Final Results

News Release

Release date: 10 March 2016

PRELIMINARY RESULTS FOR THE YEAR TO 31 JANUARY 2016

Making our supermarkets strong again

Financial summary

Strategic and operating highlights

Financial targets update

Andrew Higginson, Chairman, said:

"I am delighted that the reshaping of the Board and Executive Committee is now complete. The Morrisons team now comprises a wealth of internal and external talent with the experience to deliver the turnaround.

"The Board is pleased to be announcing that future dividends will be covered around two times by earnings per share, which is a policy that aligns shareholder returns with the long-term performance of the Company. 

"The team made good progress during the year, with lower debt once again a highlight. We are on track to deliver improved future profits and returns for shareholders."

David Potts, Chief Executive, said:

"By improving the shopping trip for customers, we have started the journey to turnaround the business and make our supermarkets strong. Our listening programme is informing and shaping the six priorities that are now driving the improvements that customers are noticing.

"Our strong balance sheet and cash flow provide the platform for turnaround and growth, but what makes us truly unique as food maker and shopkeeper is the personality and dedication of our thousands of colleagues. I am confident these strengths will help us fix, rebuild and grow Morrisons."

Outlook

During 2016/17, we expect to realise the remainder of our £1bn three-year cost savings target, but the turnaround will take time and will continue to require sustained investment in the proposition. We also expect to exceed our three-year targets for £600m operating working capital improvement and £1bn property disposal proceeds.

For 2016/17 year-end net debt, we expect a range of £1.4bn-£1.5bn.

The Board recognises the importance of sustainable dividends to shareholders. From 2016/17, we will be paying a dividend covered around two times by underlying earnings per share.

In the medium-term, we now expect £50m-£100m incremental UPBT from broader business opportunities we have identified within online, manufacturing, wholesale, popular and useful services, and from lower interest costs.

In addition, in the medium-term we now expect free cash flow to be at least £300m better than first guided, with operating working capital improvement at least £800m (up from £600m previously), and property disposal proceeds at least £1.1bn (up from £1bn).

Figure 1 - 2015/16 profit reconciliation

Figure 2 - Sales performance (ex-VAT)

* For supermarkets, online and convenience stores, reported ex-VAT and in accordance with IFRIC 13

Figure 3 - Summary of operational key performance indicators (KPIs)

* Excludes online and convenience

Notes:

Enquiries:

Wm Morrison Supermarkets PLC

Media Relations

Management will host an analyst presentation this morning at 09:30. A webcast of this meeting is available at http://www.morrisons-corporate.com/Investor-centre/

Dial-in details:

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- ENDS -

This announcement may include forward-looking statements, which are statements made about potential future events or occurrences. These statements are made by the Directors in good faith, based on the information available to them at the time of the announcement. Consequently such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking statements and information.

Financial overview

Total turnover during the period was £16.1bn, down 4.1% year-on-year. Store turnover of £12.8bn, excluding fuel, was down by 1.4%, comprising LFL down 2.0% (including a positive contribution of 1.0% from online) and 0.6% from new space.

Fuel sales fell by 12.6% to £3.1bn, with deflation a key feature. Towards the end of the year we led the market lower on fuel prices, and volumes responded. In Q4, despite deflation of nearly 20%, fuel LFL was almost flat.

Sales improved through the year. In the second half ex-fuel LFL was down 1.3%, an improvement on the first half (down 2.7%). For Q4, LFL was up 0.1%, despite deflation of over 3%, and LFL Number of Transactions was up 1.6%.

Underlying operating profit was £339m, with operating margin down 53bps year-on-year to 2.1%. This excludes impairment and provision for onerous contracts, property disposal profits, loss on disposal of 140 M local stores, and the one-off set-up cost of the defined contribution pension scheme - see Figure 1 for details.

Further adjusting for store closure and restructuring costs of £60m as previously guided, underlying operating profit was down 22% to £399m (2014/15: £510m) and operating margin down 56bps year-on-year to 2.5%.

Net finance costs were £99m (2014/15: £98m).

Reported PBT was £217m, and UPBT(1) was £242m. Adjusting for the £60m store closure and restructuring costs, UPBT was down 27% to £302m (2014/15: £413m), in the middle of our guidance range of £295m-£310m - see Figure 1 for details.

