Final Results

15th Mar 2007 07:04

Morrison(Wm.)Supermarkets PLC15 March 2007 Preliminary results for the year ended 4 February 2007 Satisfactory progress for Morrisons Financial summary • Turnover up 3% to £12.5bn (2006: £12.1bn) • Like for like sales (ex fuel) up 5.2% (2006: 2.4%) • Profit before property gains and tax £331m (2006:£54m) • Net debt reduced to £0.8bn (2006: £1.15bn) • Final dividend up 9.8% giving a total for the year of 4.0p (2006: 3.7p) Operational summary • All year one Optimisation Plan targets achieved. • Increasing focus on health, quality, provenance and freshness of food - sales of Eat Smart, Organics and The Best up by 47%, 20% and 58% respectively. • Particularly strong performance from smaller stores, benefiting from focus on range selection, merchandising techniques and labour efficiency. Business review • Morrisons to position as "the food specialist for everyone". • Investments to be made in stores, manufacturing, distribution, systems and the environment. • Customers to see a fresh new Morrisons, launched in April 2007. Commenting on the results, Sir Ken Morrison, Chairman, said: "We remain at the early stages of our profit recovery, but I believe that goodfoundations have been laid as demonstrated by delivering the first stage of ourOptimisation Plan and I am delighted that we welcomed Marc Bolland to thebusiness." Commenting on the business review, Marc Bolland, CEO, said: "Morrisons is a great business, and the results of this review are aboutevolution not revolution. Reflecting our nationwide presence, and our many newcustomers, we will be making Morrisons the food specialist for everyone." Chairman's Statement 2006/7 The year under review saw a good demonstration of the sound progress we havemade towards our former operating standards. The absorption of the Safewaybusiness was completed and we saw solid growth in sales, profit and cashgeneration. Profit before tax and exceptional items was £369m compared with £62m last year.This included £39m of property profits, compared with £8m last year. There wereno exceptional items compared with costs of £374m last year when we incurredSafeway integration and conversion costs. The Board is recommending a finaldividend of 3.375p per share, to bring the total for the year to 4.0p - anincrease of 8%. The dividend is covered 2.3 times by earnings and we arepleased to be growing the dividend once again. It was important during this period to show recovery in profit terms whilstmaximising cash generation. Our net debt fell from £1.15bn to £0.8bn in theyear due in no small part to tightening our control in all aspects of thebusiness. Whilst our future capital investment will increase, I believe thiscan be comfortably accommodated. I was delighted in September to welcome Marc Bolland to the company as ChiefExecutive Officer and I have worked closely with him since in helping him tolearn about our unique culture. He has worked hard, and later in this report hewill acquaint you with his reactions and outline his proposals for the future. On behalf of the Directors I wish to thank all members of our staff for theirskill, dedication and energy throughout this period. We have all been extremelybusy with numerous changes being made in all areas of the business. We will bemarking the progress made so far in our profit recovery by total payments tostaff for profit share and their loyalty of £43m. A major move to bring all ouradministration functions into a new head office was completed smoothly and onschedule. The staff also found energy and enthusiasm to raise a total of £1.6m for theBreast Cancer Campaign, our chosen Charity of the Year. The vote for thecharity for the current year was won by Asthma UK, and I feel sure the jointefforts of our staff, customers and suppliers will ensure another good year. It has been a particular personal pleasure to present no fewer than 128 membersof staff with awards to recognise their 25 years service with the company. The Board is very aware of the spotlight that is on food retailers with regardto promoting healthy eating and being environmentally responsible. We believethat exercising social responsibility is entirely compatible with deliveringcontinued profit recovery and we are pleased, this year, to be publishing acorporate responsibility report for the first time. As always, capital investments have been made wherever necessary in order toachieve more efficient operations. Capital has been invested in stores and ourmanufacturing and distribution facilities. We are currently running too manydistribution miles because of the less than ideal disposition of our depots andthis matter is being urgently addressed. A major investment has been made inmodern heavy goods vehicles which is showing good economies in costs per mile onfuel consumption, and reduced carbon emissions. We will continue to invest in suitable development opportunities and have onceagain appreciated the great value of our freehold property portfolio. We are making changes to the management structure to recognise the increasedsize of the company and its greater complexity. In order to motivate managementtowards improved performance in a highly competitive market, we will beproposing a long-term incentive plan at our AGM in May. This plan and anassociated annual bonus scheme will offer strong incentives for top performancesand no rewards for failure. Board structure is changing as a result of Bob Stott and Marie Melnyk steppingdown during the year and the impending departure of David Hutchinson in June.Jointly the 3 of them have a contribution of 75 years of really outstandingservice to the company. I thank them most sincerely for the enormous dedicationand effort which they have always demonstrated and say what a pleasure it hasbeen to work with them. We were delighted to confirm Martyn Jones' appointmentas Trading Director last week. The search for a new Deputy Chairman continuesand good progress is being made. The Competition Commission enquiry into the Grocery Industry continues and ourlatest information suggests the outcome is likely to be in October or November.We have cooperated fully with all the requests for information. We believe thatthe final outcome should favour us as we are the smallest of the big companiesand as local competition would appear to be the main criterion, we believe weshould see opportunities in important locations where we are not currentlyrepresented. The task for the coming years is to modernise certain aspects of our businessbut equally it is important to remember the many areas of our operations whichmade us outstandingly successful in our formative years. We are now firmly onthe road to further improvement and I view the future with optimism. Sir Kenneth Morrison CBEChairman Chief Executive's operating review It is a pleasure to present my first operating review, after being part ofMorrisons for eight months. I am impressed by the business and by our people,who are at the heart of the Group. Market backdrop 2006/7 was an unusual year for UK grocery retailers. It began in similar fashionto the pattern of previous years, with price deflation. This was characterisedby high profile price cuts on certain commodity items, such as milk, bananas andbacon. No volume retailer can afford to be out of line with the market on suchstaple items, but equally cutting prices on them will not result in salesuplifts adequate to compensate for the margin foregone. This intense pricingactivity eased in the second quarter, and the whole sector benefited from anexceptional summer. The prolonged period of good weather saw sales move intohigher margin fresh, premium and beverage lines. The good weather continuedthrough much of October, when the usual competitive promotional activity aheadof Christmas got under way. Trading in the weeks leading to Christmas appearedto be slow for most retailers, with trade coming in a late surge in the finalweek. An important, and encouraging, feature of the year was the increasing focus byconsumers, the media and the industry on health, quality, freshness and theprovenance of food. This was a shift away from merely focusing on price, themain area of attention in the previous five years. A combination of factors havecontributed to this, including great consumer interest in food and drinkprogrammes on television and a national debate emerging over obesity concerns. The industry remained highly competitive in the year. As pointed out by theCompetition Commission, 80% of the UK population has a choice of 3 supermarketslarger than 13,000 square feet within a 15 minute drive of home. Tesco, Asda,Sainsbury and Morrisons account for approximately 66% of the grocery market. Afurther 15% is operated by Marks and Spencer, Waitrose, Somerfield and theCo-op. Following Somerfield's acquisition by a private equity consortium in2005, its alternative fascia, Kwik Save, has all but disappeared from themarket, providing some boost to other operators in the sector. Overall, TNS estimate that the grocery market grew by 3.4% during our 2006/7financial year. Morrisons growth, excluding fuel, was 2.0%, due to disposaleffects. Operating review of the year 2006/7 was Morrisons first year operating as a truly national retailer, underone brand, with common systems and processes. Whilst, inevitably, there was someresidual activity dealing with legacy Safeway issues, most of our attention wason delivering Morrisons best practice through the enlarged stores estate and onrecovering profitability. Our targets in this regard were laid out in theOptimisation Plan, published in March, and all of these were achieved. We opened 4 new, large stores in the year, in Leyland, Swadlincote, Cardiff andCrowborough, and disposed of 14 small stores, leaving us with an unchanged 10.5msquare feet of retail space. Like for like Other 53rd Week 2006/7 2005/6 stores Total Total Sales of goods (£'000) 10,269 372 200 10,841 10,540Fuel (£'000) 2,603 52 51 2,706 2,516Total sales inc VAT( £'000) 12,872 424 251 13,547 13,056 Turnover exc VAT (£'000) 11,844 387 231 12,462 12,115 Sales per square foot (£) 19.57 - - 19.34 17.68Customer numbers ('000) 464 - - 479 484Customer spend (£) 22.62 - - 22.53 21.79 Total turnover of £12.5bn was in line with the previous year, although elementschanged year on year, as shown in the table. The reporting period benefited froman extra, 53rd week, but was disadvantaged by the continuing drag effect ofstore disposals in the previous year. These elements are isolated in the table.The most important sales measure for us is store like for like sales - growthcoming from existing stores. This was strong in the year, at 5.2%, reflectingthe continued good progress of the stores converted to Morrisons from Safeway.Original Morrisons stores, which had been showing like for like sales declines,had turned positive week on week by the year end, but were still growing behindthe market. Within the like for like sales figure, we saw growth both in thenumber of transactions (i.e. customers shopping with us) and basket size (howmuch customers spend with us). Our like for like sales growth of 5.2% excluding fuel included some shifts inproduct mix. Fresh produce performed particularly well, helped by the goodsummer and the emerging healthy eating trends. Our fishmongery business was astar performer, reflecting its Retail Industry Award of "Seafood Retailer of theYear", and represents a real point of difference for Morrisons. Health andbeauty began