BUILDING A BROADER,
STRONGER BUSINESS
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Overview
BUILDING A BROADER,
STRONGER BUSINESS
Morrisons is becoming broader and stronger, aiming to be more
popular and accessible for customers. Growth is capital light,
meaningful and sustainable, built on strong free cash flow and
balance sheet foundations
ST R AT EG IC R E PO RT
FI NAN CIAL STAT E M E N TS
Our core purpose
Chairman’s statement
Chief Executive’s statement
Our six priorities
Case studies
Our customers
Our colleagues
Our suppliers
Our shareholders – Chief Financial Officer’s report
Corporate responsibility
Risk
GOVE R NAN CE
Corporate governance report
Directors’ remuneration report
Directors’ report
2
4
6
8
10
12
14
16
17
21
23
27
38
52
Independent auditors’ report
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement of changes in equity
General information
Notes to the Group financial statements
Company balance sheet
Company statement of changes in equity
Company accounting policies
Notes to the Company financial statements
Related undertakings
I NVE STO R I N FO R MATIO N
Five year summary
Supplementary information
Glossary
Investor relations and financial calendar
Information at your fingertips
R E AD M O R E AT
www.morrisons-corporate.com/annual-report-2018
55
63
64
65
66
67
70
106
107
108
111
122
124
126
127
129
131
Throughout the Directors’ report and Strategic report:
Unless otherwise stated, 2017/18 refers to the 53 week period ended 4 February 2018 and 2016/17 refers to the 52 week period ended 29 January 2017.
2017 and 2018 refer to calendar years.
Highlights
Measuring the progress of Fix, Rebuild and Grow
FI NAN CIAL H IG H LIG HTS
Group revenue
£17.3bn +5.8%
17.3
16.8
16.1
16.3
#
Group like-for-like (LFL) sales
(exc. fuel)*
#
Underlying profit before tax
(UPBT)*
#
+2.8%
1.9%
2.8%
(2.0)%
(5.9)%
£374m +11.0%
345
374
337
242
2014/15
2015/16 2016/17 2017/181
2014/15 2015/16 2016/171 2017/181
1 Group revenue on a 53 week basis
1 2016/17 and 2017/18 include wholesale contribution
to LFL sales
2014/15 2015/161 2016/17 2017/182
1 2015/16 reported UPBT. UPBT before £60m one-offs was £302m
2 UPBT on a 53 week basis. £369m 52 week equivalent
Free cash flow*
£350m
inflow
SH
Net debt*
£973m down £221m
year-on-year
2,340
1,746
1,194
973
2014/15 2015/16 2016/17 2017/18
SH
SH
Total dividend
10.09p
+85.8%
* Alternative Performance Measures as defined in the Glossary on page 127
N O N - FI NAN CIAL H IG H LIG HTS
Like-for-like (LFL) customer
transaction numbers
#
Customer satisfaction
Colleague engagement index
C
CO
+2.9%
+7% pts
+2% pts
4.0%
2.9%
(1.9%)
(1.6%)
+7%
+3%
+2%
Base
76%
76%
75%
78%
2014/15 2015/16 2016/17 2017/18
Jan 15
Jan 16
Jan 17
Jan 18
2014/15 2015/16 2016/17 2017/18
LFL customer transaction numbers, year-on-year change.
Excludes online
Customer satisfaction measured at January each year,
year-on-year change
Colleague engagement index as measured in the annual
‘Your Say’ survey
O PE R ATIO NAL H IG H LIG HTS
• Meaningful, sustainable sales and profit
growth with strong cash flow
• Improving capability, and becoming more
differentiated for all stakeholders
• Proposal to return surplus capital to
shareholders through a total ordinary
dividend of 6.09p per share and a special
dividend of 4.00p per share
• Started a rolling programme to supply
McColl’s stores nationwide with both
branded products and our own revived
Safeway brand
• Store-pick online service extending
Morrisons.com into further new areas
• ‘Morrisons at Amazon’ expanded into
more postcodes and more cities
Alignment of highlights to our stakeholder ambitions:
C Customers
S Suppliers
CO Colleagues
SH Shareholders
# All
1
Strategic reportGovernanceFinancial StatementsInvestor information Our core purpose
We make and provide food we’re all proud of,
where everyone’s effort is worthwhile, so more
and more people can afford to enjoy eating well
Resources and
relationships
Our business
Customers
Over 11 million customer transactions take place
every week
Food maker
We have thousands of food makers in our stores and in our manufacturing sites
Colleagues
Over 105,000 friendly and skilled colleagues,
and a high quality management team
• Our skilled food makers make fresh food
daily in our stores on Market Street for
our customers
• Over half of the fresh food we sell, we make
ourselves
• We work with our suppliers to carefully
• We make fresh food in our manufacturing
source the products we don’t make ourselves
sites across the UK
Sites
491 conveniently located supermarkets
18 manufacturing sites
9 distribution centres
Increasing digital
presence
Brand
A well known brand which is becoming more
popular and accessible to more customers
Our business...
Our food making skills provide products
that are fresh, good quality, great value and
unique to us
Controlling the whole supply chain means
we know where our food comes from and
can provide our customers with what they
want, when they want it
Financial strength
A strong balance sheet, with a largely freehold
estate, low debt and a net pension surplus
Continued generation of significant and
sustainable levels of free cash flow
…delivered through our six priorities
1
To be more
competitive
2 To serve customers
better
3 Find local
solutions
…and supported by our five ways of working
1 Customers
first
2 Teamwork
3 Freedom in the
framework
4
Listening and
responding
5
Selling, controlling costs, growing
profits, removing waste
2
4 Develop popular
and useful services
5 To simplify and
6 To make the core
speed up the
organisation
supermarkets
strong again
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Distributor
We have a national distribution network
that moves the food we make and buy
Retailer
We sell the products we make and buy, in our stores
and online
• Our stores are serviced by eight regional
distribution centres and one national
distribution centre
• This supports our growth through
other channels
• Listening informs improvements we make
• We have a Morrisons price list, providing good quality fresh
food and great value
• Our shopkeepers care deeply about service
• Our More Card helps us to understand and serve our
customers better
• Over 60% of the UK population has access to our online offer
and we continue to expand our reach
Wholesaler
We are a wholesaler, providing products to retail partners
and wholesale customers
• We aim to make our brands more popular, accessible and increase
volume through our existing assets
• We leverage the strength of our brand and manufacturing
capability to deliver good quality products at great value
• Revival of the Safeway brand for wholesale
Understanding our customers powers the
decisions we make. Customers trust our brand
and see us as competitive and locally relevant
Through stores, manufacturing, online and
our wholesale partners, we can leverage our
brand to achieve meaningful and sustainable
capital light growth
See page 8 for more detail
1
To be more
competitive
2 To serve customers
better
3 Find local
solutions
4 Develop popular
and useful services
5 To simplify and
speed up the
organisation
6 To make the core
supermarkets
strong again
1 Customers
first
2 Teamwork
3 Freedom in the
framework
4
Listening and
responding
5
Selling, controlling costs, growing
profits, removing waste
See page 15 for more detail
Outcomes for our
stakeholders
1. Customers
• More customers, buying more
from us, more often
• Customers can get what they
want, when they want it
See page 12 for more detail
2. Colleagues
• Engaged and motivated
colleagues
• Colleagues sharing in the
success of the business
• A fair day’s pay for the work
they do
See page 14 for more detail
3. Suppliers
• Establishing lasting relationships
• Working together with
simplified terms
See page 16 for more detail
4. Shareholders
• A strong balance sheet
• A cash generative business with
falling debt
• Sales, profit and dividend
growth
See page 17 for more detail
Environmental
and social value
• Making a positive contribution
to society
• Reducing food waste and
taking care of the environment
• Ethical trading practices
See page 21 for more detail
3
Strategic reportGovernanceFinancial StatementsInvestor information
Chairman’s statement
A TURNAROUND
SHARED BY ALL
STAKEHOLDERS
The Board spend time balancing the need to deliver adequate
short‑term returns with the imperative of investing back in the
shopping trip, such that we can deliver long‑term sustainable growth
Andrew Higginson, Chairman
4
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 HIGHLIGHTS
10.09p
Total dividend
12.19p
Underlying basic earnings
per share (2016/17: 10.86p)
It is now three years since David and the team started the Morrisons
turnaround journey. The business is in good shape. Like-for-like sales have
been positive for more than two years, the balance sheet and cash flow
are strong, and we are developing successful relationships with retail and
wholesale partners such as Ocado, Amazon, Rontec, Timpson and, more
recently, McColl’s and Sandpiper in the Channel Islands.
We were pleased with our strong performance last year, becoming more
competitive for customers and delivering strong sales, profit and return
on capital employed (ROCE) growth in a very tough environment, despite
being faced with some substantial input inflation and other cost pressures.
There is still a very long way to go. Morrisons has many opportunities
to grow and develop into a broader, stronger business.
To achieve success for the long term, the Board will give management
headroom to execute the Fix, Rebuild and Grow strategy. We are
determined not to repeat the missteps of the food retail industry in
recent years, where inappropriate targets sometimes contributed to
behaviours and strategies that were not in the best long-term interests
of stakeholders. Our targets for management are designed to prioritise
consistent and sustainable long-term growth over short-term profit.
The Board was disappointed to receive only a low vote of support for the
Directors’ remuneration report at the 2017 Annual General Meeting (AGM),
and has been grateful for subsequent shareholder consultation and
feedback. We are pleased the new remuneration policy, commencing this
year, was well supported, and hope to now move forward with interests
and opinions aligned.
Key to aligning all those stakeholder interests will be continuing to
improve the shopping trip for customers. As I have said before, this may
seem simple but it is not easy. We are making good progress. Fresh Look
is transforming the look and feel of our stores; new and improved ranges
are bringing excitement, freshness and provenance to our offer, and; our
unique team of food makers and shopkeepers are reconnecting with
customers and serving them better.
This last point is especially important for us; our dedicated and hard-
working colleagues are the driving force behind the turnaround and, as
they continue to improve the shopping trip for customers, we are paying
them more in hourly wages and a higher annual bonus. Our hourly pay
rate for front line colleagues has increased by 27% in just three years,
and the average colleague bonus payment has more than doubled over
the last two years. In addition, over 1,000 of our most senior colleagues,
including store managers, are benefiting from our Long Term Incentive
Plan. As I said in last year’s Annual Report, the management team are
making a big difference at Morrisons, and they will be well rewarded over
the long term for consistent success, but this will be a turnaround shared
by all the Morrisons team.
As I noted last year, a sustainable turnaround will be accompanied by
a sustainable dividend, and I am pleased that we recently announced
a final ordinary dividend of 4.43p per share. As we continue to Fix,
Rebuild and Grow, Morrisons will remain highly cash generative and our
commitment to capital disciplined growth will be unwavering. We intend
to return surplus capital to shareholders, and are proposing a special
dividend of 4.00p per share which, together with the ordinary, means
a 10.09p total dividend for the year, up 85.8% on last year. In future we
will continue to be guided by the principles of our capital allocation
framework, and retain a strong and flexible balance sheet. We will
review options for uses of our strong free cash flow each year.
Andrew Higginson
Chairman
Governance Highlights
Board composition and membership – page 28
Board effectiveness – page 28
External Auditor – pages 36 and 37
• The Board comprises of seven independent
Non-Executive Directors and two Executive Directors
• There is an appropriate mixture of skills and experience
on the Board, which has been further strengthened
with the appointment of Tony van Kralingen and
Kevin Havelock
• There is a clear division of responsibilities between
the roles of Chairman and the Chief Executive
• All Directors stand for re-election annually at the AGM
• Our Senior Independent Director is Rooney Anand
• Consilium Board Review undertook an external review
of Board effectiveness this year, and reported that the
Board has a well balanced set of capabilities, and that
governance and compliance is strong
• The Audit Committee is satisfied that the Group’s
statutory auditor, PwC, who were appointed in 2014/15,
are performing effectively
• The Board has a policy on the engagement of the
• The Directors have all attended an appropriate number
external auditor to supply non-audit services
of Board and Committee meetings and commit
sufficient time to the Group
Accountability – page 29
• The Board is satisfied with the effectiveness of internal
control and that risk is being managed effectively
across the Group
5
Strategic reportGovernanceFinancial StatementsInvestor information Chief Executive’s statement
BROADER,
STRONGER, MORE
COMPETITIVE
2017/18 was a year of continued progress
and strong performance. A broader,
stronger Morrisons is emerging
David Potts, Chief Executive
6
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 2017/18 quarterly Group LFL sales (exc. fuel)
2017/18 LFL quarterly number of transactions
3.4%
2.9%
2.6%
2.5%
2.8%
4.6%
4.6%
3.2%
2.1%
2.0%
Q4*
Q1
Q2
Q3
Q4
Q4*
Q1
Q2
Q3
Q4
Definition
See the Glossary on page 127 for a definition.
*2016/17
Definition
LFL number of transactions, year-on-year change.
Excludes online.
*2016/17
2017/18 was a year of continued progress and strong performance.
A broader, stronger Morrisons is emerging. Capability is improving, the
offer is more consistent and more competitive, and we are becoming
more differentiated for all stakeholders. All three phases of our
turnaround – Fix, Rebuild and Grow – are running concurrently
and providing meaningful and sustainable growth opportunities.
The year was not without its challenges, most notably the inflationary
pressures on imported food prices caused by weak sterling. However,
the team responded well, creating self-help opportunities from these
challenges, and further improving Morrisons offer for customers.
We continued to listen and learn from customers and colleagues.
We again improved all aspects of the shopping trip, served customers
better, and became more competitive.
Our core supermarkets are showing strong annual growth on growth
as we enter a fourth year of turnaround. Two year like-for-like (LFL)
was in the 4%-5% range for most of the year, and accelerated to above
6% during the important Christmas and New Year period.
Growth was driven by more customers and more volume. Put simply,
more and more customers found more things they wanted to buy at
Morrisons. New and improved ranges in areas such as Home & Leisure
and ‘Eat Smart’, and more innovation meaning multi-year growth in
‘Best’, ‘Free From’ and ‘Nutmeg’. For example, in its second Christmas,
our premium ‘Best’ range grew sales by 25%.
Our Fresh Look refit programme extended to another 80 stores during
the year, and we have now completed around half of our stores.
In addition, many of the Fresh Look learnings are being applied across the
whole estate as we go. For example, the majority of our cafés, Fruit & Veg,
and Florist departments were updated with a new look and feel during
the year. We are very pleased with the Fresh Look results. A modernised
Morrisons is emerging, with its roots firmly in fresh food and Market
Street, for which we are rightly renowned.
The growth on growth is not just in sales. Our turnaround is colleague-led,
and customers are again telling us that our service is improving and our
colleagues are friendly. Our customer satisfaction scores improved again,
and have now been growing for three years. This was helped by our new
automated ordering system which was fully operational by the end of
the year, improving availability, reducing cost and freeing up time for our
colleagues to serve customers better.
One of the biggest opportunities created by the inflationary pressures
was to improve our price position further and become more competitive
for customers. As a uniquely vertically integrated British food maker
and shopkeeper, we are ideally placed to do this, and we are working
hard to save customers every penny we can. For example, we recently
bought a potato processing plant in Scotland, which is enabling us to have
closer relationships with local farmers. We have also invested in industry
leading robotics and innovation which is improving product quality and
consistency, and is providing lower prices for customers. We are just
starting a similar project in our newly acquired egg packing business
in Yorkshire.
This, and other ongoing work focusing on our brand at our prices,
means we are making good progress towards our own Morrisons price
list. I was especially pleased last year that, despite input cost pressure
on many commodities, our good work meant the price of a basket
of key 2017 Christmas items was the same as in 2016.
We made further progress in the year with our plans for a broader,
stronger Morrisons.
In wholesale supply, we are open for business. We signed a major new
agreement with McColl’s, and have started a rolling programme to supply
all McColl’s stores nationwide with both Safeway products and national
brands. In addition, we recently announced we will be supplying around
40 Sandpiper stores in the Channel Islands, many of which will convert
to Morrisons Daily. We are on track for our target of £700m of annualised
wholesale supply sales by the end of 2018.
For online, we are adding extra capacity to Morrisons.com through new
store-pick capability in areas outside of those covered by the Dordon
customer fulfilment centre (CFC), for example in North East England.
We are also growing as Amazon grows its food offer, and are now
supplying 40 Rontec-owned Morrisons Daily stores on its forecourts.
Despite this strong progress, our approach remains restless and relentless.
Our colleagues have many ideas of how we can keep improving for years
to come. For example, capability in technology and data is improving, but
we still have substantial opportunities – in automated ordering, in-store
administration, distribution, and procurement of goods not for resale – to
save on cost and recycle the savings back into improving the offer further.
I am pleased we made further good progress with our plan for
£75m-£125m of incremental profit from wholesale, services, interest
and online, and that debt has fallen to less than £1bn as we guided.
We are striving to keep growing sales, profit and ROCE, and generate
significant levels of free cash flow, which we expect to be capital light,
meaningful and sustainable. The recent announcement proposing a
special dividend reflects our good progress so far and our expectations
for continued growth.
All of the progress – in morale, customer transactions, customer
satisfaction, sales, profits, ROCE, and cash flow – are interlinked.
They are as a result of Morrisons colleagues listening to customers and
responding to improve the shopping trip. Our people really are the key.
I would like to thank every colleague for helping make 2017/18 a success,
and know they will make every effort to keep up the pace of progress
into 2018/19 and beyond.
David Potts
Chief Executive
7
Strategic reportGovernanceFinancial StatementsInvestor information To be more
competitive
To serve
customers
better
Find local
solutions
Develop
popular and
useful services
Simplify and
speed up
Make core
supermarkets
strong again
The progress
we have made on
OUR SIX
PRIORITIES
We continued to listen and learn from
customers and colleagues. We again
improved all aspects of the shopping
trip, served customers better, and
became more competitive
David Potts, Chief Executive
8
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 We are listening and responding
• As a British business with a largely British supply
chain, the impact of weaker sterling on imported
food inflation is an opportunity to help save
customers every penny we can
• We work hard with growers, farmers and
suppliers to focus on being more competitive
on the products which matter the most
to our customers
• Our unique manufacturing skills help us to drive
prices lower, particularly on fresh food
• ‘Price Crunch’, ‘Way Down’ and ‘Morrisons Makes
It’ are building a great value Morrisons price list
• We are making good progress on improving the
quality and packaging of our own label range
while keeping prices low
• Our premium own label range, ‘Best’
continues to grow, with a broader range
and twice as many products as last year
• We introduced improved ranges in Home &
Leisure, ‘Eat Smart’, ‘Free From’ and ‘Food to Go’
We are listening and responding
• The shopping trip across the store is becoming
more consistent and customer satisfaction
has improved
• A new automated ordering system is improving
availability, reducing stock levels and helping
to lower costs
• More customers are able to shop with us online,
via a new store-pick delivery service
• A new ‘Flowerworld’ website has been launched,
offering fresh bouquets with free next day
delivery
• ‘Food to Order’ is available all year round, in-store
• Investment in new and improved checkouts gives
customers more choice and shorter queues
and online including a large selection of ‘Free
From’ products
• Colleagues in-store are more visible, showcasing
their craft skills, particularly on Market Street
We are listening and responding
• Local solutions enable us to tailor our offer
to each store’s catchment
• We continue to improve our offer during
key events and tailor ranges around different
demographics and seasons
• We have hosted hundreds of local suppliers
at 16 different regional food maker events
across Britain
• We are identifying and sourcing more products
from the nation’s best local growers, farmers,
fishermen and other food makers
• Through the Fresh Look programme, we continue
to incorporate local solutions based on listening
to how we can improve the store
• Data from our More Card helps us understand
how we can improve the shopping trip
store-by-store
We are listening and responding
• Existing services are increasingly popular and
continue to perform well
• We have modernised almost all of our cafés, and
introduced over 50 new standalone barista bars
• In addition to our plans with Rontec
for Morrisons Daily, we are developing
more convenience opportunities on
our own forecourts
• Parcel pick up services continue to be popular.
We have Amazon lockers in over 400 stores, and
Doddle is now in over 160 stores
• Timpson continues to grow and is now in around
180 stores
• We are utilising our car parks better through
partnerships with car wash and tyre change
concessions
We are listening and responding
• We are simplifying and speeding up the organisation end-to-end, focusing
on providing colleagues with simpler and more efficient ways of working
• We continue to work with suppliers to build strong, long-term and mutually
beneficial relationships
• We have started to introduce more automation in our warehouse
management systems, which will improve forecasting and demand planning
• There remain opportunities to simplify procurement processes for goods
not for resale and we have developed partnership programmes with
suppliers in many key areas
We are listening and responding
• Fresh Look extended to another 80 stores during
the year and have now completed around half
of our stores
• We continue to make improvements across
Market Street, particularly in Fruit & Veg and
Florist departments
• Many local Fresh Look learnings have been applied
• ‘Nutmeg’ womenswear has been further
across the whole estate
expanded and is now in almost 100 stores,
with plans for more next year
9
Strategic reportGovernanceFinancial StatementsInvestor information Case studies
A YEAR OF
PROGRESS IN OUR
STRATEGY TO FIX,
REBUILD AND GROW
We have continued
to make progress
in our turnaround.
These case studies illustrate the
progress this year in building a
broader, stronger Morrisons and
delivering against our six priorities.
1
To be more competitive
2 To serve customers better
3
4
Find local solutions
Develop popular and
useful services
5 Simplify and speed up
6
Make core supermarkets
strong again
10
Wholesale
We are open for business as a wholesaler, and are making good progress. During
the year, we announced a major new wholesale supply agreement with McColl’s.
As part of this agreement we are reviving the Safeway brand which we have been
developing since the end of 2016. Many products will be made by our own skilled
food maker colleagues in one of our 18 manufacturing sites. ‘Morrisons at
Amazon’ continues to grow and expand into new areas, and a further 32 Rontec
owned and operated Morrisons Daily convenience stores were opened, taking
the total to 40. We also recently announced a new wholesale agreement with
Sandpiper in the Channel Islands.
Manufacturing
During the year, we invested
in our supply chain for British
potatoes. We acquired a potato
facility in Angus, Scotland, as well
as investing in increasing capability
in existing manufacturing sites.
Owning more of the supply chain
means we can work closely with
farmers and growers to improve
product quality and consistency,
lower the cost of production
and provide our customers the
lowest possible prices.
1
5
6
1
4
Fresh Look
Through Fresh Look we are improving our
stores each day, one by one, by resetting
and introducing new ranges, and providing
the tools and environment our team of
food makers and shopkeepers need to
deliver great customer service. It is
important we take the time to listen to
customers, both before and after, the
Fresh Look is completed, and that we
keep disruption to a minimum. So far we
have improved around half of our stores,
and will complete the rest in a phased
programme over the next few years.
1
2
3
4
5
6
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Morrisons ordering
We have introduced a new automated ordering system
into all stores, which has given greater visibility of stock and
helped to improve availability and lower costs. The system
did not require a large capital investment and utilises cloud
technology, and store-specific sales data to accurately
forecast stock requirements. We have identified further
efficiency opportunities upstream within our depots,
manufacturing sites and with suppliers.
Mastercraft
Mastercraft is our national competition to find our best food makers and
shopkeepers from across our stores and sites. Our colleagues demonstrate
their expertise, knowledge and passion for their craft in our biggest annual celebration
of how we make and provide food we are all proud of. There were 12 categories this
year including Butchery, Bakery, Fishmongers, Fruit & Veg, Deli, Floristry, Cake Shop,
Wine & Spirits, three apprentice categories and an ‘innovation’ category which was
new for 2017. The event was a huge success and truly showcased the breadth of skills
and the talented colleagues we have at Morrisons.
2
5
6
1
2
6
Local solutions
Customers tell us that local is important to them. They value
local products and want to support their community, so we
listened and launched a search for the next generation of
local food makers nationwide through The Nation’s Local
Foodmakers. Throughout the year, we hosted 16 different
events where we met hundreds of local farmers, growers,
fishermen and other food makers.
Local solutions enable us to tailor our offer in each store
and we take pride in working with smaller, local suppliers
to create a range that is locally relevant for our customers
and reflects our individual stores’ demographic. Locally
grown fruit and vegetables are now seasonally available
in 350 stores, and locally sourced meat is now available
in all Scottish, Welsh, Yorkshire, Lincolnshire and, most
recently, South West stores.
Our Skipton store in Yorkshire features over 500 local
products across categories such as crisps, yogurts, cereals
and pies. The store has specific local point of sale, feature
bays and regular tasting sessions. We are proud that 100%
of the beef and pork on the Butchery counter in Skipton
is sourced from Yorkshire.
1
2
3
6
11
Strategic reportGovernanceFinancial StatementsInvestor information
HIGHLIGHTS
Over 11m
Customer transactions per week on
average
40,000
Customers connected with
each month
Our four stakeholder ambitions
OUR CUSTOMERS
Listening and responding to our customers
With over 11 million transactions per week on average, it is important
that we listen to our customers and respond quickly wherever possible.
We continue to increase the breadth and depth of our customer listening
activities across the business and more colleagues now spend more of
their time listening to customers.
Improving the customer shopping trip by listening hard and responding
quickly remains fundamental to our plan. Our colleagues are doing an
outstanding job of serving customers better and we are listening to
customers in more ways than ever. Every month, we connect with
around 40,000 customers through a combination of our large online
panel of customers, our regular in-store listening programme and monthly
customer surveys.
The ‘My View’ online customer panel is an important way for customers
to give us immediate feedback so that we can respond quickly.
Through this programme of listening, customers have told us that
healthy eating, price, increased convenience and simplicity in stores
are all becoming more important in their lives. This customer feedback
has helped us to make significant improvements.
Our customer service contact centre connected with over 1.7 million
customers during the year by telephone, email, letter or social media.
Our contact centre colleagues put the customer at the heart of
everything they do.
Improving the customer shopping trip
As food makers and shopkeepers we are committed to improving the
customer shopping trip. More customers than ever are highly satisfied
with the service they receive in our stores, and they have told us that
we have improved in a number of important areas. For example,
customers told us they continue to see improvements in reduced queues.
We also focused on improving shop floor service, and customers told us
that we have made significant improvements in staff friendliness, store
cleanliness and ease of navigation. Customers also tell us that we have
made improvements in the availability of products on our shelves.
Customers continue to rate us highly on our food maker credentials,
recognising the skill and expertise of our in-store crafts people and
our unique Market Street offer. Customers have told us they appreciate
the fact that our in-store experts make and provide more fresh food
from scratch than anyone else in Britain. The ‘Morrisons Makes It’
campaign, which showcases unique products made by our specialists,
has been well received by customers. Customers continue to associate
us strongly with buying from British suppliers and working closely
with farmers and growers. We are working hard to build this national
association at a regional and local level through The Nation’s Local
Foodmakers programme.
Our brand continues to play an important role at Morrisons.
Understanding our customers and focusing on the things that matter
most, such as price, quality and range, help us ensure that our brand
remains relevant and attractive.
We have improved the quality of our products within both the ‘Savers’
and Morrisons ranges, and removed unnecessary packaging making the
product more visible. We have doubled the size of our ‘Best’ range to
over 1,000 products and we are continuing to see strong growth. We have
also extended our range of ‘Free From’ and made it easier for customers
who want to buy these specific products to find them in our stores.
In 2017, we won over 300 awards for the quality of our own brand
products, with some highlights being Own-label Range of the Year for
‘Best’ at the Grocer Gold Awards; Supply Chain Innovation of the Year
for our automated ordering system at the IGD Awards; Innovator of the
Year at the International Wine and Spirits Competition; and Multiple Beer
Retailer of the Year and Multiple Cider Retailer of the Year at the 2018
Drinks Retailing Awards. Demonstrating the opportunity to extend our
‘Nutmeg’ brand beyond clothing, we also won Best Disposable Nappy
for our ‘Nutmeg’ Ultra Dry Nappy at the Mumii Awards.
12
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 UK grocery market size (£bn)
2017 Composition of UK grocery market size
177.0
178.0
179.0
175.0
184.5
2013
2014
2015
2016
2017
Supermarkets
Convenience
Discounters
Hypermarkets
Other Retailers
Online
£86.0bn
£40.0bn
£20.1bn
£16.2bn
£11.8bn
£10.4bn
Source
Institute of Grocery Distribution (IGD)
Source
Institute of Grocery Distribution (IGD)
Being more competitive
The Market
In September 2017, we introduced ‘Way Down Price Crunch’ which
communicates our great value prices, and prices which have been held
down lower for longer. With more prices being ‘Crunched’ for customers,
and a higher average discount, ‘Crunch’ sales have achieved record levels.
Customers have responded positively, telling us that ‘Way Down Price
Crunch’ provides a clearer and more confident communication that we
are lowering prices across the store, and that they can expect to make
more noticeable savings.
More Card
The Morrisons More Card continues to grow in popularity. More and
more of our customers are regularly collecting points and receiving
rewards, which they can use to make savings when they shop with us.
We continue to innovate, and have recently introduced a student specific
programme for the More Card which encourages students to join when
they start higher education.
The More Card continues to be a very important way to listen to our
customers allowing us to better tailor our offer to meet our customers’
needs. We are using what we learn about our customers in a number of
different ways and responding accordingly, from providing personalised
rewards that are based around customers actual shopping behaviour,
to developing our pricing strategy and making sure the range in each
individual store is relevant to the customers who shop in it.
During the year, the UK grocery market continued to be competitive.
The backdrop is still one of some uncertainty for UK consumers, with
the longer term outlook for the UK economy and the wider implications
of Brexit still unclear.
Input inflation, as we had expected, was a factor during the year
as a result of weaker sterling pushing up import prices. In these times
of uncertainty value is even more critical to customers, as their budgets
do not expand if prices are higher, so we continue to work hard to
manage the impacts of retail price inflation.
However, we believe these challenges can continue to bring the best
out of Morrisons. We are listening hard to customers and colleagues,
which is helping us better respond to these changes as they occur.
We are improving every day and our team of food makers and
shopkeepers continue to find ways to be more competitive and
serve customers better.
Our vertically integrated supply chain means we are less reliant on
imported products. As a British manufacturer sourcing home-grown
products wherever possible, and as British farming’s biggest single
supermarket customer, we are well placed to mitigate some of the
wider economic pressures. We continue to work hard with growers,
farmers and other suppliers to save customers every penny we can.
Whilst much of our continued turnaround is in our own hands, we are
aware of, and respond to, changes in customer sentiment and trends
in the market. We expect the trends towards digital shopping, more
frequent shopping and convenience to continue, and these are real
opportunities for a broader, stronger Morrisons.
Wholesale, online and popular and useful services provide opportunities
for Morrisons in these significant and growing channels, and help increase
the size of the market in which we operate. We are serving more
customers online in new areas through a new store-pick delivery service
launched with our partner Ocado. We will be extending that further
into more new areas in the coming year, as well as taking some capacity
in Ocado’s new customer fulfilment centre at Erith. New wholesale
partnerships with McColl’s and Sandpiper, together with existing partners
Amazon and Rontec, and our own Morrisons Daily stores, make Morrisons
more accessible to more customers, through new channels.
However, supermarkets continue to represent around half of the
UK grocery market and it is forecast this sub-sector will represent
the majority of the market for many years. Therefore, our focus on
the core supermarkets is a key priority in our turnaround. The Fresh
Look programme, guided by listening and incorporating local solutions,
continues to be rolled out and improvements in growing areas such
as Clothing and ‘Food to Go’ are important to strengthening the offer
in our core supermarkets.
We cannot predict the future but, as long as we continue to do what
is right for our customers, we expect to emerge from this period of
uncertainty a broader, stronger business.
13
Strategic reportGovernanceFinancial StatementsInvestor information HIGHLIGHTS
78%
Colleague Engagement Index Score
(2016/17: 76%)
Over
7,000
Number of colleagues involved
in ‘Your Say’ forums
Our four stakeholder ambitions
OUR COLLEAGUES
Listening hard and responding
Listening to colleagues at all levels and across the organisation is critical
to the business and its turnaround. Through our annual ‘Your Say’ survey
and ongoing forums, we have listened more than ever to the views of
our colleagues.
Three-quarters of colleagues completed the 2017 ‘Your Say’ survey.
Feedback included over 80,000 comments on how we can make
Morrisons a better place to work and shop. For the second consecutive
year, our colleague engagement score increased across the business and
overall we have achieved an engagement score of 78%, with every single
business function in positive growth.
Our ‘Your Say’ forums have been up and running for over a year, and
over 7,000 colleagues have been involved in identifying ways of making
Morrisons a better place to work and shop. Our national forum saw
colleagues from all areas of our business join members of the Executive
Committee to discuss and agree ways to continue to improve Morrisons.
Fair day’s pay and colleague bonus
It is important that colleagues feel valued and that they share in the
success of the business. We listen closely to the feedback in this area
through our ‘Your Say’ survey. Positive responses to the question ‘I receive
a fair day’s pay for the work I do’ has increased again. We also continue
to invest in colleagues, with pay increasing from £8.20 per hour to £8.50
during the year, and again to £8.70 from April 2018, for our front-line
store colleagues.
We have introduced an improved bonus scheme for junior managers
and the average colleague bonus payout in March 2017 was over
25% higher this year than the previous year. During the year, we also
introduced a new pension scheme which provides colleagues with
a more affordable way to save, enabling them to make contributions
starting at 1% of salary, which are matched by the Group.
Store management structures
We have continued to listen to our colleagues and customers and review
our structures to make sure we are in a strong position to serve our
customers better. Over the past two years, we have introduced a number
of new ways of working and invested in stores by improving some of our
technology and systems, as well as offering new products and services.
During the year, we have carried out a full review of our store structure
and announced that we are proposing to introduce a new management
structure which is simpler, with clearer management accountabilities that
establishes an improved balance of colleague and management roles in
14
each store. We will be investing in more colleague roles across stores to
serve our customers better. This will mean that we reduce the number of
management roles by c.1,500, whilst simultaneously creating c.1,700 more
colleague roles in stores. We will continue to look to mitigate the impact
as much as possible. All those impacted will be given the opportunity to
apply for alternative roles in stores or elsewhere in the business.
Tools and training to do the job
During the year, we introduced our ‘MyMorri’ digital platform which gives
all colleagues online access to their payslip, colleague handbook and a
dedicated news channel to keep up-to-date with all relevant company
information. We have introduced ‘My Perks’ on this platform giving
colleagues access to discounts across many high street retailers. Since
the launch, we have seen over 95% of our colleagues use ‘MyMorri’.
We also introduced a new online learning management system,
‘My Learning’. This provides a single platform to access relevant training
materials and an electronic employee record regarding legal training.
Our ‘My Job’ programmes continue to be delivered across the business
to develop technical and leadership skills. This year we delivered
a programme to 2,500 colleagues.
An opportunity to develop, progress and grow
To give our colleagues the opportunity to develop, progress and grow,
we introduced the internal ‘Pathways’ programme which give a clear,
visible route to progression. We had over 500 successful applications
starting on the first of the team manager, senior manager and store
manager programmes.
We have also introduced 21 designated training stores aligned to
geographic regions, where we now train both technical and behavioural
skills consistently across the business.
Over 850 colleagues completed our ‘Leading with Purpose’ programme
up to December 2017. This programme, which is delivered by Leadership
Team members, enables colleagues to understand their role in the
turnaround of Morrisons and in delivering our core purpose.
Our graduate programmes continue to increase in size with
76 graduates starting their careers on one of our eight schemes. Over
50 colleagues have started our new look degree apprentice programme,
and our apprenticeship programmes continue to grow with over 300
colleagues starting an apprenticeship in areas including Butchery, Bakery,
Fishmongers, Engineering and Floristry. We held our annual in-house
Mastercraft competition in November 2017 to celebrate the talent of our
very best food makers and shopkeepers from across the business and
once again it was a huge success. For more details, see page 11.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 HIGHLIGHTS
18%
Percentage of store managers
who are female (2016/17: 7%)
Over
95%
Colleagues who have
accessed ‘MyMorri’
Five ways of working
Diversity
We pride ourselves on being a diverse and inclusive business.
All colleagues and people in the communities in which we work are
welcomed and treated with respect, regardless of their background.
We remain committed to maintaining an environment that enables
colleagues to be at their best more of the time, offering equal
opportunities for colleagues to develop, progress and grow.
During the year, Morrisons employed over 58,000 female colleagues
and over 47,000 male colleagues.
We remain committed to improving representation of females in senior
leadership roles. The Board comprises seven men and two women,
while 73% of the Leadership Team are male and 27% female. We continue
to make progress with our ambition to increase the number of female
store managers and have moved from 34 (7%) in 2016 to 86 (18%) as of
November 2017. We introduced ‘Women in Leadership’ workshops across
the business to give colleagues the opportunity to discuss the barriers and
concerns that our female colleagues face and to share details on personal
development and opportunities in Morrisons.
Gender continues to be a key area of focus for Morrisons.
Since September 2017, over 400 colleagues have joined a new
LGBT+ network.
Looking forward to 2018, the recently established diversity and inclusion
working group will define the future plans based around such things
as gender, culture, LGBT+ and disability.
Our five ways of working underpin everything we do and how Morrisons
operates. They provide a clear and consistent way of doing things
and apply to every colleague in Morrisons across our stores, sites
and central teams.
Customers first
Our customers are at the heart of everything colleagues do.
We care about our customers and do everything we can to
always put them first.
Teamwork
Through teamwork, colleagues can help each other to get things
done, knowing that we can do more together. Each colleague plays
their part in the team, respecting and enjoying working with others
to get better results. To ensure we serve our customers better,
especially at the times of the year that mean the most to them, such
as Christmas, all colleagues working in central roles help out in stores.
Freedom in the framework
Freedom in the framework means colleagues have the freedom
and are trusted to make decisions to help achieve our priorities.
Listening and responding
Listening and responding quickly wherever we can is at the heart
of our turnaround. Taking the time to listen to all of our stakeholders
is embedded in the way we work across the business.
Selling, controlling costs, growing profits
and removing waste
All colleagues are food makers and shopkeepers and are encouraged
to do everything they can to help sell more, manage our costs more
effectively, and identify opportunities to improve how we do things.
15
Strategic reportGovernanceFinancial StatementsInvestor information HIGHLIGHTS
Percentage of Morrisons
branded fresh meat,
milk and eggs sourced in Britain
100%
Our four stakeholder ambitions
OUR SUPPLIERS
Strong supplier relationships informed by listening
The Groceries Supply Code of Practice (GSCOP)
Our aim is to develop mutually beneficial relationships with our suppliers,
based on responsible and fair trading terms and practices in line with the
Groceries Supply Code of Practice (GSCOP). Having effective relationships
with suppliers ultimately helps us serve our customers better. We are
pleased with the progress we have made in simplifying the way we buy
and sell. This has helped us work with our suppliers in a transparent and
fair manner. We are encouraged that our progress in this area is being
recognised in our own listening surveys with suppliers and in industry
surveys, including the Groceries Code Adjudicator’s (GCA) annual
supplier survey.
During the year, we undertook our own surveys to listen to our suppliers
and buyers to help us improve our relationships and develop long-term
partnerships with our suppliers. We have been working with a number
of partner suppliers from across all categories, where there is a joint focus
on driving the quality of our offer. Long-term planning and collaboration
has allowed us to lower end-to-end costs in the supply chain and improve
our quality proposition, so we can serve our customers better.
We have also simplified the way we work with suppliers throughout the
buying process. For example, our dedicated supplier helpdesk provides
a single point of contact, and we continue to improve the speed with
which we resolve queries.
Our supply chain
We continue to invest in our vertically integrated business model to
have greater control over the supply chain in order to become more
competitive and improve our quality position.
As food makers and shopkeepers we are the single biggest supermarket
customer for British farmers, and we are proud to support the British
economy. 100% Morrisons branded fresh meat, milk and eggs are sourced
in Britain. We continue to have direct relationships with British farmers,
which both strengthens the agricultural industry and supports rural
communities. Our customers support the farming community through
purchasing products in the ‘For Farmers’ range (milk, cheese, butter,
cream and bacon), where a clear element of the selling price goes back
to farmers.
We also take pride in working with smaller, local suppliers to create a range
that is locally relevant for our customers and reflects the demographics
of individual stores. During the year, we launched our nationwide search
for the next generation of local food makers through The Nation’s Local
Foodmakers. For more details on these events, see page 11.
16
GSCOP applies to designated grocery retailers in the UK, adding specific
regulations into the trading relationships between retailers and their
suppliers. We actively engage with the relevant regulatory bodies, the
GCA and the Competition and Markets Authority (CMA), to build best
practice. We meet regularly with the GCA and provide updates on our
activity and details on specific areas of interest to the GCA.
The 2017 GCA supplier survey reported Morrisons as the second most
improved retailer. We continue to work hard to listen and respond
to our suppliers, so we can improve processes and build better,
stronger relationships.
We encourage and welcome feedback from suppliers and conduct our
own regular surveys that provide valuable insight on further improvements
we can make to continually improve relationships. Our Code Compliance
Officer (CCO) spoke to suppliers in every category at supplier conferences
throughout the year.
Matters raised by suppliers or the GCA have been focus areas for the
business during the year and we have worked hard to understand and
address them. Key developments during the year have included:
• Investing in improved systems, including introducing a Supplier Portal,
which is provided free of charge for all suppliers;
• Establishing a ‘Good Faith Receiving’ process for suppliers delivering
into our fresh warehouses; and
• Enhancing the dedicated supplier helpdesk, which is committed
to resolving supplier queries within five working days.
We continue to provide training, guidance and support to all colleagues in
our Trading teams together with bespoke training for relevant colleagues
in our Supply Chain and Finance teams.
Governance in this area includes a group comprising senior Leadership Team
members from all relevant functions. Routine updates are provided to our
Executive Committee and to our Corporate Compliance and Responsibility
Committee, including developments regarding the operation of the Code.
We formally report details of activity over the year and specific concerns
raised with our CCO to the GCA and to the CMA at the financial year end.
GSCOP related enquiries are dealt with in accordance with the regulations.
Any matter not resolved directly with a buyer is escalated to the relevant
Category Director and, if requested, to our CCO. During the year, our CCO
received a small number of supplier enquires, none of which remained
outstanding at the year end.
Contact details and further information can be found at
www.morrisons.co.uk/gscop
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Our four stakeholder ambitions
OUR
SHAREHOLDERS
Another strong year where we made
progress against the key financial measures
Trevor Strain, Chief Financial Officer
Introduction
2017/18 was another strong year, where we made good progress
against the key financial measures fundamental to becoming a broader,
stronger business.
We are now in our third year of positive like-for-like (LFL) sales growth
and are pleased to have made good progress with wholesale, an important
part of Morrisons meaningful and sustainable future growth opportunity.
Delivering 11% underlying profit growth is a strong performance in any year,
but is especially so in the context of 2017/18 where the market conditions
were challenging.
We are managing the business for all our stakeholders for the long term,
and are prioritising improved competitiveness, customer satisfaction
and colleague engagement. There were cost pressures in the year, but
we successfully absorbed these and were able to reinvest the benefits
of higher sales volumes back into improving the shopping trip for
our customers.
Our focus on free cash flow continues, and we are committed to
being capital disciplined – spending capital to maintain assets, reduce
costs or improve returns. Net debt is below £1bn and we have a strong,
and strengthening balance sheet, with significant freehold property
ownership and a net pension surplus. These are firm foundations on
which to rebuild and grow.
A final ordinary dividend of 4.43p per share is proposed. Reflecting
continued adherence to the principles of our capital allocation framework,
and our expectations for sustained future growth and strong free cash flow
generation, the Board has also proposed a special dividend of 4.00p per share.
17
Strategic reportGovernanceFinancial StatementsInvestor information Group LFL sales (exc. fuel)
Net debt (£m)
1.9%
2.8%
(2.0%)
(5.9%)
2,340
1,746
1,194
973
2014/15 2015/16 2016/17 2017/18
2014/15 2015/16 2016/17 2017/18
Definition
See the Glossary on page 127 for a definition.
Definition
See the Glossary on page 128 for a definition.
HIGHLIGHTS
Revenue
£17.3bn
Underlying profit before tax
£374m
Our four stakeholder ambitions continued
Summary income statement
Operating profit
2017/18
£m
17,262
458
(80)
2
380
374
12.19p
13.30p
2016/17
£m
16,317
468
(145)
2
325
337
10.86p
13.11p
Operating profit
Underlying adjustments:
– Impairment and provision for onerous contracts
– Profit/loss on disposal and exit of properties and
sale of investments
– Pension scheme set-up credit
– Other exceptional costs
Underlying operating profit
2017/18
£m
458
2016/17
£m
468
(6)
(19)
(13)
25
445
(6)
(32)
–
2
432
Operating profit was £458m (2016/17: £468m). Before the exceptional items
described below, underlying operating profit was £445m (2016/17: £432m).
Following the annual impairment and onerous contract review, a net
credit of £6m has been recognised. In the second half of the year, as
planned, we launched a new defined contribution pension scheme.
The actual cost of back-dated contributions was lower than expected,
primarily due to participation rates. This resulted in a credit of £13m.
Property profits were £19m in the year, and there was a charge of £25m
primarily relating to restructuring. All of these items were reported
outside of underlying profit before tax.
Underlying profit
Reported profit before tax
Underlying adjustments:
– Impairment and provision for onerous contracts
– Profit/loss on disposal and exit of properties and
sale of investments
– Costs associated with the repayment of borrowings
– Pension scheme set-up credit
– Net pension interest income
– Other exceptional costs
Underlying profit before tax
Underlying profit margin
2017/18
£m
380
2016/17
£m
325
(6)
(6)
(19)
16
(13)
(9)
25
374
2.2%
(32)
56
–
(8)
2
337
2.1%
Reported profit before tax was £380m (2016/17: £325m) including a benefit
of £5m from the 53rd week. Underlying profit before tax, which excludes
exceptional items, was £374m (2016/17: £337m).
Basic earnings per share increased to 13.30p (2016/17: 13.11p), and underlying
earnings per share increased to 12.19p (2016/17: 10.86p).
Revenue
Operating profit
Net finance costs
Share of profit of joint ventures
Profit before tax
Underlying profit before tax
Underlying earnings per share
Basic earnings per share
Revenue
Total revenue during the period was £17.3bn, up 5.8% year-on-year.
Revenue excluding fuel was £13.5bn, up 4.4%. 2017/18 was a 53 week
year. On an equivalent 53 week basis, total revenue including fuel
was up 3.8% and revenue excluding fuel up 2.5%.
Group LFL sales excluding fuel were up 2.8% over the year, comprising
supermarket growth of 1.9%, online growth through central fulfilment
of 0.4% and a contribution from wholesale of 0.5%.
The year had some challenges, especially inflationary pressures on
imported food prices caused by weaker sterling, but we continued
to become more competitive for our customers. We were pleased
that quarter four was the ninth consecutive period of positive LFL
sales growth.
Fuel continued to trade well, and we were very competitive throughout
the period with sales up 11% to £3.7bn.
18
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Capital expenditure (£m)
Return on Capital Employed (ROCE)
520
365
419
500
7.3%
7.7%
5.8%
5.6%
2014/15 2015/16 2016/17 2017/18
2014/15 2015/16 2016/17 2017/18
Definition
Measured as additions to property, plant and equipment,
investment properties, intangible assets, assets held-for-sale
and investments as per the cash flow statement.
Definition
See the Glossary on page 128 for a definition.
HIGHLIGHTS
Operating working capital inflow over
four years
£949m
Total payments in tax
£1,114m
Summary balance sheet
Fixed assets and investments
Working capital
Provisions and tax
Net pension asset
Net debt
Net assets
Pensions
2017/18
£m
7,761
(2,045)
(792)
594
(973)
4,545
2016/17
£m
7,761
(2,009)
(767)
272
(1,194)
4,063
The net pension asset on the balance sheet is £594m, an increase of
£322m since last year. During the year, one of the schemes entered
into a transaction to insure part of the scheme’s liabilities (a ‘buy in’).
We continue to work with the pension trustees to identify further
opportunities to de-risk the schemes. We also amended our approach
for setting discount rate assumptions. We believe this new approach
better reflects the profile of the scheme’s liabilities.
