Annual review 2012/13 Wm Morrison Supermarkets PLC. More of what matters

Transcription

1 Annual review 2012/13 Wm Morrison Supermarkets PLC More of what matters

2 Wm Morrison Supermarkets PLC Annual review 2012/13 Morrisons at a glance Who we are We are the UK s fourth largest food retailer by sales, with annual turnover in excess of 18bn. We have c500 stores across the UK, which includes 12 convenience formats. Over 11 million customers visit our stores each week, served by 129,000 friendly colleagues. Financial performance 2012/13 Turnover 18.1 bn Like-for-like sales 53 week v 53 week basis (2.1) % Profit before tax Basic earning per share Net debt Total dividend per share 879 m 26.7 p 2.2 bn 11.8 p How we ve performed against our strategic objectives What we said we would do Deliver even better value for our customers Develop our core business through opening more supermarkets and convenience stores Continue to explore multi-channel capabilities What we did Continued to offer customers great value on fresh food prepared in store Opened 17 new stores and nine convenience stores Launched Morrisons Cellar, developed our Kiddicare online offer and continued to explore food online What we will do next Increase our accessibility to customers by building our convenience portfolio to 100 stores Continue to offer great value on Market Street with our pick of the street deals Launch Morrisons online food offer in 2014 Note: Throughout the annual review (1) Unless otherwise stated, 2012/13 refers to the 53 week period ended 3 February 2013 and 2011/12 refers to the 52 week period ended 29 January and 2013 refer to calendar years. (2) Underlying profit is defined as profit before one off costs and credits, property transactions and IAS 19 pension interest, at a normalised tax rate, as reconciled in note 1 of the Group financial statements. Underlying operating profit is operating profit before property disposals. (3) Like-for-like sales reflects the percentage change in year on year store sales (excluding VAT and fuel), stripping out the impact of new store openings and closures in the current or previous financial year.

3 Chairman s review delivering value in the short term and for the long term Operational highlights Sir Ian Gibson Chairman Underlying profit before tax 901 m Underlying earnings per share Final proposed dividend per share 8.31 p Profit share pool for colleagues 27.3 p 46 m As anticipated, market conditions during the year have been challenging with ongoing commodity inflation continuing to put further pressure on household budgets and an already fragile consumer confidence. Against this difficult backdrop, Morrisons has worked hard to deliver a unique combination of value, freshness and quality to its customers. Although our overall performance has not been as good as we would have wished, an increase in underlying earnings per share and a significant increase in the dividend demonstrate both the resilience of our business model in a tough economic environment and the Board s confidence in the future. Results Profit before tax of 879m was 7% below prior year. Underlying profit before tax was 901m down by 4% on the prior year. Underlying basic earnings per share (EPS) increased by 7% to 27.3p (2011/12: 25.6p). Statutory basic earnings per share of 26.7p were in line with the previous year. The Board is recommending a final dividend of 8.31p per share. This brings the total dividend for the year to 11.80p, an increase of 10% on 2011/12. The dividend is covered 2.3 times by underlying earnings. Cash flow from operations of 1,432m was 168m (13%) higher than in the previous year, primarily as a result of improved working capital management. Capital expenditure of 1,016m reflects a planned acceleration in our new store opening programme, continuing investments in Evolve, continuing expansion of our vertical integration capacity and new investments to support our multi-channel expansion. We will continue to accelerate these essential investments in future growth and expect capital expenditure in 2013/14 to be 1.1bn, which includes 150m for multi-channel development. During the year, a further 579m was invested in our equity retirement programme and we have now met our objective of returning 1bn to shareholders in addition to our normal dividend payment. Net debt rose as expected to 2,181m (2011/12: 1,471m), reflecting these investments and increased tax payments. This brings our gearing to 42%, which remains a conservative level for the sector. The Group continues to maintain a strong balance sheet position, securely financed by a number of long dated bonds and revolving credit facilities at competitive rates. At the year end the Group had committed but undrawn facilities of 675m. Community and the environment Our customers expect us to trade responsibly. We are committed to working with the communities in which we operate, maintaining ethical standards and managing resources carefully. Our Let s Grow programme, which aims to support the next generation of food growers, is currently in its fifth year and we have donated 18m of gardening equipment to schools. Our colleagues and customers have helped us to raise over 2.1m this year for our chosen charity, Save the Children. Industry recognition Morrisons is committed to providing its customers with great service and shopkeeping, and to making it a great place to work for our colleagues. This has again been recognised with a number of prestigious industry awards. These include Grocer of the Year; Employer of the Year, for the third year in a row; Best Service at the Grocer Gold awards; six Grocer Own Label Food and Drink awards and Retail Week Employer of the Year for the second successive year. Our colleagues These awards could not have been achieved without the dedication, hard work and passion of all our 129,000 colleagues. We believe in creating long term partnerships with our colleagues by giving them the time, qualifications and support they need to develop their skills. I am delighted that their efforts have enabled them to share a profit share pool of 46m this year. On behalf of the Board, I want to express our thanks to every one of our colleagues for their dedication, professionalism and service throughout the year. See our report visit: morrisons.co.uk/corporate/ar2013 1

