Food specialist for everyone

Transcription

1 Food specialist for everyone Annual report and financial statements 2009

2 Welcome to Morrisons We are the UK s fourth largest food retailer by sales with an annual turnover in excess of 14bn. We have 382 stores, visited by 10 million customers each week and served by 124,000 employees. What makes us different from other supermarkets is our own supply chain, our own manufacturing sites and Market Street. We make and pack our produce Fresh produce is washed, graded and packed in our own packing facilities. We have three bakeries producing six million loaves, rolls and muffins each week. We own abattoirs and supply meat to the stores, where it is cut instore by trained butchers. We make fresh meat products like pies, burgers and sausage rolls in our meat processing plant. We supply direct to stores We have 12 distribution centres and our own fleet working around the clock to deliver the freshest food to our stores. Market Street Market Street is a unique shopping experience and is central to the Morrisons food offer. It contains a number of different areas, where all our fresh food is stocked, prepared and served by our staff, giving the feel and service of a traditional market. Our staff know their trade, and we have more craft skilled staff than any other supermarket. See page 20 for more on our business model Our Vision to become the Food Specialist for Everyone Our fresh food production, delivery and in-store preparation gives us control over cost, quality and freshness. Bring this together with our great prices and great shopkeeping skills and our vision is clear. Food specialist, because our expertise helps us deliver fresher food than anyone else; For everyone, because our great food is also great value. Our vision is realised through three brand values: Fresh, Value and Service. See page 18 for more on our Vision and Values Fresh Value Service

3 1 Contents The Directors report and business review 2 Financial highlights 3 Chairman s statement 5 Chief Executive s business review 5 Strategy update 6 Operating review of the year 8 Operating results 9 Optimisation Plan progress 11 Long term growth 12 Financial review 16 Market overview 18 Our strategy 20 Our business model 22 Risks and uncertainties 24 Taking good care Corporate Social Responsibility in our business 26 Our values in action 28 Board of Directors 30 Corporate governance report 34 Directors remuneration report 42 General information Performance review Strategic review Governance Financial statements 45 Directors statements of responsibilities 46 Independent auditor s report 47 Group accounting policies 52 Group financial statements 52 Consolidated income statement 52 Consolidated statement of recognised income and expense 53 Consolidated balance sheet 54 Consolidated cash flow statement 55 Notes to the Group financial statements Group financial statements Investor information 78 Company accounting policies 81 Company balance sheet 82 Notes to the Company financial statements 90 Seven year summary of results 92 Supplementary information 93 Glossary 95 Investor relations and financial calendar Company financial statements Investor information

4 2 Morrisons Annual report and financial statements 2009 Financial highlights 14.5bn Group turnover 2008: 13bn +12% +7.9% Like-for-like sales (ex-fuel) 2008: +4.6% 636m Underlying profit 2008: 563m +13% 12,969m 12,462m 14,528m 7.9% 563m 636m 5.2% 4.6% 324m Group turnover grew 12%, due to industry leading like-for-like store sales growth and strong fuel sales. Like-for-like sales, the measure of growth in existing stores, increased by 7.9%. Underlying profit before tax increased by 13%, driven by the strong like-forlike sales performance and ongoing delivery of the Optimisation Plan. 642m Net debt 2008: 543m + 99m 678m Capital expenditure 2008: 402m + 276m 5.8p Total dividend 2008: 4.8p +21% 772m 678m 5.8p 642m 4.8p 543m 402m 4.0p 257m Net debt has only slightly increased in the year despite increased capital investment of 678m. Capital expenditure has increased, reflecting additional focus on growing the estate and supporting the Optimisation Plan. Total dividend for the year has increased 21%, making dividend cover 2.9 times.

5 3 Chairman s statement Sir Ian Gibson In my first annual statement as Chairman, I am pleased that we are reporting another year of good progress for Morrisons. These are challenging times for the UK economy, but whilst we are not complacent, we are confident that Morrisons offer meets and is in tune with the demands of our customers and the economic background. Results Profit before tax was 655m compared with 612m last year. This included 2m of property gains, compared with 32m last year. Underlying basic earnings per share (EPS) increased by 16% to 16.7p, whilst statutory basic EPS decreased by 16% due to an abnormally low tax charge last year. The Board is recommending a final dividend of 5.0p per share, to bring the total for the year to 5.8p an increase of 21%. At this level, the dividend is covered 2.9 times, and we will continue our progressive policy of increasing the dividend by underlying earnings and additionally moving dividend cover towards the average for our sector, which is around 2.5 times, by January Cash generation was strong with cash from operations of 964m, a year-on-year increase of 208m, or 28%. The Group s pace of investment picked up, with capital expenditure in the year increasing to 678m following the opening of nine new stores and the acquisition of the freehold of our new distribution centre at Sittingbourne, in Kent. Additionally, we completed the planned second instalment payment into our defined benefit pension schemes of 100m and bought back 58 million shares in the market for 146m, an average share price of 251p. Following these investments, net debt increased from 543m to 642m. As previously reported, new five year term debt facilities of 1.1bn were agreed in September 2007, and only 250m of this facility was drawn at the year end, leaving gearing at 14%. Board changes As previously announced, Roger Owen, the Group Property Director, retired at the conclusion of the financial year after 34 years with the Group and 21 years service on the Board. Roger played a major role in building the store estate which forms the backbone of the business, and he goes with our thanks and best wishes for a long, happy and well deserved retirement. We are pleased to welcome Philip Cox to the Board as a Non-Executive Director, with effect from 1 April Phil is Chief Executive of International Power plc, and a previous CFO of Siebe plc. He will chair the Audit Committee after a suitable period of induction, taking over from Paul Manduca who will continue in his role as Senior Independent Director. The Board would like to record its thanks to Paul for his assured steering of the Audit Committee over the past three and a half years. This was another year of good progress for Morrisons as we continued to grow sales, profits and dividends, whilst also investing to generate future growth. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

6 4 Morrisons Annual report and financial statements 2009 Chairman s statement continued Industry recognition Morrisons success in the past year has been recognised with numerous industry awards, including Retailer of the Year from Retail Week, the Grocer of the Year from The Grocer and Supermarket of the Year at the Retail Industry Awards. This is welcome recognition of the terrific efforts of all our 124,000 employees, and on behalf of the Board I want to express our thanks for their dedication, hard work and professionalism. I am pleased that our growth in the year will provide a profit share pool for them of 34m, a 13% increase on the previous year. Charitable donations Our colleagues across the business are always enthusiastic supporters of our charitable activities. Our stores become involved in many initiatives in support of their local communities, such as Remembrance Day collections, and national events like Children in Need where we passed a cheque for 250,000 to the BBC again this year. Our own nominated charity of the year was Protecting Generations for Generations, a partnership between Help the Aged and Childline, and we were delighted to support them with funding of over 930,000 during the year. Outlook Your Board views both the short and the long term outlook for Morrisons positively. The business is well on track to achieve its goal of being the food specialist for everyone, and the Executive team continues to see opportunities to invest in the business for further growth. We expect to open c.350,000 square feet of new retail space in the coming year, on top of c.500,000 square feet that we have agreed to acquire from the Co-operative Group, reflecting our confidence in the attractions of Morrisons core grocery business. Final dividend 5.0p Total dividend for the year 5.8p +21 % The Board has recommended a final dividend of 5.0p per share, bringing the total dividend for the year to 5.8p per share. In the current economic environment we expect the competitive landscape to be extremely challenging. However, the Group s balance sheet is strong, and our financing arrangements are prudent. We will remain focused on delivering freshness and value to our customers.

7 5 Chief Executive s business review Marc Bolland Our performance over the year confirms our broadening customer appeal, successfully delivered in a wide range of stores from 11,000 to 40,000+ square feet. We have identified significant potential to attract new customers and will focus on space growth in order to take us from a national to a nationwide company. Strategy update Our three year strategy, as laid out in our 2007 Annual report, is to position the business as the UK s food specialist for everyone. This builds on our historic strengths of value and fresh food quality, now applied to a national, bigger business following the Safeway acquisition in As a food specialist, we are clearly differentiated from our larger competitors, all of whom are seeking to expand their non-food credentials. We also emphasise our deep understanding of food: through being closer to source than other retailers, through our unique manufacturing and packing facilities, through the amount of food preparation undertaken in our stores and through the employment of more specialist butchers, fishmongers and bakers than our competitors. We stress that our offer is for everyone, because our great food is also always great value. Our strategy builds on our strengths, and is in tune with our customers need for excellent value and their increasing focus on the health, provenance, quality and freshness of the food they buy. In order to deliver our strategy, we have previously outlined the building blocks that need to be put in place, and our plans to do this by These include freshening up our stores and improving and developing the infrastructure of the business in the key areas of manufacturing, distribution and operating systems. The operating review of the year, set out on pages 6 to 8, highlights our progress towards these goals. Store estate development From our position as the fourth largest grocery retailer in the UK, we see significant opportunities to expand our store estate. As the food specialist for everyone, it is our conviction that we offer a real difference in grocery retailing that is highly attractive to a broad range of customers. However, there are many parts of the country where we remain under-represented. We estimate there to be over eight million households in the UK which are not located within a 15 minute drive of a current Morrisons store. This represents a higher target customer base than any of our three larger competitors. Our offer works well in a wide range of store sizes, from 11,000 to over 40,000 square feet, giving us flexibility in site selection. A key part of our strategy, therefore, has been to grow the number of Morrisons stores, and in 2007 we published a target of adding 1.0m square feet of new space by January Our acquisition of Co-operative/Somerfield stores, completing in the coming year, will see that target exceeded by 0.5m square feet, and we are confident that we will open a further 0.5m square feet of retail space in the year to January We believe that delivery of our strategy of expansion and further optimisation of the operation of the business has resulted in strongly improved profit margins for our shareholders, whilst also positioning the Group for long term growth. Our focus on fresh food and value appeals to shoppers everywhere and provides a strong platform to take Morrisons from national to nationwide. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

8 6 Morrisons Annual report and financial statements 2009 Chief Executive s business review continued Solid shareholder investment and returns The Group is securely financed and has a strong balance sheet. We are confident that our planned investment requirements can be met from existing facilities. We will continue to pursue a prudent approach to financial management which is based on a number of principles: we wish to maintain a strong investment grade balance sheet; operational control of our retail stores is fundamental to us; Key Performance Indicators Like-for-like sales (ex-fuel) +7.9 % we are a prudent organisation and we structure our finances accordingly; and our defined benefit pension schemes assets and liabilities are effectively part of our balance sheet, and should be managed as such. (%) 7.9 The Board concluded in March 2008 that surplus capital of 1bn should be returned to shareholders during 2008 and 2009, with 500m of that to be delivered in the first 12 months of the programme. Whilst 146m was returned in 2008 through share buybacks, the Board also identified new investment opportunities for the Group, over and above our original plans. These were the acquisition of stores from the Co-operative Group, the purchase of the freehold interest in our planned distribution centre at Sittingbourne and the acquisition of the freehold interest of four existing stores which, combined, account for unplanned investments of 460m. The Board believes these growth opportunities represent a more attractive deployment of capital than the planned share buyback. The Board also believes that further investment opportunities may arise in the medium term and has therefore decided that the capital originally earmarked for share buybacks in the 2009/10 financial year should be retained within the business to give Morrisons maximum financial flexibility Like-for-like sales is the measure of growth in existing stores. Source: internal We have targeted progressive dividend growth in 2008 and 2009, over and above earnings growth, in order to bring dividend cover to a level in line with the average for our sector, which is around 2.5 times, by January Funding for this enhanced return to shareholders will come from operating cash flow and committed facilities available to the Group. Operating review of the year 2008/09 was another good year for Morrisons we made sure that we offered our customers great value every day, in a rapidly deteriorating economy, whilst still investing for the long term future of the business. New retail space We opened nine new stores in the year, at Giffnock, Gorleston, Whitefield, Kidderminster, Granton, Northallerton, Blandford Forum, Clifton (Nottingham) and Holyhead. Two of these (Giffnock and Kidderminster) were replacements of existing stores and two (Blandford and Northallerton) were former Safeways, which had been closed since the acquisition due to their small size. Our decision to reopen them reflects our growing confidence in the operation of, and return from, smaller stores, and we have been pleased with their performance. A further two of the stores (Gorleston and Clifton) were previous Co-op/Somerfield stores that we acquired and converted to Morrisons. In both cases we saw very significant uplifts in sales compared to those achieved under their former ownerships, and as a result we were pleased, later in the year, to agree the acquisition of a further tranche of stores from the Co-op/Somerfield that we will open in 2009/10.

9 7 We continued our programme of store extensions, with 90,000 square feet added in the year, and ended the year with 382 stores and a total of 11.1m square feet of retail space, growth of 2.7% on the start of the year. Turnover growth Turnover grew by 1.5bn to 14.5bn, a 12% increase. Part of this increase (c.3%) was due to the very high prices of fuel seen in our forecourts business in the year caused by a worldwide spike in oil prices, and this will unwind again in the coming year as pump prices have come back down. We were pleased with our stores sales growth, which was industry leading and broad based. Like-for-like sales, the measure of growth in existing stores, increased by 7.9% with customer numbers up 4.2% and average basket spend up 3.6%. Market share growth Based on TNS market research data, we believe our grocery market share grew from 12.1% to 12.3% in the year. 2008/ /08 Like-for-like stores Other Total Total Sales of goods ( m) 11, ,194 11,238 Fuel ( m) 3, ,597 2,871 Total sales inc VAT ( m) 15, ,791 14,109 Turnover exc VAT ( m) 14, ,528 12,969 Sales per square foot ( ) Customer numbers (m) Customer spend ( ) Geographically, we grew in all regions, with the South particularly strong as the Morrisons brand continued to become better known. Across our store estate, we grew in all sizes of stores, with smaller stores below 25,000 square feet leading the way. Our market research shows that we won customers from all major competitors in the year. In-store, our Market Street ranges did well, responding to our strong emphasis on fresh food preparation. Our own-label ranges all showed growth, albeit the strong trends of the previous two years towards premium products slowed, with Eat Smart up 13%, the Best up 5% and Organics up 10%. By contrast, the Value range relaunched in the year saw 50% growth. Industry leading offers The growth of the Value range reflected the very difficult economic environment experienced by consumers throughout the year. Commodity price inflation, which began in 2007 but fed through strongly into products during 2008, meant that customers were paying more for their weekly shopping basket for the first time in some years. At the same time, disposable incomes were decreasing due to the impact of high energy prices, reduced availability of mortgage credit, a rising tax burden and increasing unemployment. We were quick to respond to the challenges being faced by our customers. Whilst we maintained our focus on the quality, healthiness and provenance of our food, we also delivered a year of innovative value offers to our customers. We launched over 21,000 price cuts throughout the year, and designed our promotions to help customers save money while eating well. Our 4 meal deals proved very popular, and we switched more of our promotions into half price rather than buy one, get one free in response to customers need to spend less each week. We helped customers to treat themselves too, with great value deals such as 2 for 1 offers on party foods, the Mamma Mia DVD for 7 and a range of games for Nintendo Wii at 10. In the run-up to Christmas, we rewarded our most loyal customers with a 20 shopping voucher through the Collector Card scheme. UK Grocery market share 12.3 % (%) We have increased our 52 week UK grocery market share with good performance across the whole country and particularly strong growth in the South. Source: TNS Key Performance Indicators Performance review Strategic review Governance Group financial statements Company financial statements Investor information

10 8 Morrisons Annual report and financial statements 2009 Chief Executive s business review continued In addition to value messages, we continued to profile our unique food production capabilities, in our factories and in Market Street, and our understanding of food provenance. Our broad appeal and community involvement was well illustrated by our new schools initiative, Let s Grow, which is designed to help schools teach children how to grow food. Over 18,000 schools registered for the scheme, well beyond our expectations, and in February 2009 we began to dispatch free planting and gardening equipment including over 30,000 tools, 29,000 pairs of gardening gloves, 13,000 bags of compost and over 10,000 growing kits. Operating results Our forecourts business grew strongly in the year. As fuel prices moved above 1 per litre, consumers became highly price conscious and shopped around for value. We made sure that our pricing was always highly competitive, and indeed led the market back down below the key 1 price point when oil prices again began to fall. Average unleaded pump prices were 103.5p in the year, compared with 94.9p the previous year. Litreage grew by 11%, in a declining market. Summary income statement Change m m % Turnover 14,528 12, Gross profit Other operating income Administrative expenses (281) (268) (5) Property transactions 2 32 (94) Operating profit Finance income and cost (16) (100) Taxation (195) (58) (236) Profit for the period (17) Underlying earnings per share 16.7p (pence) Key Performance Indicators Basic underlying earnings per share has increased 16%. Gross profit grew in line with the level of turnover growth. The gross profit margin of 6.3% was level with the previous year, although lower than it would have been due to the dilutive effect of high fuel sales, which have a very low margin. The impact of this, we estimate, was a 20bps reduction in margin. Offsetting this was the release of a provision first taken in 2005/06 relating to the rationalisation of our distribution infrastructure. The original provision was 75m, and after taking all final costs associated with this restructuring we were left with a balance to release of 8m, which is included in gross profit. The details of this can be found on page 71 of the accounts. Adjusting for these two effects, our gross profit increased by 0.1% despite the headwind effect of high energy costs in our stores and supply chain. We successfully mitigated these costs through continued delivery of our Optimisation Plan. The Group s two biggest costs, after cost of goods sold, are store wages and distribution costs. After a number of years of strong improvement in store labour productivity, the year under review saw us investing in customer service to support our sales growth. Despite this, labour costs as a proportion of sales improved by 0.5%. The cost to deliver each case through our distribution network continued to fall, despite higher fuel costs, with a further reduction of 2.5% year-on-year. We gained good benefits from new systems that improved the efficiency of our delivery schedules. Our administrative expenses were up by 5%, below the rate of the turnover increase, reflecting tight control of our overheads. Marketing costs, which account for over one-third of administrative expenses, increased in line with turnover, as we continued to seek, with success, to articulate the Morrisons story to a wider audience.

11 9 Optimisation Plan progress Our aim is to become the Food Specialist for Everyone, and that means: Food specialist For everyone Our Optimisation Plan, originally communicated in 2007, set out a number of programmes designed to deliver by our financial year ending January 2010, and we remain well on track. Key elements of the Plan included: refreshed and rebranded stores; range extension and product innovation; investment in further manufacturing capacity; an increase in distribution capacity in the South; in-store efficiency initiatives; replacement of our systems; and Corporate Social Responsibility initiatives. Progress in each of these areas is outlined below. 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 Great food which is also: great value for every day, not just special days. Refreshed and rebranded stores Customers visiting Morrisons today experience a modern and unique food specialist, following the successful completion of the programme to freshen-up our stores and brand. The programme covered the exterior and interior signage of the stores, our Market Street counters, our trucks and our filling stations. All work was completed, on time, at an average cost per store of 0.5m a very cost effective new design scheme when compared to similar programmes elsewhere. Alongside the physical work, all staff were fitted with uniforms carrying the new brand and over 3,000 ownbrand Morrison products received new packaging. Range extension and product innovation Our product ranges, too, have been extensively reinvigorated. Range development has been particularly strong in Value lines but value and freshness are not incompatible, as seen in the launch of our innovative Fresh Ideas ready-to-cook fresh meals, which offer a great value alternative to dining out. Our control of the fresh food supply chain, through our bakeries, fruit and vegetable packing facilities, meat and cheese processing plant and abattoirs gives us great flexibility to respond to changing customer needs and priorities. The value conscious behaviour that came to the fore in 2008 provided us with the opportunity to use this flexibility to great effect. We led the industry with great value deals on fresh foods, such as our 4 family meal deals which comprised eight fresh food items for 50 pence each. Such deals, when advertised, create great demand, and it was only our close control of the supply chain that allowed us to cope with the volumes generated Dividend cover 2.9 times (times) Key Performance Indicators We have targeted progressive dividend growth in 2008 and 2009, over and above earnings growth, in order to bring dividend cover in line with the average for our sector, which is around 2.5 times, by January Performance review Strategic review Governance Group financial statements Company financial statements Investor information

12 10 Morrisons Annual report and financial statements 2009 Chief Executive s business review continued without disappointing customers looking for a bargain. Similarly, our abattoir and butchery operations are designed to use the whole animal, with minimal food waste. We have long sold lower priced cuts of meat such as brisket and neck fillet, which make delicious meals at bargain prices. These cuts are once again popular, and Morrisons is best placed to provide such variety and value. Equally, by being close to the source of supply, by being in the livestock markets every day and by only offering fresh fish on our counters, our fresh meat and fish quality cannot be matched even by much more expensive competitors. Our advertising campaigns built on the previous year s success, with a continuation of the Fresh Choice for You message placing emphasis on freshness, in-store production, in-season food and our food provenance knowledge. We continued to use down-to-earth, approachable personalities including Helen Baxendale and Richard Hammond the campaign produced the highest consumer recall in Our research has confirmed that the campaign has significantly increased consumer awareness of Morrisons and what we stand for. To balance the Fresh message, we launched a high impact Price Crunch campaign in April, which ran through the rest of the year and was used to highlight our great value offers and everyday prices. This too, struck a chord with our customers. Distribution network investment We continued to invest in our infrastructure as part of our Optimisation Plan. The new distribution centre at Sittingbourne, in Kent, is well under way. It will manage the growing volumes of our business in London and the South East and will open by the end of We took the opportunity to acquire the freehold of the site during the year, at a cost of 80m, in order to ensure maximum flexibility for the future. We were pleased to open our new abattoir at Spalding during the summer of 2008, and it is already producing at high volumes and very good levels of efficiency. This extra capacity has been key to ensuring that we can offer fresh pork, beef and lamb that is all UK sourced and all processed by us something unique in British supermarket retailing. In-store efficiency initiatives We continue to invest in ways to improve customer service whilst also becoming more efficient in our stores. Following a successful trial, self-scan checkouts are now rolling-out to over half our stores. Queue management software, which predicts very accurately the number of tills required to be open to serve the customers in store, is also at an advanced stage of roll-out. Replacement of our systems The Group s major programme of systems renewal continued to make good progress during the year, with detailed planning completed and Wipro, one of the world s premier computer services companies, selected as our implementation partner. As previously announced, the implementation programme began in late 2008 with the pilot phase of our new human resources and payroll system, which will go fully live during The coming year will see the implementation of financial systems, depot systems and the start of the roll-out of the new point of sale systems into stores. In 2010 we will begin to replace systems in our manufacturing facilities, throughout the supply chain and the product masterfile. We were proud to win all three major industry titles in the same year. Retailer of the Year 2008 & 2009 Retail Week We are the only retailer to have won this prestigious award for two consecutive years, being commended for the use of imaginative and extensive marketing to highlight our traditional strengths in fresh produce and our competitive stance on price. Supermarket of the Year 2008 Retail Industry Awards The judges commented that we won the award because we came back stronger following a challenging period; they also noted the efforts we had made in refreshing our product ranges. Grocer of the Year 2008 The Grocer Gold Awards The Grocer judges praised Morrisons for the success of its stores refresh programme and our focus on the fresh food offering of Market Street. 1 (source: Marketing Magazine Adwatch)

13 11 Corporate Social Responsibility initiatives Much of our investment, whilst improving the business, has also improved our carbon emissions. In the past two years we have invested 66m in new, efficient refrigeration capacity in our stores and 18m in new trucks and trailers. These measures have improved our chill chain, and also significantly reduced our emissions. A similar programme to replace all our petrol pumps with new, low emission technology, is well advanced, with 220 out of 287 filling stations having been re-pumped at the year end. As a result of these and other initiatives, our target to reduce our carbon footprint by 36% from 2005 levels has been achieved one year early. We are delighted to be the only grocery retailer to have been awarded the new Carbon Trust Standard for carbon reduction. Long term growth The overall investment requirements for the Optimisation Plan, outlined last year, are 450m over and above the normal run-rate of capital investment, and the programme will run to January In 2008, 182m of this was invested, bringing the cumulative total to 250m. Alongside the Optimisation Plan, our new space programme laid out a target of opening an additional 1.0m square feet of retail space in the three years to January We are well on course to achieve that through our normal pipeline of new stores and store extensions, but over and above this target, the acquisition, announced in November, of smaller Co-op and Somerfield stores, which will complete in 2009, will add around a further 500,000 square feet to our estate to bring the total at 31 January 2010 to approximately 12m square feet. Key Performance Indicators Carbon footprint* (% cumulative reduction) target We have met our target of 36% reduction of CO 2 emissions one year early from a base set in * Source: externally validated using Defra s Environmental Reporting Guidelines. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

14 12 Morrisons Annual report and financial statements 2009 Financial review The Group s results for 2008/09 have been strong once again, building on long term growth and strong cash flow generation. Cash generated by our operations continue to fund capital expenditure, reduce the pension deficit and reward our shareholders by surplus capital returns and dividends. The Operating review of the year in the Chief Executive s review provides commentary on the performance of the Group over the past year. The volatility in the financial markets impacted the economy as a whole and we are pleased that our results remained strong during this time. We have improved operating cash flows during the year and continue to have a strong balance sheet supported by long term financing. Underlying earnings Underlying earnings is a measure we use to assess normal underlying business performance and trends. The Group s earnings are adjusted to remove highly volatile or one-off costs. A reconciliation of underlying earnings is provided in note 1 of the Group financial statements. Underlying earnings before tax increased by 73m to 636m, driven primarily by the strong like-for-like sales performance. The Chief Executive s review contains further information on turnover, customer numbers and retail space. Savings from Phase 2 of the Optimisation Plan have helped to mitigate input price inflation pressures and energy cost increases. Earnings per share (EPS) Underlying earnings per share is the EPS measure we use to remove the potentially volatile impact of property gains and net pension interest income and consequently underlying EPS provides a better measure of the normal underlying business. Basic underlying earnings per share increased from 14.38p to 16.67p. The share buyback contributed 0.14p (6%) to the increase (see below) but the primary reason was the year-on-year underlying profit growth. Summary cash flow m m Cash generated from operations* 1, Interest and tax (145) (127) Capital expenditure (678) (402) Disposal and divestment proceeds Pension deficit funding (100) (100) Share buyback and issues (143) 17 Dividend (131) (108) Long term cash on deposit movement 74 (74) Financing 246 (269) Net cash inflow/(outflow) 209 (113) Net debt * Before pension deficit funding. Cash generated from operations Cash from operating activities increased by 208m (24%) reflecting the strong profit generation of the Group from increased turnover and good profit conversion, combined with cost control throughout the business and improved working capital management. Interest and tax Interest received fell 21m from last year as the continuing fall in bank interest rates during the year adversely impacted our interest receivable on cash on deposit. Interest paid remained at 70m for the year. The revolving credit facility was utilised for the first time in October 2008, resulting in a small increase in floating-rate bank interest payable. Interest paid to bondholders is at fixed rates, and this cost reduced by 8m this year following the maturity of a 250m bond in August Corporation tax payable in the year was 104m. This cash outflow represented 50% of the tax bill for the year to 3 February 2008, and 50% of the tax for the year to 1 February 2009, as well as repayments received for prior years.

