13th Mar 2008 07:01
Morrison(Wm.)Supermarkets PLC13 March 2008 Wm Morrison Supermarkets PLC Preliminary results for the year ended 3 February 2008 Strong financial and operating performance Morrisons has made real progress this year towards its aim of becoming the food specialist for everyone Financial summary • Turnover up 6.0% to £13.0bn (2007: £12.2bn for 52 weeks) • Like for like sales (ex fuel) up 4.6% (2007: 5.2%) • Profit before tax £612m (2007: £369m) • Net debt reduced to £543m (2007: £772m) • Underlying earnings per share of 14.4p (2007: 8.3p) • Final dividend up 20% giving a total dividend for the year of 4.8p (2007: 4.0p) Operating review • Range expanded and revitalised. • Store refresh programme on track to complete July 2008. • Significant increase in customer numbers in the final quarter. • Eight new stores opened. • Grocery distribution facility opened in Swindon. Balance Sheet Review • Progressive dividend growth. • Surplus capital of £1bn to be returned to shareholders. Commenting on the results: Sir Ken Morrison, Chairman said: "In my last statement as Chairman of Morrisonsit gives me particular pleasure to be reporting record earnings and to see thatmore customers than ever before are experiencing the freshness, quality andvalue that Morrisons has to offer." Marc Bolland, Chief Executive, said "This has been a strong year for Morrisons,with growing customer numbers. We have always delivered good availability andservice. Now we are also recognised for our great fresh foods. Customer numbershave grown by an extra half million per week and we are well on track tobecoming the 'food specialist for everyone'." Enquiries Wm Morrison Supermarkets Marc BollandRichard Pennycook 0845 611 5000 Investor RelationsNiall Addison 07764 624701 Media RelationsWm Morrison Supermarkets: Gillian Hall 0845 611 5359Citigate Dewe Rogerson: Simon Rigby 020 7638 9571 Sarah Gestetner An analyst presentation will take place at 0930 on Thursday 13 March 2008, atABN AMRO, 250 Bishopsgate, London, EC2. There is also a dial in facility for those that cannot attend the analystpresentation in person: Dial in number: +44 (0)1452 552018 Conference ID: 36909094 Chairman's statement The past year saw further steady progress for Morrisons, with a solid salesperformance and strong profit and cash generation. Profit before tax was £612m compared with £369m last year. This included £32m ofproperty gains, compared with £38m last year. Underlying earnings per shareincreased by 73% to 14.4p, whilst basic eps increased 123% due to an abnormallylow tax charge. The Board is recommending a final dividend of 4.125p per share,to bring the total for the year to 4.8p - an increase of 20%. Cash generation was strong - net debt fell from £772m to £543m despite openingeight new stores, beginning a phase of additional investment in our OptimisationPlan and contributing an additional £100m to our pensions schemes. From its peakin 2004 of £1.6bn, net debt has reduced by over £1.0bn through a combination ofprofit recovery actions, tight capital controls and divestment of property thatdid not fit our operating model. Following the negotiation of new term debtfacilities of £1.1bn in September 2007, the group had available headroom of£1.3bn at the year end, with zero net finance cost in the year and gearing of12.4%. As previously reported, David Hutchinson retired from the Board in June 2007 onthe grounds of ill health, after 21 years service. I am very sorry to reportthat David passed away in February 2008, after a retirement that was cruellyshort. My thoughts, and those of everyone in the Company, are with his widowDiane, and his family. On behalf of the Directors I would like to thank all our staff for another yearof exceptionally hard work, and I was delighted for them that their efforts wererewarded as the year progressed with some healthy sales momentum. Our profitimprovement in the year will provide a profit share pool for staff of £30m, along standing benefit on top of the very popular staff discount that waslaunched in the year. Our staff and customers responded strongly to our charitable activities in theyear, and we were pleased to raise over £1.1m for Asthma UK, our chosen charityof the year, as well as £0.3m in one day for Children in Need. In the comingyear, our colleagues have chosen to support "Protecting Generations forGenerations", an innovative partnership between Help the Aged and Childline. The year under review saw the rise of inflationary cost pressures in a number ofbasic commodities such as dairy products and wheat. We fought hard to avoidpassing these higher costs onto consumers, and we will continue to strive tooperate at low cost in order to ensure maximum value for our customers. The Competition Commission inquiry into the Grocery Sector will announce itsfinal conclusions in April 2008, some two years after it began. It has stated,as we all knew, that supermarket retailing in the UK is highly competitive. Wesee nothing in the provisional findings that would cause us to change the way wedo business - whether providing value and choice to customers, dealing fairlywith suppliers or seeking out new sites. We are encouraged that a competitiontest, as proposed, would afford opportunities for us in areas of the countrywhere we are under-represented. The OFT inquiry into dairy pricing activities inthe early part of the millennium resulted in fines being levied on a number ofcompanies, including Safeway for a period prior to it coming into our ownership.The OFT has alleged that Morrisons, too, was involved, a claim that we denystrongly. This is my last statement to shareholders as Chairman. I have been with thebusiness now for some 55 years and must say that the experience has been bothdemanding and fulfilling, but nonetheless it has always been enjoyable. I amprepared for a situation where I will have more time to look around and I intendto develop new interests in a number of fields. I will keep in touch with theprogress of the company and no doubt maintain contact with a number of what willbe my former colleagues. It seems a long time since I was demobilised from the army in 1952 and startedto learn about how to run a retail grocery business. I believe that over theyears I have learned one or two things and would set out what I consider to bethe important aspects for my successor. I think it is important to assume aleading position and to never forget the business principles that we might be alarge company and fairly sophisticated but we do carry out a simple task - webuy things and sell them. Our task is to ensure that we always please thecustomer with the quality of what we offer for sale and that at all times weensure outstanding value for money. This can only be achieved by strict controlof all costs and remaining in touch with all aspects of what is a fascinatingindustry. The ownership of freehold property and the willingness to invest andre-invest in fixed assets has always kept the company in good heart. This can,of course, be achieved whilst also maintaining a prudent balance sheet. Any success I have achieved in my career has always been due to the presence andhelp of numerous team members who possessed great ability, dedication and skill.I would like to take this opportunity to thank everyone I have been fortunateenough to work with over the years and at the same time wish the company everysuccess in the future. I think the present economic climate provides a wonderful opportunity for thecompany to continue to prosper as long as it remains true to its foundingprinciples. It has been great fun, and I am delighted that I enjoyed theconfidence of shareholders, staff and customers alike. I have never forgottenthat retailers are always on duty as we are in a dynamic business, 7 days aweek, 52 weeks a year. I am sure the new management team headed by our recently appointed non-executiveChairman, Sir Ian Gibson CBE, will spare no effort in further extending yourcompany's run of success. Thank you sincerely Chief Executive's review Strategy Our three year strategy, as laid out in our 2007 annual report, is to positionthe business as the UK's "food specialist for everyone". This builds on ourhistoric strengths, now applied to a much bigger business following the Safewayacquisition. As a food specialist, we are differentiating ourselves from ourlarger competitors, all of whom are seeking to expand their non-foodcredentials. We are emphasising our deep understanding of food, through beingcloser to source than other retailers, through our unique manufacturing andpacking facilities, through the amount of food preparation undertaken in ourstores and through the employment of more specialist butchers, fishmongers andbakers than our competitors. We are also emphasising that our offer is foreveryone, compared with our smaller, more expensive and exclusive competitors.Our great food is also always great value. Our strategy builds on our strengths, and is in tune with our customers'increasing focus on the health, provenance, quality and freshness of the foodthat they buy. In order to deliver it fully, we outlined last year the buildingblocks that needed to be put in place, and our plans to do this by 2010. Theoperating review of the year, below, highlights our progress towards thesegoals. We believe that the strategy has delivered strongly improved profit margins forour shareholders, whilst also positioning the Group for long term growth. The Group is securely financed and has a strong balance sheet. We are confidentthat our planned investment requirements over the next two years can be met fromexisting facilities. Our balance sheet strategy is based on a number ofprinciples: • Operational control of our retail stores is fundamental to us. • We are a prudent organisation and we structure our finances accordingly. • We wish to maintain a strong investment grade balance sheet. • Our defined benefit pension schemes assets and liabilities are effectively part of our balance sheet, and should be managed as such. Based on these principles and a review of our future operating plans, the Boardhas concluded that surplus capital of £1bn should be returned to shareholdersduring 2008 and 2009, with £500m of that delivered in the first 12 months of theprogramme. Our current intention is to achieve this through a share buybackprogramme, and we will review progress at the end of the first year ofoperation. Additionally we will target progressive dividend growth in the comingtwo years, over and above earnings growth, in order to bring dividend cover to alevel in line with the rest of our sector. Funding for these enhanced returns toshareholders will come from existing cash resources and committed facilitiesavailable to the Group. Operating review of the year 2007/8 was a strong year for Morrisons - we delivered good progress on our longterm plans and continued the profit recovery momentum of the previous year. Ourdebt fell, despite investment for the future. We opened 8 new stores in the year, at Johnstone, Speke, Erskine, Wednesbury,Dundee, Llanelli, York, and Bristol (Hartcliffe). The store in Erskine was areplacement for another store in the town, and at 25,000 square feet was thesmallest new Morrisons opened for many years. We are pleased with its initialperformance and will be looking for more such sites. Additionally, we carriedout a number of extensions of stores, with 13 extensions of retail space and 18extensions of warehousing space to cope with the growing volumes passing throughthe stores. We ended the year with 375 stores and a total of 10,835k square feetof retail space, growth of 3.0% on the start of the year. Turnover grew by 4.1% to £13.0bn, a 6.0% increase after adjusting for the effectof a 53 week year in 2006/7. We were pleased that this growth was broad-based,across all regions. Like for like store sales, the measure of growth in existingstores, increased by 4.6% with both customer numbers and average basket spendincreasing. Like for like 2007/08 2006/07 stores Other Total Total Sales of goods (£m) 11,065 173 11,238 10,841Fuel (£m) 2,822 49 2,871 2,706Total sales inc VAT (£m) 13,887 222 14,109 13,547Turnover exc VAT (£m) 12,766 203 12,969 12,462Sales per square foot (£) 20.31 14.11 20.18 19.34Customer numbers (m) 475 7 482 479Customer spend (£) 23.07 25.29 23.10 22.53 As in the previous year, the strongest sales growth was achieved in Scotland andthe South of England, but it was pleasing also to see growth in the Group'straditional Northern heartland after two challenging years. Our health andbeauty department, revamped in 146 stores in 2006/7, showed growth, but not asmuch as we had aimed for. We are trialling a new, revised format which webelieve will yield more positive results. Our home and leisure department showedgood growth, albeit this was from CDs and DVDs at low margin. New, broaderranges will be introduced in the coming year. We continued to see strong trendstowards customers choosing higher quality, more healthy food - with sales of ourEat Smart range up 35%, the Best up 25% and Organics up 14%. Our forecourts business is important in attracting traffic to our stores, and weensure that our pricing is highly competitive. Average unleaded pump prices were94.88 p in the year, compared with 90.04p the previous year. Total litreage grewby 2.9%, a reflection of the traffic growth. 