to respond to our greater focus on this area, with good growthfollowing the rollout of new fixtures and ranges in 146 stores. Less strong wasour home and leisure business, where it has become clear that our range needsrefreshing, and beers, wines and spirits, where volumes remained good butintense competition saw further deflation in the year. The healthy eating andpremium quality trends were evidenced by sales of our "Eat Smart" rangeincreasing 47%, Organics by 20% and The Best, our premium brand, by 58%. In eachcase these were growing from a low base, but the trends are clear. By contrast,sales of carbonated drinks, chocolate biscuits and crisps were down year onyear. The strong performance of fresh produce benefited not just our retail businessbut also our manufacturing operations, which were operating towards fullcapacity for much of the year. This provided a welcome boost to profitability. For a number of years, food retail prices have been declining, giving evergreater value to consumers and reflecting the intense competition in the market.In 2006/7, there were reports of inflation again entering the market, asproducers and retailers sought to pass on to customers the cumulative effect ofhigh energy, commodity and business rates costs. At some periods in the year,and in some categories, particularly fresh produce, we saw inflation in thebusiness. Overall, however, through the whole year, our customers paid less fortheir average shopping basket than they would have paid the previous year. Fuel sales in the past two years have been heavily affected by high oil prices.These price rises boost sales, but contribute little to profits, as fuel is alow margin business and we seek to remain highly competitive in the marketplace.The fact that we grew underlying fuel volumes, in litres sold, by 5% reflectsthe competitiveness of our offering. When the Optimisation Plan was launched in March 2006 we noted that the storeswe had converted from Safeway were not performing at levels of sales density asstrong as those in the original Morrisons estate. These stores made goodprogress in the year, delivering sales growth ahead of the average for themarket as a whole. Smaller stores, which we define as having less than 25,000square feet of selling area and comprise nearly a third of our store sales,performed particularly well, with sales densities up 12% in the year. Thesestores are not able to carry the full Morrisons range, but can still offercustomers our unique Market Street experience and a comprehensive range ofgrocery, frozen and household items. Adapting the way we work, to maximise ouropportunities in these stores, was a major focus in the year. We improved ourrange selection and merchandising techniques, found ways of delivering labourefficiency whilst maintaining service levels and taking cost out of the backoffice administration. Our success, so far, with these stores, has given usconfidence that they will be able to deliver acceptable levels of profitability,although they are not yet doing so. Reflecting this confidence, we will open anew, 24,800 square foot store, in Erskine in 2007. This will be the smallest newMorrisons store to have opened for over 20 years. After the cost of goods that we sell, our biggest cost is in store wages. For anumber of years, wage inflation has been running ahead of food price inflation,meaning that productivity improvements are required in order to keep labourratios to sales on an improving trend. In the period after the Safewayacquisition, store labour productivity had declined for two years. It istherefore pleasing to report that in 2006/7 it again began to improve, withsales per labour hour, a key measure for us, improving by 14% year on year.Another significant cost, both in store and throughout the business, is energy.Despite our energy efficiency improving, the high cost of gas and electricity inthe year had an impact on the result of approximately £25m. Of fundamental importance to a grocery retailer is the efficiency of the supplychain, and throughout the difficult Safeway integration period Morrisons wassuccessful in maintaining industry leading levels of availability. However, thiswas achieved at a cost, and the business had finished the previous year withsignificant excess depot capacity. Good progress was made in addressing thisissue in the year, with three large depots closed, and as a result the costs ofdistribution fell by over £44m. The business now does not have surplus depotcapacity, but geographically some of the space is poorly sited to serve ourSouthern estate. As a result, we continue to drive more miles than we would wishto service our stores. An important landmark for us in 2006/7 was the opening of our new head office inBradford, in April. This purpose built facility houses some 1,400 colleagues whopreviously worked in various buildings around the city. Bringing them alltogether in one location, with a high quality working environment, has improvedcommunication and working efficiency greatly. As a result of the move, and alsothe withdrawal from some duplicate Safeway facilities, the cost of running ourcentral functions fell in the year. Optimisation Plan delivery The March 2006 Optimisation Plan contained a number of ambitions and targets for2006/7. Where firm targets were set, these have been achieved, and whereambitions were outlined, we have made progress towards them. We wanted to seesales growth across the board, and we did. However, whilst we were pleased withthe performance of the converted stores, and particularly the smaller stores, weremain dissatisfied with sales in the original Morrisons stores. These storesgrew sales during the second half, but have yet to establish a firm positivetrend. We outlined a gross margin target of 90 basis points for delivery over threeyears, with an expectation that this would be delivered through better buying,sales mix and improved wastage control. Progress was very positive, and we werepleased to deliver the whole of the target in the year. Key to this was thepositive support of our suppliers, most of whom have been in partnership withMorrisons for many years. We also established cost saving targets totalling £110m in the year, acrossstore wages, distribution costs and central costs. Again, all of these wereachieved. Our staff numbers decreased in the period, from an average of 93,041full time equivalents in 2005/6 to 84,653 in 2006/7. We were pleased to achievemost of this through natural staff turnover as we delivered operationalefficiency improvements. The combination of good like for like sales growth and achievement of ourOptimisation Plan for gross margin and cost targets led to operating profitbefore property transactions of £384.7m being achieved in the year, compared to£104.0m (before Safeway integration and conversion costs) in the previous year.This recovery is pleasing, but at 3.1% of turnover there remains much to do tobuild profitability further. We aim to do this by acting on the results of mybusiness review, conducted over the past six months, which is the subject of thenext section. Outcome of the business review Since joining Morrisons as CEO in September 2006 I have been able, withcolleagues, to have a thorough look at what we stand for, how we perform andwhat we need to do to ensure our future success. We found many strengths in thebusiness, but also challenges that we must address if we are to be a winner inthe highly competitive UK grocery market. Earlier in this report, I outlined thereal success already achieved in the past year in establishing Morrisons as anational food retailer, in growing our sales and profits and in generating cash.Having stabilised and begun to optimise the business, we now have plans tocomplete the profit recovery and position ourselves for future growth. What we did Firstly, we stepped back from the business and asked lots of people to talk tous about their experiences and views of Morrisons. Some of the feedback camethrough structured, formal, market research, covering over 3,000 customers and8,000 colleagues. Some came from talking to people - customers, colleagues andsuppliers from all over the country - and hearing their views. A clear picture emerged of the things we should concentrate on and the issues weface, and we asked colleagues from across the business to help us get theanswers. We did not want large numbers of external consultants doing this work,we wanted the solutions to come from within, developed by the people who willhave to deliver our plans. Where necessary, we did seek outside advice andsupport in areas where real specialism could help, but this was a small part ofthe overall programme. What we found We found lots of real strengths in Morrisons. Our customers appreciate the valuewe offer, our high standards of availability and our industry leading in-storeservice. Customers highly loyal to us also understand some of our unique,quality attributes, such as our in-store butchery, fishmongery and bakeryskills, our popular cafes and the fact that we control key parts of the freshfood supply chain through our manufacturing businesses. Customers who do notknow us so well often do not appreciate these points, and we found that we arenot as good at communicating these strengths as we should be. We found that customers are very interested, today, in the provenance, qualityand health aspects of food and in the impact of big businesses on theenvironment. We have work to do here, in some cases, to communicate better thegood things that Morrisons does (like having higher standards for the selectionof beef than our competitors, or already recycling 72% of the waste packagingthat arises in our stores) but in other cases to recognise that we need to givethese things greater prominence. For example, our Organics range is too narrowand we are behind our competitors on the removal of hydrogenated fats and thereduction of salt in recipes. We found that the business is already in shape to tackle many of the challengesthat we face day to day. But we also found that some work is required tostrengthen the basic building blocks of the business, if we are to deliver ourpotential for the future. What we are going to be Morrisons is going to be the food specialist for everyone: "Food specialist" We really understand food... ...We know where it comes from ...We pack it and make it in our factories ...We make it in our stores ...We employ craft skills in every store ...We deliver fresh to you, every day "For everyone" Great food which is also great value Great food which is for everyday, not just special days How we will get there - the building blocks Delivering our goal of being the food specialist for everyone will be a greatteam effort from all 118,000 colleagues in the business. As I have toured ourstores and other operations I have been highly impressed by the enthusiasm,commitment and dedication to customer service of Morrisons people. This ispowerful, and we will build on it. Colleagues have told me where we need toimprove, in supporting the stores and in working together more effectively inthe centre, and activities are under way to make these improvements. Inparticular, I want to reduce staff turnover in stores, which is ahead ofindustry norms, and to improve the training, development and performanceevaluation of staff in the centre. I will continue to survey our staff regularlyto ensure that the promised improvements are taking effect. I am pleased that wewill