Final Results

23rd Mar 2006 07:03

Morrison(Wm.)Supermarkets PLC23 March 2006 23 March 2006 Preliminary results for the 12 months ended 29 January 2006 Operational Summary • Store conversion process and systems integration complete. Morrisons is now one business, operating under one brand • Market share has stabilised following store disposal programme and forms a good platform for future growth • Three year Optimisation Plan finalised Financial Summary • Total turnover £12.1bn, in line with previous year • Profit before tax, Safeway conversion and integration costs and goodwill written off, down from £332.2m to £61.5m • Safeway conversion and integration costs, and goodwill written off, £374.4m • £460.2m proceeds from store disposals, bringing total proceeds to £1.4bn • Net debt reduced to £1.15bn • Proposed final dividend of 3.075p per share, total dividend maintained at 3.7p • Group like-for-like sales for the seven weeks ended 19 March up 3.2% (excluding fuel) Commenting on the results, Sir Ken Morrison, Chairman, said: "The results we are presenting today are the outcome of an extremely challengingyear for Morrisons. However, through this period of great change, we have builtstrong foundations for the company's future as a national retailer. We can lookforward with renewed strength and energy now that we are one company with onefocus - to be the Best Grocer in Town. "The Optimisation Plan, outlined today, lays out the steps we need to take overthe next three years to enable the company to apply and adapt where necessarythe original Morrisons model to the new, larger business. I am confident thatthe plan will quickly deliver significant improvements in performance." END Enquiries MorrisonsBob Stott 020 7638 9571Richard Pennycook Investor RelationsNiall Addison 07764 624701 Media RelationsWm Morrison Supermarkets: Gillian Hall 01274 356804Citigate Dewe Rogerson: Jonathan Clare 020 7638 9571 Simon Rigby Sarah Gestetner There will be an analyst presentation today at 9.30 am, the dial in is +44 207138 0817 (UK), +1 718 354 1171 (USA), the slides will be available on http://www.morrisons.co.uk from 9.30am. Chairman's Statement The year under review developed much as indicated and produced the expecteddisappointing financial result. It did however represent a period of greatchange and some major achievements. • The Safeway retail estate was completely investigated and decisions made about the future of every store. Retained stores were converted and refitted to trade as Morrisons and most of the balance of stores was disposed of. • Distribution has been constantly under review and many improvements have already been made. Plans for the final shape of this function are being developed. • Operational systems have been modified and the company now operates on one single basis with a common product file. Extensive work has been carried out in benchmarking the whole range of our own label products, which has been extended and modified to meet present demands. • Problems with residual stocks identified from Safeway have all been dealt with and will not recur. • The retraining of some 90,000 Safeway staff has been ongoing throughout this period and great progress has been made. They bring with them their experience and expertise, and represent a valuable addition to our team. The team building effort has been substantial and was only made possible by the outstanding contribution of many existing Morrisons staff. • Market share of trade has now stabilised after a great deal of store disposals have been made and forms a good platform for the future. • Morrisons has been transformed into a national operation and much has been learned in the past 12 months. Our financial results for 2005/06 indicate the consequences of a year of greatchange and some difficulty. Whilst turnover was in line with the previousyear, at £12.1bn, our profits before tax and Safeway integration and conversioncosts were down from £332.2m to £61.5m. Additionally, with Safeway integrationand conversion at its peak in the year, the pre tax costs of this activityincreased from £139.2m to £374.4m. We have written off the £103.2m goodwillcreated on the acquisition of Safeway. This arose on the conversion toInternational Financial Reporting Standards and the Board considers, in view ofthe Group's financial performance and the likelihood that profit recovery willtake time, that it is appropriate to write off this item. Despite the poorperformance, our net debt reduced to £1.15bn, with proceeds from Safeway storedisposals contributing to the costs of converting the stores that we haveretained. The Board concluded that we should keep our total dividend at theprevious year's level of 3.7p per share, meaning that a final dividend isproposed of 3.075p per share. Whilst this is uncovered in the year, it reflectsthe Board's confidence in future earnings recovery. We have been fortunate to secure the services of Brian Flanagan, Paul Manduca,Nigel Robertson and Susan Murray as Non-Executive Directors. I am pleased toconfirm that they have already contributed significantly to the work of theBoard through their efforts on the various committees. Other changes during the year included the appointment of Bob Stott as ChiefExecutive Officer in March and David Jones, an existing Non-Executive, as DeputyChairman. Richard Pennycook joined the company as Group Finance Director in October with abrief to overhaul and strengthen the Company's financial administration. He hasbeen responsible for the co-ordination of the Board's activities in developingan optimisation plan for profit recovery over the next three years. In the early development of this plan it became apparent that this programmewould take some time to complete and was likely to extend beyond Bob Stott'sretirement date. The Board concluded that in this circumstance it would beprudent to commence the search for a successor for him. Egon Zehnder areconducting the search and good progress is being made. In the meantime, Bobremains totally committed to the business and the job in hand - as he has beenfor all the 33 years I have been fortunate enough to know him. I am grateful to all colleagues for their strenuous efforts in difficultcircumstances. In the interest of good team building, new colleagues fromSafeway who accepted Morrisons terms and conditions qualify for profit sharealongside their longer serving colleagues. In addition we are pleased toannounce that a new Save As You Earn scheme, open to all colleagues after aqualifying period, will be launched on 27 March 2006. The company made good progress during the year in completing the Safewayconversion and integration. The outlook remains highly competitive but I amconfident that in our optimisation plan we have a clear route forward that willenable us to deliver an improvement in like for like sales and underlyingtrading performance in 2006/07. At the date of this report, the Office of Fair Trading is considering a referralof the grocery market to the Competition Commission. Morrisons welcomes strongcompetition as good for the consumer and good for business, and we have writtento the OFT to suggest a number of ways that the competitive landscape can beimproved. We believe this can be achieved without the cost that a full marketreference would incur. Chief Executive's Operating Review The year under review has been one of high activity for many of our people andthe pace of change was intense. Towards the end of the period, as ourconversion, integration and disposal programmes came to a conclusion; thecoherent shape for the business that we had planned became clear. This reviewwill focus on much of the activity in the year, but it is perhaps helpful tobegin with a summary of how the business looked at the end of the year. Business profile By any measure, the Morrisons that has emerged from the acquisition of Safewayis a substantial business. With £12.1bn of turnover, we are the UK's fourthbiggest retailer, and with 11.8% grocery market share we feed approximately onein nine of the UK population. Our trade is now truly national, and at 29 January2006 we operated 378 Morrisons stores, with 10.6m square feet of retail space.Some 9m customers per week pass through our doors, and they are served by123,000 colleagues throughout the business. We also control much of the mostimportant elements of our fresh food supply chain, through our abattoirs,bakeries, fresh food processing facilities and fruit and vegetable packingplants. With these activities, we are a "top 5" UK food processor. Morrisons hasalways maintained a prudent balance sheet, and this is illustrated by the factthat 92% of our store space is freehold or long leasehold, and the £6.6bn ofproperty on our balance sheet at 29 January 2006 makes us a "top 10" UK propertyowner. All of these statistics underline the scale of our new business, but do notactually say anything about what we want to be. Our vision is simple and - webelieve - relevant to our customers. It is to be the Best Grocer in Town. Trading Review Sales Whilst total group sales (including VAT) were level with the prior year at£13.1bn, the composition changed substantially. The process of disposing ofSafeway stores that did not fit the Morrisons model resulted in stores with atotal turnover of some £544m in 2005/06, being sold. This was compensatedsomewhat by increased sales through former Safeway stores that were converted toMorrisons. Additionally, fuel sales increased significantly as a result of therise in oil prices and increased volumes. New/Closed/£m Core Converted Divested Stores 05/06 04/05 Morrisons Stores Total Total Sale of goods in stores 4,655 4,811 1,073 10,540 10,940Fuel 1,111 1,225 130 2,516 2,052Total sales inc. VAT 5,766 6,036 1,203 13,056 12,992Sales per square foot (£) 20.03 17.33 12.44 17.68 15.46 -inc/(dec) on prior year (3.4)% 13.3% (2.4)% 7.7% (9.3)%Customer numbers (m) 186.5 233.7 63.4 483.6 519.7 -inc/(dc) on prior year (1.8)% 12.00% (59.8)% (12.9)% (9.9)%Customer spend (£) 24.96 20.58 16.94 21.79 19.69 -inc/(dec) on prior year (1.6)% (3.0)% 12.2% 4.3% (6.9)%Like for like sales (exc fuel) % (3.4)% 8.9% - 2.4% 10.4% Within turnover, important indicators of performance are customer numbers,average basket size and like for like store sales performance. Of mostrelevance to the continuing Group are the figures for those stores operated byMorrisons prior to the Safeway acquisition and still owned by the Group ("coreMorrisons"), and the post conversion figures for Safeway stores converted to theMorrisons format ("converted stores"). Core Morrisons stores were impacted by the competitive effect of having todispose of 50 large Safeway stores in the same catchment as the equivalent coreMorrisons store. These disposals were required