We launched our new defined contribution scheme in September 2017.
This provides another option for colleagues to save for their retirement,
with colleague contribution rates starting at 1% of salary, matched by
the Group.
Capital expenditure
Capital expenditure was £500m, (2016/17: £419m). In the year we completed
80 Fresh Look refits, meaning we have now refitted around half of the
estate. We also invested in maintenance and productivity in areas such
as Morrisons ordering and new self-scan checkouts.
Borrowings
We continue to apply our policy of maintaining a conservative debt
maturity profile and continue to reduce the level of debt. In the year,
we completed a tender offer across three of our bonds – repaying £241m.
Liquidity remains strong and we have not drawn down on our £1.35bn
revolving credit facility since October 2015.
Debt, cash flow and working capital
Summary cash flow
Cash generated from operations before onerous
capital payments
Onerous capital payments
Cash generated from operations
Proceeds from sale of property, plant and equipment
and sale of investments
Capital expenditure
Dividends paid
Dividends received
Purchase of own shares
Tax and interest
Costs incurred on repayment of borrowings
Proceeds on settlement of share options
Other non-cash movements
Movement in net debt
Opening net debt
Closing net debt
2017/18
£m
2016/17
£m
926
(42)
884
108
(500)
(129)
8
(4)
(136)
(17)
26
(19)
221
(1,194)
(973)
1,207
(94)
1,113
123
(419)
(118)
8
(5)
(129)
(42)
–
21
552
(1,746)
(1,194)
We made further progress on cash in the year, with net debt falling
by £221m to £973m. Operating working capital inflow was £35m, taking
the total over four years to £949m.
Cash capital expenditure was £500m, and cash outflow on previously
provided onerous commitments was £42m. Proceeds from disposals were
£108m taking total proceeds since the start of the programme, to £1bn.
Interest
Net finance costs were £80m (2016/17: £145m). During the year, we
completed tender offers of £241m across two sterling bond and one
euro bond. There was an exceptional cost of £16m incurred relating to
these early repayments. Before this exceptional cost and impact of IAS 19
pension income, underlying net finance costs were £73m (2016/17: £97m).
Tax
We understand the importance of the tax contribution we make, and
we take our responsibility towards the communities in which we operate
and towards our colleagues, customers, investors and suppliers seriously.
We have a tax management framework which ensures the needs of all of
our stakeholders are considered. The Group is committed to paying all
of its taxes in full and on time. The Group consistently ranks as one of the
largest contributors across a range of UK taxes. In 2017/18, Morrisons made
net payments of £1,114m to the UK government of which £596m was borne
by Morrisons and the remaining £518m was collected on behalf of our
colleagues, customers and suppliers.
Corporation tax payments made during the year were £74m which was
in line with the current tax charge of £73m in the income statement.
19
Strategic reportGovernanceFinancial StatementsInvestor information Our four stakeholder ambitions continued
Return on capital employed (ROCE)
Shareholder returns
Return on capital employed increased to 7.7%. The growth opportunities
we are focused on require relatively low capital expenditure and are
accretive to profit and returns.
2017/18
2016/17
6.1 times 4.6 times
1.4
29%
7.3%
1.1
21%
7.7%
Key balance sheet metrics
Interest cover
Net debt/EBITDA
Gearing
ROCE
Financial strategy
Capital allocation framework
1 Invest in maintaining the estate and reducing cost
2 Maintain debt ratios to support investment grade rating
3 Invest for profitable growth
4 Pay dividends in line with stated policy
5 Return surplus capital to shareholders
Our policy is for the ordinary annual dividend to be sustainable and
covered around two times by underlying earnings per share. The final
ordinary dividend will be 4.43p, bringing the ordinary dividend for
the full year to 6.09p.
In addition to the final ordinary dividend, the Board is proposing a special
dividend of 4.00p per share, taking the total dividend for the year to
10.09p, an increase of 85.8%.
The principles of our capital allocation framework guide us to reinvest
to deliver profitable growth and return surplus capital to shareholders.
In recent years, we have made strong progress with the turnaround and
our Fix, Rebuild and Grow strategy. While there is still much we plan to do,
a new Morrisons is now emerging. We are growing sales and profit, and
expect that growth to continue to be meaningful and sustainable in the
future. We are generating significant levels of free cash flow, which we
also expect to sustain. The special dividend reflects our good progress
so far and our expectations for continued growth.
Looking forward, we will retain a strong and flexible balance sheet. We will
be guided each year by the principles of our capital allocation framework
in assessing the uses of free cash flow.
The components of our financial plan remain unchanged. We will
continue to focus on improving the total return for our shareholders.
Our capital allocation framework is set out above and remains unchanged.
Our first priority is to invest in our stores and infrastructure, and to reduce
costs. Second, we will seek to maintain debt ratios that support our target
of an investment grade credit rating. Third, we will invest in profitable
growth opportunities. Fourth, we will pay dividends in line with our stated
policy, and then any surplus capital will be returned to shareholders.
Trevor Strain
Chief Financial Officer
20
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 HIGHLIGHTS
£9m
Raised for British farmers through the
‘For Farmers’ range
Over 3m
unsold food products donated to charity
Corporate responsibility
RESPONSIBLE RETAILING
Our corporate responsibility programme ensures we operate in a way
that is right for our customers, colleagues, suppliers and shareholders,
while making a positive contribution to society and taking good care
of the environment.
This section showcases some of the highlights during the year as well
as our future plans.
This report should be read in conjunction with our annual Corporate
Responsibility Report which can be found at
www.morrisons‑corporate.com/cr
The Corporate Responsibility Report details the disclosure
requirements for the new Non‑Financial Reporting requirements
of the Companies Act 2006. These include:
• environmental – information on the actual and potential impacts
of our operations on the environment, and on how current and
foreseeable environmental matters may affect our development,
performance or position;
• social and employee matters – information including diversity issues,
employment issues, health and safety in the workplace, consumer
relations, impacts on vulnerable consumers, responsible marketing
and community relations;
• respect for human rights – what we expect from our management,
colleagues and business partners in relation to human rights,
including core labour standards; and
• anti‑bribery and corruption – how we manage anti‑bribery
and anti‑corruption matters and occurrences. Our anti‑bribery
and anti‑corruption policy is available online at
www. morrisons‑corporate.com
Working towards a global agenda
The UN Sustainable Development Goals officially came into force in 2015.
They apply to all and aim to end all forms of poverty, fight inequalities and
tackle climate change on a global scale. These goals can only be realised
with participation of all sectors including business. We at Morrisons
recognise the importance of the goals and the true value of collaboration
in order to create change.
At Morrisons, we want to address these global challenges in a meaningful
way that is relevant and aligned to our business strategy. As a result, we
have ensured we are aligned to at least one goal where possible.
Our focus areas this year:
Help British farmers to be competitive, profitable and sustainable
We buy animals and whole crops direct from British farmers. By owning
our own abattoirs, manufacturing and packing facilities, we can utilise
the whole animal and all of the crop, meaning farmers get a fair price
and we can reduce waste.
• During the year, we reinforced our commitment to British products
by announcing our intention to sell only 100% fresh British Morrisons
branded meat.
• Our ‘Milk for Farmers’ range comes from a dedicated pool of British
farmers, who produce to a higher welfare standard. The extra 10p per
litre paid by customers is shared among all the farmers in the Morrisons
dairy group. Since the ‘For Farmers’ range launched, we have raised over
£9m for farmers.
Ensure the authenticity, provenance and safety of our products
The high standards we set for our own brand suppliers, manufacturing
sites and stores ensure that we provide safe and legal products that
meet the demands of our customers.
• We have been working hard with our suppliers to reduce campylobacter
levels in fresh Morrisons branded chicken and we have developed an
independent monitoring programme.
• Our ‘Culture of Excellence’ programme ran for the second year
in our manufacturing business. This programme continues to play
a key role in improving our food safety and quality ways of working .
All 18 manufacturing sites have been audited and each has robust
plans in place to further improve our culture of excellence targets
for the coming year.
Reduce food waste
Smarter supply chains help us reduce avoidable food waste.
This reduces environmental risk, creates efficiencies and it
is important for our stakeholders.
• Through our unsold food programme our stores partner with local
community groups to donate any unsold food that is safe to eat.
During the year, we donated over three million unsold food products,
working with over 420 community groups.
• We launched our ‘Wonky Veg’ range in 2015, and now sell 18 varieties
and over 500 tonnes per week of ‘Wonky Veg’.
21
Strategic reportGovernanceFinancial StatementsInvestor information Corporate responsibility continued
Look after our colleagues
Reduce general operational waste and carbon emissions
It is important that our colleagues reflect the communities in which we
operate, and feel supported and engaged to enable us to deliver great
customer service and achieve our six priorities.
Reducing operational waste and carbon throughout our supply chain
is part of what we do everyday. This has environmental benefits and
ensures efficiency throughout our operations.
Please see page 14 for further details on our ambitions and progress
for our colleagues.
• 95% of our store waste is diverted from landfill and all of our
manufacturing sites are zero waste direct to landfill.
Source responsibly
We must ensure that our supply chains remain sustainable and that
we conserve the natural resources that we depend on.
• During the year, 87% of wood and wood derived products were Forest
Stewardship Council (FSC) certified, approved alternatives or recycled
for own brand household and beauty products and 72% FSC, approved
alternative or recycled in own brand Home & Leisure products.
• For the third year running we published details on the wild capture
fisheries we source from, ensuring greater transparency. More
information can be found at www.sustainablefish.org
Ensure fair working conditions for our suppliers
Our Ethical Trading Code sets out rights for workers, including
guidance on wages, working hours, safe and hygienic conditions and
discrimination. Compliance with the Ethical Trading Code is part
of our standard terms of supply.
• We are members of the Supplier Ethical Data Exchange, and share
common ethical information.
• We are a founder sponsor of the anti‑slavery initiative Stronger
Together. During the year, 587 colleagues at a manager level attended
Stronger Together training on identifying and tackling modern slavery.
Make it easier for our customers to live healthier lives
We have introduced a range of measures to help our customers
make healthier choices, including product reformulation, clear
nutritional information, healthier ranges, and strong promotions
on fruit and vegetables.
• We are rolling out colour coded nutrition labels across our own
brand pre‑packed food and drink.
• We display calorie information on our customer café menus.
• During the year, we launched a range of value vegetable boxes including
organic, British and ‘Wonky Veg’. The boxes are designed to make eating
fresh food more affordable and contain enough fresh vegetables to
feed a family of four for five days.
Make a positive difference to the communities we serve
We are committed to supporting good causes that matter to our
customers, colleagues and the communities we serve.
• Each of our stores work with local communities on a number
of initiatives, and support a range of other important charity campaigns
including Marie Curie Great Daffodil Appeal, the Poppy Appeal and
Children in Need.
• Last year the Morrisons Foundation donated £10m to 400 charities
including £0.6m in colleague match funding.
• Our three year national charity partnership with CLIC Sargent began
in February 2017 and we have raised over £3m so far to support young
cancer patients and their families.
• We are signatories to Courtauld 2025, which is a collaborative
industry‑wide commitment to cut the waste and greenhouse gas
emissions associated with UK food and drink by 20% before 2025.
• As a result of our efforts to reduce energy use across our estate, since
2005 our operational carbon emissions fell by 34% against our target
of a 30% reduction by 2020.
• We are committed to reducing unnecessary packaging, using recyclable
or recycled material wherever possible we work with suppliers on
packaging innovation to ensure our packaging is only there to protect
and preserve the product it contains, preventing food waste. To help
customers, we use On Pack Recycling Label to clearly identify the
products that can be recycled.
• We have prohibited the use of plastic microbeads ahead of legislation
as well as plastic stem cotton buds in our own brand cosmetic and
personal care products. In 2018, we will be removing the sale of single
use plastic bags, phasing out plastic drinking straws as well as offering
customers the option to refill their water bottles for free in our cafés.
Group greenhouse gas emissions for year ending 31 December¹
Emission source
Combustion of fuel
and operation of facilities
Natural gas
Haulage
Business miles
Fugitive emissions
Refrigerant
Energy purchased for
own use
Electricity
Other
Staff travel
Waste
Online deliveries
Total
Intensity ratio: kg CO2e
per sq ft gross internal
area
2005/06
Baseline year
2016/17
Prior year
2017/18
Current year
Change vs
baseline
99,039
144,497
41,656
165,306
119,611
33,209
165,684
107,473
31,984
67%
(26%)
(23%)
502,358
235,934
196,624
(61%)
767,786
587,954
503,585
(34%)
1,680
66,000
–
1,623,016
983
29,932
15,155
1,188,084
1,300
47,553
17,046
1,071,249
(23%)
(28%)
–
(34%)
53.9
32.0
29.1
(46%)
1 The information above is taken from our Group Carbon Footprint, prepared internally
and independently verified by Jacobs. We have reported for the calendar year 1 January
to 31 December in order to remain consistent with our historical footprint reports. We have
used the Government’s Environmental Reporting Guidelines (2013) to prepare these numbers,
and the emissions factors from the UK Government GHG Conversion Factors for Company
Reporting (2017). These guidelines state the baseline year should be recalculated if there have
been structural changes that would significantly impact on the organisation’s base year figures.
For this year, we have revised our historical emissions figures given the acquisition and disposal
of a number of sites and revisions to carbon conversions factors.
The Group Carbon Footprint includes all major sources of carbon emissions from the operation
of the Group’s supermarkets, manufacturing and distribution sites and operation of its haulage
fleet. Some minor exemptions include our Hong Kong office which deals with energy locally, a
number of distribution sites operated by third parties who are responsible for the energy and
carbon, and five sites which have fuel oil (less than 0.1% of the total footprint).
22
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Risk
MANAGING OUR RISKS
The achievement of our six priorities depends on our ability to make sound, risk-informed decisions.
Managing risk and uncertainty is an integral part of doing business
The risk management process
The risk management framework
Identif y
Eval
u
a
t
e
r
o
t
i
n
o
M
Mitigate
Top
down
Board of Directors
Maintains sound risk management and control systems, assesses principal risks
Audit Committee
Sets risk management framework, assesses effectiveness of risk and control systems and maintains
oversight of risk monitoring
Executive Committee
Assesses principal and operational risks and undertakes regular monitoring of risk
Risk and Internal Audit
Coordinates risk management activity through review of risk registers, agreement of risk mitigation
plans and preparation of risk reporting
Bottom
up
Operational Management
Reviews operational risks, operates controls and implements risk mitigation plans
Risk management approach
We manage uncertainty as we respond to changes in our industry and
the wider political-economic climate by maintaining a business-wide
understanding of our key risks and how to manage them. This assists in
delivering our promises to all of our stakeholders and means that we are
in a better position to achieve our objectives, respond to emerging risks
and create opportunities.
Where potential weaknesses are identified, the Risk and Internal Audit
teams work with the business to agree robust actions to mitigate these.
The Audit Committee supports the Board in maintaining a robust risk
management framework by approving the risk management process and
reviewing the Group’s principal risks and key risk indicator reporting on
a regular basis. Read more on risk governance in the Audit Committee
report on page 36.
The risk management process
Principal risks
Our risk management framework has been built to identify, evaluate,
mitigate and monitor those risks which threaten the achievement of our
six priorities. The framework incorporates both a top-down approach to
identify the Group’s principal risks and a bottom-up approach to identify
operational risks.
At the core of the risk management process are the risk registers for each
of the key business functions. These detail the main operating risks and
are used to assess the gross level of risk (likelihood and impact), mitigating
controls, and the resultant net level of risk and risk mitigation plans with
dates and target level of risk. Target levels of risks are assigned to each
risk based on the risk appetite framework established and agreed with
the Board. The risk registers are owned and managed by operational
management, with the head of each function certifying annually that
these have been reviewed and action plans are in place where required.
The risk registers are formally reviewed and challenged by a sub-group
of the Executive Committee.
The Group risk register is formally reviewed twice a year by the
Executive Committee. The register details the Group’s principal
risks, owners, the level of risk and mitigating actions. The Executive
Committee’s assessment of these risks takes into account the operating
risks, strategic risks, external factors and any emerging risks. The principal
risks are monitored every month by the Executive Committee using key
risk indicator reporting, supplemented by more detailed reviews
as appropriate to identify any changes in the risk landscape.
The Risk and Internal Audit function facilitates the preparation of both
functional and Group risk registers. It supports the Audit Committee in
reviewing the effectiveness of our risk management and internal control
systems and has established a rotational monitoring process for key
financial controls.
The Directors have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model,
achievement of the six priorities, solvency or liquidity. The Directors
consider these to be the most significant risks facing the business, they
do not comprise all the risks that the business is facing. These principal
risks are set out on the following page.
The impact of the UK’s exit from the EU continues to be an important
area of discussion. There are some continuing uncertainties around the
impact of the Brexit negotiations, particularly in relation to the impact on
imported food prices, labour availability and costs, consumer confidence
and potential changes to access to EU labour. These uncertainties impact
a number of the established Group risks and have therefore been
factored into the assessment of the relevant risk where appropriate and
the required mitigation plans. A dedicated steering group is in place that
monitors the risks associated with the outcome of the Brexit negotiations
and the mitigating actions the business has put in place.
As we expand the wholesale business the potential impact on ongoing
operations is an area of focus. This increases complexity, and there are
plans in place to address this.
Certain risks are inherent in the business and are fundamental to the
achievement of all of our key priorities. Other risks could directly impact
the achievement of certain key priorities.
23
Strategic reportGovernanceFinancial StatementsInvestor information
Risk continued
PRINCIPAL RISKS
The risks, which are shown in no particular order, are disclosed along with their alignment to the six priorities and the movement in residual risk during
the year. Residual risk is stated after considering the actions taken by management in response to new and emerging issues impacting the identified risks.
Risk
Description
Mitigation
Business
Interruption
#
Competitiveness
1
Customer
1 2 3
4 6
Data
#
There is a risk that a major incident,
such as a significant failure of
technology, a natural disaster or
strike action, could cause significant
disruption to business operations.
The Group’s response must be
appropriate to minimise disruption
and reputational damage. The growing
wholesale business increases
the complexity of operations
and technology.
The Grocery sector continues to
have high levels of competitive
activity. The continued impact of
the EU referendum, and subsequent
negotiations, on exchange rates and
the supply chain has affected costs
of goods.
If we do not engage with our suppliers
and effectively manage our trade plan
to remain competitive there is a risk
this will adversely impact performance.
There is a risk that we do not meet
the needs of our customers in respect
of price, range, quality and service.
We need to be responsive to changes
in customer confidence and trends
which have been impacted by changes
to the economy and the UK’s planned
exit from the EU. If we do not provide
the shopping trip that customers want,
we could lose sales and market share.
A security breach leading to loss
of customer, colleague or Group
confidential data is a key aspect of
this principal risk. A major data security
breach could lead to significant
reputational damage and fines.
The risk environment is challenging,
with increased levels of cybercrime
and regulatory requirements.
• We have recovery plans in place covering our stores, depots, sites and offices;
• These plans include, where appropriate, secondary locations which would be used
as backup in case of an incident;
• Business continuity resilience exercises are undertaken to test processes and
management’s ability to respond effectively;
• A Crisis Management Group is in place to oversee these plans and to manage and
respond to any major incidents;
• We conduct supplier risk assessments and have contingency plans in place, where
possible, to manage the risk of loss of supply; and
• The Technology plan is aligned with the business strategy and considers the future
needs of the business including greater investment in cloud technologies to provide
further resilience.
• We review and actively manage our pricing, trade plan and promotional and
marketing campaigns;
• We have simplified how we work with suppliers building joint business plans, ensuring
a competitive customer offer;
• We continually review our range, category plan, and quality and respond to customer
feedback, for example the ‘Best’ premium own brand range has grown to meet
customer demand;
• Competitor pricing positions and market trends are reviewed on a weekly basis; and
• Our strong balance sheet and strong cash flow will allow us to continue to invest
in our proposition.
• One of our six priorities is ‘to serve customers better’ and we have a range of
activities to support that;
• A large scale programme of customer listening groups is in place to gain a deep
understanding of what our customers want and, where we can improve, these
have informed key activities such as our store Fresh Look programme and changes
to range;
• We closely monitor research on customer perceptions and respond quickly wherever
possible. For example, with a steering group to address any particular risks arising
from the UK’s planned exit from the EU; and
• We have worked with wholesale partners to make Morrisons products accessible
to more customers and have continued to expand the geography covered by our
online offering.
• The Group’s Data Steering Group has the responsibility for overseeing data
management practices, policies, regulatory awareness and training;
• Information security policies and procedures are in place, including encryption,
network security, systems access and data protection;
• This is supported by ongoing monitoring, reporting and rectification
of vulnerabilities;
• Focused working groups are in place – looking at the management of data across
the business including colleague data, customer data, commercial data and financial
data; and
• A project team is in place which is implementing the plan to meet General Data
Protection Regulations (GDPR) in advance of May 2018.
Key
Link to our six priorities
Increase in net risk
No change in net risk
Decrease in net risk
24
1
2
3
4
To be more competitive
To serve customers better
Find local solutions
Develop popular and useful services
5
6
#
To simplify and speed up the organisation
To make the core supermarkets strong again
Underpins all six priorities
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Risk
Description
Mitigation
Financial and
Treasury
#
Food Safety
and Product
Integrity
#
Health
and Safety
#
People
#
Regulation
#
The main areas of this principal risk
are the availability of funding and
management of cash flow to meet
business needs. There is a risk of
a working capital outflow if there
was a significant reduction in payment
terms to suppliers. Some suppliers
benefit from access to supply chain
finance facilities. The withdrawal of
these facilities may require some
terms to be reviewed. In addition,
fluctuations in commodity prices and
foreign exchange rates could impact
the Group’s profitability.
There is a risk that the products we
sell are unsafe or not of the integrity
that our customers expect. It is of
utmost importance to us, and to the
confidence that customers have in our
business, that we meet the required
standards. If we do not do this it
could impact business reputation and
financial performance.
• The Group’s Treasury function is responsible for the forward planning and
management of funding, interest rate, foreign currency exchange rate and certain
commodity price risks. They report to the Treasury Committee and operate within
clear policies and procedures which are approved by the Board;
• The Group’s treasury policy is to maintain an appropriate borrowing maturity
profile and a sufficient level of headroom in committed facilities. This includes
an assumption that supply chain finance facilities are not available for the benefit
of suppliers;
• There are governance processes in place to control purchases in foreign currency and
management of commodity prices; and
• For livestock and produce, we track prices and forecasts and enter into long-term
contracts where appropriate to ensure stability of price and supply.
• Monitoring processes are in place to manage food safety and product integrity
throughout the Group and supply chain;
• Regular assessments of our suppliers and own manufacturing and store facilities
are undertaken to ensure adherence to standards;
• Our vertical integration model gives us control over the integrity of a significant
proportion of our fresh food;
• Management regularly monitors food safety and product integrity performance and
compliance as well as conducting horizon scanning to anticipate emerging issues; and
• The process is supported by external accreditation and internal training programmes.
The main aspect of this principal risk
is of injury or harm to customers or
colleagues. Failure to prevent incidents
could impact business reputation and
customer confidence and lead
to financial penalties.
• We have clear policies and procedures detailing the controls required to manage
health and safety risks across the business;
• An ongoing training programme is in place for front line operators and management;
• A programme of health and safety audits is in place across our stores, depots, sites
and offices with resources dedicated to manage this risk effectively; and
• Management regularly monitors health and safety performance and compliance.
Our colleagues are key to the
achievement of our plan, particularly
as we improve the business. There is
a risk that if we fail to attract, retain
or motivate talented colleagues, we
will not provide the quality of service
that our customers expect.
Business change and the challenging
trading environment may impact on
colleagues leading to an increase in
this risk. There is uncertainty about
potential changes to employment
regulations when the UK leaves the EU
and this could result in a retention and
recruitment risk, particularly at some
manufacturing sites.
• We have fair employment policies, and competitive remuneration and
benefits packages;
• A Group-wide reward framework is in place and roles are evaluated against
an external framework, driving stronger consistency of rewards;
• Our training and development programmes are designed to give colleagues the skills
they need to do their job and support their career aspirations;
• Line managers conduct regular talent reviews and processes are in place to identify
and actively manage talent;
• Colleague engagement surveys, listening sessions and networking forums are used
to understand and respond to our colleagues; and
• A steering group is in place to monitor and take action on any particular people risks
relating to the UK’s exit from the EU.
The Group operates in an environment
governed by numerous regulations
including GSCOP (Groceries Supply Code
of Practice), competition, employment,
health and safety, and regulations
over the Group’s products. There is
uncertainty about any potential changes
to regulations relating to the UK’s exit
from the EU. In all cases, the Board takes
its responsibilities very seriously and
recognises that breach of regulation
can lead to reputational damage and
financial damages to the Group.
• We have a GSCOP compliance framework in place including training for relevant
colleagues and processes to monitor compliance;
• We have a senior level working group in place to review and improve GSCOP
compliance activity;
• We have an independent whistleblowing line for suppliers to provide feedback to
the Group and a Code Compliance Officer so that action can be taken as necessary;
• We have a senior level steering group in place to monitor and take action on any
potential regulatory change resulting from the UK’s exit from the EU;
• We have training, policies and legal guidance in place to support compliance with
Competition Law and other regulations; and
• We actively engage with government and regulatory bodies on policy changes which
could impact our colleagues and our customers.
25
Strategic reportGovernanceFinancial StatementsInvestor information Risk continued
Viability statement
The Group’s business model and strategy, as outlined on pages 2 to 3,
are central to an understanding of its future viability. The Group continues
to progress against its turnaround strategy, focusing on strengthening the
core supermarkets and delivering capital light growth whilst maintaining
discipline and control in relation to costs and maintaining a strong
balance sheet.
The Directors have assessed the viability of the Group over a three year
period to January 2021. The Group’s business model is not dependent
on any particular contract or resource with fixed end dates. The period
was selected because the Group’s forecasts associated with the detailed
strategic and financial plans are prepared over this period and were
considered to be the most robust and appropriate means to support
its viability statement.
The Board assesses the Group’s prospects primarily through the strategic
planning process. The latest strategic planning update with the Board was
held in November 2017 with involvement of all relevant functions across
the business.
As part of the strategic planning process, the Directors make a number
of assumptions about business performance and the ability of the
Group to raise debt financing. The Group carefully plans and reviews
the maturity profile of debt facilities to avoid coterminous maturity dates
and liquidity forecasting gives visibility of headroom under committed
facilities over the period of the financial plans.
Key metrics in the plan, such as cash flow, interest cover, liquidity and the
ability to raise debt financing, were subject to sensitivity testing by flexing
a number of the main financial assumptions in order to assess the impact
of principal risks in severe but plausible scenarios.
The scenarios which have been modelled encompass the Group’s
principal risks.
Principal Risks
Description
Competitiveness
and Customer
Failure to remain competitive (e.g. through price
or keeping pace with changes in the market).
Increased inflation, labour and import costs
as a result of the UK’s decision to leave the
European Union.
Business
interruption
and Compliance
A serious data security or regulatory breach
resulting in a significant monetary penalty and
a loss of reputation among customers.
Financial and
treasury
A banking crisis leading to one or more of the
members of the Group’s banking syndicate
choosing not to, or being unable to honour
the facility agreement.
Furthermore, reverse stress testing was performed to understand the
level of performance decline that the Group could withstand.
Based on this assessment, and taking into account the Group’s current
position, the Directors have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall
due over the three year period of their assessment.
Approval of the Strategic report
Pages 1 to 26 of the Annual Report form the Strategic report.
The Strategic report was approved by the Board on 13 March 2018
and signed on its behalf by:
Jonathan Burke
Company Secretary
13 March 2018
26
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Corporate governance report
Chairman’s governance statement
I am pleased to introduce on behalf of
the Board, Morrisons Corporate governance
report for the financial year 2017/18
Andrew Higginson, Chairman
Colleague voice at the Board
Throughout Morrisons we have a culture of listening hard and responding
quickly. This culture also extends to our Board.
Board members have met hundreds of Morrisons colleagues through
the various functional updates, store and site visits and personal shopping
experiences. The Board also receives updates on the ‘Your Say’ survey
in which three-quarters of colleagues within Morrisons have shared their
thoughts about the Group. More information on the ‘Your Say’ survey
can be found in our colleagues section on page 14. The national ‘Your
Say’ forum, which includes a representative from each store region,
manufacturing site and distribution centre, gathers twice a year to discuss
issues that are important to the colleagues they represent. David Potts,
along with other senior members of the Group’s management team,
have been in attendance to discuss colleague views. Tony van Kralingen
will be attending these forums throughout 2018/19.
Engagement with shareholders
We take the opinions of all our stakeholders very seriously, and as such,
we continue to focus on engagement with our shareholders. Since his
appointment, Tony van Kralingen has begun a comprehensive shareholder
engagement programme and has personally spoken with holders
representing over 42% of Morrisons current register.
In such a competitive industry, we have and continue to make tough
decisions every day. The Board and the Group will continue to listen
hard to our stakeholders and respond quickly where we can.
Andrew Higginson
Chairman
As we Fix, Rebuild and Grow Morrisons, a robust and effective
governance framework allows our colleagues the agility and flexibility
for improvements to be made to every aspect of the Group.
We continue to make good progress in the Group’s turnaround and
this is reflected in improving like-for-like sales, customer satisfaction
and colleague engagement. This governance framework ensures that
our key stakeholders are put at the heart of all decisions we make
to drive long-term value creation for all.
Board effectiveness
The Board and management team continue to work well together.
The Board draws on the Directors’ range of experience, knowledge
and skills to help Fix, Rebuild and Grow Morrisons for all stakeholders.
We are delighted to welcome Tony van Kralingen and Kevin Havelock
to the Board. Both Tony and Kevin bring a wealth of experience from
the fast moving consumer goods industry. Tony has spent much of his
induction period listening to shareholders and other stakeholders to
help guide his approach as Chair of our Remuneration Committee.
Kevin joined the Board on 1 February 2018 and has started his
induction programme.
An external review of the effectiveness of our Board was undertaken
by Consilium Board Review during the Summer. This review found that
the Board has a well-balanced set of capabilities; and that governance and
compliance is strong. The review provided the relatively newly established
Board an opportunity to reflect on its effectiveness and as such many
insightful and helpful suggestions were made that are in the process
of being implemented.
Diversity
We truly value diversity and a culture of inclusion across our colleague
base, and the Board itself. A broad range of skills, experience and
knowledge is required in our Group as this is invaluable to the
improvements we will continue to make.
The Board continues to meet the Group’s policy to maintain female
representation at not less than 20%. At the end of the financial year,
22% of the total Board composition was female.
27
Strategic reportGovernanceFinancial StatementsInvestor information Corporate governance report continued
Compliance with the UK
Corporate Governance Code
The Board considers that its corporate governance
policies and procedures are appropriate and that
the Group has applied the principles and, save as
described below regarding the 2017 AGM results,
complied with the detailed provisions of the 2016
UK Corporate Governance Code (the ‘Code’)
throughout the financial year 2017/18 and to the
date of this Annual Report.
The Code is available on the Financial Reporting Council’s website,
www.frc.org.uk
The Board’s corporate governance compliance statement sets out
how the Group complies with each of the provisions of the Code.
It is available in the investor relations section of the Group’s website,
www.morrisons-corporate.com
Compliance with the remuneration areas of the Code are covered
in the Directors’ remuneration report which can be found on page 38.
Leadership
Effectiveness
Accountability
Relations with shareholders
Training and development
Induction programmes are agreed by the
Chairman for each new Non-Executive Director’s
appointment.
The Chairman assesses the development needs
of members of the Board on an annual basis.
Provision of information and support
The Chairman, supported by the Company
Secretary, ensures that the Board receive
information on a timely basis.
Each Director has access to the advice and services
of the Company Secretary. They may also take
external advice at the Group’s expense in relation
to their duties.
Board and committee performance
and evaluation
An external assessment of the Board was facilitated
by Consilium Board Review during the year.
Consilium Board Review does not have any other
connection with the Group.
The outcomes of this assessment can be found
on page 34.
Re-election of Directors
All the current Directors submit themselves for
re-election at the AGM to be held on 14 June 2018.
After reviewing the outcome of performance
evaluations, the Board confirms that the
contributions made by the Directors offering
themselves for election or re-election at the AGM
in June 2018, continue to be effective and that the
Group supports their re-election.
The role of the Board
The Board met eight times in the year which is
considered sufficient to fulfil its duties. Details
of attendance at each Board and Committee
meeting is provided on page 30.
The formal schedule of matters reserved for the
Board remains unaltered from 2016/17 and is set
out in the corporate governance compliance
statement which can be found in the investor
relations section of the Group’s website,
www.morrisons-corporate.com
Division of responsibilities
The Board is committed to a clear division of
responsibilities between the Chairman and the
Chief Executive. This has been reviewed by the
Board during the year and is also set out in the
corporate governance compliance statement.
The Chairman
Andrew Higginson met the independence criteria
detailed in the Code on appointment.
Senior Independent Director
Rooney Anand was appointed as the Senior
Independent Director on 1 January 2016 when
he joined the Board. Rooney has extensive
knowledge of the retail and fast moving
consumer goods industries.
The Senior Independent Director provides
shareholders with an alternative contact
to the Chairman, the Chief Executive and the
Chief Financial Officer. The Senior Independent
Director also carried out the Chairman’s
performance review.
The Chairman arranges regular discussions
between all the Non-Executive Directors
(including himself) as a group without
management present.
The Board’s composition
The majority of the Board comprises
Non-Executive Directors. The Non-Executive
Directors bring a varied range of skills and
experience to the Group. Details of their
experience outside the Group are set out
in their respective biographies on page 30.
The Board is satisfied that all Non-Executive
Directors, including the Non-Executive Chairman,
remain independent according to the definition
contained in the Code. The criteria used to
determine independence are set out in the
corporate governance compliance statement,
which can be found in the investor relations
section of the Group’s website,
www.morrisons-corporate.com
Directors’ interests
The interests of the Executive and Non-Executive
Directors of the Group, and their immediate
families, in the shares of the Group, along with
share options, are contained in the Directors’
remuneration report set out on pages 38 to 51.
At no time during the year did any of the Directors
have a material interest in any significant contract
with the Group or any of its subsidiaries.
Board appointments
The Nomination Committee leads the process
for Board appointments. More information on
this Committee can be found on pages 33 and 37.
The Nomination Committee considers that the
Board and Executive Committee contain the skills
and experience necessary in light of the Group’s
current activities and strategic direction.
Time commitments
The minimum time commitment expected of
the Non-Executive Directors is 12 days per year,
including attendance at the Annual General
Meeting (AGM), Board meetings 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.
This has been confirmed by the external Board
effectiveness assessment referred to on page 34.
28
• responding to enquiries from shareholders and
analysts through the Investor Relations team; and
• the Board encourages participation of
individual investors at the AGM; and
with shareholders to understand the reasons
behind this voting result, and further details
of this engagement are set out on page 39
of this year’s Directors’ remuneration report.
Use of the AGM
The 2018 AGM will be held on 14 June 2018 at the
Group’s headquarters at Gain Lane, in Bradford.
The whole Board is expected to attend and be
available to answer any questions shareholders
may have.
Notice of the 2018 AGM of the Group is to be
sent to shareholders with an accompanying letter
from the Chairman. The format of the meeting is:
• a summary presentation of results is provided
before the Chairman deals with the formal
business;
• all shareholders present can put questions to
the Chairman, Chairmen of the Committees,
and the Board during the meeting and
informally afterwards;
• following the meeting, details of the voting
on the resolutions will be made available on
the website www.morrisons-corporate.com/
investor-centre/shareholder-information/
generalmeetings/
The Directors recommend shareholders vote
in favour of each resolution, believing them
to be in the best interests of the Group.
Shareholders will be notified of the availability
of the Annual Report and Financial Statements
on the website unless they have elected to
receive a printed version.
Financial and business reporting
Shareholder engagement
The way the Group generates value and the
Board’s strategy for delivering the Group’s
objectives is described in the Business model
on pages 2 to 3, and our six priorities section
on pages 8 to 9. The information regarding the
Takeover Directive disclosures are on page 52.
The consideration of going concern is described
on page 52. The viability statement is on page 26.
Risk management and internal control systems
The Board is satisfied with the effectiveness of
internal control and that risk is being managed
effectively across the Group. More information
can be found on page 36.
Role and responsibility of the Audit Committee
The role and responsibility of the Audit Committee
is outlined in the Board structure on page 33.
The Board is satisfied that Belinda Richards
has recent and relevant financial experience
appropriate to her position as Chair of the
Audit Committee. Belinda is considered to have
sufficient financial experience, having been a
corporate finance partner at Deloitte for over ten
years. Additionally, she serves on the Advisory
Group of the Audit Committee Chairmen at the
Financial Reporting Council and is a member of the
Governing Council of the Centre for the Study of
Financial Innovation.
The Board is committed to communicating the
strategy to analysts, investors and shareholders
on a regular basis through a planned programme.
The Investor Relations programme includes:
• formal presentations of full and half year results;
• trading statements;
• regular meetings between institutional investors,
the CEO, the CFO and the Investor Relations
team in the UK and overseas following the full
and half year results;
• regular meetings between the Chairman and
major shareholders to discuss any aspect
of the Group or its governance arrangements;
• attending key investor conferences;
• communication between the Chairman
of the Remuneration Committee and
major shareholders on remuneration policy
and significant changes in remuneration
arrangements;
• dedicated shareholder and investor sections
on the website.
In addition, the Investor Relations team provides
a regular update to the Board and feedback from
meetings held between executive management
and institutional shareholders. The Group’s brokers
seek independent feedback from analysts and
investors following the full and half year results
meetings which is reported to the Board.
2017 AGM results
At last year’s AGM, our 2017 Directors’
remuneration report was approved with 52% of
the votes cast in favour. As our Chairman explained
in a press statement issued shortly following the
announcement of the results of last year’s AGM,
we had consulted widely with shareholders before
the AGM on our new remuneration policy, which
received strong support with more than 92%
of the votes cast in favour. We were therefore
surprised not to get a higher vote in favour of the
2017 Directors’ remuneration report. When we
announced the results of last year’s AGM we did
not expressly state, in accordance with the Code,
the actions we intended to take to understand
the reasons behind the vote result. Needless to
say, however, since the appointment of Tony
van Kralingen as the Chair of the Remuneration
Committee, we subsequently engaged extensively
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Leadership
Effectiveness
Accountability
Relations with shareholders
The role of the Board
The Board’s composition
Training and development
The Board met eight times in the year which is
considered sufficient to fulfil its duties. Details
of attendance at each Board and Committee
meeting is provided on page 30.
The formal schedule of matters reserved for the
Board remains unaltered from 2016/17 and is set
out in the corporate governance compliance
statement which can be found in the investor
relations section of the Group’s website,
www.morrisons-corporate.com
Division of responsibilities
The Board is committed to a clear division of
responsibilities between the Chairman and the
Chief Executive. This has been reviewed by the
Board during the year and is also set out in the
corporate governance compliance statement.
The Chairman
Andrew Higginson met the independence criteria
detailed in the Code on appointment.
Senior Independent Director
Rooney Anand was appointed as the Senior
Independent Director on 1 January 2016 when
he joined the Board. Rooney has extensive
knowledge of the retail and fast moving
consumer goods industries.
The Senior Independent Director provides
shareholders with an alternative contact
to the Chairman, the Chief Executive and the
Chief Financial Officer. The Senior Independent
Director also carried out the Chairman’s
performance review.
The Chairman arranges regular discussions
between all the Non-Executive Directors
(including himself) as a group without
management present.
The majority of the Board comprises
Induction programmes are agreed by the
Non-Executive Directors. The Non-Executive
Chairman for each new Non-Executive Director’s
Directors bring a varied range of skills and
experience to the Group. Details of their
experience outside the Group are set out
in their respective biographies on page 30.
appointment.
The Chairman assesses the development needs
of members of the Board on an annual basis.
The Board is satisfied that all Non-Executive
Provision of information and support
Directors, including the Non-Executive Chairman,
remain independent according to the definition
contained in the Code. The criteria used to
determine independence are set out in the
corporate governance compliance statement,
which can be found in the investor relations
section of the Group’s website,
www.morrisons-corporate.com
Directors’ interests
The interests of the Executive and Non-Executive
Directors of the Group, and their immediate
families, in the shares of the Group, along with
share options, are contained in the Directors’
remuneration report set out on pages 38 to 51.
At no time during the year did any of the Directors
have a material interest in any significant contract
with the Group or any of its subsidiaries.
The Chairman, supported by the Company
Secretary, ensures that the Board receive
information on a timely basis.
Each Director has access to the advice and services
of the Company Secretary. They may also take
external advice at the Group’s expense in relation
to their duties.
Board and committee performance
and evaluation
An external assessment of the Board was facilitated
by Consilium Board Review during the year.
Consilium Board Review does not have any other
connection with the Group.
The outcomes of this assessment can be found
on page 34.
Re-election of Directors
Board appointments
The Nomination Committee leads the process
for Board appointments. More information on
this Committee can be found on pages 33 and 37.
The Nomination Committee considers that the
Board and Executive Committee contain the skills
and experience necessary in light of the Group’s
current activities and strategic direction.
All the current Directors submit themselves for
re-election at the AGM to be held on 14 June 2018.
After reviewing the outcome of performance
evaluations, the Board confirms that the
contributions made by the Directors offering
themselves for election or re-election at the AGM
in June 2018, continue to be effective and that the
Group supports their re-election.
Time commitments
The minimum time commitment expected of
the Non-Executive Directors is 12 days per year,
including attendance at the Annual General
Meeting (AGM), Board meetings 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.
This has been confirmed by the external Board
effectiveness assessment referred to on page 34.
Financial and business reporting
The way the Group generates value and the
Board’s strategy for delivering the Group’s
objectives is described in the Business model
on pages 2 to 3, and our six priorities section
on pages 8 to 9. The information regarding the
Takeover Directive disclosures are on page 52.
The consideration of going concern is described
on page 52. The viability statement is on page 26.
Risk management and internal control systems
The Board is satisfied with the effectiveness of
internal control and that risk is being managed
effectively across the Group. More information
can be found on page 36.
Role and responsibility of the Audit Committee
The role and responsibility of the Audit Committee
is outlined in the Board structure on page 33.
The Board is satisfied that Belinda Richards
has recent and relevant financial experience
appropriate to her position as Chair of the
Audit Committee. Belinda is considered to have
sufficient financial experience, having been a
corporate finance partner at Deloitte for over ten
years. Additionally, she serves on the Advisory
Group of the Audit Committee Chairmen at the
Financial Reporting Council and is a member of the
Governing Council of the Centre for the Study of
Financial Innovation.
Shareholder engagement
The Board is committed to communicating the
strategy to analysts, investors and shareholders
on a regular basis through a planned programme.
The Investor Relations programme includes:
• formal presentations of full and half year results;
• trading statements;
• regular meetings between institutional investors,
the CEO, the CFO and the Investor Relations
team in the UK and overseas following the full
and half year results;
• regular meetings between the Chairman and
major shareholders to discuss any aspect
of the Group or its governance arrangements;
• attending key investor conferences;
• communication between the Chairman
of the Remuneration Committee and
major shareholders on remuneration policy
and significant changes in remuneration
arrangements;
with shareholders to understand the reasons
behind this voting result, and further details
of this engagement are set out on page 39
of this year’s Directors’ remuneration report.
Use of the AGM
The 2018 AGM will be held on 14 June 2018 at the
Group’s headquarters at Gain Lane, in Bradford.
The whole Board is expected to attend and be
available to answer any questions shareholders
may have.
Notice of the 2018 AGM of the Group is to be
sent to shareholders with an accompanying letter
from the Chairman. The format of the meeting is:
• a summary presentation of results is provided
before the Chairman deals with the formal
business;
• all shareholders present can put questions to
the Chairman, Chairmen of the Committees,
and the Board during the meeting and
informally afterwards;
• responding to enquiries from shareholders and
analysts through the Investor Relations team; and
• the Board encourages participation of
individual investors at the AGM; and
• following the meeting, details of the voting
on the resolutions will be made available on
the website www.morrisons-corporate.com/
investor-centre/shareholder-information/
generalmeetings/
The Directors recommend shareholders vote
in favour of each resolution, believing them
to be in the best interests of the Group.
Shareholders will be notified of the availability
of the Annual Report and Financial Statements
on the website unless they have elected to
receive a printed version.
• dedicated shareholder and investor sections
on the website.
In addition, the Investor Relations team provides
a regular update to the Board and feedback from
meetings held between executive management
and institutional shareholders. The Group’s brokers
seek independent feedback from analysts and
investors following the full and half year results
meetings which is reported to the Board.
2017 AGM results
At last year’s AGM, our 2017 Directors’
remuneration report was approved with 52% of
the votes cast in favour. As our Chairman explained
in a press statement issued shortly following the
announcement of the results of last year’s AGM,
we had consulted widely with shareholders before
the AGM on our new remuneration policy, which
received strong support with more than 92%
of the votes cast in favour. We were therefore
surprised not to get a higher vote in favour of the
2017 Directors’ remuneration report. When we
announced the results of last year’s AGM we did
not expressly state, in accordance with the Code,
the actions we intended to take to understand
the reasons behind the vote result. Needless to
say, however, since the appointment of Tony
van Kralingen as the Chair of the Remuneration
Committee, we subsequently engaged extensively
29
Strategic reportGovernanceFinancial StatementsInvestor information
Board of Directors and Executive Committee
ALWAYS LISTENING
Composition of the Board
The Board is independent and contains an appropriate mixture of skills and experience. The Board is satisfied that all Non-Executive Directors, including the Non-Executive Chairman,
remain independent according to the definition contained in the Code1. The criteria used to determine independence are set out in the corporate governance compliance statement
which can be found in the investor relations section of the Group’s website, www.morrisons-corporate.com. Each of the Non-Executive Directors has committed and is able to commit
an appropriate amount of time in fulfilling effectively their role and responsibilities on the Board.
1. Andrew Higginson
Chairman
2. David Potts
Chief Executive
3. Trevor Strain
Chief Financial
Officer
C
R N
C
5. Neil Davidson
Non-Executive
Director
6. Belinda Richards
Non-Executive
Director
7. Tony van Kralingen
Non-Executive
Director
4. Rooney Anand
Senior Independent
Non-Executive
Director
C
R N
8. Paula Vennells
Non-Executive
Director
A C
R N
A C
R N
A C
R N
A C
R N
1. Andrew Higginson
Appointment
Andrew joined the Group as Deputy
Chairman and Chairman Elect in October
2014 and became Chairman at the end
of January 2015.
Experience
Andrew brings significant Board,
commercial, retail and leadership
experience to the Board. Andrew is a
former Executive Director of Tesco PLC
having spent 15 years on the Main Board,
first as Finance and Strategy Director, and
latterly as Chief Executive of their Retailing
Services business. His early career was with
Unilever, Guinness, Laura Ashley and the
Burton Group. Andrew was previously the
Chairman of Poundland Group PLC, Senior
Independent Director of BSkyB PLC and
a Non-Executive Director of the Rugby
Football Union.
External Roles
Chairman of N Brown Group PLC
Non-Executive Director of Woolworths
Holdings Limited
Chairman of Evergreen Garden Care
2. David Potts
Appointment
David joined the Group as Chief Executive
on 16 March 2015.
Experience
David is a vastly experienced retailer who
joined Tesco PLC at the age of 16 and
worked there for 39 years. He rose to
become CEO of its Ireland business, its UK
retail stores business and then CEO of
Tesco Asia. David was also on the Tesco PLC
Board from 1998 until he left in 2011. Prior
to his appointment as CEO of Morrisons,
David held several advisory positions with
a number of private equity and consultancy
firms and developed his own retail concept
to sell general merchandise. He also worked
on two extensive retail projects in the UK.
External Roles
None
30
3. Trevor Strain
Appointment
Trevor joined the Group in June 2009
as Commercial and Operations Finance
Director. In June 2011, he became Finance
Director Corporate and took responsibility
for the Company’s productivity
programmes. Trevor joined the Board
as Chief Financial Officer on 10 April 2013.
