Wm Morrison Supermarkets plc Annual Report 2020

Plain-text annual report

W m M o r r i s o n S u p e r m a r k e t s P L C A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 1 9 / 2 0 Food makers and shopkeepers Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Living our purpose Our core purpose is the reason the business exists and underpins everything we do. To make and provide As food makers and shopkeepers, we make and provide food food we’re all proud of Food is at our heart. Our manufacturing capability and Market Street are unique points of difference where everyone’s effort is worthwhile Our colleagues are our biggest asset. Food makers and shopkeepers, with talent coming up through the organisation, surrounded by experience and know how Farming apprenticeship fund £2m We’ve opened up £2m of our government apprenticeship levy fund to develop the next generation of farmers. Market Street 92% of our customers shop Market Street. It is a key reason for customers choosing to shop at Morrisons. Group revenue £17.5bn 2019/20 2018/19 2017/181 2016/17 2015/16 Financial highlights Group like-for-like (LFL) sales (exc. fuel)* (0.8)% 2019/20 2018/19 2017/18 2016/17 2015/161 (0.8)% (2.0)% 17.5 17.7 17.3 16.3 16.1 Profit before tax, exceptional items and net retirement benefit interest1 £408m +3.0% 4.8% 2.8% 1.9% 2019/20 2018/192 2017/183 2016/17 2015/164 408 396 374 337 242 1 2017/18 Group revenue on a 53 week basis. 1 2015/16 does not include wholesale contribution to LFL sales. 1 Referred to as ‘profit before tax and exceptionals*’. 2 Restated following the application of IFRS 16. 3 £369m 52 week equivalent. 4 2015/16 profit before tax and exceptionals* excluding £60m one-offs was £302m. Free cash flow* £238m 238 281 350 2019/20 2018/191 2017/18 2016/17 2015/16 Net debt* £2,458m Total dividend 8.77p 2019/20 2018/19 2017/18 2016/17 2015/16 1,082 997 973 2,458 2,394 2,386 1,194 1,746 2019/201 2018/192 2017/183 2016/17 2015/16 8.77p 12.60p 10.09p 6.67p 6.60p 6.09p 5.43p 5.00p 670 854 1 Restated following application of IFRS 16. Net debt excluding lease liabilities Lease liabilities 2019/20, 2018/19 and 2017/18 on a post-IFRS 16 basis, 2016/17 and 2015/16 on a pre-IFRS 16 basis. Ordinary Special 1 Including 2.00p special interim dividend. 2 Including 6.00p special dividend. 3 Including 4.00p special dividend. Throughout the Directors’ report and Strategic report: Unless otherwise stated, 2019/20 refers to the 52 week period ended 2 February 2020 and 2018/19 refers to the 52 week period ended 3 February 2019. 2019 and 2020 refer to calendar years. so more and more people To grow sustainably, we must continue to listen and respond to societal changes and serve more and more customers better every day can afford to enjoy eating well We invest in the products that really matter to our customers, ensuring they are at the right price and always available Locally-produced products Our Nation’s Local Food Maker events help us to identify local suppliers who can work and grow with us to supply Morrisons stores in their area. Strategic report Our business model Chair’s statement Chief Executive’s statement Seven priorities in action Morrisons sites and brand Our customers Our colleagues Working with suppliers Our shareholders Supporting communities Protecting the environment Risk Governance Corporate governance report Directors’ remuneration report Directors’ report Financial statements Independent auditors’ report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity General information Notes to the Group financial statements Company statement of financial position Company statement of changes in equity Company accounting policies Notes to the Company financial statements Related undertakings Investor information Five year summary Supplementary information Glossary Investor relations and financial calendar Information at your fingertips 2 4 6 8 12 14 16 18 20 23 24 27 31 46 67 70 78 78 79 80 81 82 85 127 128 129 132 147 149 151 152 155 157 Non-financial highlights Business highlights Customer satisfaction index +18% pts vs baseline Colleague engagement index 77% +1.0% pts Jan 20 Jan 19 Jan 18 Jan 17 Jan 16 118 120 112 105 103 2019/20 2018/19 2017/18 2016/17 2015/16 Measured at January each year. Movement vs Jan 15 baseline (index at 100). Colleague engagement index as measured in the annual ‘Your Say’ survey. 77% 76% 78% 76% 76% Alignment of highlights to our stakeholder ambitions: Customers Suppliers Colleagues Shareholders All • Significant investments in price, service, and Market Street are improving the shopping trip for customers • £1.1bn disposal proceeds target exceeded following sale of our Camden store and site • Morrisons store on Amazon Prime Now extended to eight cities, supplied from 17 Morrisons stores across the UK • A further 44 Fresh Look store improvements complete, bringing the total to around 350 since the start of the programme • New overseas export wholesale supply partner, CP Lotus in China • ‘Nutmeg’ clothing launched online in February 2020 * Alternative Performance Measures as defined in the Glossary on pages 152 to 154. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 1 Strategic reportGovernanceFinancial statementsInvestor informationOur business model Our core purpose: To 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 Customers • Around 12 million customer transactions every week Colleagues • Over 98,000 friendly and skilled colleagues, supported by a high quality management team Sites • 492 conveniently located supermarkets • 18 manufacturing sites, eight distribution centres and an increasing digital presence Brand • A well-loved brand becoming more relevant and accessible to more customers • Online delivery service available to over 90% of British households • Stores across Britain giving the brand national reach 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 Our business is different in many ways … Food maker Our food making skills provide customers with products that are fresh, good quality, great value and made by us Distributor By controlling the whole supply chain, we know where our food comes from and can provide our customers with what they want, when they want it We are a diverse team, united by our ways of working and our food maker and shopkeeper credentials • Over half of the fresh food we sell we make ourselves • Every day, our skilled food makers on Market Street make fresh food for our customers • We make fresh food in our manufacturing sites across the UK • Our automated production lines increase productivity and efficiency, and reduce waste • We work with our suppliers to carefully source the products we do not make ourselves Our national distribution network moves the food we make and buy • Our stores are serviced by seven regional distribution centres and one national distribution centre • This network supports our growth through other channels • Technology simplifies the links between sites and stores … delivering through our seven priorities … 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 7 Naturally digital p8 For more detail 2 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Wholesaler Through stores, manufacturing, online and our wholesale partners, we can leverage our brand to achieve meaningful and sustainable capital light growth Retailer Understanding our customers power the decisions we make. Customers love our brand and see us as competitive and locally relevant We are a wholesaler, providing products to retail partners and wholesale customers We sell the products we make and buy, in our stores and online • We aim to make our brands more popular and accessible, and to increase volume through our existing assets • We leverage the strength of our brands and manufacturing capability to deliver good quality products at great value • We have the Safeway brand which we provide for wholesale partners • Listening informs the 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, by tailoring offers for them • Over 90% of British households now have access to our online offer, and we continue to expand our ‘reach’ … and supported by our five ways of working 1 Customers first 2 Teamwork 3 4 5 Freedom in the framework Listening and responding Selling, controlling costs, growing profits and removing waste p16 For more detail Outcomes Customers • An improving shopping trip informed by listening • More customers, buying more from us, more often • Customers can get what they want, when they want it p14 For more detail Colleagues • Engaged and motivated colleagues • Colleagues sharing in the success of the business • A fair day’s pay for a fair day’s work p16 For more detail Suppliers • Establishing lasting relationships • Working together with simplified terms • Ways of working that comply with the Groceries Supply Code of Practice p18 For more detail Shareholders • A strong balance sheet • A cash generative business with low levels of debt • Strong financial performance and returns p20 For more detail Community • Making a positive contribution to society • Respecting human rights and ethical trading practices • Supporting good causes and helping people in times of need p23 For more detail Environment • Reducing, reusing and recycling the plastic we use • Reducing food waste • Supporting British farmers to be more sustainable • Tackling climate change p24 For more detail Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 3 Strategic reportGovernanceFinancial statementsInvestor informationChair’s statement “ Our consistent, sustained progress was pleasing, with another year of profit growth, strong free cash flow, and the payment of both an ordinary and special dividend, all of which have been constant features of Morrisons strategy over the last few years.” Andrew Higginson, Chair Looking forward in a competitive market Last year was another packed full of retail incident. The market remained very competitive and crowded, with Brexit uncertainty a persistent concern for customers. Further retailer failures, especially in non-food, were reminders of both the pressures on the UK high street and how critical it is to stay relevant for customers. The Competition and Markets Authority’s (CMA) decision on the Sainsbury’s/Asda deal seems to block large-scale, intra-sector mergers for the foreseeable future, but also raises some uncertainty regarding what both companies may do now. In addition, two of our major competitors announced they will soon be changing Chief Executive. In this context, our consistent, sustained progress was pleasing, with another year of profit growth, strong free cash flow, and the payment of both an ordinary and special dividend, all of which have been constant features of Morrisons Fix, Rebuild and Grow strategy over the last few years. Since 2014/15, the balance sheet has strengthened considerably and we have paid and declared 64.7p per share in dividends to shareholders, equivalent to over £1.5bn. It is particularly pleasing that the continuity of the Morrisons team effort is being maintained from within, as home grown management talent is coming through. While this broad-based progress is encouraging, sales momentum did ease somewhat. Perhaps after several years of strong, uninterrupted growth, some degree of slow down was to be expected. That is not really the way that Morrisons is wired though. We are looking to get back to being the best we possibly can, and do the best possible job for customers. Turnaround momentum As always, we will take some learnings into next year. I am confident that, despite the competitive, crowded market, Morrisons can thrive. We will keep improving in key areas such as price, service and availability and we have, in our shops and our colleagues, the ability to be more on the front foot this year in delivering an even better shopping trip for customers. As the Fresh Look programme and the innovations from the new stores are rolled out across the estate, Morrisons stores are looking more and more like a great fit for today’s customers. They are neither too big nor too small, located in the heart of communities, with the emphasis on great value and good, British quality. As I said last year, we are investing more and more into our Market Street butchers, bakers, fishmongers and other skilled craftspeople just as some of our competitors are coming out of service counters, a trend that accelerated further last year. Our unique British fresh food manufacturing businesses give us an unrivalled provenance just as issues such as local, traceability and sustainability are becoming even more important for customers. Sections of this Annual Report and our Corporate Responsibility Report deal directly with many of these issues and show some of the excellent work Morrisons is doing on behalf of its multiple different types of stakeholder. 4 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2019/20 quarterly Group LFL sales (exc. fuel) Basic earnings per share before exceptionals (pence) Q4 (2.1)% (1.9)% (1.2)% Q3 Q2 Q1 Q4* 2019/20 2018/191 2017/18 2016/17 2015/16 2.3% 3.8% 13.18 12.85 12.19 10.86 7.77 Definition See the Glossary on page 152 for a definition. * 2018/19 1 Restated for application of IFRS 16 ‘Leases’. Definition See the Glossary on page 153 for a definition. Strong management succession plans Complementing the best colleagues in our shops, is a talented senior team. We were delighted to strengthen the Board with the appointment of a third Executive Director, Michael Gleeson, as Chief Financial Officer. Michael is a chartered accountant and joined Morrisons in 2014, initially as Group Financial Controller and then Supermarkets Finance Director. For the last three years he has been Trading Director, latterly responsible for ambient grocery, frozen, dairy, fuel and services. Both at Morrisons and before, he has a first-class track record and extensive financial, commercial and retail experience. We were also delighted to promote Trevor Strain, already a proven business leader, to the new role of Chief Operating Officer. Trevor has been an Executive Director of Morrisons since 2013, initially as Chief Financial Officer and, for more than a year, as Group Chief Finance and Commercial Officer. In his new role, Trevor’s responsibilities will include commercial, manufacturing, supply chain, logistics, operations development, online and wholesale. The Board and I welcome both Michael and Trevor to their new roles and wish them every success in the future. Together with changes to the Executive Committee that David describes, these important appointments are the result of a careful planning process that is bringing new generations of talent through, from within the Morrisons ranks. Continuity and management succession are vital parts of the turnaround and ones the Board will keep focusing on very closely as the evolution of the senior Executive and Non-Executive team continues. COVID-19 At the time of writing, in mid-March, there is unprecedented challenge for our country, with the COVID-19 pandemic affecting almost everyone in the UK. The confidence in food supply is one of the key stabilising elements of a public health crisis and it is our duty to steer the Company through this period and support the country more widely. As a food maker ourselves, much of our supply chain is in our own hands, and we are all working incredibly hard throughout Morrisons to keep the shelves stocked, to keep store standards high and to serve our customers. Managing the business through the crisis, getting on the front foot, doing our best work, building our resilience and becoming even more central to the communities we operate in will help us beat this pandemic together. Andrew Higginson, Chair Governance highlights Board leadership and Company purpose • The Company’s purpose, values p31 and strategy are aligned to its culture • The views of key stakeholders are considered in Board discussions and decision making p34 p38 p40 Division of responsibilities • The Board comprises a majority of Non-Executive Directors • There is an appropriate mixture of skills and experience on the Board • Rooney Anand is the Senior Independent Director • Tony van Kralingen is the Non- Executive Director designated to engage with colleagues on behalf of the Board Composition, Succession and Evaluation • All Directors are subject to re-election at our AGM • The internal Board effectiveness review found the Board to be effective, with a well balanced set of capabilities, experiences and expertise Audit, Risk & Internal Control • The Audit Committee is satisfied that the Group’s statutory auditor, PwC, who were appointed in 2014/15 are independent and performing effectively • The Board is satisfied with the effectiveness of internal control and that risk is being managed effectively across the Group Remuneration • The Board is satisfied that p46 remuneration policies and practices support the strategy and promote long-term sustainable success • The updated Directors’ Remuneration Policy will be tabled for shareholder approval at the 2020 AGM Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 5 Strategic reportGovernanceFinancial statementsInvestor informationChief Executive’s statement “ During the year, the tough trading conditions weighed on sales, but we kept focussed on our customers and our priorities – investing in the Morrisons price list, delivering good quality, improving availability, and closely managing our costs.” David Potts, Chief Executive Momentum maintained in a more challenging year 2019/20 was our fourth year of turnaround and, in many ways, proved to be our most challenging to date. In more difficult conditions, I was pleased with the further progress we made, continuing the momentum of our Fix, Rebuild and Grow strategy. However, at the time of writing in mid-March we are facing into a very rapidly developing crisis, the COVID-19 pandemic. It is a time of unprecedented challenges and we are managing the business through the crisis with the welfare of colleagues, customers and all stakeholders at the front of mind. The last year The very favourable summer weather and events such as the football World Cup in 2018, we always knew we were going to make for tougher year-on-year sales comparatives in 2019, but we also faced added challenges. Prolonged and unprecedented political debate over Brexit, plus a mid-December general election during our peak trading period, meant elevated levels of customer uncertainty throughout the year which weighed on shoppers’ confidence. In 2019/20, the food retail market, always very competitive, became collectively more so with much higher levels of promotional activity. So, after three years of positive like-for-like, it was disappointing to report lower sales for the year. We will, of course, take some learnings into the new year. However, despite the tough trading conditions weighing on sales, we kept focussed on our customers and our priorities – investing in the Morrisons price list, delivering good quality, improving availability, and closely managing our costs – and it was particularly pleasing to both grow profits for the fourth consecutive year and pay another special dividend. Important plans We are confident we have some important plans for the year ahead and beyond. We have introduced a fourth phase of our strategy – ‘Sustain’ – emphasising the critical importance of our broader societal and environmental responsibilities, and also striving to sustain the strong momentum of the turnaround so far and take opportunities to differentiate Morrisons. Further progress is on many fronts: We are continuing to invest in the Morrisons price list, and are becoming cheaper across a basket of our customers’ favourite items, both Morrisons own-brand and manufacturers’ brands. For example, our basket of hundreds of Christmas items was once again very competitive, with most prices the same or lower than last year. We will keep on investing – lower prices mean more customers coming to Morrisons more often and more volume through our stores, both of which are key for the continued momentum of the turnaround. 6 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Morrisons unique brands are taking shape. ‘Morrisons Makes It’, ‘Naturally Wonky Naturally Wonderful’, ‘Best’, ‘Free From’ and our vegan range, ‘V Taste’, are all going from strength to strength and are good examples of our great value, authentically British fresh food, made by our skilled team of food makers. In non-food ‘Nutmeg’ clothing is growing very rapidly, as too is Home and Leisure. In addition, we are unique in owning our own fresh food businesses and brands, including International Seafoods Ltd, based in the port town of Grimsby, and Woodhead Bros, our fresh meat business. We are introducing low price, great value ranges under these and other exclusive Morrisons brands. On Market Street we employ thousands of butchers, bakers, fishmongers, florists, and other highly skilled food specialists. Throughout the whole store, our knowledgeable and friendly colleagues are part of what makes us different from other supermarkets, and something our customers love most about Morrisons. We recently announced that we would be investing in 4,000 net new frontline jobs, all aimed at serving our customers better. We are removing over 3,000 managerial roles and creating 7,000 new customer-facing roles. This new colleague structure is exactly aligned with our food maker, shopkeeper credentials, and will put more pairs of hands on the shop floor, helping us stand out from the retail crowd and realise some of the productivity opportunities in our stores. New format innovation is also beginning to come through, creating further opportunities for us. Our new store in Canning Town is our first with a Market Kitchen food-to-go offer, and we opened our first smaller community store, in Bolsover. We hope to develop many of these format and property learnings across our store estate over coming years. We were also very pleased to achieve a total consideration of around £120m for our store and site in Camden, which will be re-developed into a new Morrisons store, residences and businesses. 4,000 Net new front line jobs 38 Stores picking online orders 7th priority Digitalising all aspects of our business is becoming increasingly important. Naturally digital has become our seventh priority Broader, stronger, naturally digital Away from our supermarkets, we are also making further good progress towards becoming a broader and stronger business. In wholesale, with McColl’s we are trialling the conversion of some of its shops to Morrisons Daily convenience stores. Sales so far are strong, and we are currently further tailoring and testing the proposition as we begin to transition McColl’s remaining ex-Co-op stores to Morrisons wholesale supply. We are growing sales with all our other wholesale customers, including with Amazon, where the Morrisons store on Prime Now, our ultra-fast, same day online grocery home delivery service, has now extended to eight cities across the UK. In online, we continue to grow quickly. We have deferred our entry into Ocado’s Erith Customer Fulfilment Centre (CFC) until early-2021, when we expect reduced start-up costs. In the meantime, our part of the existing Dordon CFC is running at near-capacity and we are now picking Morrisons.com orders from almost 40 of our stores, and have extended our coverage area to over 90% of British households. In addition, we have begun a click and collect trial for customers in six stores, and have recently launched our ‘Nutmeg’ clothing offer online. As we plan progress across many fronts, digitalising all aspects of our business is becoming increasingly important and relevant. So much so that ‘naturally digital’ has now become our seventh priority. We have set up a team to identify opportunities and act at pace to create value for all stakeholders by building digital solutions which will help us organise our colleagues and processes: to simplify all aspects of Morrisons, eliminate wasted effort, improve the shopping trip, and become more popular and accessible for customers. It will involve working with existing teams and infrastructure to improve or accelerate what we have, rather than invest significant new capital. Sustainability spotlight Our sustainability focus ‘Sustain’ is a core priority of our business and underpins everything we do. A key part of this is the role Morrisons is playing in helping lower the use of carbon, and reducing our business and customers’ reliance on plastic. It also means supporting British farmers, reducing food waste and supporting our suppliers to source responsibly. We are committed to being a positive force in the communities we serve, and are working towards making our business truly integrated locally. www.morrisons-corporate.com/cr/ corporate-responsibility/ A strong team In the end though it’s about people. Digital technology plays a key part, but Morrisons people are making the difference. We were delighted to welcome Michael Gleeson to the Board as Chief Financial Officer and Trevor Strain to his new role as Chief Operating Officer. We have also recently made some changes to the Executive Committee, which is responsible for day-to-day operations and strategy of the business. Andy Atkinson is now Group Commercial Director and David Lepley, an experienced retailer, has been promoted to the role of Group Retail Director. I am excited as these new generations of talent rise through the Morrisons ranks. Most importantly though, I would like to thank all our colleagues – in the stores, manufacturing, distribution, and offices. Last year was more difficult, and recent weeks facing into COVID-19 have been incredibly testing for all, but our colleagues have been exceptional in their flexibility, professionalism, resourcefulness and positivity. We promise to keep working as hard as we can for all stakeholders as we overcome this virus together. David Potts, Chief Executive Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 7 Strategic reportGovernanceFinancial statementsInvestor informationSeven priorities in action We are making progress on our priorities as we continue to listen to and learn from our colleagues and customers. These case studies illustrate progress made this year in building a broader, stronger Morrisons and delivering against our seven priorities. 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 7 Naturally digital Any case studies identified with the symbol below are part of our corporate responsibility objectives. CR Corporate Responsibility To be more competitive Customers trust and rely on Morrisons to provide great value, especially on their favourite items. • We continue to invest in the shopping trip and improve our relative competitiveness for customers. • Being more competitive is about good quality as well as great prices. During the year we improved product specification, packaging and merchandising across hundreds of our customers’ favourite items. • We are making good progress developing our brands such as ‘Morrisons Makes It’, ‘Naturally Wonky Naturally Wonderful’, ‘Best’, ‘Free From’ and our vegan range ‘V Taste’. We are also adding items from our unique manufacturing business, with brands such as International Seafoods and Woodhead Bros. • In non-food, our Home and Leisure range is progressing well. ‘Nutmeg’ clothing is growing very rapidly and is now available online for both home delivery or click and collect from any Morrisons store. Sustainability spotlight Reducing plastic packaging in our loose fruit and veg areas We are extending our plastic-free fruit and veg areas in stores. This follows a ten-month trial in three of our stores in Skipton, Guiseley and St Ives, where the amount of loose fruit and veg bought by customers increased by an average of 40%. Customers are able to purchase up to 127 varieties of loose fruit and veg including everyday essentials such as potatoes, cabbages, cauliflowers and apples, as well as seasonal varieties such as celeriac. The move to loose fruit and veg will reduce our use of plastic by an average of three tonnes per week, equating to around 160 tonnes per year. This initiative rolled out to over 60 stores during 2019. 1 2 3 6 CR www.morrisons-corporate.com/cr/ policy/plastics/ Price crunch customer favourites 1,300 own-brand customer favourites During 2019, we commenced our ‘Customer Favourites’ initiative, lowering prices on the products that matter the most to customers. We’ve identified around 1,300 own-brand customer favourites to focus on, cutting prices within this basket. The programme looks to improve both the quality and value of these products, carrying out benchmarking activities to ensure product and packaging quality. In store, additional focus is given to merchandising, point of sale and product availability. 1 2 6 8 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Find local solutions Our aim is to be truly integrated locally, to be part of local communities, helping them thrive in a sustainable way. • We hosted another ten Local Food Maker events during the year, at venues from Fort William to Folkestone. We have now surpassed a key milestone of 1,000 new, local products, which we have sourced from 37 Local Food Maker events held across Britain in just three years. • Many local food makers are continuing to expand their geographic reach through their relationship with Morrisons. • Our Fresh Look programme continues to provide us with local opportunities. At Lake, on the Isle of Wight, our Fresh Look refit delivered our most integrated local store so far. • We provide support for local communities through dedicated in-store Community Champions, community rooms where local groups can meet, and education and support programmes to help local customers enjoy eating well and address local issues. • We also continue to improve our offer around events and local demographics. To serve customers better Customers tell us provenance, authenticity and service are very important. • We are making investments to improve service for customers and in Market Street, and to increase the amount of plastic-free loose fruit and veg. • Morrisons.com continues to grow. We can now access over 90% of British households through a combination of central fulfilment and store pick in almost 40 Morrisons supermarkets. We have also begun a click and collect service in six stores. • We have introduced an initiative called ‘Too good to go’ in all of our stores allowing customers to purchase goods which are at risk of being wasted, at a discount. Sustainability spotlight Truly local at our Lake store Customers are increasingly looking to buy local products and we now stock more than 1,000 local products, from 220 local suppliers. Our store at Lake, Isle of Wight, is our most integrated store so far, stocking locally supplied milk, cheese, cream, coffee, eggs, meat, tomatoes, biscuits and garlic, and the top selling cream in the store is supplied by Briddlesford Lodge Farm & Dairy, situated just seven miles from the store. 1 2 3 4 6 CR my.morrisons.com/ foodmakers/local-sourcing/ BRITISH GROWN ‘Nutmeg’ range expands 489 stores ‘Nutmeg’ clothing is available in 489 stores, with womenswear growing throughout the year and now being stocked in almost 300 stores, alongside our already established childrenswear range. We have also released ‘Nutmeg’ gift cards, launched ‘Nutmeg’ online and have plans to introduce menswear. 1 2 3 4 6 7 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 9 Strategic reportGovernanceFinancial statementsInvestor information Seven priorities in action continued Expanding our services Market Kitchen Our new store in Canning Town is the first to include a Market Kitchen which offers food-to-go options including smoothies, wraps and stir-fries. 1 2 3 4 6 Develop popular and useful services We continue to develop and expand popular and useful services at Morrisons, providing more reasons for our customers to visit us. • We have installed 100 rapid electric vehicle chargers at our stores, which are of the highest specification available, and allow Morrisons customers to fully recharge their electric vehicles within 20 to 60 minutes. • After a successful start last year, we now have 50 Travel Money currency exchange kiosks in our stores. • We now have around 35 hand car washes through our partner, Car Park Valeting, and are part of the Responsible Car Wash Scheme. We are also starting to introduce more high street offers onto our car parks. For example, we have launched the cash-for-clothes service, Smart Recycling, into nine stores, and have plans for more popular services such as barbers, beauty bars, windscreen repairs and travel pods. • We have launched both Morrisons and ‘Nutmeg’ gift cards, introduced new third party gift card fixtures, digital gift card screens, and expanded the range of gift card services. 