by the Office of Fair Trading aspart of their clearance of the Safeway acquisition. As these stores wereacquired by competitors stronger than Safeway, there was an inevitable impact onthe neighbouring core Morrisons store. In addition, customers were hit, duringthe year, by the effect of oil price and council tax rises constraining theirspending power. For these reasons, core Morrisons saw like for like sales,(excluding fuel), decline by 3.4% in the year, with customer spending down 1.6%. Converted stores responded well to the removal of Safeway's weak trading formatand replacement with the proven, value driven, Morrisons model. The initialsales uplifts were encouraging, and the overall like for like increase of 8.9%(excluding fuel) in the year provides a solid platform for further growth overthe coming years. This was evidenced by performance of the small number ofstores that had been converted for more than one year by the end of thefinancial period. This population of stores was exhibiting 3.8% second yeargrowth (excluding fuel). Profit conversion 2005/06 2004/05 £m % £m %Total turnover (ex. VAT) 12,114.8 12,103.7Other operating income 18.5 18.3Raw materials and consumables (9,155.5) (9,110.3)Gross profit 2,977.8 24.6 3,011.7 24.9Staff costs (1,630.8) (13.5) (1,536.9) (12.7)Depreciation (256.9) (2.1) (259.2) (2.1)Other costs (978.6) (8.1) (820.2) (6.8)Operating profit before Safewayintegration and conversion costs 111.5 0.9 395.4 3.3 The Group's gross profit margin decreased marginally in the year, reflecting theincreased mix of fuel sales in the total turnover figure. This was a drag onmargin - had the sales mix remained the same, margin would have been 0.8%higher. There were positive benefits of consolidated buying terms from thecombined business and the beneficial effect of putting more volume through ourvertically integrated structure. Staff costs rose by £94m, despite the divestment of stores and the run-down ofSafeway head office facilities. This reflects, in part, investment in service inthe stores, where the Morrisons operating model has a higher ratio of staff tocustomers than Safeway. Additionally, it reflects increases in distribution andmanufacturing staff to service the new business. Other costs increased from £820.2m to £978.6m, as new manufacturing anddistribution facilities came on stream and we felt the impact throughout thebusiness of the increased price of fuel. The additional distribution costs amounted to £75m and increased fuel and energycosts to £35m. Conversion programme 160 stores were converted from Safeway to Morrisons in the year, bringing thetotal for the programme to 220. Despite the wider difficulties experienced bythe Group, the execution of this programme was flawless and reflects greatcredit on the numerous colleagues involved. Each conversion was thoroughlydone, with the stores remodelled to provide greater focus on fresh foods, thepast under-maintenance of the estate rectified, systems and processes convertedto Morrisons, the store signage changed and all colleagues trained in theMorrisons way. The total cost of the programme was £623.4m, of which £467.4m was spent in theyear - £320.4m of this was capitalised and £147.0m shown as exceptional Safewayconversion costs. In many cases, the stores conversion programme has brought a new grocer to town.The majority of past Safeway customers have converted, with us, to Morrisons,although inevitably some have chosen to go elsewhere. Overall, however, the15.8% increase in customer numbers since conversion illustrates that customersare trying us, and liking what they find. It was to be expected that our competitors would respond to the looming threatof Morrisons' arrival in town as the conversion programme progressed. Mostconverted stores opened having to compete with competitors offering deeptactical discounts in the weeks up to and following conversion - typically a £10discount on a £40 shop, or an £8 discount on a £30 spend. The converted storesgrew despite the intensity of the competition, and it is our approach to win andretain customers for the long term through great in-store service and theoverall strength of our offer. Divestment programme Store Disposals Summary£m 2005/06 2004/05 TotalTotal proceeds 460.2 903.0 1,363.2Book value disposed of 433.4 903.4 1,372.8Square footage 1.7 1.4 3.1Turnover in period 543.6 2,143.5 2,687.1Annual rent obligation 9.7 8.4 18.1 127 stores were sold or closed in the period, bringing the total since theSafeway acquisition to 241. These stores either did not fit the Morrisonstrading model, or were required to be sold by the OFT. The disposals includedthe Safeway stores in the Channel Islands, Northern Ireland and the Isle of Man,although we retained the successful store in Gibraltar. Also disposed of wasour share in the convenience store/ forecourt joint venture with BP in 61locations. Store development programme We opened 7 new stores, at Hamilton, Auchinlea, Cardonald, Paisley, Livingston,Strood and Gloucester. It was particularly pleasing, given the presumption bysome that Morrisons is a "northern" brand, that the 36,000 square foot storeopened at Strood in Kent in October saw our best ever opening week salesperformance. Looking ahead, we will continue to focus closely on optimising our existingbusiness in the coming year, and only expect to open four new stores in 2006 butprobably twice this number the following year. Support infrastructure We strengthened and expanded both our manufacturing and distributioninfrastructures in the period. In manufacturing, we expanded our in house bakingcapacity through the acquisition, in April of an 80% stake in Rathbones and ourabattoir operation was expanded in early 2005 through the acquisition of asecond facility, at Turriff in Scotland. Our two abattoirs are now processingthe bulk of our current fresh meat requirements. We also extended our fruitpacking facilities at Thrapston in Northamptonshire and opened a new vegetablepacking house nearby at Rushden. In distribution, we opened a new, dedicated Regional Distribution Centre atLatimer Park, Kettering, in October. With 702,000 square feet and at a cost of£67m, this centre will serve approximately 70 stores in the Midlands and theSouth. We also announced, during the second half of the year, our intention toclose three ex-Safeway depots that were poorly located, inefficient and surplusto requirements. The depots, in Bristol, Aylesford and Warrington are all nowclosed. Exceptional costs of £74m were incurred in closing these facilities, butas a result an annual net saving of £30m will benefit our cost base in thecoming year. The Safeway head office facility at Hayes in Middlesex was closed in Decemberfollowing the transfer of all IT processing to Yorkshire. The site was sold for£22m. Safeway's outsourced accounting facility at Crossgate, South Shields, wasbrought in house in September, in order to achieve tighter control of accountingfor Safeway's residual business. Staff numbers in this site have beenconsiderably reduced, but it will continue to operate payroll and certainaccounting services. Morrisons new head office facility in Bradford remains oncourse to open in spring 2006, and will house approximately 1,600 colleaguescurrently spread in a number of locations. Colleagues To be the best grocer in town, we need to be the best shopkeepers in town, andMorrisons has always prided itself on the high standards of in-store service weprovide to our customers. We were delighted, for our colleagues, to win theGrocer Award once again for best customer service, as well as that foravailability, in a year of great change and some turmoil. Our colleague numbers reduced over the year, as a result of the store disposalsprogramme and, latterly, the depot closures. These reductions more than offsetthe increased numbers of colleagues in converted stores, where the Morrisonsretail model required more labour in store than was the case in Safeway. Some ofthis relates to higher levels of food preparation in store, for example ourfreshly made sandwiches and our unique butchery operation. Some also reflectsthe way that Safeway were attempting to cut costs at the expense of service, forexample by restricting the number of tills open to serve customers. As we move forward, it is vital that we become "one Morrisons". The Group ismade up of Morrison colleagues who have been with us many years, Safewaycolleagues who are equally long serving and others who are new to the business.More than 90,000 of our colleagues have been with Morrisons less than two years. They need to fully understand the Morrisons way, whilst those of us who havebeen in the business a long time need to learn from our newer colleagues. Theprocess of truly becoming one team will take time, but with common goals andvalues, clearly articulated, I am confident that this will be achieved. The market Publicly available market share data shows that Morrisons share of the grocerymarket increased from 6.4% in January 2004 to 11.8% in January 2006, as a resultmainly of the new space added by converting Safeway stores. As a truly nationalplayer in the market for the first time, our brand exposure has increasedsignificantly, with the equivalent of one third of the UK population visitingour stores in any four week period. With the conversion, integration anddisposal programmes complete, and as we get back to business as usual, theopportunity for us to serve these customers better, and to sell more, issignificant. Already, the same market research shows that customers regard us as"best for value", through our combination of good prices, great promotions andconsistent high quality. UK consumers benefit from one of the best and most competitive grocery marketsin the world. We respect our competitors, and recognise that they have moved onin the two years whilst we have been inwardly focused on absorbing Safeway. OurOptimisation Plan, now under way, will see us take the fight to our rivals, andwe relish the challenge. Optimisation plan Having virtually completed the process of converting or disposing of Safewaystores, moving onto one set of systems and operating with a single head officeteam, our focus now turns to getting the best out of our new business. Ouroptimisation plan, over the next three years, lays out a clear road map forprofit recovery. The objectives are simple - apply the Morrisons philosophy,which worked so well over many years, to the new, bigger business, and adapt itwhere we have to, to reflect things that have changed. There is no simple fix in the plan - it is about getting back to the day job,and delivering improvement store by store and line by line. Morrisons has becomea new business, with 220 recently converted stores and 5.5 million new customerseach