New business development (NBD) costs for online and convenience were £47m (2014/15: £71m). These are included in all measures of operating profit and PBT.

Underlying basic EPS(1) reduced to 7.8p (2014/15: 10.9p).

Capital expenditure fell to £365m, from £520m for 2014/15. This was lower than guidance of c.£400m due to timing effects, with some projects moving into 2016/17. 

Free cash flow pre-dividend was £854m, which included a further £348m improvement in operating working capital and £300m of property disposal proceeds.

Overall, post-dividend and pre-disposal proceeds, the business was again cash flow positive, generating £257m during the year.

Group net debt fell to £1,746m, down £594m from the end of 2014/15.

The proposed final dividend is 3.50p, bringing the full year to 5.00p.

As previously announced, we closed twenty one supermarkets and opened one, with supermarket net space falling by 206,000 square feet. In addition, we recently announced the proposed closure of another seven stores (111,000 square feet).

Return on Capital Employed (ROCE) was 5.3%.

Strategy update

Our strategy is informed and shaped by continually listening to our key stakeholders - customers, colleagues, suppliers and shareholders. We will become a stronger, broader business, while maintaining capital discipline and delivering robust free cash flow. The strategy has three phases - Fix, Rebuild and Grow.

Phase 1, Fix, has got off to a good start. Our initial aims last year were to deliver a better shopping trip for customers and begin to stabilise LFL sales. We needed to reduce costs and operate the business efficiently at that lower level. Also key was identifying and recruiting management talent, both home grown and external.

LFL improved during the year, and was positive in Q4 at 0.1% with volume growth offsetting deflation as we continued to cut prices for customers. LFL transactions were up 1.6% year-on-year in Q4, as we began to attract customers back to Morrisons.

We continued to focus on costs, and remain confident of saving £1bn in the period from 2014/15 to 2016/17. This involved some difficult choices, particularly around restructuring head office, where c.800 roles have been removed, closing underperforming stores and selling the M local stores. However, these programmes were necessary to simplify and speed up the business.

We have also established a leaner, more focussed management team both at head office and in the field, with many key roles broadened to enable the business to simplify and speed up the decision making process.

Moving to Phases 2 and 3 - Rebuild and Grow - will be driven by our six priorities. We will turnaround Morrisons and become a broader, stronger business.

That opportunity is enabled by our unique capabilities as food makers and shopkeepers, and our well-invested manufacturing operations. We now expect £50m-£100m incremental UPBT from opportunities we have identified within online, manufacturing, wholesale, popular and useful services and, as debt falls, lower interest costs. The recent wholesale supply agreement with Amazon and franchise convenience store pilots with Motor Fuel Group are examples of how Morrisons can become broader and stronger.

The turnaround and broader business opportunities will improve sales, margin and asset intensity, which are the operational levers for profit and ROCE. Growth will be capital light, disciplined, sustainable and with a continued focus on optimising assets and capital returns, which are the capital improvement levers of the strategy.

Free cash flow generation and liquidity will remain strong and net debt will continue to fall which will enable flexibility and choices around re-investment and shareholder returns.

We expect the three phases of our strategy - Fix, Rebuild and Grow - will create value for all stakeholders.

Six priorities update

1. To be more competitive

During the year we made progress towards becoming more competitive. We invested a further £373m into the customer proposition, most of it into price, bringing the total to £688m over the last two years. We cut prices of key commodities, everyday items and, through our unique manufacturing skills, are building a range of great value 'Made by Morrisons' products which are proving very popular with customers.

We have made our stores easier to shop for customers. We introduced fewer and more impactful offers, many at round pound price points, and sharper prices, saving our customers every penny we can. We have also simplified our 'Match & More' card to make it easier for customers to understand and use. All of this is being communicated more clearly and simply, without complicated claims, through new look and feel in-store marketing.

Our aim is to use our strengths to provide a simpler and competitive Morrisons price list for all our customers - one that is unique to us, rather than aimed at just matching others. Building a broader business, for example through wholesale supply, will also help us lower our costs and continue to cut prices.

During the year ahead we will continue to invest in the proposition to become even more competitive. Price Crunch cut the price of more than 1,000 everyday items in February and there is more to come throughout the year.

