Interim results

RNS Number : 3920S

Morrison(Wm.)Supermarkets PLC

09 September 2010

 

 

INTERIM RESULTS FOR THE HALF YEAR TO 1 AUGUST 2010 Morrisons better than ever

 

Financial summary

·; Turnover up 9.1% to £8.1bn (09/10: £7.5bn)

·; Like-for-like sales (ex VAT and fuel) up 0.9% (09/10: 7.8%)

·; Underlying profit before tax up 14% to £410m (09/10: £359m)

·; Profit before tax £412m (09/10: £449m after exceptional credit of £91m)

·; Net debt £849m (09/10: £885m) after capital investment of £236m

·; Gearing of 17% (09/10: 19%)

·; Interim dividend up 14% to 1.23p (09/10: 1.08p)

 

Operating and strategic highlights

·; Record weekly average number of customers, up 800,000

·; Investing further in food production, a unique point of difference for Morrisons

·; Major systems replacement programme on track

·; Development of new South West regional distribution centre under way

·; First convenience store trials to take place in 2011

·; Internet grocery assessment under way

 

Sir Ian Gibson, Non-Executive Chairman, said:

 

"Our first half performance has been solid, in a tight market. At a time when value is a priority for everyone we have continued our run of market beating sales growth, attracting more customers to Morrisons than ever before, reflecting our broad appeal. Our new CEO, Dalton Philips, has made a great start in the business and with the leadership team is developing positive plans for the next phase of growth for Morrisons."

 

 

Dalton Philips, Chief Executive, said:

 

"Over the last six months I have spent time getting to know this great business and its people. Three observations stand out: Morrisons is a world class retailer; it has real and positive differences in its fresh offer, food production and craft skills; and there are many opportunities ahead to drive our top line, increase efficiencies in the business and to capture growth. Today we are outlining plans to build on our strengths and generate profitable growth.

 

I am delighted to be leading a great company and with the whole team, I am determined to make Morrisons Better than Ever".

 

 

Outlook

 

We expect low market growth to continue in the second half of the year, with further pressure on the consumer. We entered 2010 anticipating this tight environment, and are managing the business accordingly. We continue to gain new customers and to exercise strong control of costs, and as a result the Board has confidence that we will deliver our profit expectations for the year.

 

Overview

 

 

This report covers trading for the 26 weeks ended 1 August 2010.

 

Total turnover was £8.1bn, an increase of 9.1% compared to the prior period. Excluding fuel, store turnover was up 5.8%, comprising a like-for-like increase of 0.9% and a contribution of 4.9% from our new stores.

 

Profit before tax was £412m (09/10: £449m). The prior period included an exceptional pensions credit of £91m and gains of £3m from property disposals.

 

Underlying profit before tax was £410m, compared to £359m in the prior period, an increase of 14%. The operating margin of 5.2% was up by 10 basis points from the prior year primarily reflecting the benefit delivered by the Group's new South East RDC opened in 2009.

 

The Group generated positive cash flow of £98m before repayment of borrowings. This compares to an outflow of £238m in the same period last year when there was a high level of capital expenditure arising from the acquisition of 38 stores from the Co-Operative Group. Cash generated from operations was £580m, an improvement of £47m over the prior period. Net debt reduced by £75m from the year end position to £849m, to leave gearing at 17%.

 

During the period a €250m (£150m) bond was repaid using the Group's existing credit facility. At the period end £650m of this facility remained undrawn.

 

Throughout the period the Group operated 425 stores, with 11.9m square feet of net selling space. Our new stores programme will see 15 stores open in the second half, adding a further 0.4m square feet to the estate.

 

The Group's dividend policy, as previously announced, is to maintain a payout ratio consistent with the European grocery sector average and to grow the dividend in line with underlying earnings. The Board is therefore pleased to confirm its intention to increase the interim dividend by 14% to 1.23 pence per share (2009/10: 1.08p). This will be paid on 8 November 2010 to shareholders on the register on 1 October 2010.

 

The UK grocery retail market

 

As anticipated, the consumer environment has remained challenging, with disposable incomes coming under pressure from a rising tax burden and consumer confidence impacted by concerns over unemployment and public sector spending cuts. In the grocery market, pressure on the consumer was eased through the virtual elimination of the food price inflation seen in the previous two years. Additionally, the highly competitive nature of the market saw a record level of promotional activity. Market growth in the first half was 3.0 %, whilst Morrisons equivalent growth was 5.8% (source: Kantar). This level of market growth was the lowest for five years.

 

We anticipate a similar low level of market growth in the remainder of 2010, although with a slight rise in prices due to the re-emergence of some commodity price pressures. For example, wheat prices are currently more than 60% above 2009 levels due to poor harvests, and oil has risen 13% in the past 12 months. Higher wheat and grain prices lead rapidly to increases in bread prices, and in the following months to higher protein prices as the costs of animal feeds rise. Higher oil prices affect most products as a result of higher costs of distribution and packaging.