4 Wm Morrison Supermarkets PLC Annual review 2012/13 Chief Executive s review a clear vision and strategy that makes us different Operational highlights Dalton Philips Chief Executive Average basket spend (LFL basis) Stores opened (includes nine convenience) Market share source: IGD 11.8 % Gross profit bn This has been a challenging year for Morrisons but we have continued to grow sales and invest in the long term success of our business. Customers have felt the effects of the tough economy but our strategy remains on track. We re continuing to open convenience stores, develop our online capabilities and doing more of what matters to help our customers. Turnover During the period total turnover increased by 3% to 18.1bn (2011/12: 17.7bn). On a like-for-like basis, total store sales, excluding fuel, decreased slightly by 0.2% which included a contribution from new store openings of 1.9% and a decrease in like-for-like sales of 2.1%. Our below market sales performance was disappointing. Whilst we are at a structural disadvantage in that we do not yet have a meaningful presence in either convenience stores or in online, the two fastest growing sectors of the market, we did not perform as well as we should have in a trading environment that should have played more to Morrisons strengths. Whilst our base pricing was strong, we do need to do more to communicate our value message and our unique points of difference. We did run some good promotions but we need to do more to improve the overall effectiveness of our promotional programme and ensure that our pricing is clear and consistent. We will be addressing these issues in the coming year. Market overview In a tough economic climate, the UK grocery market continued to be very challenging with consumers seeing no respite in the economy. Market growth was driven by inflation (averaging 2.8% during the year, according to the Office of National Statistics) which increased faster than wages, squeezing household incomes. More shoppers now regard price as their first consideration when choosing between products compared with a year ago. Consumers are also growing increasingly forensic in the way they shop; building their knowledge of how much things cost, down trading and switching to own label products, managing their consumption and actively searching and taking advantage of promotions. As a result of these pressures, shoppers are being increasingly drawn away from traditional supermarkets towards the online, convenience and discount channels. Strategy In 2010 we outlined our vision to make Morrisons Different and Better than Ever. Three years on, we believe that our vision is even more relevant today and that we have the right strategy to achieve it. We are proud of what makes us different a distinctive offer to customers centred around fresh food, craft skills and vertical integration through our manufacturing businesses; the way we lead and support our colleagues; and our unique heritage. Being different means building on these advantages, which set us apart from all our competitors and position us to succeed. Being better than ever is about improving the way we do business doing more of the things that matter for our customers making great food, offering outstanding service and being more efficient so we can pass on the best savings possible. It also means seizing opportunities to grow the business profitably through new formats, channels and categories, to meet more of our existing customers needs and to reach new customers. Over 2.7m customers visit our Fresh Format stores each week Reinforce our differences Seize the opportunities 2

5 Our business model Doing more of what matters What we do Our business model is underpinned by the manufacturing and sourcing of great food, sold across our stores by our friendly people. Morrisons has grown from a market stall in Bradford to the UK s fourth largest supermarket group with c500 stores including 12 Morrisons M local convenience stores. Each of our stores has its own Market Street, complete with trained colleagues using their craft skills to bring fresh products to our customers, prepared just the way they like it. Every day in-store we bake 128,000 loaves, filet 5,000 fish and make 11,500 sandwiches. We have always cared about the origin of our food and we make more fresh food in-store than any other supermarket. Our head office, logistics and distribution teams support our stores and we continuously invest in technology. Our Evolve programme has helped us increase efficiency by making sure we have the right systems in place to deliver continuous improvement across our operations. Where we do it We operate throughout the UK so we re closer to our suppliers and customers the people that matter. Key Head office Online head office Distribution centres Manufacturing M local Supermarkets South West 58 Scotland 90 North South Central 85 Midlands South East We are proud to be a British Group and close to both our customers and suppliers. We are continuing to grow so that we can reach even more customers. In 2013/14 we plan to open 20 stores and increase our convenience store portfolio to 100. Our continued store roll out means we re creating local jobs across the UK. We work closely with our communities to support local initiatives, such as Let s Grow (our fun educational scheme for schools) and Raise a Smile (our charity partnership scheme). How we do it differently We provide great service to our customers by offering the best value fresh food, prepared in store by our experts. We are unique because of the transparency of our supply chain and our focus on traditional crafts. Fresh more of what matters fresh food from field to fork, catch to kitchen in hours made from scratch in-store every day vertical integration we own the supply chain and we source locally we guarantee our fresh credentials In Market Street our customers can see their food being prepared. Even our Morrisons M local stores have Market Street made products giving customers the same great fresh food. Owning our supply chain means we know where our food comes from. We can also react more quickly to customer demands throughout the day resulting in less waste. Fresh Maximising value for our shareholders Value more of what matters honest prices affordable for everyone transparent promotions great availability Value We price our food honestly to offer the best value to our customers. Our vertical integration allows us to drive out efficiencies and quickly pass savings on to customers. Service Service more of what matters craft skills in-store see and taste the food on Market Street friendly people, offering the best advice and service knowledgeable HOT service We pride ourselves on our in-store craft skills. We have over 5,000 trained butchers, bakers and fishmongers preparing food and delivering exactly what our customers want, tailored to suit local markets. Focused on our strategic objectives Underpinning our business model is our vision of being Different and Better than Ever. We have a clear set of strategic objectives to help us achieve this. Driving the topline Increasing efficiency Capturing growth 3