be launching a colleague discount scheme later in the year - the weeklyfood shop is a key household expense, and we will be offering our colleagueseven better value, through a discount on most items, for the first time. Key tothe delivery of change in any organisation is the broad leadership group, in ourcase defined as approximately 600 colleagues including our store generalmanagers. I will be articulating my plans for the business to this groupregularly, through the Management Forum, and they will be included in new longand short term incentive programmes designed to align them behind deliveringfinancial success for our shareholders. At the top of the organisation, I willhave a team of eight senior executives reporting to me. Six are already inplace, and recruitment is well advanced for an HR Director and a Marketing andCommunications Director. In a highly competitive market place, we must continually strive to be moreefficient, provided we can maintain our high levels of service. In our stores,we have identified a number of initiatives which will improve the way we work.We will bring in more product "shelf ready" so that it does not requireunpacking in store and we will be installing some self scanning checkouts instores later in 2007. These and other initiatives will contribute realreductions in our staffing costs, and implemented over two years will beattained through natural staff turnover rather than redundancies. After a quiet period in 2006/7, with only 4 store openings, we will accelerateour opening programme in the coming year to 8 and will also be working on anumber of schemes to extend sales areas in existing stores. Our manufacturing businesses will be an important part of delivering our foodspecialist credentials. They comprise two abattoirs, six fruit and vegetablepackhouses, three bakeries and a food preparation factory. Collectively, theyrank as a top 5 UK food producer. We reviewed them thoroughly and confirmedthat, financially, they are important profit contributors to the Group thatjustify their capital employed. In the case of the bakeries, we own a majoritybut not all of the business, and our strategic review is not yet complete. Inall other cases, we have confirmed our commitment to invest and grow thebusinesses, as they provide vital support to our aim of being the foodspecialist for everyone. Through the control of the supply chain created by ourvertical integration, we can monitor sourcing quality more closely, and bringproduct to market more quickly, than competitors. In order to deliver thiseverywhere, we need more capacity in meat and in fresh produce. We havetherefore acquired a new abattoir, in Spalding, which we will commission in thefourth quarter of 2007, and we will be extending our maturation and packingfacilities at the Colne site. These two investments will make us self sufficientin beef, pork and lamb, and allow us to deliver more specialist products such asextra matured beef joints. We identified some gaps in our "chill chain" whichhave led, in certain product categories and at certain times of year, to freshproduce not having the shelf life and freshness that our customers deserve. Forexample, in some stores, soft fruits are displayed at ambient temperature ratherthan refrigerated and this can cause issues in hot weather. Similarly, somepotatoes are transported in non-refrigerated lorries. We intend to invest inrefrigeration in store, in trailers and at our packhouse at Flaxby to addressthis issue, with consequent benefit to the product quality delivered to ourcustomers. As our business grows, we will need further capacity in fruit andvegetable packing, and we will be seeking a new facility to open in 2009. Our distribution infrastructure, although adequate to deal with our currentvolumes, will not satisfy all our future growth requirements, and is notgeographically optimal for serving our Southern stores. We are confident ofsecuring a facility in the South later in 2007. Whilst not a full regionaldistribution centre, it will allow us to move some of our grocery supply fromthe Midlands to a base closer to our South West stores. We will continue to seekfurther depot capacity in the South to deal with future growth requirements. Systems are fundamental to the efficient operation of any large retailer, andthe Morrisons systems platforms have served the business well. They are nowapproaching the point of requiring to be changed. Most of the core systems inMorrisons have been developed in house, over many years, and some are up to 30years old. We will be pursuing a three year programme of moving our trading,store, warehousing, distribution, payroll and financial systems on to newplatforms, wherever possible using best of breed package software. We believethe market for retail systems is well developed, and that there are relativelyfew areas where we need to continue with home grown applications. We will not beseeking to implement any "leading edge" technology, as we believe ourcompetitive advantages come in other areas, such as in-store service. A new MISDirector has been recruited to lead this programme. How we will get there - what our customers will see Our loyal and growing customer base likes what we do, and we have no wish todisappoint them. In their feedback to us, however, they helped point to somethings that we can do better. Equally, those who do not shop with us today gaveus useful insights into where we can be more attractive to a broader range ofcustomers. Great products are fundamental to any retailer's success, and we havework to do to broaden and contemporise our ranges. Additionally, with our morediverse estate, we need more sophistication in the way we tailor our ranges tothe needs of the local store catchment area. So our customers will be seeing newand interesting products, better focused on their needs. There will be morehealthy options, more products hand prepared in store that day and moreinnovative meal solutions for those who love to cook. Customers love ourpromotions, and these will continue to be a big part of the Morrisons offer.Customers like the way we package products to ensure freshness and a long shelflife, and particularly like the way we show prices clearly on many more of ourfresh products than our competitors. But they are also conscious ofenvironmental concerns, and do not want to see "over packaging". We will bereducing our packaging wherever we can, and looking for more sustainable andrecyclable sources. Customers like the atmosphere of the market created in a Morrisons, and love tofind a bargain in an unexpected place. But they tell us they do not likeclutter, and in some of our stores, particularly smaller stores, we make it toodifficult to navigate around. So we will be de-cluttering our stores, and alsofreshening up our brand. This will be signalled by the change of our logo forthe first time in a number of years, and will also involve new and freshersignage, a brighter Market Street, new staff uniforms and, in the Spring, thelaunch of a new advertising campaign to replace the "more reasons to shop atMorrisons" campaign that served the company well for 30 years. Customers willhave more chance to see Morrisons, as we will be extending our opening hours ina third of the estate. Our overall programme requires investment, which I believe will deliverreturns. Over three years, we will invest approximately £450m on top of ournormal annual capital requirements, which we estimate to be £400m including ournew store programme. I anticipate that we will deliver £200m of annual profitenhancement by 2010, over and above the first phase of the Optimisation Planannounced last year. As a result of the investments outlined, our net debt is likely to rise in thecurrent financial year, but in the expectation that it will fall againthereafter we will be exploring ways to return value to our shareholders. As afirst step towards this, we are in discussions which may lead to us enteringinto a property partnership for some of our investment properties. This willonly involve approximately 25 of our properties, but if it proceeds might be aninteresting first step towards extracting further value from our property base. Outlook Our new financial year began slowly, with like for like sales excluding fuelgrowing at 3.4%, well below the momentum seen last year. Whilst, partly, thisreflects the disruption caused by contaminated fuel supplied to us in the South,it also emphasises the need for us to make good progress with our new plans. Iam confident that in the coming months our loyal customers will continue to seethe best of the Morrisons they know, but with a fresh new twist. It is important for the Group to build on the good, strong culture of commitmentthat already exists. This programme is evolution, not revolution, and is aboutour people, our stores and our brand taking us forward to a fresh future. I would like to take this opportunity to thank the many people that I have metsince I arrived in the business, for their help, suggestions and support.Especially I would like to thank Ken Morrison, who has been a fantastic support.I value him as an entrepreneur and a person who is truly unique. Marc BollandChief Executive Officer Financial Review Overview The Chairman's statement and Chief Executive's operating review describe theoverall operating performance of the Group. This review summarises other aspects of the Group's financial performance,including those in the income statement - property transactions, finance incomeand costs, taxation, earnings and dividends; those in the balance sheet -debtors, provisions and pensions, and those within the cash flow. In additionthe subjects of share performance and risk are covered. Income statement The income statement format was changed this year to conform with the format ofinternal management reporting and to enable more direct comparison with ourcompetitors. Other operating expenses, staff costs and depreciation were splitbetween cost of sales and administrative expenses according to function. Property transactions As previously announced, a profit of £22.0m was made on the sale of 6 stores and1 depot to Waitrose. The sale of other items of plant, property and equipmentduring the year accounted for a further £16.5m of profit. Finance income and costs The amount of interest payable on bonds, loans and overdrafts was down by £3.8mto £65.4m, as the reduction in net debt more than offset the rise in floatinginterest rates. The amount of the interest charge is reduced for interestcapitalised on the construction of new stores. This was £5.7m lower than in theprevious year. The notional interest on the pension liability decreased by £10.2m to become anet interest receivable. This reflects the increase in the schemes' assets overthe past two years driven by improvements in the equity market and additionalfunding from the Group. Whilst interest rates increased during the year, interest receivable reduced by£2.1m overall. This was due to improved cash management reducing the amount ofsurplus cash balances available for deposit. Other movements relate to fair value changes on a limited number of derivativefinancial instruments during the first half year. In the second half, hedgeaccounting for these financial instruments was introduced, and this has theeffect of eliminating future volatility through the income statement for anymovements on fair values of these instruments. Taxation Tax of £121.4m has been charged at an