15 13 The effective rate of tax for the year was 30% which is 2% above the prevailing corporate tax rate of 28%. The higher rate is mainly a result of non-qualifying depreciation and expenses where the Group is unable to obtain tax deductions. The principal objective of the in-house tax department continues to be to pay the appropriate level of tax at the right time. We actively engage with the UK tax authorities and aim to be transparent in all of our activities. The Group is predominantly UK-based, operates a simple business model, and does not engage in sophisticated tax planning structures. Capital expenditure Capital expenditure cash outflow was 678m, an increase from 402m last year, reflecting additional focus on growing the estate and supporting the Optimisation Plan as well as taking advantage of opportunities arising from the weakening of the commercial property market. Normal planned capital expenditure We opened nine new stores and extended a further 18 stores, as well as a number of projects strengthening the retail estate and the supply chain. Optimisation Plan investment The rebranding programme was completed throughout the estate, at an average cost per store of 0.5m. A new abattoir was developed and opened in the year, and a vegetable packhouse extended in order to increase capacity. A Groupwide programme to replace our IT systems entered the design phase and we began work on our new distribution centre in the South East of England. Total Optimisation Plan investment in the year was 182m. Unplanned investments During the year, we took advantage of the weakness of the commercial property market by acquiring the freehold of four stores that were previously leaseholds, as well as the freehold of our planned new distribution centre at Sittingbourne in Kent. The total cost of these investments in the year was 120m. As a result, the proportion of freehold to leasehold properties in the estate grew to 95%, and we regard this as a key strength of the Group s balance sheet. Pension Pension deficit bridge m Net pension deficit at 3 February 2008 (68) Actual vs expected return on scheme assets (425) Higher discount factor 328 Funding above annual service cost 103 Other 13 Net pension deficit at 1 February 2009 (49) The continuing volatility in the financial markets does not change our view that, on completion of the actions arising from the Pension Review announced last year, these schemes are adequately funded for the long term. The markets will have to be continually monitored for emerging trends to ensure this continues to be the case. The move from a final salary basis to one of Career Average Revalued Earnings (CARE) is the final action planned from the review, and is intended to make the schemes affordable for the future. If, following the consultation, the proposals are adopted, then it is anticipated that the valuation of the liability will decrease by c. 90m. Scheme valuations for accounts purposes were inevitably impacted by the turmoil in the financial markets, which had an effect on both the asset values and the liabilities of the schemes. The return on scheme assets was 425m worse than actuarially expected, due mainly to falls in the equity markets. This was offset by the reduced long term value of scheme liabilities resulting from a rise in the long term real discount rate. The injection, as planned, of 100m of additional funding in the year combined with the move to CARE for future benefit accrual will leave the schemes well funded for the long term and in a small surplus position on current actuarial assumptions. Financing The Group has a 1.1bn revolving credit facility which is not due to mature until September At the year end 250m had recently been drawn, allowing significant headroom for the Group s activities and investments. The Group s bonds, originally issued by Safeway plc, were retained in the acquisition of the Safeway Group in The next bond repayment is due April 2010 for 250m. Moody s rating of these bonds was upgraded to Baa1 in March Performance review Strategic review Governance Group financial statements Company financial statements Investor information

16 14 Morrisons Annual report and financial statements 2009 Financial review continued Net debt Net debt at the year end increased slightly from 543m to 642m. Increases in capital expenditure, additional pension funding, and the share buyback have required significant cash funds. Much of this was funded by cash generated from operations, demonstrating our solid underlying cash flow. Despite this high level of investment, we were pleased to have utilised only 250m of the revolving credit facilities at the year end. Net debt m Returns to shareholders Returning surplus capital to our shareholders In March 2008, we announced a two year share buyback programme to return 1bn of surplus capital to shareholders with a target of 500m in the first year. By the end of 2008, we had repurchased and cancelled 57.8 million shares costing 146m. In view of the acquisition of the Co-op stores, the purchase of a number of freeholds and the possibility that further attractive investment opportunities may arise in the medium term, the Board has decided that the capital originally earmarked for share buybacks in the 2009/10 financial year should be retained within the business to give Morrisons maximum financial flexibility. 1, Net capital expenditure Special pension contributions Share buyback Net debt Progressive dividend growth The final dividend is proposed at 5.0 pence per share, making the total dividend for the year 5.8 pence per share, an increase of 21% on last year. We have targeted progressive dividend growth in 2008 and 2009, over and above earnings growth, in order to bring dividend cover to a level in line with the average for our sector, which is around 2.5 times. Funding for this enhanced return to shareholders will come from operating cash flow and committed facilities available to the Group. Net debt has only slightly increased despite increasing levels of investment. Optimisation Plan Our Optimisation Plan is to strongly improve operating margins, whilst shaping for growth. The Optimisation Plan was announced in March 2006 as a medium term plan to bring profitability back in line with sector standards after the integration of Safeway. The objectives were simple to apply the Morrisons philosophy to the new bigger business while adapting it where necessary. The plan identified areas where savings could be made, or margins improved, as well as areas where investments were necessary to shape the business for growth. Savings from Phase 1 were achieved in the prior year. Savings m* Phase 1 Phase 2 Phase 2 (06-08) (07-10) Total Investment m (07-10) Gross margin Better buying, sales mix and wastage control In-store Realising efficiencies Store refresh programme 180 Manufacturing Managing capacity New abattoir 70 Distribution Rationalisation New capacity in the South 90 Centre/IT Elimination of dual running costs New systems across the business 110 Total savings Total investment 450 * Contributions to EBITDA. The investment of 450m is in addition to normal planned capital expenditure, including new space, of 400m annually.

17 15 Share price and total shareholder value The Company s share price was p on 1 February 2009, a fall of 9% from the start of the year. This compares with a fall of 31% in the FTSE100 index and 14% in the Food and Drugs sector over the same period. Over a three year period, the Company s share price has risen by 44% compared with a fall of 28% in the FTSE100 index and a rise of 19% in the Food and Drugs sector over the same period. Total shareholder value* Value of hypothetical 100 holding Wm Morrison FTSE100 The total shareholder return on Morrisons shares has increased over a three year period, whilst the FTSE100 has declined. * Total shareholder value is the value of 100 invested in Morrisons shares on 2 February 2004 compared to FTSE100. Key judgements and assumptions Judgements and assumptions made in the financial statements are continually reviewed. Whilst some outcomes have been affected by the volatility in the financial markets, all judgements and assumptions in the accounting policies remain consistent with previous years. Consideration of impairment to the carrying values of assets has been made and we concluded that the individual carrying values of stores and other operating assets are supportable either by value in use or market values. The impact of the current economic conditions on the assessment of going concern has been considered in the general information section of the Directors report and business review. Provisions The property provision of 112m (note 21) includes 75m for onerous leases relating to sublet properties to cover the shortfall between expected rent received and the rent payable, taking into account the vacant tenancy periods during the terms of the lease. The provision assumptions were reviewed in the last quarter in the light of worsening market conditions. This resulted in a charge of 5m to cover the additional anticipated risk over the life of the leases. Store acquisitions In December 2008, we agreed to purchase a number of stores from the Co-operative Group, subject to Office of Fair Trading (OFT) approval. The stores have an average retail square foot size of c.14,000 and will fit very well within our existing portfolio of around 150 smaller stores. The acquisition was agreed at a price of 223m, of which a refundable deposit of 22m had been paid by the year end. Should the purchase obtain full OFT approval, the remaining 201m will be paid by instalments during 2009, and a store refurbishment programme costing a further 98m will commence in spring Performance review Strategic review Governance Group financial statements Company financial statements Investor information

18 16 Morrisons Annual Report and Financial Statements 2009 Market overview In this section we address the dynamics of the UK grocery market and how it has changed during the year to provide context for our strategy and performance. UK grocery retail market For our financial year, the grocery market was worth 97bn, an increase of 5.6%. The top four supermarkets combined accounted for 79% of the market #. # Nielson Retailer Services Consumer confidence UK consumer confidence is at the lowest ever recorded. It is four points lower now than in March 1990, which was just ahead of the last recession and at an historic low. Consumer confidence Source: GfK NOP Commodity prices Although commodity prices were easing off at the start of 2009, during the year prices increased significantly for a number of basic commodities. Commodity price increases caused food price inflation across all food groups. -40 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan Consumers are switching retailers in search of cheaper prices and value, and switching brands from premium and organic to standard and value ranges. The combination of lower consumer confidence, rising food and fuel prices and the deterioration of the economy had the result that, by May 2008, there was real evidence of a change in consumer behaviour. Consumer shopping trends Source: TNS 20 Wheat The price of wheat more than doubled, reaching record highs in early Wheat prices eased off during the remainder of the year as stock levels recovered from the shortage caused by bad weather in the key worldwide wheat growing areas. World stock levels have now returned to the level of supply seen in recent years. This continues to put downward pressures on wheat prices. Sources: FAO Jan Feb 08 Total 23 Mar Apr May Jun Jul 08 Value Standard Premium 10 Aug 08 7 Sep 08 5 Oct 08 2 Nov Nov %* of household spend is on groceries, 49p * 28 Dec 09 Consumers are eating out less and are generally looking for cheaper forms of entertainment, to a large extent based in the home. Cook at home ranges have seen strong sales growth as customers are dining out at home. third only to housing and transport. out of every 1 in retail spending is on groceries. 25 Jan 09 * Institute of Grocery Distribution

19 17 Consumer trends Despite the current economic environment, consumers are still interested in where their food comes from. Health, quality and provenance remain important factors in food choice. 6.5 % Our market position Although the market environment remains difficult for the consumer, we continue to provide value and a unique fresh offer with great service. The success of our strategy shows we have the capability to manage the business during this difficult time, as reflected in our increase in market share year-on-year. The purchase of a number of Co-op stores, 22 of which are in the South, will further increase our market share in our three southern regions. Total Morrison market share % Performance review Strategic review Governance increase in purchases of fruit and vegetables in recent years, believed to be as a result of the 5-a-day government initiative to increase the public s intake of fresh produce. Defra Family food survey 2007, published in 2008 Source: TNS 15.4% Scotland (2008: 14.3%) Our market share by region Group financial statements Regulatory change The government reduced the rate of Value Added Tax to 15% with effect from 1 December 2008 in order to help boost retail sales during the current economic downturn. It is due to increase to the previous rate of 17.5% on 1 January This rate change has a relatively small impact as a large proportion of food sales are zero rated. 16.5% Lancashire and North East (2008: 16.6%) 12.2% Wales and West (2008: 11.3%) South West (2008: 12.5%) 21.5% Yorkshire (2008: 22.8%) 12.6% Central (2008: 12.4%) 6.4% London (2008: 5.9%) 14.1% South & South East (2008: 5.8%) 11.4% East of England (2008: 11.0%) 6.4% Company financial statements Investor information

20 18 Morrisons Annual report and financial statements 2009 Our strategy In this section we describe our three year strategy, which started in 2007/08 and builds on our historical strengths of value and fresh food offer. Vision Our vision is to be the Food Specialist for Everyone. Brand values We have three distinct brand values: Fresh, Value and Service. Having these three brand values gives us the flexibility to react to market changes and consumer trends. Fresh Value Service Demonstrated through Vertical integration in the supply chain. Fresh in-store preparation. Keeping costs low to ensure our prices are competitive. Great value across our ranges. Ensuring the right product is always available. Great selling and service for our customers. Commentary We aim to offer more freshly prepared food than any other retailer. That s because we have more staff preparing food than any other supermarket. We are vertically integrated by having our own factories, production facilities and distribution network. With these facilities we can get food to our stores faster so that it s always fresher. Value is key to our vision and is especially important in the current market conditions. We offer quality and freshness at a price people like. Our famous promotional offers always save our customers money. We don t just offer value on a few items our prices are great value across the ranges. By having our own distribution network, we can ensure the right products are always available for our customers. Our staff are skilled and know their trade and they give our customers what they want fresh food served by helpful, friendly, well-trained people. With our commitment to great selling and service we aim to get it right for our customers every time. Positioning We measure customer perceptions against the other top four grocery retailers based on exit interviews and on-line surveys, the latest of which was taken in January This survey indicated that our customers viewed our position against each of our brand values as: Fresh improving, now strong Value held our strong position Service held our strong position Progress We believe customer perceptions of our fresh offer have improved due to our efforts to demonstrate this message over the last two years. We are pleased that Value and Service have retained their strong position whilst we tried hard to show our Fresh credentials. Our employees Success at Morrisons relies on our 124,000 people delivering great service to our customers each and every day by living our values. For more information on Our values in action, see pages 26 to 27. While being a responsible and ethical retailer In a survey of 400 shoppers conducted in October 2008, in answer to the question What makes a responsible and ethical retailer? approximately 90% answered They charge fair prices. For more information on our Corporate Social Responsibility strategy, see pages 24 to 25.

21 19 Delivering results Financial objectives Commentary Measures of success We believe our strategy has delivered, and will continue to deliver, strongly improved profit margins for our shareholders, whilst positioning the Group for long term growth. Sales growth that exceeds that of the market Sales growth, particularly organic growth, is key to retail success and long term expansion. We aim to grow grocery like-for-like sales faster than market growth. Like-for-like sales growth in excess of the market (%) Like-for-like sales growth (ex-fuel) Market growth rate Like-for-like sales growth in excess of the market Earnings that meet the expectations of shareholders Sales growth needs to be converted into profitable growth. We aim to strongly improve profit margins whilst positioning for long term growth. Underlying basic earnings per share (pence) Performance review Strategic review Governance Like-for-like sales growth in excess of the market (%) Total dividend (pence per share) Group financial statements Source: Nielsen like-for-like sales growth for 52 weeks to our year end Balance sheet strategy The Group is securely financed and has a strong balance sheet. Our balance sheet strategy is based on the following principles: Principle Maintain operational control of our retail stores. Planned investments funded through existing facilities. Maintain strong investment grade balance sheet. Commentary 95% of our estate is freehold. We are confident that our planned Optimisation Plan investments for the next two years can be met from existing financing facilities. Our credit rating improved to Baa1 in March 2008 and we received a further upgrade in March 2009 to A3. We are one of only three European retailers to have this rating, which is the highest in this sector. Company financial statements Investor information Sustain funded pension schemes on IAS 19 basis. We continue to take actions to ensure that the schemes are adequately funded for the long term.

22 20 Morrisons Annual report and financial statements 2009 Our business model What makes Morrisons different from other supermarkets is that we control our supply chain we are closer to source by cutting out the middleman. The advantages of this business model are: our customers get great value for money and fresh food at great prices; and we can react earlier to consumer trends and bring seasonal food in-store quicker than other supermarkets. From selection... Being closer to source means we can better control the provenance and quality of our food. Ethical and sustainable sourcing is important to us and we work with the producers to develop a relationship that is reasonable and fair to all parties. to the packhouse... We own all our manufacturing facilities, which means we reduce our supply chain lead times allowing us to maximise the freshness in-store and reduce waste and costs. Many of these facilities are situated close to our distribution centres, enabling us to also reduce our food miles. The vast majority of our fresh food is prepared by our production plants providing us with security of supply. delivered to... We own and operate a very modern transport fleet, ensuring freshness and cost control. We believe we have the quickest turnaround time between order and delivery compared to any other supermarket. all our stores. Because we prepare food in-store, we can react to customer trends throughout the day, only producing what the customer wants. This reduces waste, makes us cost efficient and keeps our prices low to the customer, as well as ensuring our products are always freshly made.

23 21 UK arable and livestock farmers Our buyers deal directly with the producer to either select the livestock we believe is good enough or to purchase whole crops of produce which is fairer to the farmer. Manufacturing sites We have 13 manufacturing sites in total comprising: 12 in the UK; and 1 in the Netherlands 100 % British We sell only 100% British pork, beef and lamb. We also own: 3 Abattoirs 3 Bakeries 6 Fruit & vegetable packhouses 1 Food preparation factory Overseas We source entire containers of produce from overseas which is individually packed and graded to our own standards. This effective method of buying also passes on great value to the customer. Top 5 UK food producer Source: The OC&C Grocer Index, Top 150 suppliers Performance review Strategic review Governance Our transport fleet We have 680 tractor units and 2,000 trailers moving over 16 million cases of products to stores each week. Our craft skilled staff prepare more fresh food in-store than any other supermarket. 2,000 Bakers 1,500 Butchers 800 Fishmongers 90% of all meat and the majority of our fresh food is selected and packed through our manufacturing facilities. 12 distribution centres We have 12 distribution centres operated by ourselves and specialist providers. Rest of store We take pride in great shopkeeping and having the right produce available for the customer. We have product ranges to suit all budgets. External suppliers Some of our suppliers deliver directly to our stores. 18,000 product lines in a typical store, 32% of which are our own-brand labels. Group financial statements Company financial statements Investor information

24 22 Morrisons Annual report and financial statements 2009 Risks and uncertainties Like all businesses, our business faces risks and uncertainties that could impact on the Group s achievement of its objectives. Risk is accepted as being a part of doing business and within the Group, responsibility for risk management and internal control lies with the Board. Through the application of reasoned judgement and consideration of the likelihood and consequence of events, the Board believes a successful risk management framework balances risk and reward. The list below sets out the most significant risks to the achievement of the Group s business goals. The list does not include all risks that the Group faces and it does not list the risks in any order of priority. Business strategy In the long term, effectively managing the strategic risks that the Group faces will deliver benefits to all our stakeholders. The Board understands that if the strategy and vision are not properly formulated or communicated then the business may suffer. The strategy is developed by the Chief Executive and senior executives and is considered and approved by the Board, which takes time each year to review and monitor its delivery. To ensure that our strategy is communicated and understood, the Group engages with a wide range of stakeholders including shareholders, employees, suppliers and other groups. This continual process helps to ensure that the strategy remains relevant and improves the likelihood of success. The Board is conscious of the difficult economic environment in which it operates, with rising unemployment, reduced spending power and high levels of anxiety amongst customers. The Group s operating plans have been developed with this backdrop in mind, ensuring that there is a strong emphasis on value in our product offering and a focus on cost control in the business. Financial and treasury The Group s financial results may be subject to volatility arising from movements in commodity prices, foreign currencies, interest rates and the availability of sources of funding. See note 18 on page 64. Product quality and safety We recognise that the quality and safety of our products is of critical importance to us and that any failure in this regard would affect the confidence of our customers in us. We work with our suppliers to ensure the integrity of the products supplied. Also, as a manufacturer of food products, we maintain strict standards and monitoring processes to manage the risks associated with food safety throughout our Group and its supply chain. Food hygiene practices are taken very seriously throughout our Group, and are monitored both through internal audit procedures and external bodies such as environmental health departments. We have well prepared procedures for crisis management in order to act quickly when required. We are aware that if we fail or are perceived to have failed to deliver, to our customers satisfaction, the expected standards of quality and safety in our products this has the potential to impact on their loyalty to us. This in turn could adversely impact on our market share and our financial results. Regulation The Group operates in an environment governed by strict regulations to ensure the safety and protection of customers, shareholders, staff and other stakeholders and the operation of an open and competitive market. These regulations include food hygiene, health and safety, the handling of hazardous materials, data protection, the rules of the stock exchange and competition law. In all cases, the Board takes its responsibilities very seriously, and recognises that any breach of regulation could cause reputational and financial damage to the Group. There is clear, ultimate accountability with Directors for compliance with all areas of regulation. The grocery sector continues to be under close focus from the Office of Fair Trading (OFT) despite the Competition Commission s findings that the sector is highly competitive. The OFT has issued Statements of Objection in relation to conduct in the milk and tobacco categories in the early part of the millennium. We always fully co-operate with such enquiries. In the case of milk, we believe strongly that Morrisons has no case to answer and have made representations in detail to this effect. In the case of tobacco, there is a complex legal question as to whether well established industry practices represented a breach of competition law. It is likely that this can only be settled through a formal judicial process. Corporate Social Responsibility In line with our commercial objectives we have identified three areas, Environment, Society and Business where by doing the right thing, we protect valuable resources, meet demand for sustainable products and make our business more efficient. Morrisons is committed to taking good care of our environment and if we fail to meet our commitments this could damage our reputation and possibly lose the trust of our stakeholders.

25 23 Therefore, reporting to the Board is a cross functional steering group of senior executives that ensures that the appropriate management, evaluation and verification systems are integrated into operational management activities. Delivery against targets and key performance indicators is regularly monitored and reported. Further information is available in our Corporate Social Responsibility summary on page 24. Business interruption Our distribution and systems infrastructures are fundamental to ensuring the normal continuity of trading in our stores. If a major incident occurred to this infrastructure or another key facility this would have a detrimental impact on the business ability to operate effectively. To reduce the chances of this happening and also to reduce the impact of such an event if it were to happen, we have developed recovery plans and invested in the creation of a remote IT disaster recovery site. The current challenging economic environment increases the risk that one of our key suppliers is adversely impacted by the recession and is unable to supply our stores. We mitigate the potential impact of this on our business by seeking several sources of supply for products wherever possible. Property The business is growing the size of its retail space through acquisition and by modernising and extending existing stores and facilities. In this context there is a possibility that the business fails to deliver an acceptable return on this investment or that there is damage to the business reputation if this is not done in a safe and timely manner. The business mitigates against these risks through: a property strategy that develops stores to a well proven format; the application of a formal capital approval process; and long-standing relationships and agreements with contractors with a track record of achieving the required quality, safety and cost standards. Systems and infrastructure The Board has identified that many of the Group s existing systems are approaching the end of their useful lives and that a comprehensive programme of replacement is required. The Board is aware of the risks faced by any organisation seeking to successfully implement new systems, and has established a programme and assurance structure to manage these. Our business, like other similar businesses, has a capacity to absorb a level of change without this having a detrimental impact on continuing business operations. The change programmes within the Group have been designed with this capacity in mind, and are structured and governed in a manner that allows the Board to monitor their impact. Most of the Group s systems projects are in the design and development phases, with implementation activities starting more significantly in Employee engagement and retention The continued success of the Group relies heavily on the investment in the training and development of our 124,000 employees. The Group s employment policies, remuneration and benefits packages are designed to be competitive, as well as providing colleagues with fulfilling career opportunities. The Group continually engages with colleagues across the business to ensure that we keep strengthening our team at every level. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

26 24 Morrisons Annual report and financial statements 2009 Taking good care Corporate Social Responsibility in our business Our Corporate Social Responsibility (CSR) programme is aligned with our vision to be the food specialist for everyone. We are committed to acting sustainably, protecting and nurturing the valuable resources on which we all depend. We believe that by taking good care of what we do today, we can make a real difference for tomorrow. Go to to view our full 2008/09 CSR report. Managing CSR Championed by our Chief Executive, Marc Bolland, the CSR programme is governed by a Project Team of senior Directors reporting into the Board. It is structured around three principal areas: Environment Taking good care of our planet. Carbon, waste and sustainability. Society Taking good care of our shoppers, our colleagues and their communities. Work, communities and healthy, balanced lifestyles. CSR Key Performance Indicators We have a number of commitments, which are supported by over 70 targets. Further details can be found in our 2008/09 Corporate Social Responsibility Report, which is available on our website at Key Performance Indicators Group energy use (% cumulative reduction) 8 Business Taking good care as we go about our business. Sourcing, supply and engagement with stakeholders. Each area has a cross functional Steering Group, chaired by a member of the CSR Project Team, which is supported by a number of working groups. 5 6 Identifying issues and managing CSR risks Processes are in place to capture and address issues important to our key stakeholders. Each issue is considered for material risk or opportunity to our business, and how best to meet our responsibilities. The key issues for our business have been rated in terms of strategic and business impact. The issues with the highest impact rating are therefore most important to our business and are the prime focus of our programme. Policies We have a range of policies, available to all stakeholders, relating to aspects of responsible business practice. They are regularly reviewed through our CSR governance structure to ensure they remain accurate, relevant and up to date. Our CSR policies are available on our website at Stakeholder satisfaction Stakeholder engagement is vital in ensuring our CSR programme remains relevant and effective. It enables us to identify issues and be responsive to changing needs by incorporating views and feedback into the development of our programme. Let s Grow In September 2008, we launched our Let s Grow campaign. Aiming to help schoolchildren learn more about fresh produce, the scheme ties into the national curriculum and supports the government s Growing Schools initiative. Let s Grow inspires children to follow a healthier lifestyle through learning about growing fresh fruit and vegetables at their own school. Vouchers were given to shoppers for every 10 they spent with us, which could then be redeemed by schools for new gardening equipment. The campaign was an outstanding success with over 18,000 schools enrolling nationwide target We aim to reduce our Group energy use by 8% per square metre by 2010 (based on 2005 usage). To date, we have reduced energy use by 6%. Carrier bags Target exceeded! We set a target to reduce the environmental impact of our standard carrier bags by 25% by the end of We reduced our usage by 32%, the equivalent of 505 million bags saved.