6 Wm Morrison Supermarkets PLC Annual review 2012/13 Driving the topline What we said we would do Roll out our Fresh Format to 90 stores Liberate 114,000 square feet of space Launch 5,000 new own brand lines What we did Rolled out Fresh Format to over 90 stores Continued to liberate space in our grocery aisles Launched over 5,000 own brand lines, including NuMe What we will do next Continue the Fresh Format roll out, tailoring the concept to local markets Relaunch 10,000 products by 2013/14 Launch Nutmeg, Morrisons own label children s clothing Own brand Own brand products launched Sales growth of M savers brand 5, % Strengthening our own brand Having great own brand products can give customers a reason to switch supermarkets. Based on intensive research and customer insight, we are now around half way through a three year programme to deliver greater quality, whilst maintaining our strong value perception across the whole of our own brand range of some 10,000 products by Christmas Since the programme started, we have re-launched over 5,000 products and introduced four new Morrisons brands, in addition to our core range of everyday family favourites, and we have had great feedback from our customers. We have also announced that we will launch Nutmeg, our new range of clothing for children aged 0 to 13, which will be available in over 90 stores from March Completing National to Nationwide There are currently 6.4m households in Britain not in close proximity to a Morrisons store. This represents a significant opportunity for us to grow, particularly in the South where we are less well represented. In March 2011, we announced an accelerated programme to open 2.5m square feet of new space over the three years to 2013/14. During the current year we added a further 17 new core stores to our estate, including three replacement stores, as well as nine convenience format stores. We ended the year with 13.4m square feet of net retail space in total and an estate of 498 stores, including 12 in convenience format. Moving further ahead on fresh Fresh Format is about providing customers with the best fresh food in the UK, unrivalled value for money and fantastic service from an environment that really feels different. From the outset we have been very conscious that the new format would have to be tailored to reflect different stores sizes and the requirements of local demographics one size would certainly not fit all. To highlight our points of difference and provide more of what matters to our customers, we have rationalised the space given over to ambient grocery items and added a new wow factor into Market Street, including introducing category experts to provide advice to customers. In some stores we have knocked down walls so that customers can see our craft skills in practice, and in others we have introduced children s clothing, a category customers now expect to see in-store. We have continued to build on the initial progress we made in 2011 by applying the Fresh Format concept to a further 76 of our existing stores, and implementing it in the 17 new stores we opened during the year. By the end of 2013/14 a further 100 stores will have benefited from the new fresh treatment. Our fruit and veg is so fresh it s award winning we ve won produce retailer of the year three years running 4

7 Increasing efficiency What we said we would do Implement new IT systems at our Woodheads meat manufacturing site Introduce a new distribution centre forecasting system Deliver 40m of efficiency savings What we did Rolled out new financial systems to all three meat manufacturing sites Implemented our new distribution centre forecasting system Continued to focus on cost control, delivering over 90m of savings What we will do next Roll out supply chain forecasting solution to four further distribution centres Deliver new commercial systems and processes to increase focus on promotions Deliver 100m of further efficiency savings Key savings In-store and distribution productivity improvements in 2012/13 4 % Revamping our systems We are now well over the half way stage of our six year Evolve programme. When complete, the programme will replace all the systems in our business and provide us with industry leading software capability. We are delighted with the improvements we have delivered to the business so far. 2012/13 saw the deployment of new systems to many parts of the business. During the year we concluded the implementation of our EPOS till system, introducing it into our petrol filling stations and our stores. We substantially completed the roll out of new meat manufacturing solutions in Woodheads which link our buying, delivery, production and despatch to stores processes onto a single system, helping us to trace our meat products from field to fork. We also commenced the implementation of the important supply chain module which has initially been introduced into the Stockton warehouse and will ultimately enable us to consolidate our accounting, supplier ordering and distribution systems onto a single platform. Driving in-store productivity Efficiency remains paramount, particularly in a low growth sales environment and with value for money at the forefront of customers minds. We continue to look for better ways of working, to improve the service we offer and to reduce unnecessary spend. We have implemented a number of long term initiatives to make Morrisons more efficient but always with the guiding principle that great customer service is central to our business. In March 2011 we launched an initiative to focus on in-store productivity and have made further good progress in the year. During the year we completed the roll out of intelligent labour planning across Market Street, reconfigured our check outs to reduce the amount of time required to process a till transaction, introduced more self service checkouts, increased our case rates and redesigned a number of other work processes including receipting systems for newspapers and magazines. Indirect procurement savings 45 m Tackling indirect procurement Our indirect procurement programme aims to reduce the cost of our goods and services without impacting customers. Our colleagues have played a significant part in helping us to identify and remove unnecessary costs from the business. The programme involves reviewing every area of spend in the business, both revenue and capital expenditure, looking for ways to sensibly reduce cost, including the use of e-auctions, rate negotiations, consolidating spend and reducing consumption. During the year we made further good progress delivering a further 45m of annual revenue benefit in addition to the 40m we achieved in 2011/12. 5