Experience
Prior to joining Morrisons, Trevor worked
for Tesco PLC in a number of roles until
his appointment as UK Property Finance
Director in 2006 and subsequently UK
Planning and Reporting Finance Director.
Trevor began his career with Arthur
Andersen and is a member of the Institute
of Chartered Accountants in England
and Wales.
External Roles
None
4. Rooney Anand
Appointment
Rooney joined the Board as a
Non-Executive Director and Senior
Independent Director on 1 January 2016.
Experience
Rooney is a highly experienced retail and
fast moving consumer goods (FMCG)
executive. Following a career with United
Biscuits and then Sara Lee, he joined
Greene King PLC in 2001 as Managing
Director of its brewery company. He was
appointed CEO in 2005.
External Roles
Chief Executive Officer of Greene King PLC
Chairman of Purity Soft Drinks Limited
5. Neil Davidson
Appointment
Neil joined the Board as a Non-Executive
Director on 1 October 2015. He became
Chair of the Corporate Compliance and
Responsibility Committee on 1 January 2016.
Experience
Neil has had an extensive career in
manufacturing, starting with Northern
Foods PLC where he rose to become
Managing Director of its milk division.
He subsequently became CEO of Express
Dairies PLC and then Arla PLC. He is
currently Chair of the Youth Sport Trust
and has also been a Non-Executive Director
of Produce Investments PLC, Persimmon
PLC and Northern Recruitment Group PLC.
External Roles
Chairman of OptiBiotix Health PLC
6. Belinda Richards
Appointment
Belinda joined the Board as a Non-
Executive Director on 1 September 2015.
She became Chair of the Audit Committee
on 1 January 2016.
Experience
Belinda had a career in professional services
for over 25 years, where she operated as
a senior adviser in corporate finance and
strategy. She was a corporate finance
partner at Deloitte and Global Head of
Merger and Separation Advisory Services
until 2010. Belinda serves on the Advisory
Group of Audit Committee Chairmen at
the Financial Reporting Council, is a
member of the Governing Council of the
Centre for the Study of Financial Innovation
and is a Trustee of the Youth Sport Trust.
External Roles
Senior Independent Director and
Remuneration Chair of Grainger PLC
Non-Executive Director of Monks
Investment Trust PLC
Non-Executive Director of Phoenix
Group Holdings (PGH)
Non-Executive Director of Schroder
Japan Growth Fund PLC
7. Tony van Kralingen
Appointment
Tony joined the Board as a Non-Executive
Director on 1 September 2017.
Experience
Tony has a very broad experience across
a number of disciplines including marketing,
supply, procurement and manufacturing
and human resources. Tony served 35 years
at SABMiller PLC, 14 of which he was on the
Executive Committee. He held a number
of positions including Group Director:
Integrated Supply, Chairman and Managing
Director SAB, and Chairman and CEO:
Plzensky Prazdroj. He is also currently an
Honorary Professor of Global Corporate
Strategy at Nottingham University.
External Roles
Chair of Crown Commercial Services
8. Paula Vennells
Appointment
Paula joined the Board as a Non-Executive
Director on 1 January 2016.
Experience
Paula has significant experience in
commercial, marketing and supply chain.
Paula is currently Chief Executive of the
Post Office, a role she has held since April
2012. Paula joined the Post Office in 2007.
Previously she was Group Commercial
Director of Whitbread PLC having started
her career with Unilever and L’Oréal. Paula
has held directorships in sales and
marketing with a number of major retailers
including Dixons Stores Group and Argos.
External Roles
Chief Executive of the Post Office
Non-Executive Chair of First Rate Exchange
Services Limited
1 On 6 February 2018, Belinda Richards was
appointed Trustee of the Youth Sport Trust,
a national charity, of which Neil Davidson
is Chairman. The Board has considered this
cross-directorship and is satisfied that it
does not compromise the independence
of Belinda or Neil.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Composition of the Board
The Board is independent and contains an appropriate mixture of skills and experience. The Board is satisfied that all Non-Executive Directors, including the Non-Executive Chairman,
remain independent according to the definition contained in the Code1. The criteria used to determine independence are set out in the corporate governance compliance statement
which can be found in the investor relations section of the Group’s website, www.morrisons-corporate.com. Each of the Non-Executive Directors has committed and is able to commit
an appropriate amount of time in fulfilling effectively their role and responsibilities on the Board.
Executive Committee
The Executive Committee is driving a culture of listening to all of our key stakeholders
within the business.
9. Kevin Havelock
Non-Executive
Director
Jonathan Burke
Company
Secretary
1. David Potts
Chief Executive
2. Trevor Strain
Chief Financial Officer
A C
R N
9. Kevin Havelock
Appointment
Kevin joined the Board as a Non-Executive
Director on 1 February 2018.
Experience
Kevin has significant fast moving consumer
goods (FMCG) industry experience, most
recently having been a member of the
Executive Committee at Unilever and
President of Global Refreshment, which
comprises of Unilever’s drinks and ice
cream brands. Kevin is a Trustee of the
British Council and a Trustee of The
Eden Project.
External Roles
Non-Executive Director of Fevertree PLC
Appointment
Jonathan was appointed as the Group’s
Company Secretary on 15 February 2017,
replacing Mark Amsden.
Experience
As a qualified accountant and Company
Secretary, Jonathan has worked at
Morrisons for over 25 years holding
various finance, compliance and project
roles. He also previously held the role
of Company Secretary between 2001
and 2009.
C
3. Andy Atkinson
Group Customer and
Marketing Director
5. Clare Grainger
Group People
Director
Attendance at meetings
Board
Nomination Remuneration
Audit
Andrew Higginson
David Potts
Trevor Strain
Rooney Anand
Neil Davidson
Kevin Havelock
Tony van Kralingen
Belinda Richards
Paula Vennells
8/8
8/8
8/8
8/8
8/8
–
3/3
7/8
8/8
4/4
–
–
4/4
4/4
–
1/1
4/4
4/4
6/6
–
–
6/6
6/6
–
2/2
6/6
6/6
–
–
–
–
6/6
–
3/3
6/6
6/6
CCR
5/5
5/5
–
5/5
5/5
–
2/2
5/5
5/5
On the rare occasions that a Director is unavoidably unable to attend a meeting, the Director will
still receive and consider the relevant papers allowing them to share and discuss any comments
or input with the other members of the Board before the meeting.
Committee key
A Audit Committee
C Corporate Compliance and Responsibility Committee
R Remuneration Committee
N Nomination Committee
Committee Chairman
1. David Potts
See Board of Directors on page 30
2. Trevor Strain
See Board of Directors on page 30
3. Andy Atkinson
Appointment
Andy joined Morrisons in 2011 and
was appointed as Group Customer
and Marketing Director in January 2016
having held the interim position for
over five months.
Experience
Andy previously held a number of senior
Commercial and Trading roles within the
organisation. Prior to joining Morrisons,
Andy held a variety of senior commercial
roles within Boots, progressing to
Commercial Director. Andy started his
career at Coca-Cola before roles at Walt
Disney and then L’Oréal.
4. Darren Blackhurst
Appointment
Darren joined Morrisons in June 2015
as Group Commercial Director.
Experience
Darren started his career at Tesco in 1988,
holding a number of buying roles in fresh
food and grocery. In 1994, he was seconded
to Tesco’s French business Catteau before
holding a number of category director
positions. Darren became Commercial
Director for Tesco Lotus Thailand in 2002.
He joined Asda in 2006 as Executive Trading
Director for Food and in 2008 was
appointed Chief Merchandising Officer. In
2011, he joined Matalan as Chief Executive
before moving to B&Q as Commercial
Director in 2014.
4. Darren Blackhurst
Group Commercial
Director
C
6. Gary Mills
Group Retail
Director
5. Clare Grainger
Appointment
Clare joined Morrisons in February 2009 and
was appointed Group People Director on
1 September 2015.
Experience
Clare started her career at Asda and held
a number of roles both within Head Office
and the Retail division. She progressed
through a variety of senior human
resources (HR) roles including Head of HR
at HBOS/Lloyds Banking Group, where she
led a number of programmes to drive
differentiation in both sales and services.
6. Gary Mills
Appointment
Gary joined Morrisons in August 2015
as Group Retail Director.
Experience
Gary has more than 30 years’ retail
experience, with Stewarts Supermarkets
in Northern Ireland and then with Tesco
PLC where he held a variety of senior
positions including Retail Director for
Convenience and Retail Director for
the North and Northern Ireland. Gary’s
experience covers all areas of retail and
all formats, including supermarkets
and convenience stores.
31
Strategic reportGovernanceFinancial StatementsInvestor information Corporate governance report continued
The decisions delegated by the Board to its Committees during the financial year 2017/18
are shown in the table below and on the following page. See pages 34 and 37 for details
of activities.
Leadership around the business
Function
Main Board
Members
Andrew Higginson
(Chair)
David Potts
Trevor Strain
Rooney Anand
Neil Davidson
Kevin Havelock1
Tony van Kralingen2
Belinda Richards
Paula Vennells
Executive
Committee
David Potts
(Chair)
Trevor Strain
Andy Atkinson
Darren Blackhurst
Clare Grainger
Gary Mills
David Potts, Chief Executive
Clare Grainger, Group People Director
Gary Mills, Group Retail Director
Andy Atkinson, Group Customer and Marketing
Director
32
Key
objectives
Overall conduct of the business and
strategy setting.
Implementation of strategy and actions
in respect of financial planning and
performance; day-to-day management
of operations.
Responsibilities
• Understanding, reviewing and responding
• Developing and implementing
to views of all stakeholders;
the strategy;
• Developing and approving the strategy
and key policies of the Group;
• Managing culture and values;
• Monitoring progress towards achieving
all Board objectives;
• Monitoring of financial performance, critical
operational issues and risks by reviewing
performance against strategy, objectives,
business plans and budgets;
• Approving communications to
shareholders, including the Annual Report
and Financial Statements, half-yearly
financial report and interim management
statements;
• Approving changes to the Group’s capital
structure, external financial reports, major
expenditure; and
• Approving membership of the Board on
recommendation of the Nomination
Committee.
• Understanding, reviewing and
responding to the feedback from
stakeholders including customers
and colleagues;
• Maintaining oversight of:
– financial performance, reporting
and control;
– risk management;
– operational improvement
programmes; and
– review and supervision of
operational activities;
• Making recommendations to the
Board in respect of:
– budgets and long-term plans;
– dividend levels;
– Group risk register; and
– ad-hoc events;
• Managing succession planning for
all colleagues including senior
management; and
• Organising Sub-Committees which are
responsible for key operational oversight
and decision making including:
– management of capital expenditure;
– departmental performance reviews;
– oversight of improvements to process
for suppliers; and
– GSCOP Compliance.
1 Kevin Havelock was appointed to the Board, Audit, Corporate Compliance and Responsibility
Committee, Remuneration and Nomination Committee on 1 February 2018.
2 Tony van Kralingen was appointed to the Board and as Chair of the Remuneration Committee
on 1 September 2017. He was appointed to the Audit, Corporate Compliance and Responsibility
Committee and Nomination Committee on 9 September 2017.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Structure of the Board and its Committees
Chairman
Key objective: Governance of the Board
Executive
Committee
Audit
Committee
Main Board
Corporate
Compliance and
Responsibility
Committee
Remuneration
Committee
Nomination
Committee
Audit
Committee
Belinda Richards
(Chair)
Neil Davidson
Kevin Havelock1
Tony van Kralingen2
Paula Vennells
Corporate Compliance and
Responsibility Committee
Remuneration
Committee
Nomination
Committee
Neil Davidson
(Chair)
Andrew Higginson
David Potts
Rooney Anand
Darren Blackhurst
Andrew Clappen3
Kevin Havelock1
Tony van Kralingen2
Belinda Richards
Paula Vennells
Tony van Kralingen2
(Chair)
Andrew Higginson
Rooney Anand
Neil Davidson
Kevin Havelock1
Belinda Richards
Paula Vennells
Andrew Higginson
(Chair)
Kevin Havelock1
Tony van Kralingen2
Rooney Anand
Neil Davidson
Belinda Richards
Paula Vennells
Developing and implementing of the Group’s
policies on corporate compliance and
corporate responsibility. Reviewing and
ensuring compliance with those policies
and ethical and governance standards.
Developing and implementing of the Group’s
remuneration framework and policies for
Directors and colleagues including all
incentives, bonuses and pensions.
Advising the Board on Board and
senior management appointments
and succession planning; monitoring
of the composition of the Board
and its Committees.
Effective governance of financial
reporting, internal controls and risk
management systems; review of
significant accounting judgements,
assumptions and estimates;
management of the relationship and
appointment of the external auditor;
monitoring and review of the
effectiveness of the Group’s Risk
and Internal Audit function.
• Reviewing and making
• Maintaining oversight of strategy and
• Setting the remuneration policy for
• Evaluating the current and required mixture
recommendations to the Board on:
– the integrity of financial reports,
including reviewing significant
financial reporting issues and
considering how these issues have
been addressed;
– whether the Annual Report is fair,
balanced and understandable;
– the effectiveness of the Group’s
internal control and risk
management system;
– the effectiveness of the Risk and
Internal Audit function;
– the independence, effectiveness
and appointment of the external
auditor, approval of their fees; and
monitoring of the Group’s policy
on non-audit services;
– approval of Tax and Treasury
policies; and
– pensions.
process in areas of corporate
responsibility, including:
– Groceries Supply Code of Practice
(GSCOP);
– food safety and food integrity;
– health and safety;
– gender pay;
– cyber security;
– ethical trading;
– modern slavery;
– environmental and competition
compliance;
– governance and reputation;
– General Data Protection Regulation
(GDPR); and
– The Morrisons Foundation and
charitable giving.
the Group’s Chief Executive, Chairman,
Executive Directors and Executive
Committee;
• Agreeing remuneration of the Executive
Directors and Executive Committee;
• Engaging with shareholders in respect
of remuneration polices;
• Reviewing the terms and operation of the
Share Ownership Guidelines; and
• Reviewing the Chief Executive and
Chairman’s expenses.
of skills and experience on the Board;
• Reviewing succession planning for
the Board;
• Sourcing and selecting Board candidates
(more information can be found on
page 37);
• Maintaining general oversight of people
and capability within the business, and
their diversity (more information can
be found on page 37);
• Reviewing the talent pool for the
Executive Committee and levels below
Executive Committee; and
• Reviewing and setting policy on diversity.
3 Andrew Clappen is the Group Corporate Services Director. Andrew joined Morrisons in 2012 and
is responsible for the Corporate Affairs and Policy, Corporate Social Responsibility (CSR) & Ethical
Trading, Agriculture and Technical Services (Food and General Merchandise Technology, Safety, Quality,
Compliance and Health & Safety) of the Group. Prior to Morrisons, Andrew was the Senior Vice President
responsible for Food Safety, Quality Assurance & Regulatory Affairs at Loblaw Companies Ltd in Canada.
33
Strategic reportGovernanceFinancial StatementsInvestor information
Corporate governance report continued
Board and Committee activities
Main Board
Executive Committee
Activities in 2017/18
During the year the Board has:
• set the strategy and plans for the Group;
• reviewed the results and forecasts and approved the
regulatory announcements;
Activities in 2017/18
During the year the Executive Committee has:
• driven trading performance and reviewed financial performance;
• reduced the cost base of the organisation;
• considered regular updates on customer views including attending
• reviewed the annual business plan and received regular updates from
customer listening sessions and shopping trips with customers;
the Executive Committee regarding its delivery;
• ensured the conduct of the business in accordance with its values;
• reviewed the performance of the Chief Executive;
• approved the 2018/19 budget and commercial plans, including
productivity savings required to invest in the customer offer;
• approved the plan for the Group’s balance sheet and capital
structure strategy;
• approved the proposed dividends;
• considered feedback received from customers, colleagues, suppliers
and shareholders;
• discussed compliance to regulations with the Grocery Code
Adjudicator (GCA);
• approved the Group’s continued operations and growth opportunities
• implemented the Group’s six priorities;
• overseen the Group’s compliance with its obligations under the
Groceries Supply Code of Practice (GSCOP);
• overseen the Group’s commitment to corporate social responsibility
in particular in minimising food waste, in supporting the Group’s
charity partner CLIC Sargent and in supporting the charitable
Morrisons Foundation;
• overseen the Group’s continued development of its wholesale, online
and manufacturing operations;
• approved capital budgets;
• determined the draft budget and long-term plan;
• reviewed the talent, capability and capacity within the Group;
• listened to views of colleagues including reviewing the ‘Your Say’ survey
in online, wholesale and manufacturing; and
results and agreement of improvement actions;
• reviewed the governance structure and activities of the sub-committees
of the Board.
Board evaluation
The assessment of the Board was completed this year in line with the
UK Corporate Governance Code (the ‘Code’). This assessment was
facilitated by Consilium Board Review which does not have any other
connection with the Group.
Six suppliers were asked to tender for this work, and Consilium Board
Review was selected from a shortlist of three that were interviewed
by the Chairman and Company Secretary.
Following a comprehensive briefing provided by the Chairman and
Company Secretary, Consilium Board Review completed the review.
This comprised of a paper questionnaire, individual interviews with
each Director and key members of the Group’s management team
and attending the July Board and Committee meetings.
The review concluded that both governance and compliance are strong,
and that the Board operates in an effective and efficient manner. It was
also noted that the Board takes a serious and responsible approach
towards governance, compliance ethics and controls, and that the Board
has installed an effective governance framework.
The review recommended some actions that could be taken to further
improve the performance of the Board. The Board action plan for 2018/19
will include:
• ensuring the Board agendas are set to allow additional time for the
Board to consider strategic matters; and
• increasing the informal interaction time of the Board within the
next year.
During the year, the Group also reviewed and considered the
effectiveness of its principal advisers to ensure they remain appropriate
and relevant to the Group’s needs.
34
• periodically reviewed performance against strategic objectives;
• determined principal risks for the Group;
• reviewed the General Data Protection Regulation (GDPR)
compliance plans;
• reviewed changes to speed up and simplify the business;
• agreed improvements to the Group’s technology infrastructure;
• recommended the dividend to the Board; and
• continued to review the Group’s reduction programme in energy
and plastic.
Audit Committee
Activities in 2017/18
During the year, the Committee has:
• considered the appropriateness of the Group’s Annual Report and
Financial Statements and Half-yearly report;
• considered the effectiveness of the internal controls and the work of
Risk and Internal Audit and discussed key risks (described in more detail
on page 36);
• considered reports produced by Internal Audit covering topics including
regulatory compliance and the control environment;
• reviewed key policies including those governing tax and treasury;
• reviewed the recognition of commercial income and the controls
in place over compliance with GSCOP;
• understood the Corporate Governance Code and reporting
requirements; and
• assessed the proposed viability statement, reviewed and challenged
the scenarios modelled.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 In respect of financial reports, the Committee has focused on:
• the accounting judgements and estimates made by management that
could have a significant effect on the Group’s financial results;
• the clarity of disclosure of financial information including Alternative
Performance Measures (APMs);
• whether the Annual Report, taken as a whole, is fair, balanced and
understandable – the Directors’ statement on this can be found
on page 54 of this Annual Report; and
• reviewed the impact of upcoming changes to accounting standards, and
management’s assessment of the impact on future financial statements.
Financial reporting matters
The Audit Committee has considered whether suitable accounting
policies have been applied and has reviewed key accounting
judgements and estimates made by management. This section outlines
the key judgements and financial reporting matters considered by the
Committee during the year.
Impairment of property, plant and equipment, intangible assets and
onerous property contracts
Impairment and onerous property contracts continue to be a focus area
for the Committee on the basis of their materiality and level of inherent
judgement and estimation. The Group’s policy to assess impairment on
an annual basis, or where changes in circumstances indicate impairment
(or impairment reversal), is disclosed in note 3.1 of the financial statements.
The impairment review is comprehensive, covering non-financial
assets, principally the Group’s property portfolio, technology assets
and goodwill.
Management estimates the recoverable amount of assets to determine
the extent of any impairment charge or whether a reversal of a previous
impairment charge is required. This assessment led to a reversal of
previous impairment of assets in certain cash generating units and an
impairment charge being recognised on others, resulting in a net credit
of £7m recognised, as disclosed in note 3.3 of the financial statements.
The Committee reviewed reports produced by management detailing
the outcomes of the impairment assessment. This review focused on
understanding the methodology, the basis of key assumptions (discount
rate and long-term growth rate) and a review of the outcomes of the
impairment assessment performed by management. The Committee
has also reviewed management’s key assumptions around the market
valuation of the store portfolio.
In addition, for property contracts where the expected future
cash flows are less than the future contract commitment, an onerous
contract provision is recognised. This work resulted in a net £1m release
in relation to provisions for onerous contracts being recognised and
a net £2m increase in accruals for onerous commitments during the
year. The Committee reviewed the key judgements and understood
the reasons for any movements in provisions.
The Committee reviewed the key assumptions along with their impact
on the impairment and onerous contract provisions and is satisfied the
assumptions applied by management are appropriate.
Commercial income
The Group’s definition of commercial income is disclosed in note 1.1 of the
financial statements and is consistent with the definition in the prior year.
Commercial income is accounted for as a deduction from the cost
of purchase, and it is recognised in accordance with signed supplier
agreements, with most income subject to little or no subjectivity
or judgement.
Commercial income continues to be an area of focus for the Committee,
despite reduced complexity and size, due to industry focus and its
judgemental nature. In considering the appropriateness of commercial
income recognised in the year and the financial position at the year end,
the Committee has reviewed reports from management and Internal
Audit outlining the accounting judgements and the control environment.
The Committee understood the key judgements in this area and considers
them to be appropriate.
Stock
Stock is a material balance in the Group’s financial statements, with stock
held across a large number of locations. As such, this remains an area
of focus for the Committee. Stock count procedures have remained
consistent with the prior year.
Judgement is required in determining provisions for shrinkage and
valuation and the Committee reviews these judgements as part of the
annual review of judgements and estimates. The Committee has reviewed
the level of stock provision and assumptions underpinning the provision
and considers these to be appropriate.
Pensions
The Group operates a number of defined benefit pension schemes.
Accounting for defined benefit pension schemes requires the application
of a number of assumptions which have an impact on the valuation
of the schemes’ assets and liabilities. The IAS 19 valuations are performed
by an independent actuary.
The Committee has reviewed the assumptions used in the schemes’
valuations. The Committee has considered the appropriateness and
sensitivity of the assumptions used by the independent actuaries
in the valuation, including the discount rate. The Committee has
concluded that the assumptions are appropriate.
The Committee considered the legal advice the Group has obtained
with regard to the recognition of a pension surplus for the Group’s
defined benefit pension schemes, as disclosed in note 8.5 of the financial
statements and considered the treatment appropriate.
The Committee reviewed the accounting treatment resulting from the
set-up of the new defined contribution scheme. This resulted in a net
£13m credit recognised in the year, as an adjustment to underlying earnings
(as disclosed in notes 1.4 and 8.6). This credit represents the difference
between the expected back dated contributions and the cost based on
actual participation rates. The Committee concluded that this treatment
was appropriate.
Presentation of financial statements
The Committee has considered the Guidelines on Alternative
Performance Measures (APMs), issued by the European Securities and
Markets Authority (ESMA) in 2016. The Group now includes additional
disclosure on the APMs used by the Group in a Glossary on page 127.
In addition, the Committee has considered the use of APMs, in particular
the items presented as adjustments to underlying earnings presented in
the financial statements. The Committee is satisfied the classification of
these items is appropriate and consistent and that the level of disclosure
provided in note 1.4 is appropriate.
35
Strategic reportGovernanceFinancial StatementsInvestor information
Corporate governance report continued
Board and Committee activities
Internal control and risk management
Internal Audit
The Board has overall accountability for ensuring that risk is effectively
managed across the Group. Risks are reviewed by the Executive
Committee twice a year and results are brought to the Board.
The Group’s principal risks are set out on pages 24 to 25.
On behalf of the Board, the Audit Committee has responsibility for
reviewing the effectiveness of internal control including financial,
operational and compliance controls.
In order to do this, as a matter of course in any one year, the focus of
Committee includes:
• receiving and agreeing appropriate actions in response to regular reports
from the Risk and Internal Audit function on:
– the status of internal control and risk management systems across
the Group;
– the department’s findings, annual plan and the resources available
to it to perform its work; and
– any concerns expressed by colleagues about possible malpractice
or wrongdoing;
• reviewing financial whistleblowing reports from colleagues;
• reviewing the external auditor’s report 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.
These systems and processes have been in place throughout the period
and up to the date of approval of this Annual Report.
The main features of the Group’s internal control and risk management
systems relating to the accuracy and reliability of financial reporting,
including the process for preparing consolidated accounts, are:
• the recruitment of suitably qualified and experienced finance colleagues;
• the segregation of duties, clear lines of accountability and delegation
of authority;
• policies and procedures that cover financial planning and reporting,
preparation of financial information, and capital expenditure;
• a robust period end review process including review and commentary
from process owners;
• a tiered review process for external financial reports involving internal
stakeholders from relevant areas of the business;
• information and data security policies and procedures; and
• self certification by each function of the business.
The Committee regularly reviews the Group’s process for risk
management and internal control and annually conducts a formal review
of these processes. No significant failings or weaknesses of internal
control were identified during these reviews. Limited weaknesses and
areas where controls could be further automated were identified.
Clear action plans are in place to address these weaknesses and
are captured as part of functional risk registers with defined
management responsibility.
The Committee understands the importance of a robust risk
management process and control environment and looks to progressively
strengthen it over time.
The Committee is regularly updated on the work and findings of Internal
Audit throughout the year, including:
• approval of the terms of reference of the Internal Audit function;
• approval of the Internal Audit plan for the year;
• review of findings from work of Internal Audit completed during the
year; and
• review of the effectiveness of the Internal Audit function.
The review of the effectiveness of Internal Audit conducted during the
year took the form of a survey completed by Non-Executive Directors,
members of the Executive Committee and Leadership Team and
other key stakeholders. The effectiveness assessment also included a
comparison to the Institute of Internal Auditors Best Practice standard.
An external review of the effectiveness of Internal Audit is conducted
every five years.
External audit tenure
As noted in last year’s Annual Report, the Board appointed
PricewaterhouseCoopers LLP (PwC) as external auditor in June 2014.
The lead audit partner, Andrew Paynter has held the position for
three years.
The Group confirms that it has complied with the provisions of the
Competition and Markets Authority’s Order in respect of The Statutory
Audit Services for Large Companies Market Investigation (Mandatory Use
of Competitive Tender Processes and Audit Committee Responsibilities)
Order 2014.
Each year the Audit Committee considers the effectiveness and
independence of the external auditors in making the decision regarding
the proposal of re-appointment of the auditors, which is tabled each
year at the AGM.
Independence of the external auditor
The independence and objectivity of the Group’s external auditors
is a fundamental safeguard which the Committee keeps under review.
In order to ensure the independence of PwC during the year, the
Committee has:
• considered the terms, areas of responsibility, duties and scope of work
of the external auditor as set out in the engagement letter;
• considered the Group’s policy for provision of non-audit services;
• reviewed details of the non-audit services provided in the year;
• considered the letter from the external auditor confirming its
independence and objectivity; and
• understood and approved the basis for the audit fee.
The policy on the engagement of the external auditor to supply non-
audit services is set out in the investor relations section of the Group’s
website (see www.morrisons-corporate.com). PwC has provided certain
non-audit services throughout the year. This was in line with the policy
and the ratio of audit to non-audit services was within the 1:0.7 limit set
in the policy. Details of the external auditor’s remuneration is disclosed
in note 1.6 of the financial statements. The Committee is satisfied that
this non-audit activity carried out by the statutory auditors is subject to
safeguards to avoid a threat to the auditor’s independence or objectivity.
These safeguards include separate teams for audit versus non-audit work.
36
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Effectiveness of the external auditor
The Committee considered the effectiveness of PwC as auditor during
the year. The Committee holds meetings with the auditor without
management present. The purpose of these meetings is to understand
the auditor’s views on the control and governance environment and
management’s effectiveness within it.
When assessing the effectiveness of the external auditor, the
Committee considered:
• the content and quality of the audit work plan for the Group;
• the detailed findings of the audit, including a discussion of any
major issues that arose during the audit;
• management’s responses to the auditor’s findings;
• the quality and knowledge of the audit team;
• the level of professional scepticism and independence applied; and
• the output of an effectiveness survey completed by the Directors
and management.
An independent assessment of the effectiveness of the external auditors
is conducted annually by Internal Audit. The assessments takes the form
of a questionnaire gathering feedback from key stakeholders including
Non-Executive Directors, Executive Committee members and other key
members of the management team. The survey covers the robustness of
audit approach, quality of reporting and quality of people and services.
Nomination Committee
Activities in 2017/18
During the year, the Nomination Committee has:
• reviewed colleagues throughout the organisation including diversity,
succession planning, capability and capacity. More information on this
can be found on pages 14 to 15;
• recommended the appointments of Tony van Kralingen and Kevin
Havelock to the Board; and
• considered the Board’s structure.
Diversity
At the end of the 2017/18 financial year, the Board included two female
members representing, 22% of its total composition. The Board’s policy
is that female representation should be maintained at not less than
20% and aspires that this should be higher than 30%. The Executive
Committee comprises one woman and five men, resulting in 17% female
representation. The diversity of the Leadership Team and a review of the
diversity of the general population of Morrisons colleagues is outlined
on page 15 of this report.
The Committee also adhere to the Group-wide policy on diversity
and inclusion.
Corporate Compliance and Responsibility Committee
Other areas of focus
Activities in 2017/18
The Committee spent time reviewing succession planning for both the
Board and Executive Committee as well as reviewing the talent pool for
levels below Executive Committee.
During the year, the Corporate Compliance and Responsibility Committee
has reviewed:
Board appointments
• GSCOP compliance including training and results of internal reviews;
• cyber and technology security risk;
• health and safety incidents and actions taken and progress of health
and safety initiatives;
• energy strategy and carbon reduction measures;
• ethical trading;
• redistribution of food waste;
• food safety and improvements;
• Market Abuse Regulation compliance;
• food integrity and testing;
• plastic waste;
• General Data Protection Regulation (GDPR);
• supply chain human rights;
• modern slavery; and
• non-financial whistleblowing reports.
More detail on the Group’s Corporate responsibility activities can
be found on page 21.
The Committee follows a rigorous approach for selecting and
recommending the appointment of Non-Executive Directors.
The Group appointed Ridgeway Partners to assist in identifying a long list
of candidates with the requisite skills and experience for the role of Chair
of the Remuneration Committee. Ridgeway was deemed independent
with no other connections to the Group. From Ridgeway’s search, Tony
van Kralingen was identified as a suitable candidate for this role and added
to a shortlist of potential candidates. Potential candidates were then
interviewed by the Chairman and other Directors, following which Tony
was put forward to the Nomination Committee for their consideration.
Through advisers Stork & May, the Group was advised that Kevin Havelock
was stepping down from his role as Executive Committee Member at
Unilever PLC. Kevin was seen as having an excellent balance of fast moving
consumer goods industry based skills, particularly in relation to brand and
digital marketing, that would considerably enhance the strength of the
Board. Following interviews with the Chairman and other Directors, Kevin
was proposed to the Nomination Committee for appointment to the
Board as a Non-Executive Director. The Committee felt it highly unlikely
that external searches would identify other candidates who would
improve on the specific knowledge and expertise that Kevin offers the
Group. Stork & May are deemed independent of the Group.
37
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report
Annual statement by the Chairman
of the Remuneration Committee
On behalf of the Board, I am pleased to present the
report on Directors’ remuneration for 2017/18
Tony van Kralingen, Remuneration Committee Chair
Dear Shareholder
This is my first report having been appointed as a Non-Executive
Director and Chair of the Remuneration Committee in September 2017.
My priorities in the six months since my appointment have been to:
• understand the business, meet with management and colleagues and
learn about Morrisons past, present and future;
• meet with our shareholders and their representatives to understand
their views on pay following the 2017 AGM outcome;
• review 2017/18 pay outcomes relative to short and long-term business
performance and the shareholder experience; and
• determine how the remuneration policy will be implemented in
2018/19, enhancing the level of transparency in our remuneration
determination process.
I address each of these areas in turn below:
Understanding what makes Morrisons
I have joined a business in turnaround – to paraphrase Winston
Churchill, this is not the beginning of the end, but it is perhaps the
end of the beginning, and our aim is to ensure sustainable progress.
Management assumed responsibility for a business which had
experienced three years of continuous like-for-like sales decline, falling
profits and increasing levels of debt. Talking to investors, I know they
are understandably pleased with the performance of the business and
recognise that management has been pivotal in fixing the core business.
Equally they praise management for their innovative and capital light
ways of delivering growth.
Group performance
Alongside management’s strong performance is a colleague-led
turnaround. Central to this philosophy has been investing in colleague
pay – over the last few years hourly pay for front line colleagues has risen
faster than any of the supermarkets, from £6.83 per hour in 2015 to £8.70
per hour in April 2018 (an increase of over 25%). Colleagues are also sharing
in the value they create, from the Sharesave scheme which matured in
2017/18 providing a significant gain, to the spend on colleague bonus which
has increased again this year. In addition, all parts of our business reported
improved colleague engagement, which has no doubt led directly to the
increase in customer satisfaction.
Over the last few years we have also rediscovered the proud history that
makes Morrisons unique – we are food makers and shopkeepers – and we
are winning customers back.
From a shareholder perspective, in the three years since David Potts’
appointment and embarking on Fix, Rebuild and Grow, the business
has generated:
• nine consecutive quarters of positive like-for-like sales;
• 8% increase in underlying profit before tax, or 24% on a two year basis;
• c.£2bn of free cash flow; and
• 22% increase in share price.
In 2017/18, this positive performance continued with the key
highlights including:
• a second annual increase in like-for-like sales (2.8%, excluding fuel);
• growing like-for-like customer transactions by 2.9%;
• an 11% increase in underlying profits before tax; and
• further strong free cash flow and a 4.00p special dividend, taking full
year total dividend up 85.8% to 10.09p.
£374m
12.19p
2.8%
How our Directors’ remuneration report is structured
£337m
10.86p
1.9%
Policy summary
Underlying profit
before tax (UPBT)
Group like-for-like
sales (LFL)
Underlying
basic earnings
per share (EPS)
2016/17
2017/18
38
Implementation of the remuneration policy in 2018/19
Annual report on remuneration
pages 41 to 43
pages 44 to 45
pages 46 to 51
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Responding to feedback on Executive remuneration
In taking on the role of Remuneration Committee Chair, I was keenly
aware of the voting outcome at the June 2017 AGM, where the new
remuneration policy for Directors was approved with 92% in favour,
but last year’s remuneration report only received 52% in favour. I have
engaged with shareholders to understand that gap, and listened to
their concerns about remuneration. I wish to extend my sincere thanks
to those who have taken the time to share their views and help us in
this process.
Although there was inevitably some divergence of views expressed
by investors on particular items, I observed two consistent themes
relating to:
• a need for greater transparency in how targets are calibrated which
contributed to the perception that there was a lack of stretch attached
to the 2017-20 Long Term Incentive Plan (LTIP) targets; and
• a better understanding of the Committee’s target setting process which
created doubts as to whether our due diligence is sufficiently robust.
Notwithstanding that feedback, all shareholders we spoke to
recognised the highly effective job that management are doing to
turn the business around, and were keen that they are retained and
appropriately incentivised.
How we are responding
Improving transparency
The feedback noted that the rationale and context to accompany the
2017-20 LTIPs could have been clearer, to help evaluate the level of stretch.
In response, the Committee has enhanced the narrative to accompany
targets in this Directors’ remuneration report and all relevant definitions
are clearly presented in one place (see page 45) to remove any ambiguity
and potential for misinterpretation, so our investors are able to make
a fully informed determination of the target stretch.
Restoring confidence
Food retailing is fast paced, adapting to fundamental shifts in consumer
behaviour. The performance of the sector is subject to intense
scrutiny and what stretch performance looks like constantly evolves.
Setting targets is therefore inherently challenging, but I wish to reassure
our investors that the Committee subjects targets to a robust due
diligence process as follows:
• targets are determined shortly before announcement of our preliminary
financial results and prior to analysts updating their forecasts for both
Morrisons and the food retailing sector, thus the Committee must
exercise a degree of judgement;
• as Board Directors, each member of the Committee benefits from
knowledge of business plans, strategic initiatives, projected cash flows
and performance data which form primary reference points when
determining the appropriateness of proposed targets. This information
is supplemented by economic indicators, competitor analysis and the
latest available analyst projections for the industry. The Committee also
seeks the independent counsel of its advisers who subject targets to
complex probability analysis; and
• having been presented with this information the Committee
purposefully adjourns to allow for individual deliberation and provision
of any additional information. On reconvening, each Committee
member is asked to feedback their individual view on each target before
the Committee collectively approve the targets by majority vote.
Pay for performance
Outcomes in 2017/18
It is the policy of the Committee to ensure that superior reward should
only be received for superior performance. The food retail industry
continues to be highly competitive for both customers and talented
management. Looking at the industry, many of our competitors have
reported decreasing profits and like-for-like sales, so both in absolute
and relative terms, the team are outperforming the market.
Over the last 12 months management has delivered another four
consecutive quarters of like-for-like sales growth (making nine in
succession) resulting in the Company achieving:
• like-for-like sales growth of 2.8% (excluding fuel) and, for the first time
since 2011, two consecutive years of positive like-for-like sales growth;
• underlying profit before tax of £374m, an increase of 11% on last year; and
• further progress in cost and productivity savings, and sustained
improvements across a number of areas of the business including
productivity and procurement of goods not for resale and loss
prevention savings, resulting in cost reduction/productivity
improvement of £195m.
As a consequence of this performance the Committee has approved
a bonus payout of 98.7% of maximum for Executive Directors of which
50% will be deferred into shares which must be held for three years.
LTIP 2015-18
The 2015-18 LTIP outcome is the first to reflect the turnaround in
Morrisons performance since David Potts was appointed, and started the
Fix, Rebuild and Grow plan. At the time David assumed the role of Chief
Executive, Morrisons reported full year like-for-like sales of (5.9)% and
net debt at £2.3bn. The team has strengthened the balance sheet, grown
like-for-like sales and done so profitably. This has resulted in a share price
which has outperformed the FTSE 100 (1 March 2015 to 1 March 2018) over
the period, and shareholders are rightly pleased with the performance.
The performance over the period is summarised below:
Measure1,2
Total sales (exc. fuel)
Adjusted free cash flow
Underlying earnings per
share (EPS)
1 See the definitions on page 45.
2 Additional detail on page 48.
Min (25%)
£12.7bn
£850m
10p
Max (100%)
£13.2bn
£1,600m
15p
Weighting
20%
60%
20%
Actual
performance
£13.5bn
£2,053m
12.19p
It is also important to note that during this period, management
increased external guidance for working capital improvement (from
£600m to £1bn) and for disposal proceeds (from £1bn to £1.1bn); this has
resulted in management exceeding the targets significantly on free cash
flow – a measure that investors have told us is extremely important
to them, as well as on sales, which is a key measure of the health
of a food retailer.
The LTIP is vesting at 96.3% of maximum, which the Committee believe
is reflective of the value created for shareholders over the period.
Implementation in 2018/19
Base Salary
The Committee awarded both David Potts and Trevor Strain an
increase of 2.4% (in line with the wider workforce). David has again
waived his increase, and his salary therefore remains unchanged since
his appointment.
Annual Bonus
The performance measures and weightings remain unchanged. Subject
to no longer being commercially sensitive, the performance against
targets will be disclosed in next year’s report.
LTIP
In line with the policy approved by shareholders last year, awards
will be 300% of salary. Performance measures and weightings are
unchanged from the previous year. Further detail on the targets
can be found on page 44.
I look forward to your support at the 2018 AGM.
Tony van Kralingen
Remuneration Committee Chair
39
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report continued
At a glance
Looking at how we’ve performed through the perspective
of shareholders, customers and colleagues
Three year summary of financial measures
Measure 1
Underlying profit before tax (UPBT)
Underlying basic earnings per share
2017/182
£374m
12.19p
2016/17
£337m
10.86p
2015/16
£302m3
7.77p
Group like-for-like (LFL) sales (exc. fuel) (%)
Cumulative adjusted free cash flow (2015/16 onwards)
1 Definitions of these measures are set out on page 45.
2 2017/18 is a 53 week year. Underlying profit before tax and underlying basic earnings per share are with with reference to the 53 week period. Group like-for-like has been calculated on a 53 week versus
2.8%4
£2,053m
1.9%4
£1,656m
(2.0)%
£874m
53 week basis.
3 2015/16 UPBT adjusted for £60m one-off costs.
4 2017/18 and 2016/17 include wholesale contribution to LFL. No impact on 2015/16 LFL sales.
Key shareholder performance indicators
Three year total shareholder return (TSR)
12 month total shareholder return (TSR)
Value of a £100 holding
Value of a £100 holding
£
160
140
120
100
80
£
115
110
105
100
95
90
Feb 15
Feb 16
Feb 17
Feb 18
Jan 17
Apr 17
Jul 17
Oct 17
Jan 18
Morrisons
FTSE 100
FTSE All Share Food & Drug Retailers
Morrisons
FTSE 100
FTSE All Share Food & Drug Retailers
The graph above shows the Group’s total shareholder return (TSR)
compared with the TSR of the FTSE 100 and FTSE All Share Food & Drug
Retailers indices over the three year period to 2 February 2018 (the last
trading day before the year end).
The graph above shows the Group’s total shareholder return (TSR)
compared with the TSR of the FTSE 100 and FTSE All Share Food & Drug
Retailers indices over the 12 month period to 2 February 2018 (the last
trading day before the year end).
Customer satisfaction
Colleague satisfaction with pay
+12%
+7%
+3%
+2%
+26%
+9%
+17%
Jan 15
Jan 16
Jan 17
Jan 18
2015
2016
2017
The above graph demonstrates the continued progress the Group has
made in terms of customer satisfaction over the last three years.
Colleagues’ satisfaction with their pay continues to improve as a result
of the positive changes we have made to colleague pay in each of the
last three years, as portrayed above, and described in the section on pay
and conditions across the business on page 45.
40
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Directors’ remuneration report continued
Directors’ remuneration policy
Approved 15 June 2017
This part of the report sets out a summary of the Group’s policy for the remuneration of Executive and Non-Executive Directors as approved
by shareholders on 15 June 2017 at the AGM. The full policy can be found on page 37 in the 2016/17 Annual Report and Financial Statements
(www.morrisons-corporate.com/annual-report-2017). The policy took effect from this date and may operate for up to three years.
The principles that underpin our Directors’ remuneration policy are:
1
Doing what is right
for the business in
the long term
2
Continuing to
deliver sector
superior returns
to shareholders
3
Providing clear
alignment of
Directors and
shareholders
4
Ensuring competitive
pay in a talent hungry
market
5
Ensuring lock in
of Directors as we
deliver Fix, Rebuild
and Grow
Executive Directors – policy table
ELEMENT
OPERATION
OPPORTUNITY
Base
salary
Benefits
Pension
The Committee’s policy is to set base salaries competitively to
attract and retain the best talent, which is critical to the Group’s
success and delivery of the strategy. Base salary is part of a total
remuneration package which rewards stretching performance
aligned to the Group’s strategy.
Base salaries are set by the Committee on appointment and
then normally reviewed annually. In setting and reviewing salary
levels, the Committee considers the responsibilities of the role,
progression in the role, individual performance (including any
change in responsibilities), skills, experience, and pay levels and
structure throughout the Group. The Committee also has regard
to rates for similar roles in comparator companies, both in FTSE 100
retailers and UK-based companies of a similar size and complexity,
but seeks to avoid the automatic ratcheting effects of following
benchmark levels of salary.
The Group provides a market competitive benefits package for
Executive Directors to support in the ability to recruit and retain
the best talent.
Executive Directors are entitled to a car allowance (or other car
benefit), transport costs, private health provision, life assurance
and normal colleague discount entitlement. Executive Directors
are also entitled to participate in the all colleague Sharesave
schemes (and any other all colleague share plan which the Group
may operate) on the same terms as all other UK-based colleagues.
The Committee reviews benefit provision from time-to-time and
retains flexibility to add or remove benefits if necessary to ensure
that benefit provision remains market competitive or to meet
the operational needs of the business (for example, through the
payment of relocation expenses).
The Group provides a market competitive retirement provision
for Executive Directors which is aligned with retirement benefits
available throughout the Group.
Executive Directors are entitled to membership of the Group’s
cash balance pension arrangement known as the Morrisons
Retirement Saver Plan. Individuals contribute 5% of capped base
salary in return for a guaranteed cash balance. A 10% cash salary
supplement in lieu of Group pension contributions applies on
base salary above the capped amount. A cash alternative to
pension provision is provided where the Group’s standard pension
provision is not appropriate, for example, where an Executive
Director has reached the Lifetime Allowance. Executive Directors
may elect to receive this cash salary supplement in lieu of pension
of broadly the same value as would accrue on an annual basis in
the pension plan.
PERFORMANCE
MEASURES AND PERIOD
Not applicable.
Salary increases will ordinarily be in
line with salary increases across the
Group. The Committee may award
increases above this level where this
is warranted due to a change in the
scope or responsibilities of the role,
to reflect progression in the role (for
example, staged increases for a recent
appointment) or to remain competitive
in the market. Current base salary levels
are disclosed on page 44.
Not applicable.
The maximum car allowance is currently
£24,000. The cost to the Group of
providing other benefits depends on
the nature of the benefit and can vary
from year-to-year. Benefit provision
will be maintained at a level which
is competitive.
Not applicable.
The Morrisons Retirement Saver Plan
guarantees a value of the cash balance
in the plan of 24% of pensionable pay
(assuming retirement at age 65 years)
adjusted for inflation capped at 2% p.a.
A maximum 10% cash salary supplement
applies above capped base salary.
Where an Executive Director receives
a cash salary supplement only, the
maximum supplement payable is
25% of salary.
41
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report continued
Directors’ remuneration policy
Approved 15 June 2017
Executive Directors – policy table
ELEMENT
OPERATION
OPPORTUNITY
The maximum bonus potential
for Executive Directors is 200%
of base salary. The number of
shares subject to the deferred
award is determined by
reference to the bonus and
the share price on the date
of award.
The maximum annual
individual award level under
the plan is 300% of salary.
The annual award level for
Executive Directors is 300%
of salary.
Annual
bonus
LTIP
Annual bonus awards are designed to incentivise
and reward achievement of the Group’s
short-term financial and strategic objectives
and personal performance objectives.
Compulsory deferral is designed to encourage
retention and further align the interests of the
Executive Directors with shareholders.
Bonus awards are made annually subject to a
mix of financial and non-financial performance
measures. Achievement of each performance
element is assessed independently and the level
of payout is determined by the Committee
after the end of the relevant financial year.
50% of any bonus payable is paid in cash with
the other 50% deferred in shares under the
deferred share bonus plan (DSBP), normally for
a period of three years. The Committee has
discretion to allow a higher level of deferral.
Dividend equivalents accrue over the vesting
period and are paid at the time of vesting on the
number of shares that vest.
Awards under the LTIP are designed to
incentivise and reward achievement of the
Group’s long-term strategic objectives and
creation of sustainable value for shareholders
through execution of the strategy.
Awards are made annually subject to
performance measures set by the Committee,
which are aligned with business strategy and
the Group’s financial plan. The Committee
has the discretion to change the weightings of
measures, remove measures or introduce new
measures to support delivery of the Group’s
objectives and strategy. Achievement of each
element is assessed independently. Awards will
normally vest three years after the award is
made. The Committee retains discretion to
introduce a holding period which would apply
after the award has vested. Dividend equivalents
accrue over the performance period and are
paid at the time of vesting on the number of
shares that vest.
PERFORMANCE
MEASURES AND PERIOD
Annual bonus awards are subject to the following
performance measures:
• 50% is based on underlying profit before tax;
• 30% is linked to achievement of a number of
strategic scorecard measures; and
• 20% is linked to achievement of personal objectives.