27 25 Local and seasonal sourcing We are dedicated to providing the very best fresh produce, at great value. Following research indicating that 74% of our customers wanted opportunities to buy more regional produce in store, in 2008 we introduced the new From My Farm range. The products available change with the seasons. All produce is grown and packed within the East of England and the range is labelled with the name and location of every grower. Packaging is minimised, by using small tags, or is recyclable and compostable. A penny from each pack purchased is donated to the Growing Trust, with the money raised going towards selected good causes within the East of England. 100% British In 2007, we were the first of the top four supermarket chains to commit to selling 100% British fresh meat throughout the year. In 2008, we extended our commitment to British farmers by ensuring all our own-brand fresh milk is sourced regionally. We already sell Scottish and Welsh own-label standard fresh milk. We also began to establish producer groups for dairy, beef and poultry farmers, to develop closer links with those farmers. Through the producer groups, we aim to share and increase knowledge and understanding across our supply chain, driving quality and efficiency, and helping secure the long term viability of British farming. Reducing waste We work hard to prevent waste. This year, we have reduced the volume of our waste to landfill by a further 2,886 tonnes, achieving a cumulative reduction of 17% since In 2008, we trialled a new waste segregation project at two stores, which, if successfully rolled out to all stores, could result in further significant reductions in waste sent to landfill. We are also investigating the best means of generating renewable energy from our waste. Carrier bags In May 2008, and again in December, we urged our customers to help reduce carrier bag use by giving a free reusable carrier bag to every shopper. On each occasion we gave away 10 million reusable bags (one for each of our customers), made from 100% recycled material and larger than standard bags. We encouraged our customers to use the reusable bags on every shop. We have achieved a 32% reduction since 2006 (4,502 tonnes), the equivalent of 505 million bag units. energy efficient and low emission technologies; carbon and energy monitoring, management and control; sourcing and generating renewable energy; transport efficiency; colleague awareness and good housekeeping policies; and numerous energy and carbon saving projects. Key Performance Indicators Waste to landfill (% cumulative reduction) Cutting our Carbon Footprint We have cut our Carbon Footprint by 36% since 2005, being ahead of our 2010 target. Our reduction strategy is based on: target During the year, we reduced the volume of our waste to landfill by 2,886 tonnes. Amount raised for our Charity of the Year partnership Help the Aged and Childline 1m * Each year, our customers and employees choose a charity for national fundraising and for 2008/09 our Charity of the Year was a joint partnership with Help the Aged and Childline. We aim to raise over 1m for our Charity of the Year through collections and fund-raising events. * Amount raised from April 2008 to March 2009 In June 2008, we were among the first of only 12 companies to receive the prestigious new Carbon Trust Standard, for reducing carbon emissions. The accreditation scheme is the world s first carbon award requiring an organisation to measure, manage and reduce its Carbon Footprint and make real reductions year-on-year. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

28 26 Morrisons Annual report and financial statements 2009 Our values in action Our people are our most valuable asset and our success relies on our people delivering great service to our customers each and every day. Our aim is to attract, motivate and develop skilled people to ensure that Morrisons becomes the food specialist for everyone. At the end of 2006, Morrisons conducted its first colleague attitude survey (Climate Survey) which showed that whilst we had strengths in a number of areas, we could still improve. In 2007, we set out a programme of activity designed to support the business optimisation and growth agenda, focused on four areas: Values, Leadership, Talent and Performance. We have implemented a structured set of policies in each area. Values Our values define what we expect of our employees and what our customers can expect from us. This year has seen a large scale education programme to fully integrate these values into every day behaviours at Morrisons. In total, over 120,000 employees have taken part in the interactive Vision and Values workshops. Additionally, every new employee experiences our Vision and Values programme as part of their induction. Focusing forward, we want to ensure that our values sit at the heart of everything we do by integrating them into our recognition programmes and education frameworks. Leadership Great leadership is critical to us bringing the best out of our people. We involved a cross section of senior managers in a number of steering groups, who helped shape how our values could be mapped onto our leadership agenda. A set of leadership profiles, outlining leadership styles and what leadership actually looks like in action, was one of the primary outputs of this exercise. Our leadership development initiatives, such as the Leading the Morrisons Way programme, aim to further develop and enhance the future of our business and senior leadership careers. 124,000 employees across the business Our values Can do Getting things done Fresh thinking Always looking for new and better ways of doing things One team Working well together Great selling and service We love to sell and serve Bringing the best out of our people We re constantly learning and looking to improve on where we are Great shopkeeping Setting high standards in all areas of the business Ratio of internal versus external appointments (%) Talent We strongly believe that everyone has talent and we actively look to develop people from within to meet the growing demands of the business Internal External The Fresh Food Academy, launched in 2009, will strengthen Morrisons position as the UK s leading proponent of retail craft food skills; skills which help people build a career, and help Morrisons further increase the quality, value and service we provide to our customers. Over the coming year, as part of its store expansion, Morrisons will create 5,000 new jobs. The jobs will be created across the business in a variety of positions including butchery, fishmonger and bakery. The Academy will play a key role in developing people in these roles. The Fresh is Best programme focuses on engaging and training managers around consistently delivering market leading availability, product presentation and quality, preparing the freshest product, maintaining standards, reducing wastage and giving great selling and service. By demonstrating what good and fresh is we are helping managers to maintain and improve standards target Target Internal External By engaging and training our employees, we aim to retain our talent and increase the ratio of internal appointments within management. The I Want a Fresh Start campaign, launched in 2008, completely redefined our approach to attracting and recruiting fresh talent into the business. Our new dedicated recruitment website, allows candidates to apply online for careers at Morrisons. National advertising has raised the profile of Morrisons as an

29 27 employer, evidenced by the high interest and number of applications for our management positions. Our revised attraction strategy has, so far, resulted in over 4,500 applications and the appointment of 50 key retail managers. Performance Setting clear expectations sets the benchmark for a high performing culture. In this respect we have started a general role evaluation programme across the business to enhance career advancement. The output of workshops held across all sectors of the business is being used to create live documents that give greater clarity around role requirements, and how we expect people to focus not only on what they deliver but also on how they deliver it. Communication is also playing a key role in the delivery of our high performance culture. In November 2008, we launched Gimme 5 briefings to strengthen our communication across the business and create a more committed and productive workplace. These are five minute, face-to-face monthly departmental briefings and are based on messages cascaded down through the business, starting with Marc Bolland. Colleagues are encouraged to ask questions and provide feedback on the topics covered. Employee relations Morrisons is an equal opportunities employer. Equal opportunities are offered to all, regardless of race, colour, nationality, religion, sex, marital status, disability or age. The Group gives full and fair consideration to applications for employment made by people with disabilities. The policy is to offer equal opportunity to all disabled candidates and employees who have a disability, or who become disabled during the course of their employment. A full assessment of the individual s needs is undertaken and, where practical, modifications are made to the work environment or business practices in order to assist those with disabilities. All candidates and employees are treated equally in respect of recruitment, promotion, training, pay and other employment policies and practices. All decisions are based on merit. Employee engagement Engaged and involved employees are important to the success of our business and values. Employees are encouraged to give their opinions through the Climate Surveys. The Climate Survey conducted at the end of 2008 covered all colleagues across all areas of the business, seeking opinion on a range of areas such as job satisfaction, team environment and management. From the survey we have identified four key indicators of engagement centring on employee pride, loyalty, satisfaction and commitment. These key indicators have provided us with a summary of the progress and shows a net improvement of 12% from our last survey. We will continue to track these four areas in our next Climate Survey. Other ways in which we involve our employees are through the development and communication of the Values principles, and through the Gimme 5 briefings where employees are encouraged to give feedback. All employees participate in either the Profit Share Scheme or Management Bonus Plan, ensuring that everyone feels a part of the challenges and successes of the organisation. Our employee turnover rate has improved and our employee stability has risen 2% to 78%. Moreover, some 33% of our employees have been with us for at least five years, with 164 celebrating 25 years service in This is a clear sign that we create an environment where colleagues feel proud to work for us. Employee stability* (%) Key Performance Indicators Four KPIs Pride Loyalty In 2008, we conducted an employee satisfaction survey to assess our progress against our four KPIs. We are pleased with our overall improvement in performance and we recognise there is even more we can achieve. Climate survey results Satisfaction Commitment Net improvement +12% Four of the KPIs in our colleague attitude survey focus on engagement. These show a net improvement of 12%. * Employee stability is measured as the percentage of employees who have been with us for over one year. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

30 28 Morrisons Annual report and financial statements 2009 Board of Directors Sir Ian Gibson Chairman Sir Ian Gibson (aged 62) joined the Group as Non-Executive Deputy Chairman in September He was appointed Chairman, following the retirement of Sir Ken Morrison, in March He is also Non-Executive Chairman of Trinity Mirror PLC. Previous Board appointments include Chairman of BPB PLC, Deputy Chairman of Asda Group PLC, and a Director of Chelys Limited, GKN PLC, Greggs Plc and Northern Rock Plc. He is also a former member of the Court of the Bank of England. Sir Ian enjoyed a distinguished 30-year career in the motor industry, most recently as President of Nissan Europe. Marc Bolland* Chief Executive Marc Bolland (aged 49) joined the Group in September 2006 as Chief Executive. Previously, he was Chief Operating Officer and executive board member at Heineken NV, based in the Netherlands. He held a number of senior roles at Heineken over the last 20 years, including having responsibility for the brand and marketing strategies. He is also currently a Non- Executive Director of Manpower Inc in the USA. Mark Gunter* Group Retail Director Mark Gunter (aged 50) joined the Group in 1986 as a Store General Manager. In 1993 he was appointed Regional Director and subsequently Stores Director in He was appointed to the Board of the Group in 2000 as Group Store Operations Director with additional responsibility for retail operations, retail fuel, retail projects and Company-wide security. Prior to joining Morrisons, he gained wide experience in UK food retailing, which included working at Iceland, Fine Fare, Tesco, Argyll Foods and Asda. Martyn Jones* Group Trading Director Martyn Jones (aged 50) joined the Group in 1990 as Trading Manager for frozen foods before being promoted to Trading Operations Director in He was appointed Grocery Director in 1997 and then Senior Trading Director in He was appointed to the Board as Group Trading Director in March Richard Pennycook* Group Finance Director Richard Pennycook (aged 45) joined the Board as Group Finance Director in October Prior to that, he was the Group Finance Director of RAC Plc, the quoted specialist motoring and vehicle management company. Previous senior roles include Group Finance Director of H P Bulmer Holdings PLC, Laura Ashley Plc and J D Wetherspoon plc and Chief Executive of Welcome Break Holdings plc. He is also a Non-Executive Director of Persimmon Plc.

31 29 Paul Manduca Senior Independent Director Paul Manduca (aged 57) was appointed as a Non-Executive Director in September He is a member of the Audit, Nomination and Remuneration Committees and became the Chair of the Audit Committee from October He is also Chairman of Aon (UK) Limited and Henderson Diversified Income plc, and a Non-Executive Director of Development Securities PLC, JPMF European Fledgling Investment Trust Plc, JSC KazMunaiGas Exploration Production Plc, as well as other companies. He was the Chairman of Bridgewell Group plc until August 2007, when it was sold to Landsbanki Securities (UK) Ltd. Prior to that, he was the Global CEO of Rothschild Asset Management Limited and CEO of Deutsche Asset Management Europe. Brian Flanagan Brian Flanagan (aged 56) was appointed to the Board as a Non-Executive Director in July He is a member of the Audit, Nomination and Remuneration Committees. He is also a Non-Executive Director of The Financial Services Authority and is an advisor to Jet Environmental Systems. Previously he worked for the Mars Corporation for 26 years and possesses broad international business experience. He has held senior management positions in finance, information systems, manufacturing, purchasing and was, most recently, the global Vice President of Business Transformation for Mars Inc. Performance review Strategic review Governance Susan Murray Susan Murray (aged 52) was appointed as a Non-Executive Director in July She is a member of the Audit, Nomination and Remuneration Committees and became the Chair of the Remuneration Committee from October Currently, she is a Non-Executive Director of Compass Group plc, Enterprise Inns plc and Imperial Tobacco Group Plc. She is a council member of the Advertising Standards Authority. Group financial statements Nigel Robertson Nigel Robertson (aged 49) joined the Group as a Non-Executive Director in July He is a member of the Audit, Nomination and Remuneration Committees. Working in the private equity sector, he is the Group Chief Executive of Covenant Healthcare Ltd. Until the business was sold in 2007 he was the Chief Executive Officer of Chelsea Stores Holdings Ltd and he was previously the Managing Director of Ocado, the online grocery shopping business set up in partnership with Waitrose. Prior to this he held senior positions in Marks and Spencer Group PLC both in the UK and USA. * Executive Director Non-Executive Director Company financial statements Investor information

32 30 Morrisons Annual report and financial statements 2009 Corporate governance report Combined Code The Board has prepared this report with reference to the UK Combined Code of Corporate Governance issued by the Financial Reporting Council as revised in June Throughout 2008/09 the Group has complied with the provisions set out in Section 1 of the Combined Code and applied its principles, except in the following areas: Combined Code provisions Status Explanation A.3.2 at least half the Board, At the beginning of the year there With the retirements of Sir Ken Morrison and excluding the Chairman, was one more Executive Director Roger Owen in the past year plus the recruitment comprise independent than Non-Executive Directors. of Philip Cox as a Non-Executive Director in April Non-Executive Directors. 2009, the Board will comprise of a majority of independent Non-Executive Directors. C.3.1 at least one member of During the year the Audit Committee It is intended that Philip Cox will, after a period the Audit Committee has recent did not have a member with recent of induction, chair the Audit Committee. He has relevant financial experience. relevant financial experience. recent and relevant financial experience. C.3.4 there are arrangements Comprehensive whistle-blowing Whistle-blowing procedures were enhanced in place for the staff to raise procedures did not exist throughout after the start of the year in February concerns in confidence. the period. The Board a) Membership On 1 February 2009, the Board comprised of a Non-Executive Chairman, four Executive Directors and four Non-Executive Directors. On 13 March 2008, Sir Ken Morrison retired as Chairman and Director of the Company. Sir Ian Gibson, previously Deputy Chairman was appointed Non-Executive Chairman on this date. There is a clear division of responsibilities between the Non- Executive Chairman and the Chief Executive (CEO), which has been set out in writing and agreed by the Board. On 1 February 2009, Roger Owen retired as a Director and on 1 April 2009, Philip Cox will join the Group as a Non-Executive Director. With these changes, the majority of the Board will consist of Non-Executive independent Directors. Details of appointments, roles and backgrounds of the Directors are set out on page 28. b) Performance evaluation The performance of the Board, its committees and its Directors is assessed and appraised throughout the year. The Chairman is responsible for the monitoring of the performance of the Executive Directors. In January 2009, the Chairman conducted an evaluation, without external assistance, of the performance of the Board and the results were shared with the other Directors. The Board was satisfied with its performance and it agreed to act on those areas for which it believed improved processes could be implemented. c) Senior Independent Director Paul Manduca, the Senior Independent Director (SID) is available to shareholders as an alternative to the Chairman, CEO and the Group Finance Director. The SID ensures that he is available to meet shareholders during the year and reports any relevant findings to the Board or Chairman. d) Non-Executive Directors The Non-Executive Directors provide a varied range of skills and experience to the Group. The Board is satisfied that all Non- Executive Directors, including the Non-Executive Chairman remain independent according to the definition contained in the Combined Code. No Non-Executive Director: has previously been employed by the Group within the last five years; has had a material business relationship with the Group within the last three years; receives remuneration other than Director s fees; has close family ties with any of the Group s advisors, Directors or senior employees; holds cross-directorships or has significant links with other Directors through involvement in other companies or bodies; represents a significant shareholder; or has served on the Board for more than nine years. All Non-Executive Directors are provided with a comprehensive, formal and tailored induction to the business. The minimum time commitment expected of the Non-Executive Directors is one day per month attendance at meetings, together with attendance at the Annual General Meeting, Board away days and site visits, plus adequate preparation time. The Board is satisfied that each of the Non-Executive Directors commits sufficient time to the business of the Group and contributes to the governance and operations of the Group.

33 31 e) Board responsibilities The Board is responsible for setting and approving the strategy and key policies of the Group, and for monitoring the progress towards achieving these objectives. It monitors financial performance, critical operational issues and risks. The Board also approves all circulars, listing particulars, resolutions and correspondence to the shareholders including the Annual report, half yearly financial report and interim management statements. The formal schedule of matters reserved for the Board remains unaltered and further details are available in the Investor Relations section of the Group s website Operating boards The Board delegates the operational responsibility to the following three main bodies, with the CEO and the Group Finance Director being members of each: a) Executive Board The Executive Board comprises four Executive Directors who oversee the day-to-day direction of the retail business. The Executive Board meets frequently through the year. Examples of the matters brought to the Executive Board include store and product performance, brand management, food safety, marketing initiatives and the Group s corporate social responsibilities. b) Property Board The Property Board consists of three Executive Directors and meets monthly. This Board has oversight of the strategic development and operational management of the Group s property. Matters brought to this Board include development of new stores and facilities, refurbishments and extensions. c) Manufacturing & Distribution Board The Manufacturing & Distribution Board comprises two Executive Directors, the Manufacturing Director and the Distribution Director plus one other senior executive. This body meets monthly and considers the strategic development of the Group s manufacturing and distribution functions. Committees of the Board The principal committees of the Board are the Audit, Remuneration and Nomination Committees. Committee membership Name Nomination Audit Remuneration Marc Bolland X Brian Flanagan X X X Sir Ian Gibson X X Paul Manduca X X X Susan Murray X X X Nigel Robertson X X X The Directors attended the following numbers of Board and Committee meetings: Board Nomination Audit Remuneration Number of meetings Marc Bolland 12/12 1/1 Brian Flanagan 12/12 1/1 6/6 8/8 Sir Ian Gibson 12/12 1/1 8/8 Mark Gunter 11/12 Martyn Jones 12/12 Paul Manduca 12/12 1/1 6/6 7/8 Sir Ken Morrison 3/3 Susan Murray 12/12 1/1 6/6 8/8 Roger Owen 11/12 Richard Pennycook 12/12 Nigel Robertson 11/12 1/1 5/6 8/8 The Company Secretary organises the appropriate level of insurance cover for Directors to defend themselves against legal claims and civil actions. The level of cover is currently 60m aggregate. Full terms of reference of the Committees are available on request and on the Group s website a) Nomination Committee During the year, the activities of the Committee were focused on recruiting a Non-Executive Director with recent and relevant financial experience. The project culminated in the appointment of Philip Cox, who will take up his position as a Non-Executive Director with effect from 1 April The Committee employed executive search agency, MWM Consulting to identify candidates who were then interviewed by members of the Committee. Meetings also took place with other Executive Directors as appropriate. Following this process, the Nomination Committee recommended the appointment of Philip Cox to the Board on 19 February b) Remuneration Committee The objective of the Group s remuneration policy is to encourage a strong performance culture and emphasise long term shareholder value creation. The intention is to position remuneration arrangements competitively against the market, with a clear reward structure to enable the Group to attract, retain and motivate the best talent, who are key to the Group s recent and future success. The Human Resources Director has advised the Group on all remuneration related matters, including pensions and Executive Directors contracts. Where necessary, this advice was supplemented by external advisors. The Committee also receives advice from its appointed advisors Hewitt New Bridge Street on remuneration matters, Jardine Lloyd Thompson in respect of pensions, and Ashursts in respect of Executive Directors contracts. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

34 32 Morrisons Annual report and financial statements 2009 Corporate governance report continued c) Audit Committee The Board has delegated to the Audit Committee the responsibility for reviewing on its behalf: the integrity of financial reports; the effectiveness of the Group s internal control and risk management system; and the independence of the external auditors. The Audit Committee s responsibilities have not changed during the year. The Audit Committee regularly considers the professional development needs of its members, and whether adequate technical information is being provided. Where necessary, it will seek independent external advice at the Group s expense, with such arrangements made through the Company Secretary. Whilst the Audit Committee was short of a member with recent and relevant financial experience, the Company Secretary had retained, at the request of the Audit Committee Chairman, the services of PricewaterhouseCoopers LLP to advise the Audit Committee at relevant times during the year. There has been no change in the composition of the Audit Committee during the year and the roles of the members also remained unchanged. It is intended that Philip Cox will chair the Audit Committee after an appropriate period of induction. The Chairman, the CEO, the Group Finance Director, the Head of Risk and Internal Audit and other finance department representatives have attended meetings by invitation. i) Overview of actions taken by the Audit Committee in discharging its duties The Committee has received and reviewed reports and presentations from senior management to fulfil its terms of reference. To meet its responsibilities in this respect, the Committee considered: interim and preliminary announcements, together with any other formal announcements relating to financial performance; the accounting principles, policies and procedures adopted in the Group s financial statements including, where necessary, challenging the judgements made; and the potential effects of tax and pensions accounting and other significant judgemental and complex accounting issues dealt within the financial statements. The Audit Committee oversees the Group s relationship with the external auditors. Private meetings are held with the external auditors, without management present. The purpose of these meetings is to understand their views on the control and governance environment and management s effectiveness within it. To fulfil its responsibilities in respect of the independence and effectiveness of the external auditors, the Committee reviewed: the terms, areas of responsibility, duties and scope of the external auditors as set out in the engagement letter; the external auditors work plan for the Group and its subsidiaries; the detailed findings of the audit, including a discussion of any major issues that arose during the audit; the letter from KPMG Audit Plc confirming its independence and objectivity; and the audit fee and the extent of non-audit services provided by the external auditors. In this period the external auditors have provided a significant level of non-audit work, primarily to provide the Board with independent assurance in respect of the IT systems replacement. The Board believes that this activity is a reasonable extension of their statutory audit work and that there are safeguards in place to avoid a threat to their independence or objectivity. The Board has a policy on the engagement of the external auditors to supply non-audit services and the Committee has reviewed the scope of non-audit services provided by the external auditors to ensure that there was no impairment of objectivity. ii) Internal control The Board is responsible for setting a system of internal controls for the Group and reviewing its effectiveness. The control system is intended to manage rather than eliminate the risk of not meeting the Group s strategic objectives, whilst recognising that certain inherent risks may be outside the Group s control. Any system of internal control can only seek to provide reasonable, not absolute, assurance against material misstatement or loss. The Board delegates to the Audit Committee the review of the effectiveness of the Group s internal controls and risk management systems. During the year, the Committee discharged this responsibility by: receiving and considering regular reports from the internal audit function on the status of internal control and risk management systems across the Group. The Committee also reviewed the department s findings, annual plan and the resources available to it to perform its work; reviewing the external auditor s management letters on internal financial control; seeking reports from senior management on the effectiveness of the management of key risk areas; and monitoring the adequacy and timeliness of management s response to identified audit issues. During the year, a Group-wide process for identifying, evaluating and managing the significant risks faced by the business was initiated. This process consisted of various workshops, facilitated by the Head of Risk and Internal Audit, designed to identify formally and document the key risks faced by various business operations in achieving their business objectives. Risks identified as part of this process are evaluated based on the likelihood and potential impact of each risk and where necessary, actions to mitigate the risks were also identified.