8 Wm Morrison Supermarkets PLC Annual review 2012/13 Capturing growth What we said we would do Trial more convenience stores Open our first Kiddicare store Continue to develop Morrisons online food proposition Open Grimsby seafood plant What we did Opened nine convenience stores including petrol forecourts and city centre locations Acquired a dedicated convenience store distribution centre in Feltham Successfully opened four Kiddicare stores and our Grimsby seafood plant Launched wine online (Morrisons Cellar) What we will do next Continue to roll out convenience stores, particularly in the South East Further develop Morrisonscellar.com and other online non-food categories Launch Morrisons online food offer in 2014 Convenience New convenience stores in 2012/13 Target convenience stores by the end of 2013/ Becoming multi-channel Customers are changing the way they shop and online is now the fastest growing channel in the UK, which represents an exciting opportunity for Morrisons. Morrisons took the first steps in establishing itself in online retail through its acquisition, in 2011, of Kiddicare. As planned, we have continued to integrate Morrisons and Kiddicare brands using Kiddicare s industry leading technology platform to provide the foundation for Morrisons first own online offer. In the second half of the year we launched Morrisons Cellar. In 2011 we took an initial step in online grocery through the acquisition of a minority stake in Fresh Direct, a leading online, fresh food retailer in New York, which enabled us to embed a Morrisons team into their business for nearly a year. We are now confident that we have identified a model that will enable us to provide food online in a distinctive, customer focused way that reinforces Morrisons leadership in fresh food by putting fresh food at the heart of its offer. Accordingly we will be launching Morrisons first online food offer in line with previous guidance by the end of January Growing convenience Customers want to be able to top up on the items they need without having to travel to their nearest large supermarket. The UK convenience market is a huge opportunity for Morrisons to leverage our points of difference, our unique vertical integration and great fresh and value credentials, and to develop a truly compelling new fresh food experience at the heart of local communities. In February 2013, we announced that we had acquired 62 stores and have increased our target for new convenience format openings to 100 by the end of 2013/14. We will be looking to increase that number in the future. Increasing our presence in London and the South East, where we are significantly under represented, is a major opportunity for Morrisons and convenience outlets have a key role to play in that development. We will support our expansion in London and the South East from a 100,000 square foot distribution centre in Feltham, West London, which opened in the first quarter of In the coming year we will be looking to acquire a new convenience distribution centre (CDC) in the north of England to support our planned growth of convenience formats in that region. Outside of the major conurbations we will supplement this expanding CDC network with our unique hub and spoke distribution system. We believe that capturing strategic growth through the development of multi-channel opportunities will be an important driver of shareholder value in future years. Vertical integration Vertical integration is crucial to our leadership in fresh food. Sourcing and processing fresh food through our own facilities has long been a key point of difference for Morrisons. In addition to the flexibility that controlling our own supply chain brings to the business, it is a true source of competitive advantage which enables us to offer great quality products for great prices. It also enables us to have control over the provenance, safety and quality of our fresh products. It is becoming increasingly important to consumers that they are able to understand and trust where their food comes from. With half of the fresh products we sell in-store being processed through our own factories, Morrisons is uniquely placed to offer customers the reassurances they seek. This year we have acquired a fresh meat packing facility, established a seafood processing facility in Grimsby and started to expand our Colne abattoir and Wakefield bakery. 6