week, being served by some 90,000 colleagues new to Morrisons. Much of whatwe have to do is to deliver, for customers, as we always have done, but we alsoneed to recognise that our store portfolio is more diverse, in both space termsand geography, than it was. Morrisons has always been able to adapt successfullyto new locations and geographic markets - the key to the optimisation plan willbe more, and faster, adaptation than before. Our vision is to be the best grocer in town. We will get there by being customerfocused, sales led, value driven, with a trading mentality and great attentionto the detail of shopkeeping in our stores. Key elements of the optimisation plan are as follows: • Focus on getting the best out of the enlarged business • Sales led, value driven programme • Maintain successful customer focussed trading mentality • Target of 90bps margin improvement over three years • Save 6 million staff hours in store, from natural staff turnover this year • Save £30m on distribution and £30m on central costs I am confident that this will be achieved. Financial Review Overview The Chairman's statement and Chief Executive's operating review describe theoverall operating performance of the Group. This review summarises other aspectsof the Group's financial performance, including financing costs, taxation,dividends and pensions and also comments on key financial policies andprocedures. Conversion to International Financial Reporting Standards (IFRS) This is the first annual report required to be prepared under IFRS. The Group'sunaudited interim results, mailed to shareholders in November 2005, includeddetails of the impact of the change to IFRS reporting on the results for boththe year ended 30 January 2005 and the half year to 24 July 2005. A copy ofthat announcement is available in the Investor Relations section of the Group'sweb site. As permitted by IAS 39 Financial Instruments: Recognition and Measurement, theGroup elected not to adopt to re-measure financial assets and liabilities until30 January 2005. The Group has also decided to keep its published holdingcompany balance sheet under UK GAAP. The impact of IFRS is not material to the operating result. The main impactsare on pensions, deferred tax, share-based payments, financial instruments andthe classification of certain balance sheet items. Finance income and costs Net costs decreased by £13.2m to £52.2m. The Group generated cash, throughtrading and store disposals, resulting in drawings under the Group's revolvingcredit facility being on average £260m lower than in the prior year. Inaddition, interest capitalised was higher in the year, at £11.8m (2005: £6.4m),due to an increased number of new store and other infrastructure projects takingplace in the year. The impact of marking certain financial instruments to fair value, required byIFRS, resulted in a net, non-cash, charge of £6.2m included in the above total. Safeway conversion and integration costs As shown in the income statement, the Group recorded costs associated with theconversion and integration of Safeway of £374.4m in the year, bringing totalcosts expensed in the two years since acquisition to £513.6m. The largest costin the period of £147.0m, shown in note 4, related to the conversion of storesfrom Safeway to Morrisons. These costs, comprising items such as staff uniforms,trolleys and remedial maintenance, were in addition to costs capitalised of£320.4m for items such as refrigeration plant and till systems. A total of 220stores were converted, at an average cost per store of £2.8m, £418.9m of whichwas capitalised and £204.5m charged in the income statement. Other integration costs included redundancies associated with the wind-down ofthe former Safeway head office and, late in the period, the announced closure ofthree Safeway depots with the loss of approximately 2,500 jobs. Additionally, animpairment of the closed depots was taken, to reflect their anticipatedrealisable values. An impairment of £103.2m, providing for the full amount ofgoodwill arising on the Safeway acquisition, has been booked within these costs.This is commented on below. Taxation - effective rate 2006 Profit 2006 2006 2005 Profit 2005 2005 £m Tax Tax £m Tax Tax £m @30% £m @30%(Loss)/profit on ordinary activities (312.9) 93.9 30.0 193.0 (57.9) 30.0multiplied by rate of corporation tax inthe UK of 30% (2005: 30%)Goodwill impaired (31.0) (9.9)Expenses and depreciation not deductible (32.8) (10.5) (53.6) 27.8Divestment profits covered by tax 32.5 10.4 23.5 (12.2)reliefsTotal taxation (312.9) 62.6 20.0 193.0 (88.0) 45.6 Split as follows:Pre-Safeway integration costs 61.5 (15.6) 25.4 332.2 (112.4) 33.8Safeway integration costs (374.4) 78.2 20.9 (139.2) 24.4 17.5Total taxation (312.9) 62.6 20.0 193.0 (88.0) 45.6 Tax is a credit as a result of relief available against the loss made in theyear. This will result in recovery of tax paid in prior years. The effective taxrate differs from the standard UK rate of 30% because: • Goodwill impaired is not allowable for tax. • Certain items of expenditure and depreciation are not allowable as deductions for tax. • Divestment profits in 2006 are sheltered by capital losses and roll over relief. Safeway conversion and integration costs are deductible for tax purposes apartfrom the impairment of goodwill and the Safeway brand and some smaller sundryamounts. This gives rise to a 20.9% tax credit on these costs (2005:17.5%). Profit before taxation and Safeway integration and conversion costs As highlighted in note 3, in the previous year the Group made certain amendmentsto its accounting estimates which resulted in operating profits being £89mhigher than they would otherwise have been. No such amendments were made in theyear under review. The Group operates a profit share scheme which is open to all employees subjectto certain qualification criteria. Given the difficulty in predicting futureprofitability of the Group when the Safeway acquisition was announced, Morrisonsqualifying employees were guaranteed that for two years (ending 29 January 2006)their profit share would be maintained at the level paid in the year ended 1February 2004. Additionally, as an incentive to Safeway employees to transfer toMorrisons terms and conditions, employees who did transfer were offered the samearrangements. As a result, profit share amounting to £33.4m was charged in theyear (2005: £19.7m) - a level significantly higher than would have been the caseif no guarantee was in place. No guarantee applies to future years, when profitshare will be limited once again to 5% of pre tax profits. Included in operating profits are certain payments to KPMG, the auditors, fornon-audit work. The ratio of these payments to the audit fee is unusually high,reflecting assistance given by them in the year to the Board in reviewing itsfinancial forecasting procedures. Such assistance is permitted, within the APB'sethical standards, in exceptional circumstances. It is the intention of theBoard, through strengthening of the Group's finance function, to ensure thatnon-audit fees paid to the auditors return to more normal levels. A formalpolicy setting out appropriate use of the auditors for such work has beenadopted by the Audit Committee. Earnings per share Basic earnings per share moved from earnings of 4.14p last year to a loss of9.46p this year. This is due to the following factors: Pence per shareDecrease in profit for the financial year before Safeway conversion and integration (7.15)costsIncrease in Safeway conversion and integration costs (6.85)Impact of additional shares in issue 0.40Overall decrease in basic earnings per share (13.60) The effect of the exercise of share options and conversion of preference sharesduring the year would be to dilute the basic loss per share. Therefore, inaccordance with IAS 33 Earnings per Share, this has been ignored whencalculating the diluted earnings per share. Shareholders' funds and dividends Shareholders' funds decreased by £357.3m, from £4,005.9m at 30 January 2005 to£3,648.6m at 29 January 2006. This is due to the following factors: £mRetained loss for the financial year (250.3)Defined benefit pension scheme actuarial loss net of tax (28.2)Proceeds on the issue of shares 18.3Dividends paid during the year (97.8)Other factors 0.7Overall decrease in shareholders' funds during the period (357.3) The Group's pension schemes' deficits increased in the year, despite goodperformance of the schemes' assets reflecting the general improvement in thestockmarket during the period. The gross actual return exceeded the expectedreturn by over £165.3 million. This benefit was however more than offset bychanges in financial assumptions, primarily a lower rate used to discount thescheme's liabilities, resulting in an increase in the gross pension schemeliability of £205.6m In accordance with IAS 10 Events after the balance sheet date and the amended UKCompanies Act, the proposed final dividend for 2006 has not been reflected inthese financial statements. The dividends charged against reserves of £97.8million represent the final dividend for the year to 30 January 2005 and theinterim dividend for the year to 29 January 2006. In view of the financial performance of the Group during the current financialyear, the Directors do not recommend an increase in the final dividend thisyear. The Directors therefore propose to maintain the final dividend at 3.075pence per ordinary share. Subject to approval at the forthcoming Annual GeneralMeeting the dividend will be paid on 30 May 2006 to shareholders on the registeron 28 April 2006 and will be charged to shareholders funds next year. A full reconciliation of the movements in shareholders' funds is given in thenotes to the financial statements. Cash flow, capital expenditure and net debt Despite the loss for the financial period, the Group generated cash from itsoperations and from the Safeway stores disposal programme in the year. Cashgenerated from operations was £311.0m after adding back non-cash depreciation of£256.9m and working capital benefits of £218.1m. Cash realised from the sale ofstores, and subsidiaries was £460.2m. The Group concluded the programme of converting Safeway stores to Morrisons inthe year, opened 7 new Morrisons stores and also expanded its distribution andmanufacturing infrastructures to support the enlarged business. 