2. To serve customers better

During the year we launched several initiatives aimed at improving customer service and product availability. At the time of our first half results we updated on some of these, such as the introduction of express checkouts, and the programme of replacing and upgrading all our self-scan checkouts in all stores at the rate of 40 per week, which was completed in the second half.

We will continue to improve customer service. We are currently introducing a separate customer service desk into all our stores, and customer greeters into our biggest stores. We are also ensuring we have the right technology and in-store colleague structure to more effectively and directly manage queues. Already there is some improvement, with our queue lengths improving significantly over the recent Christmas period. We will be extending these improved customer service initiatives into Market Street during the year.

Availability continues to improve. Deliveries are more frequent in categories such as Beers, Wines & Spirits, we have been working hard to improve stock levels in Fresh, and more senior colleagues are being allocated to store warehouses.

There is still a lot to do to provide our customers with the best possible product availability. However, customers are noticing a difference. We have sustained significant improvements in customer satisfaction through the year, and this will remain an important measure for Morrisons.

3. Find local solutions

We are beginning to improve our local offer region-by-region and store-by-store. Scotland, Wales and big cities have their own identity, and each store has its own unique neighbourhood and community which can be served better.

We have appointed a small team responsible for local buying, marketing and events. They are working with the stores and customer data to tailor the offer more towards local tastes and demographics. Key local opportunities include seasonality, ethnicity, affluence and life stage.

In addition, the Fresh Look refit programme is being shaped by the communities served by Morrisons stores. Specific popular and useful services will be tailored to help provide local solutions for each store.

Together, these various local solutions will provide national benefit for Morrisons.

4. Develop popular and useful services

Morrisons already has successful fuel, pharmacy, dry cleaning and café businesses, and we can improve them further. We also have a big opportunity to add further popular and useful services. We own 85% of our stores and have space available inside and outside many.

For example, we have been trialling various in-store formats, such as Timpson at Morrisons, and we have the opportunity for complementary retail developments in our car parks.

These initiatives will generate income and enhance returns without requiring significant capital commitment.

5. To simplify and speed up the organisation

Work is continuing to simplify and improve, and to build a culture based on speed and teamwork. This is helping to create a leaner, more efficient business, which is more responsive for customers.

During the second half of the year, we completed the restructuring of head office, removing c.800 roles, and we continued to refine both the in-store and field leadership structures. The field team is nearly complete and will comprise a diverse mix of internal and external appointees, with a breadth of experience across a range of backgrounds.

We have started to simplify and develop our relationships with key suppliers. We are working together to develop a 'sell for less' culture which will mean lower every day prices for customers. This will involve substantially reducing the 37 categories of commercial income to a target of just three.

We are also working with our suppliers category-by-category and shelf-by-shelf to simplify the range and add back space in areas where our customers have said they would like more range, such as Free From and Nutmeg. This category review process will be ongoing and will mean a simpler, but enriched and more relevant offer for customers. It will also be lower cost to operate for both Morrisons and our suppliers.

6. To make core supermarkets strong again

Customers tell us what Morrisons stands for - good quality fresh food, great value for money, expert customer service and authentically British. We aim to deliver these strengths in every store.

During the year, we completed our Back to Best maintenance programme. We also brought maintenance back in house, which is improving the service standards to our stores.

Our Fresh Look programme is accelerating and we aim to review and upgrade the entire estate by the end of 2018/19. During 2015/16, we completed over 50 Fresh Looks, and aim for a further 100 a year from 2016/17.

There are many improvements that Fresh Look can apply universally across the estate. Improving the look and feel of Fresh and allocating more space to growth categories such as Nutmeg, Free From, World Foods, and Food to Go, as well as improving customer facilities such as the Customer Service desk and Café, are typical elements of the programme.

Fresh Look is also much more than a standardised refit. At each store, customer listening groups tell us what a store needs before work starts and we listen to feedback again after the work has been done. This covers all aspects of the store - management structure, range and labour scheduling, not just the layout.

Online

We continue to grow Morrisons.com and now cover more than half of the households in Britain. Customer metrics remain very strong. After the year-end, we announced an agreement in principle with Ocado to grow Morrisons.com further by taking space in the new customer fulfilment centre in Erith, and by developing store pick. The agreement is subject to detailed terms being agreed and there can be no certainty that it will be concluded.