The measures and weightings are set by the
Committee on an annual basis, and may be changed
if the Committee decides this is appropriate
to support delivery of the Group’s strategy.
Each element is assessed independently at the end
of each year. Achievement of threshold performance
will result in a payout of 20% of the underlying profit
element (i.e. 10% of the maximum bonus potential).
Achievement of one of the strategic scorecard
measures or one of the personal objectives is
regarded as threshold performance for that element.
Deferred share awards are not subject to any further
performance conditions. Awards will normally vest
three years after the date of award but may be
forfeited if the individual leaves employment before
the vesting date. The Committee has discretion to
award ‘good leaver’ status.
LTIP awards are subject to the following
performance measures:
• 40% is based on cumulative adjusted free cash flow;
• 40% is based on total sales growth (excluding fuel and
VAT); and
• 20% is based on underlying basic earnings per share
(EPS) growth.
Achievement of threshold performance will ordinarily
result in vesting of 25% of each element with 100%
vesting for maximum performance. However, the
Committee has discretion to reduce the level of vesting
at threshold. There is a ROCE underpin which allows the
Committee to adjust vesting of awards if ROCE is below
the weighted average cost of capital (WACC). For all
awards, the Committee has the discretion to adjust the
vesting calculations as set out in the ‘Implementation
of the remuneration policy in 2018/19’ section.
The Committee has the discretion to amend the
weightings, introduce new measures and exclude
measures in order to best align to long-term
shareholder interests. Malus and clawback policies apply.
42
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Other key features of policy:
Service contracts
Our policy is for Executive Directors to have rolling service contracts
with a notice period of 12 months. On an exceptional basis, to complete
external recruitment, a longer initial period reducing to 12 months might
be used.
Termination payments summary
At its discretion, the Group may pay in lieu of notice. Payment in lieu
of notice could potentially include up to 12 months base salary, benefits
and pension, but is payable in instalments and subject to mitigation.
Under the Annual Bonus and LTIP scheme rules, the Committee has
discretion in relation to termination of employment.
CIRCUMSTANCES
OF TERMINATION
SALARY AND
CONTRACTUAL BENEFITS
ANNUAL BONUS PLAN
UNVESTED DEFERRED SHARES
UNVESTED LTIP AWARDS
Resignation or
gross misconduct
Paid to date
of termination
No bonus paid for year
of termination
Award lapses when
employment ends
Award lapses when employment ends
Injury/ill health,
disability, death,
retirement (with
agreement of
the Group)
Negotiated
termination at
the discretion of
the Committee
Paid to date
of termination
Eligible to be considered
for a bonus, calculated
on a time pro-rata basis
Deferred shares are retained
and will typically vest on
the normal three year cycle.
The Committee has discretion
to bring forward vesting in
exceptional circumstances
Paid to date
of termination
As above
As above
Eligible to be considered for good leaver status,
which gives entitlement to retain the award
granted calculated on a time pro-rata basis
At the Committee’s discretion, may be eligible
to be considered for good leaver status, which
gives entitlement to retain the award granted
calculated on a time pro-rata basis
Approach to new hires
Chairman and Non-Executive Director fees
Prior to appointment, the Committee will apply the following principles
in agreeing the remuneration of Executive Directors:
• the overall package will be sufficient to attract and retain the best
talent to effectively deliver the Group’s strategy, taking into account
similar positions in the market, experience of the candidate and
current remuneration;
• the Committee will look to align the base salary, benefits, pension
benefits, Annual Bonus and LTIP, in line with the remuneration policy
whilst taking into account the individual circumstances (including
compensation for loss of remuneration from a previous employer)
of candidates and existing Executive Directors; and
• the maximum variable pay opportunity will be 500% of salary. Up to
200% may be earned under the Annual Bonus Plan, and up to 300%
may be granted under the LTIP. This would be separate to arrangements
required to recruit the preferred candidate.
Fees for the Non-Executive Directors (NEDs) are determined by
the Chairman and the Executive Directors, and are reviewed from
time-to-time with regard to the necessary time commitment, and the
level of fees in comparable companies. The Chairman’s fee is determined
by the Remuneration Committee and the Board, and is reviewed on the
same basis. Fees for the NEDs are made up of a base fee, plus additional
fees for Committee chairmanship, Committee membership and for the
appointed Senior Independent Director. The Chairman receives a single
fee only with no additional fees for other duties to the Group.
Current NED fees are as follows:
Fee type
Chairman
Senior Independent Director
NED base fee
Committee chair fee
Committee membership fee
Annual Fee
£400,000
£20,000
£61,200
£20,000
£7,000 (per Committee)
Benefits and other items in the nature of remuneration
The Chairman has use of a car and driver and receives private health
provision. The Chairman and NEDs are entitled to normal colleague
discount. Neither the Chairman nor any of the NEDs participate in any
Group incentive scheme.
43
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report continued
Implementation of
remuneration policy in 2018/19
Base salary
LTIP targets 2018-21
Annual base salaries for the Executive Directors are set out below:
The targets for the 2018-21 LTIP are in the table below:
The Committee awarded David Potts and Trevor Strain a pay rise of 2.4%,
in line with the wider workforce. As in previous years, David has waived
his pay award and his salary remains unchanged since his appointment
at £850,000. Trevor Strain’s new salary is £610,560.
Benefits and pension
David Potts and Trevor Strain receive a pension supplement of 25%
and 24% of base salary respectively. This is consistent with Morrisons
Retirement Saver Pension Scheme, which guarantees a cash balance of
24% of salary for each year of membership for store managers and above.
Annual Bonus
The structure of the bonus, including maximum potential (200% of salary)
and the requirement to defer 50% of any bonus in shares under the
DSBP is in line with the Directors’ remuneration policy (summary on
pages 41 to 42).
The performance measures and weightings are unchanged from
previous years:
Measure1
Underlying profit before tax
Strategic scorecard
Personal objectives
1 Performance measures are defined on page 45.
Weightings
(% of maximum bonus
opportunity)
50%
30%
20%
Scorecard measures for 2018/19 will continue to focus on strategic
objectives in the areas of like-for-like sales growth (20%) and productivity
improvement/cost reduction (10%).
Personal objectives will be linked to strategy.
Detail on the performance targets is regarded as commercially sensitive
at this time and cannot be disclosed here. Subject to no longer being
regarded as commercially sensitive, targets will be disclosed in next year’s
remuneration report.
LTIP
2018-21 LTIP target setting
In setting this year’s targets, the Committee reviewed past LTIP
targets and performance, the Group’s strategic plan, current market
performance, and those analysts’ estimates that were available at the
time. The Committee also analysed the targets through a variety of lenses
to assess the level of stretch. Unattainable or inappropriate targets, such
as exaggerated focus on short-term margin expansion, are not in the
best long-term interests of any stakeholders. Instead, the Committee is
striving to set targets that achieve the right balance between continuing
to drive the turnaround, maximising shareholder returns and incentivising
management to prioritise consistent and sustainable growth over
short-term profit.
Through the consultation process it was clear that shareholders feel
the current performance conditions and weightings are aligned to the
strategy, and therefore these remain unchanged. The Committee also
noted the benefit of consistent measures to allow performance over
time to be clear.
In line with the policy approved by shareholders, the LTIP awards for
David Potts and Trevor Strain for 2018/19 will be 300% of salary.
44
Measure1,2
Total sales growth (exc. fuel)
Adjusted free cash flow
Underlying basic EPS growth
1 Performance measures are defined on page 45.
2 Vesting is on a straight-line basis between threshold and maximum.
Threshold
Weighting
40%
£1.1bn
40% £730m
5%
20%
Mid point
£1.3bn
£820m
7%
Maximum
£2.0bn
£1bn
10%
The Committee has the discretion to adjust these calculations for material
exceptional events or actions (which may include strategic changes to
capital expenditure approved by the Board and material acquisitions or
disposals) which were not in the contemplation of the Committee at the
time the targets were set and which might otherwise materially distort
the outcome, in order to ensure the vesting of the LTIP is an accurate and
fair reflection of performance. If the Committee exercises its discretion to
amend the calculation, a full disclosure of the reason for the amendment
and an explanation of the impact will be given in the relevant annual
report on remuneration.
Given the pending changes on lease accounting (which impact all
companies reporting under IFRS) for the purposes of the LTIP reporting,
standards in place at the time of grant will be used in calculation
of vesting.
There is a ROCE underpin which allows the Committee to adjust vesting
options if ROCE is below weighted average cost of capital (WACC).
Sales growth
The maximum growth target is an increase of £2bn over a 2017/18 52 week
equivalent base (excluding fuel) of £13.3bn which is equivalent to c.5% total
sales growth per annum (excluding fuel). This is a significant step up in the
growth ambition, in the context of a company that had experienced
16 quarters of continuous sales decline only three years ago.
During consultation, some shareholders asked whether potential food
inflation could boost sales. At Morrisons, inflation does not typically help
sales performance as our customers’ budgets do not increase as prices go up.
The Committee will take into account, as they deem appropriate, any impact
of inflation or deflation on sales performance.
For the sales targets, as set out in the Directors’ remuneration policy, the
Committee will retain the discretion to adjust the targets in the event of
material disposals or store closures during the performance period which
were not taken into account at target setting.
Adjusted free cash flow
Our definition of free cash flow for the purposes of the LTIP is the same
as in previous years. The definition is provided on page 45. This year’s
target follows a successful three year programme of property disposals
and working capital which is now mostly complete, with c.£2bn of
improvements delivered. For the three year period since 2015/16 delivery
adjusted for property disposals, working capital and onerous capital
payments was c.£700m. This is c.5% below the threshold of the 2018-21
target. Despite strong progress, the high level of property disposals and
working capital generation already achieved, management remain focused
on this key measure and the mid-point of the new range is £20m above
the maximum level for the 2017-20 LTIP.
Underlying basic EPS growth
The definition of underlying basic EPS is set out in definitions on page 45.
The maximum growth target is an increase of 10% p.a over a 2017/18 52
week equivalent base of 12.03p.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 In setting the target in January 2018, the Committee took into account
analyst estimates available at the time, which were for the first two years
of the LTIP only. Underlying EPS performance in this range will require the
business to deliver sales growth on growth over a number of years, and
achieving the maximum 10% underlying EPS growth each year, would likely
be a strong relative performance particularly when comparing to historic
performance and competitor experience in 2017.
When setting the target, the Committee was mindful of the lessons
learned in the recent past when some UK food retailers were focused
on short-term profitability ahead of remaining competitive for customers,
and became less relevant for customers over time. EPS growth cannot
be disconnected from shopping trip improvements. The targets are
designed to prioritise consistent and sustainable long-term growth.
Chairman and Non-Executive Director fees
Fees for the Chairman and NEDs remain unchanged from those payable
in 2017/18 and as set out in the summary of the remuneration policy
on page 43.
Directors’ remuneration report performance measures definitions
Annual Bonus Performance Measures
Measure
Group financial
Definition
Underlying profit before tax As defined in the Glossary on page 127
Strategic scorecard
Group like-for-like sales
growth (exc. fuel)
As defined in the Glossary on page 127
Productivity improvement/
cost reduction
Cost savings from productivity and cost reduction
delivered in the year
Other measures
Personal objectives
Personal objectives are linked to delivery
of the strategy
Long Term Incentive Plan (LTIP) Performance Measures
Measure
Definition
Total sales growth (exc. fuel)
Adjusted free cash flow
Underlying basic earnings
per share (EPS) growth
The change in total sales (excluding fuel and VAT)
over the performance period of the award
Total sales (excluding fuel and VAT) is defined
in the Glossary on page 127
The cumulative adjusted free cash flow over
the performance period of the award
Adjusted free cash flow is defined as:
• Cash generated from operations
• Less: Interest and tax
• Plus: Property disposal proceeds (excluding
sale and leaseback)
• Less: Capital expenditure
• Plus: Onerous payments
The percentage change in underlying basic
earnings per share (EPS) per annum over the
performance period of the award
Underlying basic earnings per share is defined
in the Glossary on page 127
Note for the 2018-21 LTIP, sales and EPS growth will use 2017/18 52 week
equivalent numbers as a base as set out on page 44.
Pay and conditions in the wider group – investing in a colleague-led
turnaround.
One of our ambitions for colleagues is ‘a fair day’s pay for a fair day’s
work’. The Board receive regular updates on progress against this
ambition. We are delighted that colleague satisfaction with pay has
increased over 26% over the last three years, reflecting our substantial
investment in both pay and working conditions.
In 2016, the colleague hourly rate in stores was increased from £6.83
to £8.20. Last year we increased all store colleagues to £8.50 – the
highest of the ‘big 4’ grocery retailers and will increase again this year,
to an hourly rate of £8.70. Colleagues are sharing in the value they
create, with colleague bonus levels continuing to increase, from an
average payment for applicable colleagues of £164 in March 2016,
£276 in March 2017 and £350 in March 2018.
Following feedback from our listening and responding channels,
we launched two new benefit schemes this year. The first is a more
affordable pension scheme, with lower colleague contribution
rates. 27,000 colleagues not previously in a pension scheme are
now enrolled in it, and with new joiners there are around 30,000
colleagues benefiting.
The second is a new website, which offers a range of discounts to
colleagues such as discounted cinema tickets, meals out and savings at
high street retailers. This has proved extremely popular, with average
monthly savings of £17 per user – equivalent to another two hours pay.
Colleagues have the chance to participate in an annual Sharesave
scheme, offering share options at the maximum 20% discounted
option price.
As part of our Fresh Look programme, we have underlined our
commitment to a colleague-led turnaround by refurbishing colleague
areas, many of which had not been refreshed for some time.
In June 2016, we launched a Group-wide listening and responding
channels for colleagues called ‘Your Say’. Stores and sites each have
a monthly meeting, regional quarterly meetings and a national
meeting twice a year. As the Chair of the Remuneration Committee,
Tony van Kralingen will attend the national ‘Your Say’ forum, to hear
views from colleagues on a range of issues, not just remuneration.
Improvements that have been made as a result of colleague feedback
include upgrading the scanners at our check out tills, making price
reduction labels easier to scan, upgrading all our hand held terminals
in-store and replacing all the shop floor printers. Our colleagues are
passionate about our business, and engage with energy on how we can
help them to simplify and speed up their roles, to enable them to put
customers first.
45
Strategic reportGovernanceFinancial StatementsInvestor information
Directors’ remuneration report continued
Annual report on remuneration
Audited information
Single total figure of remuneration
The table below sets out the single total figure of remuneration and breakdown for each Director for 2017/18 and the comparative figure for 2016/17.
Salary/fees
£000
Benefits1
£000
2017/18
Annual2
bonus
£000
LTIP3
£000
Pension4
benefits
£000
Total
£000
Salary/fees
£000
Benefits
£000
2016/17
Annual
bonus
£000
LTIP5
£000
Pension4
benefits
£000
Executive Directors
D Potts
T Strain
D Philips
850
596
–
27
35
–
1,678
1,177
–
3,042
1,503
–
213
143
–
5,810
3,454
–
850
575
–
31
35
–
1,700
1,150
–
–
809
366
213
138
–
Total
£000
2,794
2,707
366
Non-Executive
Directors
A Higginson
415
–
R Anand
92
–
P Vennells
76
–
T van Kralingen
–
–
N Davidson
92
–
B Richards
92
–
I Lee6
54
–
1 Taxable benefits for the Executive Directors include a car allowance (or other car benefit), transport costs and private health provision. The Chairman has use of a car and driver for Group business and
receives private health provision. For 2017/18, the figure disclosed for the Chairman includes tax paid via PAYE settlement agreement. All Directors receive the Group’s normal staff discount entitlement
which is not taxable. Applicable Sharesave awards granted in given financial years are also included in this figure.
400
102
89
35
102
102
–
400
92
76
–
92
92
54
424
102
89
35
102
102
–
24
–
–
–
–
–
–
15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2 50% of the annual bonus is deferred in shares for a period of three years. There are no performance conditions attached to this deferred element.
3 Awards granted under the LTIP in April 2015 are scheduled to vest in April 2018. The performance conditions relating to the 2015-18 LTIP award ended on 4 February 2018 and the vest value of the 2015-18
LTIP award is therefore calculated on the closing share price as at 2 February 2018 (the last trading day before year end). The figures stated in the 2017/18 figures also include the value of dividends accrued
on the 2015-18 LTIP award at the time of vesting. Further detail is in the table on page 48.
4 D Potts received a salary supplement equal to 25% of base salary. T Strain received a salary supplement of 24% of base salary. None of the Executive Directors have a prospective entitlement to a defined
benefit pension by reason of qualifying service.
5 The value of the 2014-17 LTIP vest that was disclosed in the 2016/17 Directors’ remuneration report was based on an indicative price at 27 January 2017. The value of the 2014-17 LTIP vest has been restated
to reflect the actual June 2017 vest value.
6 I Lee retired from the Board on 31 August 2016.
Annual Bonus Plan
Annual bonus achieved 2017/18
Director
D Potts
T Strain
Group financial and strategic scorecard
Performance measure 1, 2
Group financial
Underlying profit before tax
Strategic scorecard
Productivity improvement/cost reduction
Group like-for-like sales growth (exc. fuel)
Other measures
Personal objectives
Maximum bonus
opportunity
(% of salary)
200%
200%
Actual bonus
(% of salary)
197.4%
197.4%
Actual bonus
(£000)
1,678
1,177
Bonus deferred
into shares
(% of award)
50%
50%
Bonus paid
in 2017/18
(£000)
839
588
Achieved as a % of maximum
Threshold
20% payout
£338m
20% payout
£170m
0%
Target
60% payout
50% payout
Maximum
100% payout
£371m
100% payout
£200m
2%
Weighting
(as a % of total
annual bonus
opportunity)
50%
10%
20%
20%
Actual
achievement
Payout
(as a % of total
annual bonus
opportunity)
£374m
£195m
2.8%
50%
8.7%
20%
20%
1 Performance measures are defined on page 45.
2 Targets were set for 2017/18 taking into account it is a 53 week period, and are reported on that basis. For 2018/19 like-for-like sales targets will be off the 2017/18 52 week excluding fuel sales base (£13.3bn)
and for underlying profit before tax purposes the growth will be with reference to the 2017/18 base adjusted for the £5m benefit relating to the 53rd week (£369m).
As shown in the table above, management have delivered another year of strong performance which is further explained on page 47.
46
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Underlying profit before tax
Underlying profit before tax increased by 11%, delivering just above the £371m maximum. At the time the target setting process started (end of 2016),
the grocery market was facing falling consumer confidence and growing inflationary/cost pressures. The growth target challenged management to
balance competing demands of growing profit while investing in the offer to be more competitive for customers, and in customer service and colleague
pay (in line with our six priorities). Competitor/market performance in the year illustrates how stretching this target has been, and the strength of the
performance against this measure.
Productivity improvement/cost reduction
At the start of the year, management identified significant procurement savings, resulting in a high target for a second year running. Management have
performed well against this stretching target, resulting in £195m (97.5%) of this element being achieved. The maximum was set slightly lower than
the previous year, given the performance in accelerating benefits in 2016/17 (delivered £269m vs max of £190m). The maximum of £200m was a very
stretching target as a percentage of the cost base.
Group like-for-like sales growth (excluding fuel)
Group like-for-like sales growth (excluding fuel) was 2.8%. When the targets were set, the Group had achieved five quarters of like-for-like sales growth,
following 16 quarters of decline. Therefore, this year was the first time since 2011 that management were required to grow sales on top of prior year
growth in order to achieve the target. A target range of 0-2% therefore represented significant stretch given prior year performance and the ongoing
intensely competitive market.
For context, the previous year’s range had been (2)% to 0%, so the 2017/18 target was 200 basis points more challenging.
Personal objectives
Stretching and measurable objectives are set by the Committee at the start of the financial year, taking into account our six priorities, and the ambitions
for our four stakeholders: customers, colleagues, suppliers and shareholders.
Objective
Achievement
D Potts
Deliver key actions against our six
priorities
• Invested in being competitive through ‘Price Crunch’, ‘Way Down’ and Christmas shopping list
• Local food makers roadshows resulted in new locally relevant ranges in stores
• Number one for checkout wait times
• Significant capital investment in Fruit & Veg
Develop capability
• Leadership development programme delivered to c.1,000 leaders
• Continued investment in store manager capability
• Hired 83 new store managers into Morrisons
Start to implement strategy for a
broader, stronger business
• ‘Nutmeg’ womenswear launched
• Home & Leisure complete range reset
• Strategic acquisitions in manufacturing
Start to realise potential of Wholesale
and Popular and Useful services (as part
of the £75m-£125m incremental profit
opportunity)
• Wholesale supply agreements signed with McColl’s and Sandpiper
• Continued expansion with Rontec
• All cafés refurbished and new menu
• Roll out of barista bars in selected areas
T Strain
Take lead on identifying opportunities
and building the 2018/19 cost reduction
programme
• Strong plan identified to realise cost saving opportunities across automated ordering, in-store
administration, procurement of goods not for resale, and distribution
Drive work to develop and execute
plans for non-core/non-strategic assets
• Proceeds from disposals of non-core assets were £108m in the year
• Proceeds from the start of the programme to monetise non-core assets now £1bn
Deliver cash flow objectives
• Net debt below the £1bn target
• Strong free cash flow delivery
Develop our Wholesale business
• Wholesale turnover target exceeded
• Safeway brand revived with McColl’s supply agreement
• New wholesale supply agreements signed, providing foundations for future wholesale growth
Continue to develop and execute
broad-based strategy for profitable
growth
• Three sites for new stores developed for opening in 2018/19
• Petrol forecourt offer expanded
• Continued strong progress with Popular and Useful services
Lead GSCOP compliance Executive
Sub Committee
• Strong progress in improving processes
47
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report continued
Annual report on remuneration
Audited information continued
Personal objectives performance summary
The Committee carefully assessed performance against objectives at the end of the financial year. In determining the final level of bonus payable, the
Committee took into account both the performance against objectives and the performance of the wider business. As well as individual objectives
being delivered in full, management continue to make significant progress against our six priorities, in particular being more competitive which is
improving like-for-like sales and volumes, and thereby rebuilding profitability. The Committee therefore decided to award them each the full 20%,
and their total bonus achieved is 197.4%.
50% of any bonus payable is deferred in shares under the DSBP which vest three years after the date of award. Dividend equivalents will accrue and
be paid on the shares that vest. Deferred shares are normally forfeited if the individual leaves the Group before they vest.
LTIP awards
2015-18 LTIP awards
Awards granted under the LTIP in April 2015 are scheduled to vest in April 2018. The performance period relating to these awards ended on 4 February
2018. Details of the performance conditions and the extent to which they have been satisfied are set out below:
Measure1,2
Total sales (exc. fuel)3
Adjusted free cash flow4
Underlying basic earnings per share (EPS)
1 Performance measures are defined on page 45.
2 Vesting is on a straight-line basis for the cumulative free cash flow and total sales (excluding VAT and fuel) measures. Intermediate vesting applies for the underlying earnings per share measure: 10p (25%),
Actual outcome
£13.5bn
£2,053m
12.19p
Weighting
20%
60%
20%
(25%)
Threshold performance required
£12.7bn
£850m
10p
(100%)
Maximum performance required
£13.2bn
£1,600m
15p
Actual LTIP vesting
(% of maximum)
20%
60%
16.3%
11p (60%), 12p (80%), 15p (100%) with straight-line vesting between each point.
3 Total sales (exc. fuel) exceeded the 2015-18 target by £336m, of which £248m was due to the impact of the 53rd week. The 2018-21 £2bn sales growth target will be off a 52 week base for 2017/18 (£13.3bn).
4 The 2015-18 LTIP awards were subject to certain ‘guardrails’ relating to the free cash flow measure. The Committee has minimum and maximum guardrails for maintenance capital expenditure and
cumulative net proceeds from property sales over the performance period. When considering vesting against the free cash flow measure, the Committee can review and adjust as appropriate in the
event of operation outside the agreed parameters. The 2015-18 vesting for free cash flow was within the agreed parameters and as such no adjustment was required.
Share awards granted in 2017/18
The table below sets out the share awards made to the Executive Directors during 2017/18 under the Group’s LTIP:
Performance conditions
D Potts
see table below
T Strain
see table below
1 The face value in the table above has been calculated by multiplying the maximum number of shares that could vest by the average share price used to determine the number of shares awarded.
Award type
Conditional award
Conditional award
Grant date
22 March 2017
22 March 2017
Basis on which
award made
300% of salary
300% of salary
Face value
of award (£)1
2,550
1,789
Performance
period end date
2 February 2020
2 February 2020
Percentage of award
vesting at threshold
performance
25%
25%
The average share price used was £2.373 and this was calculated over a period of five business days prior to the date of grant.
The table below sets out the performance conditions attached to the awards made during the year. These awards were granted in March 2017.
Measure1,2
Total sales growth (exc. fuel)
Adjusted free cash flow
Underlying basic earnings per share (EPS) growth
1 Performance measures are defined on page 45.
2 Vesting is on a straight-line basis between threshold and maximum.
Period over which the
measure applies
Three year performance period (2017/18 – 2019/20)
Three year performance period (2017/18 – 2019/20)
Three year performance period (2017/18 – 2019/20)
Weighting
(% of maximum award)
40%
40%
20%
Maximum (100%)
Threshold
(25%)
£400m £750m
£600m £800m
5%
10%
For the sales target, as set out in the Directors’ remuneration policy, the Committee will retain the discretion to adjust the targets in the event
of material disposals or store closures during the performance period which were not taken into account in setting the target range.
The Committee has discretion to adjust these calculations for material exceptional events or actions (which may include strategic changes to capital
expenditure approved by the Board and material acquisitions or disposals) which were not in the contemplation of the Committee at the time the
targets were set and which might otherwise materially distort the outcome, in order to ensure that vesting of the LTIP is an accurate and fair reflection
of performance. If the Committee exercises its discretion to amend the calculation, a full disclosure of the reason for the amendment and an
explanation of the impact will be given in the relevant Annual Report on remuneration. There is a ROCE underpin which allows the Committee
to adjust vesting options if ROCE is below weighted average cost of capital (WACC).
48
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Payments to past Directors and loss of office payments
There were no payments made to past Directors of the Group or loss of office payments made during the year.
Statement of Directors’ shareholdings (Executive and Non-Executive Directors)
The Group has share ownership guidelines for Executive Directors of 250% of salary. Shares held under the deferred share bonus plan (calculated
on a post-tax basis) which are subject only to a continuing service requirement, will be included in assessing the level of shareholding. The shareholding
guideline should be reached within five years of appointment to the Board. The Group has share ownership guidelines for Non-Executive Directors
of 50% of base fees. This guideline should be reached within three years of appointment to the Board or three years after the date of adoption
of the policy for incumbent Directors.
David Potts has met his shareholding requirement. Trevor Strain met the 200% shareholding guidance set at the time of his appointment but is yet
to meet the updated 250% shareholding guideline, he is within the five year period permitted to build up his shareholding.
Shareholding
requirement
(% salary)
Shareholding
as at
2 February 2018
(% salary)1,2
Shares owned
outright
Deferred shares
not subject to
performance
Share save options
not subject to
performance
LTIP shares subject
to performance3
Total interests
in shares
Executive Directors
D Potts
T Strain
1 Includes shares held under the DSBP on an after tax basis.
2 For the purpose of calculating the shareholding as a percentage of salary, the three month average share price of £2.1934 up to 2 February 2018 (the last trading day of the financial year ended 4 February
5,028,095
2,946,534
3,385,918
2,081,520
1,002,881
282,732
631,885
580,087
250%
250%
347%
218%
7,411
2,195
2018) has been used. In previous years, shares purchased in the market were valued at the acquisition price. This has been changed to obtain a more representative shareholding calculation.
3 1,293,365 shares and 639,074 shares represent LTIP awards granted to D Potts and T Strain respectively in April 2015 which are due to vest in April 2018. Performance targets for these awards and associated
outcomes are provided in the section headed ‘2015-18 LTIP awards’ on page 48. 1,017,964 and 688,622 shares granted to D Potts and T Strain respectively represent LTIP awards made in April 2016 which
are due to vest in April 2019. 60% of the award is linked to a cumulative free cash flow target. 25% of this element vests for achieving £620m over the performance period, and 100% vests for achieving
£1,340m over the period. 20% of the award is linked to an underlying EPS target. 25% of this element will vest for achieving 6% growth per annum over the performance period. 100% of this element will
vest for achieving 13% growth per annum over the performance period. 20% of the award is linked to total sales (excluding fuel and VAT) for the final year of the performance period (2018/19). 25% of this
element vests for achieving £12.7bn in total sales (excluding fuel and VAT) in 2018/19. 100% of this element vests for achieving total sales (excluding fuel and VAT) of £13.2bn in 2018/19. 1,074,589 and 753,824
shares granted to D Potts and T Strain respectively represent LTIP awards made in March 2017 which are due to vest in March 2020. Performance targets for these awards are disclosed in the section
headed ‘Share awards granted in 2017/18’ on page 48.
All Non-Executive Directors are still within the three year period allowed to build up their shareholding. Shareholdings as at 2 February 2018 (the last
trading day of the financial year ended 4 February 2018) are set out in the table below.
A Higginson
R Anand
N Davidson
K Havelock (appointed 1 February 2018)
C A van Kralingen
B Richards
P Vennells
There have been no changes in the Directors’ interests since the year end.
2 February 2018
Total (owned outright)
266,209
22,500
12,800
–
13,000
13,721
12,745
49
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ remuneration report continued
Annual report on remuneration
Unaudited information
Total shareholder return (TSR)
Value of a £100 holding
£
300
250
200
150
100
50
Performance graph and table
2009
2010
2011
2012
2013
2014
2015
2016
2017
Feb 18
Morrisons
FTSE 100
FTSE All Share Food & Drug Retailers
The graph above shows the Group’s total shareholder return (TSR) compared with the TSR of the FTSE 100 and FTSE All Share Food & Drug Retailers
indices over the nine year period to 2 February 2018 (last trading day before year end). These indices have been selected as being appropriate in giving
a broad equity view and given that the Group is or has been constituent of these indices over the period.
TSR is a measure of the returns that a company has provided for its shareholders, reflecting share price movements and assuming reinvestment
of dividends.
The table below sets out the total remuneration figure for the CEO over the previous nine years, valued using the methodology applied to the single
total figure of remuneration.
Chief Executive
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/163
Total remuneration (£000)
Annual bonus payment
(% of maximum opportunity)
–
3,3282
304
–
70%
–
–
–
–
1 M Bolland was not treated as a good leaver and therefore did not receive a bonus in 2009/10.
2 Total remuneration includes value of unrestricted share award over 319,401 shares and restricted share award over 120,965 shares granted on recruitment.
3 D Potts was appointed on 16 March 2015 and D Philips stepped down from the Board on 16 February 2015.
4 M Bolland was not treated as a good leaver and therefore lost any eligibility to shares that may have otherwise vested following his departure.
D Potts
D Philips
M Bolland
D Potts
D Philips
M Bolland
D Potts
D Philips
M Bolland4
LTIP vesting level achieved
(% of maximum opportunity)
–
2,502
–
–
90%
–
–
–
–
–
1,089
–
–
0%
–
–
0%
–
–
1,089
–
–
0%
–
–
0%
–
–
–
1,1591
–
–
0%1
–
–
–
–
2,101
–
–
60%
–
–
0%
–
2,252
50
–
73%
–
–
–
0%
–
2016/17
2,794
366
–
100%
–
–
–
50%
–
2017/18
5,810
–
–
98.7%
–
–
96.3%
–
–
Change in remuneration of CEO compared to Group employees
The table below sets out the change in total remuneration paid to the CEO from 2016/17 to 2017/18 and the average percentage change from 2016/17
to 2017/18 for employees of the Group as a whole.
Salary and fees
Taxable benefits
Annual bonus
% increase in element between 2016/17 and 2017/18
D Potts
All Group employees1
1 Reflects the change in average pay for all Group employees employed in both the financial year 2016/17 and the financial year 2017/18.
2 Reflects the increase in the average bonus payout for eligible employees.
0%
2.4%
(13)%
0%
(1.3)%
21%2
Relative importance of spend on pay
The table below sets out the total spend on remuneration in the 2016/17 and 2017/18 financial years compared with distributions to shareholders.
Total spend on remuneration for all Group employees
Profit distributed by way of dividends
2017/18
£m
1,938
129
2016/17
£m
1,925
118
Difference
£m
13
11
50
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 The Committee and its advisers
During the year, the following individuals were members of the Remuneration Committee:
T van Kralingen (Chair since 1 September 2017)
R Anand
N Davidson
K Havelock
A Higginson
B Richards
P Vennells
1 September 2017
21 January 2016
3 November 2015
1 February 2018
22 January 2015
2 September 2015
21 January 2016
To date
To date
To date
To date
To date
To date
To date
The CEO, CFO, the Group People Director and other Human Resources (HR) representatives also attend meetings by invitation (other than where
their own remuneration is being discussed). The Company Secretary acts as secretary to the Committee. Willis Towers Watson were appointed
by the Committee in August 2016, following a competitive tender process, to provide independent external advice on market practice and Executive
and Non-Executive remuneration. The Committee is satisfied that the advice provided by Willis Towers Watson is objective and independent. Fees are
agreed by the Committee according to services provided. Total fees paid for assistance in relation to Remuneration Committee matters were £110,703
on a time and expense basis.
Statement of voting at the 2017 AGM on the remuneration policy
Remuneration policy
Votes for
1,639,088,405
For as a % of votes cast
92.35%
Votes against
135,826,285
Statement of voting at the 2017 AGM on the remuneration report
Remuneration report
Votes for
873,317,656
For as a % of votes cast
51.89%
Votes against
809,799,691
Votes against
as a % of votes cast
7.65%
Votes against
as a % of votes cast
48.11%
Abstentions
575,379
Total
1,775,490,069
Abstentions
93,759,087
Total
1,776,876,434
The Chair of the Remuneration Committee has met with shareholders to understand the reasons for the 52% vote on the 2016/17 Directors’
remuneration report. This was primarily driven by perceived stretch in 2017-20 LTIP targets and there is therefore greater explanation and clarity about
the target setting process and why the Committee believes the 2018-21 LTIP targets are appropriately stretching in the Implementation report which
starts on page 44.
Tony van Kralingen
Remuneration Committee Chair
13 March 2018
51
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ report
Statutory disclosures
The following disclosures have been included elsewhere within
the Annual Report and are incorporated into the Directors’ report
by reference.
Disclosure
Financial instruments
Financial risk management
Future developments
Dividends
Greenhouse gas emissions
Corporate governance report
Directors of the Group
Employee involvement
Page
95 to 97
95
1 to 26
75
22
27 to 37
30 and 31
14 and 15
Disclosures required pursuant to Listing Rule 9.8.4R can be found on the
following pages:
Disclosure
Interest capitalised
Long term incentive plans
Waiver of Directors’ emoluments
Page
80 to 83
104
44
Political donations
No political donations were made in the financial year, which is
Group policy.
Going concern
The Directors’ assessment of the Group and the Company’s ability
to continue as a going concern is based on cash flow forecasts for the
Group and the committed borrowing and debt facilities of the Group.
These forecasts include consideration of future trading performance,
working capital requirements, retail market conditions and the
wider economy.
The Group remains able to borrow cash at competitive rates. The Group
has negotiated, and has available to it, committed, competitive facilities
that will meet the Group’s needs in the short and medium term.
Having assessed the principal risks as set out on pages 24 and 25 and
the other matters discussed in connection with the viability statement
on page 26, the Directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements.
Forward-looking statements
The Strategic report and Directors’ report are prepared for the members
of the Group and should not be relied upon by any other party or for
any other purpose. Where the Strategic report and Directors’ report
include 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 the Annual 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.
The liabilities of the Directors in connection with the Strategic report, the
Directors’ remuneration report and the Directors’ report shall be subject
to the limitations and restrictions provided by the Companies Act 2006.
52
Borrowing powers
The Articles of Association of the Group restrict the borrowings
of the Group and its subsidiary undertakings to a maximum amount equal
to twice the share capital and consolidated reserves.
Relating to 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 communications to the
registered holder of their shares rather than to the Group’s registrar, Link
Asset Services, or to the Group directly.
Directors’ and Officers’ liability insurance
The Group maintains insurance cover for the protection of Directors and
senior management from personal liabilities and costs which may arise in
the course of fulfilling their duties. The Group also provides an indemnity
to the Non-Executive Directors for such liabilities and costs to the fullest
extent permitted by law.
Substantial shareholdings
As at 4 February and 13 March 2018, the following information has been
received, in accordance with DTR 5, from holders of notifiable interest
in the Group’s issued share capital.
The information provided below was correct at the date of notification,
however the date received may not have been within the current financial
year. As notification is not required until the next notifiable threshold is
crossed, it should be noted that these holdings are likely to have changed
since the Group was last notified.
Amerprise Financial Inc
Schroders PLC
Deutsche Bank AG
Silchester International
Investors LLP
BlackRock Inc
Majedie Asset
Management Limited
Brandes Investment
Partners, LP
First Eagle Investment
Management, LLC
Invesco Limited
Morgan Stanley
Zurich Financial Services
As at 4 February 2018
As at 13 March 2018
Number of
shares
177,970,287
155,916,196
142,101,677
% of share
capital
7.62
6.68
6.03
Number of
shares
177,970,287
155,916,196
141,816,217
% of share
capital
7.62
6.68
6.02
117,553,329
117,232,444
5.04
5.02
117,553,329
117,232,44
5.04
5.02
116,805,074
5.00
114,296,273
5.00
115,902,280
4.96
115,902,280
4.96
114,296,273
111,082,524
102,579,493
81,286,130
4.89
4.75
4.36
3.04
114,296,273
111,082,524
98,985,578
81,286,130
4.89
4.75
4.20
3.04
Additional shareholder information
Additional information for shareholders is required by the implementation
of the EU Takeover Directive into UK law.
Pursuant to section 992 of the Companies Act 2006, the Group
is required to disclose certain additional information. Such disclosures,
which are not covered elsewhere in this report, include the following
paragraphs. The disclosures set out below are in some cases a summary
of the relevant provisions of the Group’s Articles of Association and the
relevant full provisions can be found in the Articles which are available
for inspection at the Group’s registered office.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
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 Group in general meeting by special
resolution, the business of the Group shall be managed by the Directors,
who may exercise all powers of the Group which are not required to be
exercised by the Group in general meeting.
Articles of Association
The Group’s Articles of Association may only be amended by a special
resolution at a general meeting of shareholders.
Share capital
The authorised and called-up share capital of the Group, together
with details of shares allotted and cancelled during the year, are shown
in note 6.5 of the Group financial statements.
At the AGM of the Group held in June 2017, a special resolution was
passed to renew the authority given at the AGM held in June 2016 for the
purchase by the Group of up to 233,561,903 ordinary shares, representing
approximately 10% of the issued ordinary share capital at that time.
During the period, 20,279,315 (2017: 381,043) ordinary shares were issued
to employees exercising share options and 2,584,182 (2017: 2,733,049)
out of the Group’s trust shares.
Share capital and rights attaching to the Group’s shares
Under the Group’s Articles of Association, any share in the Group may
be issued with such rights or restrictions, whether in regard to dividend,
voting, return of capital or otherwise as the Group 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 Group, every member has one vote on
a show of hands and, on a poll, one vote for each share held. The notice
of general meeting specifies deadlines for exercising voting rights either
by proxy or present in person in relation to resolutions to be passed at
a general meeting.
No member is, unless the Board decides otherwise, entitled to attend
or vote either personally or by proxy at a general meeting, or to exercise
any other right conferred by being a shareholder if they or any person
with an interest in shares has been sent a notice under section 793 of the
Companies Act 2006 (which confers upon public companies the power
to require information with respect to interests in their voting shares)
and they or any interested person failed to supply the Group
with the information requested within 14 days after delivery of that
notice. The Board may also decide that no dividend is payable in respect
of those default shares and that no transfer of any default shares shall be
registered. These restrictions end seven days after receipt by the Group
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 Conduct 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 Group is not
aware of any other restrictions on the transfer of shares in the Group
other than certain restrictions that may from time-to-time be imposed
by laws and regulations (for example, insider trading laws). The Group is
not aware of any agreements between shareholders that may result in
restrictions on the transfer of securities or voting rights.
Other disclosures
The Group is not party to any significant arrangements which take effect,
alter or terminate upon a change of control of the Group following a
takeover bid.
The Group does not have any employee share schemes where the shares
to which the scheme relates have rights with regard to the control of the
Group which are not exercisable by employees.
Equal opportunities for all
Integral to a high performing culture is the concept of equal opportunity
and inclusion for all colleagues, which we promote through an
environment free from discrimination, harassment and victimisation.
We believe that everyone’s efforts are worthwhile and offer all colleagues
regardless of race, colour, nationality, ethnic origin, gender (including
gender reassignment), marital or civil partnership status, disability,
religion or belief, sexual orientation, age or trade union membership the
opportunity to be their best, using their individual talents and abilities.
This includes applications for employment made by people with disabilities,
which are given full and fair consideration. Respect underpins our behaviour
towards all disabled candidates, as well as colleagues who have a disability
or become disabled in any way during the course of their employment.
A full assessment of the individual’s needs is undertaken and we will make
reasonable adjustments to the selection process, work environment or
practices in order to help people with disabilities. With a heightened
awareness of the impact of mental health on society we are a more mindful
than ever that not all disabilities can be seen and therefore ensure the same
respect and support is provided to those candidates or colleagues whose
disabilities are not visible.
All candidates and colleagues are treated equally in respect of
recruitment, promotion, training, pay and other employment policies
and conditions. The decisions we make are based on relevant merits and
abilities, with decisions made free from bias.
It is also a priority that we remain receptive to the needs of our customers
and the wider communities by providing the same level of respect and
taking an inclusive approach respect.
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 Group 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 Committee.
Health and safety improvement plans are in place for each division which
are monitored to ensure continuous improvement in performance
and practice.
By order of the Board
Jonathan Burke
Company Secretary
13 March 2018
53
Strategic reportGovernanceFinancial StatementsInvestor information Directors’ report continued
Statement of Directors’ responsibilities in respect
of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for
each financial period. Under that law the Directors have prepared the
Group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and
Group financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 Reduced Disclosure Framework, and applicable
law). Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and Company and of the profit or
loss of the Group and Company for that period. In preparing the financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• state whether applicable IFRSs as adopted by the European Union have
been followed for the Group financial statements and United Kingdom
Accounting Standards, comprising FRS 101, have been followed for the
Company financial statements, subject to any material departures
disclosed and explained in the financial statements;
• make judgements and accounting estimates that are reasonable and
prudent; and
• prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Group and Company will
continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group and Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and Company and enable them to ensure
that the financial statements and the Directors’ remuneration report
comply with the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the
Group and Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
• the Annual Report includes a fair review of the development and
performance of the business and the position of the Group and
Company, together with a description of the principal risks and
uncertainties that it faces.
In the case of each Director in office at the date the Directors’ report
is approved:
• so far as the Director is aware, there is no relevant audit information
of which the Group and Company’s auditors are unaware; and
• they have taken all the steps that they ought to have taken as a Director
in order to make themselves aware of any relevant audit information
and to establish that the Group and Company’s auditors are aware
of that information.
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.
Assessment of whether the Annual Report is fair,
balanced and understandable
As required by the Code, the Directors confirm that they consider that
the Annual Report, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group’s position and performance, business model and strategy.
When arriving at this position the Board was assisted by a number
of processes including the following:
• the Annual Report is drafted by appropriate senior management with
overall coordination by the Chief Financial Officer to ensure consistency
across sections;
• an extensive verification process is undertaken to ensure factual
accuracy; and
The Directors are responsible for the maintenance and integrity of
the Group and Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
• comprehensive reviews of drafts of the report are undertaken by
members of the Executive Committee and other senior management;
and the final draft is reviewed by the Audit Committee prior
to consideration by the Board.
The Directors consider that the Annual Report and accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group and
Company’s position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in
the Corporate governance report confirm that, to the best of
their knowledge:
• the Company financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting
Policies (United Kingdom Accounting Standards, comprising of FRS
101 ‘Reduced Disclosure Framework’, and applicable law), give a true
and fair view of the assets, liabilities, financial position and profit of
the Company;
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give
a true and fair view of the assets, liabilities, financial position
and profit of the Group; and
54
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group and its subsidiaries
included in the consolidation as a whole; and
• the Strategic report includes a fair review of the development of the
business and the position of the Group 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
Jonathan Burke
Company Secretary
13 March 2018
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Independent auditors’ report
Independent auditors’ report to the members
of Wm Morrison Supermarkets PLC
Report on the audit of the financial statements
Opinion
In our opinion,
• Wm Morrison Supermarkets PLC’s Group financial statements and Company financial statements (the ‘financial statements’) give a true and fair
view of the state of the Group’s and of the Company’s affairs as at 4 February 2018 and of the Group’s profit and cash flows for the 53 week
period (the ‘period’) then ended;
• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law); and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Financial Statements (the ‘Annual Report’), which comprise: the
consolidated balance sheet and Company balance sheet as at 4 February 2018; the consolidated statement of comprehensive income; the consolidated
cash flow statement; the consolidated statement of changes in equity; the Company statement of changes in equity for the 53 week period then
ended; the general information; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under ISAs (UK)
are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group
or the Company.
Other than those disclosed in note 1.6 to the financial statements, we have provided no non-audit services to the Group or the Company in the period
from 30 January 2017 to 4 February 2018.
Our audit approach
Overview
Materiality
Audit scope
Areas of
focus
Materiality
• Overall Group materiality: £18.7m (2017: £16.9m), based
on 5% of underlying profit before tax.
Areas of focus
• Impairment of property, plant and
equipment (Group and Company).
• Overall Company materiality: £16.8m (2017: £16.0m), based
• Onerous property contracts
(Group and Company).
• Commercial income and manual
promotional funding (Group
and Company).
• Impairment of intangible assets
(Group and Company).
• Stock valuation (Group and Company).
• Pension accounting
(Group and Company).
on the amount of component materiality allocated
to the Company as part of the Group audit.
Audit scope
• We identified two reporting units, Wm Morrison
Supermarkets PLC and Safeway Stores Limited, which
in our view, required a full scope audit based on their
size and risk. In addition, we determined that certain
account balances of a further four reporting units were
in the scope of our Group audit to address specific risk
characteristics or to provide sufficient overall Group
coverage of particular financial statement line items.
• The Group engagement team performed the audit
procedures for each reporting unit in the scope of our
Group audit, which accounted for 99% of total Group
revenue and 84% of profit before tax. Our audit scope
provided sufficient appropriate audit evidence as a basis
for our opinion on the Group financial statements as
a whole.
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Independent auditors’ report to the members
of Wm Morrison Supermarkets PLC
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular,
we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered
the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and
significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk
of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or
through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and Company financial statements,
including, but not limited to, the Companies Act 2006, the Listing Rules, Pensions legislation and UK tax legislation. Our tests included, but were not
limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with, and reports to, the
regulators, review of correspondence with legal advisers, enquiries of management and review of internal audit reports in so far as they related to the
financial statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management
override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors that represented a risk
of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not
a complete list of all risks identified by our audit.
Key audit matter
Impairment of property, plant and equipment
Refer to page 69 (sources of estimation uncertainty), note 3.1 (accounting policies)
and note 3.3 (property, plant and equipment).
The Group has a large freehold store estate (£5,770m at 4 February 2018).
Given the challenging trading conditions in the UK grocery retail market in recent
years and the subsequent adverse impact on the market value of traditional
supermarket freehold stores, the possibility of impairment of these assets and
the related trading assets is an area of focus for management, as is the possibility
that previously charged impairments may need reversing where store trading
conditions have improved.
We focused on this area because of the judgemental factors involved in testing
for impairment and the significant carrying value of freehold property.
Management considers each store to be a cash generating unit (‘CGU’) and has
calculated the recoverable amount of each CGU as the higher of value in use
and fair value less costs of disposal.