2008 2007 ChangeSummary income statement £m £m £mTurnover 12,969 12,462 507Gross profit 818 636 182Other operating income 30 21 9Admin expenses -268 -272 4Property transactions 32 38 -6Operating profit 612 423 189Finance income and costs 0 -54 54Taxation -58 -121 63Profit/(loss) for the period 554 248 306 With the continued delivery of the Group's Optimisation Plan, first announced in2006, profit growth significantly outstripped turnover growth. Gross profitincreased by 29%, from £636m to £818m, reflecting the benefit of manyinitiatives detailed further in this Operating Review. Administrative expenseshave remained flat compared to 2007. Advertising activity has beensignificantly increased to support the rebranding campaign in the second half ofthe year, and these additional costs were offset by efficiency savingselsewhere. After the cost of products, our two biggest costs are store wages costs anddistribution costs. In both areas, we continued to make strides to improve ourefficiency. Store labour productivity increased by 6% year on year, following a14% improvement in the previous year. The cost to deliver each case through ourdistribution network reduced by 9.4% year on year, with not only financialbenefits but also significant environmental benefits in terms of 3.4 millionfewer miles travelled. We were pleased, in the year, to win a number of important industry awards,reflecting great achievements of our colleagues throughout the business.Foremost amongst these were the Grocer Gold Awards for Service and forAvailability, the National Recycling Awards for Best Supermarket RecyclingInitiative Scheme and the International Wine Challenge with 147 GoldCommendations. Optimisation Plan progress Last year, having achieved our initial targets for cost reduction and marginimprovement, I outlined a detailed programme for the next stage of developmentfor Morrisons, with the overall aim of becoming the "food specialist foreveryone". I explained what we mean by this: "Food specialist" We really understand food... ...we know where it comes from ...we pack it and make it in our factories ...we make it in our stores ...we employ craft skills in every store "For everyone" Great food which is also great value Great food which is for everyday, not just special days We made good strides in the past year in building on our food specialistcredentials. In many cases, this has been about showing more clearly to ourcustomers the things that we already do. In some cases, too, we have needed tomake improvements. Our meat is butchered the old fashioned way, in-store ratherthan in a factory, by highly trained butchers. Much of our bread is freshlybaked overnight and throughout the day, from scratch using flour, yeast andwater. Our award winning fish bar is laid out fresh every day. Salads arechopped, sandwiches are made, pizzas prepared and cakes topped with cream. Thislocal, fresh preparation, provides a real quality advantage, and was notnecessarily being appreciated by all our customers. We introduced new packagingand labelling during the year which clearly shows the products that have beenmade in store. And we are undertaking a programme to open up many of the areasof Market Street where food preparation takes place, so that customers can seeat first hand what we do. We previously had work to do to improve our product range. We made strides inthe year, with an increase in range from 28,000 to 30,000 lines and the relaunchof over 8,000 lines in total. The work included the removal of all hydrogenatedfats, and significant reductions in salt, from our own label ranges. We launcheda new range of healthy food for children called "Kids Smart", designed to bedelicious, nutritious and healthy. The fresh fruit in the range, for example, iscarefully selected smaller, sweeter varieties of apple and pear. Our programmeto tailor each in-store range more closely to the local customer base continued- for example we now stock a range of Polish products in over 100 stores, and wehave successfully trialled local sourcing in a small number of stores. In ourdialogue with our customers, we find that they strongly support Britishagriculture, and we are proud to reflect that sentiment by confirming that wewill only stock fresh beef, pork and in-season lamb that is British. We arecloser to source than any other major food retailer. I outlined last year our plans to sharpen our image, with a programme tofreshen-up our stores. The new look is rolling out through our estate, and byJuly 2008 the work will be complete. At this stage, all store exteriors andapproximately 140 interiors have been completed. The programme covers theexterior and interior signage of the stores, our filling stations, our trucksand our Market Street counters. The total cost of the work will average lessthan £0.5m per store, reflecting the care that has been taken to ensure that thenew design is cost effective. It has been well received by customers. Being the food specialist for everyone means not just providing great productsbut also great value, and that has always been a strength of Morrisons. UKgrocery retailing is one of the most competitive retail sectors in the world,and the battle for customers in 2007, as the economy tightened, was hard fought.Morrisons delivers value through having highly competitive base prices andoffering a broad range of attractive promotions. These are available all week,every week - never less than 1,000 promotions including 100 "buy one get onefrees". The sector has also been increasing the number of "big event"promotions, where eye-catching deals are used to attract customers into store -examples in the year were the launch of the final Harry Potter book and the DVDof Casino Royale - where supermarket prices were very significantly below thoseof high street competitors. Morrisons played its full part in this activity -but for us the best way to provide our customers with value is to offer superbquality products, unique to Morrisons, at great prices. We had real success inthe year - we were first to market with Spring Lamb, a wonderful product,sourced from British farmers at fair market rates and offered to customers at aprice over 20% below competitors. A number of our Christmas products were ratedvery highly - our Christmas cake outscored similar products from competitors intaste tests, but at half the price of some. Griffith Park sparkling rose, at£4.99, beat off many champagnes costing over £20 at the Effervescents du Mondeawards in France. It was exclusive to Morrisons. This is what being the "foodspecialist for everyone" is all about - showing to our customers that great fooddoes not have to be expensive food. In support of the changes taking place in store, we launched an advertisingcampaign in the second half year designed to attract new customers to come andtry us. It placed emphasis on our in store food production and our foodprovenance knowledge, which we know appeals to customers. Well known, but downto earth, personalities were used in the campaign - Nick Hancock, Denise VanOuten, Diarmuid Gavin, Gaby Logan, Alan Hansen and Lulu - and fresh productfeatured strongly. We were pleased with the success of this campaign - it toldcustomers things they did not know about Morrisons, and they liked what theyheard. We welcomed many new customers into our stores towards the end of theyear as a result and, very importantly, they kept coming back. Our colleagues are vital to delivering our success - to be the food specialistfor everyone demands a higher level of service and knowledge in our stores. Webelieve we are the largest employer of craft skills - butchers, bakers,fishmongers - in the country, and we have 25,000 people employed in producingthe food that we sell. Our 117,000 people are also our customers, and we were delighted to introduce adiscount scheme for them for the first time, in November 2007. Given that theweekly food bill represents a significant part of household budgets, this is akey benefit for our staff. Our stability index, a measure of the proportion ofour colleagues who have been with us for over one year, improved from 71.3% to75.7% in the year. This is not yet high enough, and we will continue toimplement initiatives to encourage our best staff to stay longer with us. Wewish to invest in skills, and take out work where we can be more efficient. Ourtrials of "self scan" checkouts were successful in the year, and we intend toroll these out to over 200 stores. I was pleased to complete our senior management team during the past year, withthe appointment of new HR, Marketing, and Home and Leisure Directors.Additionally, upon the retirement of David Hutchinson as Production Director wechose not to replace this main Board position, instead creating two separateroles - Manufacturing Director and Distribution Director, both promoted fromwithin. The senior team has come together well around our Optimisation Planagenda, and I am pleased that we now have a stable and complete team driving theleadership agenda. The importance to society of large corporations acting responsibly is growing,and Morrisons is determined to play its full part. In 2007 we published ourfirst Corporate Social Responsibility report, which highlighted our activitiesin this area and set out some ambitious targets for reductions in carbonemissions, energy usage and wastage. We made good progress in many areas in the past year - overall carbon emissionswere down by 25% on 2005 - 70% of the way towards our target of a 36% reduction.This has been achieved by installing new refrigeration in our stores, with lessleakage of coolant, by training our colleagues to be more aware of energyefficiency, resulting in a 5.0% reduction in group energy usage, and bybeginning to re-equip our vehicle fleet with more efficient engines. Customersare concerned to contribute to the environmental agenda, and improved recyclingdisciplines can help greatly. In addition to providing recycling facilities atmost of our stores, we launched an information campaign called "Recyclopedia"last year. It seeks to inform customers, through simple graphics, of therecycling options available for the packaging concerned. We were pleased thatthis initiative won a National Recycling award. In outlining our Optimisation Plan last year, I highlighted a number of areaswhere our infrastructure required further investment, in distribution,manufacturing and in systems. In distribution, we successfully opened a newgrocery depot in Swindon to serve stores in the South and West, relocating theactivity from Tamworth. This saved 2.9m miles of transportation and allowed usto sell the surplus depot. We have agreed terms for the development of a newregional distribution centre at Sittingbourne, in Kent, and expect thisleasehold facility to open in 2010. In manufacturing, the development of our newabattoir in Spalding continued, and it will open fully in the second half of2008 - by that stage all our fresh beef, pork and in-season lamb will not onlybe British but also will be processed through our own facilities. We made progress in completing our chill chain through the manufacturing anddistribution businesses, and all products that we wish to chill now arrive atthe back door of our stores in chilled condition. In-store, we still have workto do to provide more chilled space and this programme will continue through2008 and 2009. Our progress here was slower than we would have wished. Ourprogramme to replace all the major systems in the business got underway in 2007.The first stages involved hardware and software selection and the overall designof the new systems. Hewlett Packard were selected to provide our core hardwareand Oracle the software. The first major systems