35 33 In order to further strengthen the internal control environment, the Group introduced whistle-blowing procedures in February 2008 in order to enable colleagues to raise concerns about possible malpractice or wrongdoing. The Audit Committee receives regular reports from the Head of Risk and Internal Audit on any whistleblowing activity. Whilst there were no significant concerns raised by colleagues, all actions required were discussed and agreed with the Committee. The Board is satisfied that a continual process for identifying, evaluating and managing significant risks has been in place for the financial year and up to the date of this Annual report. To date, no material financial problems have been identified that would affect the results reported in these financial statements. The Board confirms that if significant weaknesses had been identified during this review the Board would have taken the necessary steps to remedy them. Shareholder relations The Chief Executive and the Group Finance Director meet regularly with analysts and institutional shareholders. The Investor Relations Director also maintains a programme of work that reports to the Board the requirements and information needs of institutional and major investors. This is part of the regular contact that the Group maintains with its institutional shareholders. All Directors, Executive and Non-Executive, attend the AGM. The Chairs of the Audit, Nomination and Remuneration Committees are available to answer any questions. Additionally, the Group s brokers sought independent feedback from investors following the annual and interim results in This feedback was reported to the Board. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

36 34 Morrisons Annual report and financial statements 2009 Directors remuneration report The Group is required by the Companies Act 1985 to prepare a Directors remuneration report for the 52 weeks ended 1 February 2009 and put that report to a shareholder vote. A resolution to approve this report will be proposed at the Annual General Meeting of the Company to be held on 4 June The auditor is required to report on part of the Directors remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the Companies Act The report has therefore been divided into separate sections for unaudited and audited information. Unaudited information The members of, and advisors to the Remuneration Committee are laid out in the Corporate governance report on page 31, in the section titled Remuneration Committee. Remuneration policy The Remuneration Committee considers that the Company s remuneration policies should encourage a strong performance culture and emphasise long-term shareholder value creation, with clear links between executive performance goals and business strategy. The Committee also believes that there should be a clear reward structure to enable the Company to attract, retain and motivate the best talent who have been and will continue to be key to the Company s recent success and future performance by: positioning base salaries around the mid-market; and operating annual and long-term incentives, so that a substantial proportion of total remuneration is subject to performance and so that executives are aligned with shareholders through share ownership. Fixed versus variable remuneration A substantial proportion of the Executive Directors pay is performance-related. The chart below demonstrates the balance between fixed and performance-related pay for the Chief Executive at target and maximum performance levels. Maximum performance assumes the achievement of maximum bonus and full vesting of shares under the LTIP. Performance-related versus fixed remuneration % Target Maximum Fixed pay (base salary and pension, excluding benefits) Bonus Base salary and benefits Base salary is a fixed cash sum payable monthly in arrears. In order to set the right balance in Executive Directors packages, the policy is generally to set salaries around mid-market levels with a substantial proportion being subject to the performance of the business and individuals. The Remuneration Committee has regard to the following when reviewing salary levels: LTIP the rates for similar roles in comparator companies, both in FTSE100 retailers, including the Company s major competitors, and more generally in UK-based companies of a similar size and complexity (specifically FTSE companies ranked 20 to 60 by market capitalisation excluding those with significant overseas turnover/operations); the performance of the individual concerned, together with any change in responsibilities that may have occurred; avoiding the automatic ratcheting effects of following median or upper quartile levels of salary derived from comparator company analyses; and pay quantum and structure throughout the Company. During the year, base salaries were reviewed in the light of benchmark data, internal relativities and personal performance. As a result, increases were approved for certain Directors. Current base salaries for the financial year, together with the previous year s salaries, are set out below: 2009/ /09 Marc Bolland 850, ,050 Mark Gunter 540, ,750 Richard Pennycook 540, ,120 Martyn Jones 450, ,000 The increase to Marc Bolland s base salary, which became effective from 1 August 2008, followed a review carried out by the Remuneration Committee around the time of the second anniversary of his appointment. The review included a comprehensive benchmarking exercise which identified that base salary was significantly below mid-market. Given the base salary positioning, and following consideration of Marc Bolland s performance during his first two years in role, a mid-year review was deemed appropriate in these exceptional circumstances. Marc Bolland did not receive any further increase in February Richard Pennycook s base salary was increased from 519,120 to 540,750 effective from the normal review date of 1 February Martyn Jones base salary was increased with effect from 1 February 2009 from 425,000 to 450,000 reflecting his greater experience since promotion to the Board. Mark Gunter s base salary, as a result of already being positioned at the mid-market level, was left unchanged. The Remuneration Committee is satisfied that these increases were necessary to enable the Company to pay competitive base salaries and are reasonable in the context of the Directors total remuneration packages. Benefits include health insurance, transport costs and telephone expenses. Annual bonus The Remuneration Committee operated an annual bonus plan for Executive Directors and other senior managers during 2008/09. For 2008/09 the maximum bonus was 100% of base salary, with measurement based upon profit before taxation (excluding exceptionals) and personal objectives, as set out below:

37 35 Measures % of bonus potential Profit before tax, excluding exceptionals 80% Personal objectives 20% No bonus was payable for the achievement of personal objectives unless the minimum profit targets had been achieved. Details of the actual amounts paid for 2008/09 are set out in the Directors emoluments table on page 37. For the 2009/10 annual bonus plan, maximum bonus potential will remain at 100% of base salary. In addition to profit before tax (excluding exceptionals) and personal objectives, strategic corporate scorecard measures structured around financial objectives, operational excellence, customers and employees have been introduced, as set out below: Measures % of bonus potential Profit before tax, excluding exceptionals 65% Strategic corporate scorecard measures 20% Personal objectives 15% No bonus will be payable for the achievement of strategic corporate scorecard measures or personal objectives unless the minimum profit target has been achieved. Specific performance targets have not been disclosed as they are considered to be commercially confidential but they will be demanding and require performance significantly better than plan for full payout. The arrangements will be operated for other senior managers on similar terms to the above but at reduced levels. All Employee Sharesave Scheme The Group operates a Sharesave Scheme which is approved by HM Revenue & Customs. All eligible employees, including Executive Directors, may be invited to participate on similar terms to save up to a maximum of 250 each month for a fixed period of three years. At the end of the savings period, individuals may use their savings plus a tax-free bonus to buy ordinary shares in the Group at a discount capped at up to 20% of the market price, set at the launch of each Scheme. Long Term Incentive Plan The Long Term Incentive Plan (LTIP), approved by shareholders in 2007, is designed to reward management for achieving the Group s strategic objectives and to provide an appropriate level of long-term performance pay. Each year, participants receive conditional awards of shares in the Group which will normally vest three years after they are awarded, subject to the satisfaction of performance conditions measured over a three-year period and continued service. The plan s individual annual limit is 300% of salary (face value of shares). In 2008, awards were made to 740 participants, including Executive Directors, their direct reports and management tiers below (including supermarket store managers). An award of shares worth 250% of salary was made to the Chief Executive, with 200% of salary for the other Executive Directors in April A further award of shares worth an additional 50% of salary was made to the Chief Executive in October 2008 to reflect his personal contribution since appointment and act as a further incentivisation and retention mechanism over and above his existing awards. This award was made within the individual limit of 300% of salary contained in the LTIP rules. The current intention is that for the Chief Executive, future award levels from April 2009 will revert back to 250% of salary per annum. Other Executive Directors currently receive a 200% of salary award level. For tiers below Executive Director, awards were made in April 2008 at the 100% or lower levels, dependent upon seniority. It is intended that the next awards will be granted in April 2009 shortly after the 2008/09 Preliminary announcement. Performance under the plan is measured over three years. Performance measures are 75% based on earnings per share and 25% based on like-for-like non-fuel sales growth. These performance metrics were selected for the following reasons: they are directly linked to the objectives set out in the Group s strategy improving EPS and sales performance reflects the need for basic profit growth and should flow through to increased shareholder value; there is a clear line of sight between performance and reward; and they are relatively easy to understand and communicate. To guard against the possibility of individuals receiving value from the LTIP as a result of sales targets being hit but EPS targets being missed, no awards can vest under the sales targets unless threshold EPS targets have been met. For the awards intended to be granted in April 2009, details of the three year EPS and sales targets are set out below. 25% of the EPS-related component of the award will vest if the Group s Underlying EPS grows in line with the growth in the Retail Prices Index plus an average of 4% per annum, rising on a pro rata basis until 100% vests for outperforming the Index by at least 10% per annum. Underlying EPS will be as defined in note 7 to the financial statements. The Group will report EPS in this way in its Annual report. In light of food price unpredictability, the Remuneration Committee reviewed the best way of measuring sales growth and has made a revision to ensure that performance continues to be measured in a robust way. Instead of setting absolute like-for-like sales growth targets, the Remuneration Committee considers that it is preferable to measure the Group s like-for-like grocery sales growth against the IGD (Institute of Grocery Distribution) Index, which measures market growth in like-for-like sales (excluding fuel). This independently audited index, which includes all of the Company s major competitors, is considered to be the most reliable method of measuring market growth. 25% of the sales growth-related component of the award will vest if the Group s like-for-like sales match the IGD Index, rising on a pro rata basis until 100% vests for outperforming the Index by at least 2% over the three years ending with the 2011/12 financial year. Like-for-like sales is defined as the reported sales from existing space (excluding VAT), less total fuel sales. As has been the previous practice, no part of the award relating to sales growth can vest unless the minimum EPS target is achieved. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

38 36 Morrisons Annual report and financial statements 2009 Directors remuneration report continued The Remuneration Committee considers that the targets set out above are demanding in the context of the Group s circumstances and take into account the prospects for growth. The targets are considered to be at least as challenging in the circumstances as the targets set for awards made in prior years. Share ownership guidelines The Group operates share ownership guidelines for Executive Directors. Under the guidelines, Directors are expected to retain 50% of vested LTIP awards (net of tax) until such time as they own shares worth 100% of their salary after which point they will be expected to retain, as a minimum, this level of holding. Pension arrangements The Executive Directors, with the exception of Marc Bolland, participate in the Group s Defined Benefit Pension Scheme. Pension entitlements accrue at the rate of 1/30th for each year, with a maximum pension of 2/3 pensionable salary at age 62. Pensionable pay for the Executive Directors is annual salary as at 6 April each year. In the case of members joining the pension scheme prior to 1 June 1989, the pension payable is currently based on final pensionable pay calculated as the average of the highest three years pensionable pay in the Director s last 10 years of employment. For members joining the scheme after 31 May 1989, final pensionable pay is currently the lower of the average of the highest three years pensionable pay in the Director s last 10 years of employment and the maximum earnings limit which in 2008/09 is 117,600. Mark Gunter, Richard Pennycook and Martyn Jones became members of the pension scheme subsequent to 1 June Sir Kenneth Morrison is in receipt of a pension from the scheme, in addition to his emoluments up to retirement shown on page 37. His pension amounted to 33,997 in the period up until cessation of employment. The expected cost of providing retirement benefits to the Directors is assessed in accordance with the advice of independent qualified actuaries. The pension arrangements include life assurance cover whilst in employment, an entitlement to a pension in the event of ill health or disability and a pension for the spouse and any dependant children on death. No contributions were paid or are payable by any Directors under the terms of the scheme. There are no enhanced early retirement rights. Post-retirement pensions increase in line with the annual increase in the retail price index or by 5% per annum compound, whichever is the lower. Richard Pennycook, Mark Gunter and Martyn Jones, who were all subject to the earnings cap in place before April 2006 which has been retained for benefits accruing thereafter, received a cash supplement of 10% of salary in excess of the cap in 2008/09. Following a review of this pension provision against the market, it was determined that the salary supplement should be increased from 10% to 15% for 2009/10 onwards. Marc Bolland is not in the pension scheme but instead receives a salary supplement of 30% of salary which will remain unchanged. On 25 February 2009, the Group commenced consultation with active members of the Group s two defined benefit pension schemes and, where appropriate, their trade union representative bodies. As part of the agreement in principle with the Trustee of each scheme announced in last year s Annual report, the Group is proposing to change the basis of future pension accrual from final salary to one based on career average revalued earnings (CARE). Subject to the outcome of consultation, the change to CARE will be made in the third quarter of Under the proposals, benefits that have been earned under final salary arrangements will be preserved and increased in line with the Retail Price Index from date of conversion until retirement. The financial impact of this proposed change is described on page 13 of the Financial review. Performance graph The following graph shows the Company s total shareholder return (TSR) compared against the TSR of the FTSE100 and FTSE Food & Drug Retailers indices over the five year period to 1 February These indices have been selected as being appropriate in giving a broad equity view and the Company is a constituent of both indices. Total shareholder return Source: Thomson Financial Value of hypothetical 100 holding Feb Jan Jan 06 4 Feb 07 3 Feb 08 1 Feb 09 Wm Morrison FTSE All Share Food & Drug Retailers Index FTSE100 Directors contracts a) Executive Directors All Executive Directors have a service agreement without expiry dates. These contracts can be terminated by either the Group or Director giving 12 months notice. The Remuneration Committee has in place a model contract which provides that any compensation provisions for termination without notice will only extend to 12 months of salary, benefits and pension (which may be payable in instalments and subject to mitigation). Going forward, all new Director contracts will be on that basis. The model contract does not contain change of control provisions. This policy was applied to Marc Bolland at the time of his recruitment and to Mark Gunter and Martyn Jones from Richard Pennycook s contract provides that he has an obligation to mitigate his loss in the event of termination in breach of contract. Notice period from Name of Director Date of contract Company (months) M Bolland 7 Jun M Gunter 5 Apr M Jones 5 Apr R Pennycook 23 May Roger Owen tendered his resignation on 18 October 2007 and left the business on 1 February On the basis that full notice was served, there was no termination payment made in relation to his contract. Roger Owen participated in the Annual Bonus Plan for 2008/09 and received an award under the LTIP in April Consistent with best practice, the two sets of LTIP awards granted to Roger Owen will continue to vest three years from the relevant grant date, subject to the satisfaction of performance conditions, with amounts pro-rated to reflect the period of time between the grant date and the leaving date.

39 37 Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards or committees as long as these are not deemed to interfere with the business of the Company. Any fees received in respect of these appointments, which are disclosed under the Directors emoluments table, are retained by the Executive Directors concerned. b) Non-Executive Directors Brian Flanagan, Paul Manduca, Susan Murray and Nigel Robertson were appointed for a three year period from their original dates of appointment in Following the expiry of this initial period, each has been re-appointed for a further three year term, unless otherwise terminated earlier by, and at the discretion of, either party upon one month s written notice. Following the retirement of Sir Kenneth Morrison as Chairman on 13 March 2008, Sir Ian Gibson was appointed as Non-Executive Chairman. Sir Ian Gibson was appointed to the Board for a three year period from 1 September 2007 unless otherwise terminated earlier by, and at the discretion of, either party upon 12 months written notice. Date Date Expected date original term current term of expiry of Name of Director commenced commenced current term B Flanagan 1 Jul Jul Jul 2011 I Gibson 1 Sep Sep Sep 2010 P Manduca 6 Sep Sep Sep 2011 S Murray 1 Jul Jul Jul 2011 N Robertson 1 Jul Jul Jul 2011 Audited information The Board makes the initial appointment of Directors who are then subject to re-election by the shareholders at the first AGM following appointment and thereafter at least every three years. The remuneration of the Non-Executive Directors is a matter for the Non-Executive Chairman and Executive members of the Board and is reviewed from time-to-time with regard to the time commitment required and the level of fees paid in comparable companies. The remuneration of the Non-Executive Chairman is a matter for the Remuneration Committee and the Board and is reviewed from timeto-time with regard to the time commitment required and the level of fees paid in comparable companies. All Non-Executive Directors receive no benefits from their office other than fees and staff discount entitlement, and are not eligible to participate in the Group s pension arrangements. The current levels are as follows: Senior Committee Independent Base Chairmanship Director Total Name B Flanagan I Gibson P Manduca S Murray N Robertson Total Directors emoluments and pension entitlements The emoluments of the Directors were as follows: Directors Benefits Pension Annual Total year to Total year to salaries/fees in kind supplement bonus 1 Feb Feb 2008 Name Non-Executive Chairman I Gibson Chairman K Morrison Executive Directors M Bolland ,700 1,689 M Gunter ,054 1,093 M Jones R Owen ,009 R Pennycook ,011 1,145 Non-Executive Directors B Flanagan P Manduca S Murray N Robertson Former Directors D Hutchinson Total 3, ,180 6,158 7,182 Resigned from the Board with effect from: 1 13 March June Performance review Strategic review Governance Group financial statements Company financial statements Investor information

40 38 Morrisons Annual report and financial statements 2009 Directors remuneration report continued In addition to the emoluments detailed above, a charge of 3.9m has been made to the income statement in respect of Directors share-based payments. Benefits in kind comprise transport costs, health insurance, telephone expenses and the use of a Company leased apartment for Marc Bolland. The Directors also receive a staff discount entitlement which is not taxable. None of the Directors has a material interest in any contract significant to the Group s business. The Executive Directors each received 77% of the potential annual bonus payable in respect of profit before tax (excluding exceptionals). The range of percentages of potential bonus payable in respect of personal objectives was between 82% and 93%. For the period 2008/09 Marc Bolland received cash fees from Manpower Inc. to a Sterling equivalent of 13,607, and deferred and restricted stock worth a Sterling equivalent of 85,447 for his role as Non-Executive Director at Manpower Inc. For the period 2008/09 Richard Pennycook received cash fees from Persimmon Plc of 42,215. Following cessation of employment on 29 September 2006, Robert Stott agreed to work on a consultancy basis for the Group from 1 November 2006 for a minimum of 156 days over the following 12 month period. During that period, he was responsible for co-ordinating the Group s response to the Competition Commission enquiry into the Grocery sector. Following completion of the initial consultancy period, Robert Stott s engagement was extended, for 10 days per month, until the Competition Commission s final report was issued. Robert Stott s engagement ended on 14 May Consultancy fees paid to Robert Stott amounted to 137,568 (including VAT) for the period from 3 February 2008 to 14 May The following Directors had accrued entitlements under defined benefit schemes as follows: Increase in Transfer accrued value of pension the increase Transfer Transfer Movement (excluding in accrued value of value of in transfer Accrued inflation) pension Accrued accrued accrued value pension at for year ended during pension at pension at pension at during 3 Feb Feb 2009 the year 1 Feb Feb Feb 2009 the year Name Executive Directors M Gunter M Jones R Owen N/A N/A 295 5,278 5,257 N/A R Pennycook Total ,158 6, Roger Owen retired on 1 February 2009 and the pension shown is the early retirement pension. It is not therefore directly comparable to the prior year figures.

41 39 Share awards As at 1 February 2009, Directors interests under LTIPs and one-off deferred awards (Richard Pennycook) were as follows: Date Share price As at Shares As at Vesting Notes of grant on grant 3 Feb 2008 granted 1 Feb 2009 date M Bolland LTIP 1 24 May p 294, ,256 1 Sep 2009 LTIP 2 24 May p 557, , May 2010 LTIP 3 14 Apr p 682, , Apr 2011 LTIP 3, 4 14 Oct p 175, , Oct , ,065 1,709,766 M Gunter LTIP 2 24 May p 318, , May 2010 LTIP 3 14 Apr p 390, , Apr , , ,550 M Jones LTIP 2 24 May p 168, , May 2010 LTIP 2, 5 24 Oct p 78,553 78, Oct 2010 LTIP 3 14 Apr p 306, , Apr , , ,937 R Owen LTIP 2, 6 24 May p 305, , May 2010 LTIP 3, 6 14 Apr p 356, , Apr , , ,379 R Pennycook Deferred share award 7 1 Apr p 309, ,073 1 Apr 2009 (notional grant date) LTIP 2 24 May p 305, , May 2010 LTIP 3 14 Apr p 374, , Apr , , ,281 1 Following shareholder approval at the 2007 AGM, Marc Bolland received a one-off LTIP reflecting the five months worked from appointment in 2006/07, with the value of shares equal to 5/12ths of 250% of 700,000 (his salary on 1 September 2006) based on the average closing share prices on the day of the announcement of the interim results for 2006/07 (declared on 21 September 2006) and the following four business days (247.80p). This award was treated as having been made on 1 September 2006 (when Marc Bolland joined the Company) and it vests, subject to performance and continued employment, on 1 September 2009 (i.e. three years after it was deemed to have been awarded). This award is not pensionable. Vesting of the award on 1 September 2009 will be based on performance over the period ending with 2008/09, to reflect the position which would have applied had he received an award during the 2006/07 financial year. Performance measures are 75% based on EPS and 25% based on like-for-like non-fuel sales growth. 25% of the EPS related part of the award will vest if the Group s EPS is 13.3p per share in 2008/09, rising on a pro rata basis until full vesting is achieved at 16p per share. 25% of the sales growth related part of the award will vest if the Group s like-for-like non-fuel sales grow at 3% per annum compound over 2007/08 and 2008/09, rising on a pro rata basis until full vesting is achieved for growth of 5% p.a. compound. No awards can vest under the sales targets unless threshold EPS targets have been met. 2 LTIP awards granted on 24 May 2007 and 24 October 2007 are subject to three year performance targets. Performance measures are 75% based on EPS and 25% based on like-forlike non-fuel sales growth. 25% of the EPS related component of the award will vest if the Group s EPS in 2009/10 is 15.8p per share rising on a pro rata basis until 100% vests for an EPS of 19p per share. 25% of the sales growth related component will vest if the Group s like-for-like non-fuel sales grow by 3% p.a. compound rising on a pro rata basis until there is 100% vesting for growth of 5% p.a. compound. No awards can vest under the sales targets unless threshold EPS targets have been met. 3 LTIP awards granted on 14 April 2008 and 14 October 2008 are subject to three year performance targets. Performance measures are 75% based on EPS and 25% based on like-forlike non-fuel sales growth. 25% of the EPS related component of the award will vest if the Group s EPS in 2010/11 is 19.6p per share rising on a pro rata basis until 100% vests for an EPS of 23.5p per share. 25% of the sales growth related component will vest if the Group s like-for-like non-fuel sales grow by 3% p.a. compound rising on a pro rata basis until there is 100% vesting for growth of 5% p.a. compound. No awards can vest under the sales targets unless threshold EPS targets have been met. 4 Marc Bolland received an additional LTIP award of 175,547 shares in October 2008 to reflect his personal contribution since appointment and act as a further incentivisation and retention mechanism over and above his existing awards. In the future, it is currently intended that the Chief Executive will normally receive a 250% of salary LTIP award per annum. 5 Martyn Jones received an additional LTIP award of 78,553 shares in October 2007 to reflect an increase in salary upon joining the Board. 6 Following Roger Owen s retirement on 1 February 2009, LTIP awards will vest three years from grant, subject to the satisfaction of performance conditions and time pro-rating to reflect the shorter period of time between grant date and leaving date. 7 To fulfil promises made to Richard Pennycook at the time of his recruitment, as reported in last year s Remuneration Report, the annual bonus award made to him for 2006/07 included, in addition to the cash element, a deferred share award as a result of no LTIP being adopted by shareholders in the 2006/07 financial year. That award was in shares of the Group with a value equal to 950,400 (two times the amount of the cash bonus earned for the 2006/07 financial year) with the number of shares calculated by reference to the average share price over the five dealing days prior to the deemed date of the award (1 April 2007) which was 307.5p. The deferred share award will vest on 1 April 2009, provided Richard Pennycook is still an employee of the Group at this time. Upon vesting, a payment will also be made in cash or shares, as determined by the Remuneration Committee, equivalent to the dividends which would have been payable on the shares over the two-year deferral period (or such shorter period if awards vest earlier). This award is not pensionable. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

42 40 Morrisons Annual report and financial statements 2009 Directors remuneration report continued Share options Options granted to Directors to acquire ordinary shares in the Group which are still outstanding on 1 February 2009 or on ceasing to be a Director are as follows: Number of options Market price Gain on At during the 52 weeks ended 1 Feb 2009 At Exercise on day of exercise Exercisable Date of grant 3 Feb 2008 Granted Exercised Lapsed 1 Feb 2009 price exercise 000s From To M Gunter 2 Apr , , p 2 Apr Apr Nov , , p 12 Nov Nov Apr , , p 1 Jul Jan , ,917 M Jones 5 Apr ,000 50, p 5 Apr Apr Apr ,000 88, p 2 Apr Apr Apr , , p 1 Jul Jan , ,917 K Morrison 5 Apr , , p Apr Apr Apr , , p Apr Apr Apr , , p Apr Apr Nov , , p Nov Nov ,110,000 1,110, R Pennycook 18 May , , p 1 Jul Jan ,825 3,825 1 Options granted under the Sharesave scheme. The 1995 Senior Executive Share Option Scheme terminated at the end of its 10-year life on 25 May 2005 and no grants have been made under it since November The ordinary share mid-market price ranged from 220p to 306p and averaged 271.7p during the period. The price on 1 February 2009 was p compared to 299.0p on 3 February The performance condition attached to options under the Executive Share Option Scheme (which has been satisfied) is as follows: The operating profit of the Group, as detailed in the audited report and financial statements, must increase by at least 20% between the base year and its third or succeeding anniversary. Once an option is exercisable it will remain so until it lapses (in accordance with the rules of the Scheme) even if on a future anniversary the operating profit does not exceed the base year by 20%.

43 41 Dilution and share usage Awards under the Group s share option and SAYE schemes are satisfied by the issue of new shares within the limits agreed by shareholders when the plans were approved. These limits comply with the Association of British Insurers guidelines restricting dilution from employee share plans. The overall limits under the guidelines are that no more than 10% of a Group s issued share capital may be used in any 10 year period. Up to 5% may be used for executive share plans. As at 1 February 2009, the Group s share usage against these limits was 3.11% and 0.72% respectively. It is currently intended that LTIP awards be satisfied by market purchased shares which are held in an Employee Benefit Trust. Directors interests The interests of the Directors and their families in the shares of the Company (including percentages where holdings are over 3%) were as follows: 1 February February 2008 Options to purchase Options to purchase Beneficial Ordinary shares ordinary shares Ordinary shares ordinary shares M Bolland M Gunter 38, ,917 38, ,917 M Jones 18, ,917 18, ,917 R Owen 482, ,178 R Pennycook 3,825 3,825 B Flanagan I Gibson 108, ,055 S Murray 5,000 5,000 P Manduca 25,000 25,000 N Robertson Performance review Strategic review Governance There were no changes in the above interests in the period from 1 February 2009 to 11 March Approval The audited section of this report was approved by the Board of Directors on 11 March 2009 and the unaudited section was approved on 19 March 2009 and signed on its behalf by Susan Murray Chair of the Remuneration Committee Group financial statements Company financial statements Investor information

44 42 Morrisons Annual report and financial statements 2009 General information The Directors report and business review Pages 2 to 44 inclusive of this Annual report consist of a Directors report and business review that has been drawn up and presented in accordance with, and in reliance on, English company law. The liabilities of the Directors in connection with that Directors report and business review shall be subject to the limitations and restrictions provided by the Companies Act There are no persons with whom the Group has contractual or other arrangements which are essential to the business of the Group. Forward-looking statements The Directors report and business review is prepared for the members of the Company and should not be relied upon by any other party or for any other purpose. Where the Directors report and business review includes forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking statements and information. Result and dividend The profit for the period after taxation amounted to 460m. The Directors have declared and recommended the following dividends: m Paid interim dividend of 0.8p per share (2008: 0.675p) 21 Recommended final dividend of 5.0p per share (2008: 4.125p) 131 The final dividend, if approved by shareholders at the Annual General Meeting (AGM), is to be paid on 10 June 2009 to ordinary shareholders on the register of members at close of business on 8 May If the final dividend is approved by shareholders, the total ordinary dividend for the year will be 5.8p per share. Auditor A resolution to reappoint KPMG Audit Plc as auditor and to authorise the Directors to set their remuneration is to be proposed at the forthcoming AGM. Annual General Meeting The notice of the 2009 AGM of the Company (to be held at the Company s headquarters at Gain Lane in Bradford on 4 June 2009) is sent to shareholders with an accompanying explanatory letter from the Chairman. The Directors believe each of the resolutions to be proposed at the AGM is 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 results to view on the Group s website, unless they have elected to receive a printed version. Share capital The authorised and called-up share capital of the Company, together with details of shares allotted during the year, is shown in note 22 of the financial statements. At the AGM of the Company held in 2008, a special resolution was passed to renew the authority given at the AGM held on 24 May 2007 to the purchase by the Company of up to 268,361,042 ordinary shares representing approximately 10% of the issued ordinary share capital at that time. This authority remained valid on 1 February During the period, the Company purchased and cancelled 57,788,600 of its ordinary shares pursuant to that authority which will expire at the close of the 2009 AGM. Further details appear in note 41 of the financial statements. In addition, 1,530,738 ordinary shares were issued during the period to employees exercising share options. Borrowing powers The Articles of Association of the Company restrict the borrowings of the Company and its subsidiary undertakings to a maximum amount equal to twice the share capital and consolidated reserves. Substantial shareholdings As at 11 March 2009, the Company had been notified by the following shareholders (excluding Directors) that they have interests in 3% or more of the issued share capital of the Company: Number % of of shares holding Ameriprise Financial Inc 173,736, % Sir KD Morrison 171,346, % AR Wilson 155,758, % Legal & General Group Plc 137,128, % Brandes Investment Partners LP 132,155, % Walter Scott & Partners Ltd 107,775, % Susan & Nigel Pritchard 106,405, % Zurich Financial Services 81,286, % The number of shares appearing above is that appearing in the relevant notification to the Company. The percentage appearing above is the percentage that number represents of the issued share capital of the Company as at 11 March Beneficial owners of shares with information rights Beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all enquiries and communications to the registered holder of their shares rather than to the Company s registrar, Capita Registrars, or to the Group directly. Directors The current Directors of the Group and their biographies are shown on pages 28 to 29. Sir Ken Morrison and Roger Owen retired from the Board on 13 March 2008 and 1 February 2009 respectively. Philip Cox will join the Board on 1 April 2009 as a Non-Executive Director. Brian Flanagan (aged 56), Paul Manduca (aged 57), Susan Murray (aged 52) and Nigel Robertson (aged 49) retire by rotation and Philip Cox (aged 57) retires at the first AGM following his appointment. All of them, being eligible, offer themselves for re-election at the AGM.