Value in use
Value in use is based on discounted future cash flow forecasts, requiring
management to make judgements on certain key inputs including, for example,
discount rates and long-term growth rates.
Fair value less costs of disposal
Fair value less costs of disposal is estimated by management based on their
knowledge of individual stores, likely demand from grocers or other retailers in the
event those stores were for sale and also informed by a valuation performed by
a third party valuer. The key judgements made by the Directors in this fair value
calculation relate to the estimated rental values and the yields of the stores.
Management has calculated that an impairment charge of £118m is required as
at 4 February 2018. A release of impairment charged in previous years of £126m
has also been calculated following an improvement in the performance of
certain stores.
How our audit addressed the key audit matter
Value in use
We have obtained the Group’s approved budget (upon which forecasts
underlying the value in use calculations are based). Our audit procedures included
an assessment of management’s discounted cash flow models. We tested the
mathematical accuracy of the calculations derived from each forecast model
and assessed key inputs in the calculations, such as the discount rate of 9%,
by reference to management’s forecasts, industry reports and our valuation
experts. We focused on these key assumptions because small changes can
have a material impact on the value in use assessment and any resultant
impairment charge. We found, based on our audit work, that the key assumptions
used by management were supportable and appropriate in light of the
current environment.
Fair value less costs of disposal
Management has determined its own view of estimated rental values and yields
for each store used in their calculation of market values. Management derived
these assumptions having considered available information such as industry
data on market conditions, purchase offers recently received for properties and
information from an independent third party valuer. We evaluated management’s
supporting information, and assessed this using our own internal experts, with a
particular focus on the assumptions and methodology used, obtaining third party
evidence and market data to corroborate the assumptions. We determined that
the valuations performed by management were reasonable.
Disclosures
In addition, we evaluated the adequacy of the disclosures made in note 3.3 of
the financial statements, including those regarding the key assumptions and
sensitivities to changes in such assumptions by comparing the disclosures against
the requirements of IAS 36 ‘Impairment of assets’ and found them
to be consistent.
56
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Key audit matter
Onerous lease provisions and onerous property contracts
Refer to page 69 (sources of estimation uncertainty), note 5.1 (accounting policies)
and note 5.5 (provisions).
Onerous lease provisions
Accounting standards require management to assess the Group’s leasehold
properties to identify where the expected future benefits from a property are less
than the future lease commitments which would indicate that an onerous lease
provision is required. Under IAS 37 ‘Provisions, contingent liabilities and contingent
assets’ such a provision is made for the unavoidable costs of the contract, defined
in the standard as the ‘least net cost of exit’.
How our audit addressed the key audit matter
Onerous lease provisions
Having considered the possibility of impairment in the value of freehold properties
(see above), we also tested management’s calculations in respect of leasehold
stores where the estimated future benefits are not expected to exceed the future
lease commitments, resulting in an onerous lease.
We obtained management’s onerous lease model, which includes all leased stores,
and tested the accuracy and completeness of key data by agreeing inputs such
as individual store cash flows. This helps provide an insight into store profitability.
We agreed lease expiry dates for a sample of stores to the original signed lease
agreements, noting no issues.
We focused on this area because of the judgements required to be made by
management in identifying those stores requiring an onerous lease provision and
the assumptions used in the models, such as the discount rate and those used in
developing the associated cash flow forecasts. We also note that management
judgement is required to assess the level of provision for lease guarantees in
respect of convenience stores previously disposed of.
We obtained the Group’s approved budget (upon which forecasts are based)
and assessed the principles of the Group’s discounted cash flow model, noting
no exceptions. We tested the mathematical accuracy of the calculation derived
from each forecast model and assessed key inputs in the calculations such as
revenue growth and discount rate, by reference to management’s forecasts,
analyst reports and our own valuation experts, with no issues noted.
Onerous property contracts
The Group recognises a provision in respect of committed onerous property
contracts. For example, where management believes that no economic benefit
would result from developing sites, a provision is made. There are judgements
involved in determining the expected realisable value of these sites and associated
contract exit costs, therefore this has been an area of focus during our audit.
We obtained management’s calculation of the required provision for former
convenience store leases which reverted back to the Group in a prior year.
We assessed the principles of the model and tested key inputs such as lease
commitment information and sub-let assumptions, with no issues noted.
Onerous property contracts
In respect of onerous property contracts, we obtained original contracts and
management’s calculations and considered the accuracy of these provisions by
performing recalculations and testing key inputs such as estimates of contract exit
costs, contractual payments due and by reviewing evidence of the status of any
negotiations with landlords. We considered the completeness of these provisions
by reviewing documentation in relation to these contracts. We found no issues
in this area.
Disclosures
We read the disclosures within the Annual Report in respect of onerous lease
provisions and onerous property contracts, and, based on our work, determined
that they are consistent with accounting standards.
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Strategic reportGovernanceFinancial StatementsInvestor information Independent auditors’ report continued
Independent auditors’ report to the members
of Wm Morrison Supermarkets PLC
Key audit matter
Commercial income and manual promotional funding
Refer to page 69 (sources of estimation uncertainty), note 1.1 (accounting policies)
and notes 1.6 (operating profit).
Commercial income
The Group has two categories of commercial income: marketing and advertising
funding, and volume-based rebates on purchases.
Commercial income is recognised as a deduction from cost of sales and is
earned over the period of the contractual agreements with individual suppliers,
as disclosed in the Group’s accounting policy on page 70. The total income
recognised in the income statement in a year is based on the expected entitlement
earned up to the balance sheet date under each supplier agreement. It requires
management to apply judgement based on the contractual terms in place with
each of its suppliers, together with estimates of amounts the Group is entitled
to where transactions span the financial period end.
The relative level of judgement in each category of commercial income is
considered below:
Commercial income – marketing and advertising funding
This income is varied with regards to the nature and timing of the activity to which
it relates, and is recognised in accordance with written agreements with suppliers.
This income is based on specific agreements, and its recognition requires limited
judgement or estimation by management in determining the amount that the
Group is entitled to. Our focus was on assessing whether a written agreement
for the marketing and advertising funding existed, whether the relevant marketing
or advertising had taken place and whether the income recognised was recorded
in the appropriate period.
Commercial income – volume-based rebates
Volume-based rebates are driven by the Group achieving purchase volume targets
set by individual suppliers for specific products over a predetermined period.
There is therefore judgement involved in estimating the volume of purchases,
particularly where rebate agreements span a financial period end. In order to
narrow this judgement, management endeavours to structure agreements to
coincide with the Group’s financial period end, thereby reducing or eliminating
the degree of estimation. In instances where the rebate agreement does not fully
coincide with the period end, the key judgement that we focused on was the
estimate of commercial income to be accrued at the period end.
Promotional funding
The Group separately recognises promotional funding on promotions that are
partially funded by suppliers.
The majority of promotional funding is an automated deduction from cost
of sales, triggered when a sale is recognised. The funding is recognised when
the transaction occurs in accordance with the terms of supplier agreements.
The amount receivable is wholly based on sales volumes achieved, multiplied
by rates agreed with each supplier in advance. There are some elements of
promotional funding which include a manual element to the invoicing.
We focused on the manual elements of promotional funding because of the
significance of the amounts to the Group’s gross profit, the significant number
of transactions and agreements in place with suppliers covering a range of periods,
the manual nature of the invoicing process and the industry-wide focus on this
area of accounting.
How our audit addressed the key audit matter
Our audit work in respect of commercial income and the manual elements of
promotional funding comprised a combination of controls testing, substantive
testing of a sample of income and funding recognised during the period,
testing of amounts recognised in the balance sheet and an assessment of the
Group’s disclosures in this area. Each element of our work is considered in more
detail below.
Controls testing
Our controls work encompassed understanding, evaluating and testing
management’s key controls in respect of the recognition of both commercial
income and manual promotional funding. These key controls included the
monitoring of invoices raised and the accuracy of confirmations from suppliers.
We found no significant deficiencies in these key controls, and our testing of
management’s key system controls contributed to our evidence in determining
whether commercial income and manual promotional funding had been recorded
appropriately and in the correct period.
Income statement testing
We tested a sample of commercial income and the manual elements of
promotional funding to supporting documentation including supplier agreements.
We requested confirmations directly from suppliers in respect of a sample of
commercial income and the manual elements of promotional funding across
a large number of suppliers. The confirmations received, and documentation
reviewed, allowed us to evaluate whether commercial income or the manual
elements of promotional funding had been appropriately recognised in the
period. No exceptions arose from this work.
We also analysed commercial income and the manual elements of promotional
funding recognised each month and compared it to the previous period to identify
whether there were any unusual trends in the amounts or timing of commercial
income and the manual elements of promotional funding recognised in each
period. We used a data analytics approach to identify any unusual items in the
commercial income and the manual elements of promotional funding populations.
Where unusual items were identified these were agreed to supporting
documentation without exception.
Balance sheet testing
We wrote to a sample of suppliers, and obtained independent evidence of the
value and timing of commercial income and the manual elements of promotional
funding to evaluate whether it had been recognised in the correct period. We
also agreed a sample of accrued income to evidence of post-year end invoicing.
We performed cut-off procedures and credit note testing to provide further
evidence to support the timing of the recognition of both commercial income
and the manual elements of promotional funding. Cut-off work involved testing
a sample of commercial income and the manual elements of promotional funding
recognised both pre and post the period end and evaluating by reference to
documentation from suppliers that the timing of recognition was appropriate.
We found no issues as a result of our audit procedures.
Our credit note testing focused on credit notes raised after the period end in
order to identify any instances of commercial income or the manual elements
of promotional funding being subsequently reversed. We did not identify any
exceptions from this work. We tested the recoverability of invoiced commercial
income and the manual elements of promotional funding (unsettled balances
included within trade debtors in note 5.3 to the financial statements and where
the Group does not have the right of offset against trade creditors). This testing
was performed by assessing the ageing of both outstanding commercial
income and the manual elements of promotional funding debtors together
with understanding the details of any disputes, and obtained explanations
from management to assess whether any provisions were appropriate. We also
considered management’s commercial income and promotional funding Key
Performance Indicators in this analysis. No exceptions were noted.
Disclosures
We read the disclosures within the Annual Report in respect of commercial
income and manual promotional funding and, based on our work, determined that
they are consistent with accounting standards and the guidance on the reporting
of complex supplier arrangements issued by the Financial Reporting Council.
58
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Key audit matter
Impairment of intangible assets
Refer to page 69 (sources of estimation uncertainty), note 3.1 (accounting policies)
and note 3.2 (goodwill and intangible assets).
How our audit addressed the key audit matter
We obtained management’s assessment as to whether the development of new
software or systems superseded or impaired any of the existing assets on the
balance sheet.
The Group balance sheet includes intangible assets of £428m, of which the
majority relates to software development costs incurred in connection with
the Group’s technology improvement programme, details of which are shown
on pages 79 to 81 of the Annual Report.
We re-visited the expected costs budgeted by management within the cost
benefit analysis and compared them to actual outcomes in the current period
and we assessed the future expected benefits of the projects, with no issues
being identified from our work.
We focused on this area because judgement is required to assess whether the
carrying value of the existing capitalised software or systems is impaired.
Stock valuation
Refer to page 69 (sources of estimation uncertainty), note 5.1 (accounting policies)
and note 5.2 (stock).
The stock valuation of £686m (2017: £614m) was focused on due to the nature of
judgements made by management when assessing the level of provisions required.
As disclosed in note 5.1, the stock valuation is reduced by commercial income
and promotional funding (as the stock which this income and/or funding relates
to, is yet to be sold). When the stock is sold, the commercial income and/or
promotional funding is recognised in the income statement.
The stock valuation is additionally reduced for provisions related to estimated
losses due to shrinkage, obsolescence and other known specific risks. As stock is
counted by the Group on a cyclical basis, rather than in full at the period end date,
the shrinkage provision at 4 February 2018 contains a degree of estimation.
Pension accounting
Refer to page 69 (sources of estimation uncertainty) and note 8 (pensions).
We have focused on the valuation of the Group’s defined benefit pension
schemes because of the level of judgement required in determining the year end
valuation. In addition, the size of the gross assets (£4,857m) and liabilities (£4,263m)
within the schemes are significant and material.
We also applied our own understanding of both new and existing projects and
considered whether, in our view, any existing software was no longer in use or
whether its life had been shortened by development activity. We found no
such items.
No material impairment of the intangible assets was identified from our work.
Disclosures
We read the disclosures within the Annual Report in respect of intangible
assets, and, based on our work, determined that they are consistent with
accounting standards.
We attended stock counts and performed sample counts at a number of the
Group’s supermarkets and petrol forecourts throughout the period. In addition
to performing sample test counts, we assessed the effectiveness of the count
controls in operation, with no material issues identified from our work.
We also evaluated the results of cycle counts performed by management and
third parties through re-performance and inspection at a sample of distribution
centres throughout the period to assess the level of count variances. We found
no material variances or count control deficiencies across these sites.
We tested the unearned commercial income and promotional funding deduction
by verifying the inputs of the calculation and methodology of the provision,
noting no issues.
We tested management’s shrinkage assumptions determined by the count
procedures and the comparison of this to historical data. The historical data
included the results of the recent counts at each location, and our procedures
did not identify any significant unusual fluctuations in the data.
The obsolescence provision is calculated by applying a judgemental percentage to
the period end stock levels, with this judgement being informed by management’s
view of the current stock profile and expected stock life. We considered this
provision by assessing the explanations provided by management on the current
profile and expected stock life noting no issues.
We have assessed the other specific provisions with reference to the risks
identified by management and noted no issues.
Disclosures
We read the disclosures within the Annual Report in respect of stock, and, based
on our work, determined that they are consistent with accounting standards.
We obtained the IAS 19 valuation reports produced by the Group’s actuaries.
We used our own actuarial experts to assess the judgemental assumptions used
within the reports to form the valuation of the pension schemes’ liabilities, such
as discount rate, inflation and mortality rates. We obtained the detailed reports
underlying the valuation of the schemes’ assets and agreed the valuations to
third party confirmations. We assessed the membership data used in valuing the
schemes’ liabilities and tested any significant changes since the last valuation.
We agreed a sample of contributions made by the Group to bank statements.
We have no exceptions to report as a result of this testing.
The net surplus position of the schemes at 4 February 2018 was £594m. We have
reviewed management’s assessment of the right to recognise the net surplus in
two of the three schemes under the requirements of IFRIC 14, including inspecting
updated legal advice, and are satisfied that it is appropriate to recognise the net
asset on the balance sheet. The third scheme (RSP) is recognised as a net liability
and therefore this aspect of IFRIC 14 is not applicable.
Disclosures
We read the disclosures within the Annual Report in respect of pensions,
and, based on our work, determined that they are consistent with
accounting standards.
59
Strategic reportGovernanceFinancial StatementsInvestor information Independent auditors’ report continued
Independent auditors’ report to the members
of Wm Morrison Supermarkets PLC
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
The Group’s accounting process is structured around a Group finance function at its head office in Bradford who are responsible for the Group’s
reporting units. For each reporting unit we determined whether we required an audit of their reported financial information (‘full scope’), or whether
certain account balances of reporting units were required to be in the scope of our Group audit to address specific risk characteristics or to provide
sufficient overall Group coverage of particular financial statement line items.
A full scope audit was required for Wm Morrison Supermarkets PLC and Safeway Stores Limited determined as financially significant because they
individually contribute more than 15% of the Group’s profit before tax. We also considered that certain account balances of a further four reporting
units were in the scope of our Group audit to address specific risk characteristics or to provide sufficient overall Group coverage of particular financial
statement line items. All of the audit procedures have been performed by the Group audit engagement team.
In aggregate, our audit procedures accounted for 99% of Group revenues and 84% of profit before tax. In addition, the Group audit team performed
analytical review procedures over a number of smaller reporting units. This included an analysis of year-on-year movements, at a level of disaggregation
to enable a focus on higher risk balances and unusual movements. Those not subject to analytical review procedures were individually, and in aggregate,
immaterial. This gave us the evidence we needed for our opinion on the financial statements as a whole.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark applied
Company financial statements
£16.8m (2017: £16.0m).
The amount of component materiality allocated
to the Company as part of the Group audit.
In our view, users focus on the consolidated results
of the Group rather than the individual results
of the Company, therefore we determined our
materiality in the overall context of the Group.
Group financial statements
£18.7m (2017: £16.9m).
5% of underlying profit before tax.
Consistent with last year, we applied this benchmark
because, in our view, this is the most relevant metric
against which the performance of the Group is most
commonly measured. Underlying profit is defined by
management as profit before impairment, onerous
contracts and other items that do not relate to the
Group’s principal activities on an ongoing basis, profit/
loss arising on disposal and exit of properties and sale of
investments and IAS 19 pension interest, at a normalised
tax rate, as reconciled in note 1.4 of the Group financial
statements.
For the two reporting units in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The materiality
allocated to the two components was £16.8m.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.9m (Group audit) (2017: £0.8m)
and £0.8m (Company audit) (2017: £0.8m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or draw attention to in respect
of the Directors’ statement in the financial statements about whether the Directors considered
it appropriate to adopt the going concern basis of accounting in preparing the financial
statements and the Directors’ identification of any material uncertainties to the Group’s and the
Company’s ability to continue as a going concern over a period of at least 12 months from the
date of approval of the financial statements.
Outcome
We have nothing material to add or to draw
attention to. However, because not all future
events or conditions can be predicted, this
statement is not a guarantee as to the Group’s
and Company’s ability to continue as a
going concern.
We are required to report if the Directors’ statement relating to Going Concern in accordance
with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
60
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly,
we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether
there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report
based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 have
been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and the
Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK)
unless otherwise stated).
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report
for the period ended 4 February 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic report and Directors’ report. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 23 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 26 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have
done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only
consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the
relevant provisions of the UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent with the knowledge and
understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 54, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and
provides the information necessary for the members to assess the Group’s and Company’s position and performance, business model and strategy
is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit.
• The section of the Annual Report on pages 34 to 37 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
• The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ remuneration
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
(CA06)
61
Strategic reportGovernanceFinancial StatementsInvestor information Independent auditors’ report continued
Independent auditors’ report to the members
of Wm Morrison Supermarkets PLC
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities set out on page 54, the Directors are responsible for the preparation of the
financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also
responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate
the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due
to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not
visited by us; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records
and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the members on 5 June 2014 to audit the financial statements for the
year ended 1 February 2015 and subsequent financial periods. The period of total uninterrupted engagement is four years, covering the years ended
1 February 2015 to 4 February 2018.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Leeds
13 March 2018
62
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Consolidated statement of comprehensive income
53 weeks ended 4 February 2018
Revenue
Cost of sales
Gross profit
Other operating income
Profit/loss on disposal and exit of properties and sale of investments
Administrative expenses
Operating profit
Finance costs
Underlying finance costs
Adjustments for:
Costs associated with the repayment of borrowings
Finance income
Share of profit of joint venture (net of tax)
Profit before taxation
Analysed as:
Underlying profit before taxation
Adjustments for:
Impairment and provision for onerous contracts
Profit/loss on disposal and exit of properties
Profit arising on disposal of investment
Costs associated with the repayment of borrowings
Pension scheme set-up credit
Net pension income
Other exceptional costs
Taxation
Profit for the period attributable to the owners of the Company
Other comprehensive income/(expense)
Items that will not be reclassified to profit or loss:
Remeasurement of defined benefit pension schemes
Tax on defined benefit pension schemes
Items that may be reclassified subsequently to profit or loss:
Cash flow hedging movement
Items reclassified from hedging reserve in relation to repayment of borrowings
Tax on items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations
Other comprehensive income for the period, net of tax
Total comprehensive income for the period attributable to the owners of the Company
Earnings per share (pence)
– basic
– diluted
Note
1.2
1.4
1.6
6.2
6.2
1.4, 6.2
6.2
4.2
1.4
1.4
1.4, 4.3
1.4, 6.2
1.4, 8.6
1.4, 6.2
1.4
2.2
8.2
2.3
1.4
2.3
1.5
1.5
2018
£m
17,262
(16,629)
633
78
19
(272)
458
(94)
(78)
(16)
14
2
380
374
6
19
–
(16)
13
9
(25)
380
(69)
311
323
(55)
268
(18)
(2)
(2)
(1)
(23)
245
556
2017
£m
16,317
(15,713)
604
76
32
(244)
468
(160)
(104)
(56)
15
2
325
337
6
19
13
(56)
–
8
(2)
325
(20)
305
86
(17)
69
30
6
1
(1)
36
105
410
13.30
13.03
13.11
12.95
63
Strategic reportGovernanceFinancial StatementsInvestor information
Consolidated balance sheet
4 February 2018
Assets
Non-current assets
Goodwill and intangible assets
Property, plant and equipment
Investment property
Pension asset
Investment in joint venture
Investments
Derivative financial assets
Current assets
Stock
Debtors
Derivative financial assets
Cash and cash equivalents
Assets classified as held-for-sale
Liabilities
Current liabilities
Creditors
Short-term borrowings
Derivative financial liabilities
Current tax liabilities
Non-current liabilities
Borrowings
Derivative financial liabilities
Pension liability
Deferred tax liabilities
Provisions
Net assets
Shareholders’ equity
Share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves
Total equity attributable to the owners of the Company
Note
2018
£m
2017
£m
3.2
3.3
3.5
8.2
4.2
4.3
7.3
5.2
5.3
7.3
6.4
3.4
5.4
6.3
7.3
6.3
7.3
8.2
2.3
5.5
6.5
6.5
6.6
6.6
6.6
428
7,243
33
612
53
–
16
8,385
686
250
15
327
1,278
4
1,282
(2,981)
(72)
(13)
(15)
(3,081)
(1,245)
(1)
(18)
(478)
(299)
(2,041)
4,545
236
159
39
2,578
1,533
4,545
445
7,227
33
293
56
–
16
8,070
614
214
22
326
1,176
–
1,176
(2,837)
–
(3)
(24)
(2,864)
(1,550)
(5)
(21)
(417)
(326)
(2,319)
4,063
234
128
39
2,578
1,084
4,063
The notes on pages 70 to 105 form part of these financial statements.
The financial statements on pages 63 to 105 were approved by the Board of Directors on 13 March 2018 and were signed on its behalf by:
Trevor Strain
Chief Financial Officer
64
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Consolidated cash flow statement
53 weeks ended 4 February 2018
Cash flows from operating activities
Cash generated from operations
Interest paid
Taxation paid
Net cash inflow from operating activities
Cash flows from investing activities
Interest received
Dividends received from joint venture
Proceeds from the sale of property, plant and equipment
Proceeds from the sale of investments
Purchase of property, plant and equipment, investment property and assets classified as held-for-sale
Purchase of intangible assets
Net cash outflow from investing activities
Cash flows from financing activities
Purchase of own shares for trust
Settlement of employee tax liability for share awards
Proceeds from exercise of employee share options
Proceeds on settlement of derivative financial instruments
Repayment of borrowings
Costs incurred on repayment of borrowings
Dividends paid
Net cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents
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
Net increase/(decrease) in cash and cash equivalents
Cash outflow from decrease in debt
Non-cash movements
Opening net debt
Closing net debt
Note
5.6
10.1
4.3
6.5
6.5
6.5
1.8
6.4
Note
6.4
2018
£m
884
(66)
(74)
744
4
8
108
–
(429)
(71)
(380)
(4)
(7)
33
6
(245)
(17)
(129)
(363)
1
326
327
2018
£m
1
239
(19)
(1,194)
(973)
2017
£m
1,113
(100)
(35)
978
6
8
79
44
(374)
(45)
(282)
(5)
–
–
37
(729)
(42)
(118)
(857)
(161)
487
326
2017
£m
(161)
692
21
(1,746)
(1,194)
65
Strategic reportGovernanceFinancial StatementsInvestor information
Consolidated statement of changes in equity
53 weeks ended 4 February 2018
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Note
Merger
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
Total
equity
£m
Attributable to the owners of the Company
234
–
128
–
39
–
2,578
–
1.4
8.2
2.3
6.5
1.7
6.5
6.5
1.8
–
–
–
–
–
–
–
–
–
2
–
2
236
–
–
–
–
–
–
–
–
–
31
–
31
159
–
–
–
–
–
–
–
–
–
–
–
–
39
–
–
–
–
–
–
–
–
–
–
–
–
2,578
18
–
(18)
(2)
–
–
4
(16)
–
–
–
–
–
–
2
1,066
311
4,063
311
–
–
(1)
323
(61)
572
(4)
33
(7)
–
(129)
(107)
1,531
(18)
(2)
(1)
323
(57)
556
(4)
33
(7)
33
(129)
(74)
4,545
Attributable to the owners of the Company
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Note
Merger
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
234
–
127
–
39
–
2,578
–
–
–
–
–
–
–
–
–
–
–
–
234
–
–
–
–
–
–
–
–
1
–
1
128
8.2
2.3
6.5
1.7
6.5
1.8
–
–
–
–
–
–
–
–
–
–
–
39
–
–
–
–
–
–
–
–
–
–
–
2,578
(10)
–
30
6
–
–
(8)
28
–
–
–
–
–
18
788
305
–
–
(1)
86
(8)
382
(5)
20
(1)
(118)
(104)
1,066
Total
equity
£m
3,756
305
30
6
(1)
86
(16)
410
(5)
20
–
(118)
(103)
4,063
Current period
At 30 January 2017
Profit for the period
Other comprehensive (expense)/income:
Cash flow hedging movement
Items reclassified from hedging reserve in relation to
repayment of borrowings
Exchange differences on translation of foreign operations
Remeasurement of defined benefit pension schemes
Tax in relation to components of other comprehensive
income
Total comprehensive (expense)/income for the period
Purchase of trust shares
Employee share option schemes:
Share-based payments charge
Settlement of employee tax liability for share awards
Share options exercised
Dividends
Total transactions with owners
At 4 February 2018
Prior period
At 1 February 2016
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Items reclassified from hedging reserve in relation to
repayment of borrowings
Exchange differences on translation of foreign operations
Remeasurement of defined benefit pension schemes
Tax in relation to components of other comprehensive
income
Total comprehensive income for the period
Purchase of trust shares
Employee share option schemes:
Share-based payments
Proceeds and settlements of employee share award
Dividends
Total transactions with owners
At 29 January 2017
66
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
General information
Company information
Wm Morrison Supermarkets PLC is a public limited company
incorporated in the United Kingdom under the Companies Act 2006
(Registration number 358949). 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 53 weeks ended
4 February 2018 (2017: 52 weeks ended 29 January 2017) in accordance
with International Financial Reporting Standards (IFRS) and International
Financial Reporting Standards Interpretation Committee (IFRS IC)
interpretations as adopted by the European Union and with those parts
of the Companies Act 2006 applicable to companies reporting under
IFRS. IFRS and IFRS IC interpretations 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.
The financial statements have been prepared on a going concern basis.
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 two decimal places. They are
drawn up on the historical cost basis of accounting, except as disclosed
in the accounting policies set out within these financial statements.
The Group’s accounting policies have, unless otherwise stated,
been applied consistently to all periods presented in these
financial statements.
Accounting reference date
The accounting period of the Group ends on the Sunday falling
between 29 January and 4 February each year.
New IFRS and amendments to IAS and interpretations
The following amendments to standards are mandatory for the first
time for the financial period ended 4 February 2018:
Amendments to IAS 7 ‘Statement of Cash Flows’
The amendment to IAS 7 requires additional disclosures about changes
in an entity’s financing liabilities arising from both cash flow and
non-cash flow items. The amendment applies to changes in financial
assets as well as liabilities if the cash flows from those financial assets
are included in cash flows from financing activities in the cash flow
statement. The Group has applied the amendment to the disclosures
in the financial statements (see note 6.4). There is no material impact
on the Group as a result of applying this amendment.
Other than the amendment to IAS 7 noted above, there have
been no significant changes to accounting under IFRS which have
affected the Group’s reported results for the period. The Group has
considered the following amendments to published standards that
are effective for the first time for the 53 weeks ended 4 February 2018
and concluded that they are either not relevant to the Group or they
do not have a significant impact on the Group’s financial statements.
These amendments are:
• Amendments to IAS 12 ‘Income taxes’ on recognition of deferred
tax assets for unrealised losses; and
• Annual improvements 2014-2016.
There are a number of standards and interpretations issued by the IASB
that are effective for financial statements after this reporting period.
These are detailed below:
IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ was published in July 2014 and will be
effective for the Group from the period beginning 5 February 2018.
The standard replaces IAS 39 ‘Recognition and Measurement’ and is
applicable to financial assets and financial liabilities.
The main changes the new standard introduces are:
• new requirements for the classification and measurement of financial
assets and financial liabilities;
• a new model for recognising impairments of financial assets; and
• changes to hedge accounting by aligning hedge accounting more
closely to an entity’s risk management objectives.
The Group will apply the modified retrospective approach for
transition, including no requirement to restate comparative amounts.
Any differences in carrying values will be recognised as an adjustment
to the opening balance sheet at 5 February 2018.
The Group has assessed in detail the impact of the three areas of the
new standard on the consolidated financial statements. The Group
does not expect any material changes in relation to accounting policies,
classification and measurement of financial assets and liabilities, nor
for hedge accounting as detailed in note 7.1 of the financial statements.
IFRS 9 also introduces a forward looking approach to impairment of
financial assets which results in earlier recognition of credit losses.
The Group has assessed the impact of IFRS 9 in this area, with reference
to all financial assets including trade receivables, and concluded that
the impact will be immaterial.
IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ was published
in May 2014 and will be effective for the Group from the period
beginning 5 February 2018. The standard replaces IAS 18 ‘Revenue’, IAS
11 ‘Construction contracts’ and related interpretations. The standard
introduces a five-step approach to the timing and recognition of
revenue based on performance obligations in customer contracts.
Under IFRS 15, revenue should only be recognised when a customer
obtains control of goods or services and has the ability to direct the
use and obtain the benefits from the goods or services. It applies to all
contracts with customers, except those in the scope of other standards.
The Group will apply the modified retrospective approach for transition
set out in the standard. The cumulative effect of initial application
will be recognised as an adjustment to the opening balance sheet
at 5 February 2018, without restating comparative amounts.
The Group has performed a detailed impact assessment, identifying
all current sources of revenue and analysing accounting requirements
for each under IFRS 15. The Group has concluded that the adoption
of IFRS 15 will not have a material impact on the consolidated financial
statements as the vast majority of transactions (volume and value) are
for sale of goods in stores or online where the transfer of control is
clear (either at the till or on delivery of goods). The impact assessment
also covered areas which require further specific consideration such
as customer loyalty schemes, rights of return and wholesale supply
arrangements and concluded that there is no material impact on the
current accounting policies for revenue recognition applied by the
Group, which are disclosed in note 1.1 of the financial statements.
67
Strategic reportGovernanceFinancial StatementsInvestor information General information continued
New IFRS and amendments to IAS and interpretations
continued
IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’
IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’
was issued in December 2016 and will be effective for the Group from
the period beginning 5 February 2018. The interpretation clarifies the
date to be used in determining the initial exchange rate for transactions,
relating to advance payments or receipts in a foreign currency, to be
the date the related non-monetary asset or liability is first recognised.
The Group will apply the interpretation prospectively to assets,
expenses and income recognised on or after 5 February 2018, including
where related non-monetary assets and liabilities from advance
consideration have been recognised before this date.
The Group has performed an impact assessment and believes that
the interpretation will not have a material impact on the consolidated
financial statements as sales and purchases involving advanced
consideration in foreign currencies are negligible.
IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ was published in January 2016 and will be effective
for the Group from the period beginning 4 February 2019, replacing
IAS 17 ‘Leases’. The main principle of the standard is to eliminate the dual
accounting model for lessees under IAS 17, which distinguishes between
on-balance sheet finance leases and off-balance sheet operating leases,
and to provide a single model for lessee accounting. IFRS 16 requires
lessees to recognise right-of-use assets and lease liabilities for leases.
Accounting requirements for lessors as disclosed in note 3.1 will be
substantially unchanged from IAS 17.
The standard represents a significant change in the accounting and
reporting of leases for lessees and it will impact the income statement
and balance sheet as well as statutory and alternative performance
measures used by the Group.
The impact on the financial statements on transition to IFRS 16, where
the Group is the lessee, will depend on the approach taken by the
Group. The new standard allows for two different transition approaches,
fully retrospective and modified retrospective. Both approaches will
impact the income statement, balance sheet and disclosure when
adopted including the opening balance sheet at 4 February 2019,
although the amounts will differ dependent on the approach taken.
The Group is currently in the process of assessing the impact of the
new standard, deciding on the transition approach and identifying
process, systems and information required when adopted. The initial
phase of work, which is still in progress, has involved assessing and
modelling the impact of the new standard for a sample of leases and
beginning to consider assumptions and assessing data requirements.
The Group has not yet concluded on a transition approach and as such
it is not possible to fully quantify the impact of IFRS 16 at this stage.
Amendment to IAS 19 ‘Employee Benefits’
An amendment to IAS 19 ‘Employee Benefits’ was published in February
2018 and will be effective for the Group from the period beginning
4 February 2019. The amendment applies prospectively in connection
with accounting for plan amendments, curtailments and settlements.
The amendment requires entities to use updated assumptions to
determine current service cost and net interest for the remainder
of the period after a plan amendment, curtailment or settlement.
The Group is in the process of assessing the impact of the amendment.
However, at this stage it is not yet practicable to fully quantify the effect
of this amendment on these consolidated financial statements.
IFRIC 23 ‘Uncertainty over income tax treatments’
IFRIC 23 ‘Uncertainty over income tax treatments’ was issued in June
2017 and will be effective for the Group from the period beginning
4 February 2019. The interpretation covers how the Group accounts
for taxation, where there is some uncertainty over whether treatments
in the tax return will be accepted by HMRC or the relevant overseas
jurisdictions. Each uncertain treatment (or combination of treatments)
is considered for whether it will be accepted, and if probable taxable
profits/losses, tax bases, unused tax losses, unused tax credits and tax
rates are accounted for consistently with the tax return. Otherwise the
Group accounts for each treatment using whichever of the two allowed
measurement methods is expected to best predict the final outcome –
the single most likely outcome or a probability weighted-average value
of a range of possible outcomes.
The new standard allows for two different transition approaches,
fully retrospective and modified retrospective. The Group has not yet
concluded on a transition method and as such it is not possible to fully
quantify the impact of IFRIC 23 at this stage, though it is not expected
to be material as the Group has taken a comparable approach to the
interpretation in previous periods.
Basis of consolidation
Subsidiaries (including partnerships) are all entities over which the
Group has control. The Group controls an entity when it has power
over that entity, is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns
through its power over the entity. Subsidiaries are fully consolidated
from the date on which control is transferred to the Group. They are
deconsolidated from the date the control ceases. The financial
statements of subsidiaries used in the consolidation are prepared for
the same reporting period as the Company and are based on consistent
accounting policies. Intra-group balances and any unrealised gains and
losses or income and expenses arising from intra-group transactions are
eliminated on consolidation.
68
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Stock
Certain estimates are required to assess the net realisable value
of stock, along with provisions for obsolete and slow moving stock,
where estimation is required. The Group’s accounting policy for
stock is provided in note 5.1.
Pensions
Accounting for defined benefit pension schemes requires the
application of a number of assumptions which have an impact on
the valuation of the schemes’ assets and liabilities. The significant
assumptions include discount rate, inflation, rate of salary increases
and longevity. Details of these assumptions are provided in note 8.
Alternative Performance Measures
The Directors measure the performance of the Group based on a range
of financial measures, including measures not recognised by EU-adopted
IFRS. These Alternative Performance Measures may not be directly
comparable with other companies’ Alternative Performance Measures
and the Directors do not intend these to be a substitute for, or superior
to, IFRS measures. For definitions of the Alternative Performance
Measures used, see the Glossary on page 127.
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.
Critical accounting judgements
The critical judgement made in the process of applying the Group’s
accounting policies are detailed below:
Items excluded from underlying earnings
The Directors consider that the underlying earnings measure
provides useful information for shareholders on underlying trends
and performance. These measures are consistent with how
business performance is measured internally by the Board and the
Executive Committee.
Underlying profit and underlying earnings per share measures are
not recognised measures under EU-adopted IFRS and may not be
directly comparable with adjusted measures used by other companies.
The classification of items excluded from underlying earnings requires
judgement after considering the nature and intentions of a transaction.
The Group’s definition of items excluded from underlying earnings,
together with further details of adjustments made during the period,
are provided in note 1.4.
Sources of estimation uncertainty
The areas of estimation uncertainty that have a significant risk of
resulting in material adjustment to carrying amounts of assets and
liabilities are detailed below. These estimates and assumptions are
continually evaluated and are based on historical experience and
other factors that the Directors believe to be reasonable.
Impairment of property, plant and equipment and intangible assets
and onerous property commitments
Property, plant and equipment and intangible assets are reviewed
annually for impairment or where changes in circumstances indicate
impairment (or impairment reversal). The recoverable amount is
estimated when the impairment review is conducted. Further detail
is provided in notes 3.1, 3.2 and 3.3.
Where property contracts for which expected future cash flows are less
than the future contract commitments, an onerous contract provision
is recognised. Judgement is required in applying estimates to assess the
level of provision required. Further detail is provided in notes 5.1 and 5.5.
Commercial income
Commercial income is accounted for as a deduction from the cost
of purchase, and it is recognised in accordance with signed supplier
agreements, with most income subject to little or no subjectivity
or judgement. However, a certain level of estimation or judgement
is required in assessing future sales or purchase volumes and whether
performance obligations are achieved. The Group’s recognition policy
for commercial income along with areas of estimation is included
in note 1.1.
69
Strategic reportGovernanceFinancial StatementsInvestor information Notes to the Group financial statements
53 weeks ended 4 February 2018
1 Performance in the period
1.1 Accounting policies
Revenue recognition
Sale of goods in-store and online, and fuel
Revenue from the sale of goods in-store and online comprises cash from customers and excludes VAT. It is stated net of returns, colleague discounts,
coupons, vouchers, ‘More’ points earned in-store and online, and the free element of multi-save transactions. Sale of fuel is recognised net of VAT
and ‘More’ points earned on fuel. Revenue is recognised when transactions are completed in-store, or, in the case of Food Online, when goods are
accepted by the customer on delivery.
Other sales
Other sales includes income from concessions and commissions based on the terms of the contract, and wholesale sales made direct to third
party customers recognised on despatch of goods. Revenue collected on behalf of others is not recognised as revenue, other than the related
commission. Sales are recorded net of VAT and intra-group transactions.
‘More’ points
The fair value of ‘More’ points is determined to be the value to the customer of the points issued, adjusted for factors such as the expected
redemption rate. The Group continues to assess the appropriateness of the expected redemption rates against actual redemptions.
The fair value is treated as a deduction from revenue at the time the points are issued, and is deferred until the rewards are redeemed by the
customer in a future sale.
Cost of sales
Cost of sales consists of all costs of the goods being sold to the point of sale, net of promotional funding and commercial income, and includes
property, manufacturing, warehouse and transportation costs. Store depreciation, store overheads and store-based employee costs are also
allocated to cost of sales.
Promotional funding
Promotional funding refers to investment in the customer offer by suppliers by way of promotion. The calculation of funding is mechanical and
system generated based on a funding level agreed in advance with the supplier. Funding is recognised as units are sold and invoiced in accordance
with the specific supplier agreement. Funding is recorded effectively as a direct adjustment to the cost price of the product in the period. Funding
is invoiced and collected through the year, shortly after the promotions have ended.
Commercial income
Commercial income is recognised as a deduction from cost of sales, based on the expected entitlement that has been earned up to the balance
sheet date for each relevant supplier contract. The Group only recognises commercial income where there is documented evidence of an
agreement with an individual supplier and when associated performance conditions are met.
The types of commercial income recognised by the Group, and the recognition policies are:
Type of commercial income
Marketing and advertising
funding
Volume-based rebates
Description
Examples include income in respect of
in-store marketing and point of sale, as
well as funding for advertising.
Income earned by achieving volume or
spend targets set by the supplier for
specific products over specific periods.
Recognition
Income is recognised over the period as set out in the specific supplier
agreement. Income is invoiced once the performance conditions in the
supplier agreement have been achieved.
Income is recognised through the year based on forecasts for expected
sales or purchase volumes, informed by current performance, trends and
the terms of the supplier agreement. Income is invoiced throughout the
year in accordance with the specific supplier terms. In order to minimise
any risk arising from estimation, supplier confirmations are also obtained to
agree the final value to be recognised at year end, prior to it being invoiced.
Uncollected commercial income at the balance sheet date is classified within the financial statements as follows:
• Creditors: A large proportion of the Group’s trading terms state that income due from suppliers is netted against amounts owing to that supplier.
Any outstanding invoiced commercial income relating to these suppliers at the balance sheet date are included within trade payables. Any amounts
received in advance of income being recognised are included in accruals and deferred income.
• Debtors: Where the trading terms described above do not exist, the Group classifies outstanding commercial income within trade debtors.
Where commercial income is earned and not invoiced to the supplier at the balance sheet date, this is classified within accrued
commercial income.
• Stock: The carrying value of stock is adjusted to reflect unearned elements of commercial income when it relates to stock which has not yet been
sold. This income is subsequently recognised in cost of sales when the product has been sold.
In order to provide users of the financial statements with greater understanding in this area, additional income statement and balance sheet
disclosure is provided in notes 1.6, 5.2, 5.3 and 5.4 to the financial statements.
70
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 1 Performance in the period continued
1.1 Accounting policies continued
Other operating income
Other operating income primarily consists of income not directly related to in-store and online grocery retailing and mainly comprises rental income
from investment properties and income generated from the recycling of packaging.
Profit/loss on disposal and exit of properties
Profit/loss from the disposal and exit of properties includes gains and losses on disposal of property assets and other costs incurred by the Group
following a decision to dispose, close or no longer purchase properties. Where the Group disposes of a property, this disposal transaction is
accounted for upon unconditional exchange of contracts. Gains and losses are determined by comparing sale proceeds with the asset’s carrying
amount and are presented net of costs associated with disposal.
1.2 Revenue
Sale of goods in-store and online
Other sales
Total sales excluding fuel
Fuel
Total revenue
2018
£m
13,246
290
13,536
3,726
17,262
2017
£m
12,747
219
12,966
3,351
16,317
1.3 Segmental reporting
The Group’s principal activity is that of retailing, derived from the UK.
The Group is required to determine and present its operating segments based on the way in which financial information is organised and reported
to the chief operating decision-maker (CODM). The CODM has been identified as the Executive Committee as this makes the key operating
decisions of the Group and is responsible for allocating resources and assessing performance.
Key internal reports received by the CODM, primarily the management accounts, focus on the performance of the Group as a whole.
The operations of all elements of the business are driven by the retail sales environment and hence have fundamentally the same economic
characteristics. All operational decisions made are focused on the performance and growth of the retail outlets and the ability of the business
to meet the supply demands of the stores.
The Group has considered the overriding core principles of IFRS 8 ‘Operating segments’ as well as its internal reporting framework, management and
operating structure. In particular, the Group considered its retail outlets, the fuel sale operation, the manufacturing entities and online operations.
The Directors’ conclusion is that the Group has one operating segment, that of retailing.
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Performance is measured by the CODM based on underlying profit before tax as reported in the management accounts. Management believes that
this underlying profit measure is the most relevant in evaluating the results of the Group. This information and the reconciliation to the statutory
position can be found in note 1.4. In addition, the management accounts present a Group balance sheet containing assets and liabilities.
71
Strategic reportGovernanceFinancial StatementsInvestor information 1 Performance in the period continued
1.4 Underlying profit
The definition of underlying profit is defined in the Glossary on page 127.
The Directors consider that the underlying profit and underlying adjusted earnings per share measures referred to in the results provide useful
information for shareholders on underlying trends and performance. The adjustments are made to reported profit/loss to: (a) remove impairment,
provision for onerous contracts, or other items that do not relate to the Group’s principal activities on an ongoing basis; (b) remove profit/loss arising
on disposal and exit of properties and sale of investments; (c) remove the impact of pension volatility; and (d) apply a normalised tax rate of 23.8%
(2017: 25.0%).
Profit after tax
Add back: tax charge for the period1
Profit before tax
Adjustments for:
Impairment and provision for onerous contracts1
Profit/loss arising on disposal and exit of properties1
Profit arising on disposal of investment (note 4.3)1
Costs associated with the repayment of borrowings1
Pension scheme set-up credit (note 8.6)1
Net pension income (note 8.2)1
Other exceptional costs1
Underlying profit before tax
Normalised tax charge at 23.8% (2017: 25.0.%)1,2
Underlying profit after tax
Underlying earnings per share (pence)
– basic (note 1.5.2)
– diluted (note 1.5.2)
1 Adjustments marked1 decrease post-tax underlying earnings by £26m (2017: decrease of £52m), as shown in the reconciliation of earnings disclosed in note 1.5.2.
2 Normalised tax is defined in the Glossary, see page 128 for details.
2018
£m
311
69
380
(6)
(19)
–
16
(13)
(9)
25
374
(89)
285
12.19
11.94
2017
£m
305
20
325
(6)
(19)
(13)
56
–
(8)
2
337
(84)
253
10.86
10.73
Following the Group’s annual impairment and onerous contract review a net credit of £6m has been recognised. This included a net impairment
reversal of £7m (£126m impairment reversal offset by £119m impairment charge). The £119m impairment charge includes £118m in relation to property,
plant and equipment and £1m in relation to intangible assets (see notes 3.2 and 3.3). The £126m impairment reversal relates entirely to property, plant
and equipment. A net £1m credit has been recognised in relation to provisions for onerous contracts (£22m charge offset by £23m release) (see note
5.5). In addition, amounts provided for onerous commitments has increased by a net £2m. Impairment and provision for onerous contracts in 2016/17
totalled a net credit of £6m. This included a net impairment reversal of £44m (£191m impairment reversal offset by £147m impairment charge) and
charge of £38m relating to provisions for onerous contracts.
Profits/losses arising on disposal and exit of properties amounted to £19m (2017: £19m) and includes £14m (2017: £nil) relating to the disposal of the
customer fulfilment centre (CFC) at Dordon in June 2017. For further detail, see note 3.3. In the 52 weeks ended 29 January 2017, a profit of £13m was
recognised on the disposal of the Group’s investment in Fresh Direct Inc (see note 4.3).
Costs associated with the early repayment of borrowing facilities and other refinancing activities total £16m (2017: £56m). This includes £17m relating
to financing charges on redemption of financial instruments (primarily premiums) and £1m of fees written off on the repayment of bonds, offset
by £2m relating to gains which had previously been recognised in reserves which have been reclassified to the income statement on termination
of hedging arrangements.
The pension scheme set-up credit of £13m relates to back dated contributions in respect of the Group’s new defined contribution scheme which
was established in the year and is the auto enrolment scheme for the Group. The credit represents the difference between the expected back dated
contributions and the cost based on actual participation rates.
Other exceptional costs include restructuring costs of £21m (2017: £nil) primarily relating to the restructuring of store management teams, and legal
costs incurred in relation to cases in respect of historic events.
72
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
1 Performance in the period continued
1.4 Underlying profit continued
The adjustments above are classified within the consolidated statement of comprehensive income on the following lines:
• impairment and provision for onerous contracts has been included within administrative expenses;
• profit/loss arising on disposal and exit of properties and profit arising on disposal of investments are classified within profit/loss arising on disposal
and exit of properties and sale of investments;
• pension scheme set-up credit is classified within administrative expenses;
• costs associated with the repayment of borrowings are classified within finance costs;
• net pension income is included within finance income; and
• other exceptional costs have been recognised in administrative expenses.
1.5 Earnings per share
Basic earnings per share (EPS) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary
shares in issue during the period excluding shares held in trust. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to
assume conversion of all potentially dilutive ordinary shares.
The Company has two (2017: two) classes of instrument that are potentially dilutive: those share options granted to employees where the exercise
price together with the future IFRS 2 charge of the option is less than the average market price of the Company’s ordinary shares during the period
and contingently issuable shares under the Group’s long term incentive plans (LTIP).