 

Morrisons strong value credentials and focus on high quality fresh foods leave us well placed to continue to be successful in a low growth environment in the coming 18 months. In considering our strategy for growth, our financial strength allows us to look through the recession in order to invest for the long term.

 

We believe the UK grocery market will continue to offer attractive growth in the medium to long term. The UK population is expected to grow at a higher rate in the coming ten years, and the pre-recessionary trend towards healthier eating and concern for the provenance and quality of food will strengthen again as the economic recovery takes hold. The long term trend of food expenditure falling as a proportion of GDP reversed in the past two years, and we believe it is likely to continue to rise given the growing global demand for commodities.

 

Trading

 

Our total store sales growth of 5.8% and like-for-like growth of 0.9% were once again ahead of the market. The squeeze on consumer disposable income was reflected in a marginally lower (0.2%) basket spend in like-for-like stores, although the strength of our offer saw a 1.1% increase in the number of customers visiting these stores. Overall, including customers visiting our new stores, there was an 8.0% increase in total customers with a record average of 11.1m visiting our stores each week.

 

On our forecourts, the rise in the price of oil, exacerbated by sterling weakness and a rise in fuel duty, meant that consumers were paying on average 17p per litre more at the pump than in the previous period, with average unleaded prices per litre of 115p. This represented a £240m adverse effect on the disposable income of our customers. Our strong value positioning in the market attracted more customers onto our forecourts with total unleaded and diesel litreage up 4%. Overall, like-for-like fuel sales were up 23% in the period.

 

Although the economy has started to show the first tentative signs of recovery for the consumer, the prospects of a higher tax burden and a background of rising unemployment have continued to undermine confidence. Saving has become a more important consideration for many than spending. In this challenging environment Morrisons continuing strong focus on its quality and value offer has, for the third year in a row, enabled us to deliver sales growth ahead of the market. The fresh products offered in Market Street continue to perform well, reflecting our sharp everyday pricing and extremely attractive promotions. We have continued to exploit the flexibility delivered by our food production facilities, coupled with specialist food preparation skills that our competitors cannot match.

 

The market remained highly promotional during the period, and we ensured that Morrisons continued to offer the broadest range and greatest depth of promotional discounts in the market. Whilst some promotions were aimed at giving our customers affordable treats, such as a very successful Pimms promotion, most were designed to offer savings on everyday essentials. Our promotional offers with milk and bread at 50p and fresh fruit and vegetables at 30p, representing the lowest priced staple products in the country, were extremely popular. Our volume momentum has been ahead of the sector for a sustained period and has enabled us to invest strongly in value for our customers, both in base price and in the promotional programme.

 

Towards the end of the period we launched our new television advertising campaign. This continues the strong emphasis on the provenance, quality and freshness of our food and on our in-store skills, with food stories told to school children. Early research from the campaign has shown it to be highly effective.

 

Strategy update and operating review

 

In 2009/10 the Group opened 43 new stores, including 34 acquired from the Co-Operative Group and converted to Morrisons after complete refurbishment. The management and staff of these new stores have continued to establish Morrisons reputation for quality and value in areas of the country where we were under-represented, and their operational performance has been very much in line with our projections at the time of the acquisition. Our expansion into new areas of the country continues successfully, through the National to Nationwide programme. We reiterate our space expansion target of 1.5m square feet in the three years to the end of January 2013.

 

The development of our new South West RDC at Bridgwater is now underway and the site will become fully operational in early 2012. This is a few months later than we had originally planned, due to delays experienced by the site developer in achieving a viable total scheme for the site, which depends also on residential development that has proved challenging given the state of the housing market. Our facility will be freehold, and at 800,000 square feet will serve 63 stores and provide further capacity to support our National to Nationwide expansion. The total investment will be £95m.

 

Our supply chain is key to enabling us to deliver a unique fresh offer to our customers and really demonstrating that we understand the provenance of our food. We previously announced that we were reviewing further opportunities to expand our manufacturing operations and in the period we made two investments:

 

·; We acquired a stir fry and prepared vegetable business for which Morrisons was the biggest customer, but which had significant further capacity. This will enable us to consolidate our sourcing of all these products in house.

 

·; We acquired a cooked meat production plant which will add to our existing capacity and allow us to produce nearly all of our requirements in-house.

We have identified a number of other areas of production which would fit well into the Morrisons model and are continuing to evaluate these. In addition, we intend to develop a new produce packhouse facility alongside the Bridgwater RDC in 2012.

