

1. Operating costs are stated before operating specific items.

2. For further details on alternative performance measures used, see the section entitled 'Presentation of results and Alternative Performance Measures.'

Consolidated Statement of Comprehensive Income

For the 52 weeks ended 27 March 2022 and 52 weeks ended 28 March 2021

Consolidated Balance Sheet

At 27 March 2022 and 28 March 2021

The Financial Statements were approved and authorised for issue by the Board of Directors on 18 May 2022 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 27 March 2022 and 52 weeks ended 28 March 2021

1. Shares required for employee share schemes.

Consolidated Statement of Cash Flows

For the 52 weeks ended 27 March 2022 and 52 weeks ended 28 March 2021