effective rate of 32.9%. The underlyingcurrent period tax rate of 30.2% is close to the prevailing UK Corporation Taxrate of 30%. This underlying rate increased to the effective rate because ofseveral prior year tax adjustments. The nature of these adjustments is therevision of estimates used for deferred taxation and the release of provisionsthat covered the uncertainty of open computations with the Inland Revenue. Areconciliation of the tax charge is shown in note 5 and an analysis of deferredtaxation in note 18. An internal Tax Department was established in the year, removing the need torely solely on external advisors to undertake the compliance work necessary tocalculate the Group's tax charge and provisions. The principal objective of thedepartment is to pay the right amount of tax at the right time, while minimisingthe risk of mistakes which might give rise to penalties being levied against theGroup. The Group is almost exclusively UK based, with a simple business modeland does not engage in sophisticated tax planning structures. Earnings and dividends Earnings per share were 9.32p (2006: loss per share 9.46p). On a diluted basis,and eliminating the profit on property disposals, earnings per share were 8.30p(2006: loss per share 9.21p). At this level, earnings remain below the levelsachieved immediately prior to the acquisition of Safeway, underlining the needfor the business to continue the profit recovery begun in 2006/7. A final dividend of 3.375p has been proposed, taking the total for the year to4.0p. This delivers total dividend growth of 8.1% on 2005/6, following twoyears when the dividend was held at 3.7p. Share performance At 4 February 2007 the share price was £3.01, an increase of 59% compared to thelast financial year end, giving a market capitalisation for the Group of £8bn.Over the same period, the FTSE 100 index rose by 9.1% and the Food and DrugRetail Sector by 38.7%. From 8 March 2004, the date of the Safeway acquisition, to 4 February 2007, theGroup's share price rose by 20.8%. Over the same period, the FTSE 100 index roseby 38.6% and the Food and Drug Retail Sector by 55.3%. Balance sheet The balance sheet strengthened in the year, primarily as a result of a reductionin the pension liability, net of deferred tax, of £153m and the retained profitachieved of £247.6m. Key features are: Current assets and liabilities (excluding debt) Trade debtors of £79.9m consist primarily of rental debtors, supplier income,pharmacy and large fuel customers. The bad debt provision has reduced from£4.3m to £1.7m as a result of improvements in control following the fullintegration of all Morrisons and Safeway financial systems. Other assets and liabilities are broadly in line with the prior year. Pension liabilities The pension liability of £197.9m has fallen by £218.3m from £416.2m. Twosignificant changes in assumptions were made, in line with current marketexpectations - the discount rate applied to scheme liabilities (which movedfrom 4.75% to 5%) and the inflation assumption (which moved from 3.0% to 3.2%).In addition, £41.6m was paid into the two pension funds in excess of theservice cost charged in the income statement. Assets held within the pensions schemes totalled £1,774m at 4 February 2007.68.1% of the total was held in equities, 12.5% in bonds and 19.4% in commercialproperty investments, currencies and other investments. In the light of thesatisfactory reduction in the scheme deficits, the Group intends to discuss withthe Pension Trustees ways in which the prudence underpinning the investmentprinciples operating in the schemes can be further strengthened. Provisions The restructuring provision of £49.6m includes £35.5m of committed spend in 2007/08 associated with re-branding. The restructuring has involved reviewing thecorporate identity resulting in a change to the corporate logo includingchanging all store and distribution fleet signage. Separate but related expenditure on brightening up Market Street is alsoexpected though at this stage the programme is insufficiently advanced toprepare an accounting estimate of the costs. No provision has been included inthe current year for this cost. The property provision of £95.3m includes £65.1m for onerous leases relating tosublet properties to cover the shortfall between expected rent receivable andthe rent payable, taking into account vacant tenancy periods during the term ofthe leases. The charge of £33.5m in the year is in line with the normal revieweach year to establish the best estimate of liability, and compares to anequivalent amount of £18.3m in the prior year. Net debt Net debt fell by £375.4m to £772.2m despite lower store disposal proceeds, as aresult of improved profitability and reduced capital expenditure. This resultedin the repayment of borrowings totalling £263.0m. The prime components of net debt are the Bonds acquired with the Safewayacquisition. The next bond repayment is due in August 2007 and the Groupintends to repay this £250m instalment through existing bank facilities. Covenants The financial covenants in relation to the syndicated revolving credit facilityare in respect of the level of net debt to EBITDA and interest cover. The Groupcontinues to comply with all borrowing and financial obligations at all times. Cash flow and net debt Operating cash flow The Group generated cash from operations of £704.3m compared to £311.0m in theprior year. The improvement was primarily due to the growth in Operating Profit,but also benefited from better working capital management, particularly stockreduction, which contributed £76.4m. The Group continues to adhere strictly to the payment terms agreed with itssuppliers, and at the year end the average creditor days outstanding was 31,compared to 33 in the prior year. Disposal and divestment proceeds Proceeds of £158.3m on disposal of properties include £88m on the disposal of 6stores and 1 depot to Waitrose. The remaining £70.3m relate to another 7properties. Acquisition of property The capital expenditure programme in the year has been fully funded from cashflow. It was planned to restrict capital expenditure to no more thandepreciation in the first year of the Optimisation Plan and that wassubstantially achieved. It is expected that capital expenditure will rise to alevel in excess of depreciation in 2007/08 as the impact of the business reviewtakes effect. Capital expenditure and depreciation Capital Depreciation expenditure 2007 2007 £m £mProperty, plant and equipment 268 277Investment property - 5Lease prepayments 15 -Total 283 282 The principal additions in the year were 4 large new stores and the Group's newhead office, with a combined investment of £137.6m. Additionally, stagepayments had been made associated with the planned opening, in the coming year,of a further 8 new stores. Treasury and finance risk The newly created treasury management function is now operating within clearlydefined policies and procedures that have been authorised by the Board andmonitored by the Audit Committee. There is an amount of delegated authority tothe Treasury Committee, but all activities are summarised in a half yearlytreasury report which is presented to the Audit Committee. In establishing policies for the treasury function, a review of the Group'sfinancial risk was conducted. The risks identified can be summarised asfollows: Foreign Currency Risk Management The Group objective is to have low risk to short term profits from exchange ratefluctuations. Exposures on debt denominated in a foreign currency are hedgedusing cross currency interest rate swaps. It is Group policy that any transactional currency exposures recognised to havea material impact on short term profits will be hedged. There were no suchoutstanding instruments at the year end. Interest Risk Management The Group objective is to have low risk potential for volatility in interestcharges. The Group's policy is to protect itself against adverse movements in interestrates by hedging up to 60% of total net debt over a four year horizon. Funding and Liquidity Risk Management The Group policy is to maintain a balance of funding with a range of maturitiesand a sufficient level of undrawn committed borrowing facilities to meet anyunforeseen obligations and opportunities. Short term cash balances, togetherwith undrawn committed facilities, enable the Group to manage its liquidityrisk. The Group finances its operations with a combination of bank credit facilitiesand bonds. Credit rating The Group's bonds, issued by Safeway Ltd, are publicly traded and rated byMoody's as Baa2. They maintain a watch on this rating. Consolidated income statement53 weeks ended 4 February 2007 Restated - see note 3 --------------------------------- 2006 Before 2006 Safeway Safeway integration integration & & conversion conversion 2006 2007 costs costs Total Note £m £m £m £m Turnover 1 12,461.5 12,114.8 - 12,114.8Cost of sales (11,825.5) (11,793.0) (184.8) (11,977.8)Gross profit 636.0 321.8 (184.8) 137.0 Other operating income 20.5 18.5 - 18.5Administrative expenses (271.8) (236.3) (172.9) (409.2)Profits/(losses) arising on 38.5 7.5 (16.7) (9.2)property transactionsOperating profit/(loss) 3 423.2 111.5 (374.4) (262.9)Finance costs 4 (74.9) (73.2) - (73.2)Finance income 4 20.7 21.0 - 21.0Share of post-tax profits from BP - 2.2 - 2.2joint ventureProfit /(loss) before taxation 369.0 61.5 (374.4) (312.9)Taxation 5 (121.4) (15.6) 78.2 62.6Profit /(loss) for the financial 247.6 45.9 (296.2) (250.3)period Earnings/(loss) per share (pence) - basic 6 9.32 (9.46) - diluted 6 9.31 (9.46) - diluted excluding property 6 8.30 (9.21) transactions Ordinary dividends (pence pershare)Interim - paid 0.625 0.625Final - proposed 28 3.375 - - paid - 3.075Total 4.000 3.700 Consolidated statement of recognised income and expense (SoRIE)53 weeks ended 4 February 2007 2007 2006 £m £mProfit/(loss) for the financial period 247.6 (250.3)Actuarial gain/(loss) arising in the pension scheme (net of 118.7 (28.2)taxation)Cash flow hedging movement (0.6) -Total recognised income and expense for the financial period 365.7 (278.5) Consolidated balance sheet4 February 2007 2007 2006 Note £m £mAssetsNon-current assetsProperty, plant and equipment 8 6,117.4 6,143.9Lease prepayments 9 227.9 217.8Investment property 10 240.5 225.3Financial assets 11 19.1 36.4 6,604.9 6,623.4Current assetsStocks 12 367.9 399.4Debtors 13 150.6 157.4Cash and cash equivalents 14 231.1 135.3 749.6 692.1Non-current assets classified as held for sale 15 16.4 128.6 766.0 820.7LiabilitiesCurrent liabilitiesCreditors 16 (1,501.1) (1,471.2)Other financial liabilities 17 (253.8) (296.6)Current tax liabilities (100.0) (39.0) (1,854.9) (1,806.8)Non-current liabilitiesOther financial liabilities 17 (768.6) (1,022.7)Deferred tax liabilities 18 (477.6) (422.6)Pension liabilities 19 (197.9) (416.2)Provisions 20 (144.9) (127.2) (1,589.0) (1,988.7)Net assets 3,927.0 3,648.6 Shareholders' equityCalled up share capital 21 267.7 267.3Share premium 21 41.5 36.9Merger reserve 22 2,578.3 2,578.3Retained earnings and other reserves 22 1,039.5 766.1Total equity 3,927.0 3,648.6 Consolidated cash flow statement53 weeks ended 4 February 2007 2007 2006 Note £m £mCash flow from operating activitiesCash generated from operations 23 704.3 311.0Interest paid (68.0) (74.9)Taxation (paid)/received (53.6) 33.3Net cash inflow from operating activities 582.7 269.4Cash flows from investing activitiesInterest received 12.5 23.2Proceeds from sale of property, plant