10 To simplify and speed up the organisation Many components of our Fix, Rebuild, Grow and Sustain strategy aim at simplifying and speeding up, demonstrating how our priorities are interconnected. • We are identifying several sources of productivity and cost saving opportunities. • We made good progress in improving the shopping trip and being more competitive for our customers across areas such as merchandising, on-shelf stock holding, and range optimisation. We also introduced enhanced in-store systems to reduce waste and markdown and to enable better visibility of stock levels which improves availability. • Work continues in our supply chain to introduce forecasting tools to enable better short and long-term order planning, and for promotions. We have also completed the implementation of a new fresh food warehouse management system in two depots. • We have outsourced transportation planning and operations at three of our distribution centres and vehicle maintenance at five sites, bringing greater simplicity and flexibility to our distribution infrastructure. • We are working more closely with suppliers, forming simpler, more collaborative relationships. Investing in manufacturing capability 9,000+ manufacturing colleagues • We provide fresh food straight from the factory • A short supply chain keeps prices low for customers and provides choice • Over 9,000 colleagues at food maker sites • Increased automation is simplifying and speeding up 1 2 5 6 7 CR To make the core supermarkets strong again We continue to improve our existing store network through our Fresh Look refresh programme and are opening a handful of new stores each year. • Our Fresh Look refits and new stores continue to provide learnings and changes across the Morrisons estate. • 44 Fresh Look refits were completed in the year, bringing the total to almost 350 since the start of the programme. • We will continue the Fresh Look programme and aim to have completed the refresh on the whole estate over coming years. • We introduced almost 70 more garden centres for the summer season and around 50 additional enhanced Home & Leisure departments. • We have started a programme to increase investment in our Market Street service counters. Customers tell us that our Market Street fresh food offer and our skilled craftspeople are highly valued and part of what makes Morrisons different. • All three of 2018/19’s new store openings, at Abergavenny, St Ives in Cambridgeshire, and Acocks Green in Birmingham are performing well. • We opened four new stores during the year, which included two replacements. The new stores include Canning Town, which is our first store with a ‘Market Kitchen’ food-to-go offer, and Bolsover, our first smaller, ‘community store’ format. • ‘Nutmeg’ womenswear is now in almost 300 stores and we have plans for a launch of menswear. Naturally digital With technology changing the way customers live and shop, we have added a seventh priority – to be naturally digital. • We have set up a team to identify opportunities and act at pace to create value for all stakeholders by building digital solutions. • This team and technology will help us organise our colleagues and processes to; simplify all aspects of Morrisons; eliminate wasted effort; improve the shopping trip; and become more popular and accessible for customers. • It will involve working with existing teams and infrastructure to improve or accelerate what we have, rather than re-invent or invest significant new capital. • As digital solutions aim to change things fast and once, they are increasingly the natural way to execute many elements of our Fix, Rebuild, Grow and Sustain turnaround strategy. Garden centres 250+ We introduced almost 70 more garden centres for the summer season, taking the total across the estate to over 250, as our Fresh Look refits and new stores continue to drive innovation. 1 2 3 4 6 Sustainability spotlight Our charity partner: CLIC Sargent Our fundraising partnership with CLIC Sargent reached a total of £11m in January 2020. In late 2019, we decided to extend the initial three year partnership by a further 12 months, until February 2021. The highlight of this final year of fundraising will be the opening of a new CLIC Sargent ‘Home from Home’ in Manchester. 2019 saw increased colleague fundraising with more people than ever before taking on challenges and organising fundraising events. 133 colleagues took part in CLIC Sargent’s sponsored Snowdon trek in July, and many more took part in store and site activities, such as Childhood Cancer Awareness Month. Other notable events included four ‘Every Pack Gives Back’ campaigns, together with the launch of a special own-brand ice cream and a bespoke shopper bag, designed by CLIC Sargent children, to raise money for the charity. To date, the partnership has funded over 7,800 grants for families facing the unexpected costs of cancer, a ‘home comforts’ scheme at CLIC Sargent ‘Home from Home’, and has created a Nurse Educator programme to help improve young people’s cancer care. “ Morrisons are incredible and we feel so grateful to have their support as a charity partner. We’re in awe of what they’ve raised for CLIC Sargent in the last year – our partnership just keeps getting better and better.” Kate Lee, Chief Executive, CLIC Sargent www.morrisons-corporate.com/cr/ charity-of-the-year/ BRITISH GROWN 11 Strategic reportGovernanceFinancial statementsInvestor information Morrisons sites and brand Our brand is more accessible, more popular and we are broadening the markets we operate in to become more relevant to more people. 12m We serve an average of around 12 million customers every week 50There are 50 Morrisons Daily convenience stores on our own forecourts and we have 335 petrol filling stations in total 492Supermarkets conveniently located across the UK 90% Our online home delivery service is now available to over 90% of British households North 117 00 Number of stores by area Distribution centre Manufacturing site Central 145 South 230 12 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Our brands Our wide range of brands cater for all tastes and budgets, from our entry price ranges: Savers, Woodhead Bros, International Seafoods and Greenside Deli to The Best range, for those special occasions and treats. Veganism is becoming increasingly popular and we have extended our own-brand vegan range, V Taste. Our Free From range continues to expand and includes products such as jackfruit pizza, as well as vegan pasties and rolls available at our Market Street counters. Renowned for provenance and authenticity, our own-brand crumpets and pitta bread, are manufactured at our Rathbones bakery. Market Street is a brand in its own right. Recognised and valued by customers, it offers traditional market counters where skilled colleagues prepare food exactly the way customers want, in exactly the portions they want – from hand cut steak and filleted fish, to hand finished cream cakes and personalised giant cookies. ‘Nutmeg’ is increasing in popularity and we have extended the range into other categories such as baby accessories, toothpaste, mouthwash and skincare. Our ‘Nutmeg’ Womenswear range is now available in 293 stores and is available to buy online. Our sites At Morrisons we have 492 conveniently located supermarkets, along with 50 Morrisons Daily convenience stores located on our petrol forecourts, served by our seven regional distribution centres and our national distribution centre. During 2019, we opened two new stores; one at Bolsover, which is a ‘community’ format store of 15,000 square feet, and one at Canning Town, along with two replacement stores at Folkestone and Oswestry, all of which are proving very popular with new and existing customers. The store at Canning Town is our first to incorporate ‘Market Kitchen’, an innovative food-to-go offer. During the year, 44 stores received a Fresh Look refit and now benefit from a new look, innovation in produce, Food To Go, Café, Barista, Home & Leisure, Garden and Party. Our store- pick online delivery service has been extended to 38 stores and, together with our central fulfilment model, over 90% of British households now have access to our online offer. Morrisons store on Prime Now, the ultra-fast same day grocery service, in partnership with Amazon, has been expanded to 17 stores, in eight cities. As the UK’s biggest fresh food maker, our 18 well invested manufacturing sites make and supply our stores with meat, fish, bakery, flowers, cooked meats, pies, quiches, pastries, cheese and eggs, as well as fruit and veg. This provides unrivalled provenance and we work closely with British farmers and growers, to utilise whole crops, reduce food waste and provide good quality, great value products, which customers love. In addition to our ‘Naturally Wonky Naturally Wonderful’ brand, we have partnered with ‘Too Good To Go’ to offer discounted one kilo boxes of fresh products which have come to the end of their shelf life, but are still perfectly good to eat. A few of our brands: 220 local food makers p9 For more detail Over 50% of the fresh food we sell is made by us 8Distribution centres 18Manufacturing sites Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 13 Strategic reportGovernanceFinancial statementsInvestor informationOur customers Listening hard and responding to changing demands of our customers. In addition, more and more colleagues are spending more time in stores with customers, understanding their views on the shopping experience and learning how we can improve. As a result of all this listening, we know that great value for money, good quality and a quick and easy shopping trip is important to customers. The IGD reports that 85% of shoppers are trying to improve their diet in some way, adopting a variety of techniques to achieve this. Our customer listening helps us understand these trends and how we can better serve customer needs. Morrisons More Card continues to be popular with customers who enjoy earning points and money off their shopping trip. Through the More Card we capture millions of transactions a year, giving us a huge source of data which helps us further understand customer behaviours. This year, we developed tools which enable us to analyse data more quickly and easily, making this crucial information available to more colleagues around the business, so that we can continue to improve the shopping trip. Truly integrated locally Customers tell us how important ‘local’ is to them, particularly within produce, meat and dairy, and our local sales continue to grow. Our ambition is to become ‘truly integrated locally’ providing more locally produced food and drink to more stores and being more locally relevant and integrated in the communities we serve. See page 9 for detail on progress of Local Solutions. Love index 18,256 We had 18,256 ‘love’ reactions and 7,405 ‘love’ mentions on social media this year. The Love Index is all about sharing the reasons why customers love Morrisons. Grocery market and consumer confidence The Institute of Grocery Distribution (IGD) forecasts modest growth in the grocery market over the next few years, with the UK grocery market expected to grow +12.5% by 2024. Online is set to be the fastest growing channel, driven by improving fulfilment options and multi-channel developments. Supermarkets will remain the largest channel, with marginal growth and a focus on competing harder on price and offering a differentiated customer experience. UK consumer confidence has been declining since August 2018 and through much of 2019 was at a six-year low. The lack of confidence is particularly apparent with regards to the general economic situation. Brexit continues to cause uncertainty for customers. While Brexit Day passed on 31 January 2020, uncertainty still remains around the conclusion of the transition period and detail of future trading relationship with the EU. The subsequent potential for price increases is causing concern for many. Media coverage of potential delays to imports and government contingency plans for food and medical shortages have added to existing fears. Our vertically integrated supply chain means we are well placed to mitigate the potential impacts of different UK – EU trade scenarios, and we have been working hard to put plans in place to minimise the impact of all scenarios. In these times of uncertainty we continue to focus on our priorities. Driven by our core purpose, we are seeking to find ways in which we can continue to improve and be more competitive. Listening and responding to customers Listening to customers and responding quickly is at the heart of our business. We must understand customers’ constantly evolving needs and expectations in order to grow and compete. In the last year, almost a quarter of a million of our shoppers gave us feedback regarding their experiences in our stores, while one and a half million customers got in touch with us via our customer service contact centre team. These interactions provide a rich and valuable source of data, feedback which we capture, analyse and share across the business. Outcomes for customers An improving shopping trip informed by listening More customers buying more from us, more often Customers can get what they want, when they want it Consumer confidence -6 -7 -8 -9 -10 -11 -12 -13 -14 -15 Jun 18 Dec 18 Jun 19 Dec 19 Source GFK monthly consumer confidence index, 20 December 2019. UK grocery market size forecast (£bn) 2024 2023 2022 2021 2020 2019 218 212 207 202 198 194 Source Institute of Grocery Distribution (IGD). Composition of UK grocery market size 2019 vs 2024 (% share) 2019 2024 2024 forecast 2019 Supermarkets 46.5% 42.6% Convenience 21.4% 22.2% Discounters 12.6% 15.8% Hypermarkets 7.4% 8.4% Online 6.0% 7.7% Other Retailers 6.1% 3.3% Source Institute of Grocery Distribution (IGD) (June 2019). 14 Sustainability spotlight Healthier choices: chilled ready meals 85% of shoppers are trying to improve their diet in some way1 Service and value We have made improvements to the customer shopping experience this year, increasing our average customer satisfaction score by +3% pts across 2019/20, driven by improvements in item availability and presentation of fresh food. Customers continue to tell us that they rate us highly for the expertise and friendliness of our colleagues, which they regard as important. Value for money is one of the most important reasons customers choose a grocery retailer. We continue to reduce prices through ‘Price Crunch’ and a compelling promotional programme. This year we launched an initiative to reduce prices and benchmark quality on ‘Customer Favourites’ (see case study on page 8). This has already driven increased sales and volumes. Within own-brand, we also improved our entry price point brands with the launch of value brands which are primarily produced in our own fresh food sites including ‘International Seafood Co’ and ‘Woodhead Bros’. In addition, January 2020 saw the early stages of a new brand direction within the rest of our entry price point range. Offering healthier choices Our listening programmes tell us that customers are more conscious than ever about their food choices. Free From and Veganism are important trends and growth areas, as is providing healthier choices, such as products with lower calorie, sugar and salt content. We recognise that we have an important role to play in helping customers lead healthier lives, and this year we continued our nutritional reformulation removing more salt, sugar and fat from our own-brand products. We have made, or are making, improvements to our brands which support customers with healthier eating or specific dietary requirements. Our ‘Counted’ range, which provides a calorie controlled alternative to our customers’ favourite meals, launched in January 2019. The range focuses on improved quality, new products, revised nutritional criteria and clearer on pack communication. We have also extended our ‘Fresh Ideas’ brand, providing fresh and nutritious meals, meal components and ‘on the go’ solutions to help our customers enjoy eating well. Free From is an important and rapidly growing area of our business and this year we continued to develop our offer in this area for customers. Veganism and vegetarianism are growing trends, and many customers are consciously choosing to reduce meat consumption for health, sustainability and ethical reasons2. Having launched our ‘V Taste’ range in November 2018, we continue to develop our range of vegan and vegetarian products, to meet increased demand. Customer service and Market Street We have commenced a programme focussed on improving our customers’ experiences. This programme is about listening hard and responding quickly to feedback from colleagues and customers; and by doing so, we have seen average customer satisfaction improve and colleague engagement increase. Over 4,500 colleagues have completed additional customer service training, where the emphasis has been on putting customers first through teamwork to deliver great service for our customers. We relaunched our range of Morrisons chilled ready meals, comprising 100 new or improved products. Based on 52 weeks of sales, the reformulated range now has over 679 million fewer calories, 58 tonnes less sugar, and 38 tonnes less fat compared with the previous range. The new products include a number of popular cuisines such as Chinese, Indian, Italian and Korean. For further information, please see our 2019/20 Corporate Responsibility Report which can be found at www.morrisons-corporate.com/cr/ corporate-responsibility/ Customers value the expertise of our food makers on Market Street, and we continue to provide training and development for our team. Since November 2018, over 3,000 Market Street colleagues have completed training sessions focussed on offering customers the very best service across our counters, including tastings and advice. As well as the service we provide in store, we believe that Morrisons has an important role within local communities. In a number of stores, we have increased the hours our store teams can dedicate to supporting local causes each week, and we have also made more cafés available for use by community groups. Minimising our environmental impact Reducing packaging, particularly plastic, continues to be an important issue for customers. Although plastic remains important to protect and preserve food, we have nevertheless made significant progress in reducing unnecessary plastic packaging by removing expanded polystyrene from all of our own-brand food and drink products. We also provide customers with more opportunities to reduce their plastic consumption by offering reusable paper bags and more loose products such as fruit, veg and eggs (see page 24 for more detail on our progress on plastic). In addition, we are continuing to make recycling easier for customers by moving recycling information to the front of our packaging. Where a product is widely recyclable we have added a green logo to the front of packs to increase awareness among customers while also continuing to provide the usual icons on the back of packs. 1 IGD Report, June 2019. 2 Mintel Meat Free Foods, 2018. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 15 Strategic reportGovernanceFinancial statementsInvestor informationOur colleagues United by our ways of working, our team of talented food makers and shopkeepers are our biggest asset. Outcomes for colleagues Engaged and motivated colleagues Colleagues sharing in the success of the business A fair day’s pay for a fair day’s work Our five ways of working Our five ways of working underpin everything we do and how we operate. They provide a clear and consistent way of doing things and apply to every colleague across our stores, sites and central teams: 1 Customers first Customers are at the heart of everything our colleagues do. We care about our customers and do all we can to always put them first. 2 Teamwork Through teamwork, colleagues can help each other to get things done, knowing that we can achieve more together. Each colleague plays their part in the team, respecting and working with others to get better results. To ensure we serve our customers better, especially at those times of the year that mean the most to them, such as Christmas and Easter, all colleagues working in central roles help out in stores. 3 4 5 Freedom in the framework Freedom in the framework means colleagues have the freedom to, and are trusted to, make decisions to help achieve our priorities. Listening and responding Listening and responding quickly is at the heart of the turnaround. Taking the time to listen to all of our stakeholders is embedded in the way we work. 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. Having a say on what matters We want all our people to have their say on what matters, so we are involving all 98,000 food makers and shopkeepers in delivering our Fix, Rebuild, Grow and Sustain plan. Acting on their frontline insights means we can continually improve the business for all our stakeholders. This year we were pleased that 79% of colleagues took the opportunity to complete our annual ‘Your Say’ survey. This was the highest ever proportion of colleagues to participate, and we recorded a strong overall engagement score of 77%, which was up on last year’s result. Highlights from the survey included colleagues telling us they are clear on what they are expected to achieve in their job (91%) and that they understand how their work contributes to the success of the business (88%). The survey also identified improvement areas where we have ways to improve, such as increasing the regularity of our ‘Your Say’ forums and providing colleagues with more opportunities for them to develop and progress. 77% Colleague engagement index (2019: 76%) Our ‘Your Say’ forum meetings take place monthly in stores and sites, as well as quarterly at a regional level and twice a year nationally. They provide a mechanism for colleagues to share opportunities to improve the business, and discuss these with local management, members of the Executive Committee and Non-Executive Directors. Recent improvements suggested by colleagues have included more time to complete product markdown in some stores to improve sell-through, additional messages on product shippers to highlight product protection, and increasing the number of locations that our office colleagues are able to support through ‘Teamwork days’ to include depots and manufacturing sites. Managers who listen, help and support By creating and developing the right culture and environment for all our colleagues, they are able to make the maximum contribution to our turnaround. This year we invited store and people managers to attend our ‘Leading with Purpose’ programme, which incorporated specific additions to support the managers’ work on workplace culture. The programme equips managers with the tools to lead their teams in solving increasingly complex business problems. It also enables them to adapt and lead in different situations, while continuing to provide high levels of support to get the best out of their teams. Over half of our store and people managers attended the programme in 2019, with the remainder due to attend in 2020. This investment was complemented by our ‘Teamwork Meeting’ for leaders across the business at which we focussed on the ‘Core Purpose’ and how this is continuing to guide our plans into the future, including by increasing the involvement of all our colleagues in running the business. Sustainability spotlight ‘My Wellbeing’ continues to provide helpful advice ‘My Morri’, our digital platform for colleagues, provides useful tools and resources. Recent additions include ‘My Wellbeing’ which gives colleagues helpful advice on topics such as nutrition, sleep, stress awareness and mental health. my.morrisons.com/blog/lifestyle/ 16 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Tools and training to do the job We have continued to invest in digital tools for colleagues, expanding our colleague platform ‘MyMorri’ to include resources for shrinkage, guidance on wellbeing and an improved electronic handbook. We have also been listening to colleagues through our ‘Company-wide effort’ initiative. This has led to, for example, improved systems such as our ‘Stock and Systems App’ which, supported by training at the shelf edge, is saving colleagues time on core processes so they can focus on serving our customers. Furthermore, we were pleased to introduce our new people, payroll and time and attendance system into Head Office and a small number of stores. This new, modern system simplifies existing people processes, allows colleagues to manage their own data and availability to work, and to swap shifts with other colleagues or pick up overtime electronically. We will roll out the system into all stores and sites, and expect to see significant colleague work-life balance and flexibility benefits. A fair day’s pay for a fair day’s work One of our ambitions for our people is ensuring everyone receives fair rewards for their contribution to our turnaround and business performance. During the year we again improved our hourly rate of pay for frontline store colleagues, moving it from £8.70 to £9.00 per hour, with a further increase to £9.20 an hour from April 2020, maintaining our competitive position in the marketplace. Our frontline colleagues in stores and sites also shared in our annual colleague bonus scheme. At the same time we reduced the weekly contract hours of our store management team, with no loss of pay, to support better work-life balance. Social Mobility Employer Index Top 30 In 2019, we were again placed in the top 30 in the Social Mobility Employer Index by the Social Mobility Foundation. Working with greater purpose During the year we also continued to listen hard to our colleagues about how we could enable them all to work with greater purpose. In January 2020 we confirmed our plans to introduce a flatter management team structure into all our stores, focussed on taking end-to-end accountability for their department areas and more directly supporting their colleagues. At the same time, we also described our plans to create more colleague roles in store, to better serve customers as well as improvements to colleague communications and the processes for involving colleagues in business improvement initiatives. An opportunity to develop, progress and grow Nurturing existing talent and bringing new talent into the business continues to be a priority. During the year, we were pleased to place a further 250 colleagues onto craft apprentice schemes in butchery, bakery and fish as we continue our tradition of growing real craft food makers. This number is in addition to the 45 colleagues who took up apprenticeships in areas as diverse as floristry, abattoirs and food science. Our degree apprentice and graduate programmes continue to play an important role in attracting young talent and create a pipeline for management roles. This year, over 150 colleagues started on these schemes, with one in three joining through our ‘Generations’ campaign, which provides priority assessment for friends and families of existing colleagues. We also expanded our ‘Morrisons in schools’ programme, partnering with almost 400 schools, as we work locally to offer opportunities and support social mobility. We were pleased to be recognised as the Top Retail Employer for school leavers for the second year running in the ‘All About School Leavers’ award scheme1, and have again been placed in the top 30 in the Social Mobility Employer Index2. Very highly valued and treated with respect Colleague wellbeing is very important, and this year we took significant strides to improve the support we offer. For example, our new ‘My Wellbeing’ site provides guidance for mental, physical, social and financial wellbeing, as well as offering access to resources provided through our partnership with ‘Retail Trust’. During the year we supported a number of national campaigns, providing visibility and creating good conversations around topics such as mental health, the menopause and testicular cancer. Responding to issues raised by colleagues in our ‘Your Say’ forums, we invested in our store staffrooms, introducing new hot and cold water fountains, reviewing and improving menus and providing dedicated fridges, so that colleagues are better able to manage their own hydration and nutrition. Our work to celebrate diversity continues to progress. This year, our LGBT+ community attended more Pride events than in any previous year. We also developed plans to create more opportunities for Black Asian and Minority Ethnic (BAME) colleagues informed by listening, while our ‘Women in Morrisons’ events were attended by over 600 colleagues. The ‘Women in Morrisons’ initiative supports our strong pipeline of female talent. Over the last few years, we have seen our proportion of female store managers increase from 7% to around 20%, female buying managers and senior buying managers increase from 44% to 55%, and female members of our leadership team increase from 17% to 33%. ‘Your Say’ Forum 79% of colleagues completed the ‘Your Say’ survey this year, the highest proportion of participation yet. We also held many local, regional and national ‘Your Say’ forums, with suggestions, such as expanding ‘Teamwork’ days to depots and manufacturing sites, being just some of the recent improvements we have made based on colleague feedback. 1 ‘All About School Leavers Awards’ 2019 Retail Industry winner. 2 Social Mobility Foundation, Social Mobility Employer Index 2019. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 17 Strategic reportGovernanceFinancial statementsInvestor informationWorking with suppliers Strong supplier relationships, based on mutual respect and benefit, continue to be key to Morrisons becoming broader and stronger – our growth means growth for our suppliers. Outcomes for suppliers Establishing lasting relationships Working together with simplified terms Ways of working that comply with the Groceries Supply Code of Practice Listening and responding Strong supplier relationships, based on mutual respect and benefit, continue to be key to Morrisons becoming broader and stronger – our growth means growth for our suppliers. We have made good progress over recent years, focusing on improving longer-term relationships with suppliers and developing a consistent framework for our ways of working together. Our progress was reflected in this year’s scores in the industry survey carried out by the Groceries Code Adjudicator (GCA), which shows us continuing to be recognised for the overall improvement in the way we work with suppliers. Listening is central to this progress. By regularly engaging with suppliers at all levels, and understanding their views, we can simplify how we work, and improve the areas that matter most to them. For example, during the year, we continued to focus on improving how we work together on promotional activity and planning. This included planning further in advance, simplifying the way we execute promotions in store and collaboratively agreeing forecasts with our suppliers. In 2018/19, we introduced our supplier portal, a free-to-use platform that enables suppliers and buyers to document and store agreements. We have listened to suppliers’ feedback and have continued to improve the tool to simplify the way we work together. Food we are all proud of We are food makers and shopkeepers, with our Market Street colleagues making a huge range of fresh products in store every day, that our customers truly value. We work closely with all our suppliers to ensure we provide products we are all proud of, and offer customers great quality, removing unnecessary cost to improve competitiveness. We value innovation, and work together with suppliers to bring new and exciting products to our customers as well as ensuring the products we sell are sourced in a sustainable way. In the past 18 months, we removed over 4,000 tonnes of plastic by various means including an increase in the amount of loose fruit and veg we sell. This alone is saving around 160 tonnes of plastic packaging each year, while moving our 2019 Christmas cards from plastic to cardboard boxes, saved more than 42 tonnes. Best of British 100% of our own-brand fresh meat, milk and eggs are British. We work with around 3,400 UK farmers to give our customers the best and freshest produce all year round. Direct sourcing, farmers and small suppliers We are proud to be British farming’s biggest supermarket customer, supporting farmers and the wider community throughout the British food supply chain. We remain committed to sourcing all of our fresh beef, pork, lamb, chicken, turkey, milk, eggs and cream from British farmers, and continue to strengthen our relationships by working directly with, for example, potato, onion and carrot growers. Our customers support the farming community by purchasing products in the ‘For Farmers’ range, where a clear part of the retail price of the products goes directly back to farmers. We continue to grow and expand our manufacturing division. This year we integrated our new Yorkshire egg packing business, focusing on delivering the best quality products while enhancing our efficiencies to improve costs for our customers. This year also saw us again conduct our Local Food Makers events and to grow our range of locally supplied products. This helps us stay close to small British suppliers, giving them an opportunity to engage with us and to bring their products to our stores. We continue to support British Farming and our smaller suppliers by offering shorter payment terms to these suppliers. Paying suppliers on time is important to us, with 99.5% of our suppliers paid on time, as presented in the report covering 5 August 2019 to 2 February 2020 featured on the government website1. 1 Government website www.gov.uk/check-when-businesses- pay-invoices/ for the period 5 August 2019 to 2 February 2020. 18 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Sustainability spotlight Free-range eggs We have moved away from caged eggs after doubling the number of free-range farmers that supply our egg packing business. This means that 100% of our fresh eggs will come from hens that have outdoor access for at least eight hours each day, as well as nest boxes with wide perches and spaces for scratching and dust bathing. We are also working to ensure that 100% of eggs used as ingredients in our own-brand products are cage free by 2025. www.morrisons-corporate.com/media- centre/corporate-news/free-range-eggs/ 220 Local food makers and over 1,000 local products in our stores The Groceries Supply Code of Practice (GSCOP) GSCOP applies to designated grocery retailers in the UK, adding specific regulations into the trading relationships between retailers and their suppliers. We take our responsibilities to suppliers seriously and have established ways of working that enable us to build strong collaborative relationships. For more details see www.morrisons-corporate.com/suppliers/ supplier-information/ We listen closely to ideas on how we can improve and, in response to supplier feedback, have continued to invest in our supply chain and commercial systems and processes. Over the last year we made further improvement to our promotional execution in stores, invested in a new improved Morrisons Supplier Database and provided further enhancements to our Supplier Portal. We actively engage with the relevant regulatory bodies, the Groceries Code Adjudicator (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 Adjudicator. As in previous years, our Code Compliance Officer (CCO) has provided support to the GCA to help familiarise new retailers designated to operate under the Code. Effective compliance risk management is critical to delivering on our commitments to all our stakeholders. We have well established governance structures to support GSCOP compliance, which we discussed in detail with the GCA during the course of the year. This includes a group consisting of senior leadership team members from all relevant functions. Routine updates are also provided to our Executive Committee and to our Corporate Compliance and Responsibility Committee including developments about the operation of the Code. We formally report details of activity over the year as well as specific concerns raised with our CCO to the GCA and to the CMA at the financial year end. Our Legal, Compliance and Internal Audit teams work closely together to provide colleagues across the business with the tools needed to comply with the Code. Using a range of formats, we 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. Throughout the year, we review and update all of our training activities and materials taking account of any new learnings, building in current real-life examples and reflecting additional guidance from the GCA. The 2019 GSCOP supplier survey conducted by YouGov on behalf of the GCA placed Morrisons sixth overall and the fourth most improved of the 12 designated retailers. Suppliers rated Morrisons as complying with the Groceries Code ‘mostly’ or ‘consistently well’ with a score of 92%. Working with the GCA, we encouraged suppliers to complete the anonymous survey, and this led to more of our suppliers taking part than those of any other designated retailer. 