 

During the period we began in earnest the deployment of our new IT systems across all areas of the business. This six year, £310m programme of investment, will result in the replacement of all the Group's core systems and technology infrastructure. To date, the bulk of the Group's payroll, HR and financial systems have been replaced, a complete new wide-area network installed, the majority of store hardware renewed and voice-picking technology implemented in our grocery and frozen distribution centres. Additionally, the Group's new store electronic point of sale system is being rolled out in a programme that will complete in 2012 and the new trading product master file is also being populated, a process that will complete in early 2011. The software required to run our distribution centres and our food production facilities is currently undergoing pilot running in one depot and one produce plant, and has been successful. Roll out to other depots and plants will take place through 2011 and 2012. The success of these activities, and our proven ability to implement changes with no impact on the business, gives us great confidence for the remainder of the programme.

 

The Board believes that Morrisons core business of operating grocery stores from 10,000 to 40,000 square feet of retail space remains highly attractive, with good long term growth prospects. This has been confirmed by the review carried out following the arrival of Dalton Philips as Chief Executive. Dalton, together with the leadership team, has developed a range of internal programmes which will strengthen the core further, to make the business better than ever. These programmes include new initiatives to emphasise our fresh food credentials, a focus on creating powerful own label brands, activities to improve our customer service delivery and work to use our new systems to our advantage in increasing productivity, reducing cost and improving our use of analytical tools.

 

The Board also recognises that certain aspects of the grocery market where Morrisons does not currently operate afford attractive opportunities for future growth, and these are under review. In the first half of 2011 we will begin a trial of a new convenience format and we are currently investigating the opportunities for Morrisons in the internet grocery channel. Morrisons past success has been built on being different, in the offer we bring to customers, and this will continue in any new areas for business development.

 

Corporate Social Responsibility (CSR)

 

Our CSR programme remains a key focus of our management agenda and we are moving forward with targets covering a new three year period from 2010-2013. Our emissions remain on a downward trend despite the growth of our business in both retailing and manufacturing. We are also on track to have ceased sending waste from our stores to landfill by 2013.

 

We have now completed our first full farming year at The Morrisons Farm at Dumfries House, in Ayrshire, Scotland. This is a cornerstone of our wider programme of farming research, aimed at supporting a sustainable British agriculture industry, spanning the beef, lamb, pork, dairy and poultry sectors. Our latest research work includes a review of the welfare of free range hens by the University of Bristol.

 

Colleagues

 

Our colleagues are at the heart of our business. We continue to invest heavily in training, and the Morrisons Academy marked the country's largest ever vocational programme with more than 24,000 colleagues, including butchers, bakers, greengrocers and fishmongers receiving their national qualifications. We were delighted to receive the Employer of the Year Award from The Grocer magazine, a fitting recognition of the great work performed by our colleagues in delivering for our customers everyday.

 

Outlook

 

We expect low market growth to continue in the second half of the year, with further pressure on the consumer. We entered 2010 anticipating this tight environment, and are managing the business accordingly. We continue to gain new customers and to exercise strong control of costs, and as a result the Board has confidence that we will deliver our profit expectations for the year.

 

Enquiries:

 

Wm Morrison Supermarkets plc

Richard Pennycook - Finance Director		0845 611 5000
Niall Addison - Investor Relations Director		07764 624701
Media Relations
Wm Morrison Supermarkets plc	Gillian Hall	0845 611 5359
Citigate Dewe Rogerson:	Simon Rigby	020 7638 9571
	Kevin Smith	020 7282 1054
	Sarah Gestetner	020 7282 2920

 

There will be an analyst presentation at 09.30 on Thursday 9 September 2010 at the offices of the Royal Bank of Scotland, 250 Bishopsgate, London EC2M 4AA.

 

The presentation will also be available live via audio webcast at: www.morrisons.co.uk/Corporate/Investors/ and via conference call: access number: 0845 634 0041 and participant pin: 3274901. There will be a replay available for 7 days: replay dial in: +44 207 769 6425 and replay pin: 3274 901#.

 

 

 

Forward looking statements

Certain statements in this interim report are forward-looking. Where the interim report includes forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including both economic and business risk factors, that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

 

 

 

Wm Morrison Supermarkets PLC

Condensed consolidated financial statements

 

Consolidated statement of comprehensive income

26 weeks ended 1 August 2010

 