9 More of what matters for our people At Morrisons, we create long term partnerships with our people by giving them the time, qualifications and support needed to grow and develop their skills. Developing talent Talented people are our greatest asset and the way we engage and train our colleagues helps us deliver more of what matters to our customers. We believe in bringing the best out of people by offering continuous training, from the Best First Day through to Best Last Day. This year, we have provided over 750,000 training days to our colleagues, seen over 14,000 colleagues trained in retail skills and promoted over 2,100 people following successful job skills qualification. We have maintained our position as the largest apprenticeship provider in the country with 11,000 colleagues graduating this year. We pride ourselves on our colleagues craft skills and our apprenticeships and training programmes are vital in transforming our people into skilled and knowledgeable butchers, bakers and fishmongers. Employer of choice At Morrisons, we are passionate about providing a great place to work for our colleagues, which in turn provides a better experience for our customers. We are proud to have won the Grocer Gold Employer of Year Award for the third time in a row and the Retail Week Employer of the Year for the second year. This year, against a backdrop of significant pension changes, we introduced our ground breaking Retirement Saver colleague pension scheme, which offers colleagues a guaranteed pension pot when they choose to retire. The scheme received positive feedback and pension participation trebled within one month of its launch. Formal feedback from colleagues is important and our annual Climate survey, supported by bi-monthly Pulse surveys are a key part of monitoring engagement. This year, our response rate is over 90% and our year-on-year engagement has increased by 6.2%. Heart of the community At Morrisons, we want our stores to be truly part of the communities they serve. We are committed to growing our people to build a loyal and committed workforce, which provides the basis of a strong Morrisons culture and increased social mobility. We also want our communities to benefit from our growth plans by creating opportunities, on average 75% of colleagues in new stores are recruited from the local area. Highlights Labour turnover 15.0 %1 Employee stability, measured as colleagues with more than one year service 86.2 %3 Increase in colleague engagement, measured through our colleague engagment survey +6.2 %2 Increase in the number of female managers 2.0 %4 source: 1 12 months to 31 January Latest Pulse survey (Pulse 6), compared with Climate survey months to 31 December February 2013, compared with 31 January 2012 Awards won in 2012/13 We have a Market Street in all our stores. 7

10 Wm Morrison Supermarkets PLC Annual review 2012/13 Corporate responsibility At Morrisons we re passionate about doing more of what matters...for customers The past year has seen a number of developments in our work to provide customers with the information and products they need to make healthier choices, for example launching our new healthier eating brand, NuMe and continuing to support the Government s Public Health Responsibility Deal which includes commitments such as working towards 2012 salt reduction targets and putting calorie information on our out of home eating options. In addition, our in-store café menus and counter items provide calorie information at point of choice and customers who shop in Market Street can find nutrition information for those products on our website....for farmers The Morrisons farming programme is now in its fourth year of operation. This year, the programme has completed a number of industry led projects to provide farmers with new information that can help them build sustainable farm businesses and enable Morrisons to secure a supplier base ready to meet our customers need for transparency, quality and affordable food. At Morrisons we take the welfare of livestock in our food chain very seriously. It s an important issue to our farmers and our customers. We continue to invest in research that helps raise the bar for animal wellbeing....for communities Let s Grow is our award winning community investment programme that teaches schoolchildren about the story of fresh food and the practical experience of growing their own fruit and vegetables. Since our programme began in 2008, we ve given away 18m worth of gardening equipment to schools all over the UK. Corporate responsibility highlights: Big Tick for our Let s Grow programme at Business in the Community s annual Awards of Excellence Reduction in carbon emissions (2005 baseline) 19.3 % Raised for our charity partner Save the Children achieved to date 4.5 m raised to date Morrisons actively supports Save the Children s Families and Schools Together (FAST) programme; working with families, schools and communities to support children across the UK. Since April 2011 we have raised over 4.5m. See our CR review visit: morrisons.co.uk/cr 8

11 Board of Directors and Management Board Board of Directors (left to right) Sir Ian Gibson N R C Johanna Waterous N R C A Nigel Robertson N R C A Philip Cox N R A Penny Hughes N R C A Richard Pennycook Dalton Philips N C Management Board (left to right) Neal Austin Trevor Strain Mark Amsden Dalton Philips Richard Pennycook Martyn Fletcher Martyn Jones Terry Hartwell Mark Harrison Committee key Nomination Committee Remuneration Committee Corporate Compliance and Responsibility Committee Audit Committee N R C A See our report visit: morrisons.co.uk/corporate/ar2013 9