1.5.1 Basic and diluted EPS (unadjusted)
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
Unadjusted EPS
Basic EPS
Profit attributable to ordinary shareholders
Effect of dilutive instruments
Share options and LTIPs
Diluted EPS
Earnings
£m
Weighted average
number of shares
millions
311.1
–
311.1
2,338.6
49.3
2,387.9
2018
EPS
Pence
13.30
(0.27)
13.03
Earnings
£m
Weighted average
number of shares
millions
305.0
–
305.0
2,327.1
27.9
2,355.0
1.5.2 Underlying EPS
Basic EPS is adjusted to more accurately show underlying business performance. The reconciliation of the earnings used in the calculations of
underlying earnings per share is set out below:
Underlying EPS
Basic EPS
Profit attributable to ordinary shareholders
Adjustments to determine underlying profit
(note 1.4)
Effect of dilutive instruments
Share options and LTIPs
Diluted EPS
Earnings
£m
Weighted average
number of shares
millions
311.1
2,338.6
(26.1)
285.0
–
285.0
–
2,338.6
49.3
2,387.9
2018
EPS
Pence
13.30
(1.11)
12.19
(0.25)
11.94
Earnings
£m
Weighted average
number of shares
millions
305.0
(52.2)
252.8
–
252.8
2,327.1
–
2,327.1
27.9
2,355.0
2017
EPS
Pence
13.11
(0.16)
12.95
2017
EPS
Pence
13.11
(2.25)
10.86
(0.13)
10.73
73
Strategic reportGovernanceFinancial StatementsInvestor information
1 Performance in the period continued
1.6 Operating profit
The following items have been included in arriving at operating profit:
Employee costs (note 1.7)
Depreciation and impairment:
– Property, plant and equipment (note 3.3)
– Investment property (note 3.5)
– Net impairment reversal (note 1.4 and 3.3)
Amortisation and impairment:
– Intangible assets (note 3.2)
– Net impairment (note 1.4 and 3.2)
Operating lease rentals:
– Land and buildings
– Other
– Sublease receipts
Value of stock expensed
Commercial income
The amounts recognised as a deduction from cost of sales for the two types of commercial income are detailed as follows:
Commercial income
Marketing and advertising funding
Volume-based rebates
Total commercial income
Auditor remuneration
During the period PricewaterhouseCoopers LLP, the Group’s auditor, provided the following services:
Audit services
Fees payable to the Group’s auditor for the audit of the Group and the Company financial statements
Other services
Fees payable to the Group’s auditor and its associates for other services:
– the audit of the Group’s subsidiaries pursuant to legislation
– other services
2018
£m
1,938
333
1
(8)
84
1
93
17
(3)
13,365
2018
£m
34
192
226
2018
£m
0.5
0.2
0.2
0.9
2017
£m
1,925
305
1
(44)
93
–
93
16
(6)
12,519
2017
£m
52
257
309
2017
£m
0.5
0.2
0.2
0.9
The Board has a policy on the engagement of the external auditor to supply non-audit services, which is available in the Corporate governance
compliance statement set out in the investor relations section of the Group’s website at www.morrisons-corporate.com
74
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
1 Performance in the period continued
1.7 Employees and Directors
Employee benefit expense for the Group during the period
Wages and salaries
Social security costs
Share-based payments
Other pension costs
Average monthly number of people, including Directors
Stores
Manufacturing
Distribution
Centre
2018
£m
1,682
131
33
92
1,938
2018
No.
89,558
8,212
5,565
2,152
105,487
2017
£m
1,708
119
20
78
1,925
2017
No.
96,612
8,207
5,467
2,079
112,365
Directors’ remuneration
A detailed analysis of Directors’ remuneration, including salaries, bonuses and long term incentives, and the highest paid Director, is provided in
the Single total figure of remuneration table in the audited section of the Directors’ remuneration report, which forms part of these financial
statements (page 46). There are no Executive Directors (2017: none) who have retirement benefits accruing under any of the Group’s defined benefit
pension schemes.
Senior management remuneration
The table below shows the remuneration of senior managers. It excludes employees already included in the Directors’ remuneration report.
Senior managers are considered to be key management personnel in accordance with the requirements of IAS 24 ‘Related party disclosures’, and in
the context of gender disclosures required by the Companies Act 2006.
Senior managers
Wages and salaries
Social security costs
Share-based payments
Other pension costs
1.8 Dividends
Amounts recognised as distributed to equity holders in the period:
Interim dividend for the period ended 4 February 2018 of 1.66p (2017: 1.58p)
Final dividend for the period ended 29 January 2017 of 3.85p (2017: 3.50p)
2018
£m
20
4
11
1
36
2018
£m
39
90
129
The Directors propose a final ordinary dividend in respect of the financial period ended 4 February 2018 of 4.43p per share which will absorb
an estimated £104m of shareholders’ funds. The Directors also propose a special dividend of 4.00p per share which will absorb an estimated
£94m of shareholders’ funds. Subject to approval at the AGM, these dividends will be paid on 28 June 2018 to shareholders who are on the
register of members on 25 May 2018.
The dividends paid and proposed during the year are from cumulative realised distributable reserves of the Company.
2017
£m
25
4
8
2
39
2017
£m
37
81
118
75
Strategic reportGovernanceFinancial StatementsInvestor information
2 Taxation
The Group takes a compliance-focused approach to its tax affairs, and has a transparent relationship with the UK and overseas tax authorities
and interacts with HMRC on a regular basis. The Group’s tax policy provides a governance framework with all related risks and stakeholder interests
taken into consideration. The tax policy is approved by the Board, with updates on tax compliance and governance matters being provided
to the Audit Committee.
The Group’s approach to tax is to ensure compliance with the relevant laws of the territories in which the Group operates. The majority of the
Group’s stores and sales are in the UK so the majority of the Group’s taxes are paid in the UK.
The Group operates a small number of branches and subsidiary companies outside of the UK based in the following overseas jurisdictions:
• The Netherlands: The Group has operations in the Netherlands as part of its produce supply chain. Local corporation taxes of £2m were paid
during 2018 (2017: £1.3m);
• Hong Kong: Offices in Hong Kong were established in 2011 and source many of the Group’s non-food products. Local corporation taxes of £0.4m
were paid during 2018 (2017: £0.3m); and
• Isle of Man, Jersey and Guernsey: The Group’s insurance company is based in the Isle of Man for regulatory reasons. Companies based in Jersey
and Guernsey hold UK property assets as a result of historic acquisitions. All profits arising in these companies are subject to UK tax.
2.1 Accounting policies
Current tax
The current income tax charge is calculated on the basis of the tax laws in effect during the period and any adjustments to tax payable in respect
of previous periods. Taxable profit differs from the reported profit for the period as it is adjusted both for items that will never be taxable
or deductible, and temporary differences. Current tax is charged to profit or loss for the period, except when it relates to items charged or
credited directly in other comprehensive income or equity, in which case the current tax is reflected in other comprehensive income or equity
as appropriate.
Deferred tax
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 are 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 to profit for the period except when it relates to items charged or
credited directly to other comprehensive income or equity, in which case the deferred tax is reflected in other comprehensive income or equity
as appropriate.
Deferred tax assets are recognised to the extent that it is probable that the asset can be utilised. Deferred tax assets are reviewed at each reporting
date as judgement is required to estimate the probability of recovery. Deferred tax assets and liabilities are offset where amounts will be settled
on a net basis as there is a legally enforceable right to offset.
Uncertain tax positions
The Group uses in-house tax specialists, professional advisers and relevant previous experience to assess tax risks, and considers IFRIC 23 ‘Accounting
for Uncertainties in Income Taxes’, which provides guidance on the determination of taxable profit and tax bases, when making its assessment.
The Group recognises a tax provision when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are
measured based on the single most likely outcome for each item unless there is a range of possible outcomes for a particular item where a weighted
average measurement is more appropriate. Provisions are included in current liabilities.
76
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 2 Taxation continued
2.2 Taxation
2.2.1 Analysis of charge in the period
Current tax
– UK corporation tax
– overseas tax
– adjustments in respect of prior periods
Deferred tax
– origination and reversal of timing differences
– adjustments in respect of prior periods
– impact of change in tax rate
Tax charge for the period
2.2.2 Tax on items charged in other comprehensive income and equity
Remeasurements arising in the pension scheme
Cash flow hedges
Share-based payments
Total tax on items included in other comprehensive income and equity (note 2.3)
2018
£m
69
4
(8)
65
(2)
6
–
4
69
2018
£m
55
(4)
6
57
2.2.3 Tax reconciliation
The reconciliation below shows how the tax charge of £69m (2017: £20m) has arisen on profit before taxation of £380m (2017: £325m).
The tax for the period is lower (2017: lower) than the standard rate of corporation tax in the UK of 19.16% (2017: 20.0%). The differences are
explained below:
Profit before taxation
Profit before taxation at 19.16% (2017: 20.0%)
Effects of:
Recurring items:
– Expenses not deductible for tax purposes
– Disallowed depreciation on UK properties
– Deferred tax on Safeway acquisition assets
– Adjustments in respect of prior periods
Non-recurring items:
– Profit on property transactions
– Tax impact of impairment and related items
– Effect of change in tax rate
Tax charge for the period
2018
£m
380
73
(6)
20
(4)
(2)
(8)
(4)
–
69
Factors affecting current and future tax charges
The effective tax rate for the year was 18.2% (2017: 6.2%). The normalised tax rate for the year (excluding the impact of property transactions,
business disposals and tax rate changes) was 23.8% (2017: 25.0%).
The normalised tax rate was 4.64% above the UK statutory tax rate of 19.16%. The main factor increasing the normalised tax rate is disallowed
depreciation on UK properties which reflects the Group’s strategy to maintain a majority freehold estate.
Legislation to reduce the standard rate of corporation tax to 17% from 1 April 2020 was included in the Finance Bill 2016 and was enacted
in the prior period. Accordingly, deferred tax has been provided at 19% or 17% depending upon when the temporary difference is expected
to reverse (2017: 19% or 17%).
There have been no indications of any further changes to the rate of corporation tax after 1 April 2020.
2017
£m
57
2
(11)
48
(10)
3
(21)
(28)
20
2017
£m
17
8
(9)
16
2017
£m
325
65
1
20
(10)
(8)
(6)
(21)
(21)
20
77
Strategic reportGovernanceFinancial StatementsInvestor information
2 Taxation continued
2.3 Deferred tax
Net deferred tax liability
2018
£m
478
2017
£m
417
IAS 12 ‘Income taxes’ permits the offsetting of balances within the same tax jurisdiction. All of the deferred tax assets are available for offset against
deferred tax liabilities.
The movements in deferred tax liabilities during the period are shown below:
Current period
At 30 January 2017
Charged to profit for the period
Charged to other comprehensive income and equity
At 4 February 2018
Prior period
At 1 February 2016
(Credited)/charged to profit for the period
Charged/(credited) to other comprehensive income and equity
At 29 January 2017
The analysis of net deferred tax liabilities are as follows:
Net deferred tax liabilities to be settled after more than 12 months
Net deferred tax assets to be settled within 12 months
Property,
plant and
equipment
£m
Pensions
£m
Other
short-term
temporary
differences
£m
361
3
–
364
392
(31)
–
361
46
–
55
101
33
(4)
17
46
10
1
2
13
4
7
(1)
10
2018
£m
480
(2)
478
Total
£m
417
4
57
478
429
(28)
16
417
2017
£m
420
(3)
417
78
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
3 Operating assets
3.1 Accounting policies
Intangible assets
Goodwill
Goodwill arising on a business combination is not amortised but is reviewed for impairment on an annual basis or more frequently if there are
indicators that it may be impaired. Goodwill is allocated to cash generating units that will benefit from the synergies of the business combination
for the purpose of impairment testing.
Software development costs
Costs that are directly attributable to the creation of identifiable software, which meet the development asset recognition criteria as laid out
in IAS 38 ‘Intangible assets’, are recognised as intangible assets.
Direct costs include consultancy costs, the employment costs of internal software developers, and borrowing costs. All other software
development and maintenance costs are recognised as an expense as incurred. Software development assets are held at historic cost less
accumulated amortisation and impairment, and are amortised over their estimated useful lives (three to ten years) on a straight-line basis.
Amortisation is charged in cost of sales.
Licences
Separately acquired pharmaceutical licences and software licences are recognised at historic cost less accumulated amortisation and impairment.
Those acquired in a business combination are recognised at fair value at the acquisition date. Pharmaceutical licences and software licences are
amortised over their useful lives (three to ten years) on a straight-line basis or over the life of the licence if shorter. Amortisation is charged in cost
of sales.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly
attributable costs such as borrowing costs and employment costs of those people directly working on the construction and installation of property,
plant and equipment.
Depreciation rates
Depreciation rates used to write off cost less residual value on a straight-line basis are:
Freehold land
Freehold buildings
Leasehold land
Leasehold buildings
Plant, equipment, fixtures and vehicles
Assets under construction
0%
2.5%
Over the lease period
Over the shorter of lease period and 2.5%
10% to 33%
0%
Depreciation expense is primarily charged in cost of sales with an immaterial amount in administration expenses.
Investment property
Property held to earn rental income is classified as investment property and is held at cost less accumulated depreciation and impairment.
The depreciation policy is consistent with that described for property above.
Non-current assets classified as held-for-sale
Non-current assets are classified as held-for-sale if their carrying amount is to be recovered principally through a sale transaction, rather than
continuing use within the Group, and the sale is considered highly probable. The sale is expected to complete within one year from the date
of classification and the assets are available for sale in their current condition. Non-current assets held-for-sale are stated at the lower of carrying
amount and fair value less costs of disposal and are not depreciated.
Lessor accounting – operating leases
Assets acquired and made available to third parties under operating leases are recorded as property, plant and equipment or investment property
and are depreciated on a straight-line basis to their estimated residual values over their estimated useful lives. Operating lease income is credited
on a straight-line basis to the date of the next rent review.
Finance leases
Assets funded through finance leases are capitalised as property, plant and equipment and depreciated over their useful economic life or lease term,
whichever is shorter. The amount capitalised is the lower of the fair value and the present value, calculated using the interest rate implicit in the
lease, of the future minimum lease payments. The obligations to pay future rentals are included within liabilities. 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.
79
Strategic reportGovernanceFinancial StatementsInvestor information 3 Operating assets continued
3.1 Accounting policies continued
Impairment of non-financial assets
Intangible assets with indefinite lives, such as goodwill, and those in construction that are not yet being amortised, are tested for impairment
annually. Group policy is to test non-financial assets annually for impairment or if events or changes in circumstances indicate that the carrying
amount may not be recoverable.
Testing is performed at the level of a cash generating unit (CGU) in order to compare the CGU’s recoverable amount against its carrying value.
An impaired CGU is written down to its recoverable amount, which is the higher of value in use or its fair value less costs to dispose. 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.
The Group considers that each of its stores is a CGU, which together form a grocery group of CGUs supported by corporate assets such as head
office and vertically integrated suppliers.
Impairment losses are reversed if there is evidence of an increase in the recoverable amount of a previously impaired asset, 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.
Impairment losses relating to goodwill are not reversed. Any reversal of impairment losses is excluded from underlying earnings.
3.2 Goodwill and intangible assets
Current period
Cost
At 30 January 2017
Additions
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Accumulated amortisation and impairment
At 30 January 2017
Amortisation charge for the period
Impairment
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Net book amount at 4 February 2018
Goodwill
£m
Software
development costs
£m
Licences
£m
10
–
–
–
–
10
–
–
–
–
–
–
–
10
647
60
7
(3)
(26)
685
229
78
1
2
(3)
(26)
281
404
31
8
(7)
–
(3)
29
14
6
–
(2)
–
(3)
15
14
Total
£m
688
68
–
(3)
(29)
724
243
84
1
–
(3)
(29)
296
428
Included within software development costs are assets under construction of £20m (2017: £3m).
The Group has performed its annual assessment of its amortisation policies and asset lives and deemed them to be appropriate. No changes
have been made to asset lives during the year.
As in previous years, fully amortised assets are retained in the Group’s fixed asset register. In order to provide greater understanding of
the Group’s annual amortisation charge, assets which have become fully amortised in the year have been removed from both cost and
accumulated amortisation.
Following the annual impairment review conducted by the Group, an impairment charge of £1m (2017: £nil) has been recognised in relation
to intangible assets. This has been included as an adjustment to underlying earnings (see note 1.4).
Goodwill
The goodwill arose on the acquisition of Flower World Limited (£3m) and Farmers Boy (Deeside) Limited (£7m).
Impairment testing of goodwill
Goodwill of £10m is allocated to the grocery group of CGUs. This group of CGUs has been tested for impairment via the value in use calculation
described in note 3.3. The pre-tax discount rate used is 9.0% (2017: 9.0%) and the growth rate applied to the period after five years is 2.0% (2017: 2.0%).
80
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
3 Operating assets continued
3.2 Goodwill and intangible assets continued
Software development costs
The cumulative interest capitalised included within software development costs is £41m (2017: £41m). The cost of internal labour capitalised during the
year is not material for separate disclosure.
Prior period
Cost
At 1 February 2016
Additions
Fully written down assets
At 29 January 2017
Accumulated amortisation and impairment
At 1 February 2016
Amortisation charge for the period
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
3.3 Property, plant and equipment
Current period
Cost
At 30 January 2017
Additions
Interest capitalised
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Accumulated depreciation and impairment
At 30 January 2017
Depreciation charge for the period
Impairment
Impairment reversal
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Net book amount at 4 February 2018
Assets under construction included above
Goodwill
£m
Software
development costs
£m
Licences
£m
10
–
–
10
–
–
–
–
10
647
41
(41)
647
187
83
(41)
229
418
31
14
(14)
31
18
10
(14)
14
17
Freehold
buildings
£m
Leasehold
land and
buildings
£m
Plant,
equipment,
fixtures and vehicles
£m
4,251
23
1
5
(67)
(24)
4,189
1,690
100
25
(44)
4
(10)
(24)
1,741
2,448
16
944
1
–
(7)
(2)
(4)
932
469
17
24
(21)
(4)
(2)
(4)
479
453
–
1,409
403
–
–
(8)
(68)
1,736
565
216
20
(10)
–
(7)
(68)
716
1,020
3
Total
£m
688
55
(55)
688
205
93
(55)
243
445
Total
£m
10,552
427
1
–
(129)
(96)
10,755
3,325
333
118
(126)
–
(42)
(96)
3,512
7,243
24
Freehold
land
£m
3,948
–
–
2
(52)
–
3,898
601
–
49
(51)
–
(23)
–
576
3,322
5
The Group has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. No changes have
been made to asset lives during the year.
As in previous years, fully depreciated assets are retained in the Group’s fixed asset register. In order to provide greater understanding of the Group’s
annual depreciation charge, assets which have been fully depreciated in the year have been removed from both cost and accumulated depreciation.
During June 2017, the Group sold the land and buildings of its customer fulfilment centre (CFC) at Dordon to a third party for cash consideration of
£92m. The disposal is included within the disposals during the 53 weeks ended 4 February 2018. The disposal resulted in a profit of £14m. This profit
has been included in profit/loss on disposal and exit of properties as an adjustment to underlying earnings (see note 1.4).
81
Strategic reportGovernanceFinancial StatementsInvestor information
3 Operating assets continued
3.3 Property, plant and equipment continued
Included within the table on page 81 are leasehold land and buildings held under finance lease with a cost of £293m (2017: £294m) and accumulated
depreciation of £75m (2017: £72m).
The cost of financing property developments prior to their opening date has been included in the cost of the asset. The cumulative amount
of interest capitalised in the total cost above amounts to £199m (2017: £198m).
Impairment
The Group considers that each store is a separate cash generating unit (CGU) and therefore considers every store for an indication of impairment
annually. The Group calculates each store’s recoverable amount and compares this amount to its book value. The recoverable amount is determined
as the higher of ‘value in use’ and ‘fair value less costs of disposal’. If the recoverable amount is less than the book value, an impairment charge is
recognised based on the following methodology:
‘Value in use’ is calculated by projecting individual store pre-tax cash flows over the remaining useful life of the store, based on forecasting
assumptions. The methodology used for calculating future cash flows is to:
• use the actual cash flows for each store in the current year;
• allocate a proportion of the Group’s central costs to each store on an appropriate basis;
• project each store’s cash flows over the next five years by applying forecast sales and cost growth assumptions;
• project cash flows beyond year five for the remaining useful life of each store by applying a long-term growth rate; and
• discount the cash flows using a pre-tax rate of 9.0% (2017: 9.0%). The discount rate takes into account the Group’s weighted average cost of capital.
‘Fair value less costs of disposal’ is estimated by the Directors based on their knowledge of individual stores and the markets they serve and
likely demand from grocers or other retailers. The Directors also obtain valuations by store prepared by independent valuers and consider these
in carrying out their estimate of fair value less cost of disposal for the purposes of testing for impairment. In determining their valuation, the
independent valuers assume an expected rent and yield for each store based on the quality of the asset, local catchment and the store being
occupied by a supermarket tenant with a similar covenant to Morrisons.
In order to reflect specific local market conditions, in particular the continued low demand from major grocery retailers for supermarket space, the
Directors consider it appropriate for the purpose of testing for impairment to revise downwards the rent and yield assumptions in the independent
valuation to reflect the following factors on a store by store basis:
• whether a major grocery operator might buy the store, taking into consideration whether they are already located near the store, and whether
the store size is appropriate for their business model, and then if not;
• assessing whether a smaller store operator might buy the store, in which case the value has been updated to reflect the Directors’ assessment
of the yield which would be achievable if such an operator acquired the store, and then if not; and
• assessing whether a non-food operator might buy the store, in which case the value has been updated to reflect the Directors’ assessment
of the yield which would be achievable if such an operator acquired the store.
Having applied the above methodology and assumptions, the Group has recognised a net impairment reversal of £8m (£126m impairment reversal
offset by £118m impairment charge) during the year in respect of property, plant and equipment (2017: £44m; £191m impairment reversal offset by
£147m impairment charge). This movement reflects fluctuations from store level trading performance and local market conditions.
At 4 February 2018, the key assumption to which the value in use calculation is most sensitive to is the discount rate. Specific sensitivity analysis
with regard to this assumption shows that an increase of 1% in the discount rate would result in an additional impairment charge of £96m.
82
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 3 Operating assets continued
3.3 Property, plant and equipment continued
Prior period
Cost
At 1 February 2016
Additions
Interest capitalised
Reclassifications
Transfers from investment properties
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 29 January 2017
Accumulated depreciation
At 1 February 2016
Depreciation charge for the period
Impairment
Impairment reversal
Reclassifications
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
Assets under construction included above
3.4 Assets classified as held-for-sale
At start of period
Additions
Transfers from property, plant and equipment at net book value
Transfers from investment property at net book value
Disposals
At end of period
Freehold
land
£m
Freehold
buildings
£m
Leasehold
land and
buildings
£m
Plant,
equipment,
fixtures and vehicles
£m
3,978
2
–
3
–
(35)
–
–
3,948
657
–
55
(92)
–
(19)
–
–
601
3,347
4
4,290
10
1
11
(4)
(30)
(9)
(18)
4,251
1,645
99
38
(53)
9
(26)
(4)
(18)
1,690
2,561
–
978
9
–
(14)
–
–
(24)
(5)
944
510
16
18
(39)
(9)
–
(22)
(5)
469
475
–
1,306
346
–
–
–
(4)
(76)
(163)
1,409
579
190
36
(7)
–
(4)
(66)
(163)
565
844
2
2018
£m
–
–
–
4
–
4
No assets were transferred from property, plant and equipment to assets classified as held-for-sale in the 53 weeks ended 4 February 2018
(2017: assets transferred with a cost of £69m and accumulated depreciation of £49m). Assets transferred from investment property had a cost
of £5m (2017: £10m) and accumulated depreciation of £1m (2017: £3m).
Total
£m
10,552
367
1
–
(4)
(69)
(109)
(186)
10,552
3,391
305
147
(191)
–
(49)
(92)
(186)
3,325
7,227
6
2017
£m
–
19
20
7
(46)
–
83
Strategic reportGovernanceFinancial StatementsInvestor information
3 Operating assets continued
3.5 Investment property
Cost
At start of period
Additions
Transfers from property, plant and equipment
Transfers to assets classified as held-for-sale
At end of period
Accumulated depreciation and impairment
At start of period
Charge for the period
Transfers to assets classified as held-for-sale
At end of period
Net book amount at end of period
2018
£m
53
5
–
(5)
53
20
1
(1)
20
33
2017
£m
59
–
4
(10)
53
22
1
(3)
20
33
Included in other operating income is £8m (2017: £7m) of rental income generated from investment properties. At the end of the period the fair
value of investment properties was £52m (2017: £51m). Investment properties are valued by independent surveyors on a vacant possession basis
using observable inputs (fair value hierarchy level 2).
3.6 Operating leases – lessor
The Group has non-cancellable agreements with tenants with varying terms, escalation clauses and renewal rights. The future minimum lease income
is as follows:
Within one year
More than one year and less than five years
After five years
3.7 Capital commitments
Contracts placed for future capital expenditure not provided in the financial statements
(property, plant and equipment and intangible assets)
2018
£m
11
29
20
60
2018
£m
38
2017
£m
16
55
27
98
2017
£m
28
84
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
4 Interests in other entities
4.1 Accounting policies
Joint ventures
The Group applies IFRS 11 ‘Joint Arrangements’ to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint
operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint
arrangements and determined them to be joint ventures. Joint ventures are accounted for under the equity method and are initially recognised
at cost.
The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of the equity accounted
investees, from the date that joint control commences until the date that joint control ceases.
Investments
Investments comprise investments in equity instruments held for long-term investment. They are measured at fair value through other
comprehensive income, where the fair value can be measured reliably. Where the fair value of the instruments cannot be measured reliably, for
example, when there is variability in the range of estimates, the investments are recognised at cost less accumulated impairment losses. When the
Group disposes of an investment, the fair value of the consideration received less the carrying value of the investment at the date of disposal is
recognised in profit or loss, along with any amounts previously recognised in other comprehensive income in respect of the investment.
Business combinations
The acquisition method is used to account for business combinations. Consideration is the fair value of the assets transferred, the liabilities incurred
and the equity interests issued by the Group, including the fair value of any contingent consideration arrangement. Acquisition related costs are
expensed as incurred. Identifiable assets acquired, and liabilities and contingent liabilities assumed, are measured initially at their fair values at the
acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at
the non-controlling interest’s proportionate share of the acquiree’s net assets.
Goodwill is the excess of consideration transferred, plus any non-controlling interest and the fair value of any previous equity interest in the
acquiree, over the fair value of the identifiable net assets acquired. In the event that this excess is negative the difference is recognised directly
in profit for the period.
Disposal of subsidiaries
When the Group ceases to have control over a subsidiary, any retained interest in the entity is remeasured to its fair value at the date when control
is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other
comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities.
This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
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Strategic reportGovernanceFinancial StatementsInvestor information 4 Interests in other entities continued
4.2 Investment in joint ventures
The Group and Ocado Group plc are sole investors in a company (MHE JV Co), which owns the plant and equipment at the Dordon Customer
Fulfilment Centre. The Group has a 51.5% interest in MHE JV Co (2017: 50%). Decisions regarding MHE JV Co require the unanimous consent of both
parties. The Directors have considered the impact of IFRS 11 and determined that the Group continues to jointly control MHE JV Co.
MHE JV Co
Non-current assets
Current assets
Current liabilities
Net assets
Group’s share of net assets
Profit
Group’s share of profit
4.3 Investments
At start of period
Fair value adjustments
Disposals
At end of period
2018
£m
86
20
(3)
103
53
4
2
2018
£m
–
–
–
–
2017
£m
96
22
(6)
112
56
4
2
2017
£m
31
14
(45)
–
In the 52 weeks ended 29 January 2017, the Group disposed of its 10% stake in Fresh Direct Inc, a US internet grocer, for cash consideration of £45m,
net of £1m of transaction costs. In line with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the asset was remeasured to fair value
before the sale completed, resulting in a £14m increase in the book value of the investment. On disposal the £14m revaluation gain was recognised
in the income statement net of £1m of transaction costs. This profit is one-off in nature and was excluded from reported underlying earnings for
the 52 weeks ended 29 January 2017 (see note 1.4). Following the transaction the undrawn loan facility provided to Fresh Direct Inc ceased.
4.4 Business combinations
In the 53 weeks ended 4 February 2018 and in the 52 weeks ended 29 January 2017 there were no business combinations.
4.5 Disposals of businesses
In the 53 weeks ended 4 February 2018 and in the 52 weeks ended 29 January 2017 there were no disposals of businesses.
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Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 5 Working capital and provisions
5.1 Accounting policies
Stock
Stock represents goods for resale and is measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price
in the ordinary course of business, less the estimated costs necessary to make the sale. Cost is calculated on a weighted average basis and comprises
purchase price, and other directly attributable costs, including import duties and other non-recoverable taxes, reduced by promotional funding and
commercial income and a provision for estimated losses relating to shrinkage and obsolescence. Losses relating to shrinkage in stores are based on
historical losses verified by physical stock counts conducted by an independent third party. Provision is made for obsolete and slow moving items.
Trade and other debtors
Trade and other debtors are initially recognised at fair value, which is generally equal to face value, and subsequently held at amortised cost.
Provision is made when there is objective evidence that the Group will not be able to recover balances in full, with the charge being included
in administrative expenses.
Cash and cash equivalents
Cash and cash equivalents for cash flow purposes includes cash-in-hand, cash-at-bank and bank overdrafts. In the balance sheet, bank overdrafts
that do not have right of offset are presented within current liabilities.
Cash and cash equivalents includes debit and credit card payments made by customers which clear the bank shortly after the sale takes place.
Cash held by the Group’s captive insurer, Farock Insurance Company Limited, is not available for use by the rest of the Group as it is restricted for
use against the specific liability of the captive. As the funds are available on demand, they meet the definition of cash in IAS 7 ‘Cash flow statements’.
Trade and other creditors
Trade and other creditors are initially recognised at fair value, which is generally equal to face value of the invoices received, and subsequently held
at amortised cost. Trade creditors are presented net of commercial income due when the Group’s trading terms state that income from suppliers
will be netted against amounts owing to that supplier.
Provisions
Provisions are created where the Group has a present 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, and where it can be reliably measured. For petrol filling station decommissioning costs this is when
the filling station is first constructed and for dilapidations on leased buildings, when the lease is entered into. Provisions for onerous leases and
other onerous contracts are recognised when the Group believes that the unavoidable costs of meeting the obligations exceed the economic
benefits expected to be received under the contract. The amounts provided are based on the Group’s best estimate of the least net cost of
exit. Where material, these estimated outflows are discounted to net present value using a pre-tax rate that reflects current market assumptions.
The unwinding of this discount is recognised as a financing cost in the income statement.
5.2 Stock
Finished goods
Unearned elements of commercial income are deducted from finished goods as the stock has not been sold.
2018
£m
686
2017
£m
614
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Strategic reportGovernanceFinancial StatementsInvestor information 5 Working capital and provisions continued
5.3 Debtors
Trade debtors:
– Commercial income trade debtors
– Accrued commercial income
– Other trade debtors
Less: provision for impairment of trade debtors
Prepayments and accrued income
Other debtors
The ageing analysis of trade debtors is as follows:
Neither past due nor impaired
Past due but not impaired:
Not more than three months
Greater than three months
Impaired debt
2018
£m
3
29
123
(6)
149
91
10
250
2018
£m
149
–
–
6
155
2017
£m
4
38
101
(6)
137
68
9
214
2017
£m
137
–
–
6
143
As at 4 February 2018 and 29 January 2017, trade debtors that were neither past due nor impaired related to a number of debtors for whom there
is no recent history of default. The other classes of debtors do not contain impaired assets.
As at 11 March 2018, £2m of the £3m commercial income trade debtor balance had been settled and £16m of the £29m accrued commercial income
balance had been invoiced and settled.
5.4 Creditors
Trade creditors
Less: commercial income due, offset against amounts owed
Other taxes and social security payable
Other creditors
Accruals and deferred income
Included within accruals and deferred income is £4m (2017: £3m) in respect of deferred commercial income.
As at 11 March 2018, £20m of the £28m commercial income due above had been offset against payments made.
2018
£m
2,298
(28)
2,270
93
147
471
2,981
2017
£m
2,160
(34)
2,126
68
198
445
2,837
88
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
5 Working capital and provisions continued
5.5 Provisions
At 30 January 2017
Charged to profit for the period
Utilised/released during the period
Unwinding of discount
At 4 February 2018
Onerous leases and
onerous contracts
£m
306
22
(62)
13
279
Other property
provisions
£m
20
–
–
–
20
Total
£m
326
22
(62)
13
299
Part of the onerous leases relate to sublet and vacant properties, with commitments ranging from one to 55 years. The provision is revised regularly
in response to market conditions. During the year, £22m has been charged to onerous lease and onerous contracts provisions due to changes in
circumstances or performance relating to certain contracts, which has been offset by a £23m release in relation to others, as detailed in note 1.4.
The utilisation of provisions relates to the ongoing utilisation of onerous contracts and the assignment of onerous leases.
Other property provisions include a petrol filling station decommissioning reserve for the cost of decommissioning petrol tanks, and provisions for
dilapidations on leased buildings, for the cost of restoring assets to their original condition.
5.6 Cash generated from operations
Profit for the period
Net finance costs
Taxation charge
Share of profit of joint venture (net of tax)
Operating profit
Adjustments for:
Depreciation and amortisation
Impairment
Impairment reversal
Profit/loss arising on disposal and exit of properties and sale of investments
Adjustment for non-cash element of pension charges
Share-based payments charge
Other non-cash charges
(Increase)/decrease in stock1
Increase in debtors1
Increase in creditors1
(Decrease)/increase in provisions1
Cash generated from operations
2018
£m
311
80
69
(2)
458
418
119
(126)
(19)
10
33
–
(72)
(50)
153
(40)
884
2017
£m
305
145
20
(2)
468
399
147
(191)
(32)
7
20
2
2
(19)
306
4
1,113
Total working capital outflow (the sum of items marked1 in the table) is £9m in the year (29 January 2017: £293m inflow). This includes £1m (29 January
2017: £38m) as a result of the current year charges in respect of onerous contracts and accruals of onerous commitments, net of £42m (29 January
2017: £94m) of onerous payments and other non-operating payments of £3m (29 January 2017: £11m). When adjusted to exclude these items, the
working capital inflow is £35m (29 January 2017: £360m).
89
Strategic reportGovernanceFinancial StatementsInvestor information
6 Capital and borrowings
6.1 Accounting policies
Borrowings
Interest-bearing 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 profit for the period over the period of the borrowings
on an effective interest rate basis.
Borrowing costs
All borrowing costs are recognised in the Group’s profit for the period on an effective interest rate basis except for interest costs that are directly
attributable to the construction of buildings and other qualifying assets, which are capitalised and included within the initial cost of the asset.
Capitalisation commences when both expenditure on the asset and borrowing costs are being incurred, and necessary activities to prepare the asset
for use are in progress. In the case of new stores, this is generally once planning permission has been obtained. Capitalisation ceases when the asset
is ready for use. Interest is capitalised at the effective rate incurred on borrowings before taxation of 5% (2017: 5%). Capitalised interest is included
within interest paid in cash flow from operating 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. Property leases are analysed into separate components for land and buildings and tested to establish whether
the components are operating leases or finance leases. Rental payments on operating leases in which the Group is lessee are taken to profit
for the period on a straight-line basis over the life of the lease.
Sale and leaseback of properties
The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classification principles
described above). For sale and operating leasebacks, the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised
immediately in the Statement of comprehensive income. When forming the conclusion of operating lease classification, consideration is given to
the key lease classification indicators of IAS 17. The leases are typically for a 25 year period. On making this assessment the Directors reviewed the
remaining useful lives for these particular properties and concluded they are significantly longer than the period of the lease. As disclosed on page
81 a review of the useful economic lives of each of the property, plant and equipment categories has been performed in the year with no changes
made. Other key indicators considered in reaching an operating lease classification were the present value of the minimum lease payments and
the ownership clauses in the contracts upon expiry of the lease.
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.
Own shares held
The Group has employee trusts for the granting of Group shares to executives and members of the employee share plans. Shares in the Group held
by the employee share trusts are presented in the balance sheet as a deduction from retained earnings. The shares are deducted for the purpose
of calculating the Group’s earnings per share.
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).
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Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 6 Capital and borrowings continued
6.2 Finance costs and income
Interest payable on short-term loans and bank overdrafts
Interest payable on bonds
Interest capitalised
Total interest payable
Provisions: unwinding of discount (note 5.5)
Other finance costs
Underlying finance costs1
Costs associated with the repayment of borrowings (note 1.4)
Finance costs
Bank interest received
Amortisation of bonds
Underlying finance income1
Net pension income (note 1.4 and 8.2)
Finance income
Net finance cost
1 Underlying net finance costs marked 1 amount to £73m (2017: £97m).
6.3 Borrowings
The Group had the following current borrowings and other financial liabilities:
Current
£71m sterling bonds 6.12% December 2018 (2017: £135m)
The Group had the following non-current borrowings and other financial liabilities:
Non-current
£71m sterling bonds 6.12% December 2018 (2017: £135m)
£365m sterling bonds 4.625% December 2023 (2017: £365m)
£318m sterling bonds 3.50% July 2026 (2017: £384m)
£300m sterling bonds 4.75% July 2029 (2017: £300m)
€280m euro bond 2.25% June 2020 (2017: €411m)
Total non-current borrowings
2018
£m
(2)
(63)
1
(64)
(13)
(1)
(78)
(16)
(94)
5
–
5
9
14
(80)
2018
£m
72
2018
£m
–
363
342
293
247
1,245
2017
£m
(3)
(86)
1
(88)
(13)
(3)
(104)
(56)
(160)
6
1
7
8
15
(145)
2017
£m
–
2017
£m
136
363
411
292
348
1,550
The December 2018 sterling bond has been reclassified as current as it is due for repayment within one year of the balance sheet date.
The movements in the nominal value of the other bonds are due to partial early repayment during the 53 weeks ended 4 February 2018.
During the year, the Group continued to reduce its level of debt, through the partial early settlement of the 2018 and 2026 sterling bonds,
and the 2020 euro bond.
Borrowing facilities
The Group has a syndicated committed revolving credit facility of £1.35bn with a maturity date of September 2021. The revolving credit facility incurs
commitment fees and drawdowns bear interest at floating interest rates at a spread above LIBOR. There were no borrowings under the revolving
credit facility at the balance sheet date. Therefore the Group had £1.35bn of undrawn committed borrowing facilities available (2017: £1.35bn).
In the event of default of covenants the principal amounts of borrowings and any interest accrued become repayable on demand.
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6 Capital and borrowings continued
6.3 Borrowings continued
Maturity of borrowings
The table below summarises the maturity profile of the Group’s borrowings based on contractual, undiscounted payments, which include interest
payments. As a result, amounts shown below do not agree to the amounts disclosed on the balance sheet for borrowings. Creditors (note 5.4) are
excluded from this analysis.
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
2018
£m
123
48
293
42
42
1,130
2017
£m
61
195
52
400
45
1,248
Fair values
The fair value of the sterling and euro denominated bonds is measured using closing market prices (level 1). The fair values of borrowings included
in level 2 are based on the net present value of the anticipated future cash flows associated with these instruments using rates currently available
for debts on similar terms, credit risk and equivalent maturity dates.
These compare to carrying values as follows:
Total bonds: non-current and current
Amortised
cost
£m
1,317
2018
Fair
value
£m
1,429
Amortised
cost
£m
1,550
2017
Fair
value
£m
1,676
The fair value of other items within current and non-current borrowing equals their carrying amount, as the impact of discounting is not material.
6.4 Analysis of net debt
Cross-currency contracts and interest rate swaps1
Fuel and energy price contracts
Non-current financial assets
Foreign exchange forward contracts
Fuel and energy price contracts
Current financial assets
Bonds1
Foreign exchange forward contracts
Fuel and energy price contracts
Current financial liabilities
Bonds1
Fuel and energy price contracts
Non-current financial liabilities
Cash and cash equivalents
Net debt
Note
7.3
7.3
6.3
7.3
7.3
6.3
7.3
2018
£m
12
4
16
1
14
15
(72)
(13)
–
(85)
(1,245)
(1)
(1,246)
327
(973)
2017
£m
6
10
16
11
11
22
–
(2)
(1)
(3)
(1,550)
(5)
(1,555)
326
(1,194)
Total net liabilities from financing activities (the sum of items marked 1 in the table) is £1,305m in the 53 weeks ended 4 February 2018 (2017: £1,544m).
Cash and cash equivalents include restricted balances of £7m (2017: £9m) which is held by Farock Insurance Company Limited, a subsidiary of
Wm Morrison Supermarkets PLC.
92
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
6 Capital and borrowings continued
6.5 Called-up share capital
At 30 January 2017
Share options exercised
At 4 February 2018
Number of
shares
millions
2,335.6
20.3
2,355.9
Share capital
£m
234
2
236
Share premium
£m
128
31
159
Total
£m
362
33
395
The total authorised number of ordinary shares is 4,000 million shares (2017: 4,000 million shares) with a par value of 10p per share (2017: 10p per
share). All issued shares are fully paid. The Group did not acquire any of its own shares for cancellation in the 53 weeks ended 4 February 2018
or the 52 weeks ended 29 January 2017.
The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at the meetings of the Company.
Trust shares
Included in retained earnings is a deduction of £14m (2017: £14m) in respect of own shares held at the balance sheet date. This represents the cost
of 7,661,470 (2017: 8,458,487) of the Group’s ordinary shares (nominal value of £0.8m (2017: £0.8m)). These shares are held in a trust and were acquired
by the business to meet obligations under the Group’s employee share plans using funds provided by the Group. The market value of the shares
at 4 February 2018 was £17m (2017: £20m). The trust has waived its right to dividends. These shares are not treasury shares as defined by the London
Stock Exchange.
During the period the Group acquired 1,787,165 (2017: 2,790,045) of its own shares to hold in trust for consideration of £4m (2017: £5m), and utilised
2,584,182 (2017: 2,733,049) trust shares to satisfy awards under the Group’s employee share plans.
Proceeds from exercise of employee share options
The Group issued 20,279,315 (2017: 381,043) new shares to satisfy options exercised by employees during the period. Proceeds received on exercise
of these shares amounted to £33m (2017: £0.6m) and these have been recognised as an addition to share capital and share premium in the period.
Settlement of employee tax liability for share awards
During the 53 weeks ended 4 February 2018 the Group has settled 2,584,182 of share options out of trust shares which have vested during the period
net of tax. The Group paid the £7m tax liability in cash (2017: £nil) due on the vesting of these share options on behalf of the employees rather than
selling shares on the employees’ behalf to settle the tax due.
6.6 Reserves
Capital redemption reserve
Merger reserve
Hedging reserve
Retained earnings
Total
2018
£m
39
2,578
2
1,531
4,150
2017
£m
39
2,578
18
1,066
3,701
Capital redemption reserve
The capital redemption reserve relates to 389,631,561 of the Company’s own shares which it purchased on the open market for cancellation between
31 March 2008 and 8 March 2013 at a total cost of £1,081m.
Merger reserve
The merger reserve represents the reserve in the Company’s balance sheet arising on the acquisition in 2004 of Safeway Limited.
Hedging reserve
This represents the gains and losses arising on derivatives used for cash flow hedging.
93
Strategic reportGovernanceFinancial StatementsInvestor information
6 Capital and borrowings continued
6.7 Capital management
The Group defines the capital that it manages as the Group’s total equity and net debt balances, as well as its lease commitments.
The Group’s capital management objectives are to safeguard its viability taking into consideration the risks that it faces whilst maintaining an
investment grade credit rating and having adequate liquidity headroom. The Group manages its capital structure by managing the balance of debt
and shares outstanding. It does this by seeking an effective balance between debt and equity. During the 53 weeks ended 4 February 2018, net debt
has reduced by £221m. Throughout the year, the Group has comfortably complied with the gearing and fixed charge cover covenants attaching to
its revolving credit facility.
6.8 Operating leases – lessee
The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases. The leases have varying
terms, escalation clauses and renewal rights, and fall due as follows:
Within one year
More than one year and less than five years
After five years
The movement in the property lease commitments within one year is summarised below:
2018
Vehicles, plant
and equipment
£m
13
22
–
35
Property
£m
114
435
1,666
2,215
2017
Vehicles, plant
and equipment
£m
14
34
–
48
Property
£m
121
466
1,851
2,438
At 30 January 2017
Net impact of disposal programme
New lease commitments
Other
At 4 February 2018
£m
121
(7)
1
(1)
114
94
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
7 Financial risk and hedging
7.1 Accounting policies
Derivative financial instruments and hedge accounting
Derivatives are transacted to mitigate financial risks that arise as a result of the Group’s operating activities and funding arrangements. At the
inception of a hedge, the Group documents the relationship between the hedging instrument and the hedged item, the risk management
objective and strategy for undertaking the hedge.
The Group assesses whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item
at inception and it also assesses whether the hedge has been and will continue to be effective on an ongoing basis.
All derivatives are initially recognised at fair value and are also measured at fair value at each reporting date. Derivatives with positive fair values are
recognised as assets and those with negative fair values as liabilities. They are also categorised as current or non-current according to the maturity
of each derivative. All gains or losses arising due to changes in the fair value of derivatives are recognised in profit or loss except when the derivative
qualifies for cash flow hedge accounting.
Cash flow hedges
The Group designates derivatives into a cash flow hedge where they have been transacted to hedge a highly probable forecast transaction or
a particular risk associated with an asset or liability. The effective portion of the change in the fair value of the derivatives, that are designated into
cash flow hedge relationships, are recognised in other comprehensive income. Cumulative gains or losses on derivatives are reclassified from other
comprehensive income into profit or loss in the period when the transaction occurs. Any ineffective portion of the gain or loss on the derivative
is immediately recognised in profit or loss.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised or no longer qualifies for hedge
accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted
transaction occurs at which point the net cumulative gain or loss recognised in equity is transferred to profit or loss in the period.
Fair value hedge
The Group designates derivatives into a fair value hedge relationship when they hedge the Group’s exposure to changes in the fair value of
a recognised asset or liability, or a firm commitment. The change in fair value of the hedged asset or liability that is attributable to the hedged
risk is recognised in profit or loss for the period as well as the gain or loss from changes in the fair value of the derivative.
7.2 Financial risk management
The Group has a centralised treasury function which manages funding, liquidity and other financial risk in accordance with the Board approved
Treasury Policy. The objective of the policy and controls that are established is to mitigate the risk of an adverse impact on the performance of the
Group as a result of its exposure to financial risks arising from the Group’s operations and its sources of finance. It is the Group’s policy not to engage
in speculative trading of financial instruments.
The Board retains ultimate responsibility for treasury activity and is involved in key decision making. A Treasury Committee is established to provide
governance and oversight to treasury activity within delegated authority limits and formally reports to the Audit Committee.
Foreign currency risk
The majority of purchases made by the Group are denominated in sterling, however some trade purchases are made in other currencies, primarily
the euro and US dollar. The Group’s objective is to reduce short-term profit volatility from exchange rate fluctuations. Group policy specifies the
minimum percentage of committed and highly probable exposures that must be hedged.
Cross-currency interest rate swaps are used to mitigate the Group’s currency exposure arising from payments of interest and principal in relation
to foreign currency funding.
At the reporting date, the sensitivity to a reasonable possible change (+/-10%) in the US dollar and euro exchange rates would equate to a £9m
post-tax profit or loss exposure in relation to the euro and £2m in relation to the US dollar, for the unhedged forecast foreign currency exposures
over the next 12 months. A movement of the pound sterling by +/-10% against the euro and US dollar exchange rates would impact other
comprehensive income by £27m for the hedged amount.
Liquidity risk
The Group policy is to maintain an appropriate maturity profile across its borrowings and a sufficient level of committed headroom to meet
obligations. The Group finances its operations using a diversified range of funding providers including banks and bondholders.