implementation will be a newGroup HR and payroll system, which will go live in late 2008 and will be one ofthe largest and most advanced payrolls in the UK. Thereafter, the programme ofsystems renewal will run throughout 2009 and 2010. The overall investment requirements for the Optimisation Plan, outlined lastyear, are £450m over and above normal capital investment, and the programme willrun to 2010. In 2007 only £68m of this was incurred as many of the programmeswere in the enabling stages, but investment will accelerate in 2008. We have notchanged our estimate of the overall costs. Outlook Household budgets are tight, with disposable incomes under pressure and globalcommodity price rises feeding through to the cost of basic foodstuffs andenergy. At the same time, the period of cheap credit has come to an end. This environment presents an opportunity for Morrisons. Whilst many of ourprogrammes are designed to improve product quality or the overall shoppingexperience, the great value we offer our customers will be at the forefront ofour activity in the year ahead. We expect to open eight new stores in the coming year, and to extend a further19 stores with an additional 100,000 square feet of selling space. We are wellplaced to achieve our target of increasing selling space by 1m square feet overthree years, and we expect to complete all our other, previously announced,investment programmes as planned. We have made a promising start to our new financial year, in a market that weknow will be particularly challenging. We are well on track towards our goal ofbeing the "food specialist for everyone". Financial review The Group's sales and operating profit performance has been dealt with in theOperating Review above. This section deals with other aspects of the Group'sincome statement and its balance sheet and cash flow. Property There were a small number of individual divestments of surplus, non-retailproperty, which generated proceeds of £94m and provided a profit on disposal of£32m. Finance income and costs 2008 2007 £m £m Interest payable on short term loans and bank overdrafts (1) (5)Interest payable on bonds (53) (60)Interest capitalised 8 6Total interest payable (46) (59)Fair value movement of derivative instruments (7) (12)Other finance costs (7) (11)Finance costs (60) (82)Bank interest received 28 8Amortisation of bonds 8 8Other finance income 7 5Net pension interest income 17 7Finance income 60 28Net finance cost 0 (54) The interest payable on bonds dropped to £53m from £60m following the maturityof one bond totalling £250m in August 2007. Interest receivable increased significantly to £28m, largely as a result oftight capital controls on the business, strong cash flows from improvedprofitability and the property proceeds. In addition the notional interest income on the pension liability increased by£10m reflecting the continued improvement in the schemes' asset position. Taxation The tax charge in the year of £58m represents a tax rate of 9.5%, which is belowa normal rate for the following reasons. The current corporation tax charge of £142m was lower than the charge expectedat a "normal" tax rate, which would have been £184m. This was largely as aresult of a tax deduction in respect of a £100m special cash contribution tothe Group's pension schemes and also the benefit of final agreement withrespect to the brought forward tax position for Safeway. During the period the Group successfully concluded lengthy negotiations with HMRevenue and Customs (HMRC) over a number of open issues relating to the Safewaygroup prior to its acquisition by Morrisons in 2004. The closure of thesenegotiations has resulted in the Group being able to release prior periodcorporation tax and deferred tax provisions. An additional contributor to the low effective tax rate was the change of the UKcorporation tax rate from 30% to 28%. This change required the Group torecalculate its deferred tax liabilities, resulting in a release of deferred taxprovision. During the year, the group paid a net £107m of corporation tax to HMRC. The principal objective of the in-house tax department continues to be to paythe right tax at the right time. We actively engage with the UK taxauthorities and aim to be transparent in all of our activities. The group ispredominantly UK based, operates a simple business model, and does not engage insophisticated tax planning structures. Underlying earnings Unadjusted basic earnings per share were 20.8p (2007: 9.3p).. Underlying basicearnings per share of 14.4p (2007: 8.3p) has been computed by removing propertygains and net pension interest income from profit before tax for the period andis adjusted for a normalised tax charge (see note 1) Balance sheet 03-Feb 04-Feb 2008 2007 ChangeSummary balance sheet £m £m £mProperty assets 6,687 6,602 85Current assets and liabilities -1,135 -1,082 -53(excluding debt)Deferred tax -424 -478 54Net pension -68 -198 130liabilitiesProvisions -139 -145 6Total before net debt 4,921 4,699 222Net debt -543 -772 229Net assets 4,378 3,927 451 Net debt During the year, the outstanding amount of net debt fell from £772m to £543m.This reduction in debt levels was a consequence of the improving profitperformance of the business and lower levels of capital investment than weoriginally anticipated. It is stated after making an additional contribution of£100m into the Group's pension schemes. The bonds, acquired with the Safeway acquisition in 2004, constitute the majorcomponent of borrowings within net debt. The next bond repayment is due in April2010. Outstanding loan notes amounting to £2m will mature in 2008 and will berepaid from operational cashflow. The Group entered into a new revolving credit facility in September 2007 with 8banks providing committed facilities of £1.1bn for 5 years. At the balance sheetdate the facility was undrawn. With this facility and the bonds the Group nowhas available committed facilities of £1,800m (2007 £1,450m) maturing between2010 and 2018. There are financial covenants in relation to the revolving credit facility,based on the level of consolidated net borrowings to EBITDA, and interest cover.The Group continues to comply with these financial obligations. Pensions Pension deficit bridge £m Net pension deficit at 4 February 2007 (198)Funding above annual service cost 148Interest cost greater than asset return (95)Strengthening longevity assumptions (127)Higher discount factor 122Impact of triennial valuation 70Other 12Net pension deficit at 3 February 2008 (68) During the year a review of the two defined benefit pension schemes wascompleted. The review also incorporated the triennial Safeway actuarialvaluation of 1 April 2007. Among the principles agreed between the Group andthe Trustees of both schemes were funding, actuarial assumptions and investmentstrategy. These principles are: • two additional contributions of £100m each (£75m Safeway and £25m Morrisons) to be made - one in 2007/08 and one intended to be made in 2008/ 09 to eliminate the IAS19 deficit. • funding will be set on an IAS 19 basis. • prudent longevity assumptions based on most recent actuarial evidence. • over exposure to equity will be reduced and investment management fees reduced through moving to passive investment management. • disposal of certain investments inconsistent with the Group's view of balance sheet risk. The funding contributions during the year were those agreed as part of previousfunding plans, which gave contributions over service cost of £48m, plus theadditional contribution of £100m (split £75m Safeway scheme and £25m Morrisonsscheme) being the first of two instalments designed to eliminate the deficit. Volatility in the capital markets caused changes to the IAS19 asset andliability measurements. The implied real discount rate (the difference betweeninflation and the discount rate) has increased by 20 basis points, reducing theliability by £122m. Offsetting this, the return on assets would normally morethan cover the unwinding of interest in the present value calculation. Thisyear, with the downturn of the equity markets at the end of 2007 and early 2008,any gains or returns on assets were eliminated, leaving a net interest cost of£95m. In agreeing the valuation assumptions for both schemes, the Trustees and theGroup agreed that the long cohort adjustment to the mortality tables used wasthe most appropriate to ensure a period of improvement consistent with aliability of a long duration. This is consistent with the latest viewsexpressed by the Pension Regulator in a recent discussion paper. The effect isto assume an additional 3.6 years' life for a male currently aged 45, comparedwith the assumption made in the prior year. The key financial risks to the pension schemes are: • investment risk - changes in bond yield rates and fluctuations in the equity markets. • further longevity risk which ultimately rests with the Group to fund. The Group Treasurer attends the Investment Sub Committee of the pension schemesand represents the views of the Group to the Trustees. Provisions The property provision of £110m (note 22) includes £73m for onerous leasesrelating to sublet properties to cover the shortfall between expected rentreceived and the rent payable, taking into account the vacant tenancy periodsduring the terms of the lease. The provision assumptions were reviewed in thelast quarter in the light of worsening economic conditions, and the prospectiveGovernment legislation which will reduce rates relief on vacant properties fromApril 2008, to establish the best estimate of liability. This resulted inincreases to the provision of £8m and £6m to address each of these respectiveissues. The restructuring provision of £29m (note 22) includes £20m for ongoing activityassociated with the 2007/08 rebranding initiative described in the ChiefExecutive's review. This programme will be complete by July 2008. Cash flow 2008 2007 ChangeSummary cash flow statement £m £m £mCash generated from operations 756 704 52Interest and tax -127 -109 -18Disposal and divestment proceeds 94 158 -64Capital expenditure -402 -257 -145Share issues and dividend -91 -93 2Long term cash on deposit -74 0 -74Repayment of loans -269 -263 -6Net (decrease)/increase in cash -113 140 -253 Operating cash flow The Group generated an increasing level of cash flow fromoperations of £756m driven from improved operational efficiency and afterfunding additional contributions of £100m to the two pension funds. The overallworking capital cash impact was neutral as the business required an increasedlevel of stock to support higher sales in the last quarter, along with acommensurate increase in trade creditors. The Group adheres strictly to the payment terms agreed with its suppliers, andat the year end the average creditor days outstanding was 34, compared to 31days in the prior year. Disposals and divestment proceeds: Proceeds of £94m on disposal of propertieswere lower than in the previous year as the process of disposing of storesacquired with Safeway that did not fit Morrisons operating model largelycompleted in 2006/7. In the year under review the proceeds were realised from asurplus depot, surplus land and two replaced stores. The capital expenditure programme was fully funded from cash flow. It includedthe opening of eight new stores, compared with four in the previous year, aswell as the fitting out of the new Swindon depot and the acquisition anddevelopment costs of the new Spalding abattoir planned to open in the secondhalf of 2008. Consolidated income statement 52 weeks ended 3 February 2008 2008 2007 Note £m £m Turnover 2 12,969 12,462Cost of sales (12,151) (11,826)Gross profit 818 636 Other operating income 30 21Administrative expenses (268) (272)Profits arising on property transactions 32 38Operating profit 4 612 423Finance costs 5 (60) (82)Finance income 5 60 28Profit before taxation 612 369Taxation 6 (58) (121)Profit for the financial period attributable to equity holders 554 248of the parent Earnings per share (pence) - basic 7 20.79 9.32 - diluted 7 20.67 9.31 Ordinary dividend per share (pence)Interim - paid 0.675 0.625Final - proposed 31 4.125 - paid 3.375Total dividend 4.800 4.000 Consolidated statement of recognised income and expense 52 weeks ended 3 February 2008 2008 2007 Note £m £mActuarial (loss)/gain arising in the pension scheme (26) 119(net of taxation)Cash flow hedging movement 7 (1)Deferred tax on share options 20 (2) 3Net (expense)/income recognised directly in equity (21) 121Profit for the financial period 554 248Total recognised income and