45 43 The interests of the Executive and Non-Executive Directors of the Company and their immediate families in the shares of the Company, along with share options, are contained in the Directors remuneration report set out on pages 34 to 41. At no time during the year did any of the Directors have a material interest in any significant contract with the Company or any of its subsidiaries. Political and charitable donations During the period the Group made charitable donations amounting to 0.3m. In addition, the Group sponsored various charities and in the year over 0.9m was raised by customers and staff. No political donations were made, which is Group policy. Disclosure of information to auditors The Directors who held office at the date of approval of this Directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Group s auditor is unaware; and each Director has taken all steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Group s auditor is aware of that information. Going concern The Directors assessment of the Group and Company s ability to continue as a going concern has taken into consideration the effect that the current economic climate has on the Group. The Group s ability to borrow cash has not been adversely affected by the lack of liquidity in the financial markets and the Group has already negotiated and has available committed, competitive facilities that will meet the Group s needs in the medium term. The principal risks that the Group are challenged with have been set out on page 22 to 23 including such risks as the loss of a key supplier, along with how the Directors mitigate these risks in the current economic climate. After reviewing the Group s Optimisation Plan, financial forecasts including an assessment of working capital and other medium term plans, the Directors are confident that the Company and the Group have adequate financial resources available to continue in operational existence for the foreseeable future. The going concern basis has continued to be adopted in the preparation of the financial statements. Payment to creditors Supplier credit is an important factor in the success of the business. The Group works within the spirit and letter of the supermarkets code of practice. It is Group policy to ensure all payments are made within mutually agreed credit terms. Where disputes arise, the Group attempts to sort these out promptly and amicably to ensure delays in payment are kept to a minimum. Trade creditors for the Group at the financial year end represented 33 days of purchases (2008: 34 days). Health and safety policy It is the Group s intention, so far as is reasonably practicable, to ensure the health, safety and welfare of all its employees, customers and visitors to its premises. In order to achieve this, a comprehensive health and safety manual is in place for each division of the Company and subsidiary companies within the Group. Each health and safety manual contains the policy and procedures for complying with the Health and Safety at Work Act 1974, including the provision, based on risk assessment, of safe working practices for all work activities across the Group. The Group s health and safety policy is approved by the Executive Board. The Group has adopted the national targets set by the Health and Safety Commission for the reduction of workplace accidents and workrelated ill health, and is on course to meet or exceed these targets. Health and safety performance is monitored to ensure continuous improvement in all areas. Additional shareholder information Additional information for shareholders is required by the implementation of the EU Takeover Directive into UK Law. Pursuant to Part VII of Schedule 7 of the Companies Act 1985 and section 992 of the Companies Act 2006, the Company is required to disclose certain additional information. Such disclosures, which are not covered elsewhere in this report, include the following paragraphs. Where reference is made to the Company s Articles of Association, this refers to the existing set of Articles, although the changes proposed to be made at the Company s 2009 AGM will not change the relevant sections. The disclosures below are in some cases a summary of the relevant provisions of the Company s Articles of Association and the relevant full provisions can be found in the Articles which are available for inspection at the Company s registered office. 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 he 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 he 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 Performance review Strategic review Governance Group financial statements Company financial statements Investor information

46 44 Morrisons Annual report and financial statements 2009 General information continued 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. Appointment and powers of Directors Directors are appointed by ordinary resolution at a general meeting of ordinary shareholders. The Directors have the power to appoint a Director during the year but any person so appointed must be put up for appointment at the next AGM. Subject to its Articles of Association and relevant statutory law and to such direction as may be given by the Company in general meeting by special resolution, the business of the Company shall be managed by the Directors, who may exercise all powers of the Company which are not required to be exercised by the Company in general meeting. Articles of Association The Company s Articles of Association may only be amended by a special resolution at a general meeting of shareholders. At the Company s AGM to be held on 4 June 2009, a resolution will be put to shareholders proposing amendments to the existing Articles of Association to incorporate changes introduced by the new Companies Act Other disclosures The Company is not party to any significant arrangements which take effect, alter or terminate upon a change of control of the Company following a takeover bid. The Company does not have any employee share schemes where the shares to which the scheme relates have rights with regard to the control of the Company which are not exercisable by employees. By the order of the Board Jonathan Burke Company Secretary 11 March 2009

47 45 Statement of Directors responsibilities in respect of the Annual report and financial statements The Directors are responsible for preparing the Annual report and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The Group financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position and the performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. The Parent Company financial statements are required by law to give a true and fair view of the state of affairs of the Parent Company. In preparing each of the Group and Parent Company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; Responsibility statement We confirm that to the best of our knowledge: for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU; for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors report, Directors remuneration report and Corporate governance statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Performance review Strategic review Governance Group financial statements the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair review of the assets, liabilities, financial position and profit or loss of the Company and its subsidiaries included in the consolidation as a whole; and the Directors report includes a fair review of the development of the business and the position of the Company and its subsidiaries included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board 11 March 2009 Company financial statements Investor information

48 46 Morrisons Annual report and financial statements 2009 Independent auditor s report to the members of Wm Morrison Supermarkets PLC We have audited the Group and Parent Company financial statements (the financial statements ) of Wm Morrison Supermarkets PLC for the 52 weeks ended 1 February 2009 which comprise the Consolidated income statement, the Consolidated and Parent Company balance sheets, the Consolidated cash flow statement, the Consolidated statement of recognised income and expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors remuneration report that is described as having been audited. This report is made solely to the Company s members, as a body, in accordance with section 235 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors responsibilities for preparing the Group Annual report and financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the EU, and for preparing the Parent Company financial statements and the Directors remuneration report in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors responsibilities on page 45. Our responsibility is to audit the financial statements and the part of the Directors remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors report and business review is consistent with the financial statements. In addition, we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors remuneration and other transactions is not disclosed. We review whether the Corporate governance statement reflects the Company s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual report and financial statements and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group s and Company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors remuneration report to be audited. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the EU, of the state of the Group s affairs as at 1 February 2009 and of its profit for the year then ended; the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; the Parent Company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Parent Company s affairs as at 1 February 2009; the Parent Company financial statements and the part of the Directors remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors report and business review is consistent with the financial statements. KPMG Audit Plc Chartered Accountants Registered Auditor Leeds 11 March 2009

49 47 Consolidated financial statements under International Financial Reporting Standards Accounting policies General information Wm Morrison Supermarkets PLC is a public limited company incorporated in the United Kingdom under the Companies Act 1985 (Registration number ). The Company is domiciled in the United Kingdom and its registered address is Hilmore House, Gain Lane, Bradford, BD3 7DL, United Kingdom. Basis of preparation The financial statements have been prepared for the 52 weeks ended 1 February 2009 (2008: 3 February 2008) in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee interpretations (IFRIC) as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. IFRS and IFRIC are issued by the International Accounting Standards Board (the IASB) and must be adopted into European Union law, referred to as endorsement, before they become mandatory under the IAS Regulation. Shown below are recent standards and interpretations that have been issued by the IASB, indicating their status of endorsement. The financial statements have been prepared on a going concern basis. The Directors assessment of going concern has been considered within the general information section of the Directors report and business review. The financial statements are presented in Pounds Sterling, rounded to the nearest million, except in some instances, where it is deemed relevant to disclose the amounts up to one decimal place. They have been prepared on the historical cost basis of accounting, except for share-based payments and derivative financial instruments, which are measured at fair value, and pension scheme liabilities that are measured using actuarial valuations. The Group s accounting policies are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. The endorsement of IFRIC 14 IAS19 The limit on a defined benefit asset, minimum funding requirements and their interaction, has no material impact on the Group s financial statements. The accounting policy for Retirement benefits has been updated to cover the recognition of an asset if one should exist in the future. There have been no further alterations made to the accounting policies as a result of considering all amendments to IFRS and IFRIC interpretations that became effective during the financial period as these were considered to be immaterial to the Group s operations or were not relevant. New IFRS and amendments to IAS and interpretations There are a number of standards and interpretations issued by the International Accounting Standards Board that are effective for financial statements after this reporting period. The following have not been adopted by the Group: Effective for accounting International Financial Reporting Standards periods starting on or after IAS 1* Presentation of financial statements: A revised presentation 1 January 2009 IFRS 2* Share-based payment: Vesting conditions and cancellations 1 January 2009 IFRS 8* Operating segments 1 January 2009 IAS 23* Borrowing costs 1 January 2009 IFRSs* Annual improvements to IFRSs 1 January 2009 IAS 27 Consolidated and separate financial statements 1 July 2009 IFRS 3 Business combinations 1 July 2009 International Financial Reporting Interpretations Committee IFRIC 13* Customer loyalty programmes 1 July 2008 * These standards and interpretations have been endorsed by the European Union. The application of these standards and interpretations are not anticipated to have a material effect on the Group s financial statements except for additional disclosure. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries, being those undertakings that it controls. Control is achieved where the Company has the power to govern the financial and operating policy of an investee entity so as to obtain benefits from its activities. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting period as the Parent Company and are based on consistent accounting policies. The results of subsidiaries acquired or disposed of during the period are included in the consolidated financial statements from the effective date of acquisition up to the effective date of disposal, as appropriate. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Significant accounting policies The Directors consider the following to be significant accounting policies in the context of the Group s operations: Revenue recognition Revenue is recognised when significant risks and rewards of ownership have been transferred to the buyer, there is reasonable certainty of recovery of the consideration and the amount of revenue, associated costs and possible return of goods can be estimated reliably. a) Sale of goods in-store and fuel Sale of goods in-store is recorded net of value added tax, staff discounts, coupons, vouchers and the free element of multi-save transactions. Sale of fuel is recognised net of value added tax and Morrisons Miles award points. Revenue is recognised when transactions are completed in-store. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

50 48 Morrisons Annual report and financial statements 2009 Accounting policies continued b) Manufacturing sales Manufacturing sales are made direct to third-party customers from our manufacturing companies and are recognised on despatch of goods. Sales are recorded net of value added tax and intra-group transactions. c) Income from concessions and commissions Income from concessions and commissions is based on the terms of the contract. Revenue collected on behalf of 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 operating of supermarkets and mainly comprises rental income from investment properties. Other categories of income included within Other operating income are backhaul income and credits earned from the recycling of waste and packaging materials. Details of rental income from investment property are provided in note 10. a) Rental income from investment property Rental income arising from operating leases on investment properties is accounted for on a straight line basis over the lease term. Segmental reporting Based on the nature of risks and returns impacting the Group s activities, the Directors consider that the primary reporting format is by business segment. The Directors consider that there is only one business segment, being grocery and related retailing. The disclosures for the primary segment are therefore given by the primary financial statements and related notes. The Group s business operations are conducted almost exclusively in the UK so a geographical segment report is not required. Cost of sales Cost of sales consists of all costs to the point of sale including manufacturing, warehouse and transportation costs. Store depreciation and a proportion of employee costs are also allocated to cost of sales. Supplier income Supplier incentives, rebates and discounts are collectively referred to as supplier income in the retail industry. Supplier income is recognised as a deduction from cost of sales on an accruals basis based on the expected entitlement which has been earned up to the balance sheet date for each relevant supplier contract. The accrued incentives, rebates and discounts receivable at year end are included within prepayments and accrued income. Where amounts received are in the expectation of future business, these are recognised in line with that future business. Property transactions Property includes the balance sheet headings of property, plant and equipment, investment property, lease prepayments and noncurrent assets classified as held for sale. The results of transactions relating to disposal of property are reported in the income statement under Profit arising on property transactions. Depreciation and any impairment charges or reversals are recognised in cost of sales or administrative expenses, as appropriate. Borrowing costs All borrowing costs are recognised in the Group s income statement on an effective interest rate basis except for interest costs that are directly attributable to the construction of buildings which are capitalised and included within the initial cost of a building. Capitalisation of interest cost ceases when the property is ready for use. Deferred and current tax Current tax payable is based on the taxable profit for the period, using tax rates enacted or substantively enacted at the reporting date and any adjustments to tax payable in respect of previous periods. Taxable profit differs from the profit as reported in the income statement as it is adjusted both for items that will never be taxable or deductible and temporary differences. Current tax is charged in the income statement, except when it relates to items charged or credited directly in equity in which case the current tax is reflected in equity. Deferred tax is recognised using the balance sheet method. Provision is made for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. No deferred tax is recognised for temporary differences that arise on the initial recognition of goodwill or the initial recognition of assets and liabilities that is not a business combination and that affects neither accounting nor taxable profits. Deferred tax is calculated based on tax law that is enacted or substantively enacted at the reporting date and provided at rates expected to apply when the temporary differences reverse. Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is reflected in equity. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the asset can be utilised. Deferred tax assets recognised are reviewed at each reporting date as judgement is required to estimate the availability of future taxable income. Deferred tax assets and liabilities are not discounted and are offset where amounts will be settled on a net basis as there is a legally enforceable right to offset. Accruals for tax contingencies require management to make judgements and estimates of ultimate exposures in relation to tax compliance issues. All accruals 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 measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. The goodwill in respect of the acquisition of Safeway was fully impaired in 2006.

51 49 Property, plant and equipment a) Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly attributable costs. Annual reviews are made of estimated useful lives and material residual values. b) Depreciation rates used to write off cost less residual value on a straight line basis are: Freehold land 0% Freehold and long leasehold buildings 2.5% Short lease buildings Over lease period Plant, equipment, fixtures and vehicles 14-33% Assets held under a finance lease Shorter of life of lease or asset Assets under construction 0% Investment property Property held to earn rental income rather than for the purpose of the Group s principal activities is classified as Investment property. Investment property is recorded at cost less accumulated depreciation and any recognised impairment loss. The depreciation policy is consistent with those described for other Group properties. Income from investment properties is disclosed in Other operating income and details are shown in note 10 Investment property. The related operating costs are immaterial and are included within Administrative expenses. Impairment of non-financial assets Property, plant and equipment and investment property are annually reviewed for indications of impairment, or when events or changes in circumstances indicate that the carrying amount may not be recoverable. This is performed for each cash generating unit, which in the case of a supermarket is an individual retail outlet. If there are indications of possible impairment then a test is performed on the asset affected to assess its recoverable amount against carrying value. An asset impaired is written down to its recoverable amount which is the higher of value in use or its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments 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 been previously impaired, then this is recognised by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset. Stocks Stocks are measured at the lower of cost and net realisable value. Cost is calculated on a weighted average basis and comprises purchase price, import duties and other non-recoverable taxes, less rebates. Stocks are primarily goods for resale. Net realisable value is the estimated selling price in the ordinary course of business, 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 will be recovered through sale rather than continuing use. This condition is regarded as 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 be committed to the sale and it should be expected to be completed within one year from the date of classification. On reclassification, non-current assets held for sale are recognised at the lower of carrying amount and the fair value less costs to sell. Impairment losses on initial classification as held for sale are included in the income statement, as are gains or losses on subsequent remeasurement. The depreciation of the asset ceases on reclassification. Assets are reclassified from non-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 are retained by the lessor are classified as operating leases; all other leases are classified as finance leases. Lessor accounting a) Operating leases Assets acquired and held for use under operating leases are recorded as property, plant and equipment and are depreciated on a straight line basis to their estimated residual values over their estimated useful lives. Operating lease income is recognised on a straight line basis to the date of the 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 a straight line basis over the life of the lease. Property leases are analysed into separate components for land and buildings and tested to establish whether the components are operating leases or finance leases. Premiums paid for land are treated as a prepayment of an operating lease rental and recognised on a straight line basis over the life of the lease. b) Finance leases The present value, calculated using the interest rate implicit in the lease, of the future minimum lease payments is included within fixed assets and financial liabilities as an obligation to pay future rentals. Depreciation is provided at the same rates as for owned assets, or over the lease period, if shorter. Rental payments are apportioned between the finance charge and the outstanding obligation so as to produce a constant rate of finance charge on the remaining balance. Provisions Provisions are created where the Group has a present legal or constructive obligation as a result of a past event, where it is probable that it will result in an outflow of economic benefits to settle the obligation from the Group, and where it can be reliably measured. The nature of these provisions are: Performance review Strategic review Governance Group financial statements Company financial statements Investor information

52 50 Morrisons Annual report and financial statements 2009 Accounting policies continued a) Property provisions Provisions made in respect of individual properties where there are obligations for onerous contracts, dilapidations and certain decommissioning obligations for petrol filling stations. The amounts provided are based on the Group s best estimate of the likely committed outflow to the Group. Where material, these estimated outflows are discounted to net present value. b) Restructuring provisions Provisions are established for announced and ongoing restructuring programmes planned and controlled by management where there is an obligation to make changes to the scope of the business undertaken by the Group or the manner in which business is conducted. The provision includes costs of severance to the affected employees, costs of property closure, and other direct expenditures not associated with ongoing activities. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the balance sheet date. Gains and losses arising on retranslation are included in the income statement for the period. Retirement benefits The Group operates defined benefit and defined contribution schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is one that is not a defined contribution scheme. Pension benefits under defined benefit schemes are defined on retirement based on age at date of retirement, years of service and a formula using either the employee s compensation package or career average earnings. The Group operates two defined benefit retirement schemes which are funded by contributions from the Group and members. The defined benefit schemes are not open to new members. Pension scheme assets, which are held in separate trustee administered funds, are valued at market rates. Pension scheme obligations are measured on a discounted present value basis using assumptions as shown in note 20. The operating and financing costs of the scheme are recognised separately in the income statement in the period in which they arise. Death-in-service costs are recognised on a straight line basis over their vesting period. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense. The Group has a right to recognise an asset, should one arise, in respect of the Group s net obligations to the pension schemes. Therefore, either an asset or a liability is recognised in the balance sheet, calculated separately for each scheme. Payments by the Group to the defined contribution scheme are charged to the income statement as they arise. Share-based payments The Group issues equity-settled share-based payments to certain employees in exchange for services rendered by them. The fair value of the share-based award is calculated at the date of grant and is expensed on a straight line basis over the vesting period with a corresponding increase in equity. This is based on the Group s estimate of share options that will eventually vest. This takes into account movement of non-market conditions, being service conditions and financial performance, if relevant. The fair value of equity-settled awards granted is not subsequently revisited. Fair value is measured by use of a binomial stochastic model. The expected life used in the model has been adjusted, based on management s best estimate, for effects of non-transferability, exercise restrictions and behavioural considerations. The Group has applied fair values to all grants of equity instruments after 7 November 2002 which were unvested as of 1 January 2005, at each balance sheet date. Financial instruments Financial assets and liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. a) Financial assets i) Trade and other debtors Trade and other debtors are carried at the lower of their original invoiced value and recoverable amount. Provision is made when there is objective evidence that the Group will not be able to recover balances in full, with the charge being recognised in administrative expenses in the income statement. Balances are written off when the probability of recovery is assessed as being remote. ii) Cash and cash equivalents Cash and cash equivalents for cash flow purposes includes cash-inhand, cash-at-bank and bank overdrafts together with short term, highly liquid investments that are readily convertible into known amounts of cash, with an insignificant risk of a change in value, within three months from the date of acquisition. In the balance sheet, bank overdrafts are presented within current liabilities. b) Financial liabilities i) Trade and other creditors Trade and other creditors are stated at cost. ii) Borrowings Interest-bearing bank loans and overdrafts are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, any difference between the redemption value and the initial carrying amount is recognised in the income statement over the period of the borrowings on an effective interest rate basis. c) Derivative financial instruments and hedge accounting Derivative financial instruments are initially measured at fair value, which normally equates to cost, and are remeasured at fair value through profit or loss. Cash flow hedges Derivative financial instruments are classified as cash flow hedges when they hedge the Group s exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction.

53 51 The Group has a cross-currency swap which has been designated as a cash flow hedge. This derivative financial instrument is used to match or minimise risk from potential movements in foreign exchange rates inherent in the cash flows of certain financial liabilities. To minimise the risk from potential movements in commodity prices, the Group has fuel price contracts which are also designated as cash flow hedges. Derivatives are reviewed quarterly for effectiveness. Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or highly probable forecast transaction, the effective part of any gain or loss on the movement in fair value of the derivative financial instrument is recognised directly in equity through SoRIE. The gain or loss on any ineffective part of the hedge is immediately recognised in the income statement within finance income/costs in relation to the cross-currency swap and within cost of sales in relation to the fuel price contracts. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or liability, the associated cumulative gains or losses that were recognised directly in equity are reclassified into the income statement when the transaction occurs. Net debt Net debt is cash and cash equivalents, long term cash on deposit, bank and other current loans, bonds and derivative financial instruments (stated at current fair value). Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company s equity share capital, the consideration paid, including directly attributable incremental costs, is deducted from retained earnings until the shares are cancelled. On cancellation, the nominal value of the shares is deducted from share capital and the amount is transferred to the capital redemption reserve. Treasury shares The Group has an employee trust for the granting of Group shares to executives and members of the employee share plans. Shares in the Group held by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from retained earnings. The finance and administration costs relating to the Executive Share Option Scheme are charged to the income statement. The shares are deducted for the purpose 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 historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities are discussed below. a) Property provisions Provisions have been made for onerous leases, dilapidations and decommissioning costs. These provisions are estimates based on the condition of each property and market conditions in the relevant location. The actual costs and timing of future cash flows are dependent on future events. Any difference between expectations and the actual future liability will be accounted for in the period when such determination is made. b) Pension scheme assumptions and mortality table The carrying value of defined benefit pension schemes is valued using actuarial valuations. These valuations are based on assumptions including the selection of the correct mortality tables for the profile of members in each scheme. All these are estimates of future events. The mortality experience study conducted as part of the Safeway scheme triennial valuation is statistically significant and the longevity assumption is adjusted to reflect its results. As both of the Group s schemes have a similar composition and type of members, this adjustment is also made to the Morrisons scheme. The mortality assumptions, financial assumptions and mortality experience study are based on advice received from the schemes actuaries. Where appropriate, these are corroborated from time to time with benchmark surveys and ad hoc analysis. c) Assumptions relating to tax The Group recognises expected liabilities for tax based on an estimation of the likely taxes due, which requires significant judgement as to the ultimate tax determination of certain items. Where the actual liability arising from these issues differs from these estimates, such differences will have an impact on income tax and deferred tax provisions in the period when such determination is made. d) Determination of useful lives, residual values and carry values of property, plant and equipment, investment property and long leasehold land prepayments Depreciation is provided so as to write down the assets to their residual values over their estimated useful lives as set out in the accounting policies for property, plant and equipment, investment property and long leasehold land prepayments. The selection of these residual values and estimated lives requires the exercise of judgement. The Group is required to assess whether there is indication of impairment to the carrying value of assets. In making that assessment, judgements are made in estimating value in use. The Directors consider that the individual carrying values of stores and other operating assets are supportable either by value in use or market values. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

54 52 Morrisons Annual report and financial statements 2009 Consolidated income statement 52 weeks ended 1 February Note m m Turnover 2 14,528 12,969 Cost of sales (13,615) (12,151) Gross profit Other operating income Administrative expenses (281) (268) Profits arising on property transactions 2 32 Operating profit Finance costs 5 (60) (60) Finance income Profit before taxation Taxation 6 (195) (58) Profit for the financial period attributable to equity holders of the parent Earnings per share (pence) basic diluted Ordinary dividend per share (pence) Interim paid Final proposed paid Total dividend Consolidated statement of recognised income and expense (SoRIE) 52 weeks ended 1 February Note m m Actuarial loss arising in the pension scheme (net of taxation) 20 (72) (26) Cash flow hedging movement (net of taxation) 8 7 Foreign exchange movements 6 Deferred tax on share options 19 (2) Net expense recognised directly in equity (58) (21) Profit for the financial period Total recognised income and expense for the financial period attributable to equity holders of the parent

55 53 Consolidated balance sheet 1 February Note m m Assets Non-current assets Property, plant and equipment 8 6,587 6,205 Lease prepayments Investment property Financial assets ,160 6,726 Current assets Stocks Debtors Financial assets Cash and cash equivalents , Non-current assets classified as held for sale 4 1, Liabilities Current liabilities Creditors 16 (1,915) (1,679) Other financial liabilities 17 (1) (77) Current tax liabilities (108) (97) (2,024) (1,853) Performance review Strategic review Governance Non-current liabilities Other financial liabilities 17 (1,049) (774) Deferred tax liabilities 19 (472) (424) Net pension liabilities 20 (49) (68) Provisions 21 (112) (139) (1,682) (1,405) Net assets 4,520 4,378 Shareholders equity Called-up share capital Share premium Capital redemption reserve 23 6 Merger reserve 23 2,578 2,578 Retained earnings and hedging reserves 23 1,613 1,474 Total equity attributable to equity holders of the parent 4,520 4,378 The financial statements on pages 47 to 77 were approved by the Board of Directors on 11 March 2009 and were signed on its behalf by: Marc Bolland Chief Executive Richard Pennycook Group Finance Director Group financial statements Company financial statements Investor information

56 54 Morrisons Annual report and financial statements 2009 Consolidated cash flow statement 52 weeks ended 1 February Note m m Cash flows from operating activities Cash generated from operations Interest paid (70) (70) Taxation paid (104) (107) Net cash inflow from operating activities Cash flows from investing activities Interest received Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment and investment property (678) (402) Net cash outflow from investing activities (627) (258) Cash flows from financing activities Proceeds from issue of ordinary shares 3 17 Shares repurchased for cancellation (146) Finance lease principal payments (2) (3) New borrowings 250 Repayment of borrowings (2) (266) Decrease/(increase) in long term cash on deposit (74) Dividends paid to equity shareholders (131) (108) Net cash inflow/(outflow) from financing activities 46 (434) Net increase/(decrease) in cash and cash equivalents 209 (113) Cash and cash equivalents at start of period Cash and cash equivalents at end of period Reconciliation of net cash flow to movement in net debt in the period Note m m Net increase/(decrease) in cash and cash equivalents 209 (113) Cash outflow from decrease in debt and lease financing Cash inflow from increase in loans (250) Long term cash on deposit (74) 74 Other non-cash movements 12 Opening net debt (543) (772) Closing net debt 25 (642) (543)