Franchise convenience store trial and wholesale supply

We have opportunities to become a broader, stronger business, extending our brand reach and leveraging our manufacturing, distribution and wholesale skills in a capital light way. We recently started a pilot with Motor Fuel Group to operate a franchise convenience store format, 'Morrisons Daily'. In addition, after the year-end, we announced a wholesale supply agreement with Amazon that will launch in the coming months.

Financial strategy and update

Capital allocation framework

The capital allocation framework is unchanged. Our first priority is to invest in the stores and infrastructure, and reduce costs. Second, we will seek to maintain debt ratios that support our target of an investment grade credit rating. Third, we will invest in profitable growth opportunities. Fourth, we will pay dividends in line with our stated policy and; finally, any surplus capital will be returned to shareholders.

Shareholder returns

We have made good progress in reducing net debt. Our plan is to continue this progress in the year ahead, and we have issued updated guidance for our cash improvement programmes. As debt falls our strong balance sheet will get stronger. This will remain our focus until trading has stabilised for a sustained period, profitability starts to rebuild and net debt has fallen further.

The 2015/16 dividend was re-aligned to reflect the Board's commitment to the capital allocation framework and to provide the necessary financial resources to invest in delivering the turnaround. The final dividend will be 3.50p per share, bringing the total for the year to 5.00p which is in line with our guidance of "not less than 5p". Looking ahead, the Board believes that annual dividends should be sustainable and covered around two times by underlying earnings. This policy will provide a balance between continued investment in our business and shareholder returns.

Optimise assets

We are committed to improving returns by addressing underperforming assets. We closed 21 underperforming supermarkets and sold 140 M local stores during the year, and recently announced a proposal to close a further seven supermarkets. In total, this represents 5% of Morrisons space. The review of our network is now complete and, as we said in January, we have no further plans for a programme of store closures.

We opened one new store during 2015/16 and will open one during 2016/17. As previously guided, the 2016/17 sales contribution from net new space will be negative. We estimate this in the range -2.0% to -2.5%.

£1bn cost savings

We achieved full year cost savings of £423m, bringing the two year total to £647m. We continue to expect £1bn of cost savings in the three years to the end of 2016/17.

Cash flow and working capital

Our free cash flow plans are progressing very well. We now expect to exceed our target of generating £2bn of operating free cash flow.

Working capital improved by £348m during the year, taking the two year total to £554m. Continued strong cash generation meant our committed working capital facilities were called upon only temporarily in the second half. We made good progress in all areas of stock control and have continued the roll-out of our supply chain finance programmes. We have also started to see the benefits of simplifying commercial terms with suppliers.

We now expect to exceed our original plan for £600m operating working capital improvement, and target a total of at least £800m in the medium-term.

During the year we achieved net property proceeds of £300m and profit on disposal of £131m. Over the last two years, we have achieved £750m of property disposal proceeds. We now expect to exceed our original plan for £1bn of property disposals, and target at least £1.1bn in the medium-term.

As previously announced, we remain committed to a freehold store portfolio. At the year-end, we owned 85% of our stores, a ratio that is broadly unchanged since the start of our disposal and underperforming store closure programmes. Our opportunities now are property developments and further non-core asset disposals. We do not expect rent costs to increase as a result of the higher property disposals guidance.

Capital expenditure

Capital expenditure fell to £365m, from £520m for 2014/15. This was lower than our guidance of c.£400m due to timing effects, with some projects moving into 2016/17 which will mean capital expenditure of around £450m for the year ahead. From 2017/18, we expect capital expenditure to be sustained in the range £400m to £450m per annum.

We completed over 50 Fresh Look refits during the year and now expect a run-rate of around 100 per annum, with the whole estate to be updated by the end of 2018/19.

In addition, we incurred £29m of capital payments on onerous contracts in 2015/16, which was lower than the £50m we initially anticipated. We still expect to incur around £100m of capital payments on onerous contracts during 2016/17.

Debt

Group net debt fell to £1,746m, down £594m year-on-year. For 2016/17, our strong cash flow will continue to reduce debt. We expect a year-end range of £1.4bn-£1.5bn.