12 Wm Morrison Supermarkets PLC Annual review 2012/13 Summary Directors remuneration report Remuneration summary How Executive Director pay is structured at Morrisons The major components of executive pay in 2012/13 were: base salary; annual bonus plan, based on underlying profit before tax, strategic scorecard and personal objectives, of which 50% of any payment is deferred in shares for three years; and long term incentive plan (LTIP) delivered in shares, based 75% on earnings per share (EPS) growth and 25% on like-for-like sales growth over three years. Key points from the 2012/13 remuneration report are: base salary levels for Dalton Philips and Richard Pennycook were unchanged in 2012/13; no annual bonus was paid for the year 2012/13 as the business missed the stretching underlying profit before tax growth target; the LTIP for the 2010/13 cycle did not vest as a result of the EPS growth over that three year performance period falling short of target; following a review in February 2013, the Committee decided that there will be no base salary increases for Executive Directors in 2013/14; the balance of the annual bonus weighting between personal objectives and strategic scorecard will be 20:20 (changed from 10:30) for 2013/14; the like-for-like sales growth and earnings per share targets attached to the LTIP will be amended for grants from 2013/14 so that maximum vesting will occur if LFL sales growth equals or exceeds 1% v the IGD index and EPS reaches 10% above RPI; a return on capital employed (ROCE) underpin will be implemented for LTIP grants from 2013/14; clawback provisions will apply to deferred shares and LTIP awards from 2013/14; and shareholding guidelines have been increased for Directors to 200% of salary. We pay for performance our principles encourage a strong performance culture; emphasise long term shareholder value creation; and position pay competitively in relation to our major peers. Key performance indicators Pay for performance at Morrisons The Remuneration Committee believes that the executive remuneration policy and the supporting reward structure provide clear alignment with the performance of Morrisons. To maintain this relationship, the Remuneration Committee constantly reviews Morrisons business priorities and the environment in which the Company operates. The overall relationship is shown in the graph below. PBT v total remuneration (base salary + cash bonus) for Chief Executive and Group Finance Director during the period 2008/09 to 2012/13 PBT ( m) (1) (2) / / / / /13 PBT Base salary + cash bonus (3) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Notes 1. No Chief Executive bonus paid in year due to departure of Marc Bolland 2. Dalton Philips appointed as Chief Executive during year (salary and bonus shown on annualised basis for 2010/11) /11 bonus opportunity increased to 200% to reflect competitive benchmarks; and introduction of bonus deferral into shares to reinforce the linkage of pay to long term shareholder value Performance graph The graph below shows the Company s total shareholder return (TSR) compared with the TSR of the FTSE 100 and FTSE food and drug retailers indices over the five year period to 3 February These indices have been selected as being appropriate in giving a broad equity view and the Company is a constituent of both indices. Base salary + cash bonus ( 000) 2012/ /12 Total shareholder return PBT growth over one year (7.2)% 8.4% Underlying EPS growth over one year 6.7% 10.9% Average share price growth (6.1)% 4.4% Dividend payment 11.8p 10.7p Value of hypothetical 100 holding Feb Feb Feb Feb Jan Feb 2013 Wm Morrison Supermarkets PLC FTSE 100 FTSE all share food and drug retailers index source: Thompson Reuters 10

13 Dear Shareholder As the Chair of the Remuneration Committee, I am pleased to present the summary Directors remuneration report for the financial year ended 3 February This summary is an extract from the Directors remuneration report within the annual report and financial statements for the 53 weeks ended 3 February The full remuneration report can be viewed on the corporate website: The Committee remains focused on encouraging a strong performance culture, positioning pay competitively whilst doing the right things for our shareholders. Tough conditions resulted in the business missing performance targets for both the annual bonus plan and long term incentive plan. In response to shareholders feedback, the Remuneration Committee has reviewed our reward policies and made a number of changes with effect from 2013/14. Short term incentives are based on a combination of underlying profit before tax targets, strategic corporate scorecard measures and personal objectives. For 2013/14, the Committee has increased the weighting for personal objectives metrics to 20%. This is intended to drive greater emphasis on personal impact in the business. Long term incentives are based on EPS and like-for-like sales growth to support a sustainable approach to growth. The mix of the total remuneration package and the use of stretching performance targets ensures that there is alignment between pay and performance. In 2013/14, in addition to the EPS and sales growth measures, we will introduce a ROCE underpin to reinforce a focus on efficient use of capital. The like-for-like sales growth stretch target will be set at IGD +1% and the EPS performance range will be set at 1% to 10% above RPI, which the Committee believes remains challenging and reflects the structure and strategic growth priorities of the business. As a Committee, we are mindful of our responsibilities and review executive remuneration arrangements with a critical eye on corporate governance. We also welcome the recently published guidance from BIS in this regard. With this in mind, we have raised the shareholding guideline for Executive Directors from 100% to 200% of salary, to be achieved over five years. We have also introduced clawback provisions for both the deferred shares and LTIP which would be triggered in the event of financial misstatement or such similar acts by the Directors that could bring the business into disrepute. The Committee believes that the adjustments to remuneration policy for 2013/14 set out above reinforce our focus on delivering stretching performance, driving the right behaviours in the executive team and doing the right thing for our shareholders. Johanna Waterous Chairman of the Remuneration Committee Audited information Directors emoluments and pension entitlements. The emoluments of the Directors were as follows: Name Directors salaries/fees 000 Benefits in kind Pension supplement 000 Annual cash bonus Total year to 3 Feb Total year to 29 Jan Non-Executive Chairman I Gibson Executive Directors D Philips ,089 1,782 R Pennycook ,178 Non-Executive Directors P Cox P Hughes N Robertson J Waterous Total 2, ,441 3,641 1 Details of benefits in kind comprise transport costs, private health provision and, in certain cases, a telephone allowance. 2 For all Executive Directors, 50% of any total bonus earned is paid in cash, with 50% deferred in shares for three years under the Deferred Share Bonus Plan. 3 In addition to the amounts shown in the table for the year ended 29 January 2012, 472,000 was paid to Executive Directors and 33,000 was paid to Non-Executive Directors, who resigned from the Board during that year. Vested share awards During the year, partial vesting occurred of the LTIP awards granted in 2009/10 to Richard Pennycook. Mr Pennycook received 403,095 shares on 9 April 2012 (vesting share price of p) and 179,226 shares on 29 January 2013 (vesting share price p) in both cases representing 97% of the maximum award. Dalton Philips received 120,965 shares under the Restricted Share Award, granted on 31 March This represents 100% of the maximum award. The vesting share price on 25 March 2012 was p. 11