and equipment 158.3 324.1Purchase of property, plant and equipment (257.2) (635.4)Acquisition of subsidiaries (net of cash acquired) - (15.6)Proceeds on the sale of BP joint venture assets - 87.0Proceeds from the sale of subsidiaries - 49.1Net cash outflow from investing activities (86.4) (167.6)Cash flows from financing activitiesNet proceeds from issue of ordinary shares 5.0 18.3Finance lease principal payments (2.5) (2.6)New borrowings - 100.0Repayment of borrowings (260.5) -Dividends paid to equity shareholders (98.3) (97.8)Net cash (outflow)/inflow from financing activities (356.3) 17.9Net increase in cash and cash equivalents 140.0 119.7Cash and cash equivalents at start of period 91.1 (28.6)Cash and cash equivalents at end of period 14 231.1 91.1 Reconciliation of net cash flow to movement in net debt in the period 2007 2006 £m Note £mNet increase in cash and cash 140.0 119.7equivalentsCash outflow from decrease in debt 263.0 2.6and lease financingCash inflow from increase in loans - (100.0)Other non cash movements (27.6) (9.0)Opening net debt (1,147.6) (1,160.9)Closing net debt 24 (772.2) (1,147.6) Basis of preparation The financial information set out herein does not constitute the company'sstatutory accounts for the periods ended 4 February 2007 or 29 January 2006 butis derived from those accounts. Statutory accounts for 2006 have been deliveredto the registrar of companies, and those for 2007 will be delivered in duecourse. The auditors have reported on those accounts; their reports were (i)unqualified, (ii) did not include references to any matters to which theauditors drew attention by way of emphasis without qualifying their reports, and(iii) did not contain statements under section 237(2) or (3) of the CompaniesAct 1985. Significant accounting policies The Directors consider the following to be the significant accounting policiesin the context of the Group's operations: Revenue recognition Revenue is recognised when the significant risks and rewards of ownership havebeen transferred to the buyer, there is reasonable certainty of recovery of theconsideration receivable and the associated costs and possible return of goodscan be estimated reliably. a) Turnover Turnover represents sales to customers excluding value added tax, intra-grouptransactions, staff discounts, coupons and the free element of multi-savetransactions. It also includes service charges relating to concessions, carpark income, commission receivable and external sales made by manufacturingsubsidiaries. Revenue collected on behalf of others is not recognised inturnover, other than the related commission. b) Other operating income Other operating income consists of income not directly related to the operatingof supermarkets such as investment property income or the credits earned fromthe recycling of waste and packaging materials. Segmental reporting Based on the sources of risks and returns impacting the Group's activities, theDirectors consider that the primary reporting format is by business segment. TheDirectors consider that there is only one business segment being grocery andrelated retailing and vertically integrated manufacturing. The disclosures forthe primary segment are therefore given by the primary financial statements andrelated notes. The Group's business operations are conducted almost exclusively in the UK so ageographical segment report is not required. Supplier income Supplier incentives, rebates and discounts are recognised as a deduction fromcost of sales on an accruals basis based upon the expected entitlement which hasbeen earned up to balance sheet date for each relevant supplier contract. Whereamounts received are in the expectation of future business then revenue isrecognised in line with that future business. Property transactions Property includes the balance sheet headings of property, plant and equipment,investment property, lease prepayments and non-current assets classified as heldfor sale. The results of transactions relating to property are reported in theincome statement under Profit/(losses) arising on property transactions.Depreciation and impairment charges or reversals are recognised in cost of salesor administrative expenses as appropriate. Borrowing costs All borrowing costs are recognised in the Group's income statement on anaccruals basis except for interest costs that are directly attributable to theconstruction of buildings which are capitalised and included within the initialcost of a building. Capitalisation ceases when the property is ready for use. Deferred and current taxation Current tax payable is based on the taxable profit for the year, using tax ratesenacted or substantively enacted at the reporting date. Taxable profit differsfrom the profit as reported in the income statement as it is adjusted both foritems that will never be taxable or deductible and temporary timing differences. Deferred tax is recognised using the balance sheet method. Provision is madefor temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for taxation purposes.Deferred tax is calculated based on current tax law and is provided at ratesthat are expected to apply when the timing differences crystallise. Deferred taxis charged or credited in the income statement except when it relates to itemscharged or credited directly to equity in which case the deferred tax isreflected in equity. Deferred tax assets are recognised to the extent that it is probable thattaxable profit will be available against which the asset can be utilised.Deferred tax assets recognised are reviewed at each reporting date as judgementis required to estimate the availability of future taxable income. Deferred taxassets and liabilities are not discounted and are offset where amounts will besettled on a net basis as there is legally enforceable right to offset. Accruals for tax contingencies require management to make judgements andestimates of ultimate exposures in relation to tax compliance issues. Allaccruals are included in creditors due within one year. Business combinations and goodwill The assets, liabilities and contingent liabilities of subsidiaries are measuredat their fair values at the date of acquisition. Any excess of the cost ofacquisition over the fair values of the identifiable net assets acquired isrecognised as goodwill. Goodwill is recognised as an asset and reviewed for impairment annually asdetailed in 'Impairment of non-financial assets' below. Property, plant and equipment a) Property, plant and equipment are carried at cost less accumulateddepreciation. Costs include directly attributable costs. Annual reviews are madeof estimated useful lives and material residual values. b) Depreciation rates used to write off cost less residual value are straightline:Freehold land 0%Freehold and long leasehold buildings 2.5%Short lease buildings Over lease periodPlant, equipment and vehicles 15 -33%Assets held under a finance lease Shorter of life of lease or assetAssets under construction 0% Impairment of non-financial assets Goodwill is tested annually for impairment, or more frequently if there are anychanges in circumstances or events that indicate that a potential impairment mayexist. Goodwill impairments cannot be reversed. For property, plant and equipment individual assets are reviewed for indicationsof impairment when events or changes in circumstances indicate that the carryingamount may not be recoverable. If there are indications then a test isperformed on the asset affected to assess its recoverable amount againstcarrying value. An asset impaired is written down to the higher of value in use or its fairvalue less costs to sell. If there is indication of an increase in fair value of an asset that had beenpreviously impaired, then this is recognised by reversing the impairment. Stocks Stocks are valued at the lower of weighted average cost and net realisablevalue. Cost comprises purchase price, import duties, rebates and othernon-recoverable taxes. Stocks are primarily goods for resale. Cash and cash equivalents Cash and cash equivalents for cash flow purposes includes cash-in-hand,cash-at-bank and bank overdrafts together with short term, highly-liquidinvestments that are readily convertible into known amounts of cash, with aninsignificant risk of a change in value, within three months from the date ofacquisition. In the balance sheet bank overdrafts are presented within currentliabilities. Non-current assets held for sale Where there is a committed plan to sell and it is highly probable that a salewill be achieved, assets are reclassified as non-current assets held for sale.On reclassification, non-current assets held for sale are recognised at thelower of carrying amount and the fair value less costs to sell. Impairmentlosses on initial classification as held for sale are included in the incomestatement, as are gains or losses on subsequent remeasurement. The depreciationof the asset ceases on reclassification. Assets are reclassified fromnon-current assets held for sale when the above criteria cease to be met. Leases Leases in which substantially all the risks and rewards of ownership areretained by the lessor are classified as operating leases; all other leases areclassified as finance leases. Lessor accounting a) Operating leases: Assets acquired and held for use under operating leases arerecorded as fixed assets and are depreciated on a straight line basis to theirestimated residual values over their estimated useful lives. Operating leaseincome is recognised on a straight line basis to the date of the next rentreview. b) Finance leases: The Group does not lease out any assets on a finance leasebasis. Lessee accounting a) Finance leases: The present value, calculated using the interest rateimplicit in the lease, of the future minimum lease payments is included withinfixed assets and financial liabilities as an obligation to pay future rentals.Depreciation is provided at the same rates as for owned assets, or over thelease period if shorter. Rental payments are apportioned between the finance charge and the outstandingobligation so as to produce a constant rate of charge on the remaining balance. b) Operating leases: Rental payments are taken to the income statement on astraight line basis over the life of the lease. Leases that containpredetermined, fixed rental increases are accounted for such that thepredetermined, fixed rental increases are recognised on a straight line basisover the life of the lease. Property leases are analysed into separate components for land and buildings andtested to establish whether the components are operating leases or financeleases. Premiums paid for land are treated as a prepayment of an operatinglease rental and recognised on a straight line basis over the life of the lease. Provisions Provisions are created where the Group has a present legal or constructiveobligation as a result of a past event, where it is probable that it will resultin an outflow from the Group, and where it can be reliably measured. The natureof these provisions are: a) Property provisions: Provisions made in respect of individual propertieswhere there are obligations for onerous contracts, dilapidations and certaindecommissioning obligations for petrol filling stations. The amounts providedare based on the Group's best estimate of the likely committed outflow to theGroup. Where material these estimated outflows are discounted to net presentvalue. b) Restructuring provisions: Provisions are established for announced and ongoing restructuring programmesplanned and controlled by management where there is an obligation to makechanges to the scope of a business undertaken by the company or the manner inwhich the business is conducted. The provision includes costs of severance tothe affected employees, costs of property closure, and other direct expendituresnot associated with ongoing activities. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at thedates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominatedin foreign currency are retranslated at the rates of exchange at the balancesheet date. Gains and losses arising on retranslation are included in theincome statement for the period. Retirement benefits The Group operates defined benefit and defined contribution schemes. A definedcontribution scheme is a pension scheme under which the Group pays fixedcontributions into a separate entity. A defined benefit scheme is one that isnot a defined contribution scheme. Pension benefits under defined benefitschemes are defined on retirement based on age at date of retirement, years ofservice and either the employee's final compensation package or career averageearnings. The Group operates two defined benefit retirement schemes which are funded bycontributions from the Group and members. The defined benefit schemes are notgenerally open to new members. Pension scheme assets, which are held in separatetrustee administered funds, are valued at market rates. Pension schemeobligations are measured at discounted present value and other assumptions asshown in note 19. The operating and financing costs of the scheme are recognisedseparately in the income statement in the period in which they arise.Death-in-service costs are recognised on a straight line basis over theirvesting period. Actuarial gains and losses are recognised immediately in thestatement of recognised income and expense. Payments by the Group to the defined contribution scheme are charged to theincome statement as they arise. Share-based payments The Group issues equity share-based payments to certain employees. The fairvalue of the share-based award calculated at the date of grant is expensed on astraight line basis over the vesting period. This is based on the Group'sestimate of share options that will eventually vest, taking into accountmovement of non-market conditions if relevant. The fair value is notsubsequently revisited. Fair value is measured by use of a binomial stochastic model. The expected lifeused in the model has been adjusted, based on management's best estimate, foreffects of non-transferability, exercise restrictions and behaviouralconsiderations. The fair value charge of share-based payments that are settled by cash arecredited to the balance sheet and are included within creditors. The Group has fair valued all grants of equity instruments after 7 November 2002which were unvested as of 1 January 2005, and cash settled equity instruments ateach balance sheet date. Financial instruments Financial assets and liabilities are recognised on the Group's balance sheetwhen the Group becomes a party to the contractual provisions of the instrument. Derivative financial instruments are initially measured at fair value, whichnormally equates to cost, and are remeasured at fair value. Financial instruments - hedge accounting The Group has a number of cross currency swaps which have been designated ascash flow hedges. These derivative financial instruments are used to match oreliminate risk from potential movements in foreign exchange rates inherent inthe cash flows of certain financial liabilities. Derivatives are reviewed regularly for effectiveness as hedges and correctiveaction taken, if appropriate. Where a derivative financial instrument is designated as a hedge of thevariability in cash flows of a recognised asset or liability, or highly probableforecast transaction, the effective part of any gain or loss on the derivativefinancial instrument is recognised directly in equity. The gain or loss on anyineffective part of the hedge is immediately recognised in the income statement.If a hedge of a forecast transaction subsequently results in the recognition ofa financial asset or liability, the associated cumulative gains or losses thatwere recognised directly in equity are re-classified into the income statementin the same periods during which the interest income or expense is recognised. Financial liabilities Financial liabilities are recognised initially and subsequently at amortisedcost using the effective interest rate method. Net debt Net debt is cash and cash equivalents, bank and other current loans, bonds andderivative financial instruments stated at current fair value. Investment property Investment properties are recorded at cost less accumulated depreciation and anyrecognised impairment loss. Depreciation used is the same method and rates asfor other Group properties. Income from investment properties is disclosed in "Other operating income" anddetails are shown in note 11 Investment property. Costs are included withinAdministrative expenses. Treasury shares The Group has an employee trust for the granting of Group shares to executivesand members of the employee share plans. Shares in the Group held by theemployee share trust are treated as treasury shares and presented in the balancesheet as a deduction from retained earnings. The finance and administration costs relating to the Executive Share OptionScheme are charged to the income statement. The shares are ignored for thepurpose of calculating the Group's earnings per share. Use of critical accounting assumptions and estimates Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actualresults. The estimates and assumptions that have significant risk of causing amaterial adjustment to the carrying value of assets and liabilities arediscussed below. a) Restructuring provisions At the balance sheet date the Directors' consider the announcement of thestrategic review, appointment of external advisors, preparation of detailedplans and board approval for the programme meant that they were demonstrablycommitted to the rebranding project. The constructive obligation in place at thebalance sheet date resulted in a provision being created for certain directexpenditure not associated with ongoing activities, but necessarily incurred asa result of removing the old brand across the retail stores and the distributionfleet of vehicles. b) Pension scheme assumptions and mortality tables The carrying value of defined benefit pension schemes is valued using actuarialvaluations. These valuations are based on assumptions including the selection ofthe correct mortality tables for the profile of members in each scheme. Allthese are estimates of future events. These choices will be based on advicereceived from the scheme actuaries which are checked from time to time withbenchmark surveys and ad hoc analysis. Notes to the financial statements53 weeks ended 4 February 2007 1 Turnover (excluding VAT) 2007 2006 £m £mSale of goods in stores 10,086.8 9,884.9Fuel 2,300.7 2,147.9Total store based sales 12,387.5 12,032.8Direct manufacturing sales 27.7 33.1Income from concessions and commission 46.3 48.9Total turnover 12,461.5 12,114.8 2 Employees and directors Employee benefit expense for the Group 2007 2006during the period £m £mWages and salaries 1,333.6 1,557.5Social security costs 94.2 96.0Share-based payments (note 25) 19.6 4.0Pension costs 55.4 58.9Other staff costs 3.0 0.5 1,505.8 1,716.9 Average monthly number of people 2007 2006employed No. No.By business groupStores 105,054 120,313Manufacturing 4,773 4,028Distribution 4,730 6,325Centre 3,247 3,671 117,804 134,337 3 Operating profit /(loss) 2007 2006 £m £mThe following items have been included inarriving at operating profit/(loss): Depreciation: - owned assets 275.2 250.4 - assets held under finance leases 2.1 2.1Property, plant and equipment 277.3 252.5 Investment property 4.6 4.4 Charge in the income statement 281.9 256.9 Operating lease rentals payable - property 27.1 38.9 - other 13.2 6.8 Safeway integration and conversion costs 1 - 374.4Value of stock expensed 9,364.3 9,277.5 1 Safeway integration and conversion costs were exceptional costs incurred thatrelated to the integration of Safeway and the conversion of the ex-Safewaystores to the Morrisons format. An analysis of these exceptional costs can befound in the annual report and financial statements 2006 and the interim report2005/06. These reports can be viewed in the Investor Information section of the Morrisonswebsite at www.morrisons.co.uk. Restatement of Consolidated income statement The format of the income statement has been changed to that of a functionalstyle that is consistent with the key competitors in the Food and Drug RetailSector sector. The practice in the Retail sector is to show Cost of sales and asubtotal of Gross profit. The cost of operating Morrisons integratedmanufacturing businesses are considered as part of the cost of sales of theretail business and have been incorporated within the Cost of sales in this newformat. The impact of this change is that: • Operating profit remains unchanged • Raw materials are subsumed into cost of sales • Staff costs, impairment and depreciation are split between cost of sales and administrative expenses as appropriate Services provided by the Group's auditorDuring the period KPMG Audit Plc, the Group's auditor, provided the following services: 2007 2006 £m £mAudit services - statutory group audit 0.6 0.8 - statutory audit of subsidiaries 0.2 0.2 - audit related regulatory 0.2 0.3 reportingTax services - compliance services 1.1 1.0Other - forecasting procedures review 0.2 1.0 - planning and reporting due - 1.7 diligence 2.3 5.0 4 Finance costs and income 2007 2006 £m £mInterest payable on short term loans and (5.1) (11.1)bank overdraftsInterest payable on bonds (60.3) (58.1)Interest capitalised 6.1 11.8Total interest payable (59.3) (57.4)Fair value movement of derivative (11.7) (8.4)instrumentsPension liability interest cost (94.8) (86.2)Expected return on pension assets 102.0 83.2Net pension interest income/(cost) 7.2 (3.0)Other finance costs (11.1) (4.4)Finance costs (74.9) (73.2)Bank interest received 12.5 14.6Amortisation of bonds 8.2 6.4Finance income 20.7 21.0 Net finance cost (54.2) (52.2) Interest is capitalised at the bank overdraft rate incurred before taxationwhich varies in line with the prevailing base rate. Taxation relief is obtainedon interest paid and this reduces the tax charged for the period. 