After year-end, we agreed to redeem our $250m US private placement (USPP) notes, which were due to mature in 2026. The one-off charge of £17m was half of the contracted make whole cost, and will be recognised outside of UPBT for 2016/17. The annual interest benefit will be around £8m, meaning a two year payback period.

Interest

We expect the 2016/17 net finance charge to be broadly flat year-on-year at around £100m. The impact of lower interest from redeeming the USPP will be offset by lower capitalised interest.

Pension

Our pensions remain well-funded and were £186m in surplus at year-end. As previously announced, we incurred a one-off charge of £35m in the second half relating to the forthcoming launch of our new defined contribution pension scheme.

People update

We welcomed five new Non-Executive members to the Board during the year - Irwin Lee, Belinda Richards, Neil Davidson, Paula Vennells and Rooney Anand. They bring us a wealth of executive and non-executive experience across a broad range of areas.

The Executive Committee, in charge of day-to-day business operations, is now complete. Andy Atkinson was recently appointed as Group Marketing and Customer Director, joining Clare Grainger (People Director), Darren Blackhurst (Commercial Director) and Gary Mills (Retail Director), who were also appointed to the Committee during the year. David Potts (CEO), Trevor Strain (CFO) and Mark Amsden (Group General Counsel and Company Secretary) make up the rest of the Committee.

We have appointed external and internal talent to the Leadership Team, and reduced it to around 65 from 110 people. Many of the roles have clearer accountabilities and have been broadened to enable a simplified and speeded-up decision making process.

In addition, we continue to refine both the in-store and field leadership structures. The field team is nearly complete and will comprise a diverse mix of internal and external appointees, with a breadth of experience across a range of backgrounds. One-third of our regional managers are now female, up from just one previously.

In September, we announced an increase in hourly pay for in-store colleagues, to £8.20 from a previous minimum of £6.83. We are recognising the contribution of our excellent and dedicated colleagues, who are fundamental to the Morrisons turnaround. As announced, the extra investment will be £40m, and more than 90,000 staff will benefit across all age brackets. The new rate is £1 per hour above the National Living Wage that is to be introduced from April 2016.

Corporate responsibility and community

How we operate is very important to us. Our corporate responsibility (CR) programme ensures we work in a way that is right for our customers, colleagues, suppliers and communities, creating longer term sustainable growth. Later in the year, we will publish our 2015/16 CR Review. In the meantime, our 2014/15 CR Review is available to download at www.morrisons-corporate.com/CR.

Most Sustainable Retailer of the Year award

We were recognised for our responsible business programme at the 2015 Retail Industry Awards by winning Most Sustainable Retailer of the Year. This award is for retailers who can demonstrate their full commitment to driving change by improving the sustainability of their operations.

Stores unsold food to charity programme

Across the UK, unsold food that is still safe to eat is now made available and donated to local community organisations. Organisations are able to collect from stores the food that would previously have been wasted during the week. This includes fresh fruit and vegetables as well as tins and packets.

Where possible, every Morrisons store will work with a community organisation that is able to use a variety of unsold goods to cook meals with; examples of this include a soup kitchen, community cafés, day centres, hospices and schools.

This initiative follows a successful trial in over 100 Morrisons stores in Yorkshire and the North East in Summer 2015.

Embedding Social Development into Seafood Supply Chains

Since 2012, our seafood sourcing programme has included a social element focused on fishing vessel standards as well as the environmental impact of our seafood buying.

At a United Nations Development Programme/Oxfam/Sustainable Fisheries Partnership joint conference in 2015, we joined the first global initiative looking at the barriers present to embedding social development into environmental sustainability which can deliver nutritional as well as socio-economic benefit to all stages in seafood supply chains.

Supporting good causes

We have raised £20m to support a range of good causes throughout 2015/16. £15m was raised in our stores for charities and community groups through colleague fundraising and customer donations.

We launched the Morrisons Foundation and in our first year donated £2.5m to hundreds of local charities in the communities we serve. We also raised £2.5m for our national charity partner, Sue Ryder. We are working with the charity to improve end of life care and support for families throughout the UK. The partnership will enable the charity to establish community-based healthcare services, family and bereavement support teams as well an innovative Online Community & Support to provide expert and peer-to-peer advice.