160 stores wereconverted in the year, at a capital cost of £320.4m. This programme was morethan a change of signage and brand labels; it also addressed maintenance andlayout issues to bring the stores to the high standards of the Morrisons estate.The construction of the new stores, a new 702,000 square foot distributionfacility in the Midlands, the new head office building and the acquisition ofnew baking facilities were the principal other investments, totalling £246.4m.Additionally, investment took place in assets due to open in the future,including new stores and the Group's new head office in Bradford. A total of£190.3m included in fixed assets at the balance sheet date was for assets in thecourse of construction. The Group's net debt reduced, marginally, to £1.15bn. Impairment judgements concerning assets The carrying values of assets are required to be tested annually for impairment,and the Group undertakes this in the second half of the year. If these testsindicate that the value in use (as measured by discounted cash flows) or themarket values of individual assets, or appropriate groups of assets, fall belowtheir carrying value then an impairment provision is required. These tests and the judgements required in performing them and drawingconclusions are both complex and, because of the high carrying values of theGroup's assets, highly significant to the financial statements. The Directorsconsider all relevant factors, both internal and external, in order to determineif there are circumstances or events that indicate that an impairment may exist. Following the acquisition of Safeway Limited, the Group has undertaken asignificant disposal programme which has provided support for the fair valuesascribed to the assets acquired. Approximately 20 stores remain to be sold, andthe Directors are confident that the carrying value of these will be met bydisposal proceeds. The Directors have considered carefully the current trading and operatingperformance of the Group and its future prospects. Plans are in place to enhancetrading and operational efficiency in the coming three years, and using the cashflows anticipated from this they have concluded that the individual carryingvalues of stores and other opera ting assets are supportable either by value inuse or market values. They have also concluded that the overall value ofgoodwill created on the Safeway acquisition, of £103.2m, is not supportable andshould therefore be written off. The Directors intend to keep this issue under review until such time as theGroup has returned to an appropriate level of reported profit. Treasury management Part of the change programme for the finance function is the creation of atreasury management function. A Head of Treasury and Taxation, and a TreasuryManager, have been recruited and will establish suitable treasury practices andpolicies that are appropriate for the governance of a listed company of thissize and nature. Financial instruments and financial risks associated with debt The Group manages its borrowings and exposure to interest and foreign currencyon instruments issued by using derivative financial instruments. The Groupfinances its operations with a combination of bank loans and bonds. The foreign currency exposure is always covered on debt denominated in a foreigncurrency and during the year the interest exposure has been managed withinterest rate swaps converting a portion of the Group's fixed rate interest tofloating. These swaps were in existence at the time of the Safeway acquisitionand relate to the risk associated with the bonds acquired through theacquisition of that group. Credit rating The Group's bonds, issued by Safeway Ltd, are publicly traded and rated byMoody's who downgraded their rating from Baa1 to Baa2 in January 2006, andmaintain the rating on watch. Defined benefit pension scheme liability The consolidated defined benefit pension scheme deficit increased by £8.1m from£408.1m at 30 January 2005 to £416.2m at 29 January 2006. This increase can beanalysed as follows: £m Asset Liability TotalAt 30 January 2005 1,216.9 (1,625.0) (408.1)Actual return on assets 248.5 - 248.5Interest and service cost charges - (143.1) (143.1)Actuarial loss - (205.6) (205.6)Contributions paid into the scheme 105.0 (12.9) 92.1Benefits paid (34.6) 34.6 -At 29 January 2006 1,535.8 (1,952.0) (416.2) The actual return on assets exceeded the expected return by £165.3m reflectingthe improvement in the stockmarket during the year and the fact that 78% ofscheme assets were held in equities. The improvement in the asset valuation wasmore than offset by the actuarial loss in the year of £205.6 million, mainly asa result of the rate applied to discount the pension scheme liabilitiesdecreasing by 0.5%. In accordance with advice received from the Group's actuaries, the directorshave approved the adoption of the PA92 C2020 mortality table for the purposes ofcalculating the pension scheme's liability that has been included in thefinancial statements at the beginning and the end of the period. The Directorsconsider that, statistically, this table gives the best indication of the lifeexpectancy of pension scheme members taking into account their employmenthistory, lifestyle and job location. In accordance with annual practices, the status and ongoing funding of theGroup's defined benefit schemes will be subject to further review in 2006/07. Consolidated income statement 2006 2006 2006 2005 2005 2005 Note Before Safeway Safeway Total Before Safeway Total integration & integration & Safeway integration conversion conversion £m integration & £m costs costs & conversion conversion costs £m £m costs £m £mTurnover 1 12,114.8 - 12,114.8 12,103.7 - 12,103.7Other operating income 18.5 - 18.5 18.3 - 18.3Raw materials and consumables (9,155.5) - (9,155.5) (9,110.3) - (9,110.3)Gross profit 2,977.8 - 2,977.8 3,011.7 - 3,011.7 Staff costs 2 (1,630.8) (86.1) (1,716.9) (1,536.9) (31.4) (1,568.3)Depreciation 3 (256.9) - (256.9) (259.2) - (259.2)Impairment and other asset 4 - (124.2) (124.2) - (40.0) (40.0)write offsProfit/(loss) on sale of 7.5 (16.7) (9.2) 14.5 (14.9) (0.4)property, plant and equipmentOther operating expenses 4 (986.1) (147.4) (1,133.5) (834.7) (52.9) (887.6)Operating profit /(loss) 111.5 (374.4) (262.9) 395.4 (139.2) 256.2Finance costs 5 (73.2) - (73.2) (86.5) - (86.5)Finance income 5 21.0 - 21.0 21.1 - 21.1Share of post-tax profits from 2.2 - 2.2 2.2 - 2.2BP joint venture 12Profit /(loss) before taxation 3 61.5 (374.4) (312.9) 332.2 (139.2) 193.0Taxation 6 (15.6) 78.2 62.6 (112.4) 24.4 (88.0)Profit /(loss) for the 45.9 (296.2) (250.3) 219.8 (114.8) 105.0financial period Earnings/(loss) per share 7(pence) - Basic 1.73 (9.46) 8.66 4.14 - Diluted 1.73 (9.46) 8.62 4.12 Ordinary dividends (pence pershare)Interim - paid 0.625 0.625Final - proposed 3.075 - - paid - 3.075 Consolidated statement of recognised income and expense (SORIE) 2006 2005 Note £m £m(Loss)/profit for the financial period (250.3) 105.0Actuarial loss arising in the pension scheme (net of 28 (28.2) (56.5)taxation)Total recognised income and expense for the financial (278.5) 48.5periodPrior year impact on retained earnings of first time 3.4 -adoption of IAS 39Attributable to equity shareholders (275.1) 48.5 Consolidated balance sheet at 29 January 2006 2005 Note £m £mAssetsNon-current assetsGoodwill and other intangibles 8 - 103.2Property, plant and equipment 9 6,143.9 5,708.1Lease prepayments 10 217.8 230.5Investment property 11 225.3 218.5Investment in Joint Venture 12 - 78.4Financial assets 19 36.4 37.0 6,623.4 6,375.7Current assetsStocks 14 399.4 424.6Debtors 15 157.4 224.2Cash and cash equivalents 16 135.3 93.5 692.1 742.3Non-current assets classified as held for sale 13 128.6 582.5 820.7 1,324.8LiabilitiesCurrent liabilitiesCreditors 17 (1,471.2) (1,437.2)Other financial liabilities 18 (296.6) (274.7)Current tax liabilities (39.0) (0.5) (1,806.8) (1,712.4)Non-current liabilitiesOther financial liabilities 18 (1,022.7) (1,016.7)Deferred tax liabilities 21 (422.6) (501.6)Pension liabilities 28 (416.2) (408.1)Provisions 20 (127.2) (55.8) (1,988.7) (1,982.2) Net assets 3,648.6 4,005.9 Shareholders' equityCalled up share capital 22 267.3 265.8Share premium 22 36.9 20.1Merger reserve 24 2,578.3 2,578.3Retained earnings 24 766.1 1,141.7Total equity 3,648.6 4,005.9 Consolidated cash flow statement 2006 2005 Note £m £mCash flow from operating activities Cash generated from operations 25 311.0 448.0Interest paid (74.9) (96.9)Taxation received / (paid) 33.3 (171.5)Net cash inflow from operating activities 269.4 179.6Cash flows from investing activities Interest received 23.2 21.1Acquisition of subsidiaries (net of cash acquired) 27 (15.6) (831.4)Proceeds on the sale of BP joint venture assets 27 87.0 -Proceeds from the sale of subsidiaries 27 49.1 -Proceeds from sale of property, plant and equipment 324.1 903.0Purchase of property, plant and equipment (635.4) (428.3)Net cash outflow from investing activities (167.6) (335.6)Cash flows from financing activities Net proceeds from issue of ordinary shares 18.3 3.8Treasury shares - 12.0Finance lease principal payments (2.6) (3.4)New borrowings 100.0 1,000.0Repayment of borrowings - (1,003.9)Dividends paid to shareholders (97.8) (87.7)Net cash inflow/(outflow) from financing activities 17.9 (79.2)Net increase/(decrease) in cash and cash equivalents 119.7 (235.2)Cash and cash equivalents at start of period (28.6) 206.6Cash and cash equivalents at end of period 16 91.1 (28.6) Reconciliation of net cash flow to movement in net debt in the period 2006 2005 £m £m NoteNet increase/(decrease) in cash and cash equivalents 119.7 (235.2)Cash outflow from decrease in debt and lease financing 2.6 1,007.3Cash inflow from increase in loans (100.0) (1,000.0)Other non cash movements (9.0) 11.6Loans and finance leases acquired with subsidiary - (1,149.8)Opening net (debt)/ funds (1,160.9) 205.2Closing net (debt) 26 (1,147.6) (1,160.9) Basis of preparation The financial information set out herein does not constitute the company'sstatutory accounts for the years ended 29 January 2006 or 30 January 2005 but isderived from the 2006 accounts. Statutory accounts for 2005, which wereprepared under UK GAAP, have been delivered to the registrar of companies, andthose for 2006, prepared under International Accounting Standards adopted by theEU, will be delivered in due course. The auditors have reported on thoseaccounts; their reports were unqualified, did not include references to anymatters to which the auditors drew attention by way of emphasis withoutqualifying their reports and did not contain statements under section 237(2) or(3) of the Companies Act 1985. The Group has revised its accounting policies where applicable to conform toIFRS and these are set out below. These policies have been applied consistentlyto all the years presented and in preparing the opening balance sheet at 2February 2004 for the purpose of transition to IFRS, except for those relatingto financial instruments. Significant accounting policies The Directors consider the following to be the most important accountingpolicies in the context of the Group's operations: Turnover Turnover represents sales to customers excluding value added tax, intra-grouptransactions, staff discounts, coupons and the free element of multi-savetransactions. Supplier income Supplier incentives, rebates and discounts are recognised on an accruals basisbased on the expected entitlement which has been earned up to the balance sheetdate for each relevant supplier contract. 