A central cash forecast is maintained by the treasury function who monitor the availability of liquidity to meet business requirements and any
unexpected variances. The treasury function seek to centralise surplus cash balances to minimise the level of gross debt. Short-term cash balances,
together with undrawn committed facilities, enable the Group to manage its day-to-day liquidity risk. Any short-term surplus is invested in
accordance with Treasury Policy.
The Treasury Committee compares the committed liquidity available to the Group against the forecast requirements including policy headroom.
This policy includes a planning assumption that supply chain finance facilities are not available.
95
Strategic reportGovernanceFinancial StatementsInvestor information 7 Financial risk and hedging continued
7.2 Financial risk management continued
Interest rate risk
The Group seeks to protect itself against adverse movements in interest rates by maintaining at least 60% of its total borrowings at fixed interest
rates. As at the balance sheet date, 100% (2017: 100%) of the Group’s borrowings are at fixed rate.
Whilst still applying the policy described above, from time-to-time the Group enters into fixed-to-floating interest rate swaps to achieve the
appropriate proportion of fixed versus floating rate borrowings.
Credit risk
As a retailer, the majority of the Group’s revenue is received in cash at the point of sale and therefore credit risk is not considered significant to the
Group. Some credit risk does arise from cash and cash equivalents, deposits with banking groups and exposures from other sources of income such
as commercial income, third party wholesale customers and tenants of investment properties.
The Group has established appropriate credit verification procedures in respect of financial institutions. Limits on the total exposure to any
counterparty or Group of connected counterparties are established within Treasury Policy, taking into account credit ratings. Compliance with limits
is regularly monitored.
There are no significant concentrations of credit risk within the Group.
Commodity price risk
The Group manages the risks associated with the purchase of electricity, gas and diesel consumed by its activities (excluding fuel purchased
for resale to customers) by entering into hedging contracts to fix prices for expected consumption.
The Group has adopted a capital at risk model for hedging its fuel and power consumption. The Treasury Committee reviews the Group’s exposure
to commodity prices and ensures it remains within policy limits.
A change of +/-10% in the market value of the commodity price at the balance sheet date would affect other comprehensive income
by £13m (2017: £18m).
7.3 Derivative financial assets and liabilities
Derivative financial assets
Current
Foreign exchange forward contracts
Fuel and energy price contracts
Non-current
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
2018
£m
1
14
15
12
4
16
2017
£m
11
11
22
6
10
16
All derivatives are categorised as level 2 instruments. Level 2 fair values for simple, over-the-counter derivatives are calculated by using benchmarked,
observable market interest rates to discount future cash flows.
Derivative financial liabilities
Current
Foreign exchange forward contracts
Fuel and energy price contracts
Non-current
Fuel and energy price contracts
96
2018
£m
13
–
13
1
1
2017
£m
2
1
3
5
5
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
7 Financial risk and hedging continued
7.3 Derivative financial assets and liabilities continued
The amounts disclosed in the table below are the contractual undiscounted derivative cash flows and therefore differ to those in the balance sheet.
Maturity analysis of derivatives
Derivatives settled on a gross basis
Cross-currency swaps – cash flow hedges
– Outflow
– Inflow
Forward contracts – cash flow hedges
– Outflow
– Inflow
Derivatives settled on a net basis
Energy price contracts – cash flow hedges
– Inflow
< 1 year
£m
(7)
6
(350)
339
14
2018
£m
1-5 years
£m
(254)
250
–
–
3
< 1 year
£m
(10)
8
(246)
251
8
2017
£m
1-5 years
£m
(381)
376
–
–
7
Cash flow hedges
At 4 February 2018 and at 29 January 2017, the Group held cross-currency swaps designated as cash flow hedges. The notional principal amount
of the outstanding cross-currency swaps at 4 February 2018 was €282m (2017: €413m).
The fuel and energy price contracts and foreign currency derivatives shown in note 7.3 are designated as cash flow hedges.
97
Strategic reportGovernanceFinancial StatementsInvestor information
8 Pensions
8.1 Accounting policies
A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity and provides no
guarantee as to the quantum of retirement benefits that those contributions will ultimately purchase. A defined benefit scheme is one that
is not a defined contribution scheme.
8.1.1 Defined benefit schemes
Pension scheme assets are valued at fair market value as required by IAS 19. Pension scheme obligations are an estimate of the amount required
to pay the benefits that employees have earned in exchange for current and past service, assessed and discounted to present value using the
assumptions shown in note 8.4.1. The net pension liability or asset recognised in the Consolidated balance sheet is the net of the schemes’ assets
and obligations, which are calculated separately for each scheme.
Current service cost is treated as an operating cost in the Consolidated statement of comprehensive income and Consolidated cash flow statement
and is part of underlying earnings. Net interest income/expense is calculated by applying the discount rate on liabilities to the net pension liability
or asset (adjusted for cash flows over the accounting period) and is recognised in finance costs or income and excluded from underlying earnings.
Expenses incurred in respect of the management of scheme assets are included in other comprehensive income as a reduction in the return on
scheme assets. Other scheme expenses are recognised in profit or loss as an operating expense.
Remeasurements comprise of actuarial gains and losses on the obligations and the return on scheme assets (excluding interest). They are recognised
immediately in other comprehensive income. Amounts shown within note 8 are before any adjustments for deferred taxation.
8.1.2 Defined contribution schemes
The cost of defined contribution schemes is recognised in the income statement as incurred. The Group has no further payment obligations once
the contributions have been paid.
8.2 Defined benefit schemes: summary and description
The Group operates a number of defined benefit retirement schemes (together ‘the Schemes’) providing benefits based on a benefit formula that
depends on factors including the employee’s age and number of years of service. The Morrison and Safeway Schemes provide pension benefits
based on either the employee’s compensation package and/or career average revalued earnings (CARE) (the ‘CARE Schemes’). The CARE Schemes are
not open to new members and were closed to future accrual in July 2015. The Retirement Saver Plan (‘RSP’) is a cash balance scheme, which provides
a lump sum benefit based upon a defined proportion of an employee’s annual earnings in each year, which is revalued each year in line with inflation
subject to a cap.
The position of each scheme at 4 February 2018 is as follows:
CARE Schemes
RSP
Net pension asset
The disclosures below show the details of the schemes combined:
Balance sheet:
Fair value of scheme assets
Present value of obligations
Net pension asset/(liability)
Consolidated statement of comprehensive income
Current service cost – recognised in cost of sales
Current service cost – recognised in administrative expenses
Administrative costs paid by the Schemes – recognised in administrative expenses
Settlement and curtailment gain
Net interest on net pension asset – finance income
Total expense (credited)/charged to income statement
Statement of other comprehensive income:
Remeasurements in other comprehensive income (credit)/charge
2018
CARE
£m
4,542
(3,930)
612
2018
CARE
£m
–
–
3
(10)
(9)
(16)
(295)
2018
RSP
£m
315
(333)
(18)
2018
RSP
£m
60
31
1
–
–
92
(28)
2018
£m
612
(18)
594
2017
CARE
£m
4,455
(4,162)
293
2017
CARE
£m
–
–
3
(1)
(6)
(4)
(101)
2017
£m
293
(21)
272
2017
RSP
£m
219
(240)
(21)
2017
RSP
£m
42
29
1
–
(2)
70
15
98
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
8 Pensions continued
8.2 Defined benefit schemes: summary and description continued
The Schemes are registered schemes under the provisions of Schedule 36 of the Finance Act 2004 and the assets are held in legally separate,
trustee-administered funds. The Board of each scheme is required by law to act in the best interests of the scheme participants within the context
of administering the scheme in accordance with the purpose for which the trust was created, and is responsible for setting the investment, funding
and governance policies of the fund. A representative of the Group attends Trustee Investment Committee meetings in order to provide the
Group’s view on investment strategy, but the ultimate power lies with the Trustees. The Deed and Rules of the Morrison Scheme gives the Trustees
the power to set contributions, while in the Safeway Scheme and the RSP this power is given to the Group, subject to regulatory override.
Settlement and curtailment gains in the 53 weeks ended 4 February 2018 include £8m relating to the settlement of retirement benefits resulting
from actions taken to further de-risk the Group’s pension schemes.
8.3 Scheme assets
Assets of the Schemes generate returns and ultimately cash that is used to satisfy the Schemes’ obligations. They are not necessarily intended
to be realised in the short term. The Trustees of each Scheme invest in different categories of asset and with different allocations amongst those
categories, according to the investment principles of that Scheme.
Currently, the investment strategy of the CARE Schemes is to maintain a balance of growth assets (equities and diversified growth funds), income
assets (comprising credit investments, corporate bonds and absolute return bonds) and protection assets (comprising a liability driven investment
(LDI) portfolio and the Safeway Scheme buy-in policy), with a weighting towards protection assets. There are no direct investments in the parent
Company’s own shares or property occupied by any member of the Group.
Fair value of Scheme assets:
Equities (quoted)
Corporate bonds (quoted)
Absolute return bonds (quoted)
Diversified growth funds (quoted)
Credit funds (unquoted)
Liability driven investments (unquoted)
Annuity policies (unquoted)
Cash (quoted)
Total
2018
CARE
£m
562
375
–
573
468
2,189
336
39
4,542
2018
RSP
£m
130
–
–
82
–
102
–
1
315
2017
CARE
£m
770
382
382
489
417
1,998
–
17
4,455
2017
RSP
£m
107
–
–
50
–
61
–
1
219
Liability driven investments (LDI)
Part of the investment objective of the Schemes is to minimise fluctuations in the Schemes’ funding levels due to changes in the value of the
liabilities. This is primarily achieved through the use of ‘liability driven investments’ (LDI), whose main goal is to align movements in the value of assets
with movements in the Schemes’ liabilities arising from changes in market conditions. The Schemes have hedging that broadly covers interest rate
movements and inflation movements, as measured on the Trustees’ funding assumptions which use a discount rate derived from gilt yields.
LDI primarily involves the use of government bonds (including re-purchase agreements). Derivatives such as interest rate and inflation swaps are
also used. There are no annuities or longevity swaps.
The value of the LDI assets is determined based on the latest market bid price for the underlying investments, which are traded daily on
liquid markets.
Annuity policies
During the 53 weeks ended 4 February 2018, the Safeway Scheme entered into a buy-in policy that provides insurance for a proportion of the
pensioner population. The policy pays an income to the scheme that is exactly equal to the benefits paid to the insured population. This has
removed all investment, interest rate, inflation and longevity risks in respect of these members.
The value of the annuity is determined using the disclosed assumptions used for valuing the benefits of the Schemes and is equal to the accounting
liabilities of the insured pensioner population.
Diversified growth funds
The Schemes employ diversified growth funds in order to reduce their exposure to equity markets. These funds typically invest in a range
of public and private market assets, including equities, bonds, commodities, property and other assets.
99
Strategic reportGovernanceFinancial StatementsInvestor information 8 Pensions continued
8.3 Scheme assets continued
Credit funds
The Schemes invest in credit funds in order to improve returns available from their bond assets. These funds typically lend directly to corporations
on a senior secured basis, rather than purchasing debt issued in the public markets.
The credit funds invest in a portfolio of different debt instruments and their value is equal to the value of the component assets. For high yield debt,
the value is based on the latest available market price. For senior debt and private credit, where no such market price exists, the value is taken either
at par value or by determining a fair enterprise value using a variety of techniques. For real-estate related investments, the value is derived from
market comparables or third party valuations.
Absolute return bonds
The Schemes employ absolute return bond managers to target a moderate investment return whilst aiming to preserve capital in most market
environments. These funds typically invest in a range of fixed income instruments and derivatives, across different countries and currencies, actively
managing their exposure according to their market views and opportunities available.
The movement in the fair value of the Schemes’ assets over the period was as follows:
Fair value of scheme assets at start of period
Interest income
Return on scheme assets excluding interest
Employer contributions
Employee contributions
Settlement and curtailment paid
Benefits paid
Administrative expenses
Fair value of scheme assets at end of period
2018
CARE
£m
4,455
125
159
8
–
(37)
(165)
(3)
4,542
2018
RSP
£m
219
7
25
67
3
–
(5)
(1)
315
2017
CARE
£m
3,812
138
612
10
–
–
(114)
(3)
4,455
2017
RSP
£m
138
7
20
56
3
–
(4)
(1)
219
Scottish Limited Partnership
The Group has previously entered into a pension funding partnership structure. In January 2013, Wm Morrison Supermarkets PLC made a
contribution to the CARE Schemes of £90m. On the same day, the CARE Schemes invested £90m in the Wm Morrison Property Partnership (‘SLP’)
as a limited partner. The SLP holds properties which have been leased back to the Group in return for rental income payments. The Group retains
control over these properties, including the flexibility to substitute alternative properties.
As partners in the SLP, the CARE Schemes are entitled to receive a fixed distribution of £6.6m p.a. from the profits of the SLP for 20 years from
2013, subject to certain conditions. The distributions shared with the Schemes are reflected in the Group financial statements as employer
pension contributions.
In July 2015, the SLP was amended to enhance the security provided to the Schemes by including additional properties. The terms of these
additional properties are such that the CARE Schemes have no entitlement to receive a distribution.
The CARE Schemes’ interests in the SLP reduce the respective deficits on a funding basis, although the agreements do not affect the position
directly on an IAS 19 accounting basis because the investments held by the CARE Schemes do not qualify as scheme assets for IAS 19 purposes.
100
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 8 Pensions continued
8.4 Present value of obligations
The movement in the defined benefit obligation over the period was as follows:
Defined benefit obligation at start of period
Current service cost
Interest expense
Actuarial gain – demographic assumptions
Actuarial gain/(loss) – financial assumptions
Actuarial (loss)/gain – experience
Settlement and curtailment gain
Employee contributions
Benefits paid
Defined benefit obligation at end of period
2018
CARE
£m
(4,162)
–
(116)
–
136
–
47
–
165
(3,930)
2018
RSP
£m
(240)
(91)
(7)
–
4
(1)
–
(3)
5
(333)
2017
CARE
£m
(3,634)
–
(132)
94
(852)
247
1
–
114
(4,162)
2017
RSP
£m
(130)
(71)
(5)
–
(40)
5
–
(3)
4
(240)
The durations of the defined benefit obligations at the end of the 2018 reporting period are: RSP 20 years; Morrison CARE 26 years; Safeway CARE
24 years. The weighted average duration of all three Schemes is 24 years.
8.4.1 Significant actuarial assumptions
The following are the principal actuarial assumptions at the reporting date (expressed as weighted averages):
Financial assumptions
Discount rate applied to scheme liabilities (% p.a.)
Inflation assumption (RPI) (% p.a.)
Life expectancies
Longevity in years from age 65 for current pensioners
Male
Female
Longevity in years from age 65 for current members aged 45
Male
Female
2018
CARE
2.8%
3.3%
2018
CARE
22.4
23.9
24.6
26.3
2018
RSP
2.7%
3.3%
2018
RSP
n/a
n/a
n/a
n/a
2017
CARE
2.9%
3.5%
2017
CARE
22.3
23.8
24.5
26.2
2017
RSP
2.8%
3.5%
2017
RSP
n/a
n/a
n/a
n/a
During the year, the Group has updated the methodology for deriving the discount rate assumption used in valuing the pension scheme liabilities.
The Group believes that this revised approach better reflects expected yields on high quality corporate bonds over the duration of the Group’s
pension schemes, as required by IAS 19. The previous methodology estimated the discount rate with reference to both corporate bond and gilt
yields. The new method uses high quality corporate bond yields where available. At very long durations, where there are no high quality corporate
bonds, the yield curve is extrapolated based on available corporate bond yields of mid to long duration. This change reduced the value placed
on the IAS 19 pensions liabilities of the Group by £242m and improved the pre-tax balance sheet position by £234m.
Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. Following analysis
completed as part of the 2016 actuarial valuations, the 2017 year end mortality tables used have been updated to the S2PMA/S2PFA-Heavy
tables (males/females) based on year of birth with a scaling factor of 110%/100% applied to the mortality rates in the Morrison/Safeway Scheme
respectively, with CMI 2015 projections and a long-term rate of improvement of 1.5% p.a.
Related actuarial assumptions (expressed as weighted averages)
Rate of increases in salaries (% p.a.)
Rate of increase of pensions in payment: RPI inflation capped
at either 2.5% p.a. or 5% p.a. (% p.a.)
Pre-retirement revaluation for active members (% p.a.)
Rate of increase of pensions in deferment: CPI inflation capped
at either 2.5% p.a. or 5% p.a. (% p.a.)
CPI inflation (% p.a.)
2018
CARE
–
2.1%/3.1%
–
–/2.2%
2.2%
2018
RSP
2.2%
–
1.8%
2017
CARE
–
2.2%/3.3%
–
2017
RSP
2.4%
–
1.9%
2.2%/–
2.2%
–/2.4%
2.4%
2.4%/–
2.4%
101
Strategic reportGovernanceFinancial StatementsInvestor information
8 Pensions continued
8.4 Present value of obligations continued
8.4.2 Sensitivity analysis on significant actuarial assumptions
The following table summarises the impact on the defined benefit obligation at the end of the reporting period if each of the significant actuarial
assumptions listed above were changed, in isolation, assuming no other changes in market conditions at the accounting date. In practice any
movement in assumptions could be accompanied by a partially offsetting change in asset values, and the corresponding overall impact on the net
asset/(liability) is therefore likely to be lower than the amounts below in a number of scenarios. Extrapolation of the sensitivities shown may not
be appropriate.
Discount rate applied to Scheme obligations
Inflation assumption (RPI and associated assumptions)
Longevity
+/– 0.1% p.a.
+/– 0.1% p.a.
+/– one year
2018
CARE
£m
–/+95
+/–85
+170
2018
RSP
£m
–/+7
+/–3
–
2017
CARE
£m
–/+105
+/–95
+180
2017
RSP
£m
–/+5
+/–3
–
8.5 Funding
The Morrison Scheme is entirely funded by the parent Company and the Safeway Scheme is funded by Safeway Limited and its subsidiaries.
The parent Company and its subsidiaries participate in the RSP. There is no contractual agreement or stated policy for charging the net defined
benefit cost between the parent Company and its subsidiaries. The contribution of each participating subsidiary to the RSP is currently calculated
in proportion to the number of employees that are members of the RSP.
The latest full actuarial valuations were carried out as at 1 April 2016 for the Safeway Scheme and 5 April 2016 for the Morrison Scheme and the
RSP. The valuations indicated that, on the agreed funding basis, the Safeway, Morrison and RSP Schemes had surpluses of £100m, £1m and £10m
respectively. As a result of these funding positions there are currently no deficit contributions payable. As such there is no ‘minimum funding
requirement’ in force.
The results of the 2016 actuarial valuations for the CARE Schemes have been used and updated for IAS 19 ‘Employee benefits’ purposes for the
period to 4 February 2018 by a qualified independent actuary. For the RSP an actuarial valuation for the purposes of IAS 19, based on member data
as at 31 December 2017, has been completed and updated to 4 February 2018 by a qualified independent actuary. The Schemes expose the Group
to inflation risk, interest rate risk and market investment risk. In addition, the CARE Schemes expose the Group to longevity risk.
At 4 February 2018, schemes in surplus have been disclosed within the assets on the balance sheet. The Group has taken legal advice with regard to
the recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 ‘IAS 19 – The limit on a defined benefit
asset, minimum funding requirement and their interaction’. This advice concluded that recognition of a surplus is appropriate on the basis that the
Group has an unconditional right to a refund of a surplus. In respect of the RSP this is on the basis that paragraph 11(a) of IFRIC 14 applies, enabling
a refund of surplus during the life of the RSP. In respect of the Morrison Scheme, it is on the basis that paragraph 11(b) or 11(c) of IFRIC 14 applies
enabling a refund of surplus assuming the gradual settlement of the scheme liabilities over time until all members have left the scheme or the full
settlement of the Scheme’s liabilities in a single event (i.e. as a scheme wind up). In respect of the Safeway Scheme, a refund is available on the basis
that paragraph 11(b) of IFRIC 14 applies. Amendments to the current version of IFRIC 14 are currently being considered. The legal advice received by
the Group has considered the proposed new wording to paragraph 12(A) of IFRIC 14 concerning whether other parties have a unilateral power to
use a scheme’s surplus to settle in full the scheme’s liabilities and has concluded that the above accounting treatment should not be affected by
the current exposure draft of the revised wording to IFRIC 14.
The current best estimate of Group contributions to be paid to the defined benefit schemes for the accounting period commencing 5 February
2018 is £73m (2017: £79m). This estimate includes amounts payable from the SLP and salary sacrificed contributions from employees.
8.6 Defined contribution scheme
As previously announced, the Group opened a new defined contribution pension scheme called the Morrisons Personal Retirement Scheme (‘MPRS’)
for employees during the 53 weeks ended 4 February 2018. The MPRS has become the Auto Enrolment scheme for the Group and as such the Group
was liable for backdated contributions for eligible employees to 1 October 2012. This was paid in January 2018. The pension scheme set-up credit of
£13m recognised as an adjustment to underlying earnings (see note 1.4), relates to the cost of back dated contributions in respect of this new defined
contribution scheme. The credit represents the difference between the expected back dated contributions previously accrued for and the cost
based on actual participation rates.
As the MPRS is a defined contribution scheme, the Group is not subject to the same investment, interest rate, inflation or longevity risks as it is
for the defined benefit schemes. The benefits that employees receive are dependent on the contributions paid, investment returns and the form
of benefit chosen at retirement. During the 53 weeks ended 4 February 2018, the Group paid contributions of £4m to the MPRS, and expects to
contribute £23m for the following period.
102
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 9 Share-based payments
9.1 Accounting policy
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 share options is measured by use of the Black-Scholes 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 charge in the period
for share-based payments was £33m (2017: £20m).
9.2 Share save schemes
The Share save scheme began in 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 £350 each month for a period of three years. Options are offered
at a discount 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 subject only to service conditions. The schemes that
launched in May 2011 and subsequently are under the new scheme rules approved by the shareholders in June 2010.
The fair value of options granted, and the inputs used to determine it are as follows:
Grant date
Share price at grant date
Fair value of options granted
Exercise price
Dividend yield
Annual risk free interest rate
Expected volatility1
1 The volatility measured at the standard deviation of expected share price returns is based on statistical analysis on weekly share prices over the past 3.37 years prior to the date of grant.
16 May 2016
£1.91
£5.1m
£1.70
2.62%
0.87%
26.8%
19 May 2015
£1.81
£4.8m
£1.64
5.15%
1.06%
22.7%
17 May 2017
£2.44
£16.5m
£1.84
2.08%
0.30%
28.1%
20 May 2014
£2.10
£11.6m
£1.64
6.21%
1.00%
18.3%
The requirement that the employee has to save in order to purchase shares under the Share save plan is a non-vesting condition. This feature has
been incorporated into the fair value at grant date by applying a discount to the valuation obtained from the Black-Scholes option pricing model.
The discount is determined by estimating the probability that the employee will stop saving based on expected future trends in the share price
and employee behaviour.
Movement in outstanding options
Outstanding at start of period
Granted
Exercised
Forfeited
Outstanding at end of period
Exercisable at end of period
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
2018
Options
thousands
46,765
24,257
(20,279)
(6,067)
44,676
21
Weighted average
exercise price in
£ per share
1.72
1.70
1.69
1.89
1.66
2.25
Weighted average
exercise price in
£ per share
1.66
1.84
1.64
1.73
1.75
1.64
2018
Weighted average
share price at date
of exercise
£
2.40
Weighted average
option price at date
of exercise
£
1.64
Number of
shares
thousands
20,279
Weighted average
share price at date
of exercise
£
2.14
Weighted average
option price at date
of exercise
£
1.69
2018
£1.64 to £1.84
1.61 years
2017
Options
thousands
48,827
13,478
(381)
(15,159)
46,765
52
2017
Number of
shares
thousands
381
2017
£1.64 to £2.25
1.1 years
103
Strategic reportGovernanceFinancial StatementsInvestor information
9 Share-based payments continued
9.3 Long term incentive plans
In May 2007, a discretionary LTIP for the benefit of certain employees was introduced. The awards have no exercise price and accrue the value
of dividends over the vesting period with the exception of senior employees within the schemes granted in 2016.
LTIP grants issued between 2013 and 2016 had associated performance conditions for Executive Committee members, whilst other senior
employees eligible for LTIPs had to satisfy a service condition only. The LTIP schemes granted since 2016 have service and performance conditions
for all employees. The performance conditions associated with all awards are measured through adjusted free cash flow, sales and earnings per
share performance.
Awards normally vest three years after the original grant date, provided the relevant service and performance criteria have been met.
The fair value of awards granted and the inputs used to determined it are as follows:
Grant date
Option fair value at grant date
Fair value of share awards
24 Oct
2017
£2.34
£2.0m
22 March
2017
£2.37
£29.4m
25 Oct
2016
£2.28
£9.2m
13 May
2016
£1.90
£1.9m
06 Apr
2016
£2.00
£73.6m
01 Oct
2015
£1.74
£1.8m
23 Apr
2015
£1.97
£5.3m
16 Oct
2014
£1.57
£0.9m
20 Jun
2014
£1.91
£3.0m
22 Apr
2014
£2.02
£16.7m
Movement in outstanding share awards
Outstanding at start of period
Granted
Exercised
Forfeited
Outstanding at end of period
Exercisable at end of period
2018
Share awards
thousands
2017
Share awards
thousands
46,482
13,253
(4,415)
(7,353)
47,967
–
20,279
42,258
(2,459)
(13,596)
46,482
–
The weighted average remaining contractual life of the share awards is 1.45 years (2017: 1.96 years).
9.4 One-off share awards
As part of the package for certain senior management, restricted share awards may be granted. These are primarily designed to replace the value
of share scheme awards forfeited from the previous employer. Vesting of these awards is subject only to service conditions.
The fair value of awards granted and the inputs used to determined it are as follows:
Grant date
Share price at grant date
Assumed leavers
Fair value of share awards granted
Movement in outstanding share awards
Outstanding at start of period
Granted
Exercised
Forfeited
Outstanding at end of period
The weighted average remaining contractual life of the share awards is 0.39 years (2017: 1.09 years).
10 July 2015
£1.72
–
£0.1m
2018
Share awards
thousands
2017
Share awards
thousands
62
–
(16)
–
46
62
–
–
–
62
104
Notes to the Group financial statements continued53 weeks ended 4 February 2018Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
9 Share-based payments continued
9.5 Deferred share bonus plan
Certain members of senior management participate in the deferred share bonus plan under which 50% of any bonus payable is deferred in shares
for three years from the date the deferred share award is made. Dividend equivalents accrue over the vesting period, to be paid when the shares
vest. Vesting of these share awards is subject only to service conditions.
The fair value of awards granted and the inputs used to determine it:
Grant date
Share price at grant date
Assumed leavers
Exercise price
Fair value of share awards granted
Movement in outstanding share awards
Outstanding at start of period
Granted
Exercised
Lapsed
Outstanding at end of period
2017/18 scheme
£2.35
–
£nil
£2.9m
2016/17 scheme
£2.02
–
£nil
£2.0m
2018
Share awards
thousands
2017
Share awards
thousands
1,360
1,247
(116)
–
2,491
413
947
–
–
1,360
The weighted average remaining contractual life of the share awards is 1.52 years (2017: 1.76 years).
10 Other
10.1 Related party transactions
The Group’s related party transactions in the period include the remuneration of the senior managers (see note 1.7), and the Directors’ emoluments
and pension entitlements, share awards and share options as disclosed in the audited section of the Directors’ remuneration report, which forms
part of these financial statements.
During the year, the Group received a dividend of £8m (2017: £8m) from MHE JVCo. The Group has a 51.5% interest in MHE JVCo (see note 4.2).
10.2 Guarantees and contingent liabilities
Following the disposal of the land and building of its customer fulfilment centre (CFC) at Dordon to a third party (see note 3.3) the Group continues
to guarantee the lease in respect of this site. If the lessee were to default, their lease obligations could revert back to the Group under the terms
of the guarantee and become a liability of the Group. Should the lessee default, the additional future commitment is estimated at up to £32m.
The Group has an ongoing legal case brought by a number of current and former colleagues relating to employee data theft in the 52 weeks ended
1 February 2015. In December 2017, the High Court concluded that the Group was liable for the actions of the former employee who conducted the
data theft. The Group has since launched an appeal to this judgement and the High Court has confirmed that there will be no hearings on the level
of compensation until the appeal has been concluded. It is the Directors’ view that at this stage of the process the Group can not reliably assess
the outcome of the case nor reasonably estimate the quantum of any loss and as such no provision has been recognised in these consolidated
financial statements.
10.3 Post balance sheet events
Following IAS 10 ‘Events after the Balance Sheet Date’, the Group continues to disclose events that it considers material and non-disclosure of which
can influence the economic decisions of users of the financial statements.
On 19 February 2018, the Group acquired Chippindale Foods Limited, a leading supplier of free range eggs, for a consideration of £6m. The Directors
consider this event as a non-adjusting post balance sheet event.
105
Strategic reportGovernanceFinancial StatementsInvestor information
Wm Morrison Supermarkets PLC –
Company balance sheet
4 February 2018
Fixed assets
Intangible assets
Property, plant and equipment
Investment property
Investments
Investment in joint venture
Current assets
Stock
Debtors
Pension asset due after more than one year
Derivative financial assets due within one year
Derivative financial assets due after more than one year
Cash and cash equivalents
Creditors – amounts falling due within one year
Derivative financial liabilities due within one year
Net current assets
Total assets less current liabilities
Creditors – amounts falling due after more than one year
Derivative financial liabilities due after more than one year
Pension liabilities due after more than one year
Deferred tax liabilities
Provisions for liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves1
Total shareholders’ funds
1 Included within Retained earnings and other reserves is profit after tax of £186m (52 weeks ended 31 January 2016: £78m).
Note
11.6
11.7
11.8
11.9
11.10
11.16
11.13
11.13
11.11
11.13
11.12
11.13
11.16
11.14
11.15
11.17
11.17
11.18
11.18
11.18
2018
£m
411
2,197
10
–
67
2,685
422
5,901
230
15
16
229
6,813
(3,090)
(13)
3,710
6,395
(1,375)
(1)
(18)
(143)
(250)
4,608
236
159
39
1,604
2,570
4,608
2017
£m
428
2,134
10
3,439
64
6,075
388
3,077
120
22
16
235
3,858
(3,501)
(3)
354
6,429
(1,593)
(5)
(21)
(130)
(271)
4,409
234
128
39
2,578
1,430
4,409
The accounting policies on pages 108 to 110 and the notes on pages 111 to 121 form part of these financial statements.
The financial statements on pages 106 to 121 were approved by the Board of Directors and authorised for issue on 13 March 2018. They were signed
on its behalf by:
Trevor Strain
Chief Financial Officer
106
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
Wm Morrison Supermarkets PLC –
Company statement of changes in equity
53 weeks ended 4 February 2018
Current period
At 30 January 2017
Profit for the period
Other comprehensive (expense)/income:
Cash flow hedging movement
Items reclassified from hedging reserve in
relation to repayment of borrowings
Remeasurement of defined benefit
pension schemes
Tax in relation to components of other
comprehensive income
Total comprehensive (expense)/income for
the period
Purchase of trust shares
Employee share option schemes:
Share-based payments charge
Settlement of employee tax liability
for share awards
Share options exercised
Dividends
Realisation of merger reserve
Total transactions with owners
At 4 February 2018
Prior period
At 1 February 2016
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Items reclassified from hedging reserve in
relation to repayment of borrowings
Remeasurement of defined benefit
pension schemes
Tax in relation to components of other
comprehensive income
Total comprehensive income for the period
Purchase of trust shares
Employee share option schemes:
Share-based payments charge
Proceeds and settlements of employee
share awards
Dividends
Total transactions with owners
At 29 January 2017
Note
11.16
11.14
6.5
11.5
6.5
6.5
1.8
11.18
Note
11.16
11.14
6.5
11.5
6.5
1.8
Share
capital
£m
234
–
–
–
–
–
–
–
–
–
2
–
–
2
236
Share
capital
£m
234
–
–
–
–
–
–
–
–
–
–
–
234
Share
premium
£m
Capital
redemption
reserve
£m
128
–
–
–
–
–
–
–
–
–
31
–
–
31
159
39
–
–
–
–
–
–
–
–
–
–
–
–
–
39
Share
premium
£m
Capital
redemption
reserve
£m
127
–
–
–
–
–
–
–
–
1
–
1
128
39
–
–
–
–
–
–
–
–
–
–
–
39
Merger
reserve
£m
2,578
–
–
–
–
–
–
–
–
–
–
–
(974)
(974)
1,604
Merger
reserve
£m
2,578
–
–
–
–
–
–
–
–
–
–
–
2,578
The accounting policies on pages 108 to 110 and the notes on pages 111 to 121 form part of these financial statements.
Attributable to the owners of the Company
Hedging
reserve
£m
Retained
earnings
£m
Total
shareholders’
funds
£m
11
–
(11)
(2)
–
4
(9)
–
–
–
–
–
–
–
2
1,419
186
4,409
186
–
–
127
(31)
282
(4)
33
(7)
–
(129)
974
867
2,568
(11)
(2)
127
(27)
273
(4)
33
(7)
33
(129)
–
(74)
4,608
Attributable to the owners of the Company
Hedging
reserve
£m
Retained
earnings
£m
Total
shareholders’
funds
£m
(10)
–
22
6
–
(7)
21
–
–
–
–
–
11
1,403
78
4,371
78
–
–
42
–
120
(5)
20
(1)
(118)
(104)
1,419
22
6
42
(7)
141
(5)
20
–
(118)
(103)
4,409
107
Strategic reportGovernanceFinancial StatementsInvestor information
Wm Morrison Supermarkets PLC –
Company accounting policies
53 weeks ended 4 February 2018
11 Company financial statements
11.1 General information
The principal activity of Wm Morrison Supermarkets PLC (the ‘Company’) is the operation of retail supermarket stores under the Morrisons brand
and associated activities. The Company is incorporated and domiciled in the United Kingdom. The address of its registered office is Hilmore House,
Gain Lane, Bradford, BD3 7DL, United Kingdom.
11.2 Basis of preparation
The financial statements have been prepared for the 53 weeks ended 4 February 2018 (2017: 52 weeks ended 29 January 2017). These separate financial
statements of the Company have been prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101)
and the Companies Act 2006 (‘the Act’). FRS 101 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in the standard which
addresses the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise
apply the recognition, measurement and disclosure requirements of EU-adopted IFRS.
The Company is a qualifying entity for the purposes of FRS 101 as it is a member of a group which prepares publicly available consolidated financial
statements and it is included in the consolidation for that group.
The disclosure exemptions adopted by the Company in preparation of these financial statements in accordance with FRS 101 are as follows:
a) IFRS 2 ‘Share-based payment’ (paragraphs 45(b) and 46 to 52) – details of the number and weighted-average exercise prices of share options, and
how the fair value of goods or services received was determined;
b) IFRS 7 ‘Financial Instruments: Disclosures’;
c) IFRS 13 ‘Fair value measurement’ (paragraphs 91 to 99) – disclosure of valuation techniques and inputs used for fair value measurement of assets
and liabilities;
d) IAS 1 ‘Presentation of financial statements’ (paragraph 38) – comparative information requirements in respect of:
(i) paragraph 79(a)(iv) of IAS 1;
(ii) paragraph 73(e) of IAS 16 ‘Property, plant and equipment’;
(iii) paragraph 118(e) of IAS 38 ‘Intangible assets’ – reconciliations between the carrying amount at the beginning and end of the period; and
(iv) paragraph 76 and 79(d) of IAS 40 ‘Investment property’;
e) The following paragraphs of IAS 1 ‘Presentation of financial statements’:
(i) 10(d), (statement of cash flows);
(ii) 111 (cash flow statement information); and
(iii) 134-136 (capital management disclosures);
f) IAS 7 ‘Statement of cash flows’;
g) IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (paragraph 30 and 31) – requirement for the disclosure of information
when an entity has not applied a new IFRS that has been issued but is not yet effective;
h) The following requirements of IAS 24 ‘Related party disclosures’:
(i) paragraph 17 – key management compensation; and
(ii) the requirements to disclose related party transactions entered into with two or more wholly owned members of a group.
108
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.2 Basis of preparation continued
In addition to the FRS 101 exemptions above, the Company has taken advantage of the exemption available under section 408 of the Act and not
presented a profit and loss account for the Company.
The financial statements have been prepared on a going concern basis under the historical cost convention except as disclosed in the Summary
of accounting policies in note 11.3. The Company’s accounting policies have, unless otherwise stated, been applied consistently to all periods
presented in these financial statements.
The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are the same for the Company
as they are for the Group. For further details, see page 69 in the Group financial statements.
Accounting reference date
The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year.
11.3 Summary of accounting policies
The accounting policies listed below are the same for the Company as for the Group. As such, for further detail see the following notes:
a) Revenue recognition (1.1);
b) Cost of sales (1.1);
c) Promotional funding and commercial income (1.1);
d) Other operating income (1.1);
e) Taxation (2.1);
f) Intangible assets (3.1);
g) Property, plant and equipment (3.1);
h) Investment property (3.1);
i)
Impairment of non-financial assets (3.1);
j) Lessor accounting – operating leases (3.1);
k) Finance leases (3.1);
l) Stock (5.1);
m) Trade and other debtors (5.1);
n) Cash and cash equivalents (5.1);
o) Trade and other creditors (5.1);
p) Provisions (5.1);
q) Borrowings and borrowing costs (6.1);
r) Leases (6.1);
s) Sale and leaseback (6.1);
t) Share capital (6.1);
u) Derivative financial instruments and hedge accounting (7.1);
v) Pensions (8.1); and
w) Share-based payments (9.1).
109
Strategic reportGovernanceFinancial StatementsInvestor information Wm Morrison Supermarkets PLC –
Company accounting policies continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.3 Summary of accounting policies continued
The following accounting policies are those policies which are specific, and which deal with items considered material, in relation to the Company’s
financial statements.
Investments
Investments in subsidiary undertakings and joint ventures are stated at cost less provision for impairment.
All other equity instruments are held for long-term investment and are measured at fair value, where the fair value can be measured reliably. Gains or
losses arising from changes in the fair value are presented in the profit and loss account within finance income or expenses in the period they arise.
Where the fair value of the instruments cannot be measured reliably, for example, when there is variability in the range of estimates, the investments
are recognised at cost less accumulated impairment losses.
Impairment losses or reversals of previous impairment losses are presented in the profit and loss account in the period they arise.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future
events outside the Company’s control, or present obligations that are not recognised because it is not probable that an outflow of economic
benefits will be required to settle the obligation or the amount cannot be measured reliably. The Company does not recognise contingent liabilities
but does disclose any such balances (see note 11.21). The disclosure includes an estimate of their potential financial effect and any uncertainties
relating to the amount or timing of any outflow, unless the possibility of settlement is remote.
Financial guarantees
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.
110
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Notes to the Company financial statements
53 weeks ended 4 February 2018
11 Company financial statements continued
11.4 Operating profit
The employee benefit expense for the Company is £1,009m (2017: £977m). The average monthly number of people, including Directors, employed
by the Company is 52,284 (2017: 55,556).
The Company’s auditor, PricewaterhouseCoopers LLP charged £0.5m (2017: £0.5m) for audit services in the year, £nil (2017: £nil) for services related
to taxation and £0.2m (2017: £0.2m) for other services.
11.5 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 share options is measured by use of the Black-Scholes 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 charge in the period for share-based payments was £33m (2017: £20m).
Further details of the Company’s share schemes are disclosed in note 9, including:
a) a description of the type of share-based payment arrangements that existed during the reporting period, including general terms and conditions,
maximum terms of options granted, and the method of entitlement;
b) weighted average share price information in respect of options exercised during the reporting period; and
c) the range of exercise prices and weighted average remaining contractual life of share options outstanding at the end of the reporting period.
11.6 Intangible assets
Cost
At 30 January 2017
Additions
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Accumulated amortisation and impairment
At 30 January 2017
Amortisation charge for the period
Impairment
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Net book amount at 4 February 2018
Software
development
costs
£m
Licences
£m
639
60
7
(3)
(26)
677
227
77
1
2
(3)
(26)
278
399
29
7
(7)
–
(3)
26
13
6
–
(2)
–
(3)
14
12
Total
£m
668
67
–
(3)
(29)
703
240
83
1
–
(3)
(29)
292
411
Included within software development costs are assets under construction of £20m (2017: £3m).
The Company has performed its annual assessment of its amortisation policies and asset lives and deemed them to be appropriate. No changes
have been made to asset lives during the year.
As in previous years, fully amortised assets have been retained in the Company’s fixed asset register. In order to provide greater understanding
of the Company’s annual amortisation charge, assets which have become fully amortised in the year have been removed from both cost and
accumulated amortisation.
Following the annual impairment review, an impairment charge of £1m (2017: £nil) has been recognised in relation to intangible assets.
The cost of financing asset developments prior to them being ready for use has been included in the cost of the project. The cumulative amount
of interest capitalised in the total cost above amounts to £41m (2017: £41m). Interest is capitalised at the effective interest rate of 5% (2017: 5%)
incurred on borrowings.
111
Strategic reportGovernanceFinancial StatementsInvestor information
Notes to the Company financial statements continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.7 Property, plant and equipment
Cost
At 30 January 2017
Additions
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Accumulated depreciation and impairment
At 30 January 2017
Depreciation charge for the period
Impairment
Impairment reversal
Reclassifications
Disposals
Fully written down assets
At 4 February 2018
Net book amount at 4 February 2018
Freehold
land
£m
Freehold
buildings
£m
Leasehold
land and
buildings
£m
Plant,
equipment,
fixtures and vehicles
£m
839
1
1
(2)
–
839
172
–
10
(8)
–
–
–
174
665
1,468
11
3
(8)
–
1,474
670
34
9
(18)
3
(7)
–
691
783
640
–
(4)
–
–
636
361
8
16
(25)
(3)
–
–
357
279
802
183
–
(2)
(80)
903
412
103
10
(11)
–
(1)
(80)
433
470
Total
£m
3,749
195
–
(12)
(80)
3,852
1,615
145
45
(62)
–
(8)
(80)
1,655
2,197
The Company has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. No changes
have been made to asset lives during the year.
As in previous years, fully depreciated assets have been retained in the Company’s fixed asset register. In order to provide greater understanding
of the Company’s annual depreciation charge, assets which have become fully depreciated in the year have been removed from both cost and
accumulated depreciation.
Included in the table above is a cost of £839m (2017: £839m) relating to non-depreciable land and £15m (2017: £2m) of assets under construction.
The cost of assets held under finance leases at 4 February 2018 is £334m (2017: £354m), with related accumulated depreciation of £162m (2017: £158m).
The cost of financing asset developments prior to them being ready for use has been included in the cost of the project. The cumulative amount
of interest capitalised in the total cost above amounts to £73m (2017: £73m). Interest is capitalised at the effective interest rate of 5% (2017: 5%)
incurred on borrowings.
The Company considers that each store is a separate cash generating unit (‘CGU’) and therefore considers every store for an indication of
impairment annually. The Company calculates each store’s recoverable amount and compares this amount to its book value. The recoverable
amount is determined as the higher of ‘value in use’ and ‘fair value less costs of disposal’. If the recoverable amount is less than the book value,
an impairment charge is recognised. The methodology applied by the Company is the same methodology as applied by the Group, see note 3.3
for further details.
Having applied the methodology and assumptions, the Company has recognised a net impairment reversal of £17m (£62m impairment reversal of
set by £45m impairment charge) during the year in respect of property, plant and equipment (2017: net impairment charge of £29m; £88m impairment
charge offset by £59m impairment reversal). This movement reflects fluctuations from store level trading performance and local market conditions.
At 4 February 2018, the key assumption to which the value in use calculation is most sensitive to is the discount rate. Specific sensitivity analysis
with regard to this assumption shows that an increase of 1% in the discount rate would result in an additional impairment charge of £23m.
112
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.8 Investment property
Cost
At 4 February 2018 and 29 January 2017
Accumulated depreciation and impairment
At 4 February 2018 and 29 January 2017
Net book amount at 4 February 2018 and 29 January 2017
Total
£m
20
10
10
Included in other operating income is £3m (2017: £3m) of rental income generated from investment properties. At the end of the period the fair
value of investment properties was £17m (2017: £18m). Investment properties are valued by independent surveyors on a vacant possession basis
using observable inputs (fair value hierarchy level 2).
11.9 Investments
Cost
At 30 January 2017
Disposals
At 4 February 2018
Provision for impairment
At 30 January 2017
Disposals
At 4 February 2018
Net book amount at 4 February 2018
Net book amount at 29 January 2017
Total
£m
3,440
(3,440)
–
1
(1)
–
–
3,439
The disposals above relate to an internal restructuring exercise undertaken by the Group during the 53 weeks ended 4 February 2018. As part of this
exercise, the Company sold certain investments it held in its subsidiaries to Wm Morrison Supermarkets Holdings Limited, a fellow group subsidiary,
for consideration of £3,439m.
The Directors believe that the carrying value of these investments is supported by their underlying net assets. As at 4 February 2018, the Company
continues to hold investments in related undertakings which in aggregate are less than £1m. A list of all of the Company’s other related undertakings
at the balance sheet date is shown on pages 122 to 123.
11.10 Debtors – amounts falling due within one year
Trade debtors
Amounts owed by Group undertakings
Current tax asset
Prepayments and accrued income
2018
£m
136
5,387
110
268
5,901
2017
£m
119
2,640
82
236
3,077
Prepayments includes £176m (2017: £165m) relating to amounts falling due after more than one year. Amounts owed by Group undertakings are
unsecured and repayable on demand.
113
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Notes to the Company financial statements continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.11 Creditors – amounts falling due within one year
Trade creditors
Amounts owed to Group undertakings
Other taxation and social security
Other creditors
Accruals and deferred income
Amounts owed to Group undertakings within one year are unsecured and repayable on demand.
11.12 Creditors – amounts falling due after more than one year
£365m sterling bonds 4.625% December 2023 (2017: £365m)
£318m sterling bonds 3.50% July 2026 (2017: £384m)
£300m sterling bonds 4.75% July 2029 (2017: £300m)
€280m euro bond 2.25% June 2020 (2017: €411m)
Amounts owed to Group undertakings
2018
£m
2,088
420
75
115
392
3,090
2018
£m
363
342
293
247
130
1,375
2017
£m
1,991
941
56
79
434
3,501
2017
£m
363
411
292
348
179
1,593
The movements in the nominal value of the bonds are due to partial early repayment during the 53 weeks ended 4 February 2018. During the year,
the Company continued to reduce its level of debt, through the partial early settlement of the 2026 sterling bonds, and the 2020 euro bond.
Borrowings are denominated in sterling and euros, and bear fixed interest rates. All borrowings are unsecured.
The Group has a syndicated committed revolving credit facility of £1.35bn with a maturity date of September 2021. The revolving credit facility
incurs commitment fees and drawdowns bear interest at floating interest rates at a spread above LIBOR. There were no borrowings under
the revolving credit facility at the balance sheet date. Therefore the Group had £1.35bn of undrawn committed borrowing facilities available
(2017: £1.35bn). In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand.
Amounts owed to Group undertakings are unsecured and are non-interest-bearing.
Finance leases
Net obligations under finance leases of £130m (2017: £179m) are payable in two to five years, and are included in amounts owed to Group
undertakings in the table above.
114
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.13 Derivative financial assets and liabilities
Assets due within one year
Foreign exchange forward contracts
Fuel and energy price contracts
Assets due after more than one year
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
Liabilities due within one year
Foreign exchange forward contracts
Fuel and energy price contracts
Liabilities due after more than one year
Fuel and energy price contracts
Further details of the derivative financial instruments are provided in note 7, including:
a) significant assumptions underlying the valuation; and
b) fair value and the amounts recognised in profit and loss.