14 Wm Morrison Supermarkets PLC Annual review 2012/13 Summary Directors report General information Summary financial statements The summary financial statements on pages 14 to 15, the summary Directors remuneration report on pages 10 to 11 and the summary corporate governance report on page 13 are summaries of the information contained in the annual report and financial statements 2012/13. The aim of the annual review is to provide shareholders with the key financial and other relevant information in a clear and concise manner. Therefore, the annual review and the summary financial statements do not contain the information which would allow as full an understanding of the results of the Group, its state of affairs of the policies and arrangements concerning Directors remuneration as is provided in the annual report and financial statements. Copies of the annual report and financial statements may be obtained free of charge from the Company as noted in the Investor information section at the back of this report. Auditor The auditor has reported on the full annual report and financial statements. The auditor s report was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying that report and did not contain a statement under sections 498(2) or 498(3) of the Companies Act The Directors confirm that, so far as they are aware, there is no relevant audit information of which the auditor is unaware and that each Director has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. A resolution to re-appoint KPMG Audit Plc as auditor and a separate resolution to authorise the Directors to set their remuneration is to be proposed at the forthcoming AGM. Annual General Meeting The notice of the 2013 AGM of the Company (to be held at the Company s headquarters at Gain Lane in Bradford on 13 June 2013) is to be sent to shareholders with an accompanying explanatory letter from the Chairman. The Directors believe each of the resolutions to be proposed at the AGM are in the best interests of the Group and recommend shareholders to vote in favour of each of them. Shareholders will also receive notification of the availability of the annual report and financial statements on the Group s website, unless they have positively elected to receive a printed version of the annual report and financial statements. Share capital and rights attaching to the Company s shares Under the Company s Articles of Association, any share in the Company may be issued with such rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may, from time to time, by ordinary resolution determine (or, in the absence of any such determination, as the Directors may determine). At a general meeting of the Company, every member has one vote on a show of hands and, on a poll, one vote for each share held. The notice of general meeting specifies deadlines for exercising voting rights either by proxy or present in person in relation to resolutions to be passed at a general meeting. No member is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting or to exercise any other right conferred by being a shareholder if they or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information with respect to interests in their voting shares) and they or any interested person failed to supply the Company with the information requested within 14 days after delivery of that notice. The Board may also decide that no dividend is payable in respect of those default shares and that no transfer of any default shares shall be registered. These restrictions end seven days after receipt by the Company of a notice of an approved transfer of the shares or all the information required by the relevant section 793 notice, whichever is the earlier. The Directors may refuse to register any transfer of any share which is not a fully paid share, although such discretion may not be exercised in a way which the Financial Services Authority regards as preventing dealings in the shares of the relevant class or classes from taking place on an open or proper basis. The Directors may likewise refuse to register any transfer of a share in favour of more than four persons jointly. The Company is not aware of any other restrictions on the transfer of shares in the Company other than certain restrictions that may, from time to time, be imposed by laws and regulations (for example, insider trading laws). The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or voting rights. 12