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. Since the Group's business operations are conducted almost exclusively in theUK, a geographical segment report is not required. 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. 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 Property, plant and equipment are carried at cost less accumulated depreciation.Costs include directly attributable costs. Annual reviews are made of estimateduseful lives and material residual values. Depreciation rates used to write off cost less residual value are straight line: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 other intangible assets, property, plant and equipment individual assets arereviewed for indications of impairment when events or changes in circumstancesindicate that the carrying amount may not be recoverable. If there areindications then a test is performed on the asset affected to assess itsrecoverable amount against carrying value. An asset impaired is written down to the higher of value in use or its fairvalue less costs to sell. Stocks Stocks are valued at the lower of cost and net realisable value. Cost comprisespurchase price, import duties, rebates and other non-recoverable taxes. Stocksare 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 re-measurement. Thedepreciation of the asset ceases on reclassification. Assets are reclassifiedfrom non-current assets held for sale when the above criteria cease to be met.Additional depreciation is charged where appropriate. 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. 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. Deferred and current taxation The charge for taxation is based on the profit or loss for the period and takesinto account taxation deferred because of temporary differences between thetreatment of certain items for taxation and for accounting purposes. Fullprovision is made for the tax effects of these differences. However, deferredtaxation is not accounted for if it arises from the initial recognition of anasset or liability in a transaction other than a business combination that atthe time of the transaction affects neither accounting nor taxable profit norloss. Deferred taxation is measured using tax rates that have been enacted orsubstantially enacted by the balance sheet date. The carrying amount of deferred tax assets is reviewed at each balance sheetdate to ensure that sufficient taxable profits will be available to allow theasset to be recovered. Deferred tax is charged or credited in the income statement except when itrelates to items charged directly to equity in which case the deferred tax isalso dealt with in equity. Provisions Provisions are created where the Group has a present obligation (legal orconstructive) as a result of a past event, where it is probable that it willresult in an outflow from the Group, and where it can be reliably measured. Thenature of these provisions is: a) Property provisions: Provisions made in respect of individualproperties where there are obligations for onerous contracts, dilapidations andcertain decommissioning obligations for petrol filling stations. The amountsprovided are based on the Group's best estimate of the committed net presentcash flows. b) Restructuring provisions: Provisions are established in respect ofannounced restructuring programmes. The provision includes costs of severanceto the affected employees and of property closure and other costs. Provisionsnot utilised will be reviewed in future years. 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 re-translation 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 employee's final compensation package. The Group operates two defined benefit retirement schemes which are funded bycontributions from the group and members. The defined benefit scheme is 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. The operating andfinancing costs of the scheme are recognised 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 and employees to the defined contribution scheme arecharged to the income statement as they arise. Share-based payments The Group issues equity share-based payments to certain employees. The fairvalue of the employee services received is expensed on a straight line basisover the vesting period, based on the Group's estimate of share options thatwill eventually vest. 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. 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 cost and arere-measured at fair value for reporting purposes. 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. Safeway integration and conversion costs The integration and conversion of the Safeway stores and associated distributionand administration processes has given rise to significant incremental one-offcosts. The Group views restructuring costs as costs associated with investmentin the future performance of the business and not part of the group's tradingperformance. These costs have a material impact on the absolute amount of, andtrend in the Group Operating profit. These restructuring costs are shown in aseparate column on the face of the income statement. Any provisions relating tothese costs are disclosed within "Provisions". 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 within "Other operating 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 ESOS are charged to theincome statement. The shares are ignored for the purpose of calculating theGroup's earnings per share.Notes to the financial statements 1 Turnover 2006 2005 £m £mSale of goods in stores 10,540.5 10,939.7Fuel 2,515.7 2,051.9Total sales including VAT 13,056.2 12,991.6VAT (1,026.6) (995.3)Third party sales by subsidiaries 33.1 41.4Income from concessions 48.9 53.6Other 3.2 12.4Total turnover 12,114.8 12,103.7 2 Employees and directors Employee benefit expense for the Group during the period 2006 2005 £m £mWages and salaries 1,524.1 1,389.6Profit related pay 33.4 19.7Social security costs 96.0 83.5Share-based payment costs 4.0 2.6Pension costs (note 28) 58.9 58.7Other staff costs 0.5 14.2 1,716.9 1,568.3 Average monthly number of people (including Executive Directors) employed 2006 2005 No. No.By business groupStores 120,313 128,006Manufacturing 4,028 2,417Distribution 6,325 4,256Centre 3,671 6,222 134,337 140,901 3 Profit /(loss) before taxation 2006 2005 £m £mThe following items have been included in arriving at operating profit/(loss): Depreciation:- Owned assets 250.4 252.9- Assets held under finance leases 2.1 2.1Property, plant and equipment 252.5 255.0 Investment properties 4.4 4.2 Charge in the income statement 256.9 259.2 Operating lease rentals payable- Plant and machinery 6.8 38.5- Property 38.9 56.7 Repairs and maintenance expenditure on property, plant and equipment 95.6 96.3 Accounting estimation technique revisions - (89.0) The accounting estimation technique revisions relate to supplier income and various other individually immaterialaccounting practices that affected the result for last year. Services provided by the Group's auditor During the period KPMG Audit Plc, the Group's auditor, provided the following services: 2006 2005 £m £mAudit services- Statutory audit 1.0 0.7- Audit - related regulatory reporting 0.3 -Tax services- Compliance services 1.0 1.0Other- Forecasting procedures review 1.0 -- Planning and reporting due diligence 1.7 2.2 5.0 3.9 4 Safeway integration and conversion costs Costs relating to the integration of Safeway Limited (note 27 (b)) are analysedas follows: 2006 2005 £m £mRedundancy costs 75.5 23.8Store conversion costs 10.6 7.6Staff costs 86.1 31.4 Impairment of depots closed 21.0 -Goodwill impaired 103.2 -Write off brand not used - 40.0Impairment and other asset write offs 124.2 40.0 Divestment costs 11.0 2.7Acquisition costs - 0.3Store conversion costs 136.4 49.9Other expenses 147.4 52.9 Since the acquisition in March 2004, 220 stores have been converted from theSafeway format to Morrisons, 302 stores (including joint venture properties withBP) have been disposed and a number of administration and distribution functionseither closed or merged. The resulting costs, and profits and losses on disposalof properties, are included with Safeway integration and conversion costs. Anyimpact on trading is included within operating profit. On acquisition the Safeway brand was valued as required under IFRS3 BusinessCombinations. The Directors decided not to use this name as part of thecontinuing business and the value was written off in the period ended 30 January2005. 5 Finance costs and income 2006 2005 £m £mInterest payable on short term loans and bank overdrafts (11.1) (33.4)Interest payable on bonds (58.1) (52.8)Interest capitalised 11.8 6.4Fair value costs of derivative instruments (8.4) -Pension liability interest cost (86.2) (70.2)Expected return on pension assets 83.2 64.1Net pension liability interest (3.0) (6.1)Other finance costs (4.4) (0.6)Finance costs (73.2) (86.5) 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. Bank interest received 18.8 21.1Fair value income of derivative instruments 2.2 -Finance income 21.0 21.1 Net finance cost (52.2) (65.4) 6 Taxation Analysis of charge in period 2006 2005 £m £m Current tax - current period 4.3 116.7 - adjustment in respect of prior period 3.8 4.8 8.1 121.5 Deferred tax - current period (74.8) (30.2) - adjustment in respect of prior period 4.1 (3.3) (70.7) (33.5) Tax charge for the period (62.6) 88.0 Tax on items charged directly to equity 2006 2005 £m £mCurrent tax (charge)/credit on actuarial movements (1.2) 1.0Deferred tax credit on actuarial loss 13.3 23.0Tax credit on actuarial movements taken to SORIE - note 28 12.1 24.0Share-based payments - taken direct to equity 3.3 - The tax for both periods is higher than the standard rate of corporation tax inthe UK (30%). The differences are explained below: Tax reconciliation 2006 2005 £m £m(Loss)/profit before tax (312.9) 193.0(Loss)/profit before tax at 30% (93.9) 57.9Effects of:Expenses not deductible for tax purposes 4.6 12.9Goodwill impaired 31.0 -Non-qualifying depreciation 19.6 37.2Divestment profits not taxable (32.5) (23.5)Overseas tax rates/dividends 0.7 2.0Prior period adjustments 7.9 1.5Tax (charge)/credit for the period (62.6) 88.0 7 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 24), 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 dilutive potential ordinaryshares. The Company has two classes of dilutive potential ordinary shares: thoseshare options granted to employees where the exercise price is less than theaverage market price of the Company's ordinary shares during the period andconvertible preference shares. At 29 January 2006, the performance criteria forthe vesting of the awards under the incentive scheme had not been met andconsequently the shares in question are excluded from the diluted EPScalculation. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. Unadjusted EPS 2006 2005 Earnings Weighted EPS pence Earnings £m Weighted EPS average average £m number of number of pence shares shares millions millionsBasic EPSEarnings attributable to ordinary shareholders (250.3) 2,646.9 (9.46) 105.0 2,538.1 4.14Effect of dilutive sharesOptions - - - - 10.6 (0.02)Preference share conversion - - - - 1.7 -Diluted EPS (250.3) 2,646.9 (9.46) 105.0 2,550.4 4.12 Adjusted EPS 2006 2005 Earnings Weighted EPS Earnings £m Weighted EPS average average £m number of pence number of pence shares shares millions millionsBasic EPSEarnings attributable to ordinary (250.3) 2,646.9 (9.46) 105.0 2,538.1 4.14shareholdersIntegration costs 296.2 11.19 114.8 - 4.52 45.9 2,646.9 1.73 219.8 2,538.1 8.66Effect of dilutive sharesOptions - 5.9 - - 10.6 (0.04)Preference share conversion - 1.6 - - 1.7 -Diluted EPS 45.9 2,654.4 1.73 219.8 2,550.4 8.62 Integration costs comprise the Safeway integration and conversion costs shown onthe income statement. 8 Goodwill and other intangibles Goodwill Safeway brand TotalCurrent year £m £m £mCostAt 30 January 2005 and at 29 January 2006 103.2 40.0 143.2 Aggregate amortisation and impairmentAt 30 January 2005 - 40.0 40.0Goodwill impaired 103.2 - 103.2At 29 January 2006 103.2 40.0 143.2 Net book amount at 29 January 2006 - - - Prior year £m £m £mCostAt 1 February 2004 - - -Additions 103.2 - 103.2Acquisitions (note 4) - 40.0 40.0At 30 January 2005 103.2 40.0 143.2 Aggregate amortisation and impairmentAt 1 February 2004 - - -Write off brand (note 4) 40.0 40.0At 30 January 2005 103.2 40.0 40.0 Net book amount at 30 January 2005 103.2 2 - 103.2 The goodwill of £103.2m shown above arose on the Safeway acquisition in the yearended 30 January 2005. No goodwill arose on the acquisition of the Rathbonesbusiness (note 27(a)). Goodwill is tested for impairment annually and whenever there is an indicationof impairment. The Directors do not consider that goodwill can be allocated toindividual stores (cash generating unit level) on a meaningful basis. Goodwillis consequently allocated to the portfolio of stores representing the lowestlevel within the group at which the goodwill is monitored for internalmanagement purposes. Goodwill is tested at this level. The annual loss for the year is an indication of impairment. Goodwill has beentested at this balance sheet date. The goodwill impairment test is performed by comparing the carrying value of theportfolio of stores and associated goodwill with their aggregate recoverableamount. Recoverable amount is estimated by calculating value in use on adiscounted cash flow basis. The key assumptions used in this calculation areestimates of sales growth, operating margins and the residual value of land. The assumptions used are based on the Group's Optimisation Plan, which includesdetailed budgets and forecasts covering the period 2006 to 2008. Cash flowsafter 2008 have been estimated by applying a long term growth rate of 1.5%.Cash flows have been discounted at 8.8%. As the result of the impairment test indicated that substantially all of the£103.2m was impaired, the Directors have decided that given the sensitivities ofthe calculation, that a provision for the whole of the goodwill is made. Acharge for impairment of goodwill of £103.2m (2005: £nil) has been included inthe results. The impairment charge arises principally due to changes inassumptions regarding how long profit recovery will take. The events andcircumstances that led to the recognition of this impairment loss are discussedfurther in the Financial Review. 9 Property, plant and equipment Land and buildings Plant, Current year Freehold Long Short equipment & Total leasehold leasehold vehicles £m £m £m £m £mCostAt 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 disposal 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 disposal transfer (3.1) - - (1.2) (4.3)Disposals (1.9) - (0.2) (14.9) (17.0)Impairment (note 20) 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 Land and buildings Plant,Prior year Freehold Long Short equipment & Total leasehold leasehold vehicles £m £m £m £m £mCostAt 1 February 2004 1,743.2 129.2 3.0 365.9 2,241.3Additions at cost 291.4 24.3 0.4 90.7 406.8Acquisitions 4,488.6 422.3 255.5 284.0 5,450.4Interest capitalised 4.8 1.6 - - 6.4Assets held for disposal transfer (921.7) (164.6) (246.3) (137.5) (1,470.1)Disposals (13.8) (1.2) - (19.5) (34.5)At 30 January 2005 5,592.5 411.6 12.6 583.6 6,600.3 Accumulated depreciationAt 1 February 2004 357.1 11.4 3.0 284.5 656.0Charge for the period 94.4 18.2 4.8 137.6 255.0Disposals (12.8) (2.0) - (4.0) (18.8)At 30 January 2005 438.7 27.6 7.8 418.1 892.2 Net book amount at 5,153.8 384.0 4.8 165.5 5,708.130 January 2005 Assets under construction 130.1 - - - 130.1included above 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 £11.8m (2005: £6.4m). Assets held under finance leases have the following net book amounts: 2006 2005 Vehicles and Vehicles and office equipment office equipment £m £mCost 21.8 21.8Aggregate depreciation (14.4) (12.3)Net book amount 7.4 9.5 10 Lease prepayments 2006 2005 £m £mLong lease land premiums 217.8 230.5 The current element of long lease land premiums is included within debtors (note15). 11 Investment property Current year £mCostAt 30 January 2005 249.3Additions 3.3Transfer from assets held for resale 8.4At 29 January 2006 261.0 Accumulated depreciationAt 30 January 2005 30.8Charge for the period 4.4Transfer from assets held for resale 0.5At 29 January 2006 35.7 Net book amount at 29 January 2006 225.3 Prior year £mCostAt 1 February 2004 102.4Acquisitions 139.1Additions 7.8At 30 January 2005 249.3 Accumulated depreciationAt 1 February 2004 26.6Charge for the period 4.2At 30 January 2005 30.8 Net book amount at 30 January 2005 218.5 Included in other operating income is £13.0m (2005: £12.4m) of rental incomegenerated from investment properties. The fair value of investment properties at 29 January 2006 was £277.7m. Thisvaluation has been determined by the Directors. 12 Investment in Joint Venture 2006 2005 £m £mNet assets at start of period 78.4 -Acquisitions - 74.8Profit for the year 2.9 3.6Dissolution (note 27(d)) (81.3) -Net assets at end of period - 78.4 In relation to the Group's investment in joint ventures, the assets, liabilities, income and expenses are shownbelow. 2006 2005 £m £mCurrent assets - 42.8Non-current assets - 69.0Current liabilities - (33.4)Net assets - 78.4 Income 66.4 180.0Expenses (63.5) (176.4)Share of pre-taxation results from joint ventures 2.9 3.6Taxation (0.7) (1.4)Share of post-taxation results from joint ventures 2.2 2.2 The investment in joint ventures represents the Group's investment in the BPjoint venture which was acquired as part of the Safeway acquisition. The jointventure owned and operated a number of petrol filling stations. This wasdissolved on 7 June 2005. The details of this transaction are set out in note 27(d). 13 Non-current assets classified as held for sale 2006 2005 £m £mProperty 128.6 582.5 Non-current assets classified as held for sale represent stores and otheradministration and distribution buildings being marketed for sale. The amountreclassified from property, plant and equipment is all freehold and leaseholdland and buildings including associated fixtures and fittings. The stock forthose stores still trading is not reclassified as it will be immaterial at thetime of sale. The results of any stores still trading continue to be includedwithin trading results before Safeway integration and conversion costs. 14 Stocks 2006 2005 £m £mMaterials and work-in-progress 9.1 8.3Finished goods 390.3 416.3 399.4 424.6 During the year write-downs of stocks to net realisable value were expensed tocost of sales as incurred. At year end the stocks write-down provision wasreviewed and the increase in that provision was £6.2m (2005: £3.8m). 15 Debtors 2006 2005 £m £mTrade debtors 88.6 83.5Less: Provision for impairment of trade debtors (4.3) (3.0)Trade debtors - net 84.3 80.5Amounts due from Joint Venture - 9.2Lease prepayment - long lease land premiums 1.6 1.6Other debtors 2.8 9.7Prepayments and accrued income 66.8 115.1Other taxes 1.9 8.1 157.4 224.2 The Group has recognised a provision of £4.3m (2005: £3.0m) for the impairmentof its trade debtors during the year ended 29 January 2006. The creation andusage of the provision for impaired debtors have been included in other expensesin the income statement. 16 Cash and cash equivalents 2006 2005 £m £m Cash and cash equivalents 135.3 93.5 Cash, cash equivalents and overdrafts include the following for the purposes ofthe cash flow statement: 2006 2005 £m £mCash and cash equivalents 135.3 93.5Bank overdrafts (note 18) (44.2) (122.1) 91.1 (28.6) The effective interest rate on short-term deposits was 4.43% (2005: 4.25%) andthese deposits have an average maturity of 1 day (2005: 1 day). 