11.14 Deferred tax liabilities
Deferred tax liability
Deferred tax asset
Net deferred tax liability
2018
£m
1
14
15
12
4
16
13
–
13
1
1
2018
£m
160
(17)
143
2017
£m
11
11
22
6
10
16
2
1
3
5
5
2017
£m
148
(18)
130
IAS 12 ‘Income taxes’ permits the offsetting of balances within the same tax jurisdiction. All of the deferred tax assets are available for offset against
deferred tax liabilities. The movements in deferred tax liabilities/(assets) during the period are shown below:
Current period
At 30 January 2017
(Credited) to profit for the period
Charged to other comprehensive income and equity
At 4 February 2018
Prior period
At 1 February 2016
(Credited)/charged to profit for the period
Charged/(credited) to other comprehensive income and equity
At 29 January 2017
Property, plant and
equipment
£m
Pensions
£m
Other
short-term
temporary
differences
£m
131
(7)
–
124
137
(6)
–
131
17
(5)
24
36
12
(4)
9
17
(18)
(2)
3
(17)
(17)
1
(2)
(18)
Total
£m
130
(14)
27
143
132
(9)
7
130
115
Strategic reportGovernanceFinancial StatementsInvestor information
Notes to the Company financial statements continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.15 Provision for liabilities
At 30 January 2017
Charged to profit for the period
Utilised/released during the period
Unwinding of discount
At 4 February 2018
Onerous leases and
onerous contracts
£m
264
22
(54)
11
243
Other property
provisions
£m
7
–
–
–
7
Total
£m
271
22
(54)
11
250
Part of the onerous leases relate to sublet and vacant properties, with commitments ranging from one to 55 years. The provision is revised regularly
in response to market conditions. During the year, £22m has been charged to onerous lease and onerous contracts provisions due to changes in
circumstances or performance relating to certain contracts which has been offset by a £23m release in relation to others, as detailed in note 1.4.
The utilisation of provisions relates to the ongoing utilisation of onerous contracts and the assignment of onerous leases. Other property provisions
include a petrol filling station decommissioning reserve for the cost of decommissioning petrol tanks, and provisions for dilapidations on leased
buildings, for the cost of restoring assets to their original condition.
11.16 Pensions
11.16.1 Defined benefit schemes: summary and description
The Company operates two defined benefit retirement schemes (together ‘the Schemes’) providing benefits based on a benefit formula that
depends on factors including the employee’s age and number of years of service. The Morrison Scheme provides pension benefits based on either
the employee’s compensation package or career average revalued earnings (CARE) (the ‘CARE Scheme’). The CARE Scheme is no longer open to new
members and was closed to future accrual in July 2015. The RSP is a cash balance scheme, which provides a lump sum benefit based upon a defined
proportion of an employee’s annual earnings, which is revalued each year in line with inflation subject to a cap.
The position of each scheme at the balance sheet date is as follows:
CARE Scheme
RSP
Net pension asset
Balance sheet:
Fair value of scheme assets
Present value of obligations
Net pension asset/(liability)
Statement of comprehensive income
Current service cost – recognised in cost of sales
Current service cost – recognised in administrative expenses
Administrative costs paid by Schemes – recognised in administrative expenses
Settlement and curtailment gain
Net interest on net pension asset – finance income
Total expense charged to income statement
Statement of other comprehensive income:
Remeasurements in other comprehensive income (credit)/charge
2018
£m
230
(18)
212
2017
CARE
£m
1,222
(1,102)
120
2017
CARE
£m
–
–
2
–
(2)
–
(57)
2017
£m
120
(21)
99
2017
RSP
£m
219
(240)
(21)
2017
RSP
£m
42
29
1
–
(2)
70
15
2018
CARE
£m
1,249
(1,019)
230
2018
CARE
£m
–
–
1
(9)
(3)
(11)
(99)
2018
RSP
£m
315
(333)
(18)
2018
RSP
£m
60
31
1
–
–
92
(28)
116
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.16 Pensions continued
11.16.1 Defined benefit schemes: summary and description continued
The Schemes are registered schemes under the provisions of Schedule 36 of the Finance Act 2004 and the assets are held in legally separate,
trustee-administered funds. The Board of each Scheme is required by law to act in the best interests of the Scheme participants within the context
of administering the Scheme in accordance with the purpose for which the trust was created, and is responsible for setting the investment, funding
and governance policies of the fund. A representative of the Group attends Trustee Investment Committee meetings in order to provide the
Group’s view on investment strategy, but the ultimate power lies with the Trustees. The Deed and Rules of the Morrison Scheme gives the Trustees
the power to set contributions, while in the RSP this power is given to the Group, subject to regulatory override.
Settlement and curtailment gains in the 53 weeks ended 4 February 2018 include £8m relating to the settlement of retirement benefits resulting
from actions taken to further de-risk the Company’s pension schemes.
11.16.2 Scheme assets
Assets of the Schemes generate returns and ultimately cash that is used to satisfy the Schemes’ obligations. They are not necessarily intended
to be realised in the short term. The Trustees of each Scheme invest in different categories of asset and with different allocations amongst those
categories, according to the investment principles of that Scheme.
Currently, the investment strategy of the CARE Scheme is to maintain a balance of growth assets (equities and diversified growth funds), income
assets (comprising credit investments, corporate bonds and absolute return bonds) and protection assets (comprising a liability driven instruments
(LDI) portfolio), with a weighting towards protection assets. There are no direct investments in the Group’s own shares or property occupied
by any member of the Group.
Fair value of Scheme assets:
Equities (quoted)
Corporate bonds (quoted)
Absolute return bonds (quoted)
Diversified growth funds (quoted)
Credit funds (unquoted)
Liability driven investments (unquoted)
Scottish Limited Partnership (unquoted)
Cash (quoted)
Total
2018
CARE
£m
206
106
–
196
153
555
27
6
1,249
2018
RSP
£m
130
–
–
82
–
102
–
1
315
2017
CARE
£m
208
106
101
129
133
508
28
9
1,222
For definitions of the liability driven instruments, diversified growth funds, credit funds and absolute return bonds, see note 8.3.
The movement in the fair value of the Schemes’ assets over the period was as follows:
Fair value of scheme assets at start of period
Interest income
Return on scheme assets excluding interest
Employer contributions
Employee contributions
Settlement and curtailment paid
Benefits paid
Administrative expenses
Fair value of scheme assets at end of period
2018
CARE
£m
1,222
34
57
–
–
(37)
(26)
(1)
1,249
2018
RSP
£m
219
7
25
67
3
–
(5)
(1)
315
2017
CARE
£m
1,047
38
171
2
–
–
(34)
(2)
1,222
2017
RSP
£m
107
–
–
50
–
61
–
1
219
2017
RSP
£m
138
7
20
56
3
–
(4)
(1)
219
117
Strategic reportGovernanceFinancial StatementsInvestor information Notes to the Company financial statements continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.16 Pensions continued
11.16.2 Scheme assets continued
Scottish Limited Partnership
The Company has previously entered into a pension funding partnership structure. In January 2013, the Company made a contribution to the CARE
Scheme of £30m. On the same day, the CARE Scheme invested £30m in the Wm Morrison Property Partnership (‘SLP’) as a limited partner. The SLP
holds properties which have been leased back to the Company in return for rental income payments. The Group retains control over
these properties, including the flexibility to substitute alternative properties.
As a partner in the SLP, the CARE Scheme is entitled to receive a fixed distribution of £2.2m p.a. from the profits of the SLP for 20 years from 2013,
subject to certain conditions. In July 2015, the SLP was amended to enhance the security provided to the Schemes by including additional properties.
The terms of these additional properties are such that the CARE Scheme has no entitlement to receive a distribution.
The CARE Scheme’s interests in the SLP increases the net pension asset on an IAS 19 accounting basis because the investments held by the
CARE Scheme qualify as an asset for Company IAS 19 purposes.
11.16.3 Present value of obligations
The movement in the defined benefit obligation over the period was as follows:
Defined benefit obligation at start of period
Current service cost
Interest expense
Actuarial gain – demographic assumptions
Actuarial gain/(loss) – financial assumptions
Actuarial (loss)/gain – experience
Settlement and curtailment gain
Employee contributions
Benefits paid
Defined benefit obligation at end of period
2018
CARE
£m
(1,102)
–
(31)
–
42
–
46
–
26
(1,019)
2018
RSP
£m
(240)
(91)
(7)
–
4
(1)
–
(3)
5
(333)
2017
CARE
£m
(986)
–
(36)
36
(232)
82
–
–
34
(1,102)
2017
RSP
£m
(130)
(71)
(5)
–
(40)
5
–
(3)
4
(240)
The durations of the defined benefit obligations at the end of the 2018 reporting period are: RSP 20 years; CARE 26 years. The weighted average
duration of the Schemes is 25 years.
11.16.4 Significant actuarial assumptions
The following are the principal actuarial assumptions at the reporting date (expressed as weighted averages):
Financial assumptions
Discount rate applied to scheme liabilities (% p.a.)
Inflation assumption (RPI) (% p.a.)
Life expectancies
Longevity in years from age 65 for current pensioners
Male
Female
Longevity in years from age 65 for current members aged 45
Male
Female
2018
CARE
2.8%
3.3%
2018
CARE
£m
21.8
23.3
24.0
25.7
2018
RSP
2.7%
3.3%
2018
RSP
£m
n/a
n/a
n/a
n/a
2017
CARE
2.9%
3.5%
2017
CARE
£m
21.7
23.2
23.9
25.6
2017
RSP
2.8%
3.5%
2017
RSP
£m
n/a
n/a
n/a
n/a
During the year, the Company has updated the methodology for deriving the discount rate assumption used in valuing the pension scheme
liabilities. The Company believes that this revised approach better reflects expected yields on high quality corporate bonds over the duration of the
Company’s pension schemes, as required by IAS 19. The previous methodology estimated the discount rate with reference to both corporate bond
and gilt yields. The new method uses high quality corporate bond yields where available. At very long durations, where there are no high quality
corporate bonds, the yield curve is extrapolated based on available corporate bond yields of mid to long duration. This change reduced the value
placed on the IAS 19 pensions liabilities of the Company by £81m and improved the pre-tax balance sheet position by £81m.
118
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.16 Pensions continued
11.16.4 Significant actuarial assumptions continued
Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. Following analysis
completed as part of the 2016 actuarial valuation, the 2017 year end mortality tables used have been updated to the S2PMA/S2PFA-Heavy tables
(males/females) based on year of birth with a scaling factor of 110% applied to the mortality rates in the CARE Scheme, with CMI 2015 projections and
a long-term rate of improvement of 1.5% p.a.
Related actuarial assumptions (expressed as weighted averages)
Rate of increases in salaries (% p.a.)
Rate of increase of pensions in payment: RPI inflation capped
at either 2.5% p.a. or 5% p.a. (% p.a.)
Pre-retirement revaluation for active members (% p.a.)
Rate of increase of pensions in deferment: CPI inflation capped
at either 2.5% p.a. or 5% p.a. (% p.a.)
CPI inflation (% p.a.)
2018
CARE
–
2.1%/3.1%
–
-/2.2%
2.2%
2018
RSP
2.2%
–
1.8%
2.2%/-
2.2%
2017
CARE
–
2.2%/3.3%
–
–/2.4%
2.4%
2017
RSP
2.4%
–
1.9%
2.4%/–
2.4%
Sensitivity analysis on significant actuarial assumptions
The following table summarises the impact on the defined benefit obligation at the end of the reporting period if each of the significant actuarial
assumptions listed above were changed, in isolation, assuming no other changes in market conditions at the accounting date. In practice any
movement in assumptions could be accompanied by a partially offsetting change in asset values, and the corresponding overall impact on the net
asset/(liability) is therefore likely to be lower than the amounts below in a number of scenarios. Extrapolation of the sensitivities shown may not
be appropriate.
Discount rate applied to Scheme obligations
Inflation assumption (RPI and associated assumptions)
Longevity
+/-0.1% p.a.
+/-0.1% p.a.
+one year
2018
CARE
-/+25
+/-25
+50
2018
RSP
-/+7
+/-3
n/a
2017
CARE
-/+30
+/-25
+50
2017
RSP
-/+5
+/-3
n/a
11.16.5 Funding
The CARE Scheme is entirely funded by the Company. The Company along with other subsidiaries of the Group participate in the RSP. There is no
contractual agreement or stated policy for charging the net defined benefit cost between the Company and its subsidiaries. The contribution of
each participating subsidiary to the RSP is currently calculated in proportion to the number of employees that are members of the RSP.
The latest full actuarial valuations were carried out as at 5 April 2016 for the Morrison Scheme and the RSP. The valuations indicated that, on the
agreed funding basis, the Morrison and RSP Schemes had surpluses of £1m and £10m respectively. As a result of these funding positions there are
currently no deficit contributions payable. As such there is no ‘minimum funding requirement’ in force.
The results of the 2016 actuarial valuations for the CARE Scheme has been used and updated for IAS 19 ‘Employee benefits’ purposes for the period
to 4 February 2018 by a qualified independent actuary. For the RSP an actuarial valuation for the purposes of IAS 19, based on member data as at
31 December 2017, has been completed and updated to 4 February 2018 by a qualified independent actuary. The Schemes expose the Company to
inflation risk, interest rate risk and market investment risk. In addition, the CARE Scheme exposes the Company to longevity risk.
At 4 February 2018, schemes in surplus have been disclosed within the assets on the balance sheet. The Company has taken legal advice with regard
to the recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 ‘IAS 19 – The limit on a defined
benefit asset, minimum funding requirement and their interaction’. This advice concluded that recognition of a surplus is appropriate on the basis
that the Company has an unconditional right to a refund of a surplus. In respect of the RSP, this is on the basis that paragraph 11(a) of IFRIC 14 applies
enabling a refund of surplus during the life of the RSP. In respect of the Morrison Scheme, it is on the basis that paragraph 11(b) or 11(c) of IFRIC 14
applies enabling a refund of surplus assuming the gradual settlement of the scheme liabilities over time until all members have left the scheme or the
full settlement of the Scheme’s liabilities in a single event (i.e. as a scheme wind up).
Amendments to the current version of IFRIC 14 are currently being considered. The legal advice received by the Company has considered the
proposed new wording to paragraph 12(A) of IFRIC 14 concerning whether other parties have a unilateral power to use a scheme’s surplus to settle in
full the scheme’s liabilities and has concluded that the above accounting treatment should not be affected by the current exposure draft, including
the planned revised wording, to IFRIC 14.
The current best estimate of Company contributions to be paid to the defined benefit schemes for the accounting period commencing 4 February
2018 is £67m (2017: £68m). This estimate includes amounts payable from the SLP and salary sacrificed contributions from employees.
119
Strategic reportGovernanceFinancial StatementsInvestor information Notes to the Company financial statements continued
53 weeks ended 4 February 2018
11 Company financial statements continued
11.16 Pensions continued
11.16.6 Defined contribution scheme
As previously announced, the Company opened a new defined contribution pension scheme called the Morrisons Personal Retirement Scheme
(‘MPRS’) for employees during the 53 weeks ended 4 February 2018. The MPRS has become the Auto Enrolment scheme for the Company and
as such the Company was liable for backdated contributions for eligible employees to 1 October 2012. This was paid in January 2018.
As the MPRS is a defined contribution scheme, the Company is not subject to the same investment, interest rate, inflation or longevity risks as it
is for the defined benefit schemes. The benefits that employees receive are dependent on the contributions paid, investment returns and the
form of benefit chosen at retirement. During the 53 weeks ended 4 February 2018, the Company paid contributions of £3m to the MPRS, and
expects to contribute £15m for the following period.
11.17 Share capital
At 30 January 2017
Share options exercised
At 4 February 2018
Number of
shares
millions
2,335.6
20.3
2,355.9
Share capital
£m
234
2
236
Share premium
£m
128
31
159
Total
£m
362
33
395
The total authorised number of ordinary shares is 4,000 million shares (2017: 4,000 million shares) with a par value of 10p per share (2017: 10p per
share). All issued shares are fully paid.
For further details on share capital and share premium, see note 6.5.
11.18 Reserves
Capital redemption reserve
Merger reserve
Hedging reserve
Retained earnings
Total
2018
£m
39
1,604
2
2,568
4,213
2017
£m
39
2,578
11
1,419
4,047
Capital redemption reserve
The capital redemption reserve at the start of the period related to 389,631,561 of the Company’s own shares which it purchased on the open market
for cancellation between 31 March 2008 and 8 March 2013 at a total cost of £1,081m.
Merger reserve
The merger reserve represents the reserve arising on the acquisition in 2004 of Safeway Limited. This merger reserve was initially considered
unrealised on the basis it was represented by investments held by the Company, which is not qualifying consideration in accordance with Tech
02/17 issued by the Institute of Chartered Accountants in England and Wales (ICAEW). During the 53 weeks ended 4 February 2018, the majority
of the Company’s investments were transferred to another Group company, Wm Morrison Supermarkets Holdings Limited, in exchange for an
intercompany loan. To the extent that this intercompany loan is settled in qualifying consideration, the same proportion of the merger reserve
becomes realised. During the period, this intercompany loan balance has been partially settled through £974m of qualifying consideration.
As a result, £974m of the merger reserve balance has become realised.
Hedging reserve
This represents the gains and losses arising on derivatives used for cash flow hedging.
11.19 Capital commitments
Contracts placed for future capital expenditure not provided in the financial statements
(property, plant and equipment and intangible assets)
2018
£m
27
2017
£m
20
120
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18
11 Company financial statements continued
11.20 Operating lease commitments
Total outstanding commitments for future minimum lease payments under non-cancellable operating leases are:
Within one year
More than one year and less than five years
After five years
2018
Plant, equipment,
fixtures and vehicles
£m
13
22
–
35
Land and
buildings
£m
87
339
1,308
1,734
Land and
buildings
£m
79
308
1,263
1,650
2017
Plant, equipment,
fixtures and vehicles
£m
14
34
–
48
In addition to the above, the Company has operating lease commitments of £372m (2017: £392m) with other Group companies.
11.21 Guarantees and contingent liabilities
The Company has given an unlimited guarantee in respect of the overdraft of all the subsidiary undertakings within the Group’s banking offset
agreement. The overdraft position at 4 February 2018 was £nil (2017: £nil). The Company has also provided a guarantee in respect of sterling bonds
amounting to £75m at fair value (2017: £147m) 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.
Following the disposal of the land and building of its customer fulfilment centre (‘CFC’) at Dordon to a third party (see note 3.3) the Company
continues to guarantee the lease in respect of this site. If the lessee were to default, their lease obligations could revert back to the Company
under the terms of the guarantee and become a liability of the Company. Should the lessee default, the additional future commitment is
estimated at up to £32m.
The Company has had an ongoing legal case brought by a number of current and former colleagues relating to employee data theft in the
52 weeks ended 1 February 2015. In December 2017, the High Court concluded that the Company was liable for the actions of the former employee
who conducted the data theft. The Company has since launched an appeal to this judgement and the High Court has confirmed that there will be
no hearings on the level of compensation until the appeal has been concluded. It is the Directors’ view that at this stage of the process the Company
can not reliably assess the outcome of the case nor reasonably estimate the quantum of any loss and as such no provision has been recognised in
these financial statements.
11.22 Post balance sheet events
Following IAS 10 ‘Events after the Balance Sheet Date’, the Company continues to disclose events that it considers material and non-disclosure
of which can influence the economic decisions of users of the financial statements.
On 19 February 2018, the Company acquired Chippindale Foods Limited, a leading supplier of free range eggs, for a consideration of £6m.
The Directors consider this event as a non-adjusting post balance sheet event.
121
Strategic reportGovernanceFinancial StatementsInvestor information Related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of related undertakings including the country of incorporation, the principal
activity and the effective percentage of equity owned as at 4 February 2018 is disclosed below. The registered address of all undertakings is Hilmore
House, Gain Lane, Bradford, BD3 7DL unless otherwise stated.
Related undertakings of Wm Morrison Supermarkets PLC
Name
Bos Brothers Fruit and Vegetables B.V. 1
De Mandeville Gate Management Company Limited
Dordon SPV Limited2
Farock Insurance Company Limited3
Fisherdale Properties Limited2
I Morrisons.com Limited
Ipsolus Limited2
MHE JVCO Limited4
MoClo Limited2
Morrisons Food Online Limited
Morrisons-online.com Limited
My Morrisons.com Limited
Neerock Farming Limited5
Perimeter Holdings Limited2
Wm Morrison (HK) Limited6
Wm Morrison Nominee 1 Limited
Wm Morrison Nominee 2 Limited
Wm Morrison Nominee 3 Limited
Wm Morrison Online Ltd
Wm Morrison Pension Trustee Limited
Wm Morrison Property Investments Limited7
Wm Morrison Supermarkets Holdings Limited
Country of incorporation
Netherlands
United Kingdom
United Kingdom
Isle of Man
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Hong Kong
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Principal activity
Acquirer of food products
Property maintenance
Dormant
Insurance company
Dormant
Dormant
Dormant
Joint venture with Ocado
Dormant
Dormant
Dormant
Dormant
Dormant
Property development
Acquirer of non-food products
Dormant
Dormant
Dormant
Dormant
Dormant
General partner in a partnership
Holding company
Related undertakings of other Group companies
Name
Alliance Property Holdings Limited
Amos Hinton & Sons Limited
Argyle Securities Limited7
Argyll Foods Limited
Argyll Stores (Holdings) Limited
Ascot Road Watford Limited
Cancede Limited
Cordon Bleu Freezer Food Centres Limited
Divertigo Limited
English Real Estates Limited
Erith Pier Company Limited
Evermere Limited
Farmers Boy Limited
Farmers Boy (Deeside) Limited
Federated Properties Limited
Firsdell Ltd
Flower World Limited
Freehold Investments Limited8
Holsa Limited
International Seafoods Limited
J3 Property Limited7
Kiddicare Properties Limited
Lease Securities Limited8
Maypole Limited9
MDW (Eastbourne) Limited
Monument Hill Properties Limited
Neerock Limited
Country of incorporation
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Jersey
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Jersey
Guernsey
United Kingdom
United Kingdom
United Kingdom
Principal activity
Dormant
Dormant
Dormant
Dormant
Dormant
Holding company
Property investment
Dormant
Dormant
Dormant
Property maintenance
Dormant
Manufacturer and distributor of fresh food products
Dormant
Dormant
Property investment
Dormant
Property investment
Dormant
Preparation and supply of seafood
Dormant
Lease company
Property investment
Investment company
Dormant
Dormant
Fresh meat processor
122
Interest
100%
51%
100%
100%
100%
100%
100%
51.5%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Related undertakings of other Group companies continued
Country of incorporation
Name
United Kingdom
Newincco 1072 Limited
Oldwest Limited7
United Kingdom
United Kingdom
Optimisation Developments Limited
United Kingdom
Optimisation Investments Limited
United Kingdom
Presto Stores (LC) Limited
United Kingdom
Presto Stores Limited
United Kingdom
Rathbones Bakeries Limited
United Kingdom
Rathbone Kear Limited
RP (No. 37) Limited8
Jersey
United Kingdom
Safeway (Overseas) Limited
United Kingdom
Safeway Development Limited
United Kingdom
Safeway Food Stores Limited
United Kingdom
Safeway Limited
United Kingdom
Safeway Pensions Trustees Company Limited
United Kingdom
Safeway Pension Trustees Limited
United Kingdom
Safeway Properties Limited
United Kingdom
Safeway QUEST Trustees Limited
Safeway Stores (Gibraltar) Pension Trustees Limited10
United Kingdom
United Kingdom
Safeway Stores (Ireland) Limited
United Kingdom
Safeway Stores Limited
United Kingdom
Safeway Trustee (FURB) Limited
United Kingdom
Safeway Wholesale Limited
United Kingdom
Simply Fresh Foods Holdings Limited
Stalwart Investments Limited8
Jersey
United Kingdom
Stores Group Limited
United Kingdom
The Home & Colonial Stores Limited
The Medical Hall Limited11
Gibraltar
United Kingdom
The Morrisons Foundation
United Kingdom
Tower Centre Hoddesdon Limited
United Kingdom
Trilogy (Leamington Spa) Limited
United Kingdom
Velligrist Limited
United Kingdom
Wm Morrison Bananas Limited
United Kingdom
Wm Morrison GP 1 Limited
United Kingdom
Wm Morrison GP 2 Limited
United Kingdom
Wm Morrison GP 3 Limited
Wm Morrison Growers Limited12
United Kingdom
United Kingdom
Wm Morrison LP 1 Limited
United Kingdom
Wm Morrison LP 2 Limited
United Kingdom
Wm Morrison LP 3 Limited
United Kingdom
Wm Morrison Produce Limited
Wm Morrison Property Partnership LP7
United Kingdom
Wm Morrison Property Partnership 1 Limited Partnership United Kingdom
Wm Morrison Property Partnership 2 Limited Partnership United Kingdom
Wm Morrison Property Partnership 3 Limited Partnership United Kingdom
Wm Morrison Supermarket Stores Ltd
United Kingdom
1 Registered address 3151, ZJ Hoek van Holland, the Netherlands, Amersgat 17.
2 Registered address 1 Ashley Road, 3rd Floor, Altrincham, WA14 2DT.
3 Registered address 1st Floor, Rose House, 51-59 Circular Road, Douglas, Isle of Man, IM1 1AZ.
4 Registered address Buildings 1 & 2, Trident Place, Mosquito Way, Hatfield, Hertfordshire, AL10 9UL
5 Registered address Market Hill, Market Hill Road, Turriff, Aberdeenshire, Scotland, AB53 4PA.
6 Registered address 4304 China Resources Building, 26 Harbour Road, Wanchai, Hong Kong.
7 Registered address Capella Building (Tenth Floor), 60 York Street, Glasgow, G2 8JX.
Principal activity
Property development
Dormant
Property development
Property investment
Dormant
Dormant
Dormant
Manufacturer and distributor of morning goods and bread
Property investment
Grocery retailer (overseas)
Dormant
Dormant
Holding company
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Grocery retailer
Dormant
Dormant
Dormant
Property investment
Investment company
Dormant
Pharmaceutical licence holder (Gibraltar)
Charity
Property development
Property development
Dormant
Property investment
General partner in a partnership
General partner in a partnership
General partner in a partnership
Acquirer of fresh produce
Limited partner in a partnership
Limited partner in a partnership
Limited partner in a partnership
Produce packer and purchaser
Scottish Limited Property Partnership
Property partnership
Property partnership
Property partnership
Dormant
8 Registered address Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST.
9 Registered address 1st & 2nd floors, Elizabeth House, Les Ruettes Brayes, St Peter Port,
Guernsey, GY1 4LX.
10 Registered address Suites 41/42 Victoria House, 26 Main Street, Gibraltar.
11 Registered address 1st Floor, 5 Secretary’s Lane, Gibraltar GX11 1AA.
12 Registered address Stubbings Farm, Otley, West Yorkshire, United Kingdom, LS21 1DN.
Interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
123
Strategic reportGovernanceFinancial StatementsInvestor information Five year summary
53 weeks ended 4 February 2018
Consolidated statement of comprehensive income
Revenue
Cost of sales
Gross profit
Other operating income
Profit/loss on disposal and exit of properties
and sale of investments
Administrative expenses
Operating profit/(loss)
Finance costs
Finance income
Share of profit of joint venture (net of tax)
Profit/(loss) before taxation
Analysed as:
Underlying profit before tax2
Impairment and provision for onerous contracts
Profit/loss on disposal and exit of properties
Profit arising on disposal of investment
Costs associated with the repayment of borrowings
Pension scheme set-up credit/(costs)
(Loss)/profit arising on disposal of businesses
Net pension income/(expenses)
Other exceptional costs
Taxation
Profit/(loss) for the period attributable to the owners
of the Company
Earnings per share (pence)
– basic
– diluted
– underlying basic1
Dividend per ordinary share (pence)
1 Reported on a 53 week basis.
2 2014 underlying profit restated to include new business development costs.
20181
£m
17,262
(16,629)
633
78
19
(272)
458
(94)
14
2
380
374
6
19
–
(16)
13
–
9
(25)
380
(69)
311
13.30
13.03
12.19
10.09
2017
£m
16,317
(15,713)
604
76
32
(244)
468
(160)
15
2
325
337
6
19
13
(56)
–
–
8
(2)
325
(20)
305
13.11
12.95
10.86
5.43
2016
£m
16,122
(15,505)
617
72
97
(472)
314
(112)
13
2
217
242
(87)
131
–
–
(35)
(34)
–
–
217
5
222
9.51
9.47
7.77
5.00
2015
£m
16,816
(16,055)
761
78
135
(1,670)
(696)
(105)
7
2
(792)
345
(1,273)
131
–
–
–
4
1
–
(792)
31
(761)
(32.63)
(32.63)
10.93
13.65
2014
£m
17,680
(16,606)
1,074
81
9
(1,259)
(95)
(87)
5
1
(176)
719
(903)
9
–
–
–
–
(1)
–
(176)
(62)
(238)
(10.23)
(10.23)
23.08
13.00
124
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Consolidated balance sheet
Assets
Goodwill and intangible assets
Property, plant and equipment
Investment property
Pension asset
Investment in joint venture
Investments
Other financial assets
Non-current assets
Current assets
Assets classified as held-for-sale
Liabilities
Current liabilities
Other financial liabilities
Deferred tax liabilities
Pension liabilities
Provisions
Non-current liabilities
Net assets
Shareholders’ equity
Called-up share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves
Total equity attributable to the owners of the Company
2018
£m
428
7,243
33
612
53
–
16
8,385
1,278
4
(3,081)
(1,246)
(478)
(18)
(299)
(2,041)
4,545
236
159
39
2,578
1,533
4,545
2017
£m
445
7,227
33
293
56
–
16
8,070
1,176
–
(2,864)
(1,555)
(417)
(21)
(326)
(2,319)
4,063
234
128
39
2,578
1,084
4,063
2016
£m
483
7,161
37
186
63
31
30
7,991
1,316
–
(2,755)
(2,058)
(429)
–
(309)
(2,796)
3,756
234
127
39
2,578
778
3,756
2015
£m
520
7,252
68
4
68
31
–
7,943
1,144
84
(2,273)
(2,558)
(415)
(43)
(288)
(3,304)
3,594
234
127
39
2,578
616
3,594
2014
£m
458
8,625
119
–
66
31
–
9,299
1,430
–
(2,873)
(2,516)
(430)
(11)
(207)
(3,164)
4,692
234
127
39
2,578
1,714
4,692
125
Strategic reportGovernanceFinancial StatementsInvestor information Supplementary information
53 weeks ended 4 February 2018
Increase/(decrease) on previous year %
Revenue
Underlying operating profit/(loss)
Profit/(loss) before taxation
Profit/(loss) after taxation
Underlying profit before taxation
Diluted earnings per share
Ordinary dividend per share
% of revenue
Underlying operating profit
Profit/(loss) before taxation
Profit/(loss) after taxation
Retail portfolio
Size 000s square feet (net sales area)
0–5
5–15
15–25
25–40
40+
Total number of stores
Petrol filling stations
Total supermarket takings ex petrol (gross) £m1
Average takings per store per week ex petrol (£000)1
Average number of customers per store per week1
Average take per customer (£)1
Employees
Full time
Part time
Total
Full time equivalent (average)
Average per FTE employee:
Turnover (£000s)
Underlying operating profit (£)
Employee costs (£)
1 Excludes convenience and online.
2018
£m
5.79
3.01
16.92
1.97
10.98
0.62
12.15
2.58
2.20
1.80
4
54
118
259
56
491
334
14,061
540
24,164
22.36
40,162
65,325
105,487
73,210
236
6,078
26,472
2017
£m
1.21
27.43
49.77
37.39
39.26
36.74
8.60
2.65
1.99
1.87
4
54
118
259
56
491
334
13,591
531
23,532
22.62
42,054
70,311
112,365
77,300
211
5,589
24,900
2016
£m
(4.13)
(23.30)
(127.40)
(129.17)
(29.86)
(129.17)
(18.32)
2.10
1.35
1.38
4
57
124
260
53
498
336
13,700
521
22,573
23.44
47,925
72,988
120,913
82,992
194
4,085
23,424
2015
£m
(4.89)
(44.60)
349.35
219.38
(52.02)
(218.96)
5.00
2.63
(4.71)
(4.52)
153
75
126
260
53
667
335
14,033
531
22,034
23.83
48,519
71,259
119,778
85,545
197
5,167
23,029
2014
£m
(2.41)
(14.86)
(120.02)
(136.79)
(18.67)
(138.50)
10.17
4.57
(1.00)
(1.35)
102
76
123
252
52
605
328
14,593
558
22,874
24.41
52,315
75,088
127,403
90,264
196
8,952
21,847
The impact of week 53 in the period ended 3 February 2018 was to increase turnover by £318m and increase profit before taxation by £5m.
126
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Glossary
Alternative Performance Measures
In response to the Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority (ESMA), we have
provided additional information on the APMs used by the Group. The Directors use the APMs listed below as they are critical to understanding the
financial performance and financial health of the Group. As they are not defined by IFRS, they may not be directly comparable with other companies
who use similar measures.
Measures
Closest equivalent
IFRS measure
Definition and purpose
Reconciliation for 2017/18 Group measures1
Profit measures
Like-for-like (LFL)
sales growth
Revenue
Total sales growth Revenue
Underlying profit
before tax (UPBT)
Profit before tax
Percentage change in year-on-year sales (excluding VAT), removing
the impact of new store openings and closures in the current or
previous financial year.
The measure is used widely in the retail industry as an indicator
of underlying sales performance. It is also a key measure for Director
and management remuneration. See page 45 in the Directors’
remuneration report for more information.
Including fuel:
Percentage change in year-on-year total reported revenue.
Excluding fuel:
Percentage change in year-on-year total reported sales excluding fuel.
This measure illustrates the total year-on-year sales growth.
This measure is a key measure for Director and management
remuneration. See page 45 in the Directors’ remuneration report
for more information.
Reported profit before tax excluding impairment and provisions for
onerous contracts, profit/loss on disposal and exit of properties and
sale of businesses and investments, the impact of pension volatility
and other items that do not relate to the Group’s principal activities
on an ongoing basis.
This measure is a key measure used by the Directors. It provides key
information on underlying trends and performance of the Group and
is used for Director and management remuneration. See page 45 in the
Directors’ remuneration report for more information.
Underlying profit
after tax
Profit after tax
UPBT adjusted for a normalised tax charge.
Underlying
operating profit
Operating profit2
Underlying net
finance costs
Finance costs
This measure is used by the Directors as it provides key information
on underlying trends and performance of the Group, including
a normalised tax charge.
Reported operating profit excluding impairment and provisions for
onerous contracts, profit/loss on disposal and exit of properties and
sale of investments and other items impacting operating profit that
do not relate to the Group’s principal activities on an ongoing basis.
This measure is used by the Directors as it provides key information
on underlying trends and performance of the Group.
Reported net finance costs excluding net pension income and other
items impacting net finance costs that do not relate to the Group’s
principal activities on an ongoing basis.
This measure is used by the Directors as it provides key information on
underlying cost of financing excluding the impact of exceptional items.
Group LFL (exc. fuel)
Group LFL (inc. fuel)
53rd week impact
Impact of store closures
Total revenue year-on-year
53 weeks ended
4 February
2018 %
2.8%
4.1%
2.0%
(0.3)%
5.8%
A reconciliation of total sales including and
excluding fuel is provided in note 1.2 of the
financial statements.
A reconciliation of this measure is provided
in note 1.4 of the financial statements.
UPBT of £374m less a normalised tax
charge of £89m (see note 1.4 of the
financial statements).
Reported operating profit (£458m) less
impairment and provisions for onerous
contracts (£6m), profit/loss on disposal
and exit of properties and sale of
investments (£19m), pension scheme
set-up credit (£13m), plus other exceptional
costs of £25m.
A reconciliation of this measure is provided
in note 6.2 of the financial statements.
Underlying basic
earnings per share
Basic earnings
per share
Basic earnings per share based on underlying profit after tax rather
than reported profit after tax as described above.
A reconciliation of this measure is included
in note 1.5 of the financial statements.
This measure is a key measure used by the Directors. It provides key
information on underlying trends and performance of the Group and
is used for Director and management remuneration. See page 45 in the
Directors’ remuneration report for more information.
1 Certain ratios referred to in the financial statements are calculated using more precise numbers rather than rounded numbers. These stated ratios may therefore differ slightly to those calculated by the
numbers in this report due to rounding (as numbers in the financial statements are presented in round millions).
2 Operating profit is not defined under IFRS. However, it is a generally accepted profit measure.
127
Strategic reportGovernanceFinancial StatementsInvestor information Glossary continued
Measures
Closest equivalent
IFRS measure
Definition and purpose
Reconciliation for 2017/18 Group measures1
Profit measures continued
Diluted earnings
per share
Diluted earnings per share based on underlying profit after tax rather
than reported profit after tax as described above.
A reconciliation of this measure is included
in note 1.5 of the financial statements.
Underlying
diluted earnings
per share
Tax measures
Normalised tax
Effective tax
Normalised tax is the tax rate applied to the Group’s principal activities
on an ongoing basis. This is calculated by adjusting the effective tax
rate for the period to exclude the impact of profit/loss relating to
property disposals and sale of investments, pension interest volatility,
impairment and provisions for onerous contracts, and other items that
do not relate to the Group’s principal activities on an ongoing basis.
This measure is used by the Directors as it provides a better reflection
of the normalised tax charge for the Group.
A reconciliation of the tax charge is found
in note 2.2.3 of the financial statements.
Cash flows and net debt measures
Free cash flow
No direct equivalent Movement in net debt before dividends.
This measure is used by the Directors as it provides key information
on the level of cash generated by the Group before the payment
of dividends.
No direct equivalent
See page 45 in the Directors’ remuneration report.
This measure is a key measure used by the Directors. It provides key
information on the level of cash generated by the Group and is used
for Director and management remuneration.
£350m being the movement in net
debt (£221m) before payment of
dividend (£129m).
See page 45 in the Directors’
remuneration report.
Borrowings less cash
and cash equivalents
and financial assets
and liabilities
Net debt is cash and cash equivalents, non-current financial assets and
current financial assets, less borrowings, current financial liabilities and
non-current financial liabilities.
A reconciliation of this measure is provided
in note 6.4 of the financial statements.
No direct equivalent Movement in stock, movement in debtors, movement in creditors and
movement in provisions.
No direct equivalent Working capital movement adjusted for charges for onerous contracts,
onerous payments and other non-operating payments.
This measure is used by the Directors as it provides a more appropriate
reflection of the working capital movement by excluding certain non-
recurring movements relating to property balances.
A reconciliation of this measure is provided
in note 5.6 of the financial statements.
A reconciliation of this measure is provided
in note 5.6 of the financial statements.
Adjusted free
cash flow
Net debt
Working capital
movement
Operating
working capital
movement
Other measures
Return on capital
employed
No direct equivalent
Return on capital employed is calculated as return divided by average
capital employed. Return is defined as annualised underlying profit
after tax adjusted for underlying net finance costs and operating lease
rentals (on land and buildings). Capital employed is defined as average
net assets excluding net pension assets and liabilities, less average net
debt, plus the lease adjustment (10 times rent charged).
This measure is used by the Directors as it is a key ratio
in understanding the performance of the Group.
ROCE (7.7%) equals return divided by
average capital employed:
Return (£451m) = Underlying profit after tax
annualised (£285m) adjusted for underlying
net finance costs (£73m) and operating
lease rentals (on land and buildings) (£93m).
Average capital employed (£5,884m) =
Average net assets excluding the net
pension asset (£3,871m), average net debt
(£1,084m) and the lease adjustment (£929m).
1 Certain ratios referred to in the financial statements are calculated using more precise numbers rather than rounded numbers. These stated ratios may therefore differ slightly to those calculated by the
numbers in this report due to rounding (as numbers in the financial statements are presented in round millions).
128
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Investor relations and financial calendar
10 May 2018
25 May 2018
14 Jun 2018
28 Jun 2018
5 Aug 2018
13 Sep 2018
28 Sep 2018
5 Nov 2018
6 Nov 2018
3 Feb 2019
Financial calendar 2017/18
Financial events and dividends
Quarter 1 trading statement
Final dividend record date
Annual General Meeting
Final dividend payment date
Half year end
Interim results announcement
Interim dividend record date
Interim dividend payment date
Quarter 3 trading statement
Financial year end
Company Secretary
Jonathan Burke
Company number
00358949
Registered office
Wm Morrison Supermarkets PLC
Hilmore House
Gain Lane
Bradford
BD3 7DL
Telephone: 0845 611 5000
www.morrisons.com
Investor relations
Telephone: 0845 611 5710
Email: accinvr@morrisonsplc.co.uk
Corporate responsibility enquiries
Telephone: 0845 611 5000
Annual General Meeting
The AGM will be held on 14 June 2018 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, www.morrisons.com, 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: 0906 843 3545.
Online reports and accounts
Our annual and interim Group financial
statements are available to download
from the website along with Corporate
responsibility reports and other financial
announcements. The 2017/18 Annual Report
is also available to view in HTML format at
www.morrisons-corporate.com/annual-
report-2018
The information in the online Annual Report
and Financial Statements, Strategic report, and
the Interim reports is exactly the same as in the
printed version.
Environmental matters
Our environmental footprint is taken very
seriously. In the production of the 2017/18
Annual Report, 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
or download on the Group’s website,
www.morrisons-corporate.com, unless they
have elected to receive a printed version of
the results.
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.
b) Recycled paper
This document has been printed on recycled
paper that is manufactured in mills with ISO
14001 accreditation from 100% recycled fibre.
It is totally chlorine free and is an NAPM
certified recycled product.
129
Strategic reportGovernanceFinancial StatementsInvestor information Investor relations and financial calendar continued
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:
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Telephone: 0871 664 0300
Overseas: +44 371 664 0300
Calls cost 12p per minute plus your phone
company’s access charge. Calls outside
the United Kingdom will be charged at the
applicable international rate. We are open
between 09:00 – 17:30, Monday to Friday
excluding public holidays in England and Wales.
Web: www.signalshares.com
Email: enquiries@linkgroup.co.uk
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Eversheds Sutherland (international) LLP
1 Wood Street
London EC2V 7WS
DWF LLP
1 Scott Place
2 Hardman Street
Manchester M3 3AA
Allen & Overy LLP
One Bishops Square
London E1 6AD
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Central Square
29 Wellington Street
Leeds LS1 4DL
Stockbrokers
Jefferies Hoare Govett
Vintners Place
68 Upper Thames Street
London EC4V 3BJ
Credit Suisse
One Cabot Square
London E14 4QJ
Shore Capital
Bond Street House
14 Clifford Street
London W1S 4JU
Investment bankers
NM Rothschild & Sons Limited
St Swithin’s Lane
London EC4N 8AL
Shareholder information
The number of shareholders at 4 February 2018 was 41,444 (2017: 42,308) and the number of shares in issue was 2,355,814,852 (2017: 2,335,535,537).
Number of holders
37,916
2,785
443
129
57
77
14
10
13
Number of holders
23,246
15,924
2,099
175
% holders
91.49
6.72
1.07
0.31
0.14
0.19
0.03
0.02
0.03
% holders
56.09
38.42
5.07
0.42
Balances at 4 Feb 18
90,473,635
2,119,626,946
703,766
2,845,935
4,267,975
110,837,933
74,631
67,372
26,916,659
Balances at 4 Feb 18
9,568,002
48,124,134
178,328,479
2,119,794,237
% capital
3.84
89.98
0.03
0.12
0.18
4.71
0.00
0.00
1.14
% capital
0.41
2.04
7.57
89.98
Analysis by shareholder
Private shareholder
Nominee companies
Deceased accounts
Limited companies
Other institutions
Bank and bank nominees
Investment trusts
Pension funds
Family interests
Analysis by shareholder
1–1,000
1,001–10,000
10,001–1,000,000
Over 1,000,000
130
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18 Information at your fingertips
Customer
Our website, www.morrisons.com, allows you
to shop online, search hundreds of inspirational
products and recipes for the food we make and
provide, and find out useful information about
our stores and the services they offer.
The delivery service of Morrisons.com now
covers over 60% of Great Britain. The geography
that we cover is growing all the time with the
North East, Isle of Wight and parts of East Anglia
opened up to customers in the last 12 months.
A postcode checker makes it easy to see if you
are eligible for our home delivery service.
At Morrisons.com you can:
• Purchase over 29,000 Morrisons grocery
products, including over 1,000 Best
products and 9,000 General Merchandise
branded products;
• Navigate from our home page to all our various
websites, including our newly deployed online
Florist (www.flowerworld.co.uk), and our new
all year round order and collect service for
gatherings and special occasions;
• Benefit from competitive ‘one-off’ delivery
charges or purchase a delivery pass for
unlimited deliveries for a one-off fee;
• Check out latest promotions and seasonal
events, including online exclusive deals;
• Review and research in-store only events and
‘when it’s gone it’s gone’ promotions, such
as those offered on Black Five Days;
• Sign up for our latest offers and our marketing
by email;
• Find recipes based on our ingredients and
inspired by our campaigns and events;
• Read content on healthy eating, reducing food
waste and our support for various charitable
causes such as CLIC Sargent or the Morrisons
Foundation; and
• Leave or research a Trustpilot review about
the customer service received at Morrisons,
and with four stars Morrisons is rated the
highest of the UK multiples.
You can also sign up to and manage your More
Card account on our website, and earn points
on all your purchases. In our dedicated area, you
can find out what our loyalty card scheme has
to offer, check your points balance and make
changes to preferences.
Not all products are available online. However,
the website is an excellent vehicle for finding
out more about things we offer and you can
do this on the website through your desktop,
your smartphone (using our App) and even using
your voice through an Alexa device – a first for
a UK Supermarket.
Webcasts
Webcasts of the Directors delivering the
preliminary results for 2017/18 on 14 March 2018
are available.
Shareholder information
Other relevant shareholder information is
available, for example share price history,
dividends, financial calendar and corporate
governance information.
Electronic communications
Electronic communications (eComms) is the
fastest and most environmentally friendly way
to communicate with our shareholders.
Instead of receiving paper copies of the annual
and financial results, notices of shareholder
meetings and other shareholder documents,
you will receive an email to let you know this
information is available on our website.
Visiting our website to obtain our results
reduces our environmental impact by saving
on paper and also reduces our print and
distribution costs.
Sign up to eComms on our website at
www.morrisons-corporate.com and follow
the investor eComms link.
You are also able to preview selected items
from ranges such as ‘Nutmeg’ and Market Street,
and our new café offers, in-store services,
award wins, pharmacies, glass hire and details
of our new store openings online. As standard,
morrisons.com also provides a mobile-friendly
online Store Finder where you can find details
of your nearest store, opening times and
services it offers.
Corporate
Our corporate website,
www.morrisons-corporate.com, is a one-stop
portal that exists for the benefit of our
investors, the public and the media. This site
has the following sections:
About Morrisons
You will find information about the Group,
its operations, strategy and structure, and
past financial information.
Jobs
Career opportunities and information
about working for Morrisons.
For our dedicated recruitment website, go to
www.morrisons.co.uk/jobs
Media centre
Latest releases about the growing estate
of Morrisons, along with promotions and
product news.
Corporate responsibility
Here you can find out about our corporate
responsibility ethos, including how we take
good care of our environment, society and how
we go about business. www.morrisons.co.uk/cr
Investors
Presentations, announcements and
financial reports can be quickly and easily
downloaded or viewed on-screen as PDFs.
You can easily navigate around the Annual
Report and Financial Statements 2017/18
on-screen, viewing only the parts you want
to, at www.morrisons-corporate.com/annual-
report-2018
Designed & Produced by
Printing by
Radley Yeldar
ry.com
Photography
Board and Executive
Committee portraits by
Chris Leah Photography.
Geoff Neal Group
Paper stock: This report is printed
on Amadeus Offset uncoated,
a 100% recycled paper.
Amadeus Offset is manufactured
to the certified environmental
management system ISO 14001.
131
Strategic reportGovernanceFinancial StatementsInvestor information Wm Morrison Supermarkets PLC
Hilmore House, Gain Lane
Bradford BD3 7DL
Telephone: 0845 611 5000
Visit our website:
www.morrisons.com