		Note	26 weeks ended 1 August 2010 £m	26 weeks ended 2 August 2009 £m	52 weeks ended 31 January 2010 £m
Turnover		2	8,135	7,458	15,410
Cost of sales			(7,567)	(6,940)	(14,348)
Gross profit			568	518	1,062
Other operating income			36	31	65
Administrative expenses			(177)	(167)	(315)
Pensions credit			-	91	91
Profits arising on property transactions			-	3	4
Operating profit			427	476	907
Analysed as:
Operating profit before pensions credit			427	385	816
Pensions credit			-	91	91
Operating profit			427	476	907
Finance costs		3	(23)	(34)	(60)
Finance income		3	8	7	11
Profit before taxation			412	449	858
Taxation		4	(126)	(140)	(260)
Profit for the period attributable to the owners of the Company			286	309	598
Other comprehensive income/(expense):
Actuarial gain/(loss) arising in the pension scheme			-	6	(71)
Foreign exchange movements			-	(1)	(1)
Cash flow hedging movement			(11)	(7)	(11)
Tax in relation to components of other comprehensive income			5	-	22
Other comprehensive expense for the period, net of tax			(6)	(2)	(61)
Total comprehensive income for the period attributable to the owners of the Company			280	307	537
Earnings per share (pence)		5
	- basic		10.83	11.83	22.80
	- diluted		10.65	11.76	22.37

 

 

Consolidated balance sheet
1 August 2010
				1 August 2010		2 August 2009		31 January 2010
		Note		£m		£m		£m
Assets
Non-current assets
Goodwill		12		7		-		-
Property, plant and equipment		6		7,283		6,985		7,180
Lease prepayments				256		260		257
Investment property				222		241		229
Financial assets				-		67		-
Pension surplus		7		-		51		-
				7,768		7,604		7,666
Current assets
Stocks				536		493		577
Debtors				221		221		201
Financial assets				-		-		71
Cash and cash equivalents				241		308		245
				998		1,022		1,094
Liabilities
Current liabilities
Creditors				(1,831)		(1,895)		(1,845)
Other financial liabilities				(58)		(236)		(213)
Current tax liabilities				(162)		(148)		(94)
				(2,051)		(2,279)		(2,152)
Non-current liabilities
Other financial liabilities				(1,032)		(1,024)		(1,027)
Deferred tax liabilities				(516)		(481)		(515)
Pension liabilities		7		(6)		-		(17)
Provisions				(113)		(108)		(100)
				(1,667)		(1,613)		(1,659)
Net assets				5,048		4,734		4,949
Shareholders' equity
Called up share capital				266		265		265
Share premium				104		87		92
Capital redemption reserve				6		6		6
Merger reserve				2,578		2,578		2,578
Retained earnings and hedging reserve				2,094		1,798		2,008
Total equity attributable to owners of the Company				5,048		4,734		4,949
Consolidated cash flow statement
26 weeks ended 1 August 2010
					26 weeks ended 1 August 2010		26 weeks ended 2 August 2009	52 weeks ended 31 January 2010
			Note		£m		£m	£m
Cash flows from operating activities
Cash generated from operations			8		580		533	1,004
Interest paid					(11)		(12)	(60)
Taxation paid					(62)		(92)	(209)
Net cash inflow from operating activities					507		429	735
Cash flows from investing activities
Interest received					3		4	8
Proceeds from the sale of property, plant and equipment					2		4	7
Cash outflow from acquisition of subsidiary			12		(3)		-	-
Purchase of property, plant and equipment					(236)		(572)	(906)
Net cash outflow from investing activities					(234)		(564)	(891)
Cash flows from financing activities
Proceeds from the issue of ordinary shares					13		28	34
New borrowings					-		200	200
Repayment of borrowings			11		(150)		(2)	(1)
Dividends paid to equity shareholders			9		(188)		(131)	(159)
Net cash (outflow)/inflow from financing activities					(325)		95	74
Net decrease in cash and cash equivalents					(52)		(40)	(82)
Cash and cash equivalents at start of period					245		327	327
Cash and cash equivalents at end of period					193		287	245
Reconciliation of net cash flow to movement in net debt in the period
					26 weeks ended		26 weeks ended	52 weeks ended
					1 August 2010		2 August 2009	31 January 2010
			Note		£m		£m	£m
Net decrease in cash and cash equivalents					(52)		(40)	(82)
Cash outflow from decrease in debt and lease financing					150		2	2
Cash inflow from increase in loans					-		(200)	(200)
Net increase/(decrease) in cash before debt financing					98		(238)	(280)
Other non cash movements					(19)		(5)	(2)
Debt acquired on acquisition of subsidiary			12		(4)		-	-
Opening net debt					(924)		(642)	(642)
Closing net debt			10		(849)		(885)	(924)

 

 

 

Consolidated statement of changes in equity

 