expense for the financial 24 533 369period attributable to equity holders of the parent Consolidated balance sheet 3 February 2008 2008 2007 Note £m £mAssetsNon-current assetsProperty, plant and equipment 9 6,205 6,117Lease prepayments 10 239 228Investment property 11 239 241Financial assets 12 43 19 6,726 6,605Current assetsStocks 13 442 368Debtors 14 199 151Financial assets 12 74 -Cash and cash equivalents 15 191 231 906 750Non-current assets classified as held for sale 16 4 16 910 766LiabilitiesCurrent liabilitiesCreditors 17 (1,679) (1,501)Other financial liabilities 18 (77) (254)Current tax liabilities (97) (100) (1,853) (1,855)Non-current liabilitiesOther financial liabilities 18 (774) (768)Deferred tax liabilities 20 (424) (478)Net pension liabilities 21 (68) (198)Provisions 22 (139) (145) (1,405) (1,589)Net assets 4,378 3,927 Shareholders' equityCalled up share capital 23 269 268Share premium 23 57 41Merger reserve 24 2,578 2,578Retained earnings and hedging reserves 24 1,474 1,040Total equity attributable to equity holders of the parent 4,378 3,927 Consolidated cash flow statement 52 weeks ended 3 February 2008 2008 2007 Note £m £mCash flows from operating activitiesCash generated from operations 25 756 704Interest paid (70) (68)Taxation paid (107) (53)Net cash inflow from operating activities 579 583Cash flows from investing activitiesInterest received 50 12Proceeds from sale of property, plant and equipment 94 158Purchase of property, plant and equipment and (402) (257)investment propertyNet cash outflow from investing activities (258) (87)Cash flows from financing activitiesProceeds from issue of ordinary shares 17 5Finance lease principal payments (3) (2)Repayment of borrowings (266) (261)Increase in long term cash on deposit 12 (74) -Dividends paid to equity shareholders (108) (98)Net cash outflow from financing activities (434) (356)Net (decrease)/increase in cash and cash equivalents (113) 140Cash and cash equivalents at start of period 231 91Cash and cash equivalents at end of period 15 118 231 Reconciliation of net cash flow to movement in net debt in the period 2008 2007 Note £m £mNet (decrease)/increase in cash and cash equivalents (113) 140Cash outflow from decrease in debt and lease financing 268 263Long term cash on deposit 12 74 -Other non cash movements - (27)Opening net debt (772) (1,148)Closing net debt 26 (543) (772) General information Wm Morrison Supermarkets PLC is a public limited company incorporated in theUnited Kingdom under the Companies Act 1985 (Registration number 358949). TheCompany is domiciled in the United Kingdom and its registered address is HilmoreHouse, Gain Lane, Bradford, BD3 7DL, United Kingdom. Basis of preparation The financial information set out herein does not constitute the company'sstatutory accounts for the periods ended 3 February 2008 or 4 February 2007 butis derived from those accounts. Statutory accounts for 2007 have been deliveredto the registrar of companies, and those for 2008 will be delivered in duecourse. The auditors have reported on those accounts; their reports were (i)unqualified, (ii) did not include references to any matters to which theauditors drew attention by way of emphasis without qualifying their reports, and(iii) did not contain statements under section 237(2) or (3) of the CompaniesAct 1985. Significant accounting policies The Directors consider the following to be the significant accounting policiesin the context of the Group's operations: Revenue recognition Revenue is recognised when significant risks and rewards of ownership have beentransferred to the buyer, there is reasonable certainty of recovery of theconsideration and the amount of revenue, associated costs and possible return ofgoods can be estimated reliably. a) Sale of goods in-store and fuel: Sale of goods in-store is recorded net ofvalue added tax, staff discounts, coupons and the free element of multi-savetransactions. Sale of fuel is recognised net of value added tax and MorrisonsMiles award points. Revenue is recognised when transactions are completedin-store. The related cost of sales includes the cost of transportation ofgoods to stores. b) Direct manufacturing sales: Direct manufacturing sales are recognised ondespatch of goods and are recorded net of value added tax and intra-grouptransactions. c) Income from concessions and commissions: Income from concessions andcommissions is based on the terms of the contract. Revenue collected on behalfof others is not recognised as turnover, other than the related commission. Other operating income Other operating income consists of income not directly related to the operatingof supermarkets and mainly comprises rental income from investment properties.Other categories of income included within 'other operating income' are backhaulincome and credits earned from the recycling of waste and packaging materials. a) Rental income from investment property: Rental income arising from operatingleases on investment properties is accounted for on a straight-line basis overthe lease term. 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, since they aresubject to similar risks and returns. The disclosures for the primary segmentare therefore given by the primary financial statements and related notes. The Group's business operations are conducted almost exclusively in the UK so ageographical segment report is not required. Supplier income Supplier incentives, rebates and discounts are collectively referred to assupplier income in the retail industry. Supplier income is recognised as adeduction from cost of sales on an accruals basis based on the expectedentitlement which has been earned up to the balance sheet date for each relevantsupplier contract. The accrued incentives, rebates and discounts receivable atyear end are included within prepayments and accrued income. Where amountsreceived are in the expectation of future business, these are recognised in linewith that future business. Property transactions Property includes the balance sheet headings of property, plant and equipment,investment property, lease prepayments and non-current assets classified as heldfor sale. The results of transactions relating to disposal of property arereported in the income statement under 'Profit arising on propertytransactions'. Depreciation and any impairment charges or reversals arerecognised in cost of sales or administrative expenses, as appropriate. Borrowing costs All borrowing costs are recognised in the Group's income statement on anaccruals basis except for interest costs that are directly attributable to theconstruction of buildings which are capitalised and included within the initialcost of a building. Capitalisation of interest cost ceases when the property isready for use. Deferred and current tax Current tax payable is based on the taxable profit for the year, using tax ratesenacted or substantively enacted at the reporting date and any adjustments totax payable in respect of previous years. Taxable profit differs from theprofit as reported in the income statement as it is adjusted both for items thatwill never be taxable or deductible and temporary differences. Current tax ischarged in the income statement, except when it relates to items charged orcredited directly in equity in which case the current tax is reflected inequity. Deferred tax is recognised using the balance sheet method. Provision is madefor temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for taxation purposes. Nodeferred tax is recognised for temporary differences that arise on the initialrecognition of goodwill or the initial recognition of assets and liabilitiesthat is not a business combination and that affects neither accounting nortaxable profits. Deferred tax is calculated based on current tax law and isprovided at rates that are enacted or substantively enacted at the reportingdate when the temporary differences reverse. Deferred tax is charged or creditedin the income statement except when it relates to items charged or crediteddirectly to equity in which case the deferred tax is reflected in equity. Deferred tax assets are recognised to the extent that it is probable thattaxable profit will be available against which the asset can be utilised.Deferred tax assets recognised are reviewed at each reporting date as judgementis required to estimate the availability of future taxable income. Deferred taxassets and liabilities are not discounted and are offset where amounts will besettled on a net basis as there is legally enforceable right to offset. Accruals for tax contingencies require management to make judgements andestimates of ultimate exposures in relation to tax compliance issues. Allaccruals are included in current liabilities. Business combinations and goodwill All business combinations are accounted for by applying the purchase method. The assets, liabilities and contingent liabilities of subsidiaries are measuredat their fair values at the date of acquisition. Any excess of the cost ofacquisition over the fair values of the identifiable net assets acquired isrecognised as goodwill. Goodwill is recognised as an asset and reviewed for impairment annually asdetailed in 'Impairment of non-financial assets' below. Property, plant and equipment a) Property, plant and equipment are stated at cost less accumulateddepreciation and accumulated impairment losses. Costs include directlyattributable costs. Annual reviews are made of estimated useful lives andmaterial residual values. b) Depreciation rates used to write off cost less residual value on a straightline basis are:Freehold land 0%Freehold and long leasehold buildings 2.5%Short lease buildings Over lease periodPlant, equipment, fixtures and vehicles 14 -33%Assets held under a finance lease Shorter of life of lease or assetAssets under construction 0% Impairment of non-financial assets Goodwill has been fully written off through an impairment review that occurredin a prior year. Impairment of goodwill cannot be reversed. Property, plant and equipment and investment property are annually reviewed forindications of impairment, or when events or changes in circumstances indicatethat the carrying amount may not be recoverable. This is performed for eachcash generating unit, which in the case of a supermarket is an individual retailoutlet. If there are indications of possible impairment then a test isperformed on the asset affected to assess its recoverable amount againstcarrying value. An asset impaired is written down to its recoverable amountwhich is the higher of value in use or its fair value less costs to sell. Inassessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset. If there is indication of an increase in fair value of an asset that had beenpreviously impaired, then this is recognised by reversing the impairment, butonly to the extent that the recoverable amount does not exceed the carryingamount that would have been determined if no impairment loss had been recognisedfor the asset. Stocks Stocks are measured at the lower of cost and net realisable value. Cost iscalculated on a weighted average basis and comprises purchase price, importduties, less rebates and other non-recoverable taxes. Stocks are primarily goodsfor resale. Net realisable value is the estimated selling price in the ordinary course ofbusiness, less the estimated costs necessary to make the sale. Non-current assets classified as held for sale Non-current assets are classified as held for sale if their carrying amount willbe recovered through sale rather than continuing use. This condition is regardedas met only when the sale is highly probable and the asset (or disposal group)is available for immediate sale in its present condition. Management must becommitted to the sale and it should be expected to be completed within one yearfrom the date of classification. 