57 55 Notes to the Group financial statements 52 weeks ended 1 February Underlying earnings The Directors consider that underlying earnings per share measures referred to in the Chairman s statement, CEO s review and Financial review provide additional useful information for shareholders on underlying trends and performance. The adjustments are made to reported profit to (a) remove potential income statement volatility within net pension interest; (b) remove profits arising on property transactions since these profits do not form part of the Group s principal activities; and (c) normalise the tax charge as required. In the current period, we have used the actual tax charge as the difference between the actual tax charge and a normalised charge is not significant. In the prior period, an effective tax rate of 32% was applied, being an estimated normalised tax rate, since the prior period s effective tax rate was considerably lower than the prevailing rate due to the reasons set out in note m m Profit after tax Add back: tax charge for the period Profit before tax Adjustments for: Net pension interest income (note 5) 1 (17) (17) Profits arising on property transactions 1 (2) (32) Underlying earnings before tax Taxation (2008: normalised tax rate of 32%) 1 (195) (180) Underlying earnings after tax charge Underlying earnings per share (pence) basic (refer to note 7(b)) diluted (refer to note 7(b)) Performance review Strategic review Governance 1 Adjustments marked 1 equal 19m (2008: 171m) as shown in the reconciliation of earnings disclosed in note 7(b). 2 Turnover (excluding VAT) m m Sale of goods in-stores 11,378 10,439 Fuel 3,069 2,443 Total store-based sales 14,447 12,882 Manufacturing sales Income from concessions and commission Total turnover 14,528 12,969 Group financial statements 3 Employees and Directors m m Employee benefit expense for the Group during the period Wages and salaries 1,453 1,343 Social security costs Share-based payments (note 26) 14 9 Pension costs Other staff costs ,617 1, No. No. Average monthly number of people employed by business group Stores 111, ,645 Manufacturing 5,042 4,416 Distribution 4,886 4,822 Centre 2 3,140 3, , ,454 2 Centre includes employees on maternity leave and long term sick leave. Company financial statements Investor information

58 56 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Employees and Directors continued Key management represent Executive and Non-Executive Directors as they have the responsibility of planning and controlling the operations of the business as a whole. The aggregate remuneration paid to or accrued for the Directors for services in all capacities during the period is as follows: m m Directors Short term employee benefits Pension costs Share-based payments There are three Directors (2008: four) who have retirement benefits accruing under the Group s defined benefit pension scheme. Additional information on Directors emoluments (including the highest paid Director and gains on the exercise of share options) can be found in the Directors remuneration report on pages 34 to Operating profit m m The following items have been included in arriving at operating profit: Depreciation: owned assets assets held under finance leases 2 2 Property, plant and equipment Depreciation of investment property 6 7 Charge in the income statement Foreign exchange differences 2 3 Operating lease rentals: minimum lease payments sublease receipts (5) (5) Value of stock expensed 11,016 9,739 Services provided by the Group s auditor During the period, KPMG Audit Plc, the Group s auditor, provided the following services: m m Audit services statutory Group and Company audit statutory audit of subsidiaries audit related regulatory reporting Tax services compliance services advisory services Other independent project assurance

59 Finance costs and income m m Interest payable on short term loans and bank overdrafts (3) (1) Interest payable on bonds (45) (53) Interest capitalised 4 8 Total interest payable (44) (46) Fair value movement of derivative instruments (8) (7) Other finance costs (8) (7) Finance costs (60) (60) Bank interest received Amortisation of bonds 8 8 Other finance income 2 7 Pension liability interest cost (113) (99) Expected return on pension assets Net pension interest income Finance income Net finance cost (16) Interest is capitalised at the bank overdraft rate incurred before taxation which varies in line with the prevailing base rate. Taxation relief is obtained on interest paid and this reduces the tax charge for the period. 6 Taxation a) Analysis of charge in the period m m Corporation tax current period adjustment in respect of prior period (10) (38) Deferred tax current period adjustment in respect of prior period (9) (86) 60 (46) Tax charge for the period b) Tax on items credited/(charged) directly to equity m m Tax on hedging instruments current tax 19 deferred tax (17) 2 Deferred tax credit on actuarial movements Tax on share-based payments taken to SoRIE (2) Performance review Strategic review Governance Group financial statements Company financial statements Investor information

60 58 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Taxation continued The tax for both periods is different to the standard rate of corporation tax in the UK of 28% (2008: 30%). The differences are explained below: m m Tax reconciliation Profit before tax Profit before tax at 28% (2008: 30%) Effects of: Expenses not deductible for tax purposes 8 14 Non-qualifying depreciation Effect of tax rate changes on deferred tax (32) Deferred tax on Safeway acquisition assets (7) (11) Divestment profits not taxable (2) (11) Other 1 3 Prior period adjustments (19) (124) Tax charge for the period The prior period effective tax rate was 9%. This low rate was as a result of prior period corporation tax and deferred tax provision releases due to closure of negotiations with HM Revenue and Customs on issues relating to the Safeway group prior to its acquisition by Morrisons. 7 Earnings per share Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. The Company has two (2008: two) classes of financial instruments that are potentially dilutive: those share options granted to employees where the exercise price is less than the average market price of the Company s ordinary shares during the period and contingently issuable shares under the Group s long term incentive plan. a) Basic and diluted earnings per share (unadjusted) Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below: Weighted Weighted average average number number Earnings of shares EPS Earnings of shares EPS m millions pence m millions pence Unadjusted EPS Basic EPS Earnings attributable to ordinary shareholders 460 2, , Effect of dilutive instruments Share options and LTIPs 36.5 (0.23) 15.7 (0.12) Diluted EPS 460 2, ,

61 Earnings per share continued b) Underlying earnings per share Given below is the reconciliation of the earnings used in the calculations of underlying earnings per share: Weighted Weighted average average number number Earnings of shares EPS Earnings of shares EPS m millions pence m millions pence Underlying EPS Basic EPS Earnings attributable to ordinary shareholders 460 2, , Adjustments to determine underlying profit (see note 1) (19) (0.72) (171) (6.41) 441 2, , Effect of dilutive instruments Share options and LTIPs 36.5 (0.22) 15.7 (0.09) Diluted EPS 441 2, , The calculation of underlying earnings per share in 2008 included a normalised tax charge, see note 1. c) Adjusted earnings per share The following earnings per share calculations are for the purposes of the LTIP performance conditions: Weighted Weighted average average number number Earnings of shares EPS Earnings of shares EPS m millions pence m millions pence Adjusted EPS Basic EPS Earnings attributable to ordinary shareholders 460 2, , Profits arising on property transactions 2 (1) (0.04) (29) (1.09) 459 2, , Profits arising on property transactions as shown in the income statement after adjusting for tax relief. Land and buildings Plant, equipment, 8 Property, plant and equipment Freehold Long Short fixtures and leasehold leasehold vehicles Total m m m m m Current year Cost At 3 February , ,165 7,679 Additions at cost Interest capitalised 4 4 Transfer from assets held for sale 9 9 Transfer to investment properties (6) (6) Disposals (10) (15) (2) (27) At 1 February , ,449 8,343 Accumulated depreciation and impairment At 3 February ,474 Charge for the period Transfer from assets held for sale 5 5 Disposals (5) (2) (7) At 1 February ,756 Net book amount at 1 February , ,587 Assets under construction included above Performance review Strategic review Governance Group financial statements Company financial statements Investor information Included in plant, equipment, fixtures and vehicles are assets held under finance leases at a cost of 22m (2008: 22m). The accumulated depreciation at the end of the financial period was 21m (2008: 19m).

62 60 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February 2009 Land and buildings Plant, equipment, 8 Property, plant and equipment continued Freehold Long Short fixtures and leasehold leasehold vehicles Total m m m m m Prior year Cost At 4 February , ,565 Additions at cost Interest capitalised Reclassification (205) (69) Transfer from/(to) investment properties 51 (25) 26 Transfer to long lease land premium (10) (10) Disposals (174) (8) (138) (320) At 3 February , ,165 7,679 Accumulated depreciation and impairment At 4 February ,448 Charge for the period Reclassification (108) (10) 118 Transfer from/(to) investment properties 18 (4) 14 Disposals (133) (137) (270) At 3 February ,474 Net book amount at 3 February , ,205 Assets under construction included above The classification of property, plant and equipment (PPE) was reviewed in the prior year as part of upgrading our systems. As a result of this review, it was deemed appropriate to reclassify certain assets that have historically been regarded as intrinsic to the building structure to fixtures and fittings included within plant, equipment, fixtures and vehicles. 9 Lease prepayments m m Long lease land premiums The current element of long lease land premiums is included within debtors (note 14). During the period, new long lease land premiums amounting to 13m were paid (2008: 1m).

63 Investment property m m Cost At start of period Additions 3 17 Transfer from/(to) property, plant and equipment 6 (26) At end of period Accumulated depreciation At start of period Charge for the period 6 7 Transfer from/(to) property, plant and equipment (14) At end of period Net book amount at end of period Included in other operating income is 19m (2008: 20m) of rental income generated from investment properties. The fair value of investment properties at the end of the period was 259m (2008: 328m). This valuation has been determined by the Directors based on market comparable information being rent and market rental yield. This reduction in the fair value is due to an increase in market rental yield driven by the deteriorating market conditions. Performance review Strategic review Governance 11 Capital commitments m m Contracts placed for future capital expenditure not provided in the financial statements Included above are capital commitments for investment property of 1m (2008: 7m) and 46m for future capital expenditure on the new IT systems. During the period, Morrisons entered into an agreement with the Co-operative Group to acquire over half a million square feet of additional selling space through the purchase of a number of Co-operative Group and former Somerfield stores, at a cost of 223m. A deposit of 22m was paid during the year and has been classified within debtors. The completion is dependent on obtaining certain approvals and the transaction and associated payments are expected to complete in the next financial year. 12 Financial assets m m Non-current asset Cross-currency interest swaps maturing Current asset Long term cash on deposit 74 a) Cross-currency interest swaps maturing April 2010 The cross-currency interest swaps cover the Group from currency exposure arising from payments of interest and repayment of the principal in relation to Euro bonds. The notional principal amount of the outstanding cross-currency interest swaps at 1 February 2009 was 250m (2008: 250m). b) Long term cash on deposit These were balances deposited with the bank with maturity of over three months from the date of the deposit. Group financial statements Company financial statements Investor information

64 62 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Stocks m m Materials and work-in-progress 13 8 Finished goods Debtors m m Trade debtors Less: Provision for impairment of trade debtors (3) (2) Lease prepayment long lease land premiums 1 1 Other debtors Prepayments and accrued income The Group has recognised a provision of 3m (2008: 2m) for impairment of its trade debtors as at 1 February The ageing analysis of trade debtors is as follows: m m Neither past due nor impaired Past due but not impaired: Not more than three months Greater than three months As at 1 February 2009, trade debtors that were neither past due nor impaired related to a number of independent customers for whom there is no recent history of default. The other classes of debtors do not contain impaired assets. 15 Cash and cash equivalents m m Cash and cash equivalents Cash and cash equivalents include the following for the purpose of the cash flow statement: m m Cash and cash equivalents Bank overdraft (73) Creditors current m m Trade creditors 1,443 1,152 Other taxes and social security payable Other creditors Accruals and deferred income Interest accrual ,915 1,679

65 Other financial liabilities The Group had the following current and non-current borrowings and other financial liabilities: Current Bank loans and overdrafts due within one year or on demand: Bank overdraft Other loan notes 4.19% m m Finance lease obligations m m Non-current 150m Sterling bonds 6.50% August m Sterling bonds 6.00% January m Sterling bonds 6.12% December m Euro bonds 6.50% April Total non-current Sterling and Euro bonds Floating credit facility 2.08% 250 Other loans 9.38% Finance lease obligations 1 1, Performance review Strategic review Governance a) Borrowing facilities Borrowings are denominated in Sterling and Euros and bear fixed interest rates, with the exception of the floating credit facility which bears floating interest rates. All borrowings are unsecured. The expiry date for the floating credit facility is consistent with the undrawn element of the facility disclosed below. In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand. The Group has the following undrawn floating committed borrowing facilities available in respect of which all conditions precedent had been met at that date: m m Undrawn facilities expiring: Between three and four years 850 Between four and five years 1,100 b) Finance lease obligations Payments under finance lease obligations fall due as follows: m m Not later than one year 1 2 Later than one year but not more than five years Future finance charges on finance lease obligations Present value of finance lease obligations 1 3 Group financial statements Company financial statements Investor information

66 64 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Financial instruments a) Financial risk management The Group s treasury operations are controlled centrally by the Treasury Committee in accordance with clearly defined policies and procedures that have been authorised by the Board. There is an amount of delegated authority to the Treasury Committee, but all activities are summarised in half yearly treasury reports which are presented to the Audit Committee. The Group s principal financial liabilities, other than derivatives, comprise bank loans and overdrafts, other borrowings, finance leases and trade and other creditors. The main purpose of these financial liabilities is to raise finance for the Group s operations. The Group has various financial assets such as trade debtors and cash and short term deposits which arise directly from its operations. The Group enters into derivative transactions, in the form of forward currency contracts, cross-currency swaps and diesel and electricity price contracts. The purpose of these derivative instruments is to manage risks arising from the Group s operations and its sources of finance. The financial derivatives relating to commitments entered into during the year are to manage the risks arising from its usage of diesel and electricity. It remains the Group s policy not to engage in speculative trading of financial instruments. The objectives, policies and processes for managing these risks, which remain unchanged from the prior year are stated below: i) Foreign currency risk The Group makes the majority of its purchases in Sterling. However, it incurs currency exposure in respect of overseas trade purchases made in currencies other than Sterling, primarily the Euro and US dollar. The Group s objective is to reduce risk to short term profits from exchange rate fluctuations. It is Group policy that any transactional currency exposures recognised to have a material impact on short term profits will be hedged through the use of derivative financial instruments. As at the balance sheet date, the Group had entered into forward foreign exchange contracts to mitigate foreign currency exposure on up to 50% of its forecasted purchases within the next six months. Exposure on debt denominated in a foreign currency is fully hedged using cross-currency interest rate swaps. The sensitivity to a reasonably possible change (+/ 20%) in the US dollar/euro exchange rate has been determined as being immaterial. ii) Liquidity risk The Group s policy is to maintain a balance of funding with a range of maturities and a sufficient level of undrawn committed borrowing facilities to meet any unforeseen obligations and opportunities. Short term cash balances, together with undrawn committed facilities, enable the Group to manage its liquidity risk. The Group finances its operations with a combination of bank credit facilities and bonds. The Treasury Committee monitors rolling forecasts of the Group s liquidity reserve on a quarterly basis, which comprises committed and uncommitted borrowing facilities on the basis of expected cash flow. At the year end, the Group had undrawn committed facilities of 850m (note 17); these facilities remain available to the Group. The table below summarises the maturity profile of the Group s primary non-current financial liabilities based on contractual undiscounted payments, which includes interest payments. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. As the amounts included in the table are the contractual undiscounted cash flows, these amounts do not agree to the amounts disclosed on the balance sheet for borrowings. Where borrowings are subject to a floating rate, an estimate for interest has been taken m m One to two years Two to three years Three to four years Four to five years Five+ years

67 Financial instruments continued The table below analyses the Group s derivative financial instruments which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. At 1 February 2009 < 1 year 1 2 years 2 3 years Cross-currency swap cash flow hedges Outflow (11) (156) Inflow Forward contracts Outflow (53) Inflow 56 Commodity price contracts Outflow (2) Inflow At 3 February 2008 < 1 year 1 2 years 2 3 years Cross-currency swap cash flow hedges Outflow (11) (11) (156) Inflow Forward contracts Outflow (45) Inflow 45 Performance review Strategic review Governance iii) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banking groups as well as credit exposures from tenants of investment properties. The Group maintains deposits with banks and financial institutions with an acceptable credit rating for a period not exceeding six months. Further, the Group has specified limits that can be deposited with any banking group or financial institution at any point. The maximum exposure on cash and cash equivalents and deposits is equal to the carrying amount of these instruments. The Group does not expect any significant performance losses from counterparties. The Group trades only with recognised, creditworthy third parties. It is the Group s policy that tenants of investment properties who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 14. There are no significant concentrations of credit risk within the Group. iv) Other risk Pricing risk: The Group manages the risks associated with the purchase of electricity, gas and diesel consumed by its activities. This does not include fuel purchased for resale to customers. The Treasury Committee reviews the Group s market price exposure to these commodities on a quarterly basis and determines a strategy for utilising derivative financial products in order to mitigate the volatility of the commodity prices. The Group intends to hold derivatives to maintain cover of its energy purchases of up to 75% over an appropriate timescale. Cash flow interest rate risk: The Group s long term policy is to protect itself against adverse movements in interest rates by maintaining up to 60% of its consolidated total net debt in fixed rate borrowings over a four year horizon. As at the balance sheet date, 74% of the Group s borrowings are at fixed rate, thereby substantially mitigating the Group s exposure to adverse movements in interest rate. Cash and cash equivalents is a significant interest-bearing asset held by the Group. At year end, a 1% movement in interest rates would have had a 2m (2008: 5m) impact on the Group s annual finance income. There are no other significant interest-bearing assets held by the Group. Group financial statements Company financial statements Investor information

68 66 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Financial instruments continued b) Capital management The Group s objectives are to safeguard its ability to continue as a going concern providing returns to shareholders, through the optimisation of the debt and equity balance, and to maintain a strong credit rating and headroom. The Group manages its capital structure and makes appropriate decisions in light of the current economic conditions and strategic objectives of the Group. The Group has completed a share buyback programme in the period, see note 23. A key objective of the Group s capital management is to maintain compliance with the 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 laid down in the revolving credit facility. Throughout the year, the Group has comfortably complied with this policy. There has been no change in the objectives, policies or processes with regards to capital management during the years ended 1 February 2009 and 3 February c) Fair values i) Financial assets All financial derivatives are held at fair value which has been determined by reference to prices available from the markets on which the instruments are traded. Cash and cash equivalents and Debtors are held at book value which equals the fair value. The values of the financial assets are disclosed within note 12. ii) Financial liabilities All financial liabilities are carried at amortised cost. The Euro bonds are retranslated at balance sheet date spot rates. The fair value of the Sterling and Euro bonds are measured using closing market prices. These compare to carrying values as follows: Amortised Fair Amortised Fair cost value cost value m m m m Total Sterling and Euro bonds non-current The fair value of other items within current and non-current borrowing equals their carrying amount, as the impact of discounting is not significant. d) Hedging activities i) Cash flow hedge At 1 February 2009, the Company held a cross-currency swap which has been designated as a cash flow hedge. This derivative financial instrument is used to minimise risk from potential movements in foreign exchange rates inherent in cash flow of certain liabilities. To minimise the risk from potential movements in commodity prices, the Group has fuel price contracts which are also designated as cash flow hedges. The hedged forecast transactions denominated in foreign currency are expected to occur at various dates over the next two years. Gains and losses recognised in the hedging reserve in equity (note 23) on cross-currency swaps as at 1 February 2009 are recognised in the income statement in the period or periods during which the hedged forecast transaction affects the income statement, which is generally once every year over the course of the next two (2008: three) years. ii) Forward contracts The Group uses forward foreign exchange contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. The hedging instruments are primarily used to hedge purchases in Euro and US dollars. The cash flows hedged will occur within one year of the balance sheet date. At 1 February 2009, the total notional amount of outstanding forward foreign exchange contracts to which the Group has committed was 53m (2008: 45m). The fair value of these outstanding forward exchange contracts at the balance sheet date was 3.4m (2008: 0.2m).

69 Deferred tax m m Deferred tax liability (546) (554) Deferred tax asset Net deferred tax liability (472) (424) IAS 12 Income Taxes permits the offsetting of balances within the same tax jurisdiction. All of the deferred tax assets were available for offset against deferred tax liabilities. The movements in deferred tax assets/(liabilities) during the period are shown below. Other Property, short term plant and Share-based temporary equipment Pensions payments differences Total m m m m m Current year At 3 February 2008 (554) (424) Credited/(charged) to income statement 8 (34) 1 (35) (60) Credited/(charged) directly to equity 29 (17) 12 At 1 February 2009 (546) (472) Prior year At 4 February 2007 (629) (478) Credited/(charged) to income statement 75 (50) Credited/(charged) directly to equity 10 (2) 8 At 3 February 2008 (554) (424) Performance review Strategic review Governance In 2008, other short term temporary differences included 31m of unused tax losses. The deferred income tax credited/(charged) through the SoRIE during the period was as follows: m m Actuarial gains Share options (2) Short term temporary differences (17) 20 Pensions a) 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; no part of the schemes is wholly unfunded. The latest full actuarial valuations, which were carried out at 6 April 2007 and 1 April 2007 for the Morrison and Safeway schemes respectively, were updated for IAS 19 purposes for the periods to 1 February 2009, 3 February 2008, 4 February 2007 and 29 January 2006 by a qualified independent actuary. The Deed and Rules of the Morrison Pension Scheme gives the trustees power to set the level of contributions. In the Safeway Scheme this power is given to the Group, subject to regulatory override. The current best estimate of employer contributions to be paid for the year commencing 2 February 2009 is 44m (2008: 138m, including a special contribution of 100m). b) Assumptions The major assumptions used in this valuation to determine the present value of the schemes defined benefit obligation were as follows: i) Financial Rate of increases in salaries % % % Rate of increase in pensions in payment and deferred pensions 3.50% 3.75% 3.20% Discount rate applied to scheme liabilities 6.25% 5.75% 5.00% Inflation assumption 3.50% 3.75% 3.20% Group financial statements Company financial statements Investor information

70 68 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Pensions continued ii) Longevity The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows: Male Female The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows: Male Female Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The longevity assumption considers 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 live longer than the preceding generation, and this has been reflected in the longevity assumption. This means that a 45 year old today is assumed to live on average longer than a 65 year old today. This particular adjustment, described in the mortality tables below, is known as Long Cohort and is in line with the latest advice from the Pension Regulator. In calculating the present value of the liabilities the actuary selects the appropriate mortality table that reflects the longevity assumption. The most up to date tables are used in each period. The current mortality table used is PNX00 YOB LC (2008: PNX00 YOB LC and 2007: PA92 C2020). As disclosed in the critical accounting assumptions on page 51, the results of the experience study conducted for the Safeway Scheme have been used to adjust the longevity assumption for both schemes. iii) Expected return on assets The major assumptions used to determine the expected future return on the schemes assets, were as follows: Long term rate of return on: Equities 7.00% 7.00% 7.00% Corporate bonds 6.00% 6.00% 5.00% Gilts % % Property-related funds 6.00% 6.00% 6.00% Active currency management assets 5.25% Cash 2.50% 5.50% 5.25% The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The expected return on plan assets is based on market expectation at the beginning of the period for returns over the entire life of the benefit obligation. c) Valuations Assets of the schemes are held in order to generate cash to be used to satisfy the schemes obligations, and are not necessarily intended to be realised in the short term. The allocation of assets between category is governed by the Investment Principles of each scheme and is the responsibility of the trustees of each respective scheme. The trustees should take due consideration of the Group s views and a representative of the Group attends Trustee Investment Committee meetings. The fair value of the schemes assets, which may be subject to significant change before they are realised, and the present value of the schemes liabilities which are derived from cash flow projections over long periods and are inherently uncertain, are as follows: m m m Equities 592 1,040 1,208 Corporate bonds Gilts Property and property-related funds Active currency management assets 66 Cash Total fair value of schemes assets 1,758 1,939 1,774 Present value of defined benefit funded obligation (1,807) (2,007) (1,972) Net pension liability recognised in the balance sheet (49) (68) (198) Related deferred tax asset (note 19) Net deficit (35) (49) (139)

71 Pensions continued The movement in the fair value of the schemes assets over the year was as follows: m m m Fair value of scheme assets at start of period 1,939 1,774 1,536 Expected return on scheme assets Actuarial (losses)/gains (425) (113) 78 Employer contributions Employee contributions Benefits paid (37) (41) (47) Fair value of scheme assets at end of period 1,758 1,939 1,774 The above pension scheme assets do not include any investments in the Company s own shares or property occupied by any member of the Group. The movement in the present value of the defined benefit obligation during the period was as follows: m m m Defined benefit obligation at start of period (2,007) (1,972) (1,952) Current service cost (38) (44) (53) Employee contributions (10) (10) (11) Interest on defined benefit obligation (113) (99) (95) Actuarial gain recognised in the SoRIE Benefits paid Defined benefit obligation at end of period (1,807) (2,007) (1,972) Performance review Strategic review Governance The cost of buying out pension benefits with an insurer was estimated in the recent actuarial valuations to be 2,300m at April 2007, versus assets of 1,939m at February This is a deficit of 361m or solvency funding ratio of 84%. The cost of providing pensions equivalent to the level of compensation paid by the Pension Protection Fund was estimated to be 1,633m at April 2007, compared with assets of 1,939m at February This is a Pension Protection Fund surplus of 306m or a funding ratio of 119%. d) Sensitivities Below is listed the impact on the liabilities at 1 February 2009 of changing key assumptions whilst holding other assumptions constant: Discount factor +/ 0.1% 39m Longevity +/ 1 year 48m e) Income statement The following amounts have been charged in employee benefits as set out in note 3 in arriving at operating profit: m m m Current service cost (38) (44) (53) The amounts for current and past service cost have been charged to the following income statement lines: m m m Cost of sales Administrative expenses The following amounts have been included in finance income: m m m Expected return on pension scheme assets Interest on pension scheme liabilities (113) (99) (95) Group financial statements Company financial statements Investor information

72 70 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Pensions continued f) Actuarial gains and losses recognised in the Statement of recognised income and expense (SoRIE) The amounts included in the SoRIE were: m m m Actual return less expected return on scheme assets (425) (113) 78 Experience gains and losses arising on scheme obligation (4) Changes in demographic and financial assumptions underlying the present value of scheme obligations 328 (6) 55 Actuarial movement recognised in the SoRIE (101) (36) 170 Taxation on actuarial movement in the SoRIE (51) Net actuarial movement recognised in the SoRIE (72) (26) m m m Cumulative gross actuarial movement recognised in the SoRIE (88) Taxation on cumulative actuarial movement recognised in the SoRIE 24 (5) (15) Cumulative net actuarial movement recognised in the SoRIE (64) 8 34 The actual return on schemes assets can therefore be summarised as follows: m m m Expected return on schemes assets Actuarial movement recognised in the SoRIE reflecting the difference between expected and actual return on assets (425) (113) 78 Actual return on schemes assets (295) The expected return on schemes assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets. g) History of experience gains and losses m m m m m Difference between the expected and actual return on scheme assets: Amount (425) (113) Percentage of scheme assets (24.2%) (5.8%) 4.4% 10.8% 4.9% Experience gains and losses arising on scheme liabilities: Amount (4) (33) Percentage of present value of scheme obligation (0.2%) 4.1% 1.9% 0.7% (2.1%) Effects to changes in the demographic and financial assumptions underlying the present value of the scheme liabilities: Amount 328 (6) 55 (219) (107) Percentage of present value of scheme obligation 18.2% (0.3%) 2.8% (11.2%) (6.6%) Total amount recognised in the SoRIE: Amount (101) (36) 170 (40) (81) Percentage of present value of scheme obligation (5.6%) (1.8%) 8.6% (2.1%) (5.0%) Total value of schemes assets 1,758 1,939 1,774 1,536 1,217 Present value of defined benefit obligation (1,807) (2,007) (1,972) (1,952) (1,625) Net pension liability recognised in the balance sheet (49) (68) (198) (416) (408)

73 Pensions continued h) Defined contribution pension scheme Employees joining the Company after September 2000 are no longer eligible to gain automatic entry into the final salary pension scheme. In June 2001 the Company established a stakeholder pension scheme, open to all employees, to which the Company makes matching contributions of a maximum of 5% of eligible earnings. Pension costs for the defined contribution scheme are as follows: m m m Stakeholder pension scheme (3) (3) (1) Life assurance scheme (1) (1) (1) Total costs (4) (4) (2) Property 21 Provisions Restructuring provisions Total m m m At 3 February Charged to the income statement 5 5 Unused amounts reversed during the period (8) (8) Utilised in period (21) (9) (30) Unwinding of discount 6 6 At 1 February a) Restructuring The restructuring of the Group s distribution centres, begun in 2006, concluded in the year. The original provision made, of 75m, was not fully utilised and an unspent balance of 8m was therefore reversed in the period. The remaining provision at the start of the year, relating to the Group s change in corporate logo, was fully utilised in the year. b) Property provisions Property provisions comprise onerous leases provision, petrol filling station decommissioning reserve and provisions for dilapidations on leased buildings. Onerous leases relate to sublet and vacant properties. Where the rent receivable on the properties is less than the rent payable, a provision based on present value of the net cost is made to cover the expected shortfall. The lease commitments range from 1 to 65 years. Market conditions have a significant impact and hence the assumptions on future cash flows are reviewed regularly and revisions to the provision made where necessary. As noted in the financial review, adjustments have been made to reflect the change in market conditions and the legislative changes in respect of rates charges for empty properties. Other property provisions comprise petrol filling station decommissioning reserve and dilapidations cost. Provision is made for decommissioning costs for when the petrol filling station tanks reach the end of their useful life or when they become redundant and is based on the present value of costs to be incurred to decommission the petrol tanks. Dilapidation costs are incurred to bring a leased building back to the condition in which it was originally leased. Provision is made for these costs, which are incurred on termination of the lease. 22 Called-up share capital Number Share Share of shares capital premium Total millions m m m Current year At 3 February , Shares purchased for cancellation (58) (6) (6) Share options exercised At 1 February , Prior year At 4 February , Share options exercised At 3 February , The total authorised number of ordinary shares is 4,000 million shares (2008: 4,000 million shares) with a par value of 10p per share (2008: 10p per share). All issued shares are fully paid. Performance review Strategic review Governance Group financial statements Company financial statements Investor information The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.