	Attributable to the owners of the Company
	Share capital   £m	Share premium   £m	Capital redemption reserve £m	Merger reserve   £m	Hedging reserve   £m	Retained earnings   £m	Total equity   £m
Current half year
At 31 January 2010	265	92	6	2,578	3	2,005	4,949
Profit for the period	-	-	-	-	-	286	286
Other comprehensive income:
Cash flow hedging movement	-	-	-	-	(11)	-	(11)
Tax in relation to components of other comprehensive income	-	-	-	-	2	3	5
Total comprehensive income for the period	-	-	-	-	(9)	289	280
Employees share options schemes:
Share options charge	-	-	-	-	-	(6)	(6)
Share options exercised	1	12	-	-	-	-	13
Dividends	-	-	-	-	-	(188)	(188)
Total transactions with owners	1	12	-	-	-	(194)	(181)
At 1 August 2010	266	104	6	2,578	(6)	2,100	5,048
Prior half year
At 1 February 2009	263	60	6	2,578	12	1,601	4,520
Profit for the period	-	-	-	-	-	309	309
Other comprehensive income:
Actuarial gain arising in the pension scheme	-	-	-	-	-	6	6
Cash flow hedging movement	-	-	-	-	(7)	-	(7)
Foreign exchange movements	-	-	-	-	-	(1)	(1)
Tax in relation to components of other comprehensive income	-	-	-	-	-	-	-
Total comprehensive income for the period	-	-	-	-	(7)	314	307
Employees share options schemes:
Share options charge	-	-	-	-	-	9	9
Share options exercised	2	27	-	-	-	-	29
Dividends	-	-	-	-	-	(131)	(131)
Total transactions with owners	2	27	-	-	-	(122)	(93)
At 2 August 2009	265	87	6	2,578	5	1,793	4,734

 

 

Consolidated statement of changes in equity (continued)

 

	Attributable to the owners of the Company
	Share capital   £m	Share premium   £m	Capital redemption reserve £m	Merger reserve   £m	Hedging reserve   £m	Retained earnings   £m	Total equity   £m
Prior year
At 1 February 2009	263	60	6	2,578	12	1,601	4,520
Profit for the period	-	-	-	-	-	598	598
Other comprehensive income:
Actuarial loss arising in the pension scheme	-	-	-	-	-	(71)	(71)
Foreign exchange movements	-	-	-	-	-	(1)	(1)
Cash flow hedging movement	-	-	-	-	(11)	-	(11)
Tax in relation to components of other comprehensive income	-	-	-	-	2	20	22
Total comprehensive income for the period	-	-	-	-	(9)	546	537
Employees share options schemes:
Share options charge	-	-	-	-	-	17	17
Share options exercised	2	32	-	-	-	-	34
Dividends	-	-	-	-	-	(159)	(159)
Total transactions with owners	2	32	-	-	-	(142)	(108)
At 31 January 2010	265	92	6	2,578	3	2,005	4,949

 

 

 

Notes to the condensed financial statements 26 weeks ended 1 August 2010
1	UNDERLYING EARNINGS
The Directors consider that the underlying earnings and underlying adjusted earnings per share measures referred to in the Interim management report provide useful information for shareholders on underlying trends and performance. The adjustments are made to reported profit to (a) remove the impact of pension interest income volatility on the Statement of comprehensive income; (b) remove the one-off pensions credit as a result of the move from final salary to CARE; (c) remove profits arising on property transactions since these profits do not form part of the Group's principal activities; and (d) apply an effective tax rate of 30%, being an estimated normalised tax rate.
			26 weeks ended	26 weeks ended	52 weeks ended
			1 August 2010	2 August 2009	31 January 2010
			£m	£m	£m
	Profit after tax		286	309	598
	Add back: tax charge for the period 1		126	140	260
	Profit before tax		412	449	858
	Adjustments for:
	Net pension interest (income)/cost 1		(2)	4	4
	Pensions credit 1		-	(91)	(91)
	Profits arising on property transactions 1		-	(3)	(4)
	Underlying earnings before tax		410	359	767
	Normalised tax charge at 30% 1		(123)	(108)	(230)
	Underlying earnings after tax charge		287	251	537
1 Adjustments marked 1 increase underlying earnings by £1m (2 August 2009: decrease by £58m, 31 January 2010: decrease by £61m), as shown in reconciliation of earnings disclosed in note 5.