Wm Morrison Supermarkets PLC - Preliminary results for 52 weeks ended 31 January 2016

Consolidated statement of comprehensive income

52 weeks ended 31 January 2016

Consolidated balance sheet

31 January 2016

Consolidated cash flow statement

52 weeks ended 31 January 2016

Reconciliation of net cash flow to movement in net debt in the period

Consolidated statement of changes in equity

52 weeks ended 31 January 2016

Current period

Prior period

1. General information and basis of preparation

The financial information, which comprises the consolidated statement of comprehensive income, consolidated balance sheet, consolidated cash flow statement, consolidated statement of changes in equity, and related notes, is derived from the full Group financial statements for the 52 week period ended 31 January 2016, which have been prepared under European Union endorsed International Financial Reporting Standards (IFRS) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

It does not constitute full financial statements within the meaning of section 434 of the Companies Act 2006. This financial information has been agreed with the auditor for release. The Group's full financial statements (comprising the consolidated statement of comprehensive income, consolidated balance sheet, consolidated cash flow statement, consolidated statement of changes in equity, and related notes) are available for download on the Group's website at www.morrisons-corporate.com.

The full annual report and financial statements for the 52 week period ended 31 January 2016 on which the auditor has given an unqualified report and which does not contain a statement under section 498 of the Companies Act 2006, will be delivered to the Registrar of Companies in due course.

The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group's financial statements for the 52 week period ended 31 January 2016 which can be found on the Group's website (www.morrisons-corporate.com).

New IFRS and amendments to IAS and interpretations

The following amendments to standards are mandatory for the first time for financial period ended 31 January 2016:

There are a number of standards and interpretations issued by the IASB that are effective for financial statements after this reporting period, including IFRS 9 'Financial instruments' and IFRS 15 'Revenue from contracts with customers', both of which are effective for annual periods beginning on or after 1 January 2018, and IFRS 16 'Leases' which is effective for annual periods beginning on or after 1 January 2019.

The Group is in the process of assessing the impact that the application of these standards and interpretations will have on the Group's financial statements.

Principal risks

As with all businesses, we face risk and uncertainty, which could impact the delivery of our strategy. The Board has overall accountability for ensuring that risks are effectively managed across the Group, and that there is a system for internal control. The Executive Committee is responsible for implementing and maintaining the system of controls. In accordance with the Companies Act 2006, a description of the principal risks (and the mitigating factors in place in respect of these) is included below.

Responsibility statement

This statement is given pursuant to Rule 4 of the Disclosure and Transparency Rules. It is given by each of the Directors.

To the best of each Director's knowledge:

a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

b) the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

2. Underlying profit

The definition of underlying profit is consistent with the prior year.

The Directors consider that the underlying profit and underlying adjusted earnings per share measures referred to in the results provide useful information for shareholders on underlying trends and performance. The adjustments are made to reported profit to (a) remove impairment, provision for onerous contracts, or other items that do not relate to the Group's principal activities on an ongoing basis; (b) remove profit/loss arising on disposal and exit of properties and sale of businesses; (c) apply a normalised tax rate of 25.3% (2015: 26.1%); and (d) remove the impact of pension interest volatility.

1 Adjustments marked 1 decrease post tax underlying earnings by £41m (2015: increase of £1,016m) as shown in the reconciliation of earnings disclosed in note 7(b).

Underlying profit before tax includes £60m (2015: £68m) relating to restructuring one off costs. When adjusted to exclude these items, underlying profit before restructuring costs and tax is £302m (2015: £413m).

Net profit on property is £44m (2015: loss of £1,142m). This includes profits arising on disposal of properties amounting to £131m (2015: £131m). Following our continued review of the Group's store opening programme, this profit has been offset by an additional charge of £87m for changes in estimates related to provisions for stores in the new space pipeline. 2015 included a charge of £1,273m for impairment and provision for onerous contracts.

2015/16 Impairment and provision for onerous contracts

Impairment and onerous lease provisions charge for the period of £87m includes £52m relating to onerous leases and £35m in relation to onerous commitments for changes in estimates related to provisions for stores in the new space pipeline. No impairment has been recognised during the period.

2014/15 Impairment and provision for onerous contracts

Impairment and onerous lease provisions in 2014/15 consisted of £1,273m in relation to trading stores, of which £1,116m related to impairment, £118m to onerous lease provisions, £30m to onerous commitments and £9m to lease premiums.