17 Creditors - current 2006 2005 £m £mTrade creditors 1,202.6 1,123.3Amounts owed to Joint Venture (all trading balances) - 42.8Other tax and social security payable 52.6 60.0Other creditors 101.2 86.5Accruals and deferred income 97.2 107.5Interest accrual 17.6 17.1 1,471.2 1,437.2 18 Other financial liabilities - borrowings The Group had the following current and non-current borrowings: Current 2006 2005 £m £mBank loans and overdrafts due within one year or on demand:Bank overdraft 44.2 122.1Loans 250.0 150.0 294.2 272.1Finance lease obligations 2.4 2.6 296.6 274.7 Non-current Effective interest 2006 2005 rate £m £m£250m Sterling bonds August 2007 5.88% 251.9 253.0£150m Sterling bonds August 2014 6.50% 157.1 157.9£200m Sterling bonds January 2017 6.00% 202.9 203.1£200m Sterling bonds December 2018 6.12% 205.3 205.6€250m Euro bonds April 2010 6.50% 195.8 184.9 Total Sterling and Euro bonds 1,013.0 1,004.5 Other loan notes 4.20% 4.0 4.1Finance lease obligations 5.01% 5.7 8.1 1,022.7 1,016.7 The Sterling and Euro bonds are carried at amortised cost. The Euro bonds areretranslated at balance sheet date spot rates. They had a fair value of£1,015.5m (2005: £1,041.0m). Borrowings are denominated in Sterling and Euros and bear either fixed orvariable interest based on LIBOR. All borrowings are unsecured. Borrowing facilities The Group has the following undrawn floating committed borrowing facilitiesavailable at 29 January 2006 in respect of which all conditions precedent had been met atthat date: 2006 2005 Total Total £m £mExpiring between 1 and 2 years 500.0 850.0 Payments under finance lease obligations fall due as follows: 2006 2005 £m £mNot later than one year 2.8 3.1Later than one year but not more than five years 6.2 8.6More than five years - 0.3 9.0 12.0Future finance charges on finance lease obligations (0.9) (1.3)Present value of finance lease obligations 8.1 10.7 The maturity of the Group's non-current borrowings is as follows: Less than 1 1 to 2 2 to 3 3 to 4 5+ years Total year years years years £m £m £m £m £m £mAs at 29 January 2006Total borrowings - 254.7 5.5 197.2 565.3 1,022.7 19 Financial assets 2006 2005 £m £m Interest rate swaps maturing 2007 1.6 6.3Interest rate swaps maturing 2008 2.2 1.4Cross-currency interest swap maturing 2010 32.6 29.3 36.4 37.0 The interest rate and currency swaps cover the Group from the currency and fixedinterest exposure arising from the Sterling and Euro bonds. During 2006 none ofthe derivatives were accounted for as hedges as defined by IAS 39 Financialinstruments: Recognition and measurement. There are no contracts with embedded derivatives that have been identified to beaccounted for separately as required by IAS 39. The notional principal amount of the outstanding interest rate swap contracts at29 January 2006 was £350m (2005: £350m). At 29 January 2006 the fixed interest rates of interest rate swaps vary from5.875% to 6.50% (2005: 5.875% to 6.50%) and floating rates are 5.32% to 5.44%(based on six month LIBOR plus costs). 20 Provisions Restructuring Property provisions Total £m £m £mAt 30 January 2005 - 55.8 55.8Charged to profit and loss account 53.7 23.9 77.6Utilised in period - (10.4) (10.4)Unwinding of discount - 4.2 4.2At 29 January 2006 53.7 73.5 127.2 The current portion of the provision has not been separated from non-current asthe current portion is immaterial. Restructuring As a result of the takeover of Safeway, there are 3 distribution centres whichare surplus to the requirements of the Group. A provision has been made to coverthe expected costs to close the centres. It is anticipated that the costs willbe incurred in the forthcoming year. In addition to the above, a further £21mhas been provided for impairment in value to the buildings and fittings. Theimpairment is based on estimated sale proceeds as valued by the Directors. Property provisions Property disposal provisions comprise petrol filling station decommissioningreserve, onerous leases provision and provisions for dilapidations on leasedbuildings. 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 for the present value of costs to be incurred to decommission thepetrol tanks. 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 67 years. Dilapidation costs are incurred to bring a leased building back to the conditionto which it was originally leased. The costs are due to the landlord ontermination of the lease. 21 Deferred tax 2006 2005 £m £mDeferred tax liability 609.1 719.5Deferred tax asset (186.5) (217.9)Net deferred tax liability 422.6 501.6 All of the deferred tax assets were available for offset against deferred taxliabilities. Deferred tax assets have been recognised in respect of temporary differenceswhere it is probable that these assets will be recovered. The movements in deferred tax assets and liabilities (prior to the offsetting ofbalances within the same jurisdiction as permitted by IAS12 Income Taxes) duringthe period are shown below. Property, plant Pensions Share based Provisions Total and equipment payments £m £m £m £m £mAt 30 January 2005 (719.5) 122.4 4.4 91.1 (501.6)(Charged)/credited to income statement 112.1 (10.8) 1.7 (32.3) 70.7Credited directly to equity - 13.3 - - 13.3Share-based payments - - (3.3) - (3.3)Other (1.7) - - - (1.7)At 29 January 2006 (609.1) 124.9 2.8 58.8 (422.6) At 1 February 2004 (58.0) 23.1 3.8 19.2 (11.9)Credited to income statement 0.1 0.9 1.1 31.4 33.5Credited directly to equity - 23.0 - - 23.0Acquisition of subsidiary (661.6) 75.4 - 40.5 (545.7)Other - - (0.5) - (0.5)At 30 January 2005 (719.5) 122.4 4.4 91.1 (501.6) The deferred income tax (charged)/credited to equity during the period is as follows: 2006 2005 £m £mActuarial gains/losses - taken through the SORIE 13.3 23.0Share options - taken direct to equity - note 24 (3.3) - 22 Called up share capital Number of Share capital Share premium Total shares millions £m £m £mAt 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 At 1 February 2004 1,574 157.4 15.9 173.3Share options exercised 2 0.2 3.6 3.8Acquisition of subsidiary (note 27(b)) 1,079 107.9 - 107.9Shares issued 3 0.3 0.6 0.9At 30 January 2005 2,658 265.8 20.1 285.9 The total authorised number of ordinary shares is 4,000m shares (2005: 4,000m shares) with a par value of 10p pershare (2005: 10p per share). All issued shares are fully paid. Potential issues of ordinary shares Certain eligible employees hold options to subscribe for shares in the Company at prices ranging from 77.5p to 239.3punder the share option schemes approved by shareholders. Options on 15m shares were exercised in 2006. 23 Share-based payments (a) 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 £4.0m (2005: £2.6m), of which £0.6m (2005: £0.4m) related to equity-settledshare-based payment transactions. After deferred tax, the total charge was £2.3m(2005: £1.5m). (b) Long Term Incentive Plan ("LTIP") The Group's LTIP scheme was made available to certain employees prior to theSafeway integration. Shadow shares were awarded to 684 employees as at 1September 2004. The cash payment will be made on 1 September 2007 based on thenumber of shares multiplied by the average share price of the preceding week.The scheme is cash settled. The total charge for the period relating to the cash settled LTIP was £3.3m(2005: £2.2m). After deferred tax, the total charge was £2.3m (2005: £1.5m). 24 Statement of changes in shareholders' equity Current year Share Share Retained Merger Total capital premium earnings reserve £m £m £m £m £mAt 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 - 3.4Proceeds from shares issued 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 Prior year Share Share Retained Merger Total capital premium earnings reserve £m £m £m £m £mAt 1 February 2004 157.4 15.9 1,223.9 - 1,397.2Total recognised income and expense - - 48.5 - 48.5Conversion of preference share capital 0.3 0.6 - - 0.9Acquired treasury shares - - (43.7) - (43.7)Share issues 108.1 3.6 - 2,578.3 2,690.0Share option charge - - 0.7 - 0.7Dividends - - (87.7) - (87.7)At 30 January 2005 265.8 20.1 1,141.7 2,578.3 4,005.9 Included in retained earnings is a deduction of £43.7m (2005: £43.7m) in respectof treasury shares held at balance sheet date. Interests in own shares represents the cost of 17,761,844 of the Company's ordinary shares (nominal value of £1.8m)purchased in March 2004 as part of the Safeway acquisition. These shares are held by a trust using funds provided bythe Group and were acquired to meet obligations under the share option schemes. The costs of funding andadministering the scheme are charged to the profit and loss account of the Company in the period to which theyrelate. The market value of the shares at 29 January 2006 was £33.6m (2005: £36.2m). The ESOS waiver of their rightsto dividends is set out in the accounting policy note on Treasury Shares. 25 Cash flow from operating activities 2006 2005 £m £mContinuing operations(Loss)/profit for the financial period (250.3) 105.0Adjustments for:Taxation (62.6) 88.0Depreciation and amortisation 256.9 299.2Impairment of assets to be disposed 124.2 -Loss on disposal of property, plant and equipment 9.2 0.4Net finance cost (note 5) 52.2 65.4Other non-cash changes 0.7 0.9Share of results of joint ventures after taxation (2.2) (2.2)Excess of contributions over pension service cost (35.2) (6.2)Decrease/(increase) in stocks 25.2 (11.7)Decrease/(increase) in debtors 52.2 (79.7)Increase/(decrease) in creditors 73.5 (6.9)Increase/(decrease) in provisions 67.2 (4.2)Cash generated from operations 311.0 448.0 26 Analysis of net debt 2006 2005 £m £mCash and cash equivalents (note 16) 135.3 93.5Bank overdrafts (note 18) (44.2) (122.1)Cash and cash equivalents per cash flow 91.1 (28.6) Interest and cross-currency swaps 36.4 37.0Financial assets (note 19) 36.4 37.0 Loans (250.0) (150.0)Finance lease obligations (2.4) (2.6)Current financial liabilities (note 18) (252.4) (152.6) Bonds (1,013.0) (1,004.5)Other unsecured loans (4.0) (4.1)Finance lease obligations (5.7) (8.1)Non-current financial liabilities (note 18) (1,022.7) (1,016.7) Net debt (1,147.6) (1,160.9) 27 Acquisitions and disposals (a) Acquisition of trade and assets of the Rathbones business In April 2005 the Group created a company called Rathbone Kear Limited. The Group owns 80% of the share capital ofthis company; the other 20% being owned by Mr H Kear. Rathbone Kear Limited purchased the trade and assets of abakery business from the Receiver of Rathbones Bakeries Limited. The Group also purchased other bakery property andassets from the Receiver of Rathbones Bakeries Limited for £9.5m. The Group allows Rathbone Kear Limited to use theseassets in return for a commercial rent. The trade of Rathbone Kear Limited is that of a bakery business anddistributor of pre-packaged bakery products. Acquisition Book value £m Fair value at acquisition £mProperty, plant and equipment 4.6 6.1Inventories 0.2 0.2Payables (0.2) (0.2)Cash and cash equivalents - -Net assets acquired 4.6 6.1Consideration satisfied by:Cash 6.1 A full year's results for Rathbone Kear Limited for 2006 would have been £31.7mof turnover and £1.5m of loss before taxation. (b) Acquisition in prior year - Safeway Limited On 8 March 2004, the group acquired the entire issued share capital of SafewayLimited (formerly Safeway plc) for a total consideration of £3,351.3m,comprising £665.2m cash and the issue of approximately 1,079m ordinary shares ata fair value of £2,686.1m. (c) Disposal of Safeway Stores (Jersey) Limited and Safeway Stores (Guernsey)Limited On 30 April 2005 the Group disposed of its investments in Safeway Stores(Jersey) Limited and Safeway Stores (Guernsey) Limited for a consideration of£49.1m. £mProperty, plant and equipment 50.6Current assets 1.4Total assets 52.0Creditors (2.9)Net assets disposed 49.1Profit on disposal - The proceeds arising from the sale of Safeway Stores (Jersey) Limited andSafeway Stores (Guernsey) Limited were £49.1m, all of which was settled by cash.No cash or cash equivalents were disposed as part of the transaction. The results of Safeway Stores (Jersey) Limited and Safeway Stores (Guernsey)Limited were not material to the Group. (d) Dissolution of the BP Joint Venture On 7 June 2005, the Group dissolved its joint venture with BP (BP and Safewaypartnership). The 61 petrol filling stations were divided between the Group andBP. £mShare of net assets 81.3Dissolution (81.3)Profit on dissolution - The dissolution comprised fixed assets valued at £67.7m and sundry other assetsand liabilities. These fixed assets were subsequently sold to 3rd parties for£87.0m for a profit of £19.3m. The proceeds arising from the dissolution of the BP and Safeway partnership werenot settled by cash. No cash or cash equivalents were disposed as part of thetransaction. 