 

2	TURNOVER
			26 weeks ended	26 weeks ended	52 weeks ended
			1 August 2010	2 August 2009	31 January 2010
			£m	£m	£m
	Sale of goods in stores		6,356	6,009	12,423
	Fuel		1,720	1,405	2,893
	Total store based sales		8,076	7,414	15,316
	Other sales		59	44	94
	Total turnover		8,135	7,458	15,410

 

 

		Notes to the condensed financial statements (continued) 26 weeks ended 1 August 2010
3		FINANCE COSTS AND INCOME
			26 weeks ended	26 weeks ended	52 weeks ended
			1 August 2010	2 August 2009	31 January 2010
			£m	£m	£m
		Interest payable on short term loans and bank overdrafts	(3)	(4)	(5)
		Interest payable on bonds	(19)	(22)	(45)
		Interest capitalised	3	1	5
		Total interest payable	(19)	(25)	(45)
		Fair value movement of derivative instruments	(1)	(4)	(8)
		Other finance costs	(3)	(5)	(7)
		Finance costs	(23)	(34)	(60)
		Bank interest received	2	3	4
		Amortisation of bonds	2	7	8
		Other finance income	2	1	3
		Pension liability interest cost	(60)	(56)	(109)
		Expected return on pension assets	62	52	105
		Net pension interest income/(cost)	2	(4)	(4)
		Finance income	8	7	11
		Net finance income	(15)	(27)	(49)

 

4

TAXATION

On 22 June 2010 it was announced that the rate of corporation tax will be reducing from 28% over a four year period to 24% at a rate of 1% per year. The first reduction to 27% became substantively enacted in the Finance Act (no 2) 2010 on 27 July 2010.   The tax charge within the interim report has been calculated by applying the effective rate of tax which is expected to apply to the Group for the year ended 30 January 2011 as permitted by IAS 34 Interim financial reporting. This therefore incorporates the reduction in the tax rate to 27% which has reduced the half-year tax charge by £9m. Subsequent changes in the rate of corporation tax have not yet been substantively enacted. The tax charge in the interim report is based on the rates applicable at the balance sheet date and therefore do not reflect those changes in tax rate which have not yet become effective.

 

	Notes to the condensed financial statements (continued) 26 weeks ended 1 August 2010
5	EARNINGS PER SHARE
	Basic earnings per share are calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period, excluding those held by the Group as treasury shares, which are treated as cancelled.   For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially issuable dilutive ordinary shares.    Underlying earnings per share It is the Directors’ view that Underlying earnings per share is a fairer reflection of the underlying results of the business.
		26 weeks ended		26 weeks ended		52 weeks ended
		1 August 2010		2 August 2009		31 January 2010
		pence		pence		pence
		Basic	Diluted	Basic	Diluted	Basic	Diluted
	Basic earnings per share	10.83	10.65	11.83	11.76	22.80	22.37
	Underlying earnings per share	10.86	10.69	9.59	9.53	20.47	20.08
		£m		£m		£m
		Basic	Diluted	Basic	Diluted	Basic	Diluted
	Basic earnings
	Earnings attributable to ordinary shareholders	286	286	309	309	598	598
	Underlying earnings
	Earnings attributable to ordinary shareholders	286	286	309	309	598	598
	Adjustments to determine underlying profit (note 1)	1	1	(58)	(58)	(61)	(61)
	Underlying earnings attributable to ordinary shareholders	287	287	251	251	537	537
		Millions		Millions		Millions
		Basic	Diluted	Basic	Diluted	Basic	Diluted
	Weighted average number of shares
	Ordinary shares in issue/diluted ordinary shares*	2,642	2,685	2,615	2,631	2,623	2,674

 

6	PROPERTY, PLANT AND EQUIPMENT
				1 August 2010	2 August 2009	31 January 2010
				£m	£m	£m
	Net book value
	At beginning of the period			7,180	6,587	6,587
	Acquisition of subsidiaries (note 12)			14	-	-
	Additions at cost			236	547	869
	Interest capitalised			3	1	5
	Transfers from investment property			5	-	20
	Disposals			(2)	(3)	(3)
	Depreciation charge for the period			(153)	(147)	(298)
	At end of the period			7,283	6,985	7,180
	In addition to the depreciation charge above of £149m, £2m (2 August 2009: £4m, 31 January 2010: £6m) is charged on Investment properties.   Contracts placed for future capital expenditure not provided in the financial statements amount to £141m (2 August 2009: £120m, 31 January 2010: £95m).

  

 

Notes to the condensed financial statements (continued) 26 weeks ended 1 August 2010

 

7

PENSIONS

The market assumptions used in the calculation of the defined benefit pension schemes' deficit at the prior year-end have not been updated for the interim report as the impact is not considered to be significant.   Furthermore, the Government announced on 8 July 2010 that the Consumer Price Index rather than the Retail Price Index will be used as the basis for inflationary increases to pensions in its next update of the statutory requirement. The Group is currently consulting with their advisers as to the impact of this announcement on its defined benefit pension schemes. The impact of the change, which might reduce the Group's pension obligation, is dependent upon certain clauses within the schemes' trust deeds which are currently being reviewed. The findings from this review will be implemented in the year-end financial report.