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. The depreciationof the asset ceases on reclassification. Assets are reclassified fromnon-current assets held for sale when the above criteria cease to be met. Leases Leases in which substantially all the risks and rewards of ownership areretained by the lessor are classified as operating leases; all other leases areclassified as finance leases. Lessor accounting a) Operating leases: Assets acquired and held for use under operating leasesare recorded as property, plant and equipment and are depreciated on a straightline basis to their estimated residual values over their estimated useful lives. Operating lease income is recognised on a straight line basis to the date ofthe next rent review. b) Finance leases: The Group does not lease any assets on a finance lease basis. Lessee accounting a) Operating leases: Rental payments are taken to the income statement on astraight line basis over 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. b) 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 finance charge on the remainingbalance. Provisions Provisions are created where the Group has a present legal or constructiveobligation as a result of a past event, where it is probable that it will resultin an outflow of economic benefits to settle the obligation from the Group, andwhere it can be reliably measured. The nature of these provisions is: a) Property provisions: Provisions made in respect of individual propertieswhere there are obligations for onerous contracts, dilapidations and certaindecommissioning obligations for petrol filling stations. The amounts providedare based on the Group's best estimate of the likely committed outflow to theGroup. Where material these estimated outflows are discounted to net presentvalue. b) Restructuring provisions: Provisions are established for announced and ongoing restructuring programmesplanned and controlled by management where there is an obligation to makechanges to the scope of the business undertaken by the Group or the manner inwhich business is conducted. The provision includes costs of severance to theaffected employees, costs of property closure, and other direct expenditures notassociated with ongoing activities. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at thedates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominatedin foreign currency are retranslated at the rates of exchange at the balancesheet date. Gains and losses arising on retranslation are included in theincome statement for the period. Retirement benefits The Group operates defined benefit and defined contribution schemes. A definedcontribution scheme is a pension scheme under which the Group pays fixedcontributions into a separate entity. A defined benefit scheme is one that isnot a defined contribution scheme. Pension benefits under defined benefitschemes are defined on retirement based on age at date of retirement, years ofservice and a formula using either the employee's compensation package or careeraverage earnings. The Group operates two defined benefit retirement schemes which are funded bycontributions from the Group and members. The defined benefit schemes are notopen to new members. Pension scheme assets, which are held in separate trusteeadministered funds, are valued at market rates. Pension scheme obligations aremeasured on a discounted present value basis using assumptions as shown in note21. The operating and financing costs of the scheme are recognised separately inthe income statement in the period in which they arise. Death-in-service costsare recognised on a straight line basis over their vesting period. Actuarialgains and losses are recognised immediately in the statement of recognisedincome and expense. Payments by the Group to the defined contribution scheme are charged to theincome statement as they arise. Share-based payments The Group issues equity settled share-based payments to certain employees inexchange for services rendered by them. The fair value of the share based awardis calculated at the date of grant and is expensed on a straight line basis overthe vesting period with a corresponding increase in equity. This is based onthe Group's estimate of share options that will eventually vest. This takesinto account movement of non-market conditions, being service conditions andfinancial performance, if relevant. The fair value of equity settled awardsgranted is not subsequently revisited. Fair value is measured by use of a binomial stochastic model. The expected lifeused in the model has been adjusted, based on management's best estimate, foreffects of non-transferability, exercise restrictions and behaviouralconsiderations. The fair value charge of share-based payments that are settled by cash arecredited to the balance sheet and are included within creditors. The Group has applied fair values to all grants of equity instruments after 7November 2002 which were unvested as of 1 January 2005, and cash settled equityinstruments at each balance sheet date. Financial instruments Financial assets and liabilities are recognised on the Group's balance sheetwhen the Group becomes a party to the contractual provisions of the instrument. Financial assets a) Trade and other debtors: Trade debtors are carried at the lower of theiroriginal invoiced value and recoverable amount. Provision is made when there isobjective evidence that the Group will not be able to recover balances in full,with the charge being recognised in administrative expenses in the incomestatement. Balances are written off when the probability of recovery is assessedas being remote. b) Cash and cash equivalents: Cash and cash equivalents for cash flow purposesincludes cash-in-hand, cash-at-bank and bank overdrafts together with shortterm, highly-liquid investments that are readily convertible into known amountsof cash, with an insignificant risk of a change in value, within three monthsfrom the date of acquisition. In the balance sheet bank overdrafts are presentedwithin current liabilities. Financial liabilities a) Trade and other creditors: Trade and other creditors are stated at cost. b) Borrowings: Interest-bearing bank loans and overdrafts are initiallyrecorded at fair value, net of attributable transaction costs. Subsequent toinitial recognition, any difference between the redemption value and the initialcarrying amount is recognised in the income statement over the period of theborrowings on an effective interest rate basis. Derivative financial instruments and hedge accounting Derivative financial instruments are initially measured at fair value, whichnormally equates to cost, and are remeasured at fair value. a) Cash flow hedges: Derivative financial instruments are classified as cashflow hedges when they hedge the Group's exposure to variability in cash flowsthat are either attributable to a particular risk associated with a recognisedasset or liability, or a highly probable forecasted transaction. The Group has a number of cross currency swaps which have been designated ascash flow hedges. These derivative financial instruments are used to match orminimise risk from potential movements in foreign exchange rates inherent in thecash flows of certain financial liabilities. Derivatives are reviewed quarterly for effectiveness. Where a derivativefinancial instrument is designated as a hedge of the variability in cash flowsof a recognised asset or liability, or highly probable forecast transaction, theeffective part of any gain or loss on the derivative financial instrument isrecognised directly in equity through SoRIE. The gain or loss on anyineffective part of the hedge is immediately recognised in the income statementwithin finance income/costs. If a hedge of a forecast transaction subsequentlyresults in the recognition of a financial asset or liability, the associatedcumulative gains or losses that were recognised directly in equity arereclassified into the income statement when the transaction occurs. Net debt Net debt is cash and cash equivalents, bank and other current loans, bonds andderivative financial instruments (stated at current fair value). Investment property Property held to earn rental income rather than for the purpose of the Group'sprincipal activities is classified as Investment property. Investment propertyis recorded at cost less accumulated depreciation and any recognised impairmentloss. Depreciation policy is consistent with those described for other Groupproperties. Income from investment properties is disclosed in "Other operating income" anddetails are shown in note 11 'Investment property'. The related operating costsare immaterial and are included within Administrative expenses. Treasury shares The Group has an employee trust for the granting of Group shares to executivesand members of the employee share plans. Shares in the Group held by theemployee share trust are treated as treasury shares and presented in the balancesheet as a deduction from retained earnings. The finance and administration costs relating to the Executive Share OptionScheme are charged to the income statement. The shares are deducted for thepurpose of calculating the Group's earnings per share. Use of critical accounting assumptions and estimates Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actualresults. The estimates and assumptions that have significant risk of causing amaterial adjustment to the carrying value of assets and liabilities arediscussed below. a) Property provisions Provisions have been made for onerous leases, dilapidations and decommissioningcosts. These provisions are estimates based on the condition of each propertyand market conditions in the relevant location. The actual costs and timing offuture cash flows are dependent on future events. Any difference betweenexpectations and the actual future liability will be accounted for in the periodwhen such determination is made. b) Pension scheme assumptions and mortality table The carrying value of defined benefit pension schemes is valued using actuarialvaluations. These valuations are based on assumptions including the selectionof the correct mortality tables for the profile of members in each scheme. Allthese are estimates of future events. The mortality experience study conducted as part of the Safeway scheme triennialvaluation is statistically significant and the longevity assumption is adjustedto reflect its results. As both of the Group's schemes have a similarcomposition and type of members, this adjustment is also made to the Morrisonsscheme. The mortality assumptions, financial assumptions and mortalityexperience study are based on advice received from the schemes' actuaries.Where appropriate these are corroborated from time-to-time with benchmarksurveys and ad-hoc analysis. c) Assumptions relating to tax computation The Group recognises expected liabilities for tax based on an estimation of thelikely taxes due, which requires significant judgement as to the ultimate taxdetermination of certain items. Where the actual liability arising from theseissues differs from these estimates, such differences will have an impact onincome tax and deferred tax provisions in the period when such determination ismade. d) Determination of useful lives and residual values of property, plant andequipment, investment property and long leasehold land prepayments Depreciation is provided so as to write down the assets to their residual valuesover their estimated useful lives as set out in the accounting policies forproperty, plant and equipment, investment property and long leasehold landprepayments. The selection of these residual values and estimated livesrequires the exercise of judgement. Notes to the financial statements 52 weeks ended 3 February 2008 1 Underlying earnings The Directors consider that underlying earnings and normalised adjusted earningsper share measures referred to in the Chairman's statement, CEO's review andfinancial review provide additional useful information for shareholders onunderlying trends and performance. The adjustments are made to reported profitto (a) remove income statement volatility within net pension interest incomecaused by market conditions; (b) remove profits arising on property transactionssince these profits do not form part of the Group's principal activities; and(c) to apply an effective tax rate of 32%, being an estimated normalised taxrate, since the current year's effective tax rate is considerably lower due toreasons set out in note 6. 