5 Taxation Analysis of charge in period 2007 2006 £m £m Corporation tax - current period 127.3 4.3 - adjustment in respect of (12.8) 3.8 prior period 114.5 8.1 Deferred tax - current period (15.7) (74.8) - adjustment in respect of 22.6 4.1 prior period 6.9 (70.7) Tax charge/(credit) for the period 121.4 (62.6) Tax on items charged directly to equity 2007 2006 £m £mCurrent tax (charge) on actuarial - (1.2)movementsDeferred tax (charge)/credit on actuarial (50.9) 13.3movementsTax (charge)/credit on actuarial (50.9) 12.1movements taken to SoRIEShare-based payments - taken direct to 2.8 (3.3)equity The tax for both periods is different to the standard rate of corporation tax inthe UK (30%). The differences are explained below: Tax reconciliation 2007 2006 £m £mProfit/(loss) before tax 369.0 (312.9)Profit/(loss) before tax at 30% 110.7 (93.9)Effects of:Expenses not deductible for tax purposes 10.8 4.6Goodwill impaired - 31.0Non-qualifying depreciation 27.8 19.6Divestment profits not taxable (30.5) (32.5)Overseas tax rates/dividends (1.5) 0.7Other (5.7) -Prior period adjustments 9.8 7.9Tax charge/(credit) for the period 121.4 (62.6) 6 Earnings per share Basic earnings per share are calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the period, excluding those held by the Company as treasuryshares (note 22), which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all potentially dilutive ordinaryshares. The Company has three classes of financial instruments that arepotentially dilutive: those share options granted to employees where theexercise price is less than the average market price of the Company's ordinaryshares during the period, the contingently issuable shares under the Group'slong-term incentive plan and convertible preference shares. If all the outstanding share options had been exercised, this would haveresulted in 9.3m additional shares issued for no consideration and the reversalof a share-based payment charge of £3m. These options are thereforeanti-dilutive this year and have been ignored when calculating the diluted EPS.At 4 February 2007, the performance criteria for the vesting of the awards underthe incentive scheme had not been met and consequently the shares in questionare excluded from the diluted EPS calculation. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. 2007 2006 Earnings Weighted EPS Earnings Weighted EPS £m average pence £m average pence number number of of shares shares millions millionsUnadjusted EPSBasic EPSEarnings attributable to ordinary 247.6 2,657.5 9.32 (250.3) 2,646.9 (9.46)shareholdersEffect of dilutive instrumentsPreference share conversion - 1.2 (0.01) - - -Diluted EPS 247.6 2,658.7 9.31 (250.3) 2,646.9 (9.46) 2007 2006 Earnings Weighted EPS Earnings Weighted EPS £m average pence £m average pence number number of of shares shares millions millionsAdjusted EPSBasic EPSEarnings attributable to ordinary 247.6 2,657.5 9.32 (250.3) 2,646.9 (9.46)shareholders(Profits)/losses arising on property (26.9) - (1.02) 6.2 - 0.25transactions 1 220.7 2,657.5 8.30 (241.1) 2,646.9 (9.21)Effect of dilutive instrumentsPreference share conversion - 1.2 - - 1.6 -Diluted EPS 220.7 2,658.7 8.30 (241.1) 2,648.5 (9.21) 1 Profits/(losses) arising on property transactions as shown in the incomestatement after adjusting for tax relief. 7 Goodwill and other intangibles Goodwill £mCostAt 29 January 2006 and 4 February 2007 103.2 Aggregate amortisation and impairmentAt 29 January 2006 and 4 February 2007 103.2 Net book amount at 29 January 2006 and 4 February 2007 - The goodwill of £103.2m shown above arose on the Safeway acquisition in theperiod ended 30 January 2005. In the financial statements for the period ended29 January 2006 this goodwill was fully impaired. 8 Property, plant and equipment Land and buildings Plant, Freehold Long Short equipment Total leasehold leasehold & vehicles £m £m £m £m £mCurrent yearCostAt 29 January 2006 6,078.8 379.4 14.2 815.9 7,288.3Additions at cost 139.4 35.9 5.2 87.9 268.4Interest capitalised 5.5 0.6 - - 6.1Transfer to assets held for sale (20.9) - (5.9) (3.7) (30.5)Transfer from assets held for sale 32.9 0.7 4.3 19.0 56.9Transfer to investment property (17.3) - - - (17.3)Disposals (7.0) - - (0.1) (7.1)At 4 February 2007 6,211.4 416.6 17.8 919.0 7,564.8 Accumulated depreciationAt 29 January 2006 563.6 43.2 12.3 525.3 1,144.4Charge for the period 122.2 2.6 1.3 151.2 277.3Transfer to assets held for sale (0.2) - (0.2) (1.0) (1.4)Transfer from assets held for sale 14.9 0.7 3.2 17.5 36.3Disposals (4.1) - - (0.1) (4.2)Impairment reversal (5.0) - - - (5.0)At 4 February 2007 691.4 46.5 16.6 692.9 1,447.4 Net book amount at 5,520.0 370.1 1.2 226.1 6,117.4 4 February 2007 Assets under construction included above 107.6 14.3 - 1.2 123.1 The Group adopts a policy of including the cost of financing propertydevelopments prior to their opening date in the cost of the project. Interestcapitalised in the period is £6.1m (2006: £11.8m). A property that was held for sale had been written down to its anticipated saleproceeds. On agreement of its sale this impairment was no longer necessary andwas reversed at that time. Land and buildings Plant, Freehold Long Short equipment Total leasehold leasehold & vehicles £m £m £m £m £mPrior yearCostAt 30 January 2005 5,592.5 411.6 12.6 583.6 6,600.3Additions at cost 367.8 3.4 - 283.8 655.0Interest capitalised 11.8 - - - 11.8Acquired from Joint Venture 61.3 1.6 - 4.8 67.7Assets held for sale transfer 55.5 (37.2) 1.8 2.5 22.6Disposals (10.1) - (0.2) (58.8) (69.1)At 29 January 2006 6,078.8 379.4 14.2 815.9 7,288.3 Accumulated depreciationAt 30 January 2005 438.7 27.6 7.8 418.1 892.2Charge for the period 108.9 15.6 4.7 123.3 252.5Assets held for sale transfer (3.1) - - (1.2) (4.3)Disposals (1.9) - (0.2) (14.9) (17.0)Impairment 21.0 - - - 21.0At 29 January 2006 563.6 43.2 12.3 525.3 1,144.4 Net book amount at 5,515.2 336.2 1.9 290.6 6,143.9 29 January 2006 Assets under construction included above 185.6 1.2 - 3.5 190.3 Included in Plant, equipment and vehicles are assets held under finance leasesat a cost of £21.8m (2006: £21.8m). The accumulated depreciation at the end ofthe financial period was £16.5m (2006 £14.4m). 9 Lease prepayments 2007 2006 £m £mLong lease land premiums 227.9 217.8 The current element of long lease land premiums is included within debtors (note13). During the year new long lease land premiums amounting to £15.2m werepaid. 10 Investment property 2007 2006 £m £mCostAt start of period 261.0 249.3Additions - 3.3Transfer from property, plant and 17.3 -equipmentTransfer from assets held for sale 16.1 8.4At end of period 294.4 261.0 Accumulated depreciationAt start of period 35.7 30.8Charge for the period 4.6 4.4Transfer from assets held for sale 13.6 0.5At end of period 53.9 35.7 Net book amount at end of period 240.5 225.3 Included in other operating income is £13.2m (2006: £13.0m) of rental incomegenerated from investment properties. 11 Financial assets 2007 2006 £m £mInterest rate swaps maturing 2007 - 1.6(moved to current liabilities)Interest rate swaps maturing 2008 - 2.2(cancelled in year)Cross-currency interest swaps 19.1 32.6maturing 2010 19.1 36.4 The interest rate and currency swaps cover the Group from the currency and fixedinterest exposure arising from the Sterling and Euro bonds. There are no contracts with embedded derivatives that have been identified to beaccounted for separately as required by IAS 39 Financial instruments:recognition and measurement. The notional principal amount of the outstanding interest rate swap contracts 4February 2007 was £200m (2006: £350m), and for the cross currency interest swaps€250m (2006: €250m). At 4 February 2007 the fixed interest rates of interest rate swaps vary from5.88% to 6.50% (2006: 5.88% to 6.50%) and floating rates are 5.32% to 5.44%(based on six month LIBOR plus costs). 12 Stocks 2007 2006 £m £mMaterials and work-in-progress 7.1 9.1Finished goods 360.8 390.3 367.9 399.4 13 Debtors 2007 2006 £m £mTrade debtors 79.9 88.6Less: Provision for impairment of (1.7) (4.3)trade debtors 78.2 84.3Lease prepayment - long lease land 1.2 1.6premiumsOther debtors 7.4 2.8Prepayments and accrued income 63.8 66.8Other taxes - 1.9 150.6 157.4 The Group has recognised a provision of £1.7m (2006: £4.3m) for the impairmentof its trade debtors during the year ended 4 February 2007. The creation andusage of the provision for impaired debtors has been included in cost of salesin the income statement. 14 Cash and cash equivalents 2007 2006 £m £m Cash and cash equivalents 231.1 135.3 Cash and cash equivalents include the following for the purposes of the cashflow statement: 2007 2006 £m £mCash and cash equivalents 231.1 135.3Bank overdrafts (note 17) - (44.2) 231.1 91.1 The effective interest rate on short-term deposits was 4.77% (2006: 4.43%) andthese deposits have an average maturity of 4 days (2006: 1 day). 15 Non-current assets classified as held for sale 2007 2006 £m £mProperty 16.4 128.6 Non-current assets classified as held for sale represent stores, administrationand distribution buildings being marketed for sale. The amount reclassified fromproperty, plant and equipment is all freehold and leasehold land and buildingsincluding associated fixtures and fittings. The stock for those stores stilltrading is not reclassified as it will be immaterial at the time of sale. In forming the Group's strategy, it was decided to keep three of the freeholdproperties (one store and two distribution centres) that had been previouslyclassified as held for sale. These are now classified in plant, property andequipment. 16 Creditors - current 2007 2006 £m £mTrade creditors 1,002.8 1,056.5 1Other tax and social security 55.6 52.6payableOther creditors 126.7 101.2Accruals and deferred income 297.5 243.3 1Interest accrual 18.5 17.6 1,501.1 1,471.2 1 Following a review of liabilities categorisation in the current year,liabilities of £146.1m have been recategorised from trade creditors to accrualsand deferred income. 17 Other financial liabilities The Group had the following current and non-current borrowings and otherfinancial liabilities: 2007 2006 2007 2006 Effective Effective £m £m interest rate interest rateCurrentBank loans and overdrafts due within one year or on demand: £250m Sterling bonds August 2007 5.88% - 250.7 -Loans - 5.00% - 250.0Interest rate swaps 0.7 -Bank overdraft - 44.2 251.4 294.2Finance lease obligations 10.71% 10.71% 2.4 2.4 253.8 296.6 2007 2006 2007 2006 Effective Effective £m £m interest rate interest rateNon-current£250m Sterling bonds August 2007 - 5.88% - 251.9£150m Sterling bonds August 2014 6.50% 6.50% 156.7 157.1£200m Sterling bonds January 2017 6.00% 6.00% 202.8 202.9£200m Sterling bonds December 2018 6.12% 6.12% 205.2 205.3€250m Euro bonds April 2010 6.50% 6.50% 183.4 195.8Total non-current Sterling and Euro bonds 748.1 1,013.0 Other loan notes 4.34% 4.20% 2.3 4.0Other loans 9.71% - 15.0 -Finance lease obligations 7.88% 5.01% 3.2 5.7 768.6 1,022.7 Maturity profile The maturity of the Group's non-current borrowings is as follows: 2007 2006 £m £m1 to 2 years 4.1 254.72 to 3 years 1.0 5.53 to 4 years 183.7 -4 to 5 years - 197.25+ years 579.8 565.3Total 768.6 1,022.7 Borrowing facilities Borrowings are denominated in Sterling and Euros and bear either fixed orvariable interest based on LIBOR. All borrowings are unsecured. In the event of default of covenants on the bank loan and bonds, the principalamounts and any interest accrued are repayable on demand. The Group has the following undrawn floating committed borrowing facilitiesavailable in respect of which all conditions precedent had been met at thatdate: 2007 2006 £m £mUndrawn facilities expiring 500.0 500.0between 1 and 2 years Finance lease obligationsPayments under finance lease obligations fall due asfollows: 2007 2006 £m £mNot later than one year 2.8 2.8Later than one year but not more 3.3 6.2than five yearsMore than five years - - 6.1 9.0Future finance charges on finance (0.5) (0.9)lease obligationsPresent value of finance lease 5.6 8.1obligations Measurement All financial liabilities are carried at amortised cost. The Euro bonds areretranslated at balance sheet date spot rates. The fair value of the Sterling and Euro Bonds are measured using closing marketprices. These compare to carrying values as follows: 2007 2007 2006 2006 Amortised Fair Amortised Fair cost value cost value £m £m £m £mBonds - current 250.7 249.7 - -Bonds - non-current 748.1 711.5 1,013.0 1,015.5Total Sterling and Euro bonds 998.8 961.2 1,013.0 1,015.5 The fair value of other items within current and non-current borrowing equalstheir carrying amount, as the impact of discounting is not significant. 