 

8	CASH FLOWS FROM OPERATING ACTIVITIES
		26 weeks ended	26 weeks ended	52 weeks ended
		1 August 2010 £m	2 August 2009 £m	31 January 2010 £m
	Profit for the period	286	309	598
	Adjustments for:
	Taxation	126	140	260
	Depreciation	155	151	304
	Profit on disposal of property, plant and equipment	-	(3)	(5)
	Net finance cost	15	27	49
	Other non-cash changes	6	8	10
	Pensions credit	-	(91)	(91)
	Excess of contributions over pension service cost	(8)	(7)	(16)
	Decrease/(increase) in stocks	41	1	(83)
	(Increase)/decrease in debtors	(19)	26	36
	Decrease in creditors	(22)	(24)	(46)
	Cash generated from operations	580	533	1,004

 

9	DIVIDENDS
		26 weeks ended	26 weeks ended	52 weeks ended
		1 August 2010	2 August 2009	31 January 2010
		£m	£m	£m
	Equity dividends paid in the period	188	131	159
	The dividend paid in the period represents the cash payment of the final dividend from the 52 weeks ended 31 January 2010.   The Directors are proposing an interim dividend of 1.23p per share which will be paid on 8 November 2010 to shareholders who are on the register of members on 1 October 2010. The interim dividend will absorb an estimated £33m of shareholders' funds. This amount will be charged to retained earnings when paid.

 

 

Notes to the condensed financial statements (continued) 26 weeks ended 1 August 2010

 

10	ANALYSIS OF NET DEBT
				1 August 2010	2 August 2009	31 January 2010
				£m	£m	£m
	Cash and cash equivalents			241	308	245
	Bank overdrafts			(48)	(21)	-
	Cash and cash equivalents per cash flow			193	287	245
	Cross-currency swaps			-	67	71
	Financial assets			-	67	71
	Bonds			-	(201)	(198)
	Finance lease obligations			(1)	(1)	-
	Derivative financial instruments			(9)	(13)	(15)
	Current financial liabilities (excluding bank overdrafts)			(10)	(215)	(213)
	Bonds			(560)	(561)	(561)
	Floating credit facility			(450)	(450)	(450)
	Other unsecured loans			(12)	(13)	(11)
	Finance lease obligations			(10)	-	-
	Derivative financial instruments			-	-	(5)
	Non-current financial liabilities			(1,032)	(1,024)	(1,027)
	Net debt			(849)	(885)	(924)

 

11	NON-CURRENT BORROWINGS
	In April 2010, the Group's €250m 6.5% Euro bonds matured and were settled.   At the half year end date the Group has undrawn floating committed borrowing facilities available in respect of which all conditions precedent had been met at that date of £650m (2 August 2009: £650m; 31 January 2010: £650m).

 

12

BUSINESS COMBINATIONS

IFRS 3 (revised) Business combinations has been applied to the two acquisitions completed during the period which increase the manufacturing capabilities of the Group.   Farmers Boy (Deeside) Limited On 9 July 2010 Farmers Boy (Deeside) Limited acquired the trade of production of sliced meats and delicatessen products and associated assets of Brookfield Foods Limited, a company within the Cranswick plc group with 49% of the shares of Farmer's Boy (Deeside) Limited being issued as consideration. 51% of the issued share capital was retained within the Group. As part of the transaction a put and call option has been put in place between the Group and Cranswick plc. As a result of the nature of these options, Farmers Boy (Deeside) Limited has been treated as a 100% subsidiary from acquisition, with the stake of Cranswick plc being treated as debt. The fair value of the Group's commitment in relation to the 49% shareholding at the date of acquisition is £13m.

 

Band Camp Limited   On 12 July 2010 the Group acquired 100% of the issued share capital of Band Camp Limited from its previous owners for a cash consideration of £2m. Band Camp Limited is the parent company of Simply Fresh Foods Limited which is a producer of prepared vegetable products.

 

Notes to the condensed financial statements (continued) 26 weeks ended 1 August 2010

 

12	BUSINESS COMBINATIONS (continued)
		Assets and liabilities recognised as a result of the acquisitions	Fair value
			Farmers Boy (Deeside) Limited £m	Band Camp Limited £m
		Property, plant and equipment	6	8
		Trade and other receivables	-	1
		Trade and other payables	-	(2)
		Bank overdraft	-	(1)
		Borrowings	-	(4)
		Net identifiable assets acquired	6	2
		Goodwill	7	-
		Total consideration	13	2

 

13

CONTINGENT LIABILITIES

In April 2010, the Office of Fair Trading (OFT) issued a decision, alleging that Morrisons was engaged in unlawful practices in relation to retail prices for tobacco products in the UK. The Board considers the OFT's stance to be illogical and without foundation and expects that when the case is considered with proper judicial scrutiny by the Competition Appeals Tribunal, it will be overturned. The Board has not made a provision for such a liability.