2008 2007 £m £mProfit after tax 554 248Add back: tax charge for the year1 58 121Profit before tax 612 369Adjustments for:Net pension interest income (note 5)1 (17) (7)Profits arising on property transactions1 (32) (38)Underlying earnings before tax 563 324Normalised tax charge at 32% tax rate1 (180) (104)Underlying earnings after normalised tax charge 383 220 Adjusted earnings per share (pence) - basic (refer note 7(b)) 19.70 8.30 - diluted (refer note 7(b)) 19.59 8.30 Adjusted normalised earnings per share (pence) - basic (refer note 7(c)) 14.38 8.28 - diluted (refer note 7(c)) 14.29 8.27 1 adjustments marked 1 equal £171m (2007: £28m) as shown in the reconciliationof earnings disclosed in note 7(c) 2 Turnover (excluding VAT) 2008 2007 £m £mSale of goods in-stores 10,439 10,087Fuel 2,443 2,301Total store based sales 12,882 12,388Direct manufacturing sales 27 28Income from concessions and commission 60 46Total turnover 12,969 12,462 3 Employees and directors 2008 2007 £m £mEmployee benefit expense for the Group during the periodWages and salaries 1,343 1,334Social security costs 95 94Share-based payments (note 27) 9 20Pension costs 48 55Other staff costs 10 3 1,505 1,506 2008 2007 No. No.Average monthly number of people employed by business groupStores 104,645 105,054Manufacturing 4,416 4,773Distribution 4,822 4,730Centre 3,571 3,247 117,454 117,804 4 Operating profit 2008 2007 £m £mThe following items have been included in arriving at operating profit:Depreciation: - owned assets 280 276 - assets held under finance leases 2 2Property, plant and equipment 282 278 Depreciation of investment property 7 3 Charge in the income statement 289 281 Foreign exchange differences 3 (1)Operating lease rentals: - minimum lease payments 38 40 - sublease receipts (5) (4) Value of stock expensed 9,739 9,364 Services provided by the Group's auditorDuring the period KPMG Audit Plc, the Group's auditor, provided the following services: 2008 2007 £m £mAudit services - statutory group and company audit 0.4 0.6 - statutory audit of subsidiaries 0.2 0.2 - audit related regulatory reporting 0.2 0.2Tax services - compliance services 0.3 1.1 - advisory services 0.2 -Other - forecasting procedures review - 0.2 1.3 2.3 5 Finance costs and income 2008 2007 £m £mInterest payable on short term loans and bank overdrafts (1) (5)Interest payable on bonds (53) (60)Interest capitalised 8 6Total interest payable (46) (59)Fair value movement of derivative instruments (7) (12)Other finance costs (7) (11)Finance costs (60) (82)Bank interest received 28 8Amortisation of bonds 8 8Other finance income 7 5Pension liability interest cost (99) (95)Expected return on pension assets 116 102Net pension interest income 17 7Finance income 60 28 Net finance cost - (54) Interest is capitalised at the bank overdraft rate incurred before taxation,which varies in line with the prevailing base rate. Taxation relief is obtainedon interest paid and this reduces the tax charged for the period. 6 Taxation Analysis of charge in the period 2008 2007 £m £m Corporation tax - current period 142 127 - adjustment in respect of prior period (38) (13) 104 114 Deferred tax - current period 40 (16) - adjustment in respect of prior period (86) 23 (46) 7 Tax charge for the period 58 121 Tax on items credited/(charged) directly to equity 2008 2007 £m £mCurrent tax on actuarial movements - -Deferred tax credit/(charge) on actuarial movements 10 (51)Tax credit/(charge) on actuarial movements taken to SoRIE 10 (51)Tax on share-based payments - taken to SoRIE (2) 3 The tax for both periods is different to the standard rate of corporation tax inthe UK of 30% (2007: 30%). The differences are explained below: Tax reconciliation 2008 2007 £m £mProfit before tax 612 369Profit before tax at 30% (2007: 30%) 184 111Effects of:Expenses not deductible for tax purposes 14 11Non-qualifying depreciation 35 28Effect of tax rate changes on deferred tax (32) -Deferred tax on Safeway acquisition assets (11) -Divestment profits not taxable (11) (31)Overseas tax rates/dividends - (2)Other 3 (6)Prior period adjustments (124) 10Tax charge for the period 58 121 During the period the Group successfully concluded lengthy negotiations with HMRevenue & Customs (HMRC) over a number of open issues relating to the Safewaygroup prior to its acquisition by Morrisons in 2004. The closure of thesenegotiations has resulted in the Group being able to release prior periodcorporation tax and deferred tax provisions of £124m. 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 potentially dilutive ordinaryshares. The Company has two (2007: three) classes of financial instruments thatare potentially dilutive: those share options granted to employees where theexercise price is less than the average market price of the Company's ordinaryshares during the period and contingently issuable shares under the Group'slong-term incentive plan. In the prior year, the other class of potentiallydilutive ordinary shares was the convertible preference shares. a) Basic and diluted earnings per share (unadjusted) Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. 2008 2007 Earnings Weighted EPS Earnings Weighted EPS £m average pence £m average pence number of number of shares shares millions millionsUnadjusted EPSBasic EPSEarnings attributable to ordinary 554 2,664.3 20.79 248 2,657.5 9.32shareholdersEffect of dilutive instrumentsShare options - 15.7 (0.12)Preference share conversion - - - - 1.2 (0.01)Diluted EPS 554 2,680.0 20.67 248 2,658.7 9.31 b) Adjusted earnings per share Given below is the reconciliation of the earnings adjusted for profits arisingon property transactions used in the calculations of adjusted earnings pershare: 2008 2007 Earnings Weighted EPS Earnings Weighted EPS £m average pence £m average number pence number of of shares shares millions millionsAdjusted EPSBasic EPSEarnings attributable to ordinary 554 2,664.3 20.79 248 2,657.5 9.32shareholdersProfits arising on property transactions 1 (29) - (1.09) (27) - (1.02) 525 2,664.3 19.70 221 2,657.5 8.30Effect of dilutive instrumentsShare options - 15.7 (0.11)Preference share conversion - - - - 1.2 -Diluted EPS 525 2,680.0 19.59 221 2,658.7 8.30 1 Profits arising on property transactions as shown in the income statementafter adjusting for tax relief. c) Adjusted normalised earnings per share Given below is the reconciliation of the earnings used in the calculations ofadjusted normalised earnings per share: 2008 2007 Earnings Weighted EPS Earnings Weighted EPS £m average pence £m average number pence number of of shares shares millions millionsAdjusted EPSBasic EPSEarnings attributable to ordinary 554 2,664.3 20.79 248 2,657.5 9.32shareholdersAdjustments to determine underlying profit (171) - (6.41) (28) (1.04)(see note 1) 383 2,664.3 14.38 220 2,657.5 8.28Effect of dilutive instrumentsShare options - 15.7 (0.09)Preference share conversion - - - - 1.2 (0.01)Diluted EPS 383 2,680.0 14.29 220 2,658.7 8.27 8 Goodwill Goodwill of £103m arose on the Safeway acquisition in the period ended 30January 2005. In the financial statements for the period ended 29 January 2006,this goodwill was fully impaired. 9 Property, plant and equipment Land and buildings Plant, equipment, Freehold Long leasehold Short fixtures & Total leasehold vehicles £m £m £m £m £mCurrent yearCostAt 4 February 2007 6,211 417 18 919 7,565Additions at cost 252 33 9 116 410Interest capitalised 7 1 - - 8Reclassification (205) (69) 6 268 -Transfer from/(to) investment properties 51 (25) - - 26Transfer to long lease land premium - (10) - - (10)Disposals (174) (8) - (138) (320)At 3 February 2008 6,142 339 33 1,165 7,679 Accumulated depreciation and impairmentAt 4 February 2007 691 47 17 693 1,448Charge for the period 98 15 4 165 282Reclassification (108) (10) - 118 -Transfer from/(to) investment properties 18 (4) - - 14Disposals (133) - - (137) (270)At 3 February 2008 566 48 21 839 1,474 Net book amount at 5,576 291 12 326 6,2053 February 2008 Assets under construction included above 91 14 - 22 127 The classification of Property, Plant and Equipment (PPE) was reviewed as partof upgrading our systems. As a result of this review, it was deemed appropriateto reclassify certain assets that have historically been regarded as intrinsicto the building structure to 'fixtures and fittings' included within plant,equipment, fixtures and vehicles. Land and buildings Plant, equipment, Freehold Long leasehold Short fixtures & Total leasehold vehicles £m £m £m £m £mPrior yearCostAt 29 January 2006 6,079 379 14 816 7,288Additions at cost 139 36 6 88 269Interest capitalised 5 1 - - 6Transfer to assets held for sale (21) - (6) (4) (31)Transfer from assets held for sale 33 1 4 19 57Transfer to investment properties (17) - - - (17)Disposals (7) - - - (7)At 4 February 2007 6,211 417 18 919 7,565 Accumulated depreciation and impairmentAt 29 January 2006 563 43 12 525 1,143Charge for the period 122 3 2 151 278Transfer to assets held for sale - - - (1) (1)Transfer from assets held for sale 15 1 3 18 37Disposals (4) - - - (4)Impairment reversal (5) - - - (5)At 4 February 2007 691 47 17 693 1,448 Net book amount at 5,520 370 1 226 6,1174 February 2007 Assets under construction included above 108 14 - 1 123 Included in plant, equipment, fixtures and vehicles are assets held underfinance leases at a cost of £22m (2007: £22m). The accumulated depreciation atthe end of the financial period was £19m (2007: £17m). 10 Lease prepayments 2008 2007 £m £mLong lease land premiums 239 228 The current element of long lease land premiums is included within debtors (note14). During the year, new long lease land premiums amounting to £1m were paid(2007: £15m). 11 Investment property 2008 2007 £m £mCostAt start of period 294 261Additions 17 -Transfer from property, plant and equipment - 17Transfer to property, plant and equipment (26) -Transfer from assets held for sale - 16At end of period 285 294 Accumulated depreciationAt start of period 53 36Charge for the period 7 3Transfer from property, plant and equipment - -Transfer to property, plant and equipment (14) -Transfer from assets held for sale - 14At end of period 46 53 Net book amount at end of period 239 241 Included in other operating income is £20m (2007: £13m) of rental incomegenerated from investment properties. The fair value of investment properties at the end of the period was £328m(2007: £390m). This valuation has been determined by the Directors based onmarket comparable information being rent and market rental yield. Thisreduction in the fair value is due to an increase in market rental yield drivenby the deteriorating market conditions. 12 Financial assets 2008 2007 £m £mNon current asset:Cross-currency interest swaps maturing 2010 43 19Current asset:Long term cash on deposit 74 - a) Cross-currency interest swaps maturing 2010 The cross-currency interest swaps cover the Group from currency exposure arisingfrom payments of interest and repayment of the principal in relation to Eurobonds. The notional principal amount of the outstanding cross currency interest swapsat 3 February 2008 was €250m (2007: €250m). There are no contracts with embedded derivatives that have been identified to beaccounted for separately as required by IAS 39 Financial Instruments:recognition and measurement. b) Long term cash on deposit These are balances deposited with the bank with maturity of over three monthsfrom the date of the deposit. 13 Stocks 2008 2007 £m £mMaterials and work-in-progress 8 7Finished goods 434 361 442 368 14 Debtors 2008 2007 £m £mTrade debtors 94 80Less: Provision for impairment of trade debtors (2) (2) 92 78Lease prepayment - long lease land premiums 1 1Other debtors 32 8Prepayments and accrued income 74 64 199 151 The Group has recognised a provision of £2m (2007: £2m) for impairment of itstrade debtors as at 3 February 2008. The ageing analysis of trade debtors is as follows: 2008 2007 £m £mNeither past due nor impaired 70 53Past due but not impaired:Not more than 3 months 17 24Greater than 3 months 5 1 92 78 As at 3 February 2008, trade debtors that were neither past due nor impairedrelated to a number of independent customers for whom there is no recent historyof default. The other classes of debtors do not contain impaired assets. 15 Cash and cash equivalents 2008 2007 £m £m Cash and cash equivalents 191 231 Cash and cash equivalents include the following for the purpose of the cash flowstatement: 2008 2007 £m £mCash and cash equivalents 191 231Bank overdraft (73) - 118 231 16 Non-current assets classified as held for sale 2008 2007 £m £mProperty 4 16 Non-current assets classified as held for sale represents a singleadministration building being marketed for sale. The prior year balancerepresented stores, administration and distribution buildings being marketed forsale. 