74 72 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Called-up share capital continued a) Potential issues of ordinary shares Certain eligible employees hold options to subscribe for shares in the Company at prices ranging from 0p to 247p under the share option schemes approved by shareholders. Options on two million shares (2008: nine million) were exercised in the current financial year. b) Preference shares The 282,666 5¼% cumulative preference shares with nominal amount of 1, amounting to 0.3m have been classified as a current financial liability in accordance with IFRS 7 Financial instruments: Disclosures. These preference shares do not carry any voting rights. 23 Reconciliation of movements in capital and reserves Capital Share Share redemption Merger Hedging Retained capital premium reserve reserve reserve earnings Total m m m m m m m Current year At 3 February , ,468 4,378 Share options exercised 3 3 Shares purchased for cancellation (6) 6 (146) (146) Total recognised income and expense Share option charge Dividends (131) (131) At 1 February , ,601 4,520 Capital Share Share redemption Merger Hedging Retained capital premium reserve reserve reserve earnings Total m m m m m m m Prior year At 4 February ,578 (1) 1,041 3,927 Total recognised income and expense Share issues Share option charge 9 9 Dividends (108) (108) At 3 February , ,468 4,378 Included in retained earnings is a deduction of 44m (2008: 44m) in respect of treasury shares held at the balance sheet date. This represents the cost of 17,641,448 (2008: 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 and were acquired to meet obligations under the share option schemes. The costs of funding and administering the schemes are charged to the income statement of the Company in the period to which they relate. The market value of the shares at 1 February 2009 was 48m (2008: 53m). The trust has waived its rights to dividends. These shares are not treasury shares as defined by the London Stock Exchange or the Companies Act a) Share buyback The Company purchased 57,788,600 of its own shares in the open market for cancellation between 31 March 2008 and 21 November 2008 at a cost of 146m. The shares repurchased represent 2.15% of the ordinary share capital at 3 February b) Merger reserve The merger reserve represents the reserve in the Company s balance sheet arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and accordingly it will be carried forward as a capital reserve. c) Hedging reserve This represents the gains and losses arising on the cash flow hedge from the Group s cross-currency swaps, see note 18.

75 Cash flow from operating activities m m Profit for the period Adjustments for: Taxation Depreciation and amortisation Profit on disposal of property, plant and equipment (2) (32) Net finance cost (note 5) 16 Other non-cash changes 17 6 Excess of contributions over pension service cost (103) (148) Increase in stocks (52) (74) Increase in debtors (44) (60) Increase in creditors Decrease in provisions (27) (6) Cash generated from operations Analysis of net debt m m Cash and cash equivalents (note 15) Bank overdraft (note 17) (73) Cash and cash equivalents per cash flow Long term cash on deposit 74 Interest and cross-currency swaps Financial assets (note 12) Other loans (2) Finance lease obligations (1) (2) Current financial liabilities (note 17) (1) (4) Bonds (784) (758) Floating credit facility (250) Other unsecured loans (15) (15) Finance lease obligations (1) Non-current financial liabilities (note 17) (1,049) (774) Net debt (642) (543) Performance review Strategic review Governance Group financial statements 26 Share-based payments The Group operates a number of share-based payments schemes; (i) the Executive share option scheme, (ii) the Sharesave scheme and (iii) an equity-settled Long Term Incentive Plan (LTIP). 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 The total charge for the period relating to employee share-based payment plans was 14m (2008: 9m), all of which related to equity-settled share-based payment transactions. After corporation and deferred tax, the total charge in the income statement was 11m (2008: 7m). a) Share option schemes i) Executive share option scheme In May 1995, the Group adopted the 1995 Senior Executive Share Option Scheme which was made available to Directors and other senior employees. The scheme was terminated on 25 May The scheme offered options at the market price two weeks prior to the date of the grant which are normally exercisable between three and 10 years from the date of grant. The maximum exercise value of the ordinary shares subject to options held by an individual must not exceed the greater of four times earnings and 100,000. The exercise of options under the scheme is subject to performance criteria broadly requiring an increase in Group operating profits of at least 20% between the year prior to the date of the grant and its third or any succeeding anniversary. The scheme is equity-settled. Company financial statements Investor information

76 74 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Share-based payments continued Those options which have been granted after 7 November 2002 have been fair valued using the Binomial stochastic option pricing model. The fair value per option granted and the assumptions were as follows: Grant date 12 Nov Apr 2003 Share price at grant date Fair value of options granted 1.4m 1.9m Exercise price Dividend yield 1.43% 1.49% Annual risk free interest rate 4.61% 4.12% Expected volatility* 29.4% 29.4% * The volatility measured at the standard deviation of expected share price returns is based on statistical analysis on weekly share prices over the last six years. The fair value calculations do not incorporate the effects of non-market vesting conditions, but the charge is adjusted to reflect an estimate of the number of options which vest Weighted Weighted average average exercise exercise price in Options price in Options per share thousands per share thousands Movement in outstanding options Outstanding at start of period , ,901 Exercised 1.98 (1,409) 1.92 (2,678) Outstanding at end of period , ,223 Exercisable at end of period , , Weighted Weighted average average share price share price at date of Number at date of Number exercise of shares exercise of shares Share options exercised in the financial period ,409, ,678, Share options outstanding at the end of the period Range of exercise prices Weighted average remaining contractual life 3.8 years 5.0 years ii) Sharesave scheme The Sharesave scheme has been in operation since 18 May 2000 and all employees (including Executive Directors) are eligible once the necessary service requirements have been met. The scheme allows participants to save up to a maximum of 250 each month for a fixed period of three years. Options are offered at a discount of 20% to the mid-market closing price on the day prior to the offer and are exercisable for a period of six months commencing after the end of the fixed period of the contract. The exercise of options under this scheme is only subject to service conditions and is equity-settled. Options granted before 7 November 2002 The Group has not fair valued the Sharesave plan since the grants of the options were all made before 7 November 2002 and remained unvested as at 1 January Weighted Weighted average average exercise exercise price in Options price in Options per share thousands per share thousands Movement in outstanding options Outstanding at start of period ,681 Exercised 1.76 (40) 1.74 (6,570) Expired 1.79 (139) 2.20 (932) Outstanding at end of period Exercisable at end of period

77 Share-based payments continued Weighted Weighted average average share price share price at date of Number at date of Number exercise of shares exercise of shares Share options exercised in the financial period , ,570, Share options outstanding at the end of the period Range of exercise prices Weighted average remaining contractual life 1.0 years Options granted after 7 November 2002 Those options which have been granted after 7 November 2002 to those eligible employees, including Directors, who chose to participate in the scheme have been fair valued using the Binomial stochastic option pricing model. The fair value per option granted and the assumptions were as follows: Grant date 18 May Apr 2006 Share price at grant date Fair value of options granted 12.3m 16.2m Exercise price Dividend yield 1.23% 1.91% Annual risk free interest rate 5.58% 4.57% Expected volatility* 23.5% 25.6% Performance review Strategic review Governance * The volatility measured at the standard deviation of expected share price returns is based on statistical analysis on weekly share prices over the past 3.25 years prior to the date of grant. The fair value calculations do not incorporate the effects of non-market vesting conditions Weighted Weighted average average exercise exercise price in Options price in Options per share thousands per share thousands Movement in outstanding options Outstanding at start of period , ,754 Granted ,617 Exercised 1.61 (82) 1.59 (46) Expired 2.01 (3,180) 1.81 (3,990) Outstanding at end of period , ,335 Exercisable at end of period Weighted Weighted average average share price share price at date of Number at date of Number exercise of shares exercise of shares Share options exercised in the financial period , , Share options outstanding at the end of the period Range of exercise prices Weighted average remaining contractual life 1.2 years 2.3 years b) Long Term Incentive Plans i) Equity-based Long Term Incentive Plan (LTIP) In May 2007, a discretionary Long Term Incentive Plan for the benefit of certain employees as approved by the Remuneration Committee was introduced. The awards are free share-based awards, with non-market vesting conditions attached, that accrue the value of dividends over the vesting period. Group financial statements Company financial statements Investor information

78 76 Morrisons Annual report and financial statements 2009 Notes to the Group financial statements continued 52 weeks ended 1 February Share-based payments continued The maximum total market value of shares over which awards may be granted to any employee during any financial year of the Company is 300% of salary. Awards normally vest three years after the original grant date providing the relevant performance criteria have been met. Employees have six months from the vesting date to exercise their options after which they lapse. The fair value at the date of grant, which is being charged to the income statement over the three year vesting period, has been calculated based on the following assumptions: Grant date 14 Oct Apr Oct Jun May 2007 Share price at grant date Assumed leavers 5% 5% 4% 3% 3% Performance criteria achieved 90% 90% 90% 90% 90% Exercise price nil nil nil nil nil Fair value of options granted 0.6m 12.5m 0.4m 0.1m 10.5m Weighted Weighted average average exercise exercise price in Options price in Options per share thousands per share thousands Movement in outstanding share awards Outstanding at start of period 4,470 Granted 6,128 4,470 Expired Outstanding at end of period 10,598 4,470 Exercisable at end of period Share awards outstanding at the end of the period Range of exercise prices Weighted average remaining contractual life 1.8 years 2.4 years 27 Operating lease arrangements a) Lessee arrangements The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Vehicles, Vehicles, plant and plant and Property equipment Property equipment m m m m Within one year More than one year and less than five years After five years The Group leases various offices, stores and warehouses under non-cancellable operating lease agreements. The leases have various terms ranging from four to 11 years for vehicles, plant and equipment and 25 to over 100 years for property (including land), with varying escalation clauses and renewal rights. Generally, all property leases are reviewed every five years to align them with market rentals. b) Lessor arrangements The Group has non-cancellable agreements with tenants and the future minimum lease income is as follows: m m Within one year More than one year and less than five years After five years The Group sub-lets buildings of various nature under non-cancellable agreements. The leases have various terms, escalation clauses and renewal rights.

79 Contingent liabilities In September 2007, the Office of Fair Trading (OFT) issued a Statement of Objections to a number of grocery retailers and milk producers, alleging collusion in the setting of prices for certain dairy products in 2002 and Morrisons was accused in relation to one infringement in 2002, and has vigorously denied this. Based on the evidence put forward, the Board does not consider it probable that the Company will ultimately incur a fine and, accordingly, the Company has made no provision for any such liability. The OFT have also raised a legal issue regarding the sale of tobacco and whether established industry practices represented a breach of competition law. It is likely that this can only be settled through a formal judicial process. The Board has not made a provision for such a liability. 29 Post-balance sheet events The Directors are proposing a final dividend in respect of the financial period ending 1 February 2009 of 5.0p per share which will absorb an estimated 131m of shareholders funds. Subject to approval at the Annual General Meeting, it will be paid on 10 June 2009 to shareholders who are on the register of members on 8 May A dividend reinvestment plan is available in respect of the final dividend. The Group have entered into further commodity price contracts since the period end to reduce the Group s exposure to pricing risk arising on the volatility of commodity prices purchased for the Group s own consumption. 30 Principal subsidiaries Wholly-owned subsidiaries of Wm Morrison Supermarkets PLC Bos Brothers Fruit and Vegetables BV Farmers Boy Limited Farock Insurance Company Limited Neerock Limited Wm Morrison Produce Limited Rathbone Kear Limited Safeway Limited Wholly-owned subsidiaries of Safeway Limited Safeway Overseas Limited Safeway Stores Limited Principal activity Produce wholesaler Manufacturer and distributor of fresh food products Captive insurer Fresh meat processor Produce packer Baker Holding company Grocery retailer Grocery retailer All of the above companies are registered in England and Wales except Bos Brothers Fruit and Vegetables BV which is incorporated in the Netherlands and Farock Insurance Company Limited which is incorporated in the Isle of Man. Performance review Strategic review Governance Group financial statements The principal area of trading for all the above companies is the United Kingdom apart from Bos Brothers Fruit and Vegetables BV and Safeway Overseas Limited who also trade in the rest of Europe. On 3 February 2008, one of the Group s subsidiaries, Holsa Limited, ceased trading and its activities were subsumed within another Group subsidiary. In addition to the above, the Company has a number of other subsidiary companies, particulars of which will be annexed to the next annual return. Company financial statements Investor information

80 78 Morrisons Annual report and financial statements 2009 Wm Morrison Supermarkets PLC Company financial statements under UK GAAP Company accounting policies Basis of preparation These separate financial statements of Wm Morrison Supermarkets PLC (the Company) have been prepared on a going concern basis under the historic cost convention, except for share-based payments and derivative financial instruments which are measured at fair value, and pension scheme liabilities that are measured using actuarial valuations and in accordance with applicable accounting standards under UK GAAP and the Companies Act The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company s financial statements. Accounting reference date The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year. Investments Investments in subsidiary undertakings are stated at cost less provision for impairment. Fixed assets Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly attributable costs. Annual reviews are made of estimated useful lives and material residual values. Depreciation The policy of the Company is to provide depreciation at rates which are calculated to write off the cost less residual value of tangible fixed assets on a straight line basis. The rates applied are: Freehold land 0% Freehold and long leasehold buildings 2.5% Short leasehold improvements Over lease period Plant, equipment, fixtures and vehicles 14-33% Assets under construction 0% Fixed assets are reviewed for indications of impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. This is performed for each income generating unit, which in the case of a supermarket is an individual retail outlet. If there are indications of possible impairment then a test is performed on the asset affected to assess its recoverable amount against carrying value. An asset impaired is written down to its recoverable amount which is the higher of value in use or its net realisable value. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments 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 been previously impaired, then this is recognised by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset. Financial instruments Financial assets and liabilities are recognised on the Company s balance sheet when the Company becomes a party to the contractual provisions of the instrument. a) Financial assets i) Trade and other debtors: Trade and other debtors are carried at the lower of their original invoiced value and recoverable amount. Provision is made when there is objective evidence that the Company will not be able to recover balances in full, with the charge being recognised in the profit and loss account. Balances are written off when the probability of recovery is assessed as being remote. ii) Cash: Cash includes cash-in-hand, cash-at-bank and bank overdrafts together with short term, highly liquid investments that are readily convertible into known amounts of cash, with an insignificant risk of a change in value, within three months from the date of acquisition. In the balance sheet bank overdrafts are presented within current liabilities. b) Financial liabilities Trade and other creditors: Trade and other creditors are stated at cost. c) Derivative financial instruments Derivative financial instruments are initially measured at fair value, which normally equates to cost, and are remeasured at fair value through profit or loss. Cash flow hedges: Derivative financial instruments are classified as cash flow hedges when they hedge the Company s exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction. To minimise the risk from potential movements in commodity prices, the Company has fuel price contracts which are designated as cash flow hedges. Derivatives are reviewed quarterly for effectiveness. Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or highly probable forecast transaction, the effective part of any gain or loss on the movement in fair value of the derivative financial instrument is recognised directly in equity through the Statement of recognised gains and losses (STRGL). The gain or loss on any ineffective part of the hedge is immediately recognised in the profit and loss account within cost of sales. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or liability, the associated cumulative gains or losses that were recognised directly in equity are reclassified into the profit and loss account when the transaction occurs. Borrowing costs All borrowing costs are recognised in the Company s profit and loss account on an accruals basis except for interest costs that are directly attributable to the construction of buildings which are capitalised and included within the initial cost of a building. Capitalisation of interest cost ceases when the property is ready for use.

81 79 Pension costs The Company operates defined benefit and defined contribution schemes. The defined benefit scheme is no longer open to new members. A defined contribution scheme is a pension scheme under which the Company pays fixed contributions into a separate entity. A defined benefit scheme is one that is not a defined contribution scheme. Pension benefits under defined benefit schemes are defined on retirement based on age at the date of retirement, years of service and employee s final compensation package. The Company s defined benefit retirement scheme is funded by contributions from the Company and members. Pension scheme assets, which are held in separate trustee administered funds, are valued at market rates. Pension scheme obligations are measured on a discounted present value basis using assumptions set out in note 39. The operating and financing costs of the scheme are recognised in the profit and loss account in the period in which they arise. Death-in-service costs are recognised on a straight line basis over their vesting period. Actuarial gains and losses are recognised immediately in the statement of recognised gains and losses. A liability or asset is recognised in the balance sheet in respect of the Company s net obligations to the scheme and is stated net of deferred tax. The Company also operates a stakeholder pension scheme and contributions are charged to the profit and loss account as they arise. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the balance sheet date. Gains and losses arising on retranslation are included in the profit and loss account for the period. Provisions Provisions are created where the Company has a present legal or constructive obligation as a result of a past event, where it is probable that it will result in an outflow of economic benefits to settle the obligation from the Company, and where it can be reliably measured. The nature of these provisions are: a) Property provisions: Provisions made in respect of individual properties where there are obligations for onerous contracts, dilapidations and certain decommissioning obligations for petrol filling stations. The amounts provided are based on the Company s best estimate of the likely committed outflow to the Company. Where material, these estimated outflows are discounted to net present value. b) Restructuring provisions: Provisions are established for announced and ongoing restructuring programmes planned and controlled by management where there is an obligation to make changes to the scope of the business undertaken by the Company or the manner in which business is conducted. The provision includes costs of severance to the affected employees, costs of property closure, and other direct expenditures not associated with ongoing activities. Leases Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classified as operating leases; all other leases are classified as finance leases. Lessor accounting operating leases Assets acquired and held for use under operating leases are recorded as fixed assets and are depreciated on a straight line basis to their estimated residual values over their estimated useful lives. Operating lease income is recognised on a straight line basis to the date of the next rent review. Lessee accounting operating leases Rental payments are taken to the profit and loss account on a straight line basis over the life of the lease. Deferred and current taxation Current tax payable is based on the taxable profit for the year using tax rates enacted or substantively enacted at the reporting date. Taxable profit differs from the profit as reported in the profit and loss account as it is adjusted both for items that will never be taxable or deductible and timing differences. Deferred tax is provided in full on timing differences between the accounting and tax cost bases that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date. Deferred tax is calculated based on tax law enacted or substantively enacted by the balance sheet date and is provided at rates that are expected to apply when the timing differences reverse. Deferred tax assets are recognised to the extent that it is more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. Stocks Stocks are measured at the lower of cost and net realisable value. Cost is calculated on a weighted average basis and comprises purchase price, import duties and other non-recoverable taxes, less rebates. Stocks are primarily goods for resale. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Share-based payments The Company issues equity-settled share-based payments to certain employees in exchange for services rendered by them. The fair value of the share-based award is calculated at the date of grant and is expensed on a straight line basis over the vesting period with a corresponding increase in equity. This is based on the Company s estimate of share options that will eventually vest. This takes into account movement of non-market conditions, being service conditions and financial performance, if relevant. The fair value of equity-settled awards granted is not subsequently revisited. Fair value is measured by use of a Binomial stochastic model. The expected life used in the model has been adjusted, based on management s best estimate, for effects of non-transferability, exercise restrictions and behavioural considerations. The cost of the share-based award relating to each subsidiary is calculated, based on an appropriate apportionment, at the date of grant and recharged through an intercompany account. The charge to reserves is retained within the Company s retained earnings. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

82 80 Morrisons Annual report and financial statements 2009 Wm Morrison Supermarkets PLC Company financial statements Financial contracts Where the Company enters into financial contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Company has purchased its own equity share capital, the consideration paid, including directly attributable incremental costs, is deducted from retained earnings until the shares are cancelled. On cancellation, the nominal value of the shares is deducted from share capital and the amount is transferred to the capital redemption reserve. Exemptions The Company has also taken advantage of the exemption from preparing a cash flow statement under the terms of FRS 1 Cash Flow Statement and exemption from the disclosure requirements of FRS 29 Financial instruments disclosures. The cash flows of the Company and financial instruments disclosures are included in the consolidated financial statements. The Company is also exempt under the terms of FRS 8 Related Parties from disclosing related party transactions with entities that are part of the Wm Morrison Supermarkets PLC Group.

83 81 Wm Morrison Supermarkets PLC Company balance sheet 1 February Note m m Fixed assets Tangible assets 33 2,496 2,233 Investments 34 3,366 3,366 5,862 5,599 Current assets Stocks goods for resale Debtors amounts falling due within one year Cash-in-hand ,038 1,114 Creditors amounts falling due within one year 36 (2,588) (2,413) Net current liabilities (1,550) (1,299) Total assets less current liabilities 4,312 4,300 Creditors amounts falling due after more than one year 37 (250) Provisions for liabilities 38 (61) (41) Net assets excluding pension liability 4,001 4,259 Net pension liabilities 39 (2) (22) Net assets including pension liability 3,999 4,237 Performance review Strategic review Governance Capital and reserves Called-up share capital Share premium Capital redemption reserve 42 6 Merger reserve 42 2,578 2,578 Profit and loss account 42 1,092 1,333 Equity shareholders funds 3,999 4,237 The accounting policies on pages 78 to 80 and notes on pages 82 to 89 form part of these financial statements. The financial statements on pages 78 to 89 were approved by the Board of Directors on 11 March 2009 and signed on its behalf by: Group financial statements Marc Bolland Chief Executive Richard Pennycook Group Finance Director Company financial statements Investor information

84 82 Morrisons Annual report and financial statements 2009 Notes to the Company financial statements 52 weeks ended 1 February Profit and loss account A profit of 66m (2008: 63m) is dealt with in the financial statements of Wm Morrison Supermarkets PLC. The Directors have taken advantage of the exemption available under section 230 of the Companies Act 1985 and not presented a profit and loss account for the Company alone. Audit fees and expenses paid to the Group s auditor were 0.5m (2008: 0.6m). Non-audit fees are disclosed in the consolidated financial statements (note 4). 32 Employees and Directors m m Employee benefit expense for the Company during the period Wages and salaries Social security costs Share-based payments (note 43) 7 7 Pension costs Other staff costs No. No. Average monthly number of people employed 56,629 54,502 Key management represent Executive and Non-Executive Directors as they have the responsibility of planning and controlling the operations of the business as a whole. The aggregate remuneration paid to or accrued for the Directors for services in all capacities during the period is the same as the Group and is shown in note 3. There are three Directors (2008: four) who have retirement benefits accruing under the Company s defined benefit pension scheme. Land and buildings Plant Short equipment, 33 Tangible fixed assets Freehold Long leasehold fixtures and leasehold improvements vehicles Total m m m m m Cost At 3 February , ,204 Additions at cost Interest capitalised 4 4 Transfer to subsidiary (12) (4) (2) (18) Disposals (6) (6) At 1 February , ,605 Accumulated depreciation At 3 February Charged in the period At 1 February ,109 Net book value At 1 February , ,496 At 3 February , ,233 Assets under construction included above At 1 February At 3 February Included above is an amount of 706m (2008: 661m) relating to non-depreciable land. The cost of property assets held as lessor included in the above figures is 235m at 1 February 2009 (2008: 219m). The related accumulated depreciation is 48m (2008: 42m). Since 3 February 1985, the cost of financing property developments prior to their opening date has been included in the cost of the project. Accumulated interest capitalised is 90m (2008: 86m).