3. Revenue analysis

4. Finance costs and income

5. Taxation

Legislation to reduce the standard rate of corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020 was included in the Summer Finance Bill 2015 and was enacted in the period. Accordingly, deferred tax has been provided at 20%, 19% or 18% depending upon when the temporary difference is expected to reverse (2015: 20%).

The reduction in tax rate at which deferred tax is provided has reduced the Group's deferred tax liabilities by £44m, resulting in a credit of £44m being recognised in the tax charge for the period in the profit and loss account.

There have been no indications of any further changes to the rate of corporation tax after 1 April 2020.

6. Dividends

Amounts recognised as distributed to equity holders in the period:

The Directors propose a final dividend in respect of the financial period ending 31 January 2016 of 3.50p per share which will absorb an estimated £82m of shareholders' funds. Subject to approval at the AGM, it will be paid on 15 June 2016 to shareholders who are on the register on 13 May 2016.

The dividends paid and proposed during the year are from cumulative realised distributable reserves of Wm Morrison Supermarkets PLC.

7. Earnings per share

Basic earnings per share (EPS) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares.

The Company has two (2015: two) classes of instrument that are potentially dilutive: those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period and contingently issuable shares under the Group's long term incentive plans (LTIP).

a) Basic and diluted EPS (unadjusted)

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below: 

b) Underlying EPS

Given below is the reconciliation of the earnings used in the calculations of underlying earnings per share:

1 In the period ended 1 February 2015, the effect of dilutive instruments would improve basic EPS as total earnings was a loss of £761m. Diluted EPS cannot exceed basic EPS, therefore the diluted EPS disclosed above in 2015 was adjusted so that it equated to basic EPS.

8. Goodwill and intangible assets

The carrying value of goodwill and intangible assets principally consists of software development costs of £460m (2015: £495m).

Included within software development costs are assets under construction of £16m (2015: £153m).

9. Property, plant and equipment

Included within the above are leasehold land and buildings held under finance lease with a cost of £308m (2015: £308m) and accumulated depreciation of £94m (2015: £92m) The cost of financing property developments prior to their opening date has been included in the cost of the asset. The cumulative amount of interest capitalised in the total cost above amounts to £197m (2015: £197m).

Impairment

The Group considers that each store is a separate cash generating unit (CGU) and therefore considers every store for an indication of impairment annually. The Group calculates each store's recoverable amount and compares this amount to its book value. The recoverable amount is determined as the higher of 'value in use' and 'fair value less costs of disposal'. If the recoverable amount is less than the book value, an impairment charge is recognised based on the following methodology:

'Value in use' is calculated by projecting individual store pre-tax cash flows over the remaining useful life of the store, based on forecasting assumptions. The methodology used for calculating future cash flows is to:

'Fair value less costs of disposal' is estimated by the Directors based on their knowledge of individual stores and the markets they serve, and likely demand from grocers or other retailers. The Directors also obtain valuations by store prepared by independent valuers and consider these in carrying out their estimate of fair value less cost of disposal for the purposes of testing for impairment. In determining their valuation, the independent valuers assume an expected rent and yield for each store based on the quality of the asset, local catchment and the store being occupied by a supermarket tenant with a similar covenant to Morrisons.

9. Property, plant and equipment (continued)

In order to reflect specific local market conditions, in particular the continued low demand from major grocery retailers for supermarket space, the Directors consider it appropriate for the purpose of testing for impairment to revise downwards the rent and yield assumptions in the independent valuation to reflect the following factors on a store by store basis:

Having applied the above methodology and assumptions, the Group has recognised an impairment charge of £nil (2015: £1,116m, tangible assets: £1,113m and intangible assets: £3m) during the year. At 31 January 2016, the key assumption to which the value-in-use calculation is most sensitive to is the discount rate. Specific sensitivity analysis with regard to this assumption shows that an increase of 1% in the discount rate would result in an additional impairment charge of £140m.

Based on the methodology above, the Group considers the carrying value appropriate.

10. Investment property

11. Non-current assets classified as held for sale

12. Stock

Unearned elements of commercial income are deducted from finished goods as the stock has not been sold.