17 Creditors - current 2008 2007 £m £mTrade creditors 1,152 1,003Other taxes and social security payable 35 56Other creditors 189 127Accruals and deferred income 292 297Interest accrual 11 18 1,679 1,501 18 Other financial liabilities The Group had the following current and non-current borrowings and otherfinancial liabilities: 2008 2007 2008 2007 Coupon Coupon £m £m rate rateCurrentBank loans and overdrafts due within one year or on demand:£250m Sterling bonds August 2007 - 5.88% - 251Bank overdraft 73 -Other loan notes 4.19% - 2 -Interest rate swaps - - - 1 75 252Finance lease obligations - - 2 2 77 254 2008 2007 2008 2007 Coupon Coupon £m £m rate rateNon-current£150m Sterling bonds August 2014 6.50% 6.50% 156 157£200m Sterling bonds January 2017 6.00% 6.00% 203 203£200m Sterling bonds December 2018 6.12% 6.12% 205 205€250m Euro bonds April 2010 6.50% 6.50% 194 183Total non-current Sterling and Euro bonds 758 748 Other loan notes - 2Other Safeway loans 9.38% 9.38% 15 15Finance lease obligations 1 3 774 768 Borrowing facilities Borrowings are denominated in Sterling and Euros and bear fixed interest rates.All borrowings are unsecured. In the event of default of covenants on the bank facility, the principal amountsand any interest accrued are repayable on demand. The Group has the following undrawn floating committed borrowing facilitiesavailable in respect of which all conditions precedent had been met at thatdate: 2008 2007 £m £mUndrawn facilities expiring:Between 1 and 2 years - 500Between 4 and 5 years 1,100 - Finance lease obligationsPayments under finance lease obligations fall due as follows: 2008 2007 £m £mNot later than one year 2 3Later than one year but not more than five years 1 3More than five years - - 3 6Future finance charges on finance lease obligations - -Present value of finance lease obligations 3 6 19 Financial instruments a) Financial risk management The Group's treasury operations are controlled centrally by the TreasuryCommittee in accordance with clearly defined policies and procedures that havebeen authorised by the Board. There is an amount of delegated authority to theTreasury Committee, but all activities are summarised in half yearly treasuryreports which is presented to the Audit Committee. The Group's principal financial liabilities, other than derivatives, comprisebank loans and overdrafts, borrowings, finance leases and trade and othercreditors. The main purpose of these financial liabilities is to raise financefor the Group's operations. The Group has various financial assets such as tradedebtors and cash and short-term and long-term bank deposits, which arisedirectly from its operations. The Group enters into derivative transactions, primarily forward currencycontracts and cross currency swaps. The purpose of these derivative instrumentsis to manage the currency risks arising from the Group's operations and itssources of finance. It remains the Group's policy not to engage in speculativetrading of financial instruments. The main risks arising from the Group's financial instruments are foreigncurrency risk, liquidity risk and credit risk. The objectives, policies andprocesses for managing these risks, which remain unchanged from the prior yearare stated below: (i) Foreign currency risk The Group incurs currency exposure in respect of overseas trade purchases madein currencies other than Sterling, primarily being Euro and US dollar. TheGroup objective is to reduce risk to short term profits from exchange ratefluctuations. It is Group policy that any transactional currency exposuresrecognised to have a material impact on short term profits will be hedgedthrough the use of derivative financial instruments. As at the balance sheetdate, the Group had entered into forward foreign exchange contracts to mitigateforeign currency exposure up to 50% of its forecasted purchases within next sixmonths. Exposure on debt denominated in a foreign currency is hedged usingcross-currency interest rate swaps. The sensitivity to a reasonably possible change (+/- 5%) in the US dollar / Euroexchange rate, with all other variables held constant, of the Group's profitbefore tax (due to changes in the fair value of monetary assets and liabilities)and the Group's equity (due to changes in the fair value of forward exchangecontracts and cross-currency interest swaps) has been determined as beingimmaterial. (ii) Liquidity risk The Group policy is to maintain a balance of funding with a range of maturitiesand a sufficient level of undrawn committed borrowing facilities to meet anyunforeseen obligations and opportunities. Short term cash balances, togetherwith undrawn committed facilities, enable the Group to manage its liquidityrisk. The Group finances its operations with a combination of bank creditfacilities and bonds. The treasury committee monitors rolling forecasts of the group's liquidityreserve on a quarterly basis, which comprises committed and uncommittedborrowing facilities on the basis of expected cash flow. The table below summarises the maturity profile of the group's primary noncurrent financial liabilities based on contractual undiscounted payments, whichincludes interest payments. Balances due within 12 months equal their carryingbalances as the impact of discounting is not significant. As the amounts included in the table are the contractual undiscounted cashflows, these amounts do not agree to the amounts disclosed on the balance sheetfor borrowings. 2008 2007 £m £m1 to 2 years 46 492 to 3 years 188 463 to 4 years 35 1884 to 5 years 35 355 + years 703 738 The table below analyses the group's derivative financial instruments which willbe settled on a gross basis into relevant maturity groupings based on theremaining period at the balance sheet to the contractual maturity date. Theamounts disclosed in the table are the contractual undiscounted cash flows. At 3 February 2008 < 1 year 1 - 2 years 2 - 3 years 3 - 4 years Cross currency swap - cash flow hedgesOutflow (11) (11) (156) -Inflow 12 12 200 - Forward contractsOutflow (45) - - -Inflow 45 - - - At 4 February 2007 < 1 year 1 - 2 years 2 - 3 years 3 - 4 years Cross currency swap - cash flow hedgesOutflow (11) (11) (11) (156)Inflow 11 11 11 175 (iii) Credit risk Credit risk is managed on group basis. Credit risk arises from cash and cashequivalents, deposits with banks, as well as credit exposures to customers. The Group maintains deposits with banks and financial institutions with anacceptable credit rating for a period not exceeding six months. Further, theGroup has specified limits that can be deposited with any one bank or financialinstitution at any point. The maximum exposure on cash and cash equivalents anddeposits is equal to the carrying amount of these instruments. The Group trades only with recognised, creditworthy third parties. It is theGroup's policy that customers who wish to trade on credit terms are subject tocredit verification procedures. In addition, receivable balances are monitoredon an ongoing basis with the result that the Group's exposure to bad debts isnot significant. The maximum exposure is the carrying amount as disclosed inNote 14. There are no significant concentrations of credit risk within theGroup. (iv) Other risk Cash flow interest rate risk: The Group's long term policy is to protect itselfagainst adverse movements in interest rates by maintaining up to 60% of itsconsolidated total net debt in fixed rate borrowings over a four year horizon.As at the balance sheet date all of group's borrowings are at fixed rate,thereby substantially reducing the Group's exposure to adverse movements ininterest rate. Cash and cash equivalents is a significant interest-bearing asset held by thegroup. At year end, a 1% movement in interest rate would have had a £5m (2007:£2m) impact on the Group's finance income. There are no other significantinterest bearing assets held by the Group. (b) Capital management A key objective of the Group's capital management is to maintain compliance withthe covenants set out in the revolving credit facility. The Group's policy is to maintain both a gearing ratio, and interest cover,which represents headroom of at least 10% over and above the requirements laiddown in the revolving credit facility. Throughout the year, the Group hascomfortably complied with this policy. There has been no change in the objectives, policies or processes with regardsto capital management during the years ended 3 February 2008 and 4 February2007. (c) Fair values All financial liabilities are carried at amortised cost. The Euro bonds areretranslated at balance sheet date spot rates. The fair value of the Sterlingand Euro Bonds are measured using closing market prices. These compare tocarrying values as follows: 2008 2008 2007 2007 Amortised Fair Amortised Fair cost value cost value £m £m £m £mBonds - current - - 251 250Bonds - non-current 758 693 748 711Total Sterling and Euro bonds 758 693 999 961 The fair value of other items within current and non-current borrowing equalstheir carrying amount, as the impact of discounting is not significant. (d) Hedging activities (i) Cash flow hedge At 3 February 2008, the company held a number of cross currency swaps which havebeen designated as cash flow hedges. These derivative financial instruments areused to minimise risk from potential movements in foreign exchange ratesinherent in cash flow of certain liabilities. The hedged forecast transactions denominated in foreign currency are expected tooccur at various dates over the next two years. Gains and losses recognised inthe hedging reserve in equity (note 24) on cross currency swaps as at 3 February2008 are recognised in the income statement in the period or periods duringwhich the hedged forecast transaction affects the income statement, which isgenerally once every year over the course of the next three (2007: four) years. (ii) Forward contracts The Group uses forward foreign exchange contracts to hedge the cost of futurepurchases of goods for resale, where those purchases are denominated in acurrency other than the functional currency of the purchasing company. Thehedging instruments are primarily used to hedge purchases in Euro and US dollar.The cash flows hedged will occur within one year of the balance sheet date. At 3 February 2008, the total notional amount of outstanding forward foreignexchange contracts to which the Group has committed was £45m (2007 - £nil). Thefair value of these outstanding forward exchange contracts at the balance sheetdate was £0.2m. 20 Deferred tax 2008 2007 £m £mDeferred tax liability 554 629Deferred tax asset (130) (151)Net deferred tax liability 424 478 IAS 12 Income Taxes permits the offsetting of balances within the same taxjurisdiction. All of the deferred tax assets were available for offset againstdeferred tax liabilities. The movements in deferred tax assets/(liabilities) during the period are shownbelow. Property, Pensions Share based Other short Total plant and payments term temporary equipment differences £m £m £m £m £mCurrent yearAt 4 February 2007 (629) 59 6 86 (478)(Charged)/credited to income statement 75 (50) 1 20 46Credited directly to equity - 10 (2) - 8At 3 February 2008 (554) 19 5 106 (424) Prior yearAt 29 January 2006 (609) 125 3 59 (422)(Charged)/credited to income statement (20) (15) - 27 (8)Credited directly to equity - (51) 3 - (48)At 4 February 2007 (629) 59 6 86 (478) Other short term temporary differences include £31m (2007: £nil) of unused tax losses. The deferred income tax credited/(charged) through the SoRIE during the period was as follows: 2008 2007 £m £mActuarial gains/(losses) 10 (51)Share options (2) 3 21 Pension liabilities Defined benefit pension scheme The Group operates two pension schemes, the "Morrison" and "Safeway" schemes,providing benefits based on pensionable pay of the final years of membership.The assets of the schemes are held in separate trustee administered funds; nopart of the schemes is wholly unfunded. The latest full provisional actuarialvaluations, which were carried out at 6 April 2007 and 1 April 2007 for theMorrison and Safeway schemes respectively, were updated for IAS 19 purposes forthe periods to 3 February 2008, 4 February 2007 and 29 January 2006 by aqualified independent actuary. The Deed and Rules of the Morrison Pension Scheme gives the Trustees power toset the level of contributions. In the Safeway Scheme this power is given to theGroup, subject to regulatory override. The current best estimate of employer contributions to be paid for the yearcommencing 4 February 2008 is £138 million, including a special contribution of£100m. Assumptions The major assumptions used in this valuation to determine the present value ofthe schemes' defined benefit obligation were as follows: Financial 2008 2007 2006Rate of increases in salaries 5.00 - 6.00% 4.45 - 5.45% 4.25-5.25%Rate of increase in pensions in payment and deferred pensions 3.20% 3.75% 3.00%Discount rate applied to scheme liabilities 5.75% 5.00% 4.75%Inflation assumption 3.75% 3.20% 3.00% Longevity The average life expectancy in years of a