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 2019/20 we were contacted by suppliers to review concerns including in the following areas: • queries relating to goods and invoice receipting processes; • requesting review of supplier de-listing decisions; and • asking for clarification of contractual terms. At all stages, we try to resolve the concern by talking to the supplier openly and honestly and this approach is generally successful in reaching a swift resolution. As at the end of the financial year there were two direct Code related complaints which were yet to be resolved. Contact details and up-to-date information can be found at www.morrisons-corporate.com/suppliers/ meet-our-buyers/ 92% Suppliers rated Morrisons as complying with GSCOP ‘mostly’ or ‘consistently’ well Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 19 Strategic reportGovernanceFinancial statementsInvestor informationOur shareholders A robust balance sheet with low debt, a strong maturity profile and significant cash flow generation. “ Our capital allocation framework has served the Company and its stakeholders well and remains unchanged. Free cash flow generation is significant and sustainable.” Michael Gleeson, Chief Financial Officer Outcomes for our shareholders A strong balance sheet A cash generative business with low levels of debt Strong financial performance and returns Introduction I am pleased to be your new CFO. Morrisons has a proud heritage, built on strong financial foundations and we remain focussed on maintaining our capital discipline principles. 2019/20 was another year of growth in profit, significant free cash flow and increased ordinary dividend, despite a tougher sales environment, demonstrating that Morrisons turnaround can be both consistent and sustained. Momentum in building a broader, stronger business continued, with wholesale again expanding and further development of different Morrisons brands and store format innovations. As we enter our fifth year of turnaround, we are taking some important learnings and opportunities into 2020/21. Summary income statement 2019/20 £m 17,536 2018/19 restated1 £m 17,735 521 (87) 1 435 432 (130) 1 303 Revenue Operating profit Net finance costs Share of profit of joint ventures (net of tax) Profit before tax Profit before tax and exceptionals* Basic earnings per share before exceptionals* Revenue Total revenue during the period was £17.5bn, down 1.1% year-on-year. Revenue excluding fuel was £13.9bn, down 0.8%. Group like-for- like (LFL) sales excluding fuel were down 0.8% over the year, including a negative contribution from supermarkets of 1.4% and a positive contribution from wholesale of 0.6%. Fuel sales were down 2.5% to £3.7bn, impacted by a highly promotional market. For wholesale, sales grew with all our major partners during the year, and we remain on track for our target of £1bn of annualised wholesale supply sales. Morrisons.com continues to grow. In addition to the Dordon customer fulfilment centre (CFC), we now store pick our customers’ online orders from almost 40 Morrisons supermarkets, and have extended our coverage area to over 90% of British households. We have also begun a click & collect trial for customers in six stores. Operating profit Operating profit Adjustments: – Impairment and provision for onerous contracts – Profit/loss on disposal and exit of properties – Store restructuring and closure costs – Other exceptional items – Retirement benefit exceptional items Operating profit before exceptionals* 2019/20 £m 521 2018/19 restated1 £m 432 (2) (66) 51 9 – 10 – – 42 26 513 510 We managed our costs well throughout the period, which offset some of the operating leverage impact of the lower sales. Operating profit before exceptionals was £513m (2018/19: £510m), with margin up 5 basis points year-on-year to 2.9%. EBITDA* margin before exceptionals was up 22 basis points, to 5.9%. Group LFL sales (exc. fuel) 2019/20 2018/19 2017/18 2016/17 2015/161 (0.8)% (2.0)% 4.8% 2.8% 1.9% Definition See the Glossary on page 152 for a definition. 1 2015/16 does not include wholesale contribution to LFL sales. Net debt (£m) 2019/20 2018/19 2017/18 2016/17 2015/16 1,082 997 973 2,458 2,394 2,386 1,194 1,746 Net debt excluding lease liabilities Lease liabilities Definition See the Glossary on page 153 for a definition. 2019/20, 2018/19 and 2017/18 on post-IFRS 16 basis, 2016/17 and 2015/16 on pre-IFRS 16 basis. £408m Profit before tax and exceptionals* 408 396 1 Restated for application of IFRS 16 ‘Leases‘. 13.18p 12.85p Basic earnings per share 14.60p 9.89p 1 Restated for application of IFRS 16 ‘Leases’. * Defined in the Glossary on pages 152 to 154. 20 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Profit before tax Profit before tax Adjustments: – Impairment and provision for onerous contracts – Profit/loss on disposal and exit of properties – Store restructuring and closure costs – Other exceptional items – Costs associated with the repayment of borrowings – Retirement benefit exceptional items – Net retirement benefit interest Profit before tax and exceptionals* Profit before tax and exceptionals margin 2019/20 £m 435 2018/19 restated1 £m 303 (2) (66) 51 9 – – 10 – – 42 33 26 (19) (18) 408 396 2.3% 2.2% 1 Restated for application of IFRS 16 ‘Leases’. Reported profit before tax was £435m (2018/19: £303m). Profit before tax and exceptionals was £408m (2018/19: £396m), up £12m or 3% year-on-year. Exceptional items recognised outside profit before tax and exceptionals (as fully detailed in note 1.4 of the financial statements), were a net credit of £27m. Of these, property disposal profit was £66m, the majority of which relates to our Camden store. Following a tender process, we sold Camden and our eight acre surrounding site to Berkeley Group for a total consideration of around £120m. Berkeley will pay £85m cash in stages over the years of the project, and will build a new Morrisons supermarket and convenience store on the site with a value of £34m. The consideration will be received over a number of years, so the proceeds have been discounted, resulting in a property disposal profit of £64m. Restructuring costs were £51m, the majority of which relates to the announcement in January 2020 that we are investing in creating more frontline jobs, and reducing some team manager roles within stores. Other exceptional items were £9m, mainly relating to costs associated with improvements in the Group’s logistics network. A £2m net credit (2018/19: £10m charge) has been recognised in respect of impairment and provisions for onerous contracts following the Group’s annual impairment review. Net retirement benefit interest income, which as usual was recognised outside of profit before tax and exceptionals, was £19m. The net incremental profit before tax from wholesale, services, interest and online during 2019/20 was £14m, bringing the cumulative profit so far to £68m. We remain confident of our medium-term target of £75–£125m incremental profit from these four areas. Net finance costs Net finance costs were £87m (2018/19: £130m). Net finance costs before exceptionals were £106m (2018/19: £115m). Earnings per share Basic earnings per share increased to 14.60p (2018/19: 9.89p), and basic earnings per share before exceptionals increased to 13.18p (2018/19: 12.85p). 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 2019/20, Morrisons made net payments of £1,178m to the UK Government of which £611m was borne by Morrisons and the remaining £567m was collected on behalf of our colleagues, customers and suppliers. Corporation tax payments made during the year were £87m which was in line with the tax charge of £87m in the income statement. 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 investment property 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 Debt acquired on acquisition of business Leases non-cash Other non-cash movements Movement in net debt* Opening net debt* Closing net debt* 2019/20 £m 2018/19 restated1 £m 1,058 (41) 983 (6) 1,017 977 34 (511) (302) 9 (10) (190) – 12 – (66) (57) (64) 22 (461) (289) 7 (9) (195) (30) 15 (2) (53) 10 (8) (2,394) (2,386) (2,458) (2,394) 1 Restated for application of IFRS 16 ‘Leases’. Group net debt remained low at £2,458m, compared to £2,394m at the end of 2018/19. Of the £64m increase, £57m related to non- cash movements ex-leases. On a pre-IFRS 16 basis (i.e. excluding lease liabilities), net debt was £1,082m, up £85m since the end of 2018/19 (£997m). Free cash flow was £238m (2018/19: £281m), or £295m prior to £57m non-cash movements, which is up £24m year-on-year. Property disposal proceeds were £34m (2018/19: £22m), the majority of which relates to the initial instalment from the sale of our Camden store to Berkeley Group. The cash outflow from ordinary and special dividends paid in the year was £302m, a £13m increase year-on-year (2018/19: £289m). The operating working capital* inflow was £18m (2018/19: £9m outflow). * Defined in the Glossary on pages 152 to 154. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 21 Strategic reportGovernanceFinancial statementsInvestor informationOur shareholders continued Capital expenditure (£m) 2019/20 2018/19 2017/18 2016/17 2015/16 511 461 500 419 365 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. Return on capital employed (ROCE) 2019/20 2018/191 2017/181 2016/171 2015/16 7.0% 6.9% 6.7% 6.3% 5.6% Definition See the Glossary on page 154 for a definition. 1 Restated for application of IFRS 16 ‘Leases’. Net retirement benefit surplus (£m) 2019/20 2018/19 2017/18 2016/17 2015/16 272 186 944 688 594 7.0% Return on capital employed* * Defined in the Glossary on pages 152 to 154. 22 Summary balance sheet Key balance sheet metrics Fixed assets and investments Working capital* Provisions and tax Net retirement benefit surplus Net debt* Net assets 2019/20 £m 8,641 2018/19 restated1 £m 8,581 (2,038) (2,013) (548) (537) 944 688 (2,458) (2,394) 4,541 4,325 1 Restated for application of IFRS 16 ‘Leases’. Retirement benefit We recently completed the triennial pension valuation as at April 2019, with a funding surplus of £682m across the schemes. This compares to a surplus of £111m at the last valuation at April 2016. At year end, the net retirement benefit surplus on the balance sheet was £944m, up from £688m in 2018/19. Net retirement benefit interest income was £19m, up £1m year-on-year, reported outside profit before tax and exceptionals. Capital expenditure Cash capital expenditure of £511m, (2018/19: £461m) is at a sustainable level and we maintained our capital discipline and adherence to our capital allocation framework. In the year, a further 44 stores went through our Fresh Look programme, taking the total to almost 350. Four new stores were opened (including two replacements), and four stores were closed during the period, with an overall net reduction in space (including extensions), of 4,000 square feet. Borrowings The maturity profile of our remaining debt facilities is strong. In September 2019, in advance of the upcoming maturity of our Euro Bond, the Group issued a £350m Sterling bond at a low fixed rate of 2.5%, which expires in October 2031. This was issued under the £3bn Euro Medium Term Note Programme. During the year, we also extended our revolving credit facility by a further year, resetting its five year term and resulting in a maturity date of June 2024. In addition, we also secured a further £100m 364 day committed revolving credit facility which matures in July 2020. Return on capital employed (ROCE)* Return on capital employed increased to 7.0%. The growth opportunities we are focussed on are capital light and accretive to profit and returns. Interest cover* Net debt*/EBITDA*2 Gearing* ROCE* 2019/20 4.8 times 2018/19 restated1 4.4 times 2.4 54% 7.0% 2.4 55% 6.9% 1 Restated for application of IFRS 16 ‘Leases’. 2 EBITDA before exceptionals. Shareholder returns Our policy is for the ordinary annual dividend to be sustainable and covered around two times by basic earnings per share before exceptionals*. The proposed final ordinary dividend is 4.84p, bringing the total ordinary dividend for the year to 6.77p. Including the 2.00p interim special dividend paid at the half year, the total dividend for the year is 8.77p. 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 capital discipline principles around low debt, well-funded pension schemes, sustainable capex and our overwhelmingly freehold store portfolio are fundamental, and our strong track record in all of these makes us distinct. Our capital allocation framework has served the Company and its stakeholders well and remains unchanged. Free cash flow generation is significant and, over the last six years, we have generated over £3.2 billion of free cash flow and paid or declared 64.7 pence per share in dividends, including four special dividends. With sales on an improving trend, profit growing for a fourth consecutive year, and free cash flow continuing to be strong, we had anticipated announcing another special dividend at year end. Instead, during the usual process of reviewing surplus capital payments, we determined it would be prudent to defer that announcement given current unprecedented events around COVID-19. This enables maximum future flexibility around how we prioritise uses of our strong cash flow and surplus capital, and we will keep our capital allocation options under review. Michael Gleeson, Chief Financial Officer Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Supporting communities We aim to make a positive contribution to the communities we serve, and to society more widely. Our stores were at the heart of the community effort; arranging food parcels for people affected, helping keep the emergency services fed and watered and opening up our spaces to others – including to a bus company which parked its entire fleet on one of our store car parks following the flooding of their depot. Community Champions Community Champions across all our stores and sites lead the way in building relationships with local charities and groups. In 2019/20, their work with local charities led us to donating £900,000 worth of products to good causes; helped to redistribute over five million items of unsold food; and conducted hundreds of tours for local school children. We continue to increase the hours available to our Community Champions and add to the number of stores which have community rooms. These rooms are dedicated spaces for local community groups and charities to get together free of charge. In addition, we are encouraging the use of our cafés as a meeting place for social groups such as craft and parent and baby groups. Charity We support local good causes through the Morrisons Foundation, which has now donated £29m to charity since it was launched in 2015. In total more than 2,200 charities across England, Scotland and Wales have benefited from grant funding. This money has supported projects in a wide range of areas including social inclusion, homelessness, mental health, hospice care, environmental improvement and veterans. The Morrisons Foundation has also given a boost to our colleagues’ efforts by providing match funding totalling over £350,000 in the last year alone. Outcomes for communities Making a positive contribution to society Respecting human rights and ethical trading practices Supporting good causes and helping people in times of need Making a positive difference to local communities We are committed to being a positive force in the communities we serve. We continue to source more locally produced food, which is good for our customers, the environment and local economies. We support local charities with donations and fundraising opportunities, and we share our spaces with community groups who need a place to meet. We strive to be there for the communities we serve every day, but especially in times of need. During 2019, this included when flooding hit parts of South Yorkshire, when fires engulfed moorland between Huddersfield and Manchester, and when the dam failed at Toddbrook Reservoir in Whaley Bridge. Community initiatives at our Bolsover store Since opening in November 2019, our new store in Bolsover has donated £1,000 worth of products to local good causes. Our Community Champion has spent time volunteering in the local area including helping paint the Parish Community Hall and has worked with the local foodbank to raise awareness and donations. She’s also set up a relationship with a local care home that sees us donate our excess flowers for residents. Sustainability spotlight Unsold food programme Since 2016, our stores have worked with local community group partners to ensure that edible unsold food in our stores is redistributed to those who need it. Our stores work with over 450 local community groups across the UK. Since the programme began, we’ve redistributed over five million unsold food products from our stores. my.morrisons.com/community-and-charity/ unsold-food-waste-programme/ In addition, we support a number of important national charities. Our charity partnership with CLIC Sargent raised £4m in 2019/20 and in doing so passed the milestone of £11m raised cumulatively since the start of the partnership. This money is being used to provide support for young cancer patients and their families, for example through financial grants, places to stay for free close to cancer treatment centres, and specialist nursing teams. Our colleagues and customers also raised over £600,000 for the Marie Curie Daffodil Appeal over a long weekend in March, as well as £1.8m for the Poppy Appeal. £11m raised for CLIC Sargent Modern slavery At Morrisons, we are committed to playing an active role in tackling modern slavery, forced labour, human trafficking and exploitation which impacts workers across all aspects of our global supply chain and represents an unacceptable affront to human rights. We have continuously developed and improved our approach to these issues over the past three years. Further details on the steps that Morrisons has taken to tackle modern slavery and human trafficking within our Group businesses and supply chains can be found in our 2019/20 Modern Slavery Act Statement on our corporate website at www.morrisons-corporate.com/cr/ ethical-trading/tackling-modern-slavery-and- forced-labour/ Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 23 Strategic reportGovernanceFinancial statementsInvestor informationProtecting the environment It’s important we minimise environmental risks to our business, protect natural capital and create efficiencies, respecting and valuing the food we serve to our customers. Outcomes for the environment Reducing, reusing and recycling the plastic we use Reducing food waste Supporting British farmers to be more sustainable Tackling climate change Non-financial information statement In order to comply with the requirements of the Companies Act 2006, sections 414CA and CB, we have discussed the following information in the places referenced below: • information on environmental matters is shown in this section on pages 24 to 26; • information on our colleagues is shown in Our colleagues section on page 16 and as part of the Directors’ report on page 67; • information on social matters is shown in the Supporting communities section on page 23; • our respect for human rights is set out in our Corporate governance report on page 44; • our approach to anti-corruption and anti-bribery matters is set out in our Corporate governance report on page 44; • our business model is described on pages 2 and 3; • our principal risks, and how we manage them, are described on pages 28 and 29; and • other non-financial key performance indicators are shown on page 1. Plastic Changing the way we use plastics on our products and in our operations. Reducing the impact plastic is having on the environment is important to our customers and society more generally. Our good progress to date is supported by strong commitments to further improve by 2025. As a result of our efforts on plastics, in 2019 we were awarded Business in the Community’s ‘Responsible Business Award’ for Environmental Sustainability1. The award recognises those companies taking an innovative approach to addressing the big environmental challenges facing society. Reducing plastic We are committed to reducing the plastic we use in our own-brand packaging by 50% by 2025. In 2019/20, we introduced a number of initiatives to remove plastic: • offering the highest proportion of loose fruit and vegetables sales of any UK supermarket; • launching a 100% unbleached and untreated recycled cotton string produce bag; • introducing paper produce bags saving 176 million single-use bags, the equivalent of 269 tonnes of plastic; and • increasing the price of our plastic bags for life from 10p to 20p to encourage customers to reuse them. Improving recyclability By 2025, all of the primary plastic packaging used on our own-brand products will be recyclable, reusable or compostable. In 2019/20, we made progress against our commitment through a number of initiatives including: • removing hard to recycle black plastic from all of Morrisons packaging; • removing expanded polystyrene from all of Morrisons packaging; and • ensuring front of pack ‘recycle me’ and ‘recycle in store’ logos now feature on 400 of the most popular Morrisons products. Sourcing responsibly Our customers care where their food comes from and want to know that it has been responsibly and sustainably sourced. This not only means being able to trace the origins of the food we buy, but also knowing the food that we buy has not had a negative effect on the environment which produced it. Deforestation Every year, 32 million acres of natural forest are destroyed due to illegal logging, poor forest management practices and increasing global demand for forest and agricultural products. We have a new commitment in place to support zero deforestation by the end of 2025. This strengthens our position on the sourcing of key commodities including soy, palm, timber and beef. ‘Nutmeg’ environmental plan We have set a number of stretching environmental targets for our ‘Nutmeg’ clothing range to be delivered by 2025. These include 100% of the polyester used in ‘Nutmeg’ clothing to be from recycled sources and 100% of viscose to be sourced from responsibly managed forests and produced using closed-loop manufacturing. For further information, please see our 2019/20 Corporate Responsibility Report which can be found at www.morrisons-corporate.com/cr/ corporate-responsibility/ Sustainability spotlight Award winning bee friendly eggs Morrisons won the first ever ‘Sustainable Food and Farming Award’ from Compassion in World Farming for our bee-friendly eggs. This award recognises those businesses that are taking steps to produce meat, dairy and eggs in ways that protect, improve and restore wildlife and the environment. Since 2013, under a partnership with the Bumblebee Conservation Trust, farmers supplying eggs to our manufacturing site Chippindale Foods need to plant an acre of wildflower meadow for every laying hen range. 1 Business in the Community, Responsible Business Awards, 2019. 24 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 ↓50% targeted reduction in operational food waste by 2030 Food waste Following the food waste hierarchy to reduce, reuse and recycle. We have set a target to reduce our operational food waste by 50% by 2030. Working with third party data analysts, we have developed a methodology to accurately record food wasted in our stores by weight. We are also working with our manufacturing sites to accurately measure the amount of food wasted. Further information on our figures can be found in our latest Corporate Responsibility Report 2019/20. Reducing food waste in stores In all of our stores, customers can now buy discounted goods at risk of being wasted, thanks to the ‘Too Good to Go’ initiative. Customers use this app to buy a ‘magic box’ of Market Street products that are just past ‘Best Before’ date but still perfectly good to eat. Surplus food redistribution to charity In our manufacturing and distribution centres, we work with charities FareShare and The Bread and Butter Thing to redistribute edible surplus food. Since 2017, we’ve redistributed 3.4 million meals to FareShare. Supporting British farming Working with our suppliers to keep them competitive, profitable and sustainable. Sustainability spotlight Investing in electric vehicle charging points In 2019, we installed 100 GeniePoint rapid charging points for electric vehicles in our stores’ car parks allowing customers to charge their cars in as little as 20 minutes. The GeniePoint charging points can charge an average family car’s battery from flat to full in under 45 minutes which is at least three times quicker than the standard charging points at other supermarkets. www.morrisons-corporate.com/cr/corporate- responsibility/ev-charging-points/ Tackling climate change Reducing our impact and creating efficiencies. Science-based carbon target Working with the Carbon Trust, we have set an ambitious science-based carbon reduction target to reduce scope 1 and 2 (direct) emissions by 33% by 2025 and 53% by 2030 against a 2017 baseline. In our first year, we’ve achieved a 28% reduction in emissions against our target. ↓33% targeted reduction in operational emissions by 2025, 53% by 2030 and net zero by 2040 (2017 baseline) Group greenhouse gas emissions for year ending 31 December 2019 Emission source (Scope 1) Combustion of fuel and operation of facilities Natural Gas1 Haulage2 Company Cars3 Fugitive Emissions Refrigerant 2017/18 Baseline Year 2018/19 Prior Year 2019/20 Current Year Change vs baseline Change vs 2018/19 166,154 135,029 1,791 156,348 141,002 1,828 141,572 139,164 2,140 15% (3%) (19%) 9% 1% (17%) 183,207 130,281 85,039 54% 35% Award winning bee friendly eggs See the ‘Sustainability spotlight’ panel opposite. Energy purchased for Own Use (Scope 2) Electricity4 456,682 362,706 311,954 Total Intensity Ratio: Tonnes of CO2e per m2 GIA 942,863 0.356 792,165 0.296 679,869 0.252 32% 28% 29% 14% 14% 15% Bull calves We are guaranteeing a market for all male calves born on our dairy suppliers’ farms. At present, any male calves are either killed at birth or exported. Under our scheme, farmers will be required to rear the calves to a certain weight until 15–40 days of age, at which point they will be bought by our partner beef-rearing company and processed in our manufacturing sites. Underlying Energy Use (MWh) Electricity Natural Gas Haulage Company Cars Total 1,299,017 1,281,330 1,220,479 902,207 508,955 7,308 849,900 770,039 453,654 455,917 7,402 2,866 2,717,487 2,592,286 2,449,301 6% 15% 10% 61% 10% 5% 9% (0%) 61% 6% 1 Data taken from most recent invoice data which includes subsequent adjustments for rebilling; re-baselining of site inclusions/ exclusions; and adjustments to the way data is apportioned across the year to ensure ongoing consistency. 2 Haulage data includes well to tank emissions which takes into account the extraction and transportation of fuel bringing reporting in line with our science based targets. 3 Company car data does not include scope 3 – employee commuting. 4 Transmission and distribution, electricity excludes scope 3. Data taken from most recent invoice data which includes subsequent adjustments for rebilling; re-baselining of site inclusions/exclusions; and adjustments to the way data is apportioned across the year to ensure ongoing consistency. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 25 Strategic reportGovernanceFinancial statementsInvestor information Protecting the environment continued Group greenhouse gas (‘GHG’) emissions methodology We have reported for the calendar year 1 January to 31 December 2019 in order to remain consistent with our historical footprint report and baseline year verification. We have used the Government’s Environmental Reporting Guidelines (2019) to prepare these numbers, and the emissions factors from the UK Government GHG Conversion Factors for Company Reporting (2019). 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, 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 their energy and carbon, and four sites which have fuel oil (less than 0.1% of the total footprint). In line with Streamlined Energy and Carbon Reporting (SECR) requirements we have also reported on the underlying energy use used to calculate Group GHG gas emissions. Where original data was provided in litres of diesel, petrol or gas oil it has been converted to kWh. The reporting boundary has been determined by operational control, whereby all emissions within operational control have been included within scope, i.e. scope 1 and 2. Group greenhouse gas emissions verification The review was based on the requirements of WRI GHG Protocol, Defra ‘Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance’ 2013 and ISO 14064, in particular Part 3 Specification with guidance for the validation and verification of GHG assertions. Verification was also carried out to ensure the reporting requirements of SECR were met, to ensure correct format and inclusion of relevant emissions sources and underlying energy use. Carbon Trust and PricewaterhouseCoopers LLP (PwC) validated our 2017 baseline data, following ISAE – 3410 accounting standard. We then worked with the Carbon Trust to define our new carbon target, and continue to work with them for Scope 3. 26 Energy efficiency initiatives We’ve carried out a number of energy efficiency initiatives in stores. This included LED lighting replacement; a voltage optimisation programme; and freezer door heater control installation across our stores. We’ve achieved a further reduction in electricity consumption by ensuring energy efficient equipment is considered during the design phase of our Fresh Look and maintenance and replacement programmes. Fresh Look store upgrades currently include refrigeration, heating, ventilation, air conditioning, lighting and counter operations efficiencies. We have improved the monitoring and control of heating, ventilation and air conditioning systems by upgrading controls and optimising software strategies. Reduction in gas consumption was also achieved through our boiler replacement programme. We have improved the quality of gas measurement across the estate with the installation of Automated meter reading (AMR) devices. ESOS Phase 2 was carried out during the summer of 2019, with compliance being registered in November 2019. As a direct result of the output of ESOS, we have begun carrying out a number of feasibility studies across refrigeration, motors, fans and onsite solar electricity generation. During 2019 an increased focus was placed on behaviour change to reduce consumption at our manufacturing sites, giving site managers increased visibility of the site level energy budget and carbon footprint. Our logistics division has continued to undertake a number of activities designed to reduce kilometres travelled and the fuel consumed while delivering food to our stores. These initiatives include: Longer semi-trailers – Increasing store deliveries that are carried out using longer semi-trailers, which helps to increase loads. Increased pallet sizes – Reducing the number of pallets required to service each site. Driving styles – By using our vehicle telematics system we have improved the average miles to the gallon of our drivers by reducing harsh braking, acceleration and engine idling time. Fleet investment – All 463 units are compliant with Euro 6 technology, these new units have shown an improvement of miles to the gallon. Network efficiency – Through rescheduling we have removed 700 trips and collaborated where possible with our manufacturing sites to include collecting goods using empty wagons returning to depot. Reducing value chain emissions We will be setting a science-based target for scope 3 (indirect) emissions including supply chain, purchased goods and services. Working with the Carbon Trust, we will establish baseline data during 2020/21. We have a new and stretching target to be zero net emissions in our UK agriculture supply chain by 2030. This builds on the National Farmers’ Union ambition to be net zero by 2040. We will achieve this through the work of the Farming Programme by supporting Morrisons UK farming suppliers to increase on-farm productivity, invest in farmland carbon storage and renewable energy utilisation. Governance and climate-related risk management The Corporate Compliance and Responsibility (CCR) Committee has delegated responsibility from the Board to oversee strategy and process in climate-related issues. Members of the CCR and its activities can be found on page 37. Climate-related risks are identified and incorporated into the Company risk register and include an associated improvement plan. The improvement plan is embedded into annual business plans. We monitor the issues that affect our business, engage with our stakeholders and take specialist advice. We analyse business risks and opportunities and raise this within our wider Leadership teams. Business leads are appointed to manage each area and reduce the risk or develop opportunities for progress. This is then upwardly reported through our formal governance process. We keep each commitment and KPI under review. Business leads are required to provide quarterly updates. Each commitment is mapped and reviewed as well as an overall end of year review. We welcome the recommendations from the Task Force on Climate-related Financial Disclosures and plan to build the recommendations into our reporting process in 2020/21. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Risk Managing our risks The achievement of our seven priorities depends on our ability to make sound, risk-informed decisions. Managing risk and uncertainty is an integral part of the Board’s strategic thinking. 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 ambitions for all of our stakeholders and means that we are in a better position to achieve our objectives, respond to emerging risks and create opportunities. The risk management process The risk management process Identif y r o t i n o M Eval u a t e Mitigate The risk management framework Board of Directors T o p d o w n Audit Committee Executive Committee Risk and Internal Audit Operational Management B o t t o m u p Maintains sound risk management and control systems, assesses principal risks Sets risk management framework, assesses effectiveness of risk and control systems and maintains oversight of risk monitoring Assesses principal and operational risks and undertakes regular monitoring of risk Coordinates risk management activity through review of risk registers, agreement of risk mitigation plans and preparation of risk reporting Reviews operational risks, operates controls and implements risk mitigation plans Our established risk management framework has been built to identify, evaluate, mitigate and monitor those risks which threaten the achievement of our seven 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. Risk registers for each of the key business functions sit at the heart of this process. These registers detail the main functional risks and are used to assess the gross level of risk (likelihood and impact), mitigating controls, and the resultant net level of risk, as well as risk mitigation plans with dates and target level of risk. The impact assessment of a risk includes considering its reputational, financial and operational effect. We assign targets 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 that action plans are in place where required. The risk registers are also formally reviewed and challenged by a sub- group of the Executive Committee each year. This sub-group reviews coverage across the ten Group Principal risks, key controls already in place and the mitigating actions. The Executive Committee reviews the output from the sub-group at half year and reviews the Group risks at year end. Their review considers the completeness of risks captured in the detailed functional risk registers, strategic risks, external factors and any emerging risks. This year we have formalised our assessment of emerging risks in light of the new Corporate Governance Code. 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 the functional and Group risk registers. It supports the Audit Committee in reviewing the effectiveness of the Group’s risk management and internal control systems and has established a rotational monitoring process for key controls. Where potential weaknesses are identified, the Risk and Internal Audit teams work with the business to agree robust mitigating actions. 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 pages 40 to 43. UK – EU Trade Throughout the year, uncertainty around the UK’s future relationship with the EU has impacted customer confidence. At the half year, in light of this continued uncertainty and potential impact on the operational environment for Morrisons, and the United Kingdom generally, the decision was taken to create a separate Brexit Group Risk. This was approved by the Audit Committee in September and included in the risk disclosure in the Interim Statement. This risk has now been renamed as UK – EU Trade. Whilst the UK left the EU on 31 January 2020, uncertainty still remains over the UK’s future trading relationship with the EU and the implications for the movement of goods across borders when the transition period ends on 31 December 2020. In February 2020, the UK government confirmed plans to introduce import controls on EU goods at the border after the transition period ends on 31 December 2020. There is also the potential for substantial extra costs if the objective of a zero tariff trade agreement is not achieved. In our planning for the two previous Brexit deadlines in March 2019 and October 2019, we had evaluated a number of scenarios and will continue to respond as further details emerge. Actions previously taken include securing Authorised Economic Operator status, maintaining a robust Treasury Policy for foreign exchange transactions, actively engaging with our freight partners and suppliers to ensure their preparedness and considering alternative routes of supply. Potential impacts on the availability of labour are being mitigated by further investment in automation, particularly in our Manufacturing division and are being closely monitored on a site by site basis. The business remains focussed on executing its plans to mitigate the identified risks arising from the UK’s changing relationship with the EU. This will include the impact of a proposed new points based immigration system which is due to come into force on 1 January 2021, which may reduce access to EU labour. The Group is monitoring ongoing developments through the transition period and co-ordinating operational responses. COVID-19 At the time of reporting, in March 2020, the Group continues to closely monitor the constantly changing risk of the global COVID-19 pandemic. Our response is being coordinated through a COVID-19 Business Continuity team with full time representatives from all business areas. The potential impact will depend on the severity and length of the UK outbreak. The key risks to our operations include: • The impact on our colleagues, especially those who are at high risk and need to self isolate; • Disruption to our global supply chain through restrictions on movement; • The impact on our suppliers, who we are continuing to work closely with, especially those with smaller operations; • Short-term spikes in customer demand and the impact on ongoing availability of key staple lines; and • A prolonged significant outbreak in the UK resulting in geographical movement restrictions. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 27 Strategic reportGovernanceFinancial statementsInvestor information Risk continued Principal risks Principal risks The Directors have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, the achievement of our seven priorities, solvency or liquidity. The Directors consider these to be the most significant risks facing the business, however, they do not comprise all the risks that the business is facing. These principal risks are set out on the following pages. Risk Description Mitigation UK – EU Trade 1 2 5 Brexit and continued trade negotiations with the EU and other countries, presents ongoing uncertainty to the UK economy and continues to impact consumer confidence. Failure to adequately prepare for a range of outcomes could have significant implications on business performance, including: supply chain disruption; availability of product; changes to taxes and tariffs; impact of pronounced currency fluctuations; and the ability to secure labour. Business Interruption # There is a risk that a major incident, such as a significant failure of technology or a strategic third party, a natural disaster, a global pandemic such as COVID-19, disruption in the supply chain or strike action, could cause significant disruption to business operations. The Group’s response must be appropriate to minimise disruption and reputational damage. Competitiveness 1 7 The Grocery Sector continues to be highly competitive with considerable promotional activity. If we do not engage with our suppliers or effectively manage our trade plan to remain competitive there is a risk this will adversely impact like-for-like sales and financial performance. Customer 1 2 3 4 6 7 There is a risk that we do not meet the needs of our customers in respect of price, range, quality, service, responding to changes in eating habits and sustainability concerns. If we do not provide the shopping trip that customers want, both in store and online, we could lose sales and market share particularly in an environment of weaker customer sentiment. • A business-wide Stability Group is monitoring developments through the transition period and coordinating operational responses. We have focussed action plans in place, ready to implement as the political and economic environment evolves; • We continue to actively engage with key suppliers to assess specific impacts to our business and maintain a strong focus on UK sourcing; • We have achieved Authorised Economic Operator status to enable more straight forward border checks; • We have also been working with our suppliers and freight providers to identify alternative supply routes avoiding the busiest ports; • The Group has a treasury policy in place for hedging to mitigate risks on currency fluctuations. We have assessed, and continue to plan for, potential changes to taxes and tariffs; and • We continue to monitor any changes which may impact the availability of labour across the Group. Our manufacturing and logistics sites have specific people plans in place. • 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 and disaster recovery 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; • There has been continued investment in cloud technologies to provide further resilience to the Technology systems; and • We work alongside our strategic third party partners ensuring both parties’ continuity plans are robust and aligned. • Our pricing, trade plan and promotional and marketing campaigns are actively managed; • Our strong balance sheet and strong cash flow allow us to continue to invest in our proposition; • Long-term agreements are established with suppliers, ensuring a competitive customer offer to help maintain security of supply; • We continue to work closely with British growers and farmers; and • We continually review our range, category plan and quality and respond to customer feedback. • One of our seven priorities is ‘to serve customers better’ and we have a range of activities to support that; • The ongoing programme of customer listening helps us to gain a deep understanding of what our customers want and has informed key activities such as our store Fresh Look programme as well as changes to range and the introduction of more locally sourced products; • We closely monitor research on customer perceptions and respond quickly wherever possible, such as, plastics, palm oil, red meat and changes to eating habits; • We have reduced plastic in the products we supply and launched our 2025 own-brand plastic commitment; and • We have worked to make Morrisons products accessible to more customers by working with new wholesale partners and continuing to expand the geography covered by our online offering. Data # 28 A security breach leading to a 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 cyber-crime and regulatory requirements. • The 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; and • Focussed working groups are in place – looking at the management of data across the business including colleague data, customer data, commercial data and financial data. This considers data transfer to third parties. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Risk Description Mitigation Financial and Treasury # Food Safety and Product Integrity 1 2 3 The main areas of this principal risk are the availability of funding and management of cash flow, including liquidity requirements and debt maturity profiles, 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 could lead to some terms being reviewed. In addition, exposure to movement in foreign exchange rates continues to require management. The growth of wholesale supply contracts introduces credit risk which requires policies and monitoring to manage. 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. Health and Safety 2 4 5 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. • The Group’s Treasury function is responsible for the forward-planning and management of funding, interest rate, foreign currency exchange rates 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 appropriateness of policies are reviewed on a regular basis; • 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; • For livestock and produce, we track prices and forecasts and enter into long-term contracts where appropriate to ensure stability of price and supply; and • We have policies to control and monitor the credit risk across our increasing number of Wholesale customers. • 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 production 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, such as the new allergen regulation which comes into force in 2021; • The process is supported by external accreditation and internal training programmes; and • We work closely with our supply chain to understand food provenance, sustainable and ethical practices. • 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 the Group with resource dedicated to manage this risk effectively; and • Management regularly monitors health and safety performance and compliance. People # 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. • 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; • We have worked to give colleagues increased visibility and flexibility of their hours and rotas with the introduction of a new People System and modernised working patterns; and • Colleague engagement surveys, listening sessions and networking forums are used to understand and respond to our colleagues. Regulation # 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. The Board takes its responsibilities very seriously and recognises that breach of regulation can lead to reputational damage and financial damages to the Group. Consideration is also given to any potential changes to regulations. • 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; • The Group monitors for potential regulatory change and the impact on contractual arrangements; • 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. Key Link to our seven priorities Increase in net risk No change in net risk Decrease in net risk 1 2 3 To be more competitive To serve customers better Find local solutions 4 5 6 Develop popular and useful services 7 Naturally digital To simplify and speed up the organisation # Underpins all seven priorities To make the core supermarkets strong again Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 29 Strategic reportGovernanceFinancial statementsInvestor information Risk continued Principal risks Emerging Risk Disclosure Our Risk Management process incorporates the identification and management of emerging risks, alongside our known principal risks. The scenarios which have been modelled encompass the Group’s principal risks. The hypothetical scenarios are deliberately severe and designed to test the viability of the Group. We employ the following strategies to ensure that our business is adequately prepared for the potential threats or opportunities these present: • strategic and operational horizon scanning across the business; • working with our key strategic partners to share emerging consumer trends; and • using third party experts to assist with the consideration of emerging risks and legislation. A non-exhaustive list of emerging risks currently being monitored include: • consumer eating habits and trends; • sustainability and ethical trading; • environmental and climate change; and • continued innovation in technology. Viability statement The Group’s business model and strategy, as outlined on pages 2 and 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 2023. The Group’s business model is not dependent on any particular contract or resource with fixed end dates. The period selected is consistent with the Group’s strategic and financial plans and therefore was considered to be the most robust means to support its viability statement. The Board assesses the Group’s prospects primarily through the strategic planning process. This considers the Group’s current position, business model (pages 2 and 3), opportunities for growth, performance of its strategy (including seven priorities (pages 8 to 11)), as well as the principal risks (pages 28 and 29). The latest strategic planning update with the Board was held in November 2019 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. The Group’s policy is to maintain sufficient headroom in committed facilities to mitigate the risk that supply chain finance facilities are not available. Key metrics, 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. In the case of these scenarios arising, various options are available to the Group in order to maintain liquidity. These include: reducing non-essential capital expenditure, short-term cost reductions, or reduced returns to shareholders. 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. At the time of reporting, in March 2020, the situation around the COVID-19 pandemic is rapidly evolving. Whilst the current situation is unprecedented, we have considered the potential impacts of the pandemic with respect to the scenarios tested and in the light of the reverse stress testing performed. Based on the facts available at the time of reporting, the Directors believe the conclusions reached in the viability testing remain appropriate. Scenario Principal risks Description Competitive pressure Competitiveness, Customer Compliance Failure to remain competitive (e.g. through price or keeping pace with the change in the market) resulting in declining sales and profitability. A serious data security or regulatory breach results in a significant monetary penalty and an impact on reputation among customers leading to an impact on sales and profit. Financial Treasury A banking crisis leads to one or more of the members of the Group’s banking syndicate choosing not to or being unable to honour the facility agreement, leading to a reduction in committed or uncommitted facilities. UK – EU trade Competitiveness, Customer, regulation, Financial Treasury Increased inflation and import costs as a result of the UK’s decision to leave the European Union, including the impact of reversion to WTO rates in the case of a no deal Brexit and an impact on the labour market. Business interruption or regulatory breach Banking crisis Impact of Brexit Section 172 The Board has provided a statement on page 33 explaining how it has had regard to the requirements in s.172 of the 2006 Companies Act. As part of the Board’s decision making process, our Directors regard the likely consequences of any decision to the long-term success of the Company, our four stakeholder groups, the community and the environment. Approval of the Strategic report Pages 1 to 30 of the Annual Report form the Strategic report. The Strategic report was approved by the Board on 17 March 2020 and signed on its behalf by: Jonathan Burke, Company Secretary 17 March 2020 30 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Corporate governance report Chair’s governance statement “ On behalf of the Board, I’m pleased to introduce Morrisons Corporate governance report for the financial year 2019/20.” Andrew Higginson, Chair Dear Shareholder, Corporate governance continues to be discussed and reviewed in ever greater detail. I’m proud of the work we have done and continue to do as a Board to ensure Morrisons remains committed to maintaining robust and effective standards of corporate governance. All decisions are made with the long-term benefits of all our stakeholders firmly on the Board’s mind. Corporate Governance Code Throughout the year, the Company has applied the 2018 UK Corporate Governance Code (‘the Code’). The Board has spent significant time ensuring that our corporate governance standards and processes remain aligned to the updated guidance, the changing environment in which we work, the needs of all our stakeholders and the delivery of our strategy. The Board fully support Morrisons underlying strategy which aligns to our core purpose which is ‘to 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’. Throughout the year, the Board has ensured that we fully consider our four stakeholder groups, the community and the environment in every decision that we make. Colleague voice at the Board The culture of listening is well established throughout Morrisons and at the heart of everything we do. In addition to the appointment of Tony van Kralingen as the designated Non-Executive Director of workforce engagement, each member of the Board meets hundreds of colleagues every year through functional updates at Board meetings, store and site visits and personal shopping experiences. These encounters support and add richness to our annual ‘Your Say’ survey, which this year saw more than three-quarters of colleagues across the business share their thoughts about the Group. Twice a year, representatives from each store region, manufacturing site, distribution centre and head office gather to discuss the issues that are most important to the colleagues they represent. Tony van Kralingen and David Potts each attended at least one of these forums, along with other senior members of the Group’s management team, to hear colleague views for themselves. More information on how we listen to colleagues can be found in Our colleagues section on pages 16 and 17. Engaging with all stakeholders We continue to review and improve our operating business model based on the listening activities we carry out across all our stakeholder groups. Our Corporate Responsibility Report outlines how we engage with these stakeholder groups to ensure that our responsibilities to wider society are understood and embedded in how we work. The Board and the Group are committed to listening hard to all our stakeholders and responding quickly wherever we can. Andrew Higginson, Chair Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 31 Strategic reportGovernanceFinancial statementsInvestor informationCorporate 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 in the Directors’ remuneration report regarding Executive Directors’ pensions, complied with the detailed provisions of the 2018 UK Corporate Governance Code (‘the Code’) throughout the financial year 2019/20 and to the date of this Annual Report. The Code is available on the Financial Reporting Council’s (FRC) website, www.frc.org.uk. The Board’s corporate governance compliance statement sets out how we comply with each of the provisions of the Code. It is available in the Investor Centre section of the Group’s website, www.morrisons-corporate.com. More details on how the Group has complied with these provisions is found throughout this Annual Report as referenced in the table. Board Leadership and Company Purpose Audit, Risk and Internal Control Basis of generating and preserving long-term value Morrisons culture Understanding shareholder views Section 172 reporting Workforce engagement Whistleblowing policy Managing conflicts of interest Division of Responsibilities The Chair’s role and responsibilities Non-Executive Directors 2 16 39 33 16 44 38 Audit Committee membership and responsibilities Audit Committee activities Director responsibility for the Annual Report and accounts 36 40 69 Assessment of emerging and principal risks 27 to 30 Risk management and internal control systems Going concern Viability statement Remuneration 36 Remuneration Committee membership and responsibilities 34 and 35 Non-Executive Director remuneration Senior Independent Director role and responsibilities Board and Director performance Board meeting attendance External appointment approval process Company Secretary Composition, Succession and Evaluation Nomination Committee membership and responsibilities Director annual re-election Chair tenure Director recruitment process Board evaluation 36 38 35 45 35 37 34 34 45 38 Remuneration consultants Post employment shareholding requirement Executive pensions Contract periods Director remuneration policy Remuneration Committee considerations 27 67 30 37 56 66 51 51 55 50 46 32 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 How we have considered compliance with Section 172 of the 2006 Companies Act Section 172 requires that Directors act in the way they consider, in good faith, would be most likely to promote the success of the Group for the benefit of its members as a whole. In doing so the Directors should have regard (amongst other matters) to the likely consequences of any decision in the long term; the interests of employees; the need to foster relationships with suppliers, customers and others; the impact of its operations on the community and the environment; the maintaining of a reputation for high standards of business conduct; and the need to act fairly as between members of the Company. Element S172 factors What we do Examples of where the Board have considered these factors Our Four Stakeholder Groups Employee Interests • Our annual ‘Your Say’ survey was completed by 79% of colleagues. • Overall colleague engagement score was 77%. • Hourly rate of pay for frontline store colleagues increased to £9.00 per hour during 2019/20. p16 For more detail on what we do regarding colleagues • Tony van Kralingen is the designated Non-Executive Director (NED) for workforce engagement. Tony attended the National ‘Your Say’ Forum and took part in discussions with representatives from each store region, manufacturing site and distribution centre. After attending this session, Tony reported back to the Board regarding the matters discussed and the thoughts of colleagues. This insight added further detail to the ‘Your Say’ results which were reviewed by the Board. Relationships with Customers • We track customer complaints and customer satisfaction scores. • Identified around 1,300 own-brand ‘customer favourites’ and commenced a programme to reduce prices on them. • Looked to find ways to allow customers to make healthier choices through removing calories, sugar and fat from our ranges. • We strive to act fairly between members by maintaining a strong balance sheet and a cash generative business with low levels of debt. • There are opportunities for all shareholders to have informal discussions with our Directors after the AGM each year. Act Fairly between Members Relationships with Suppliers • Establishing lasting relationships with suppliers informed by listening. • Continuing to work together with The Community and the Environment Impact on Community, Environment and Wider Society simplified terms. • Complying with the Groceries Supply Code of Practice (GSCOP), promoting involvement in GCA Supplier Survey. • Working hard to provide support for communities in times of need. • Donating £29m to charity since the launch of the Morrisons Foundation in 2015. • Redistributing 3.4 million meals of edible surplus food to FareShare and The Bread and Butter Thing, since 2017. • Reducing plastic packaging and improving recyclability. • Supporting British Farmers through initiatives such as bee-friendly eggs and providing a market for bull calves. • The Board receive regular updates on our customer listening activities including verbatim quotes, customer perception data and analysis from external sources. • All shareholders are invited to the AGM and can ask questions of the Directors in the meeting. After the 2019 meeting, all Directors were available to discuss shareholder views in a more informal setting. p14 For more detail on customers p20 For more detail on financial results p18 For more detail on supplier relationships • The Board receive regular updates on the Group’s compliance to GSCOP. As Chair of the Corporate Compliance and Responsibility (CCR) Committee, Neil Davidson also meets with the Grocery Code Adjudicator (GCA) on an annual basis to discuss best practice and supplier views in more detail. • The Board and CCR Committee receive regular updates on the community and environmental initiatives within the Group. These include regular updates on the work to reduce the use of single use plastics. p23 For more detail on community, environment and wider society Strong Corporate Governance High standards of Business conduct • Compliance with the 2018 UK Corporate Governance Code. • Clear divisions of responsibility and roles. p32 For more detail • The Board reviewed all requirements of the 2018 Code to ensure that the Group maintains high standards of business conduct. Long-Term Consequences of Decisions • All decisions are aligned to our Core Purpose. • All decisions are made with long-term consequences in mind. • The Board carefully reviewed the short and long-term consequences of providing Ocado with sole use of the new Erith Customer Fulfilment Centre (CFC) until January 2021 before concluding that such an agreement was in the long-term interests of all Morrisons stakeholders. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 33 Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Board of Directors and Executive Committee Composition of the Board The Board is independent and comprises an appropriate mixture of skills and experience. The Board is satisfied that all Non-Executive Directors, including the Non-Executive Chair, 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 Centre 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 order to effectively fulfil their role and responsibilities on the Board. All current Directors submit themselves for re-election at the AGM to be held on 11 June 2020. 1. Andrew Higginson Chair 3. Trevor Strain Chief Operating Officer 5. Rooney Anand Senior Independent Non-Executive Director 7. Kevin Havelock Independent Non-Executive Director 2. David Potts CBE Chief Executive 4. Michael Gleeson Chief Financial Officer 6. Neil Davidson CBE Independent Non-Executive Director 8. Belinda Richards Independent Non-Executive Director 1. Andrew Higginson Appointment Andrew joined the Group as Deputy Chair and Chair Elect in October 2014 and became Chair at the end of January 2015. Andrew met the Independence criteria detailed in the Code upon appointment. 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 Tesco’s Retailing Services business. His early career was with Unilever, Guinness, Laura Ashley and the Burton Group. Andrew was previously the Chair of Poundland Group PLC and N Brown Group PLC, Senior Independent Director of BSkyB PLC and a Non-Executive Director of the Rugby Football Union and Woolworths Holdings Limited. External Roles Non-Executive Director of Flutter PLC Non-Executive Director of Majid Al Futtaim Group Chair of the IGD Chair of Evergreen Garden Care Limited Adviser to Shore Capital Adviser to Clearwater International 2. David Potts Appointment David joined the Group as Chief Executive in 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 Chief Executive 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 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 Group’s productivity programmes. Trevor joined the Board as Chief Financial Officer in April 2013 and assumed the additional responsibilities of Group Commercial Director in October 2018. In December 2019, Trevor became the Chief Operating Officer. 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. Michael Gleeson Appointment Michael joined the Group in 2014 as Group Financial Controller. In 2015 he became the Supermarkets Financial Director before taking up post as Trading Director of Ambient, Frozen, Dairy, Fuel and Services. Michael joined the Board on 3 February 2020 as Chief Financial Officer. Experience Prior to joining Morrisons, Michael worked for Tesco PLC in a number of senior finance roles including Group Financial Planning and Analysis Director and CFO of Tesco.com. Michael began his career with Arthur Andersen and is a member of the Institute of Chartered Accountants in Ireland. External Roles None 5. Rooney Anand Appointment Rooney joined the Board as a Non-Executive Director and Senior Independent Director in 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 and stepped down from this role last year. External Roles Chair of Purity Soft Drinks Chair of the Casual Dining Group Chair of WorldSkills UK Chair of Away Resorts 6. Neil Davidson1 Appointment Neil joined the Board as a Non-Executive Director on 1 October 2015. He became Chair of the Corporate Compliance and Responsibility Committee in January 2016. Experience Neil’s extensive career in manufacturing started with Northern Foods PLC where he rose to become Managing Director of its milk division. He was subsequently appointed CEO of Express Dairies PLC and then Arla PLC. He has also been a Non-Executive Director of Produce Investments PLC, Persimmon PLC and Northern Recruitment Group PLC. External Roles Chair of OptiBiotix Health PLC Chair of the Youth Sports Trust 7. Kevin Havelock Appointment Kevin joined the Board as a Non-Executive Director in February 2018. Experience Kevin has significant fast moving consumer goods (FMCG) industry experience, most recently as a member of the Executive Committee at Unilever and President of Global Refreshment, which comprises Unilever’s drinks and ice cream brands. External Roles Non-Executive Director of Fevertree Drinks PLC Trustee of The British Council Trustee of The Eden Project 8. Belinda Richards1 Appointment Belinda joined the Board as a Non-Executive Director in September 2015 and became Chair of the Audit Committee in January 2016. Experience Belinda’s career in professional services has spanned 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. The Board is satisfied that Belinda has recent and relevant financial experience appropriate to her position as Chair of the Audit Committee. Belinda is considered to have sufficient finance experience, having been a corporate finance partner at Deloitte for over ten years, has served on the Advisory Group of the Audit Committee Chairman at the FRC and has been a member of the Governing Council of the Centre for the Study of Financial Innovation. External Roles Non-Executive Director of Avast 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 Trustee of the Youth Sports Trust 1 On 6 February 2018, Belinda Richards was appointed Trustee of the Youth Sports Trust, a national charity, of which Neil Davidson is Chair. The Board has considered this cross-directorship and is satisfied that it does not compromise the independence of Belinda or Neil. 34 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 9. Tony van Kralingen Independent Non- Executive Director 10. Paula Vennells CBE Independent Non-Executive Director Executive Committee 1. David Potts CBE Chief Executive 4. Andy Atkinson Group Commercial Director 9. Tony van Kralingen Appointment Tony joined the Board as a Non-Executive Director in September 2017. Experience Tony has a broad experience across a number of disciplines including marketing, supply, procurement, manufacturing, and human resources. Tony served 35 years at SABMiller PLC, 14 of them on the Executive Committee. He held a number of positions including Group Director: Integrated Supply, Group Director Human Resources, Chair and Managing Director SAB, and Chair and CEO: Plzensky Prazdroj. External Roles Chair of Crown Commercial Services Honorary Professor of Global Corporate Strategy at Nottingham University 10. Paula Vennells Appointment Paula joined the Board as a Non-Executive Director in January 2016. Experience Paula has significant experience in large scale business turnaround, digital transformation and in culture change. Paula was Group Chief Executive of the Post Office, a role she held from 2012 to 2019, having joined the Post Office in 2007. Previously she was Group Commercial Director of Whitbread PLC after starting her career with Unilever and L’Oréal. Paula has held directorships in sales and marketing, commercial, and supply chain with a number of major retailers. External Roles Non-Executive Board Member of the Cabinet Office Chair of Imperial College Healthcare NHS Trust Non-Executive Director of Dunelm Group PLC Jonathan Burke Company Secretary Board composition 30 70 Executive Non-Executive Appointment Jonathan was appointed as the Group’s Company Secretary in February 2017. Experience As a qualified accountant and Company Secretary, Jonathan has worked at Morrisons for over 25 years holding various finance, compliance and project roles. Jonathan was also previously Company Secretary between 2001 and 2009. Attendance at meetings Main Board Nomination Committee Remuneration Committee Audit Committee CCR Committee Andrew Higginson David Potts Trevor Strain Michael Gleeson Rooney Anand Neil Davidson4 Kevin Havelock Belinda Richards6 Tony van Kralingen Paula Vennells 10/10 10/10 9/91 0/03 10/10 9/10 9/105 8/10 10/10 10/10 3/3 – – – 3/3 3/3 3/3 3/3 3/3 3/3 6/6 – – – 6/6 5/6 6/6 4/6 6/6 6/6 – – – – 5/5 4/5 5/5 3/5 5/5 5/5 5/5 5/5 3/32 – 5/5 4/5 5/5 3/5 5/5 5/5 Committee key Audit Committee Corporate Compliance and Responsibility Committee Remuneration Committee Nomination Committee Committee Chair 2. Trevor Strain Chief Operating Officer 5. Clare Grainger Group People Director 3. Michael Gleeson Chief Financial Officer 6. David Lepley7 Group Retail Director 1. David Potts See Board of Directors on page 34. 