18 Deferred tax 2007 2006 £m £mDeferred tax liability 628.2 609.1Deferred tax asset (150.6) (186.5)Net deferred tax liability 477.6 422.6 IAS12 Income Taxes permits the offsetting of balances within the same taxjurisdiction. All of the deferred tax assets were available for offset againstdeferred tax liabilities. The movements in deferred tax assets/(liabilities) during the period are shownbelow. Property, Pensions Share based Provisions Total plant and payments equipment £m £m £m £m £mCurrent yearAt 29 January 2006 (609.1) 124.9 2.8 58.8 (422.6)(Charged)/credited to income statement (19.1) (14.6) - 26.8 (6.9)Credited directly to equity - (50.9) 2.8 - (48.1)At 4 February 2007 (628.2) 59.4 5.6 85.6 (477.6) Prior yearAt 30 January 2005 (719.5) 122.4 4.4 91.1 (501.6)Credited/(charged) to income statement 112.1 (10.8) 1.7 (32.3) 70.7Credited/(charged) directly to equity - 13.3 (3.3) - 10.0Other (1.7) - - - (1.7)At 29 January 2006 (609.1) 124.9 2.8 58.8 (422.6) 19 Pension liabilities Defined benefit pension scheme The Group operates two pension schemes, the "Morrison" and "Safeway" schemes,providing benefits based on final pensionable pay. The assets of the schemes areheld in separate trustee administered funds; no part of the schemes are whollyunfunded. The latest full actuarial valuations, which were carried out at 6April 2005 and 1 April 2004 for the Morrison and Safeway schemes respectively,were updated for IAS 19 purposes for the periods to 4 February 2007 and 29January 2006 by a qualified independent actuary. The current best estimate of employer contributions to be paid for the yearcommencing 5 February 2007 is £95million. Assumptions The major assumptions used in this valuation to determine the present value ofthe scheme's defined benefit obligation were as follows: 2007 2006 2005Rate of increases in salaries 4.45 - 5.45% 4.25 - 5.25% 4.25-5.25%Rate of increase in pensions in payment and deferred pensions 3.20% 3.00% 3.00%Discount rate applied to scheme 5.00% 4.75% 5.25%liabilitiesInflation assumption 3.20% 3.00% 3.00% Assumptions regarding future mortality experience are in accordance withpublished statistics. The average life expectancy in years of a pensioner retiring at the age of 65 isas follows: 2007 2006 2005Male 19.9 19.9 19.9Female 22.8 22.8 22.8 Valuations The fair value of the schemes' assets, which are not intended to be realised inthe short term and may be subject to significant change before they arerealised, and the present value of the schemes' liabilities which are derivedfrom cash flow projections over long periods and are inherently uncertain, wereas follows: 2007 2006 2005 £m £m £mEquities 1,208.0 1,190.3 958.1Bonds 221.2 211.2 163.7Property related funds 259.5 54.0 12.5Active currency management assets 66.3 21.4 -Cash 19.0 58.9 82.6Total fair value of schemes' assets 1,774.0 1,535.8 1,216.9Present value of defined benefit funded (1,971.9) (1,952.0) (1,625.0)obligationDeficit in the scheme - pension liability recognised in the balance sheet (197.9) (416.2) (408.1) Related deferred tax asset (note 18) 59.4 124.9 122.4Net deficit (138.5) (291.3) (285.7) 20 Provisions Restructuring Property provisions Total £m £m £mAt 29 January 2006 53.7 73.5 127.2Charged to the income statement 35.5 34.9 70.4Utilised in period (39.6) (19.2) (58.8)Unwinding of discount - 6.1 6.1At 4 February 2007 49.6 95.3 144.9 Restructuring The restructuring provision includes the costs associated with the brandingexercise noted in the critical accounting policies note. The majority of thecosts are anticipated to be incurred over the first half of the new financialyear, in line with the roll-out plan for this project. The continuing restructuring programme of the distribution network is alsoincluded in this balance. Property provisions Property provisions comprise petrol filling station decommissioning reserve,onerous leases provision and provisions for dilapidations on leased buildings. Decommissioning costs are incurred when the petrol filling station tanks havereached the end of their useful life or when they become redundant. A provisionis recognised on commissioning the petrol filling station for the present valueof costs to be incurred to decommission the petrol tanks. The discount in theprovision is unwound until, at the end of the useful life, the provision issufficient to pay the decommissioning costs. Onerous leases relate to sublet properties. Where the rent receivable on theproperties is less than the rent payable, a provision based on present value ofthe net cost is made to cover the expected shortfall. The lease commitmentsrange from 1 to 66 years. Market conditions have a significant impact and sothe assumptions on future cash flows are reviewed regularly and revisions to theprovision made where necessary. Dilapidation costs are incurred to bring a leased building back to its originalleased condition. Provision is made for these costs, which are typically paid tothe landlord on termination of the lease. 21 Called up share capital Number of shares Share capital Share premium Total millions £m £m £mCurrent yearAt 29 January 2006 2,673 267.3 36.9 304.2Share options exercised 4 0.4 4.6 5.0At 4 February 2007 2,677 267.7 41.5 309.2 Prior yearAt 30 January 2005 2,658 265.8 20.1 285.9Share options exercised 15 1.5 16.8 18.3At 29 January 2006 2,673 267.3 36.9 304.2 The total authorised number of ordinary shares is 4,000m shares (2006: 4,000mshares) with a par value of 10p per share (2006: 10p per share). All issuedshares are fully paid. Potential issues of ordinary shares Certain eligible employees hold options to subscribe for shares in the Companyat prices ranging from 158.0p to 239.3p under the share option schemes approvedby shareholders. Options on 3.0m shares were exercised in the current financialyear. 22 Statement of changes in shareholders' equity Retained earnings and Share Share Merger other capital premium reserve reserves Total £m £m £m £m £mCurrent yearAt 29 January 2006 267.3 36.9 2,578.3 766.1 3,648.6Total recognised income and expense - - - 365.7 365.7Share issues 0.4 4.6 - - 5.0Share option charge - - - 3.0 3.0Deferred tax on options - - - 2.8 2.8Dividends - - - (98.3) (98.3)Sale of treasury shares - - - 0.2 0.2At 4 February 2007 267.7 41.5 2,578.3 1,039.5 3,927.0 Share Share Retained Merger Total capital premium earnings reserve £m £m £m £m £mPrior yearAt 30 January 2005 265.8 20.1 1,141.7 2,578.3 4,005.9Total recognised income and expense - - (278.5) - (278.5)Prior year impact of adoption of IAS 39 - - 3.4 - 3.4Share issues 1.5 16.8 - - 18.3Share option charge - - 0.6 - 0.6Deferred tax on options - - (3.3) - (3.3)Dividends - - (97.8) - (97.8)At 29 January 2006 267.3 36.9 766.1 2,578.3 3,648.6 Included in retained earnings is a deduction of £43.5m (2006: £43.7m) in respectof treasury shares held at balance sheet date. This represents the cost of17,641,448 of the Company's ordinary shares (nominal value of £1.8m). Theseshares are held by a trust using funds provided by the Group and were acquiredto meet obligations under the share option schemes. The costs of funding andadministering the schemes are charged to the profit and loss account of theCompany in the period to which they relate. The market value of the shares at 4February 2007 was £53.1m (2006: £33.6m). The ESOS has waived its rights todividends. 23 Cash flow from operating activities 2007 2006 £m £mProfit/(loss) for the period 247.6 (250.3)Adjustments for:Taxation 121.4 (62.6)Depreciation and amortisation 281.9 256.9Impairment of assets to be disposed - 124.2(Profit)/loss on disposal of (38.5) 9.2property, plant and equipmentNet finance cost (note 4) 54.2 52.2Other non-cash changes 3.0 0.7Share of results of joint ventures - (2.2)after taxationExcess of contributions over (41.6) (35.2)pension service costDecrease in stocks 31.5 25.2(Increase)/decrease in debtors (3.3) 52.2Increase in creditors 36.5 73.5Increase in provisions 11.6 67.2Cash generated from operations 704.3 311.0 24 Analysis of net debt 2007 2006 £m £mCash and cash equivalents (note 14) 135.3 231.1Bank overdrafts (note 17) - (44.2)Cash and cash equivalents per cash flow 91.1 231.1 Interest and cross-currency swaps 19.1 36.4Financial assets (note 11) 19.1 36.4 Bonds (250.7) -Swaps (0.7) -Loans - (250.0)Finance lease obligations (2.4) (2.4)Current financial liabilities (note 17) (253.8) (252.4) Bonds (748.1) (1,013.0)Other unsecured loans (17.3) (4.0)Finance lease obligations (3.2) (5.7)Non-current financial liabilities (note 17) (768.6) (1,022.7) Net debt (772.2) (1,147.6) 25 Share-based payments The Group operates a number of share-based payments schemes; the Executive shareoption scheme, the Sharesave scheme, the Safeway Customer Care Performance ShareOwnership Plan ("CCPSOP") and a Long Term Incentive Plan ("LTIP"). In line withIFRS 2 Share-based payment, the Group has fair valued all grants of equityinstruments and shadow equity instruments after 7 November 2002 which wereunvested as of 1 January 2005. The total charge for the period relating to employee share-based payment planswas £19.6m (2006: £4.0m), of which £3.0m (2006: £0.7m) related to equity-settledshare-based payment transactions and £16.6m (2006: £3.3m) related to the LongTerm Incentive Plan ("LTIP"). After deferred tax, the total charge was £14.6m(2006: £2.3m). The total amount of the liability included in creditors at 4 February 2007 inrespect of the LTIP was £22.0m (2006: £5.4m). No amount was vested at the end ofeither period. 26 Operating lease arrangements Lessee arrangements The Group has outstanding commitments for future minimum lease payments undernon-cancellable operating leases, which fall due as follows: 2007 Property 2007 2006 2006 £m Vehicles, plant and Property Vehicles, plant and equipment £m equipment £m £mWithin one year 27.6 12.1 32.1 5.6More than one year and less than five years 109.8 15.1 121.7 17.8After five years 447.7 2.4 454.8 5.1 585.1 29.6 608.6 28.5 The Group leases various offices, stores and warehouses under non-cancellableoperating lease agreements. The leases have various terms, escalation clausesand renewal rights. The Group also leases plant and machines under non-cancellable operating lease agreements. Lessor arrangements The Group has non-cancellable agreements with tenants and the future minimumlease income is as follows: 2007 2006 £m £mWithin one year 19.0 18.6More than one year and less than 66.6 64.5five yearsAfter five years 120.6 125.3 206.2 208.4 The Group sub-lets buildings of various nature under non-cancellable agreements.The leases have various terms, escalation clauses and renewal rights. 27 Capital and other financial commitments 2007 2006 £m £mContracts placed for future capital 101.5 74.3expenditure not provided in thefinancial statements 28 Post balance sheet events The Directors are proposing a final dividend in respect of the financial periodending 4 February 2007 of 3.375p per share which will absorb an estimated £90.3mof shareholders' funds. Subject to approval at the AGM, it will be paid on 29May 2007 to shareholders who are on the register of members on 27 April 2007. This information is provided by RNS The company news service from the London Stock Exchange

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