15 Summary corporate governance report During the financial year 2012/13, the Group has fully applied the principles of the UK Corporate Governance Code (the Code ) as reported below in this Corporate governance report. During 2011/12, the Board s Corporate Compliance and Responsibility Committee reviewed and updated, and the Board approved, its Corporate Governance Compliance Statement, which sets out how the Group complies with each of the provisions of the UK Corporate Governance Code (the Code ). In light of the fact that there were relatively few changes to the Code in the year, there were no significant changes to the Corporate Governance Compliance Statement during 2012/13. That document also sets out the statement of the division of responsibilities between the Chairman and the Chief Executive, the list of matters reserved for the Board, the membership of the Board and the various Board committees, together with the terms of reference of the various standing Board committees. This document is available in the investor relations section of the Group s website: The performance of the Board, its committees and its Directors are assessed and appraised regularly. A review of the Board was carried out during the financial year. The review took the form of the completion of questionnaires by each Director, prepared by the Company Secretary, and approved by the Board s Corporate Compliance and Responsibility Committee. Those responses were collated by the Company Secretary s office and reviewed by the Chairman and the Corporate Compliance and Responsibility Committee. The conclusions of that review were that the Board was effective, well informed and active, worked well as a team, and provided appropriate but supportive challenge to management. The Board has accepted the recommendations of the Corporate Compliance and Responsibility Committee and in 2013/14 there will be a further independently facilitated external evaluation. The Board is satisfied that the arrangements for review and appraisal of the performance of the Board, its committees and individual Directors, are appropriate. The Board is also confident that the initiatives which have been implemented already or which are in progress will enable the Group to satisfy the best practice recommendations of the Code in relation to Board evaluation. The Management Board is made up of representatives of the senior management and chaired by the Chief Executive. It has detailed terms of reference and has responsibility for the day-to-day operations of the Group. This includes development and implementation of strategy (subject to overall supervision by the Board), financial performance, reporting and control, and risk management. The Board is confident that its corporate governance policies and procedures are appropriate and that the Company is fully compliant with the Code. In line with the best practice recommendation set out in Code Principle B.7.1, all Directors will be submitted for re-election at its AGM. A report explaining the Company s governance policies and practices is given in the annual report and financial statements. Independent auditor s statement to the members of Wm Morrison Supermarkets PLC We have examined the summary financial statements for the 53 week period ended 3 February 2013, which comprises the summary consolidated statement of comprehensive income, summary consolidated balance sheet, summary consolidated cash flow statement set out on pages 14 to 15, summary Directors remuneration report set out on pages 10 to 11 and summary Directors report set out on page 12. This statement is made solely to the Company s members, as a body, in accordance with section 428 of the Companies Act Our work has been undertaken so that we might state to the Company s members those matters we are required to state to them in such a statement and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our work, for this statement, or for the opinions we have formed. Respective responsibilities of Directors and auditor The Directors are responsible for preparing the annual review in accordance with applicable United Kingdom law. Our responsibility is to report to you our opinion on the consistency of the summary financial statements within the annual review with the full annual financial statements, the Directors report and the Directors remuneration report, and its compliance with the relevant requirements of section 428 of the Companies Act 2006 and the regulations made there under. We also read the other information contained in the annual review and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the summary financial statements. Basis of opinion We conducted our work in accordance with Bulletin 2008/3 The auditor s statement on the summary financial statement in the United Kingdom issued by the Auditing Practices Board. Our report on the Group s full annual financial statements describes the basis of our audit opinion on those financial statements, the Directors report and the Directors remuneration report. Opinion In our opinion, the summary financial statements are consistent with the full annual financial statements, the Directors report and the Directors remuneration report of Wm Morrison Supermarkets PLC for the 53 week period ended 3 February 2013 and complies with the applicable requirements of section 428 of the Companies Act 2006 and the regulations made there under. We have not considered the effects of any events between the date on which we signed our report on the full Annual financial statements (13 March 2013) and the date of this statement. Adrian Stone (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc Chartered Accountants 1 The Embankment Neville Street, Leeds LS1 4DW 23 April

16 Wm Morrison Supermarkets PLC Annual review 2012/13 Summary financial statements 53 weeks ended 3 February 2013 Turnover 18,116 17,663 Gross profit 1,206 1,217 Note 2013 m 2012 m Other operating income Administrative expenses (336) (329) Losses arising on property transactions (1) (1) Operating profit Net finance costs (70) (26) Profit before taxation Taxation (232) (257) Profit for the period attributable to the owners of the Company Other comprehensive expense for the period, net of tax (10) (69) Total comprehensive income for the period Earnings per share (pence) basic diluted Summary consolidated balance sheet Property assets, intangible assets and investments 9,185 8,537 Other assets and liabilities (excluding debt) (1,207) (1,110) Deferred tax (471) (464) Net pension liability (20) (11) Provisions (76) (84) Net debt (2,181) (1,471) Net assets 5,230 5,397 Called-up share capital Share premium Merger reserve 2,578 2,578 Retained earnings and other reserves 2,310 2,459 Total equity 5,230 5, m 2012 m Summary consolidated cash flow statement Cash generated from operations 1,432 1,264 Proceeds from disposals 5 4 Capital expenditure (980) (827) Cash outflow from acquisitions (36) (74) Purchase and issue of shares (537) (368) Tax, interest and servicing of finance (325) (330) Dividends paid to equity shareholders (270) (301) Cash flow (711) (632) Other non-cash movement 1 (22) Opening net debt (1,471) (817) Closing net debt (2,181) (1,471) 2013 m 2012 m 14