2. Trevor Strain See Board of Directors on page 34. 3. Michael Gleeson See Board of Directors on page 34. 4. 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. In February 2020, Andy was appointed Group Commercial Director, retaining responsibility for Customer and Marketing on an interim basis. Experience Andy previously held a number of senior commercial and trading roles within the organisation. Prior to joining the Group, Andy worked in a variety of senior commercial positions within Boots, progressing to Commercial Director. Andy started his career at Coca-Cola before moving to Walt Disney and then L’Oréal. 5. Clare Grainger Appointment Clare joined Morrisons in February 2009 and was appointed Group People Director in September 2015. Experience Clare began her career at Asda where she held a number of roles at Head Office and in the Retail division. She progressed through a variety of senior human resources (HR) positions 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. David Lepley Appointment David joined Morrisons in June 2016 as Store Replenishment Director. In February 2017, he became Operations Director for Central and took responsibility for a third of the Group’s retail stores. David joined the Executive Committee as Group Retail Director on 3 February 2020. Experience David began his career at Asda in 2004 and rapidly worked his way up from Store Manager to Regional Director for North Supermarkets. In 2015, David was appointed Senior Strategy and Development Director for Grocery Home Shopping before becoming Vice President of Online Grocery Operations later that year. 1 To avoid potential conflicts of interest, Trevor was not invited to the meeting that was held to discuss and approve his appointment as Chief Operating Officer. 2 Trevor was appointed to the CCR committee on 10 September 2019. 3 Michael was appointed to the Board at the start of the 2020/21 Financial Year. 4 Neil was unable to attend one meeting date due to a family emergency. He received papers on all subjects to be discussed and provided the Board with his comments prior to the meeting. 5 Occasionally, Board meetings are arranged to deal with matters outside the normal meeting schedule and therefore at shorter notice. In this instance, Kevin was unable to attend a meeting that was arranged with shorter notice due to time zone issues. Prior to this meeting, Kevin received all paperwork and provided his views on the subject tabled for discussion to the Board. 6 Belinda was unable to attend one meeting due to a family bereavement and one due to another commitment. Prior to the meetings, Belinda read all the papers tabled for discussion and provided feedback to the Board. She also held calls between management, PwC and the designated deputy Audit Committee Chair prior to the meeting to allow all to understand and update the Committee on her views of the Audit Committee meeting content. 7 Gary Mills was Group Retail Director from August 2015 to 3 February 2020. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 35 Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Structure of the Board and its Committees The decisions delegated by the Board to its Committees during the financial year 2019/20 are shown in the table below and on the following page. Function Main Board Executive Committee Audit Committee Corporate Compliance and Responsibility Committee Remuneration Committee Nomination Committee p38 See page 38 for details of activities. p39 See page 39 for details of activities. p40 See page 40 for details of activities. p44 See page 44 for details of activities. p46 See page 46 for details of activities. p45 See page 45 for details of activities. Members Andrew Higginson (Chair) David Potts Trevor Strain Michael Gleeson1 Rooney Anand Neil Davidson Kevin Havelock Tony van Kralingen Belinda Richards Paula Vennells David Potts (Chair) Trevor Strain Michael Gleeson2 Andy Atkinson Clare Grainger David Lepley3 Belinda Richards (Chair) Rooney Anand Neil Davidson Kevin Havelock Tony van Kralingen Paula Vennells Neil Davidson (Chair) Kevin Havelock Tony van Kralingen (Chair) Kevin Havelock Andrew Higginson (Chair) Tony van Kralingen Andrew Higginson David Potts Rooney Anand Andrew Clappen4 Tony van Kralingen Belinda Richards Trevor Strain5 Paula Vennells Andrew Higginson Rooney Anand Neil Davidson Belinda Richards Paula Vennells Rooney Anand Neil Davidson Kevin Havelock Belinda Richards Paula Vennells Developing and implementing the Group’s policies on corporate compliance and corporate responsibility; reviewing and ensuring compliance with those policies and with ethical and governance standards. Developing and implementing the Group’s remuneration framework and policies for Directors and colleagues including all long-term incentive plans, bonuses and pensions. Advising the Board on Board and senior management appointments and succession planning; monitoring the composition of the Board and its Committees. • Maintaining oversight of strategy and process in areas • Setting the remuneration policy for the Group’s • Evaluating the current and required mixture Chief Executive, Chair, Executive Directors of skills and experience on the Board; of corporate responsibility, including: – Groceries Supply Code of Practice (GSCOP); – food safety and food integrity; – health and safety; – gender pay; – environmental responsibilities, including energy usage, packaging and food waste; – cybersecurity; – ethical trading; – modern slavery; – competition compliance; – governance and reputation; – General Data Protection Regulation (GDPR); and – The Morrisons Foundation and charitable giving. and Executive Committee; • Reviewing workforce remuneration; • Aligning incentives and rewards to the corporate culture and objectives; • Agreeing remuneration of the Executive Directors and Executive Committee; • Engaging with shareholders in respect of remuneration policies; • Reviewing the terms and operation of the share ownership guidelines; and • Reviewing the Chief Executive and Chair’s expenses. • Reviewing succession planning for the Board; • Sourcing and selecting Board candidates (more information can be found on page 45); • Maintaining general oversight of people and capability within the business, and their diversity (more information can be found on page 45); • Reviewing the talent pool for the Executive Committee and levels below Executive Committee; and • Reviewing and setting policy on diversity. Key objectives Overall conduct of the business and setting strategy. Implementing strategy and actions in respect of financial planning and performance; day-to-day management of operations. Responsibilities • Understanding, reviewing and responding to the views of all stakeholders; • 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, interim financial report and trading statements; • Approving changes to the Group’s capital structure and major expenditure; • Approving membership of the Board on recommendation of the Nomination Committee; and • Appointing and removing the Company Secretary. • Developing and implementing the strategy; • 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 – Compliance with The Groceries Supply Code of Practice (GSCOP). Effective governance of financial reporting, internal controls and risk management systems; reviewing significant accounting judgements, assumptions and estimates; managing the relationship and appointment of the external auditor; monitoring and reviewing the effectiveness of the Group’s Risk and Internal Audit function. • Reviewing and making 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 and Financial Statements are 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; and – approval of Tax and Treasury policies. Chair Chief Executive Senior Independent Director Role Responsibilities • Providing leadership to the Board; • Taking responsibility for the Board’s composition and development; • Planning and conducting Board meetings effectively; and • Ensuring all Directors are involved and focus on the key tasks. • Engaging the Board in assessing and improving its performance; • Overseeing the induction and development of Directors; and • Providing advice and assistance to the Chief Executive. • Developing strategic operating plans that reflect the longer-term objectives and priorities established by the Board; • Closely monitoring the operating and financial results against plans and budgets taking remedial action where necessary and informing the Board of significant changes; and • Putting in place adequate operational planning control systems. • Building and maintaining an effective executive management team; • Ensuring that the operating objectives and standards of performance are not only understood but owned by the management and other employees; and • Maintaining ongoing dialogue with the Chair of the Board. • Acting as a sounding board for the Chair, supporting the delivery of their objectives and leading the Chair’s evaluation on the Board’s behalf; and • Meeting with the Non-Executive Directors to review the Chair’s performance at least once a year. • Being available to shareholders and other Non-Executive Directors to address any concerns or issues they feel have not been adequately dealt with through the usual channels of communications; and • Working closely with the Nomination Committee to support the succession of the Chair. 36 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Chair Key objective: Governance of the Board Main Board Executive Committee Audit Committee Corporate Compliance and Responsibility Committee Remuneration Committee Nomination Committee Function Main Board Executive Committee Audit Committee Corporate Compliance and Responsibility Committee Remuneration Committee Nomination Committee p38 See page 38 for details of activities. p39 See page 39 for details of activities. p40 See page 40 for details of activities. p44 See page 44 for details of activities. p46 See page 46 for details of activities. p45 See page 45 for details of activities. Members Andrew Higginson (Chair) Neil Davidson David Potts (Chair) David Potts Trevor Strain Michael Gleeson1 Rooney Anand Kevin Havelock Trevor Strain Tony van Kralingen Michael Gleeson2 Belinda Richards Paula Vennells Andy Atkinson Clare Grainger David Lepley3 Belinda Richards (Chair) Kevin Havelock Rooney Anand Neil Davidson Tony van Kralingen Paula Vennells Neil Davidson (Chair) Andrew Higginson David Potts Rooney Anand Andrew Clappen4 Kevin Havelock Tony van Kralingen Belinda Richards Trevor Strain5 Paula Vennells Tony van Kralingen (Chair) Andrew Higginson Rooney Anand Neil Davidson Kevin Havelock Belinda Richards Paula Vennells Andrew Higginson (Chair) Rooney Anand Neil Davidson Kevin Havelock Tony van Kralingen Belinda Richards Paula Vennells Key objectives Overall conduct of the business and setting strategy. Implementing strategy and actions in respect Effective governance of financial reporting, of financial planning and performance; day-to-day internal controls and risk management systems; management of operations. Developing and implementing the Group’s policies on corporate compliance and corporate responsibility; reviewing and ensuring compliance with those policies and with ethical and governance standards. Developing and implementing the Group’s remuneration framework and policies for Directors and colleagues including all long-term incentive plans, bonuses and pensions. Advising the Board on Board and senior management appointments and succession planning; monitoring the composition of the Board and its Committees. • Understanding, reviewing and responding • Developing and implementing the strategy; • Reviewing and making recommendations • Maintaining oversight of strategy and process in areas • Setting the remuneration policy for the Group’s • Evaluating the current and required mixture of corporate responsibility, including: – Groceries Supply Code of Practice (GSCOP); – food safety and food integrity; – health and safety; – gender pay; – environmental responsibilities, including energy usage, packaging and food waste; – cybersecurity; – ethical trading; – modern slavery; – competition compliance; – governance and reputation; – General Data Protection Regulation (GDPR); and – The Morrisons Foundation and charitable giving. Chief Executive, Chair, Executive Directors and Executive Committee; • Reviewing workforce remuneration; • Aligning incentives and rewards to the corporate culture and objectives; • Agreeing remuneration of the Executive Directors and Executive Committee; • Engaging with shareholders in respect of remuneration policies; • Reviewing the terms and operation of the share ownership guidelines; and • Reviewing the Chief Executive and Chair’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 45); • Maintaining general oversight of people and capability within the business, and their diversity (more information can be found on page 45); • Reviewing the talent pool for the Executive Committee and levels below Executive Committee; and • Reviewing and setting policy on diversity. 1 Michael Gleeson was appointed to the Main Board on 3 February 2020. 2 Michael Gleeson was appointed to the Executive Committee on 9 December 2019. 3 Gary Mills was a member of the Executive Committee from August 2015 to 3 February 2020. David Lepley joined the Executive Committee on 3 February 2020. 4 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. 5 Trevor Strain was appointed to the Corporate Compliance & Responsibility Committee on 10 September 2019. Leadership around the business David Potts Chief Executive Clare Grainger Group People Director Michael Gleeson Chief Financial Officer Andy Atkinson Group Commercial Director Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 37 reviewing significant accounting judgements, assumptions and estimates; managing the relationship and appointment of the external auditor; monitoring and reviewing the effectiveness of the Group’s Risk and Internal Audit function. reviewing significant financial reporting issues and considering how these issues have been addressed; – whether the Annual Report and Financial Statements are 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; and – approval of Tax and Treasury policies. Responsibilities to the views of all stakeholders; • Understanding, reviewing and responding to the Board on: • Developing and approving the strategy to the feedback from stakeholders including – the integrity of financial reports, including and key policies of the Group; • Managing culture and values; customers and colleagues; • Maintaining oversight of: • Monitoring progress towards achieving – financial performance, reporting and control; 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, interim financial report and trading statements; • Approving changes to the Group’s capital structure and major expenditure; • Approving membership of the Board on recommendation of the Nomination • Appointing and removing the Company Committee; and Secretary. – risk management; – operational improvement programmes; and – review and supervision of operational • Making recommendations to the Board activities. 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 – Compliance with The Groceries Supply Code of Practice (GSCOP). Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Board and Committee Activities in 2019/20 Main Board Activities in 2019/20 During the year, the Board has: Strategy and Planning • set the strategy and plans for the Group; • approved the 2019/20 budget and commercial plans, including productivity savings required to invest in the customer offer; • approved the Group’s capital allocation framework; and • reviewed the Core Purpose of Morrisons. Operational Performance • reviewed the annual business plan and received regular updates from the Executive Committee regarding its delivery and resource requirements; • reviewed the performance of the Chief Executive; and • reviewed the Group’s continued operations and growth opportunities in online, wholesale and manufacturing. Financial Performance • reviewed the results and forecasts throughout the year and reviewed and approved regulatory announcements; • approved the proposed dividends including special dividends; • approved the issue of a bond; and • approved the extension of the revolving credit facility. Risk • assessed the Group’s emerging and principal risks; and • monitored the Group’s risk management and internal control systems. Governance • ensured that business is conducted in accordance with the Group’s values; • approved the formal Terms of Reference for the Senior Independent Director; Board evaluation Each year, a review is undertaken to evaluate the performance of the Board, along with its Committees and Directors, in accordance with the requirements of the Code. The review is carried out externally every third year. The last external evaluation was facilitated by Consilium Board Review in 2017/18. Consilium Board Review has no connection to the Group. Following last year’s review, the Non-Executive Directors meet more frequently on an informal basis. Having gained a lot of value from these sessions, the frequency of these meetings will be increased as identified in this year’s review outcomes. This year, the evaluation was facilitated internally by the Company Secretary, who is considered by the Board to be suitably independent for this purpose. The review was conducted between November 2019 and January 2020 and covered each of the key aspects of the Board’s performance. These aspects included, for example, the Board’s structure, its composition and dynamics, and the extent to which it fulfils its role in terms of strategy development, assessment of operational performance, and risk management. Overall, the 2019/20 review concluded that the performance of the Board, along with its Committees and individual Directors, continues to be effective and is well placed to lead the Group going forward. The following were highlighted as being particular strengths: • the structure and composition of the Board, including the breadth of skills and experience that the Directors contribute to its operation; • Board meeting papers that are accurate, timely, clear and comprehensive and provide a positive contribution to effective decision making; • the leadership of the Chair and the contribution that he has made to the development of an effective and cohesive Board with a culture of openness and debate; and • the effectiveness of the various Board Committees and the strength of the individual Committee Chairs. The review also identified a number of possible opportunities to develop the Board’s effectiveness further. These included: • providing more opportunities for the Non-Executive Directors to spend more time with the Group’s wider leadership team; • providing the Non-Executive Directors with additional opportunities to meet on a more informal basis, outside of the normal Board timetable; and • providing additional focus on discussions relating to succession • reviewed the governance structure and activities of the sub-committees planning for the Board. of the Board; • appraised the performance of the Chair through a meeting of Non-Executive Directors; • identified and managed any potential conflicts of interests as appropriate; and • established the External Appointment Sub-Committee to approve requests from Directors to undertake external appointments. Stakeholders • ensured that the strategy is aligned to long-term success for all stakeholders; • considered feedback received from customers, colleagues, suppliers, shareholders and other stakeholders; and • reviewed the values and culture of the Group through ‘Your Say’ survey responses and feedback provided from the ‘Your Say’ forums. The Board formally discussed the findings of the review in January 2020. Over the course of 2020/21, the Chair and Company Secretary will continue to review the progress of the related actions as they are put in place. In addition to the review described above, the Senior Independent Director performed an evaluation of the Chair’s performance, taking into consideration the views and inputs of each of the other Directors. The outputs of this exercise were shared and discussed with the Chair. The Chair also formally appraised the performance of each of the other Directors. 38 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 financial results; • trading statements; • regular meetings between institutional investors, the Chief Executive, the Chief Financial Officer and the Investor Relations team in the UK and overseas following the full and half year results; • regular correspondence and meetings between the Chair and major shareholders to discuss any aspect of the Group or its governance arrangements; • attending key investor conferences; • communication between the Chair of the Remuneration Committee and major shareholders on remuneration policy and significant changes in remuneration arrangements; • responding to enquiries from shareholders and analysts through the Investor Relations team; and • maintaining 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, and this is reported to the Board. Use of the AGM The 2020 AGM will be held on 11 June 2020 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 2020 AGM of the Group is to be sent to shareholders with an accompanying letter from the Chair. The format of the meeting is: • a summary presentation of results is provided before the Chair deals with the formal business; • all shareholders present can put questions to the Chair, Chairs of the Committees, and the Board during the meeting and informally afterwards; • 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/general-meetings/ The Directors recommend that 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. Executive Committee Activities in 2019/20 During the year, the Executive Committee has: Strategy and Planning • developed plans to implement the Group’s strategy and seven priorities; • agreed a plan for the seventh priority – naturally digital; • determined the draft budget and long-term plan; and • approved capital budgets. Operational Performance • continued to implement the Group’s seven priorities; • overseen the Group’s continued development of its wholesale, online and manufacturing operations; • periodically reviewed performance against strategic objectives; • reviewed changes to speed up and simplify the business; and • agreed improvements to the Group’s technology infrastructure. Financial Performance • driven trading performance and reviewed financial performance throughout the period; and • reduced the cost base of the organisation through productivity and procurement improvements. Risk • determined principal risks for the Group; • reviewed functional risk registers; and • reviewed the Group’s risk management systems and the findings from the Internal Audit reports. Governance • overseen the Group’s compliance with its obligations under the GSCOP; and • reviewed GDPR compliance. Stakeholders • considered regular updates on customer views including attending customer listening sessions and shopping trips with customers; • overseen the Group’s commitment to corporate social responsibility, in particular the drive to minimise food waste, as well as its support for the Group’s charity partner CLIC Sargent, and for the charitable Morrisons Foundation; • continued to review the Group’s reduction programme for energy and plastic; • reviewed the talent, capabilities and capacity within the Group; • listened to views of colleagues including reviewing the ‘Your Say’ survey results agreeing of improvement actions; and • recommended the ordinary and special dividends to the Board. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 39 Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Board and Committee Activities in 2019/20 Activities in 2019/20 During the year, the Committee has: • considered the appropriateness of the Group’s Annual Report and Financial Statements and Interim report; • understood key judgements made by management in respect of the Group’s financial statements; • assessed the outcomes/findings of work performed by the external auditor; • considered the effectiveness of the Group’s internal controls and the work of the Risk and Internal Audit function; • discussed principal risks (described in more detail on pages 28 and 29); • 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 new Corporate Governance Code and reporting requirements; • assessed the proposed going concern and viability statements, reviewed assumptions made by management and challenged the scenarios modelled; • considered the requirements and impact of new accounting standards, including the adoption of IFRS 16 ‘Leases’ during the period; and • reviewed and understood pensions matters during the year and their impacts on the Group’s 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, right-of-use assets, intangible assets and provision for onerous contracts Impairment and provision for onerous contracts continue to be focus areas for the Committee, on the basis of their materiality and level of inherent judgement and estimation. Audit Committee Belinda Richards, Chair of the Audit Committee Dear Shareholder, I am pleased to present the Audit Committee Report for the 52 weeks ended 2 February 2020, my fifth as Chair. The report provides an overview of the matters considered by the Committee during the year, and summarises how the Committee has fulfilled its duties to represent the interests of shareholders in respect of financial reporting, risk management and internal controls. Each year, the Committee considers the Group’s internal control and risk management processes, the key risks facing the business, the effectiveness of the Internal Audit function, any material matters arising from the internal audits, and the independence and effectiveness of the external auditor, along with supporting the Board in respect of financial reporting matters. The Committee’s effectiveness was reviewed during the year as part of the internal review of the Board (see page 38 for further details), and I am pleased to report that the review concluded that the Committee continued to discharge its duties effectively. The Committee is responsible for reviewing and making recommendations to the Board on the integrity of the financial statements, and assessing the appropriateness of key judgements and estimates as defined in this section. This year the Committee has spent significant time reviewing key judgements and estimates made by management, with particular focus on property assets and provisions, inventory and alternative performance measures. In addition, the Committee reviewed the Group’s adoption of IFRS 16 ‘Leases’ during the period and understood the key judgements made and the impact on the financial statements. This report provides further detail on these areas and other key activities of the Committee during the year. 40 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Inventories Inventory is a material balance in the Group’s financial statements, with inventories held across a large number of locations. As such, it remains an area of focus for the Committee. Store inventory counts are a key control of the Group’s inventory balance. The Committee has reviewed outcomes of third party store inventory counts conducted during the year and understood trends concerning inventory loss (shrinkage) as well as other factors influencing loss levels. Estimation is required in determining provisions, particularly in respect of inventory loss (shrinkage) risk. The Committee reviews these estimates as part of the twice-yearly review of judgements and estimates. The Committee has reviewed the level of provision and assumptions underpinning this assessment and considers them to be appropriate. Leases The implementation of the new leasing standard, IFRS 16 ‘ Leases’, continued to be an area of focus for the Committee during the year, given the level of change to the Group’s financial statements and the complexities of effecting the transition. The Committee received regular progress updates during the year as the Group transitioned to the new standard. Many of the key decisions, including transition approach, judgements and estimation methods have been discussed and understood by the Committee in the prior year. These judgements and estimates included approaches to determining lease length and assessing discount rates. These were determined by management, working with external advisers. On implementing the change in accounting policy, management affirmed to the Committee its adherence to these principles, together with final assessment of the financial impacts. The Committee reviewed the Group’s restated financials and assessed disclosures as part of its review of the Group’s interim report and financial statements. In addition, at the request of the Committee, the Board undertook a technical training session with its advisers, covering the principles and key considerations of the new standard, as well as the impact on the Group and more widely. The Committee, having overseen the delivery of the implementation project, is satisfied that the transition had been conducted appropriately and that the key assumptions and estimates applied are appropriate. The Group’s policy is to assess impairment on an annual basis, or where changes in circumstances indicate impairment (or impairment reversal) as disclosed in note 3.1 of the financial statements. The impairment review is comprehensive, covering non-financial assets, principally the Group’s store and 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 impairment reversal of £15m recognised in 2019/20, as disclosed in note 1.4 of the financial statements. The Committee reviewed reports produced by management detailing the outcomes of the impairment testing. This review focussed on understanding the methodology, the basis of key assumptions (discount rate and growth rate) and understanding the outcomes of the impairment assessment performed by management. The Committee challenged how management had reflected expected future performance and potential changes in market conditions. The Committee has also reviewed management’s key assumptions around the market valuation of the store portfolio. In addition, for unused or closed properties where the expected future cash flows are less than the future commitments associated with those properties such as business rates, an onerous provision is recognised. This resulted in a net £2m charge in relation to amounts provided for onerous contracts. The key estimates relate to the discount and growth rates applied to future cash flows. Having reviewed all key assumptions in respect of impairment and provision for onerous contracts and the impact on the value of the Group’s assets and provisions, the Committee is satisfied that 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 reducing complexity and scale, as this continues to be an area of focus in the industry. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 41 Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Board and Committee Activities in 2019/20 Retirement benefit schemes 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, and considered the appropriateness and sensitivity of the assumptions used by the independent actuaries in the valuation, including the discount rate. The Committee is satisfied that the assumptions are appropriate. The Committee reviewed 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 considers the treatment appropriate. Presentation of financial statements The Committee has considered the Group’s use of Alternative Performance Measures (APMs) as set out in a Glossary on pages 152 to 154, and is satisfied that they adequately follow the Guidelines issued by the European Securities and Markets Authority (ESMA). In addition, the Committee has considered the use of APMs, in particular the items presented as adjustments to profit presented in the financial statements. The Committee is satisfied the classification of these items is appropriate and consistent with the Group’s policy and that the level of disclosure provided in note 1.4 is appropriate. Internal control and risk management 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 with the results presented to the Board. The Group’s principal risks are set out on pages 28 and 29. 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 the 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; and – the department’s findings, annual plan and the resources available to perform the work; • reviewing financial whistleblowing reports from colleagues; • reviewing the external auditor’s reports on 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 the Group’s financial statements, 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 business 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 of internal control and risk management by each function of the business. The Committee regularly reviews the Group’s processes for risk management and internal control, carrying out a formal review annually. 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 improvement opportunities 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. Internal Audit 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 Committee reviewed the effectiveness of the Internal Audit function through a survey which was completed by Non-Executive Directors, members of the Executive Committee and Leadership Team and other key stakeholders. The effectiveness assessment also included a review against the Institute of Internal Auditors International Professional Practices Framework and the principles outlined in the new Internal Audit Code of Practice released in January 2020. An external review of the effectiveness of Internal Audit is conducted every five years and last took place in 2018/19, concluding that the function performs well, with a small number of minor improvement opportunities. 42 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Effectiveness of the external auditor The Committee considered the effectiveness of PwC as auditor during the year. The Committee and the Committee Chair hold meetings with the auditor without management present, in order 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. Each year, the Internal Audit team facilitates an independent assessment of the effectiveness of the external auditor. This assessment 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. The outcomes of this assessment is shared with and considered by the Audit Committee. In line with the CMA Order, our intention is to put the external audit out to tender on or before 2024/25. Lead partner rotation is taking place in 2020/21, in line with the five year service guidance. External audit tenure The Board appointed PricewaterhouseCoopers LLP (PwC) as external auditor in June 2014. The lead audit partner, Andrew Paynter, has held the position for five years. After a period of five years, rotation of audit partner is due for 2020/21. PwC have identified a replacement partner, John Ellis, who will replace Andrew for the 2020/21 audit. John has already met members of the Board, the Audit Committee Chair and members of management. He has also begun a handover with Andrew Paynter. The Group confirms that it has complied with the provisions of the Competition and Markets Authority’s (CMA) 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 auditor 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 Centre 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, which 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 43 Strategic reportGovernanceFinancial statementsInvestor informationCorporate governance report continued Board and Committee Activities in 2019/20 Corporate Compliance and Responsibility (CCR) Committee Neil Davidson CBE, Chair of the CCR Committee Dear Shareholder, The CCR Committee acts as a custodian of the policies and practices that define and safeguard the reputation of Morrisons. The Committee members bring experience, insight and perspectives to help guide the work of this Committee. The Committee pays close attention to the evolving views and expectations of the Group’s broad range of key stakeholders, and receives regular information and reports on stakeholder developments. Maintaining compliance to the Groceries Supply Code of Practice (GSCOP) and General Data Protection Regulations (GDPR) have remained areas of significant prioritisation for the Committee. I am satisfied the Group makes decisions in a very thoughtful and informed manner and the Group is well positioned to ensure that its role and reputation with all our stakeholders remains strong during the upcoming year. Activities in 2019/20 During the year, the CCR Committee has: • reviewed GSCOP compliance including training and results of internal reviews; • considered cyber and technology security risk; • assessed General Data Protection Regulations (GDPR) compliance; • reviewed health and safety incidents, actions taken and progress of health and safety initiatives; • assessed energy strategy and carbon reduction measures; • reviewed Corporate Responsibility Strategy and approved publication of our Assured Corporate Responsibility Report; • reviewed progress against ambitions for: – ethical trading; – redistribution of food waste; – food safety and improvements; and – fisheries and agriculture; • evaluated Market Abuse Regulation compliance; • reviewed policies and progress regarding; – food integrity and testing; – plastic waste; – supply chain human rights; and – modern slavery; • reviewed non-financial whistleblowing reports. Further details on the Group’s corporate responsibility activities can be found on pages 23 to 26. We also publish a Corporate Responsibility Report that provides more details on these areas (see www.morrisons-corporate.com/cr/corporate-responsibility/). For more detail on the Group’s work to ensure compliance with GSCOP, see page 19. Human rights policy Morrisons respect for fundamental human rights is consistent with the United Nations Universal Declaration of Human Rights, and we ensure all of our internal policies are consistent with this. The Committee has concluded the Group does not currently have any human rights issues. Whistleblowing policy The Company is committed to ensuring that all individuals have the ability to raise genuine concerns in good faith without fear of victimisation, subsequent discrimination or disadvantage, even if they turn out to be mistaken. More information on our whistleblowing policy can be found on our website (www.morrisons-corporate.com). All Board members review the whistleblowing policy on an annual basis and receive detailed reports which include an analysis of whistleblowing trends. Anti-bribery and anti-corruption policy The Committee has reviewed the Group’s anti-bribery and anti- corruption policy, which sets out our zero tolerance approach to bribery and corruption and the conduct expected of all of our colleagues and contractors. The Committee has also considered the gifts and hospitality policy which defines the process which must be followed before any gifts or hospitality are offered or accepted. Regular training is provided to all colleagues to maintain awareness of these policies and processes. 44 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Nomination Committee Andrew Higginson, Chair of the Nomination Committee Dear Shareholder, The Nomination Committee’s role is recognised as increasingly important by shareholders and other stakeholders. During the year, we have continued to drive focus on succession planning and improving diversity within the Group. I am satisfied that the Group has an effective approach to ensuring that we have the right capability and capacity throughout the Group and that the correct level of focus is placed on increasing our diversity. The Board recognises the benefits of diversity throughout the Group, and ensures that clear processes and policies are adhered with to further increase our diversity within the Group as a whole. The Committee receives comprehensive updates from David Potts and Clare Grainger, our Group People Director, on our colleagues twice a year, with one of these updates aligning with the Group’s strategy discussions. Each Director has a good understanding of our colleagues and culture provided by the ‘Your Say’ survey results, Tony van Kralingen’s feedback from the ‘Your Say’ Forum, formal and information discussions with the Leadership of the Group, and day-to-day interactions with our colleagues in store. From these various sources, the Board is able to confirm that the culture of our colleagues is aligned to the purpose, values and strategy that the Board has set. Activities in 2019/20 During the year, the Committee has: • scrutinised the performance of management; • reviewed colleagues throughout the organisation, and considered issues including diversity, succession planning, capability and capacity; • considered the Board’s structure; including nominating Trevor Strain to the role of Chief Operating Officer; and • nominated Michael Gleeson for appointment to the Board. Board appointments Following a rigorous process, the Committee recommended the appointment of Michael Gleeson to the Board as Chief Financial Officer. This appointment supports an ongoing programme to develop capability and talent within the Group. The appointment process included: • reviewing a gender balanced shortlist of candidates for the role; • feedback from interviews with a carefully selected and sufficiently diverse Non-Executive Director recruitment panel; and • the Committee’s consideration of an external assessment of Michael’s strengths and suitability for the role. Diversity The Group remains committed to the Diversity Policy that was approved last year. This policy fully supports the Hampton-Alexander recommendations that the Board should comprise at least one-third females and continues to work towards achieving these targets in the required timescale. It also supports the Parker recommendations that the Board should include at least one Black, Asian and Minority Ethnic (BAME) Director. Throughout the year, the Committee assisted the development of a pipeline of high-calibre candidates by encouraging a broad range of senior individuals within the business to take on additional roles to gain relevant experience. For more details on the full Board, Executive Committee and Leadership Team Diversity Policy see www.morrisons-corporate.com/investor- centre/corporate-governance/ At the end of the 2019/20 financial year, the Board included two female members, representing 22% of its total composition and one BAME Director. Upon the appointment of Michael Gleeson at the start of the 2020/21 financial year, the female representation of the Board decreased to 20%. Gender composition at 2 February 2020 Main Board1 Executive Committee Direct reports to Executive Committee Total Morrisons Male 7 5 Female 2 1 31 43,173 21 53,877 % Female 22% 17% 40% 56% 1 Michael Gleeson joined the Main Board on 3 February 2020. Upon his appointment, the percentage of females on the Main Board decreased to 20%. Succession planning Succession plans are developed using objective criteria, with the Committee meeting twice a year to discuss succession planning of the Board, Executive Committee and senior management. At these sessions, the Board is presented with profiles of key individuals, which are considered alongside diversity metrics including, but not limited to, gender, social and ethnic backgrounds, age and personal strengths. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 45 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report Annual Statement by the Chair of the Remuneration Committee “ A challenging year with sustained progress, despite a competitive market.” Tony van Kralingen, Remuneration Committee Chair Dear Shareholder, As Remuneration Committee Chair I enjoyed the interaction with a variety of shareholders during the course of last year and at the 2019 Annual General Meeting (AGM). The Committee was pleased with the 95% vote in favour of our 2018/19 Directors’ remuneration report, and remains conscious of the views of our shareholders, through regular engagement, in particular, on the updated Directors’ remuneration policy. 2019/20 was a challenging year; however, the management team showed strong leadership in balancing competing demands and particularly challenging market conditions, to deliver profit growth for the fourth consecutive year, an increased ordinary dividend and, as announced at the half year, another interim special dividend. The business continues to make progress against the seven priorities, which are summarised on pages 8 to 11. Despite a difficult trading environment, the business again delivered significant levels of free cash flow, a measure which shareholders continue to tell me is very important to them. We have, of course, announced changes to the Executive team this year, with Trevor Strain promoted into the role of Chief Operating Officer (COO) managing our operations from suppliers to stores, as well as our manufacturing businesses and our growth platforms of online and wholesale. Michael Gleeson has been promoted and joins the Board as Chief Financial Officer (CFO). These moves strengthen our management team as we move into the next phase of fix, rebuild, grow and sustaining the turnaround of this great British business. Pay for performance The Committee continues to be of the view that superior performance and reward are linked, and that the UK’s food retail industry remains very competitive, providing great value for customers and good opportunities for talent. Financial performance Over the last 12 months, despite unprecedented and prolonged political and economic uncertainty, reduced customer confidence and an already competitive market increasing levels of promotional activity, management have delivered: • Group LFL sales (excluding fuel) growth of (0.8)%; • profit before tax and exceptional items of £408m, an increase of 3% on last year; • further strong free cash flow, a total ordinary dividend of 6.77p, up 2.6%, together with the already paid interim special dividend of 2.00p, bringing the total dividend to 8.77p; and • further progress in cost and productivity savings, resulting in cost reduction/productivity improvement of £147m. Group performance £408m £396m 12.85p 13.18p 4.8% (0.8)% Profit before tax and exceptionals1, 2 Basic earnings per share (EPS) before exceptionals1, 2 Group like-for-like sales (LFL) growth1 2018/19 2019/20 1 As defined in the Glossary on pages 152 to 154. 2 2018/19 restated for application of IFRS 16 ‘Leases’. 46 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Policy changes When reviewing the Policy, the Committee considered a wide range of inputs. The renewed Policy has been informed by the 2018 Corporate Governance Code changes, market practice, shareholder views, our risk appetite, the Morrisons culture and strategic plan, and the pay and conditions of the wider workforce. Governance developments The Committee has considered the introduction of the new UK Corporate Governance Code (the ‘Code’), along with updated remuneration reporting requirements. Supporting our strategy, promoting long-term sustainable success, transparency and independent judgement are already at the core of our remuneration policy. We have always said our turnaround would be led by colleagues, and consequently the Committee has always paid close attention to wider workforce remuneration, being regularly briefed on employee pay and conditions. In addition, the Committee is already responsible for setting the remuneration of the Executive Committee; and I have continued as the designated Non-Executive Director responsible for engagement with our colleagues. Sharing in success As part of the philosophy of a colleague-led turnaround, and our commitment to a fair day’s pay, the Group has continued to invest in total reward for colleagues. Colleague pay has continued to increase faster than the market, and we have retained our Colleague Bonus Scheme, which has paid out an average of £319 this year. 2019/20 saw a further increase in the hourly rate for store colleagues to £9.00 from £8.70, with a further increase to £9.20 from April 2020, whilst still retaining the annual colleague bonus. Outcomes in 2019/20 Annual Bonus Plan The Annual Bonus Plan is based on both business and personal performance. Performance against the targets for sales, profit and productivity, has resulted in a formulaic outcome of 30.7% of a maximum of 80% for these elements. The Committee was satisfied that this represented a fair outcome, and no discretion needed to be applied. Further detail on the targets set and performance against them can be found on page 60. Taking into account performance against personal objectives, the Committee has decided to award David Potts and Trevor Strain 18% of the maximum 20% for this element. This takes the total bonus achieved to a payout of 48.7% of maximum, half of which will be deferred into shares, which must be held for three years under the deferred share bonus plan. Shareholders will be asked to approve our updated Directors’ remuneration policy at the 2020 AGM. Here is a summary of the key changes we are introducing: Element Change Pension allowance (new hires) Reduced to 5% of salary Post employment shareholding requirement1 Annual bonus share deferral scheme 1 See notes below for details of operation. Lower of actual shareholding or: • 250% in year one • 125% in year two Reduced to two years from three years Pension allowance for new Executive Director hires (including the new CFO) will be at 5% – in line with what the majority of our workforce actually receive. We are very proud to have one of the higher company contributions in our industry, and are therefore able to take this simple and transparent approach. If the majority of workforce company contribution changes, this may be reviewed. Over the course of our consultations, we listened carefully to our shareholders. Whilst most were comfortable with our proposed approach and are pragmatic regarding the difficulties involved in reducing pensions for incumbents, some shareholders expected us to go further. The Committee has therefore formally committed to make further reductions to incumbent pension contributions over the life of the new remuneration policy. Further reductions will be disclosed in the relevant Directors’ remuneration report. Having already introduced a two year holding period on Long Term Incentive Plan (LTIP) vests last year, the Committee have decided to introduce a post employment shareholding requirement. Executive Directors will be required to hold the lower of their actual shareholding or 250% of base salary in the first year after leaving, and 125% (or the actual if lower) in the second. This will be achieved through the deferral period on annual bonus deferred shares, and the holding period on LTIPs from policy adoption, on grants made after the policy is approved. Having the opportunity to step back and review the policy in its entirety, the Committee has decided to reduce the deferral period for the annual bonus, to be in line with the LTIP holding period and post employment requirement. This is felt to be appropriate as retail is a very fast paced industry, and it is likely that any issues generated in the performance year for an annual bonus, would become apparent in the following two years. There is no change in quantum of earnings potential. How our Directors’ remuneration report is structured Our new Directors’ remuneration policy pages 50 to 56 Implementation of the remuneration policy in 2020/21 pages 57 and 58 Annual Report on remuneration – 2019/20 pages 59 to 66 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 47 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Annual Statement by the Chair of the Remuneration Committee LTIP 2017-20 The performance over the period is summarised below: Measure1 Total sales growth (excluding fuel) £400m £750m (100%) Weighting 40% Minimum (25%) Maximum Adjusted free cash flow £600m £800m 40% Actual performance £899m £1,005m2 Basic earnings per share (EPS) before exceptionals growth p.a. 1 See the definitions on page 58. 2 Calculation of vesting on pre-IFRS 16 basis. 5% 10% 20% 7.8%2 The original targets were set prior to the application of IFRS 16 ‘Leases’. As noted in the 2018/19 Directors’ remuneration report, for the purposes of LTIP reporting, standards in place at the time of grant will be used in calculation of vesting. Accordingly, both the EPS and adjusted cash flow measures have been recalculated on a pre-IFRS 16 equivalent basis. See pages 58 and 63 for more detail. As a consequence of the strong performance over the period as outlined above and shown on page 63, the 2017-20 LTIP is vesting at 93.5% of maximum. The Committee believe the formulaic outcome is reflective of the value created for shareholders over the period. Key Committee activities during the year Alignment to strategy and wider workforce • Assessed the ongoing alignment of remuneration structures, measures and targets to the strategy. Regularly reviewed wider workforce remuneration. Implementation in 2020/21 Base salary The Committee awarded David Potts an increase of 2.3% in line with the wider workforce, which David has waived for the fifth consecutive year. For Trevor Strain, as a consequence of his strong performance and promotion to the Chief Operating Officer role, the Committee approved an increase of 2.3% in line with wider workforce to £665,000 effective 3 February 2020. Michael Gleeson has been appointed as Chief Financial Officer on a salary of £490,000. Pension allowance for incumbents: The Chief Executive has offered to reduce his pension allowance to 24% from 25%, in line with the Chief Operating Officer. The Committee has also decided to freeze 24% of current base salary as an absolute cash amount, with no increase to this amount as future base pay increases occur. If base pay increases are made and accepted in future, this will have the effect of reducing the pension allowance percentage over time. Michael Gleeson will receive a pension allowance equivalent to 5% of base salary. This is in line with the majority of the workforce. Chair and Non-Executive Director fees The Chair’s fees were increased in February 2019 and therefore fees for the Chair will next be reviewed in 2022. Having last been reviewed in 2017, the non-executive base fee has been increased from £61,200 to £62,500. Shareholder engagement Policy Pay for performance • Considered investor feedback and proposed changes to remuneration policy from the 2019 AGM and through ongoing dialogue. • Consulted on executive remuneration, and proposed changes to remuneration policy. • Assessed performance against target sets for 2019/20 annual bonus and 2017-20 LTIP and considered whether any discretion should be used to adjust formulaic outcomes if necessary; • Reviewed and approved targets for 2020/21 annual bonus and 2020-23 LTIP; and • Reviewed the performance of the Executives. Annual Bonus The performance measures of the Annual Bonus Plan and their weightings remain unchanged from 2019/20 and are summarised on page 57. Subject to no longer being commercially sensitive, the performance against targets will be disclosed in next year’s report. 50% of any bonus is deferred in shares under the deferred share bonus plan. The 2020/21 scheme is subject to a two-year vesting period for deferred shares (subject to policy approval). LTIP In line with the policy approved by shareholders in 2017, awards will be 300% of salary. Performance measures and weightings are unchanged from the 2019-22 LTIP award. Further detail on the targets can be found on page 57. This grant will be subject to a two year holding period at vest. Governance • Reviewed and considered consequences of the changing investor, governance and reporting landscape following 2019 AGM season and issuance of the Code and updated Directors’ remuneration reporting regulations; • Reviewed progress of Executives against shareholding requirements; • Approved the 2018/19 Directors’ remuneration report; and • Approved the remuneration for the new CFO and COO. • Reviewed Executive Director, Executive Committee and Company Secretary base salaries, in line with wider workforce. Pay 48 Looking forward I have had valuable conversations with many of our shareholders this year, and was pleased to have so much support for the performance of the Committee and for management. The Committee remains committed to transparency, providing its rationale for decisions taken and embedding rigour into the target setting process and wider decisions on executive pay. I intend to continue this constructive dialogue with our shareholders during 2020. I look forward to your support at the 2020 AGM. Tony van Kralingen, Remuneration Committee Chair Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Directors’ remuneration report continued At a glance Looking at performance from the perspective of shareholders, customers and colleagues. Summary of financial measures Measure1 Profit before tax and exceptionals Basic earnings per share (EPS) before exceptionals Group like-for-like sales (excluding fuel) (%) Cumulative adjusted free cash flow (2015/16 onwards) Post IFRS 16 basis 2019/20 £408m Post IFRS 16 basis 2018/192 £396m2 Pre IFRS 16 basis 2017/183 £374m4 13.18p (0.8)% 12.85p2 4.8% 12.19p 2.8% £2,660m £2,339m £2,053m 1 Definitions of these measures are set out on page 58. 2 Adjusted for application of IFRS 16 ‘Leases’. The impact of restatement for IFRS 16 was to reduce reported profit before tax and exceptionals by £10m and reduce basic EPS before exceptionals by 0.32p. 3 2017/18 was a 53 week year. Profit before tax and exceptionals and basic earnings per share before exceptionals are with reference to the 53 week period. Group LFL was on a 53 week versus 53 week basis. 4 For 2017/18 the adjusted profit measure was underlying profit before tax. There is no change in the reported numbers under the previous and current definition. Stakeholder performance indicators 5 year dividend 12 month total shareholder return (TSR) 12.60p 10.09p 8.77p 5.00p 5.43p 6.09p 6.60p 6.67p 2015/16 2016/17 2017/181 2018/192 2019/203 Value of a £100 holding £ 120 115 110 105 100 95 90 85 80 75 70 Feb 19 Apr 19 Jul 19 Oct 19 Feb 20 1 Including 4.00p special dividend. 2 Including 6.00p special dividend. 3 Including 2.00p special dividend. Ordinary Special The graph above shows the Group’s total dividend over the five year period to 2 February 2020. Morrisons FTSE 100 The graph above shows the Group’s total shareholder return (TSR) compared with the TSR of the FTSE 100 indices over the 12 month period to 31 January 2020 (the last trading day before the year end). Investment in colleague pay Customer satisfaction index +32% +18% £8.20 £8.50 £8.70 £9.00 £6.83 100 103 105 112 120 118 2015 2016 2017 2018 2019 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jan 20 Since 2016, we have continued to invest in colleague pay. In 2019/20, we increased the hourly rate for front-line store colleagues to £9.00 an hour, increasing colleague pay by almost a third in four years. Customer satisfaction measured at January each year, index vs Jan 15 baseline. The above graph demonstrates the continued progress the Group has made in terms of customer satisfaction over the last five years. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 49 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Directors’ remuneration policy As outlined on page 47, the updated Directors’ remuneration policy will be subject to a vote at the 2020 AGM. The current Directors’ remuneration policy was approved by shareholders on 15 June 2017 at the AGM. The current full policy can be found at www.morrisons-corporate.com. The policy has been in operation for three years. The principles that underpin our Directors’ remuneration policy are: Drive a long-term sustainable business Provide clear alignment of directors and shareholders Incentivise a balanced approach to the needs of the four stakeholders – shareholders, suppliers, customers and colleagues Sustainably secure the talent to lead our business, now and in the future The Committee is committed to ongoing dialogue and consultation with shareholders and their representative bodies. Alignment of remuneration to strategy and culture The Annual Bonus Plan and Long Term Incentive Plan (LTIP) link to our seven priorities, five ways of working and four shareholder ambitions by driving profitable, sustainable growth. The choice of measures in the LTIP are designed to hold dynamic tension and create a long-term sustainably successful business. Drive for sales growth is incentivised, but must be profitable to achieve the basic earnings per share before exceptionals growth, which in turn creates the free cash flow which can then be reinvested into the business, shared with colleagues and returned to shareholders. Equally, the Annual Bonus Plan measures create focus on the short-term health of a fast moving business in a rapidly changing industry. Sales growth is a key driver of health in a fresh food retailer – higher sales improve productivity, reduce waste and allow for more competitive pricing – a combination which again delivers in year profit and productivity benefits which can then be reinvested for the benefit of all stakeholders. The personal objectives element, under the Annual Bonus Plan, allows us to include diverse but important other measures, and everyone in our business is evaluated equally both on what they do, and how they do it, in line with our five ways of working. Everyone from store manager level and above participates in the Annual Bonus Plan and LTIP with the same measures, which creates strong alignment between those running our stores and sites and shareholders, and means all our colleagues are able to share in our financial success. The Committee reviews incentives and rewards several times a year when setting targets, reviewing performance outturns, and takes time to step back outside the remuneration cycle to consider the alignment of executive remuneration to our purpose, strategy, desired behaviours and culture, and wider workforce remuneration. 50 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Policy change rationale The Committee agreed the policy remained aligned to strategy and the long-term success of the business; however we have reflected the shareholder feedback from consultation and changes to the Corporate Governance Code. The outcome of this review resulted in four changes: Element for change Change and rationale 1) Pension allowance for new Executive Director appointments 2) Pension allowance for current Executive Directors 3) Post employment shareholding requirement 4) Deferred bonus share holding period Executive Directors shall receive a contribution no higher than the majority of the workforce, which is currently 5%. Where an Executive Director receives a cash supplement only, the maximum supplement will also be limited to that of the majority of the workforce. If the majority of workforce company contribution changes, this may be reviewed. The Chief Executive has offered to reduce his pension allowance from 25% to 24% in line with the COO, with effect from the new policy and there will be no compensatory action for this voluntary reduction. The Committee has also decided to freeze the 24% pension allowance as an absolute cash amount, with no increase to this amount if future base pay increases occur. If base pay increases are made and accepted in future, this will have the effect of reducing the pension allowance percentage over time. Over the course of our consultations, we listened carefully to our shareholders. Whilst most were comfortable with our proposed approach and are pragmatic regarding the difficulties involved in reducing pensions for incumbents, some shareholders expected us to go further. The Committee has therefore formally committed to make further reductions to incumbent pension contributions over the life of the new remuneration policy. Further reductions will be disclosed in the relevant Directors’ remuneration report. We already have a shareholding requirement of 250% of salary, which both the CEO and COO have met. A two year holding period on vested LTIPs was also introduced last year. The Committee decided to adopt a policy as follows: • Year one post employment – the lower of the Director’s shareholding or 250% of salary • Year two post employment – the lower of the Director’s shareholding or 125% of salary Vested LTIP awards and bonus deferrals made from awards from 2021 onwards, will count towards the post employment shareholding requirement. Executive Director notice periods are 12 months, so the second year post employment is the third year after the start of the notice period. Given the fast moving nature of the industry and relative volatility, as well as the fact that those departing will not choose or appoint their successors, it is felt to be fair and equitable to reduce the exposure to share price movements in this third year. The Company currently operates a deferred share bonus plan whereby 50% of earned bonus is deferred into shares for three years. The Committee decided to reduce the holding period for bonus deferred shares from three years to two. This is in light of the Corporate Governance Code’s recommendation that the Remuneration Committee spend more time considering the strategic alignment of reward and business plans. It is also a reflection of the introduction of the LTIP holding period and a post employment shareholding requirement, and the Committee has significantly increased the alignment of Executive interests with shareholders, over a five-year period. While recognising the desire for long-term alignment with shareholders, given the short-term, cyclical nature of the retail industry, it has also been appropriate to consider the salience of shorter-term incentives, and reduce the holding period on what is intended to be a short-term reward for in year performance. As outlined on page 47, the Directors’ remuneration policy will be subject to a vote at the 2020 AGM. If approved, the changes will take effect following the AGM. In designing and setting the policy on Directors’ remuneration, the Committee has considered the reward structure, market levels of pay and general pay increases throughout the Group. Pay and conditions in the wider Group In updating the policy, the Committee has considered our fix, rebuild, grow and sustain plan. The industry remains fiercely competitive, and therefore we are seeking to attract, motivate and retain the best talent at all levels of the market. For store colleagues, in 2019/20 we increased our hourly rate to £9.00 an hour, with a further increase to £9.20 an hour from April 2020, while retaining colleague bonus and other benefits such as a market leading default pension rate, subsidised canteens, three colleague discount cards, and facilities in colleague areas. Colleagues’ views on pay form part of our engagement survey and colleague ‘Your Say’ forums. The results of the survey are communicated to the Board, and both Executive and Non- Executive Directors attend the national ‘Your Say’ forum. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 51 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Directors’ remuneration policy Remuneration policy table – new policy 2020 Element Operation Opportunity 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 57. Base salary 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 are 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. Benefits The Group provides a market competitive benefits package for Executive Directors to support in the ability to recruit and retain the best talent. Pension Executive Directors are entitled to a car allowance (and other car/transport 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 plans 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). New Hires Executive Directors are entitled to participate in the Morrisons Personal Retirement Scheme. Colleagues contribute 5% of salary and the Group also makes a contribution of 5% of salary. A 5% cash alternative in lieu of Group pension contributions is provided where the Group’s pension provision is not appropriate, for example, where an Executive Director has reached the Lifetime Allowance. If the majority of workforce company contribution changes, this may be reviewed. Current Executive Directors Executive Directors appointed to the Board prior to the 3 February 2020 are entitled to participate in the Morrisons Personal Retirement Scheme or receive a cash alternative in lieu of Group pension contributions. 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. Not applicable. New Hires Executive Directors receive a contribution equal to a maximum of 5% of base salary. Where an Executive Director receives a cash salary supplement only, the maximum supplement payable is 5% of salary. Current Executive Directors The 24% cash alternative has been frozen for each Executive Director as an absolute cash amount, with no increase to this amount as future base pay increases occur. If base pay increases are made and accepted in future, this will have the effect of reducing the pension allowance percentage over time. The Committee has committed to make further reductions to incumbent pension contributions over the life of the new remuneration policy. Further reductions will be discussed in the relevant Directors’ remuneration report. 52 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Element Operation Opportunity Performance measures and period Annual bonus 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 two years. The Committee has discretion to allow a differing 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. 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. Long Term Incentive Plan (LTIP) 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. A two year holding period applies 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. Annual bonus awards are subject to the following performance measures: • 50% is based on profit before tax and exceptionals; • 30% is linked to achievement of a number of strategic scorecard measures; and • 20% is linked to achievement of personal objectives. The measures, weightings and shape of the vesting curve are set by the Committee on an annual basis, and may be changed, including removing or introducing new measures 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 adjusted 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 two 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 • 20% is based on growth in basic earnings per share (EPS) before exceptionals. Achievement of threshold performance will ordinarily result in vesting of 25% of each element with 100% vesting for maximum performance and with straight-line vesting in-between. 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 2019/20’ section. The Committee has the discretion to amend the weightings and shape of the vesting curve, introduce new measures and exclude measures in order to best align to long-term shareholder interests. Malus and clawback policies apply. Shareholding requirements Executive Directors are required to hold 250% of base salary in shares, and have up to five years from appointment or any increase in requirement to achieve that. Deferred share and LTIP awards made following the approval of the policy are subject to a post-employment requirement as follows: • Year one – the lower of the Director’s shareholding or 250% of salary • Year two – the lower of the Director’s shareholding or 125% of salary Not applicable. Not applicable. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 53 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Directors’ remuneration policy Notes to Policy table Annual Bonus Plan and Deferred Share Plan The Annual Bonus Plan is measured over the financial year. The current measures are profit before tax and exceptionals (50%), a strategic scorecard (30%) and personal performance (20%). The weightings are reviewed each year to ensure strategic alignment and the Committee has the flexibility to adjust weightings and measures to ensure alignment to the strategy and our seven priorities. Weightings for each year are disclosed in the statement of implementation. Profit before tax and exceptionals is a widely accepted measure of Group and Director performance and is in line with how the Board assesses financial performance. Directors are able to impact it within the year, and it is directly aligned to shareholder experience. The Committee has the discretion to adjust for material exceptional events or actions which were not contemplated at the time of target setting, to ensure that vesting is accurate and fair. As a point of principle, the Committee has decided that the threshold for profit targets will always be higher than actual profit achieved in the previous financial year. Strategic scorecard measures are set annually in line with the Group’s strategy and key objectives for the financial year. The Committee uses objective measures where possible (for example, achievement of productivity improvement/cost reduction) and exercises its judgement to assess the outcome of each element at the end of the year. Personal objectives for the CEO are set by the Chair, in line with objectives for the next 12 months and the longer-term Group strategy. The CEO sets objectives for the other Executive Director(s). The Committee assesses performance against objectives and personal bonus achievement at the end of each year. 50% of any bonus payable is paid in cash, with the other 50% deferred in shares under the Deferred Share Bonus Plan (DSBP). Deferred share awards are not subject to any further performance conditions. LTIP The Committee believes the mix of measures and weightings are appropriate for the Group’s current strategy and aims. The current measures are: • total sales growth (excluding fuel) (40%); • adjusted free cash flow (40%); and • basic earnings per share (EPS) before exceptionals growth (20%). Application of the remuneration policy – Remuneration Scenarios The below charts set out the minimum, mid and maximum total remuneration scenarios based on current salaries, and how they would vary subject to differing performance outcomes for Executive Directors under the proposed remuneration policy (subject to shareholder approval at the 2020 AGM). In addition a ‘Max +’ scenario has been included, which is the maximum scenario + 50% share price growth. Notes • Fixed pay includes 2020 base salaries, benefits and pension benefits (based on expected benefits for 2020/21). • Minimum bonus opportunity is zero. Mid bonus opportunity is 60% of the Maximum bonus opportunity, 200% of salary. • Minimum LTIP opportunity is zero. Mid LTIP opportunity is 60% of the Maximum LTIP opportunity, 300% of salary. • Prospective Annual Bonus Plan and LTIP awards are based on 2020/21 salaries. Chief Executive Officer D Potts £3,634k 42% 28% 30% Mid £1,084k 100% Min Chief Operating Officer T Strain £2,856k 42% 28% 30% Mid £861k 100% Min £5,334k 48% 32% 20% Max £4,186k 48% 32% 20% Max £2,998k 49% 33% 18% Max £6,609k 58% 26% 16% Max+* £5,184k 58% 26% 16% Max+* £3,733k 59% 26% 15% Max+* The Committee has the discretion to amend the weightings, shape of vesting curve, introduce new measures and exclude measures in order to best align to long-term shareholder interests. Chief Financial Officer M Gleeson Targets are determined by the Committee at the time of grant, and are based on the internal financial plan, external expectations and the need to ensure it is incentivised long-term sustainable value creation for shareholders. Definitions of the performance measures are set out on page 58. The Committee uses a ROCE (Return on capital employed) underpin to ensure that ROCE exceeds weighted average cost of capital for the performance period. The calculation of ROCE is as described in the Glossary on page 154. The Committee has discretion to amend the calculation of measures in the interests of fairness and accuracy. In this event, full disclosure will be given in the Directors’ remuneration report. £2,018k 44% 29% 27% Mid £548k 100% Min Fixed Pay Annual Bonus LTIP * Maximum + 50% share price growth. 54 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Remuneration for the wider Group Everyone at store manager level and above participates in the Annual Bonus Plan, with the same measures and targets as the Executive Directors. The same population participate in the LTIP, again with the same measures and targets. This alignment within the organisation is an important part of ‘Teamwork’, one of our five ways of working. Further detail on pay and conditions in the wider Group is provided on page 58. Statement of consideration of shareholder views In reviewing the policy and making changes there has been significant consultation with shareholders and consideration of the varied views put forward. The Committee carefully considered the insights from shareholders, along with their knowledge of the business and industry, in reaching this policy. Approach to new hires 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. Directors’ service contracts, notice periods, termination payments and change of control 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. 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. Termination payments The table below sets out the treatment of elements of remuneration that would normally apply for Executive Directors whose service with the Group terminates: Circumstances of termination Resignation or gross misconduct Injury/ill health, disability, death, retirement (with agreement of the Group) Negotiated termination at the discretion of the Committee Salary and contractual benefits Annual Bonus Plan Unvested deferred shares Unvested LTIP awards Paid to date of termination No bonus paid for year of termination Awards lapse when employment ends Awards lapse when employment ends Paid to date of termination Eligible to be considered for a bonus, normally calculated on a time pro-rata basis Deferred shares are retained and will typically vest on the normal two year cycle. The Committee has discretion to bring forward vesting in exceptional circumstances Eligible to be considered for good leaver status, which gives entitlement to retain the award granted, normally calculated on a time pro-rata basis Paid to date of termination As above As above As above Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 55 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Directors’ remuneration policy Under the Annual Bonus Plan and LTIP rules, the Committee has discretion in relation to termination of employment, including: • whether a bonus payment is made; • whether unvested deferred shares and LTIP awards are retained or not; • level of vesting; and • timing of any payment arising from vesting. In exercising discretion, the Committee will take into account factors such as personal performance and conduct, overall Group performance and the specific circumstances of the departure (including but not limited to whether it is by mutual agreement). The Committee may take into account payments it considers reasonable in consideration of potential legal claims, including reasonable reimbursement of legal fees. The Committee may also consider providing support related to the ending of employment, including outplacement support, continuation of benefits for a limited period or reimbursement of repatriation costs. Change of control In the event of a change of control, deferred share awards vest immediately. Annual bonus and LTIP awards vest to the extent that any performance conditions have been met and, unless the Committee decides otherwise, with a pro-rata reduction to reflect the performance period not yet completed. Clawback and malus All annual cash bonus, Deferred Share Bonus Plan (DSBP) and LTIP awards are subject to clawback and malus provisions. Clawback provisions apply for three years following payment of a cash bonus (malus applies to the deferred share element for a two year period) and two years following vesting of an LTIP award (i.e. five years from grant). Awards may be subject to a malus adjustment, or clawed back in the following circumstances: • material misstatement of results; • gross misconduct; • reputational damage; and/or • performance assessment error. The Committee can adjust clawback and malus periods as they deem appropriate. Policy on remuneration for Non-Executive Directors Fees Fees for the Non-Executive Directors are determined by the Chair 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 Chair’s fee is determined by the Remuneration Committee and the Board, and is reviewed on the same basis. Fees for the Non-Executive Directors are made up of a base fee, plus additional fees for Committee chairship, Committee membership and for the appointed Senior Independent Director. The Chair receives a single fee only. Base Non-Executive Director fees have not changed since the last remuneration policy review in 2017, and are therefore being increased by 2.1%, to £62,500. No other fee changes have been proposed. Current fee levels are disclosed below: Fee type Chair Senior Independent Director Non-Executive Director base fee Committee chair fee Committee membership fee (per Committee) 2020/21 £ 420,000 20,000 62,500 20,000 7,000 2019/20 £ 420,000 20,000 61,200 20,000 7,000 Benefits and other items in the nature of remuneration The Chair has use of a car with fuel and driver and receives private health provision. The Chair and Non-Executive Directors are entitled to normal colleague discount. Neither the Chair nor any of the Non-Executive Directors participate in any Group incentive scheme. 56 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Directors’ remuneration report continued Implementation of remuneration policy in 2020/21 Base salary The Committee awarded David Potts an increase of 2.3% in line with the wider workforce, which David has waived for the fifth consecutive year, and therefore remains unchanged at £850,000. Trevor Strain has been promoted to Chief Operating Officer, and has been awarded an increase of 2.3% in line with wider workforce, taking his base salary to £665,000. As announced on appointment, Michael Gleeson’s salary will be £490,000. The Committee decided on this salary level at the lower end of the market, taking into account the fact this is his first Executive Director appointment. The Committee would expect to award increases higher than the wider workforce in future years, to reflect his anticipated rate of progression as he develops in role. Benefits and pension David Potts and Trevor Strain each receive a pension supplement of 24%, frozen at their 2019/20 benefit level. Following the pay increase noted above, Trevor Strain’s pension supplement now equates to 23% of base salary. Michael Gleeson will receive a pension supplement of 5% of base salary, in line with the new remuneration policy. 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 deferred share bonus plan (DSBP) is in line with the Directors’ remuneration policy (pages 50 to 56). 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. The Committee noted that while historic performance has been strong, 2019/20 was a difficult year for the wider retail industry and high street, and it is the opinion of many analysts that trading conditions are likely to remain challenging. 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 Directors’ remuneration report. There is a ROCE* (Return on capital employed) underpin which allows the Committee to adjust vesting options if ROCE is below weighted average cost of capital. In line with the policy approved by shareholders, the LTIP awards for Executive Directors for 2020-23 will be 300% of salary. This grant will be subject to a two year post vest holding period. LTIP targets 2020-23 The targets for the 2020-23 LTIP are in the table below: Measure1 Profit before tax and exceptionals Strategic scorecard Personal objectives 1 Performance measures are defined on page 58. Weightings (% of maximum bonus opportunity) 50% 30% 20% Measure1,2 Total sales growth (excluding fuel) Adjusted free cash flow Basic EPS before exceptionals growth Weighting Threshold (25% payout) Mid point (50% payout) Maximum (100% payout) 40% 40% 20% £630m £800m £780m £850m £1,065m £950m 5% 6% 8% Scorecard measures for 2020/21 will continue to focus on strategic objectives in the areas of Group like-for-like sales growth excluding fuel (20%) and productivity improvement/cost reduction (10%). Personal objectives will be linked to strategy, and the areas under each Executive’s responsibility. 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. The Committee sets bonus and LTIP targets for normal, highly competitive, food retailing conditions. However, as we finalise the report we are in abnormal times, coping with the COVID-19 pandemic. The Committee will monitor the situation from a remuneration targets perspective as it develops, retaining (as always) the discretion to amend formulaic outcomes in light of relevant context. Our primary responsibility remains making and providing food for our customers. LTIP 2020-23 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 available analysts’ estimates. The Committee also analysed the targets through a variety of lenses to assess the level of stretch. Unattainable or inappropriate targets, such as an exaggerated focus on short-term margin expansion, are not in the best interests of any stakeholder. 1 Performance measures are defined on page 58. 2 Vesting is on a straight-line basis between points. Sales growth The range is equivalent to annual growth of +1.5% to +2.5%. Achieving maximum would require an increase of over 3% from actual performance in the base year. This level of annual growth would represent high performance in our industry. The target has been set above near years’ consensus recognising the importance of top line growth. The maximum target for sales growth has reduced from the previous year, as it assumes the roll out of wholesale supply to McColl’s will now be to a total of c.1,100 stores versus an original plan of c.1,600, following McColl’s ongoing store closure programme. The change also takes into account the strategic decision to delay our online operations launching from Ocado’s Erith depot, which has created flexibility for the business. This means we reach capacity in Erith beyond 2023. Adjusted free cash flow The Committee appreciates that this remains a very important measure for shareholders, and Management continues to be very focused on delivering against it. Notwithstanding the strong progress of previous years, including a high level of property disposals and working capital improvements, the free cash target is set at levels consistent with last year taking into account the changes to timing of payments of corporation tax liabilities. * Alternative Performance Measures as defined in the Glossary on pages 152 to 154. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 57 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Implementation of remuneration policy in 2020/21 continued Pay and conditions in the wider Group – investing in a colleague-led turnaround One of our people ambitions is ‘a fair day’s pay for a fair day’s work’. The Board receive regular updates on progress against this ambition, and take this into account when setting Executive Director pay. • In 2016, the colleague hourly rate in stores was increased from £6.83 to £8.20. We have continued to invest each year, with a further increase to £9.20 from April 2020. Our total package including colleague bonus and cash long service award (paid every five years) remains market leading as additional cash benefits such as bonus are equivalent to a further 32p an hour. • Colleagues are sharing in the value they create, with over one in five of our people in a Sharesave scheme (providing colleagues with the opportunity to purchase the Company’s shares at a discount). • Colleagues continue to share in the success they create via our Colleague Bonus Scheme. This year’s average payment was £319. • We have reorganised our store management teams to remove colleague tasks from manager roles, invested in additional colleague hours, and freed managers up to realise our ambition of everyone having a ‘manager who listens, helps and supports me’. • Our colleague discount portal ‘My Perks’ continues to grow in popularity, offering 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 savings of nearly £17 per month per user, equivalent to nearly two hours extra pay. • As part of our Fresh Look programme, we have underlined our commitment to a colleague-led turnaround by refurbishing colleague areas. • In June 2016 we launched a Group-wide listening and responding forum for colleagues called ‘Your Say’. Stores and sites have a monthly meeting, a regional quarterly and a national meeting twice a year. Tony van Kralingen, along with other Non-Executive Directors, attends the national meeting, to hear views from colleagues on a range of issues, not just remuneration. Successes from the last year include: changing the markdown times on Food to Go items to reduce waste, changing store opening times to meet local demand, one of our distribution centres suggesting that our Rathbones bakery use flour bags to wrap waste saving on salvage costs, and automatic receipts being generated at self-scans for anything over £5 to improve customer returns. We also made significant investments in staff facilities for stores – installing hot and cold water fountains and fridges in staff rooms, offering healthier menu choices, and introducing a £3.50 meal deal in our cafés for colleagues to purchase a hot meal after the staff room has closed. 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. Basic EPS before exceptionals growth EPS and profit are a function of sales and, as a proportion of sales, the level of stretch has increased from previous years, with profit having to grow more than three times as fast as sales to achieve the stretch target. The Committee is very mindful of balancing sales and profit growth, investing in improving the shopping trip for customers, and sustaining performance for shareholders. Given challenging industry trading conditions, this range is very stretching. Chair and Non-Executive Director fees The base fee for Non-Executive Directors has not been reviewed since 2017, and therefore an increase of 2.1% was awarded, taking the fee from £61,200 to £62,500. Having been increased last year, the fees for the Chair will next be reviewed in 2022. Directors’ remuneration report – Performance Measures Definitions Annual Bonus Performance Measures Measure Group financial Strategic scorecard Other measures Definition Profit before tax and exceptionals As defined in the Glossary on page 152 Group like-for-like sales growth (exc. fuel) As defined in the Glossary on page 152 Productivity improvement/cost reduction Personal objectives Cost savings from productivity and cost reduction delivered in the year 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 flow1 The change in total sales (excluding fuel and VAT) over the performance period of the award Total sales growth (excluding fuel and VAT) is defined in the Glossary on page 152 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 • Less: capital repayment of leases (exc onerous)1 Basic earnings per share before exceptionals (EPS) growth The percentage change in basic EPS before exceptionals p.a. over the performance period of the award. Basic EPS before exceptionals is defined in the Glossary on page 153 1 Whilst the overall cash flows do not change on application of IFRS 16 ‘Leases’, the presentation does and therefore the adjustment to deduct capital repayments of leases is required to ensure consistency with targets and performance. 58 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Directors’ remuneration report continued Annual Report on remuneration – 2019/20 Audited information Single total figure of remuneration The table below sets out the single total figure of remuneration and breakdown for each Director for 2019/20 and the comparative figure for 2018/19. Michael Gleeson was appointed as Chief Financial Officer on 3 February 2020, and his remuneration will be reported in the 2020/21 Directors’ remuneration report. Salary/fees £000 Benefits1 £000 2019/20 Annual bonus2 £000 LTIP3 £000 Pension benefits4 £000 Total £000 Salary/fees £000 Benefits £000 Executive Directors D Potts T Strain Non-Executive Directors A Higginson R Anand N Davidson K Havelock CA van Kralingen B Richards P Vennells 850 650 420 109 102 89 102 102 89 28 46 84 – – – – – – 828 633 2,270 1,593 213 156 4,189 3,078 850 622 – – – – – – – – – – – – – – – – – – – – – 504 109 102 89 102 102 89 400 103 102 89 102 102 89 27 35 38 – – – – – – 2018/19 Annual bonus2 £000 LTIP5 £000 Pension benefits4 £000 1,037 759 2,375 1,607 213 149 – – – – – – – – – – – – – – – – – – – – – Total £000 4,502 3,172 438 103 102 89 102 102 89 1 Taxable benefits for the Executive Directors include a car allowance (or other car benefit), transport costs and private health provision. The Chair previously had use of a car and driver. In 2018/19, he moved to company car only. Whilst this change has the appearance of increasing the Chair’s benefit provision (because he has full use of the car), it actually reduces the overall cost to the business. All Directors receive the Group’s normal staff discount entitlement, which is not taxable. Applicable Sharesave plans granted in given financial years are also included in this figure (for Executive Directors). 2 50% of the annual bonus is deferred in shares for a period of three years. There are no performance conditions attached to the deferred elements other than continued service. 3 Awards granted under the LTIP in March 2017 are due to vest in March 2020. The performance conditions relating to the 2017-20 LTIP award ended on 2 February 2020 and the vest value of the 2017-20 award is therefore calculated on the three month average closing price of £1.955 up to 31 January 2020 (the last trading day before year end). The 2019/20 figures also include the value of dividends accrued on the 2017-20 LTIP award at the time of vesting. Further detail in the 2017-20 LTIP is provided on page 63. 4 D Potts received cash in lieu of pension, equal to 25% of base salary. T Strain received cash in lieu of pension of 24% of base salary. None of the Executive Directors have a prospective entitlement to a defined benefit pension by reason of qualifying services. 5 The value of the 2016-19 LTIP vest that was disclosed in the 2018/19 Directors’ remuneration report was based on an indicative price at 1 February 2019. The value of the 2016-19 LTIP vest has been restated to reflect the actual April 2019 vest value. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 59 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Annual Report on remuneration – 2019/20 Audited information continued Annual Bonus Plan Annual bonus achieved 2019/20 Director D Potts T Strain Group financial and strategic scorecard Performance measure1 Group financial Profit before tax and exceptionals Strategic scorecard Productivity improvement/cost reduction Group LFL sales growth (exc. fuel) Other measures Personal objectives Maximum bonus opportunity (% of salary) 200% 200% Weighting (as a % of total annual bonus opportunity) 50% 10% 20% 20% Actual bonus (% of salary) 97.4% 97.4% Actual bonus (£000) 828 633 Bonus deferred into shares (% of award) 50% 50% Cash bonus paid in respect of 2019/20 (£000) 414 317 Achieved as a % of maximum Threshold 20% payout £397m2 20% payout Maximum 100% payout £437m2 100% payout Actual achievement Payout (as a % of total annual bonus opportunity) £408m 20.7% £100m 1% £130m 3% £147m (0.8)% 10.0% 0% 18.0% 1 Performance measures are defined on page 58. 2 Targets for profit before exceptionals reflect the application of IFRS 16 ‘Leases’. Profit before tax and exceptionals As disclosed in the restated financial statements, 2018/19 has been impacted by the application of IFRS 16. In 2019/20, profit before tax and exceptionals was £408m, up 3% year-on-year. This is towards the lower end of the target range and reflects the challenging trading environment retailers have faced. Despite the challenging consumer context, and the subsequent impact on sales, management have balanced the competing demands of growing profit and investing in the shopping trip, to deliver a fourth year of profit growth, 20.7% out of a maximum of 50% has been delivered. Productivity improvement/cost reduction Following three years of strong delivery against stretching targets, the maximum was set slightly lower than 2018/19, given the performance in accelerating benefits since 2016/17. The maximum of £130m continued to be a very stretching target as a percentage of the remaining cost base. Management have performed well against this stretching target, resulting in £147m being delivered meaning 10% was achieved for this element. Group LFL sales growth (excluding fuel) The Committee set a target range of 1% to 3% growth, which was felt to be very stretching given the industry context at the time. Performance did not meet threshold and therefore nothing is earned for this element. 60 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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. Some specific targets have been removed as they are commercially sensitive. D Potts Objective Deliver key actions against the improvement plan, and continued implementation of fix, rebuild and grow strategy for profitable growth, i.e. the six priorities, five ways of working and four sets of ambitions Morrisons price list – further improvement relative to competitor prices Develop capability: • Continue to develop leadership team capability through development and talent hires • Maintain succession plans for Executive Committee and leadership team • Finalise roll out of Team manager ‘My Job’ • Roll out ‘leading with purpose’ to store, site and people managers Continue to reach ‘more and more people’ through convenience, online, wholesale and popular & useful services businesses: • Increase reach to Amazon customers • Start trading with two new wholesale partners • Increase reach of online/Morrisons.com Lead the business through the challenges driven through Brexit Summary of Performance • Four new stores opened, including new format innovations with our first Weighting 4% Market Kitchen stores and first new style community store • 44 ‘Fresh Look’ stores completed and outperforming control group • ‘Outstanding in Service’ trials completed in a higher number of stores than originally planned • On GSCOP, Morrisons was the fourth most improved Retailer in the GCA’s 2019 supplier survey (out of 12), with a net improvement score of 7% and strong positive feedback from the GCA • Stretch customer satisfaction target achieved • In 2019 prices on hundreds of items cut, including eggs, seafood, core grocery and household items • Planned gradual renewal of Executive team executed, as well as changes to store leadership, to set Company up for next phase of turnaround, plus key leadership team appointments • Robustness of internal talent pipeline and smooth implementation shows strength of succession plans • All Team manager ‘My Jobs’ were completed as well as the planned number of store and people managers for ‘Leading with Purpose’ 4% 4% • Four new stores opened, including new format innovations with our first 4% Market Kitchen stores and first new style community store • Now offer Amazon Prime Now in eight cities • Over 50 ‘Morrisons Daily’ format stores opened • Over 90% of British households now covered by Morrisons.com Strong plans in place regarding Brexit in terms of trade, supply chain and resourcing 4% Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 61 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Annual Report on remuneration – 2019/20 Audited information continued T Strain Objective Improve Commercial • Simplify and speed up the function • Create value for stakeholders with suppliers Build capability Control costs • Improve productivity • Plan to improve availability • Reduce stock loss Deliver growth Summary of Performance • Detailed review and improvements implemented • Invested in sustained price cuts • Improved all aspects of the shopping trip for customers • New innovations such as ‘Party’ concept • Continued to develop the team’s capability • Internal successor developed and appointed to CFO role • Productivity cost savings target exceeded • Availability and stock loss improved with future detailed plans developed • Improving existing own-brand ranges and introducing new products and ranges • Fresh Look ‘modular’ improvements introduced across the estate • Wholesale and online business met or exceeded plan Weighting 5% 5% 5% 5% 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. Individual objectives were achieved in full and often exceeded, and while the LFL sales target in the financial element was not achieved, the Committee are satisfied that strong progress was made on longer-term strategic objectives. Taking into account performance against personal objectives, the Committee has decided to award David Potts and Trevor Strain each 18% of this element. This takes the total bonus achieved to a payout of 48.7% of maximum for Executive Directors, half of which will be deferred into shares under the deferred share bonus plan. Deferred bonus 50% of any bonus payable is deferred in shares under the deferred share bonus plan, which vest three years after the date of award subject to continued service. 