member who reaches normal retirementage of 65 and is currently aged 45 is as follows: 2008 2007 2006Male 23.5 19.9 19.9Female 25.8 22.8 22.8 The average life expectancy in years of a member retiring at the age of 65 atbalance sheet date is as follows: 2008 2007 2006Male 22.2 19.9 19.9Female 24.7 22.8 22.8 Assumptions regarding future mortality experience are set based on actuarialadvice and in accordance with published statistics. The longevity assumptionconsiders how long a member will live when they reach the age of retirement.Amongst the UK population there is a continuing trend for a generation to livelonger than the preceding generation, and this has been reflected in thelongevity assumption. This means that a 45 year old today is assumed to live onaverage longer than a 65 year old today. This particular adjustment, describedin the mortality tables below, is known as "Long Cohort" and is in-line with thelatest advice from the Pension Regulator. In calculating the present value of the liabilities the actuary selects theappropriate mortality table that reflects the longevity assumption. The most upto date tables are used in each period. The current mortality table used isPNX00 YOB LC (2007 and 2006: PA92 C2020). As disclosed in the Criticalaccounting assumptions, the results of the experience study conducted for theSafeway scheme have been used to adjust the longevity assumption for bothschemes, no such adjustment was made for the comparative periods. Expected return on assets The major assumptions used to determine the expected future return on theschemes' assets, were as follows: 2008 2007 2006Long term rate of return on:Equities 7.00% 7.00% 7.00%Corporate bonds 6.00% 5.00% 4.25%Gilts 4.25 - 4.50% - -Property related funds 6.00% 6.00% 7.00%Active currency management assets - 5.25% 4.50%Cash 5.50% 5.25% 4.50% 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 Assets of the schemes are held in order to generate cash to be used to satisfythe schemes' obligations, and are not necessarily intended to be realised in theshort-term. The allocation of assets between category is governed by theInvestment Principles of each scheme and is the responsibility of the trusteesof each respective scheme. The trustees should take due consideration of theGroup's views and a representative of the Group attends trustee investmentcommittees. The fair value of the schemes' assets, which may be subject tosignificant change before they are realised, and the present value of theschemes' liabilities which are derived from cash flow projections over longperiods and are inherently uncertain, were as follows: 2008 2007 2006 £m £m £mEquities 1,040 1,208 1,190Corporate bonds 237 221 211Gilts 531 - -Property and property related funds 104 260 54Active currency management assets - 66 22Cash 27 19 59Total fair value of schemes' assets 1,939 1,774 1,536Present value of defined benefit funded obligation (2,007) (1,972) (1,952)Net pension liability recognised in the balance sheet (68) (198) (416)Related deferred tax asset (note 20) 19 59 125Net deficit (49) (139) (291) 22 Provisions Restructuring Property Total provisions £m £m £m At 4 February 2007 50 95 145Charged to the income statement - 17 17Unused amounts reversed during the period (8) - (8)Utilised in period (13) (8) (21)Unwinding of discount - 6 6At 3 February 2008 29 110 139 Restructuring The change of the corporate logo and associated freshening of sections of thestores is well underway and progress is discussed in the CEO's Operating review.The provision covers the cost of conclusion on the work already started, andother direct expenditure not associated with the ongoing activities of theGroup. The ongoing restructuring programme in the distribution centres is alsoincluded in this balance. This provision is expected to be utilised within thenext financial year. Property provisions Property provisions comprise onerous leases provision, petrol filling stationdecommissioning reserve and provisions for dilapidations on leased buildings. Onerous leases relate to sublet and vacant properties. Where the rent receivableon the properties is less than the rent payable, a provision based on presentvalue of the net cost is made to cover the expected shortfall. The leasecommitments range from 1 to 65 years. Market conditions have a significantimpact and hence the assumptions on future cash flows are reviewed regularly andrevisions to the provision made where necessary. As noted in the financialreview, adjustments have been made to reflect the change in market conditionsand the legislative changes in respect of rates charges for empty properties. Others comprise petrol filling station decommissioning reserve and dilapidationscost. Provision is made for decommissioning when the petrol filling stationtanks have reached the end of their useful life or when they become redundantand is based on the present value of costs to be incurred to decommission thepetrol tanks. Dilapidation costs are incurred to bring a leased building backto condition it was originally leased. Provision is made for these costs, whichare incurred on termination of the lease. 23 Called up share capital Number of Share Share premium Total shares capital millions £m £m £mCurrent yearAt 4 February 2007 2,677 268 41 309Share options exercised 9 1 16 17At 3 February 2008 2,686 269 57 326 Prior yearAt 29 January 2006 2,673 267 37 304Share options exercised 4 1 4 5At 4 February 2007 2,677 268 41 309 The total authorised number of ordinary shares is 4,000m shares (2007: 4,000mshares) with a par value of 10p per share (2007: 10p per share). All issuedshares are fully paid. The holders of ordinary shares are entitled to receive dividends as declaredfrom time-to-time and are entitled to one vote per share at the meetings of theCompany. Potential issues of ordinary shares Certain eligible employees hold options to subscribe for shares in the Companyat prices ranging from 0p to 247p under the share option schemes approved byshareholders. Options on 9m shares (2007: 4m) were exercised in the currentfinancial year. Preference shares The 51/4% cumulative 282,666 preference shares with nominal amount of £1,amounting to £0.3m have been classified as a current financial liability inaccordance with IFRS 7 Financial instruments: Disclosure. These preferenceshares do not carry any voting rights. 24 Reconciliation of movements in capital and reserves Share Share Merger Retained Total capital premium reserve earnings £m £m £m £m Hedging £m reserve £mCurrent yearAt 4 February 2007 268 41 2,578 (1) 1,041 3,927Total recognised income and expense - - - 7 526 533Share issues 1 16 - - - 17Share option charge - - - - 9 9Dividends - - - - (108) (108)At 3 February 2008 269 57 2,578 6 1,468 4,378 Share Share Merger Retained Total capital premium reserve earnings £m £m £m £m Hedging £m reserve £mPrior yearAt 29 January 2006 267 37 2,578 - 766 3,648Total recognised income and expense - - - (1) 370 369 Share issues 1 4 - - - 5Share option charge - - - - 3 3Dividends - - - - (98) (98)At 4 February 2007 268 41 2,578 (1) 1,041 3,927 Included in retained earnings is a deduction of £44m (2007: £44m) in respect oftreasury shares held at balance sheet date. This represents the cost of17,641,448 (2007: 17,641,448) of the Company's ordinary shares (nominal value of£1.8m). These shares are held by a trust using funds provided by the Group andwere acquired to meet obligations under the share option schemes. The costs offunding and administering the schemes are charged to the income statement of theCompany in the period to which they relate. The market value of the shares at 3February 2008 was £53m (2007: £53m). The trust has waived its rights todividends. These shares are not treasury shares as defined by the London StockExchange. 25 Cash flow from operating activities 2008 2007 £m £mProfit for the period 554 248Adjustments for:Taxation 58 121Depreciation and amortisation 289 281Profit on disposal of property, plant and equipment (32) (38)Net finance (income)/cost (note 5) - 54Other non-cash changes 6 3Excess of contributions over pension service cost (148) (42)(Increase)/decrease in stocks (74) 31Increase in debtors (60) (3)Increase in creditors 169 37(Decrease)/increase in provisions (6) 12Cash generated from operations 756 704 26 Analysis of net debt 2008 2007 £m £mCash and cash equivalents (note 15) 191 231Bank overdraft (note 18) (73) -Cash and cash equivalents per cash flow 118 231 Long term cash on deposit 74 -Interest and cross-currency swaps 43 19Financial assets (note 12) 117 19 Bonds - (251)Swaps - (1)Other loans (note 18) (2) -Finance lease obligations (note 18) (2) (2)Current financial liabilities (4) (254) Bonds (758) (748)Other unsecured loans (15) (17)Finance lease obligations (1) (3)Non-current financial liabilities (note 18) (774) (768) Net debt (543) (772) 27 Share-based payments The Group operates a number of share-based payments schemes; (i) the Executiveshare option scheme, (ii) the Sharesave scheme, (iii) the Safeway Customer CarePerformance Share Ownership Plan ("CCPSOP"), (iv) a cash settled Long TermIncentive Plan ("CLTIP") and (v) an equity settled Long Term Incentive Plan ("ELTIP"). In line with IFRS 2 Share-based payment, the Group has fair valued all grants of equity instruments issued after 7 November 2002 which were unvested as of 1 January 2005 and all shadow equity instruments which were unvested as of 1 January 2005. The total charge for the period relating to employee share-based payment planswas £9m (2007: £20m), all of which (2007: £3m) related to equity-settledshare-based payment transactions. After corporation and deferred tax, the totalcharge in the income statement was £7m (2007: £15m). 28 Operating lease arrangements Lessee arrangements The Group has outstanding commitments for future minimum lease payments undernon-cancellable operating leases, which fall due as follows: 2008 2008 2007 2007 Property Vehicles, plant and Property Vehicles, plant and £m equipment £m equipment £m £mWithin one year 38 10 27 12More than one year and less than five years 141 26 110 15After five years 619 - 448 3 798 36 585 30 The Group leases various offices, stores and warehouses under non-cancellableoperating lease agreements. The leases have various terms ranging from 4 to 11years for vehicles, plant and equipment and 25 to over 100 years for property(including land), with varying escalation clauses and renewal rights. Generallyall property leases are reviewed every five years to align them with marketrentals. Lessor arrangements The Group has non-cancellable agreements with tenants and the future minimumlease income is as follows: 2008 2007 £m £mWithin one year 28 19More than one year and less than five years 93 67After five years 154 120 275 206 The Group sub-lets buildings of various nature under non-cancellable agreements.The leases have various terms, escalation clauses and renewal rights. 29 Capital commitments 2008 2007 £m £mContracts placed for future capital expenditure not provided in the financial 102 102statements Included above are capital commitments for investment property of £7m (2007:£17m). 30 Contingent liabilities In September 2007 the Office of Fair Trading issued a Statement of Objections toa number of grocery retailers and milk producers, alleging collusion in thesetting of prices for certain dairy products in 2002 and 2003. Morrisons wasaccused in relation to one infringement in 2002, and has vigorously denied this. Based on the evidence put forward, the Board do not consider it probable thatthe Company will ultimately incur a fine, and accordingly have made no provisionfor any such liability. 31 Post balance sheet events The Directors are proposing a final dividend in respect of the financial periodending 3 February 2008 of 4.125p per share which will absorb an estimated £111mof shareholders' funds. Subject to approval at the AGM, it will be paid on 6June 2008 to shareholders who are on the register of members on 2 May 2008. As described in the Chief Executive strategy review, the Group intends to return£500m to shareholders through a share buyback program in the financial yearended February 2009. 32 Investment in Rathbone Kear Limited At the end of last year the Group owned 80% of the share capital of RathboneKear Limited, the other 20% being owned by Mr H Kear. The Group purchased theremaining 20% of the company on 25 September 2007 for a cash consideration of£0.6m which was equal to the book value of the assets acquired. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MRW.L