13. Debtors

As at 31 January 2016 and 1 February 2015, trade debtors that were neither past due nor impaired related to a number of debtors for whom there is no recent history of default. The other classes of debtors do not contain impaired assets.

As of 8 March 2016, £10m of the £13m commercial income trade debtor balance had been settled and £16m of the £26m accrued commercial income balance had been invoiced and settled.

14. Creditors - current

Included within accruals and deferred income is £5m (2015: £9m) in respect of deferred commercial income.

As of 8 March 2016, £68m of the £85m commercial income due above had been offset against payments made.

15. Pensions

The Group operates a number of defined benefit retirement schemes (together 'the Schemes') providing benefits based on a benefit formula that depends on factors including the employee's age and number of years of service. The Morrisons and Safeway Schemes provide pension benefits based on either the employee's compensation package or career average revalued earnings (CARE) (the 'CARE Schemes'). The CARE Schemes are not open to new members. The Retirement Saver Plan is a cash balance scheme, which provides a lump sum benefit based upon a defined proportion of an employee's annual earnings, which is revalued each year in line with inflation.

The movement in the net pension asset/(liability) during the period was as follows:

At the year end, schemes in surplus have been disclosed within assets on the balance sheet. The Group has taken legal advice in respect of the Schemes with regard to the recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 'IAS 19 - The limit on a defined benefit asset, minimum funding requirement and their interaction'. This advice concluded that recognition of a surplus is appropriate on the basis that the Group has an unconditional right to a refund of a surplus. Amendments to the current version of IFRIC 14 are currently being considered. The legal advice received by the Group has concluded that the above accounting treatment should not be affected by the current exposure draft of the revised wording to IFRIC 14.

The disclosures below show the details of the schemes combined:

Closure of CARE Schemes to future accrual

In July 2015, the Group reached an agreement with the trustees of the CARE Schemes to close the Schemes to future accrual. The financial effect of this is to reduce the Group's exposure to future volatility, increases in pension liabilities and cost. Subsequently, the Group has entered into an agreement to contribute additional assets into the SLP.

Defined contribution scheme set-up costs

As previously announced the Group intends to open a new defined contribution pension scheme for colleagues. This scheme will become the Auto Enrolment scheme and as such the Group will be liable for backdated contributions for eligible colleagues to 1 October 2012. The estimated set up costs relating to backdated contributions for the period 1 October 2012 to 31 January 2016 is £35m.

16. Cash flow from operating activities

Total working capital inflow (the sum of items marked1 above) is £402m in the year. This includes £83m as a result of the current year onerous leases charge and onerous commitments, net of £29m of onerous capital payments. When adjusted to exclude these items, the working capital inflow is £348m.

17. Analysis of net debt

Cash and cash equivalents include restricted balances of £16m (2015: £21m) which is held by Farock Insurance Company Limited, a subsidiary of Wm Morrison Supermarkets PLC.

18. Commercial income

The types of commercial income recognised by the Group and the recognition policies are:

In order to provide context on commercial income earned in the period, each is shown below as a percentage of the value of stock expensed (VSE) before commercial income is deducted.

19. Disposal of convenience business

On 26 October 2015, the Group disposed of its subsidiary Wm Morrison Convenience Stores Ltd and associated assets to MLCG Limited for cash consideration of £20m. This resulted in a loss on disposal of £34m. This loss is one-off in nature and therefore has been excluded from reported underlying earnings.

Following the sale, the Group continues to guarantee leases relating to its former convenience stores. The Group has made an assessment of the likelihood and amount of future rental commitments should these leases revert and recognised a liability on the balance sheet reflecting the estimated cash outflow. In the event of lessee default the Group will look to minimise its liability by finding alternative occupiers as soon as possible.

20. Related party transactions

The Group's related party transactions in the period include the remuneration of the senior managers and the Directors' emoluments and pension entitlements, share awards and share options in the audited section of the Directors' remuneration report, which forms part of the full Annual Report and financial statements for the 52 week period ended 31 January 2016.

During the year, the Company received a dividend of £8m (2015: £nil) from MHE JVCo. The Company owns 50% of the equity of MHE JVCo.

21. Post balance sheet events

On 22 February 2016, the Group repaid its $250m USPP facility of £174m which was due to mature in November 2026. The Directors consider this event as a non-adjusting post balance sheet event.