 

  

Responsibility statement

 

We confirm that to the best of our knowledge:

·; the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

·; the Interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules.

By order of the Board

8 September 2010

 

The Board

The Board of Directors that served during the 26 weeks to 1 August 2010 and their respective responsibilities are:

 

Sir Ian Gibson - Chairman*

Dalton Philips - Chief Executive

Richard Pennycook - Group Finance Director

Mark Gunter - Group Retail Director

Martyn Jones - Group Trading Director

Philip Cox *

Brian Flanagan *

Paul Manduca *

Nigel Robertson *

Penny Hughes *

Johanna Waterous *

 

* Non-Executive Director

 

Dalton Philips and Johanna Waterous joined the Board on 29 March 2010 and 1 February 2010 respectively.

 

 

 

Principal risks and uncertainties

The principal risks and uncertainties set out in Wm Morrison Supermarkets PLC's Annual report and financial statements for the 52 weeks ended 31 January 2010 remain the same for the Half-yearly financial report 2010/11. Those risks and uncertainties can be summarised as follows:

 

Operational risks that may affect reputation, market share and financial results:

Business strategy

Product quality and safety 

Regulation 

Corporate Social Responsibility

Business interruption 

Property

IT Systems and infrastructure 

Colleague engagement and retention

Pensions

 

Financial risks that may affect financial results or the financial position of the company:

Foreign currency risk 

Liquidity risk

Credit risk

 

 

More information on the principal risks and how we mitigate those risks can be found on page 13 of the Annual report and financial statements 2010. You can view the Annual report and financial statements 2010 online at www.morrisons.co.uk/annual report10.

 

 

 

Accounting policies

 

Basis of preparation

This Half-yearly financial report 2010/11 is the condensed consolidated financial information of the Group for the 26 weeks ended 1 August 2010. It has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority and the requirements of IAS 34 Interim Financial Reporting as adopted by the European Union.

 

The Half-yearly financial report 2010/11 was approved by the Board of Directors on 8 September 2010.

 

The Half-yearly financial report 2010/11 does not constitute financial statements within the meaning of Section 434 of the Companies Act 2006 and does not include all of the information and disclosures required for full annual financial statements. It should be read in conjunction with the Annual report and financial statements for the 52 weeks ended 31 January 2010 which is available either on request from the Company's registered office or to download from www.morrisons.co.uk/annualreport10.

 

The financial information contained in the Half-yearly financial report 2010/11 in respect of the 52 weeks ended 31 January 2010 has been extracted from the Annual report and financial statements 2010 which have been filed with the Registrar of Companies. The auditors report on these financial statements was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

 

The half-yearly results for the current and comparative periods are unaudited.

The auditors have carried out a review of the Half-yearly financial report 2010/11 and their report is set out below.

 

 

Significant accounting policies

Except as described below, the accounting policies applied by the Group in these condensed consolidated financial statements are consistent with those set out in Wm Morrison Supermarkets PLC Annual report and financial statements for the 52 weeks ended 31 January 2010.

 

In preparing the condensed consolidated financial statements, management are required to make accounting assumptions and estimates. The assumptions and estimation methods were consistent with those applied to the Annual report and financial statements for the 52 weeks ended 31 January 2010.

 

Business combinations

IFRS 3 (revised) Business combinations and consequential amendments to IAS 27 Consolidated and separate financial statements, IAS 28 Investments in associates and IAS 31 Interests in joint ventures, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.

 

During the period, the Group has made two acquisitions as set out in note 12, and the requirements of these standards have been applied in accounting for these transactions. The Group's accounting policy under the new standards is set out below:

 

The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquire either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.

 

The excess of consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquire over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the Statement of comprehensive income.

 

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 February 2010, but have no material effect on the Group's financial statements.

 

IFRIC 17 Distributions of non-cash assets to owners*

IFRIC 18 Transfers of assets from customers*

Additional exemptions for first time adopters (Amendment to IFRS 1)*

Improvements to International Financial Reporting Standards 2009*

 

\* These standards and interpretations have been endorsed by the European Union.

 

 

 

Independent review report to Wm Morrison Supermarkets PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the Half-yearly financial report for the 26 weeks ended 1 August 2010 which comprises the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related explanatory notes. We have read the other information contained in the Half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the DTR) of the UK's Financial Services Authority (the UK FSA). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The Half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-yearly financial report in accordance with the DTR of the UK FSA.

The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this Half-yearly financial report has been prepared in accordance with IAS 34 Interim financial reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of interim financial information performed by the independent auditor of the entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half-yearly financial report for the 26 weeks ended 1 August 2010 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

Chris Hearld

for and on behalf of KPMG Audit Plc Chartered Accountants 1 The Embankment

Neville Street

Leeds, LS1 4DW 8 September 2010

 

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