28 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 Employee benefits purposes for the periods to 29 January2006 and 30 January 2005 by a qualified independent actuary. The current joint employer / employee contribution rate of 14.0 - 16.8% ofpensionable pay that applied in 2005 /06 will continue to apply until the reviewfollowing the next valuation of the schemes. This is due on 6 April 2006 for theMorrison scheme and 1 April 2007 for the Safeway scheme. Additional voluntaryaugmentation payments are currently also being made in respect of the Safewayscheme. As the schemes are closed to new entrants, the current service cost as apercentage of pensionable payroll is likely to increase as the membership ages,although it will be applied to a decreasing pensionable payroll. The current best estimate of employer contributions to be paid for the yearcommencing 30 January 2006 is £92m. Assumptions The major assumptions used in this valuation to determine the present value ofthe scheme's defined benefit obligation were as follows: 2006 2005Rate of increases in salaries 4.25 - 5.25% 4.25 - 5.25%Rate of increase in pensions in payment and deferred pensions 3.00% 3.00%Discount rate applied to scheme liabilities 4.75% 5.25%Inflation assumption 3.00% 3.00% Assumptions regarding future mortality experience are set based on advice inaccordance with published statistics. The current mortality table used is PA92C2020. The average life expectancy in years of a pensioner retiring at the age of 65 isas follows: 2006 2005Male 19.9 19.9Female 22.8 22.8 The major assumptions used to determine the expected future return on theschemes' assets, were as follows: 2006 2005Long term rate of return on:Equities 7.00% 7.00%Bonds 4.25% 5.00%Property 7.00% 7.00%Cash 4.50% 4.75% The assumptions used by the actuary are the best estimates chosen from a rangeof possible actuarial assumptions which, due to the timescales covered, may notnecessarily be borne out in practice. The expected return on plan assets isbased on market expectation at the beginning of the period for returns over theentire life of the benefit obligation. 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: 2006 2005 £m £mEquities 1,190.3 958.1Bonds 211.2 163.7Property 54.0 12.5Cash 80.3 82.6Total fair value of plan assets 1,535.8 1,216.9Present value of defined benefit funded obligation (1,952.0) (1,625.0)Deficit in the scheme - pension liability in the balance sheet (416.2) (408.1)Related deferred tax asset (note 21) 124.9 122.4Net deficit (291.3) (285.7) The movement in the fair value of the schemes' assets over the year is asfollows: 2006 2005 £m £mFair value of plan assets at beginning of period 1,216.9 1,035.4Expected return on plan assets 83.2 64.1Actuarial gains 165.3 59.9Employer contributions 92.1 63.4Employee contributions 12.9 16.7Benefits paid (34.6) (22.6)Fair value of plan assets at end of period 1,535.8 1,216.9 The above pension scheme assets do not include any investments in the parentcompany's own shares or property occupied by the Company or its subsidiaries ateither period end. The movement in the present value of the defined benefit obligation during theperiod was as follows: 2006 2005 £m £mDefined benefit obligation beginning of period (1,625.0) (1,363.1)Current service cost (55.0) (55.9)Past service cost (1.9) (1.3)Employee contributions (12.9) (16.7)Interest on defined benefit obligation (86.2) (70.2)Actuarial loss recognised in the SORIE (205.6) (140.4)Benefits paid 34.6 22.6Defined benefit obligation at end of period (1,952.0) (1,625.0) Income statement The following amounts have been charged in employee benefits in arriving atoperating profit as set out in note 2: 2006 2005 £m £mCurrent service cost (55.0) (55.9)Past service cost (1.9) (1.3) (56.9) (57.2) The following amounts have been included in finance income and finance costsrespectively: 2006 2005 £m £mExpected return on pension scheme assets 83.2 64.1Interest on pension scheme liabilities (86.2) (70.2) (3.0) (6.1) Actuarial gains and losses recognised in the statement of recognised income andexpense (SORIE) The amounts included in the statement of recognised income and expense were: 2006 2005 £m £mActual return less expected return on scheme assets 165.3 59.9Experience gains and losses arising on plan obligation 13.3 (33.4)Changes in demographic and financial assumptions underlying the present (218.9) (107.0)value of plan obligationsActuarial loss recognised in the SORIE (40.3) (80.5)Taxation on actuarial loss in the SORIE 12.1 24.0Net actuarial loss recognised in the SORIE (28.2) (56.5) Cumulative net actuarial loss recognised in the SORIE (84.7) (56.5) The actual return on plan assets can therefore be summarised as follows: 2006 2005 £m £mExpected return on plan assets 83.2 64.1Actuarial gain recognised in the SORIE reflecting the difference between 165.3 59.9expected and actual return on assetsActual return on plan assets 248.5 124.0 The expected return on plan assets was determined by considering the expectedreturns available on the assets underlying the current investment policy.Expected yields on fixed interest investments are based on gross redemptionyields as at the balance sheet date. Expected returns on equity and propertyinvestments reflect long term real rates of return experienced in the respectivemarkets. History of experience gains and losses 2006 2005 £m £mDifference between the expected and actual return on schemeassets: Amount 165.3 59.9 Percentage of scheme assets 10.8% 4.9%Experience gains and losses arising on scheme liabilities: Amount 13.3 (33.4) Percentage of present value of plan obligation 0.7% (2.1)%Effects to changes in the demographic and financial assumptionsunderlying the present value of the scheme liabilities: Amount (218.9) (107.0) Percentage of present value of plan obligation (11.2%) (6.6%)Total amount recognised in the SORIE: Amount (40.3) (80.5) Percentage of present value of plan obligation (2.1%) (5.0%) Defined contribution pension scheme Employees joining the company after September 2000 are no longer eligible togain automatic entry into the final salary pension scheme. In June 2001 thecompany established a stakeholder pension scheme, open to all employees, towhich the company makes matching contributions of a maximum of 5% of eligibleearnings. Pension costs for the defined contribution scheme are as follows: 2006 2005 £m £mStakeholder pension scheme 1.1 1.0Life assurance scheme 0.9 0.5Total costs 2.0 1.5 29 Operating lease arrangements Lessee arrangements The Group has outstanding commitments for future minimum lease payments undernon-cancellable operating leases, which fall due as follows: 2006 Property 2006 2005 2005 £m Vehicles, plant and Property Vehicles, plant and equipment £m equipment £m £mWithin one year 0.3 0.3 8.2 15.4More than one year and less than five years 6.0 4.8 9.8 34.9After five years 602.3 - 817.5 - 608.6 5.1 835.5 50.3 The Group leases various offices, stores and warehouses under non-cancellable operating lease agreements. The leaseshave various terms, escalation clauses and renewal rights. The Group also leases plant and machines undernon-cancellable operating lease agreements. Lessor arrangements The Group has non-cancellable agreements with tenants and the future minimumlease income is as follows: 2006 2005 £m £mWithin one year 0.5 0.1More than one year and less than five years 9.3 10.2After five years 198.6 217.3 208.4 227.6 The Group sub-lets buildings of various natures under non-cancellableagreements. The leases have various terms, escalation clauses and renewalrights. 30 Capital and other financial commitments 2006 2005 £m £mContracts placed for future capital expenditure not provided in the financial 74.3 36.5statements 31 Related party transactions During the period the Group had the following transactions and balances due to and from its joint venture with BP. The following transactions were carried out with related parties: (a) BP Joint Venture 2006 2005 £m £mSales 36.2 86.6Management charges 8.5 24.4 44.7 111.0 Goods are bought on the basis of the price lists in force with non-related parties. (b) Period-end balances arising from sales/purchases of goods 2006 2005 £m £mReceivables from related parties (note 15) - 9.2Payables to related parties (note 17) - (42.8) 32 Post balance sheet events The Directors are proposing a final dividend in respect of the financial period ending 29 January 2006 of 3.075p pershare which will absorb an estimated £82.2m of shareholders' funds. It will be paid on 30 May 2006 to shareholderswho are on the register of members on 28 April 2006.8 properties were disposed between 29 January 2006 and 23 March 2006, realising a profit of £3.5m 33 Principal subsidiaries and joint ventures Subsidiaries of Wm Morrison Supermarkets plc Principal activity % equity holdingBos Brothers Fruit and Vegetables BV produce wholesaler 100Farmers Boy Limited manufacture and distribution of 100 fresh food productsFarock Insurance Company Limited captive insurance 100Holsa Limited packaging manufacturer 100Nathanspire Limited financial services 100Neerock Limited fresh meat processor 100Wm Morrison Produce Limited produce packers 100Safeway Limited holding company 100Rathbone Kear Limited baker 80 Subsidiaries of Safeway LimitedSafeway Overseas Limited grocery retailing 100Safeway Stores Limited grocery retailing 100Safeway Stores (Ireland) Limited grocery retailing 100Safeway Stores (Card Services) Limited financial services 100 All the above companies are registered in England and Wales except Bos Brothers Fruit and Vegetables BV which isincorporated in The Netherlands and Farock Insurance Company Limited which is incorporated in the Isle of Man. The principal area of trading for all the above companies is the United Kingdom apart from Bos Brothers Fruit andVegetables BV and Safeway Overseas Limited who also trade in the rest of Europe. In addition to the above, the Company has a number of other subsidiary companies, particulars of which will be annexedto the next annual return. The Joint Venture with BP was dissolved on 7 June 2005. This information is provided by RNS The company news service from the London Stock Exchange

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Related Shares:

MRW.L