85 83 Investment in subsidiary 34 Investments undertakings m Cost At 3 February 2008 and 1 February ,367 Provision for impairment At 3 February 2008 and 1 February 2009 (1) Net book value At 3 February 2008 and 1 February ,366 A list of the Company s principal subsidiaries is shown in note Debtors amounts falling due within one year m m Trade debtors Amounts owed by subsidiary undertakings Other debtors 72 7 Prepayments Corporation tax Creditors amounts falling due within one year m m Trade creditors 1,395 1,091 Amounts owed to subsidiary undertakings Bank overdrafts 73 Other taxes Other creditors Accruals and deferred income Corporation tax 30 2,588 2, Creditors amounts falling due after more than one year m m Floating credit facility 250 Performance review Strategic review Governance Group financial statements 38 Provisions for liabilities Deferred Restructuring Property taxation provision provisions Total m m m m At 3 February Charge for period Utilisation of provisions (20) (20) At 1 February Further details of property and restructuring provisions are provided in note 21. The potential deferred taxation on timing differences, calculated at 28% (2008: 28%), is set out below and has been provided for in full m m Excess of capital allowances over depreciation Provisions and short term timing differences (38) (69) Share-based payments (6) (5) 49 9 Company financial statements Investor information

86 84 Morrisons Annual report and financial statements 2009 Notes to the Company financial statements continued 52 weeks ended 1 February Pensions a) Defined benefit pension scheme The Company operates a pension scheme providing benefits based on final pensionable pay. The assets of the scheme are held in a separate trustee administered fund. The latest full actuarial valuations were carried out at 6 April 2007 and were updated for FRS 17 purposes for the periods to 1 February 2009 by a qualified independent actuary. The current best estimate of employer contributions to be paid for the year commencing 2 February 2009 is 25m (2008: 50m). b) Assumptions The major assumptions used in this valuation to determine the present value of the scheme s liabilities were as follows: Rate of increases in salaries % % % Rate of increase in pensions in payment and deferred pensions 3.50% 3.75% 3.20% Discount rate applied to scheme liabilities 6.25% 5.75% 5.00% Inflation assumption 3.50% 3.75% 3.20% i) Longevity The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows: Male Female The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows: Male Female Assumptions regarding future mortality experience are set based on advice in accordance with published statistics. The current mortality table used is PNX00 YOB LC (2008: PNX00 YOB LC). The major assumptions used to determine the expected future return on the scheme s assets, were as follows: Long term rate of return on: Equities 7.00% 7.00% 7.00% Bonds 6.00% 6.00% 5.00% Property 6.00% 6.00% 6.00% Cash 2.50% 5.50% 5.25% The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. c) Valuations The fair value of the scheme s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme s liabilities which are derived from cash flow projections over long periods and are inherently uncertain, were as follows: m m m Equities Bonds Gilts Property Cash Total market value of assets Present value of scheme liabilities (400) (438) (406) Deficit in the scheme pension liability (3) (31) (38) Related deferred tax asset Net pension liability in the balance sheet (2) (22) (27)

87 Pensions continued The movement in the fair value of the scheme s assets over the year was as follows: m m m Fair value of scheme assets at start of period Expected return on scheme assets Actuarial (losses)/gains (85) (32) 16 Employer contributions Employee contributions Benefits paid (6) (9) (5) Fair value of scheme assets at end of period The above pension scheme assets do not include any investments in the Company s own shares or property occupied by any member of the Group. The movement in the present value of the defined benefit obligation during the period was as follows: m m m Defined benefit obligation at the beginning of the period (438) (406) (381) Current service cost (19) (21) (24) Employee contributions (5) (5) (5) Other finance income (26) (21) (19) Actuarial gain Benefits paid Defined benefit obligation at the end of the period (400) (438) (406) Performance review Strategic review Governance d) Sensitivities Below is listed the impact on the liabilities at 1 February 2009 of changing key assumptions whilst holding other assumptions constant: Discount factor +/ 0.1% 11m Longevity +/ 1 year 10m e) Profit and loss account impact The following amounts have been charged in arriving at operating profit in respect of pension costs: Current service cost m m m (19) (21) (24) Group financial statements The amounts for current and past service cost have been charged to the following profit and loss account lines: m m m Cost of sales (15) (17) (19) Administrative expenses (4) (4) (5) (19) (21) (24) The following amounts have been included in other finance income: m m m Expected return on pension scheme assets Interest on pension scheme liabilities (26) (21) (19) Company financial statements Investor information

88 86 Morrisons Annual report and financial statements 2009 Notes to the Company financial statements continued 52 weeks ended 1 February Pensions continued f) Amounts recognised in Statement of total recognised gains and losses (STRGL) The amounts included in the STRGL were: m m m Actual return less expected return on scheme assets (85) (32) 16 Experience gains and losses arising on scheme liabilities 12 6 Changes in assumptions underlying the present value of scheme liabilities 82 (6) 12 Actuarial (loss)/gain recognised in the STRGL (3) (26) m m m Cumulative gross actuarial movement recognised in the STRGL (100) (97) (71) Taxation on cumulative actuarial movement recognised in the STRGL Cumulative net actuarial movement recognised in the STRGL (71) (69) (50) The actual return on scheme s assets can therefore be summarised as follows: m m m Expected return on scheme assets Actuarial movement recognised in the STRGL reflecting the difference between expected and actual return on assets (85) (32) 16 Actual return on scheme assets (56) (7) 37 The expected return on scheme s assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets. g) History of experience gains and losses m m m m m Difference between the expected and actual return on scheme assets: Amount (85) (32) Percentage of scheme assets (21.4%) (7.9%) 4.4% 11.6% 3.3% Experience gains and losses arising on scheme liabilities: Amount Percentage of present value of scheme liabilities 2.9% 1.6% 1.1% 0.6% Effects to changes in the demographic and financial assumptions underlying the present value of the scheme liabilities: Amount 82 (6) 12 (46) (17) Percentage of present value of scheme liabilities 20.5% (1.4%) 2.9% (12.2%) (5.6%) Total amount recognised in STRGL: Amount (3) (26) 34 (7) (8) Percentage of present value of scheme liabilities (0.8%) (5.9%) 8.4% (1.8%) (2.5%) Total value of scheme s assets Present value of defined benefit obligation (400) (438) (406) (381) (300) Pension liability deficit in the scheme (3) (31) (38) (75) (72) h) Defined contribution pension scheme Employees joining the Company after September 2000 are no longer eligible to gain automatic entry into the final salary pension scheme. In June 2001 the Company established a stakeholder pension scheme, open to all employees, to which the Company makes matching contributions of a maximum of 5% of eligible earnings. Pension costs for the defined contribution scheme are as follows: m m m Stakeholder pension scheme (2) (1) (1) Life assurance scheme (1) (1) (1) Total costs (3) (2) (2)

89 Reconciliation of movements in equity shareholders funds m m Profit for the financial period Dividends (131) (108) Retained loss for the financial period (65) (45) Share-based payment 14 6 Deferred tax on share options (2) Actuarial loss on pension scheme (3) (26) Tax relating to pension scheme 1 7 Shares purchased for cancellation (146) Own shares acquired by the Safeway Employee Trust (42) Share options exercised 3 17 Net addition to equity shareholders funds (238) (43) Opening shareholders funds 4,237 4,280 Closing equity shareholders funds 3,999 4,237 Own shares acquired by the Safeway Employee Trust represents 17,641,448 of the Company s ordinary shares that are held by a trust using funds previously provided by Safeway Limited. During the period, the loan obligation in respect of this investment was novated to Wm Morrison Supermarkets PLC. These shares are treated as treasury shares at the balance sheet date. These shares are not treasury shares as defined by the London Stock Exchange or the Companies Act Share capital a) Equity m m Authorised Equity share capital 4,000,000,000 ordinary shares of 10p each (2008: 4,000,000,000) Issued and fully paid Equity share capital 2,629,813,268 ordinary shares of 10p each (2008: 2,686,071,130) i) Ordinary shares m m At start of period Shares purchased for cancellation (6) Share options exercised 1 At end of period The Company purchased 57,788,600 of its own shares in the open market for cancellation between 31 March 2008 and 21 November 2008 at a cost of 146m. The shares repurchased represent 2.15% of the ordinary share capital at 3 February b) Non-equity The authorised and issued preference share capital of the Company is as follows: m m 5¼% cumulative redeemable non-convertible preference shares of 1 each Authorised 50,000,000 (2008: 50,000,000) Issued and fully paid 282,666 (2008: 282,666) The 5¼% cumulative preference shares, which are classified as a current liability in accordance with FRS 25 Financial instruments: Disclosure and Presentation, do not carry any voting rights and were issued in 1987 at 1 per share. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

90 88 Morrisons Annual report and financial statements 2009 Notes to the Company financial statements continued 52 weeks ended 1 February 2009 Share Capital Profit 42 Reserves premium redemption Merger and loss account reserve reserve account m m m m At start of period 57 2,578 1,333 Retained in the period (65) Share options exercised 3 Shares repurchased for cancellation 6 (146) Own shares acquired by the Safeway Employee Trust (42) Share-based payment reserve 14 Actuarial loss recognised (3) Tax arising on actuarial loss 1 At end of period ,578 1,092 Net pension liability (2) Profit and loss account excluding pension liability 1,090 a) Capital redemption reserve This arises from the purchase of own shares, see note 41. b) Merger reserve The merger reserve represents the reserve arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and, accordingly, it will be carried forward as a capital reserve. 43 Share-based payments The disclosure requirements for FRS 20 Share-based payment are identical to that of IFRS 2 Share-based payment. Full IFRS 2 disclosures are provided in note Capital commitments m m Contracts placed for future capital expenditure not provided in the financial statements During the period, Morrisons entered into an agreement with the Co-operative Group to acquire over half a million square feet of additional selling space through the purchase of a number of Co-operative Group and former Somerfield stores, at a cost of 223m. A deposit of 22m was paid during the year and has been classified within debtors. The completion is dependent on obtaining certain approvals and the transaction and associated payments are expected to complete in the next financial year. 45 Operating lease commitments Annual commitments under non-cancellable operating leases: Plant, Plant, equipment, equipment, Land and fixtures and Land and fixtures and buildings vehicles buildings vehicles m m m m Expiring within one year 1 Expiring within two to five years inclusive 8 8 Expiring over five years Contingent liabilities The Company has given an unlimited guarantee in respect of the overdraft of all the subsidiary undertakings. At 1 February 2009, there was a credit balance of 0.5m including uncleared banking items (2008: 0.4m). The Company has also provided a guarantee in respect of Sterling and Euro Bonds, amounting to 784m (2008: 758m) in respect of a subsidiary undertaking. Where the Company enters into financial contracts to guarantee the indebtedness of other Companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

91 Contingent liabilities continued In September 2007, the Office of Fair Trading (OFT) issued a Statement of Objections to a number of grocery retailers and milk producers, alleging collusion in the setting of prices for certain dairy products in 2002 and Morrisons was accused in relation to one infringement in 2002, and has vigorously denied this. Based on the evidence put forward, the Board does not consider it probable that the Company will ultimately incur a fine and, accordingly, has made no provision for any such liability. The OFT have also raised a legal issue regarding the sale of tobacco and whether established industry practices represented a breach of competition law. It is likely that this can only be settled through a formal judicial process. The Board has not made a provision for such a liability. 47 Post-balance sheet events The Directors are proposing a final dividend in respect of the financial period ending 1 February 2009 of 5.0p per share which will absorb an estimated 131m of shareholders funds. Subject to approval at the AGM, it will be paid on 10 June 2009 to shareholders who are on the register of members on 8 May A dividend reinvestment plan is available in respect of the final dividend. The Company has entered into further commodity price contracts since the year end to reduce the Company s exposure to pricing risk arising on the volatility of commodity prices purchased for the Company s own consumption. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

92 90 Morrisons Annual report and financial statements 2009 Seven year summary of results 52 weeks ended 1 February 2009 Consolidated income statement New format* Previous format IFRS GAAP IFRS GAAP UK GAAP , m m m m m m m m m Turnover 14,528 12,969 12,462 12,115 12,115 12,104 12,116 4,944 4,290 Cost of sales 5 (13,615) (12,151) (11,826) (11,793) Other operating income Raw materials and consumables (9,156) (9,110) (9,110) (3,682) (3,186) Gross profit ,978 3,012 3,012 1,263 1,106 Other operating income Administrative expenses (281) (268) (272) (237) Profits arising on property transactions Staff costs (1,631) (1,537) (1,533) (571) (498) Depreciation (257) (259) (265) (120) (111) Other operating charges (986) (836) (834) (256) (227) Operating profit before one-off costs One off costs (375) (375) (139) (99) (11) (3) Operating profit/(loss) (263) (263) Amortisation of negative goodwill 58 Net finance (costs)/income (16) (54) (52) (52) (65) (64) Share of joint venture operating profit Profit/(loss) before taxation (313) (313) Taxation (195) (58) (121) (88) (91) (122) (97) Profit/(loss) after taxation (250) (250) Minority interest equity (2) Profit/(loss) for the period (250) (250) Dividends 4 (131) (108) (99) (98) (98) (88) (88) (44) (36) Profit/(loss) retained (348) (348) Basic earnings per share (p) (9.46) (9.46) Diluted earnings per share (p) (9.46) (9.46) Diluted earnings excluding property transactions per share (p) (9.21) (9.21) Underlying earnings per share (p) (7.91) Dividend per ordinary share (p) weeks. 2 The results for 2005 include the acquired results of Safeway plc. 3 Reclassification under UK GAAP to reallocate distribution costs. 4 Restated for FRS 25 Financial instruments: Disclosure and Presentation for preference share dividends and FRS 21 Events after balance sheet date for dividends. 5 New category 2007 and restated * The income statement has been changed to that of a functional style.

93 91 Consolidated balance sheet IFRS GAAP UK GAAP , , m m m m m m m m Assets Goodwill and other intangibles 103 (263) Property, plant and equipment 6,587 6,205 6,117 6,144 5,708 6,824 1,739 1,609 Lease prepayments Investment property Investment in Joint Venture Financial assets Non-current assets 7,160 6,726 6,605 6,623 6,376 6,629 1,739 1,609 Current assets 1, , Liabilities Current liabilities (2,024) (1,853) (1,855) (1,807) (1,713) (1,732) (743) (656) Other financial liabilities (1,049) (774) (769) (1,023) (1,017) (990) (1) (5) Deferred tax liabilities (472) (424) (478) (422) (501) (207) (38) (37) Net pension liabilities (49) (68) (198) (416) (408) (264) (48) (20) Provisions (112) (139) (144) (127) (56) (80) (13) (12) Non-current liabilities (1,682) (1,405) (1,589) (1,988) (1,982) (1,541) (100) (74) Performance review Strategic review Governance Net assets 4,520 4,378 3,927 3,649 4,006 4,097 1,388 1,263 Shareholders equity Called-up share capital Share premium Capital redemption reserve 6 Merger reserve 2,578 2,578 2,578 2,578 2,578 2,578 Retained earnings and other reserves 1,613 1,474 1, ,142 1,233 1,215 1,094 Total equity 4,520 4,378 3,927 3,649 4,006 4,097 1,388 1, weeks. 2 The results for 2005 include the acquired results of Safeway plc. 3 Restated for FRS 25 Financial instruments: Disclosure and Presentation for preference share dividends and FRS 21 Events after balance sheet date for dividends. Group financial statements Company financial statements Investor information

94 92 Morrisons Annual report and financial statements 2009 Supplementary information IFRS GAAP UK GAAP , , Increase/(decrease) on previous year % Turnover Operating profit (202.62) (16.25) (2.26) Profit before taxation (262.12) (39.67) (7.13) Profit after taxation (16.97) (338.38) (46.86) Diluted earnings per share (16.98) (66.99) (35.34) Dividend per ordinary share Shareholder funds (8.92) % of turnover Operating profit (2.17) Profit/(loss) before taxation (2.58) Profit/(loss) after taxation (2.07) Retail portfolio Size 000s sq ft (net sales area) Total Petrol filling stations Total sales area (000s sq ft) 11,131 10,837 10,505 10,633 12,468 12,468 4,526 4,241 Average store size (000s sq ft) Average sales area (000s sq ft) 4 11,061 10,676 10,762 11,539 12,705 12,705 4,399 4,113 Total supermarket takings ex fuel (gross) m 12,180 11,238 10,841 10,541 10,929 10,929 4,550 3,988 Average per sq ft per week ( ) Average per store per week ( 000s) Average number of customers per store per week 25,928 24,411 24,343 25,818 18,712 18,712 29,242 28,277 Average takings per customer ( ) Employees Full time 50,934 50,018 51,502 57,501 56,005 56,005 23,296 21,136 Part time 73,596 67,436 66,302 76,836 84,896 84,896 29,088 25,642 Total 124, , , , , ,901 52,384 46,778 Full time equivalent 89,855 83,736 84,653 93,041 95,340 95,340 35,395 31,961 Average per FTE employee: Turnover ( 000s) Operating profit before one-off costs ( ) 7,472 7,307 4,999 1,198 4,147 4,177 8,950 8,482 Staff costs ( ) 17,996 17,973 17,787 17,528 16,120 16,081 16,124 15, weeks. 2 Includes Safeway plc. 3 Reclassification under UK GAAP to reallocate distribution costs. 4 Includes sales area of divested stores.

95 93 Glossary Carbon footprint A measure of the impact human activities have on the environment in terms of the amount of greenhouse gases produced, measured in units of carbon dioxide. Competition Commission This is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of major regulated industries. Contingent liabilities A possible obligation arising from events not wholly within the control of the Group. The liability is not recognised if the outcome is uncertain or cannot be reliably measured. Corporate Social Responsibility (CSR) The understanding and management of the relationship between the Group and the economy, environment and communities within which we operate. Defra Department for Environment, Food and Rural Affairs. The UK Government department tasked with issues such as the environment, food rural development, the countryside, wildlife, animal welfare and sustainable development. Derivatives Financial instruments that derive their value from an underlying price or index, such as an interest rate, a foreign exchange rate, an index of prices/rates or a commodity price. Distribution miles This is the distance used to transport goods from distribution centres to stores. Direct manufacturing sales These are external sales from manufacturing sites either entirely owned by the Group. Dividend cover Underlying profit after tax from continuing operations attributable to equity shareholders divided by total value of dividends declared during the year. Eat Smart The range of calorie, fat, sugar and salt controlled foods, which have been specifically designed to help maintain a controlled diet without compromising on taste. EBITDA Earnings before interest, tax, depreciation and amortisation. EPoS Electronic Point of Sale. FAO Food and Agriculture Organisation of the United Nations is a specialised agency that leads international efforts to improve agricultural productivity and better the lives of rural populations. Finance lease A lease that transfers substantially all the risks and rewards of ownership from the lessor to the lessee. FTSE100 The 100 largest companies, by market capitalisation, listed on the London Stock Exchange. Footfall The number of people who visit our stores. GAAP Generally accepted accounting principles (and practices). GfK NOP Leading market research agency providing business insight through quantitative and qualitative research surveys. Hedging Reducing the exposure to risk of loss resulting from fluctuations in exchange rates, commodity prices, interest rates, etc. Typical tools include forward foreign exchange contracts and interest rate swaps. International Financial Reporting Standards (IFRS) IFRS are standards, interpretations and the framework for the preparation and presentation of financial statements adopted by the International Accounting Standards Board. IGD Institute of Grocery Distribution. A membership service that provides research, information, and education for the food and grocery industry. Interest rate swap A financial instrument where two parties agree to exchange an interest rate obligation for a predetermined amount of time. These are used by the Group to convert floating rate debt to fixed rates. Performance review Strategic review Governance Group financial statements Company financial statements Investor information

96 94 Morrisons Annual report and financial statements 2009 Glossary continued KPIs Key Performance Indicators. Measures used by the Board of Directors to monitor the performance and development of the Group. LIBOR (London Interbank Offered Rate) This is the rate that banks can borrow funds from other banks in the London interbank market and is fixed on a daily basis, and is the world s most widely used benchmark for short term interest rates. Like-for-like sales Measuring sales on the same basis as the previous year, excluding the impact of new store openings or store disposals. Also excluded is the impact of major refurbishments and extensions. Litreage The number of litres of fuel sold. Long Term Incentive Plans (LTIPs) Incentive schemes available to certain employees to encourage a mutual financial goal. Market share The percentage of the market or market segment that is being serviced by Morrisons. Market Street Our unique range of fresh food counters that bring a personal service into the supermarket. MIS Management Information Systems covers the application of people, technologies and procedures, collectively the information systems, to business problems. Moody s Moody s Investors Service is among the world s most respected and widely utilised sources for credit ratings, research and risk analysis. Optimisation Plan Our tactical recovery programme between 2007 and Organic A range of genuine organic products that don t cost the earth. Organic farming prohibits the use of artificial fertilisers, pesticides, growth regulators and additives in livestock feed. The International Federation of Organic Agriculture Movements (IFOAM) accredits national organic certifying bodies. Safeway business The assets and business of Safeway Plc which were acquired on 8 March Sales densities The level of sales generated per square foot of selling space. Sensitivities Indicates how certain balances would shift should a key assumption move while others remain constant. In effect, shows how dependent the balances are on certain factors. SoRIE Statement of recognised income and expense. The Best Premium products that are prepared from the very best ingredients. TNS (Taylor Nelson Sofres) Global retail market information group who have a panel of some 25,000 homes in the UK. UK GAAP UK Generally Accepted Accounting Principles (and practices). Vertical integration The extent to which the upstream suppliers and downstream buyers are owned by the Group. (The) Nielsen Company The Nielsen Company is a global information and media company with leading market positions in marketing and media information. OFT Office of Fair Trading. A government body which is the UK s consumer and competition authority. Onerous lease An unavoidable lease commitment for a property that is no longer in use by the business. The lease commitment is reduced by the expected future rental income where the Group has sublet the property.

97 95 Investor relations and financial calendar Annual General Meeting The AGM will be held at a.m. on Thursday 4 June 2009 at Wm Morrison Supermarkets PLC Head Office, Gain Lane, Bradford, BD3 7DL. A separate notice convening the meeting is sent to shareholders, which includes an explanation of the items of special business to be considered at the meeting. Dividend Reinvestment Plan The Company has a Dividend Reinvestment Plan which allows shareholders to reinvest their cash dividends in the Company s shares bought in the market through a specifically arranged share dealing service. Full details of the plan and its charges, together with mandate forms, are available from the Registrars. Morrisons website Shareholders are encouraged to visit our website, to obtain information on company history, stores and services, latest offers, press information and a local store finder. Share price information The Investor Information section of our website provides our current and historical share price data and other share price tools. Share price information can also be found in the financial press and the Cityline service operated by the Financial Times (telephone ). b) Carbon offset The Annual report and financial statements, the Annual review and summary financial statement and the Corporate social responsibility report have been assessed with the assistance of the Carbon Trust for the amount of carbon emissions that will be generated in their preparation, printing and delivery. To offset these carbon emissions a donation has been made to PURE, The Clean Planet Trust, the first UK registered charity dedicated to combating climate change by offsetting. More information about PURE can be found on their website, c) Recycled paper This document has been printed by MPG on recycled paper that is manufactured in mills with ISO accreditation from 100% recycled fibre. It is totally chlorine free and is a NAPM certified recycled product. d) Photography All people featured were either customers, colleagues or suppliers. Permission to publish these photographs was received from each individual. Where minors appear, parental approval was granted. Performance review Strategic review Governance Online reports and accounts Our Annual and Interim Group financial statements are available to download from the website along with Corporate Social Responsibility reports and other financial announcements. The 2009 Annual report is also available to view in html format at The information in the Annual report and financial statements, Annual review and summary financial statement and the Interim reports are exactly the same as in the printed version. Environmental matters The effect of our business on the environment is something that Morrisons takes very seriously. In the production of the 2009 Annual report and financial statements, we have contributed to the reduction in environmental damage in the following ways: a) Website Shareholders receive notification of the availability of the results to view on the Group s website, unless they have elected to receive a printed version of the results. The full Annual report is available for viewing or downloading from the corporate website Shareholders are encouraged to view the report on the website which is exactly the same as the printed version, but using the internet has clear advantages such as lowering costs and reducing the environmental impact. e) Design The Annual report and financial statements, the Annual review and summary financial statement in both paper and HTML format, and the Corporate social responsibility report were designed and produced by Likemind Further information about other ways in which the Group is helping with environmental change can be found in the Corporate social responsibility report 2008/09 which can be viewed on the Morrisons website. Financial calendar 2009/10 Financial events and dividends Final dividend record date 08/05/09 Annual General Meeting 04/06/09 Quarterly management statement 04/06/09 Final dividend payment date 10/06/09 Half year end 02/08/09 Interim results announcement 10/09/09 Interim dividend record date 02/10/09 Interim dividend payment date 09/11/09 Quarterly management statement 19/11/09 Financial year end 31/01/10 Preliminary results announcement 11/03/10 Group financial statements Company financial statements Investor information

98 96 Morrisons Annual report and financial statements 2009 Investor relations and financial calendar continued Company Secretary Greg McMahon (appointed 16 March 2009) Registered office Wm Morrison Supermarkets PLC Hilmore House Gain Lane Bradford BD3 7DL Telephone: Investor Relations Telephone: Corporate Social Responsibility enquiries Telephone: Registrars and Shareholding enquiries Administrative enquiries about the holding of Morrisons shares, such as change of address, change of ownership, dividend payments and the Dividend Reinvestment Plan should be directed to: Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0GA Telephone: Overseas: Calls cost 10p per minute plus network extras. Solicitors Gordons LLP Riverside West, Whitehall Road Leeds, LS1 4AW Ashurst Broadwalk House, 5 Appold Street London, EC2A 2HA Wragge & Co LLP 55 Colmore Row Birmingham, B3 2AS Auditors KPMG Audit Plc 1 The Embankment, Neville Street Leeds, LS1 4DW Stockbrokers RBS Hoare Govett Limited 250 Bishopsgate London, EC2M 4AA Merrill Lynch Merrill Lynch Financial Centre 2 King Edward Street London, EC1A 1HQ Investment Bankers NM Rothschild & Sons Limited New Court, 1 St. Swithin s Lane London, EC4P 4DU

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