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. 62 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 LTIP awards 2017-20 LTIP Awards granted under the LTIP in March 2017 are scheduled to vest in March 2020. The performance period relating to these awards ended on 2 February 2020. The Committee believe the formulaic outcome is reflective of the value created for shareholders over the period. The original targets for the 2017-20 LTIP awards were set prior to the application of the IFRS 16 ‘Leases’. As noted in the 2018/19 Directors’ remuneration report, for the purposes of LTIP reporting, standards in place at the time of grant will be used in the calculation of vesting. Accordingly, Basic EPS before exceptionals has been restated on a pre-IFRS 16 basis. Details of the performance conditions and the extent to which they have been satisfied are set out below: Measure1 Total sales growth (excluding fuel) Adjusted cumulative free cash flow2 Basic earnings per share (EPS) before exceptionals growth p.a.3 Weighting 40% 40% (25%) Threshold performance required £400m (100%) Maximum performance required £750m Reported outcome £899m LTIP 2016-194 vesting and IFRS 16 adjusted outcome £899m Actual LTIP vesting (% of maximum) 40.0% £600m £800m £1,005m £1,005m 40.0% 20% 5% p.a. 10% p.a. 6.7% p.a. 7.8% p.a.4 13.5% 1 Performance measures are defined on page 58. 2 Cumulative adjusted free cash flow over the vesting period. Adjusted free cash flow as defined on page 58. 3 Basic earnings per share (EPS) before exceptionals growth rate p.a. over the vesting period. Baseline basic EPS before exceptionals of 10.86p based on 2016/17 profit before exceptionals of £337m. 4 Basic EPS before exceptionals adjusted to reflect pre IFRS 16 in line with standards in place at date of grant and to remove the dilutive impact of shares issued to settle Group’s LTIPs, during the vesting period. 2019-22 LTIP The table below sets out the share awards made to the Executive Directors during 2019/20 under the Group’s LTIP: Director D Potts T Strain Grant date Award type 17 April 2019 Conditional award 17 April 2019 Conditional award Basis on which award made 300% of salary 300% of salary Face value of award (£000)1 2,550 1,950 Percentage of award vesting at threshold performance Performance period end date 25% 30 January 2022 25% 30 January 2022 Performance conditions see table below see table below 1 The value of the award is based on the five day average close price of the trading days prior to grant: £2.2278. The table below sets out the performance conditions attached to the awards made during the year. These awards were granted in April 2019. Measure1,2 Total sales growth (excluding fuel) Adjusted free cash flow Basic earnings per share (EPS) before exceptionals growth p.a. 1 Performance measures are defined on page 58. 2 Vesting is on a straight-line basis between points. Period over which the measure applies Three year performance period Three year performance period Three year performance period Weighting (% of maximum award) 40% 40% 20% Threshold (25%) £650m £800m 5% Maximum (100%) £1.5bn £950m 10% As noted in the 2018/19 Directors’ remuneration report, the 2019-22 LTIP targets were set based on accounting standards in place for the financial period ended 3 February 2019, prior to the application of IFRS 16 ‘Leases’. Accordingly for the purposes of LTIP reporting, standards in place at the time of grant will be used in calculation of vesting. As such this will require an adjustment to a comparable pre-IFRS 16 basis. 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 Directors’ remuneration report. There is a ROCE underpin which allows the Committee to adjust vesting options if ROCE is below weighted average cost of capital. Sharesave D Potts has an option to buy 7,078 shares for a fixed price of £1.78p on 1 July 2022 under the Morrisons Sharesave award subject to continued service. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 63 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Annual Report on remuneration – 2019/20 Unaudited information 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 and Trevor Strain have met their respective shareholding requirement. Executive Director D Potts T Strain Shareholding requirement (% salary) 250% Shareholding as at 31 January 2020 (% salary)1,2 657% Shares owned outright 2,322,134 Deferred shares not subject to performance3 992,153 Sharesave options not subject to performance 7,078 LTIP shares subject to performance4 3,436,632 Total interests in shares 6,757,997 250% 270% 528,911 693,891 – 2,503,603 3,726,405 1 Includes shares held under the deferred share bonus plan (DSBP) on an after tax basis. DSBP awards are conditional awards. 2 For the purpose of calculating the shareholding as a percentage of salary, the three month average share price of £1.955 up to 31 January 2020 (the last trading day of the financial year ended 2 February 2020) has been used. 3 The number of shares awarded in respect of the 2018/19 Annual Bonus Plan (deferred element) was D Potts 230,045 and T Strain 168,322 shares. These were awarded based on a share price of £2.25. 4 1,074,589 and 753,824 shares represent LTIP awards granted to D Potts and T Strain respectively in March 2017 which are due to vest in March 2020. Performance targets for these awards and associated outcomes are provided in the section headed ‘2017-20 LTIP’ on page 63. 1,217,416 and 874,477 shares granted to D Potts and T Strain respectively represent LTIP awards made in March 2018 which are due to vest in March 2021. 40% of the award is linked to a total sales growth target. 25% of this element vests for achieving £1.1bn over the performance period, and 100% vests for achieving £2bn over the period. 40% of the award is linked to an adjusted free cash flow target. 25% of this element will vest for achieving £730m against this measure, and 100% will vest for achieving £1bn against the adjusted free cash flow target. 20% of the award is linked to basic EPS before exceptionals growth. 25% of this element will vest for achieving 5% growth per annum over the performance period. 100% will vest for achieving 10% growth per annum over the performance period. 1,144,627 and 875,302 shares granted to D Potts and T Strain respectively represent LTIP awards made in April 2019 which are due to vest in April 2022. Performance targets for these awards are disclosed in the section headed ‘2019-22 LTIP’ on page 63. Each LTIP award is a conditional award. All shares are exercised at vest, details of which are included in the notes to the Group Financial Statements, notes 9.3 and 9.4. Non-Executive Director shareholdings as at 31 January 2020 (the last trading day of the financial year ended 2 February 2020) are set out in the table below. 31 January 2020 Total (owned outright) 63,560 Shareholding Met No 22,500 12,800 100,000 13,000 14,014 12,475 Yes No Yes No No No Non-Executive Directors A Higginson R Anand N Davidson K Havelock C A van Kralingen B Richards P Vennells There have been no changes in the Directors’ interests since the year end. Total shareholder return (TSR) Performance graph and table Value of a £100 holding £ 300 250 200 150 100 50 0 2010 Morrisons 2011 FTSE 100 2012 2014 2013 FTSE All Share food and drug retailers 2015 2016 2017 2018 2019 2020 The graph above shows the Group’s total shareholder return (TSR) compared with the TSR of the FTSE 100 index over the ten-year period to 31 January 2020 (last trading day before year end). This index has been selected as being appropriate in giving a broad equity view and given that the Group has been constituent of the index 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. 64 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Chief Executive remuneration The table below sets out the total remuneration figure for the Chief Executive over the previous ten years, valued using the methodology applied to the single total figure of remuneration. Total remuneration (£000) Annual bonus payment (% of maximum opportunity) LTIP vesting level achieved (% of maximum opportunity) Chief Executive D Potts D Philips M Bolland D Potts D Philips M Bolland D Potts D Philips M Bolland1 2010/11 – 3,3282 304 – 70% – – – – 2011/12 – 2,502 – – 90% – – – – 2012/13 – 1,089 – – 0% – – 0% – 2013/14 – 1,089 – – 2014/15 – 2,101 – – 2015/163 2,252 50 – 2016/17 2,794 366 – 2017/18 5,957 2018/194 4,502 2019/20 4,189 – – – – – – 73% 100% 98.7% 61% 48.7% 0% 60% – – 0% – – – 0% – – – – 0% – – – – 50% – – – – – 96.3% 94.6% – – – – – – 93.5% – – 1 M Bolland was not treated as a good leaver and therefore lost any eligibility to shares that may have otherwise vested following his departure. 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 2018/19 total remuneration has been updated. The value of the 2016-19 LTIP vest that was disclosed in the 2018/19 Directors’ remuneration report was based on an indicative price at 1 February 2019. The value of the 2016-19 LTIP vest has been restated to reflect the actual April 2019 vest value. Change in remuneration of Chief Executive compared to Group employees The table below sets out the change in total remuneration paid to the Chief Executive from 2018/19 to 2019/20 and the average percentage change from 2018/19 to 2019/20 for employees of the Group as a whole. D Potts All Group employees1 1 Reflects the change in average pay for all Group employees employed in both 2018/19 and 2019/20. 2 Reflects the increase in the average bonus payout for eligible employees. % increase in element between 2018/19 and 2019/20 Salary and fees 0% Taxable benefits 4% 2.6% 0% Annual bonus (20)% (9)%2 Pay ratios The below table sets out the ratio of the Chief Executive’s pay (as outlined on page 66), to the median, 25th and 75th percentile full-time equivalent remuneration of Morrisons UK employees. Year 2019/20 Method Option B 25th percentile pay ratio 230:1 Median pay ratio 217:1 75th percentile pay ratio 180:1 Option B under the reporting requirements has been chosen to identify the colleagues at the median, 25th and 75th percentiles as it provides the most effective method to identifying the reference colleagues for calculation purposes. The reference colleagues’ annual pay has been calculated from their hourly rate, benefits and pension eligibility (annualised) at the close of the financial year. Bonus figures have been calculated using the business median, 25th and 75th percentile payouts rather than the bonus payments to the reference colleagues as bonus payments vary across the business dependent upon business unit performance. The business is satisfied these are the right reference colleagues based upon their role in the business and frequency of similar rates across the organisation. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 65 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ remuneration report continued Annual Report on remuneration – 2019/20 Unaudited information continued In line with the regulations, the following table sets out the total pay and benefits, and the salary element for the CEO, and colleagues at each percentile. CEO 75th percentile colleague 50th percentile colleague 25th percentile colleague Base salary £850,000 £21,591 £18,055 £17,100 Total pay and benefits £4,189,520 £23,321 £19,340 £18,202 The ratio reflects the goal of rewarding the achievement of short and long-term financial and strategic objectives under Morrisons remuneration policy. This is the first time Morrisons has disclosed its pay ratio. Relative importance of spend on pay The table below sets out the total spend on remuneration in the 2018/19 and 2019/20 financial years compared with distributions to shareholders. Total cost of remuneration for all Group employees Profit distributed by way of dividends The Committee and its advisers During the year, the following individuals were members of the Remuneration Committee: C A van Kralingen (Chair since 1 September 2017) R Anand N Davidson K Havelock A Higginson B Richards P Vennells 2019/20 £m 1,845 302 2018/19 £m 1,900 289 Difference £m (55) 13 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 Chief Executive, the Chief Operating Officer, the Group People Director and other People Team 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. Willis Towers Watson do not provide any other services to the Group. 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 £50,500 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 Votes against as a % of votes cast 7.65% Abstentions 575,379 Total 1,775,490,069 Statement of voting at the 2019 AGM on the remuneration report Remuneration report Votes for 1,790,715,172 For as a % of votes cast 95.16% Votes against 91,085,559 Votes against as a % of votes cast 4.84% Abstentions 6,124,872 Total 1,887,925,603 Tony van Kralingen, Remuneration Committee Chair 17 March 2020 66 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 pages 113 to 115 pages 113 and 114 pages 1 to 30 page 91 page 25 pages 31 to 45 pages 34 and 35 pages 16, 17 and 33 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 pages 95 to 103 page 123 page 57 Political donations No political donations were made in the financial year, in line with the Group’s 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 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 28 and 29 and the other matters discussed in connection with the viability statement on page 30, 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. Borrowing powers The Articles of Association of the Company restrict the borrowings of the Group and its subsidiary undertakings to a maximum amount equal to twice the share capital and consolidated reserves unless otherwise approved by the Company by ordinary resolution. 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, Equiniti, 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 2 February and 16 March 2020, the following information has been received, in accordance with DTR 5, from holders of notifiable interest in the Company’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. As at 2 February 2020 As at 16 March 2020 Number of shares capital Number of shares % of share % of share capital Silchester International Investors LLP 290,371,673 12.08 310,779,289 Schroders PLC 269,219,152 11.20 261,018,636 Amerprise Financial Inc 177,966,342 7.62 177,966,342 BlackRock Inc 162,136,599 6.84 162,136,599 Majedie Asset Management Limited Deutsche Bank AG Brandes Investment Partners, LP 119,982,348 117,399,109 5.00 4.96 119,982,348 117,399,109 115,902,280 4.96 115,902,280 4.96 12.92 10.85 7.62 6.84 5.00 4.96 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 2019/20 67 Strategic reportGovernanceFinancial statementsInvestor informationDirectors’ report continued Statutory disclosures 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 Annual General Meeting. 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 Company’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 Company, together with details of shares allotted and cancelled during the year, are shown in note 6.6 of the financial statements. At the AGM held in June 2019, a special resolution was passed to renew the authority given at the AGM held in June 2018 for the purchase by the Group of up to 239,230,467 ordinary shares, representing approximately 10% of the issued ordinary share capital at that time. During the period, 36,699,143 (2019: 12,440,132) ordinary shares were issued to employees exercising share options and under the LTIP scheme. In addition, 551,491 (2019: 1,721,480) share awards were settled out of the trust shares. Share capital and rights attaching to the Company’s shares Under the Company’s Articles of Association, any shares in the Company may be issued with such rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time-to-time by ordinary resolution determine (or, in the absence of any such determination, as the Directors may determine). At a general meeting of the Company, every member has one vote on a show of hands and, on a poll, one vote for each share held. The notice of general meeting specifies deadlines for exercising voting rights either by proxy or present in person in relation to resolutions to be passed at a general meeting. No member is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting, or to exercise any other right conferred by being a shareholder if they or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information with respect to interests in their voting shares) and they or any interested person failed to supply the Company with the information requested within 14 days after delivery of that notice. The Board may also decide that no dividend is payable in respect of those default shares and that no transfer of any default shares shall be registered. These restrictions end seven days after receipt by the Company of a notice of an approved transfer of the shares or all the information required by the relevant section 793 notice, whichever is the earlier. The Directors may refuse to register any transfer of any share which is not a fully paid share, although such discretion may not be exercised in a way which the Financial 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 Company is not aware of any other restrictions on the transfer of shares in the Company other than certain restrictions that may from time-to-time be imposed by laws and regulations (for example, insider trading laws). The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or voting rights. 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 is promoted through an environment free from discrimination, harassment and victimisation. The Group looks to ensure that everyone’s efforts are worthwhile and all colleagues regardless of race, colour, nationality, ethnic origin, age, sex, marital or civil partnership status, disability, religion or belief, sexual orientation, gender re-assignment or trade union membership are offered the opportunity to be their best, using their individual talents and abilities. Applications for employment are encouraged from all people and differences embraced. Every application, including those from people with disabilities, people who are transgender, or those who have particular religious beliefs will be given full and fair consideration. Respect underpins behaviour towards all candidates and all our colleagues. A full review of individual needs is undertaken and the Group will make reasonable adjustments to the selection process, work environment or practices in order to help those who require it. With a heightened awareness of the impact of mental health on society, the Group is more mindful than ever that through our practices we should ensure the same respect and support is provided to every candidate and colleague, and to treat them equally in respect of recruitment, promotion, training, pay and other employment policies and conditions. Decisions are made based on relevant merits and abilities, and made free from bias. Remaining receptive to the needs of customers and the wider communities is a priority – Morrisons operates in an inclusive and respective manner where everyone is welcome. 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. The Group’s health and safety policy is approved by the Executive Committee. In order to deliver our policy, each division has a comprehensive Health and Safety management system across the Group and subsidiary companies within the Group. The management systems contain 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 activities across the Group. To drive continuous improvement in performance and practices, each division has a schedule of audits completed by our central Health and Safety team as well as nine divisional health and safety improvement plans. By order of the Board Jonathan Burke, Company Secretary 17 March 2020 68 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 Company 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 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. 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 FRS 101 ‘Reduced Disclosure Framework’, and applicable law), give a true and fair view of the assets, liabilities, financial position and result 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 • 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 • 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. 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 17 March 2020 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 69 Strategic reportGovernanceFinancial statementsInvestor informationIndependent 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 2 February 2020 and of the Group’s profit and cash flows for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (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 and Company statement of financial position as at 2 February 2020; the consolidated income statement and consolidated statement of comprehensive income; the consolidated statement of cash flows; the consolidated and Company statement of changes in equity for the 52 week period then ended; 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 4 February 2019 to 2 February 2020. Our audit approach Overview Materiality Audit scope Areas of focus Key Audit Matters (Group and Company) • Impairment of property, plant and equipment and right-of-use assets • Inventory provisions • Exceptional items • Pension accounting • Commercial income and manual promotional funding • IFRS 16 – lease accounting • Impairment of intangible assets Materiality • Overall Group materiality: £20.4 million (2019: £20.0 million), based on 5% of profit before exceptional items and net retirement benefit interest. • Overall Company materiality: £18.3 million (2019: £18.0 million), 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. • The Group engagement team performed the audit procedures for each reporting unit in the scope of the Group audit, which accounted for 99% of total Group revenue and 93% 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. 70 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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. Capability of the audit in detecting irregularities, including fraud Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to the Companies Act 2006, the Listing Rules, Pensions legislation, UK tax legislation, health and safety legislation, employment law and Grocery Supply Code of Practice, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to forgery or intentional misrepresentations, or through collusion. 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. As in all of our audits we also addressed the risk of management override of internal controls, including identifying and testing journal entries, in particular those posted with unusual account combinations, and evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement. We did not identify any key audit matters relating to non-compliance with laws and regulation, or fraud. 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. Also, 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. 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 and right-of-use assets (Group and Company) Refer to page 84 (sources of estimation uncertainty), note 3.1 (accounting policies), notes 3.3 and 11.7 (property, plant and equipment) and notes 3.4 and 11.8 (Right-of-use assets). The Group has a large freehold store estate recognised within property, plant and equipment (Group: £5,756m, Company: £1,542m) at 2 February 2020, and for the first time following the adoption of IFRS 16, the Group and Company has recognised right-of-use assets of £888m and £1,009m respectively of leasehold land and buildings on the balance sheet. 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 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 judgement required in applying various estimations when testing for impairment and impairment reversals and the significant carrying value of freehold and leasehold 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 relating to certain key inputs including, for example, discount rates and future growth rates. Fair value less costs of disposal Fair value less costs of disposal is estimated by management based on market knowledge of individual stores and likely demand from grocers or other retailers in the event these stores were for sale. The key judgements made by the Directors relate to the estimated rental values and yields for these stores. How our audit addressed the key audit matter Value in use In relation to the value-in-use assessment we have: • obtained the Group’s and Company’s Board approved FY21 budget and medium term financial plans (upon which the forecasts underpinning the value in use calculations are based); • challenged management’s forecasts and compared future cash flow performance to historic levels to ensure that the planned performance is considered reasonable; • assessed the accuracy of management’s discounted cash flow model including testing the mathematical accuracy of the calculations included within the model and the application of the requirements of IAS 36 ‘impairment of assets’ and impact of IFRS 16; • assessed the discount rate applied, with the support of our internal valuations specialists; and • considered the sensitivity of the model to changes in these key assumptions. We found, based on our audit work, that the key assumptions and calculations used by management were supportable and appropriate. Fair value less costs of disposal We evaluated and challenged the estimates of store rental values and yields used by management in their calculation of store market values. This involved using our own internal valuation experts, with a particular focus on the assumptions and methodology used, obtaining third party evidence and market data to corroborate the assumption. We determined that the valuations performed by management were reasonable. In addition, we evaluated the adequacy of the disclosures made in notes 3.3, 3.4 (Group) and notes 11.7, 11.8 (Company) of the financial statements, including disclosures regarding the key assumptions and sensitivities as required by IAS 36 ‘Impairment of assets’ and found them to be appropriate. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 71 Strategic reportGovernanceFinancial statementsInvestor informationIndependent auditors’ report continued to the members of Wm Morrison Supermarkets PLC Key audit matter How our audit addressed the key audit matter Impairment of property, plant and equipment and right-of-use assets (Group and Company) (continued) Fair value less costs of disposal (continued) The Group has recognised a net impairment reversal of £35m (£117m impairment reversal offset by £82m impairment charge). The £82m impairment charge includes £59m in relation to property, plant and equipment, £23m in relation to right-of-use assets. The £117m impairment reversal includes £93m in relation to property, plant and equipment, £24m in relation to right-of-use assets. The Company has recognised a net impairment reversal of £11m (£58m impairment reversal offset by £47m impairment charge). The £47m impairment charge includes £32m in relation to property, plant and equipment, £15m in relation to right-of-use assets. The £58m impairment reversal includes £39m in relation to property, plant and equipment, £19m in relation to right-of-use assets. Inventory provisions (Group and Company) Refer to page 84 (sources of estimation uncertainty), note 5.1 (accounting policies), note 5.2 (inventory). Inventory of £660m is recognised on the balance sheet of the Group and £409m on the Company balance sheet. The inventory valuation is reduced by provisions including those relating to estimated losses due to shrinkage (note 5.1). The inventory valuation is further reduced for commercial income and promotional funding (where inventory which this income and/or funding relates to, is yet to be sold). When the inventory is sold, the commercial income and/or promotional funding is recognised in the income statement. Also, inventory is reduced for provisions related to estimated obsolescence and other known specific risks. We focused on this due to the estimation uncertainty and judgements involved in determining the level of provisions required, in particular those relating to shrinkage (inventory loss). Exceptional items (Group only) Refer to page 83 (critical accounting judgements) and note 1.4 (profit before exceptionals). The Group’s Alternative Performance Measure is ‘Profit before exceptional items and net retirement benefit interest’. Management use this measure to improve the transparency and clarity of the Group’s financial performance. The Group’s profit before exceptional items and net retirement benefit interest of £408m is stated before £19m of IAS 19 retirement benefit interest income and net income from exceptional items of £8m, representing: • £66m of profit on disposal and exit of properties; • £51m of store restructuring and closure costs; • £2m net reversal of impairment and provision for onerous contracts; and • £9m of other exceptional items. The determination of which items are to be excluded from profit before exceptionals is subject to judgement and therefore users of the Group financial statements could be misled if amounts are not classified and disclosed in a transparent manner and consistently with the Group’s accounting policy. In assessing the adequacy of the inventory provisions, we have: • assessed the assumptions included in the shrinkage provision, including testing the key inputs to supporting evidence; • challenged the reasonableness of management’s estimates of shrinkage through review of recent count results and other available information to ensure that the year-end provision adequately reflects the best estimate of current levels of inventory loss; and • attended inventory counts and performed sample counts at a number of the Group’s supermarkets, petrol forecourts and depots throughout the period. Based on the work performed, we satisfied ourselves that the year-end shrinkage provision adequately reflected the levels of stock loss experienced. For other provisions applied to inventory we have: • assessed the amounts deducted in respect of unearned commercial income and promotional funding, by verifying the inputs to, and the methodology of, the provision calculation; and • considered the adequacy of the obsolescence provision including challenging management on key assumptions, taking into account the current profile of stock and expected stock life. We have assessed the other specific provisions with reference to the risks identified by management and noted no issues. We considered whether the presentation of profit before exceptional items and net retirement benefit interest was appropriate. We performed the following procedures: • reviewed management’s definition and classification of exceptional items, including the sub-categorisation of these items; • obtained supporting evidence to corroborate the accuracy and completeness of exceptional items; • where estimation uncertainty exists (e.g. restructuring costs), we challenged the key assumptions in light of information available and historic assessments made for similar circumstances; and • challenged management on the classification of exceptional items through consideration of the application of the accounting policy, including those items classified as ‘other exceptional items’. We did not identify any material issues in respect of those items presented as exceptional. We reviewed management’s disclosures relating to exceptional items and consider these to be appropriate and consistent with work performed. 72 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Key audit matter Pension accounting (Group and Company) Refer to page 83 (critical accounting judgements), page 84 (sources of estimation uncertainty), note 8 (retirement benefits) and note 11.20 (pensions). We have focused on the valuation of the Group and Company’s defined benefit pension schemes because of the level of estimation required in determining the year end valuation. In addition, the size of the gross assets (Group: £5,402m and Company: £1,857m) and liabilities (Group: £4,458m and Company £1,509m) within the schemes are significant and material. The net surplus position of the schemes at 2 February 2020 was £944m for the Group and £348m for the Company. Where a defined benefit scheme is in a surplus position, management needs to consider whether the Group and Company has the right to recognise a surplus, or whether it is necessary to restrict the amount of surplus recognised. This requires judgement as to the rights of the Group, Company and Trustees in each of the Group’s schemes. Commercial income and manual promotional funding (Group and Company) Refer to page 84 (sources of estimation uncertainty), note 1.1 (accounting policies) and note 1.6 (operating profit). Commercial income The Group and Company 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 accounting policies (note 1.1). 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 and Company is entitled to where transactions span the financial period end. As such we have identified this as a key audit matter, recognising also that there could be a potential for fraud through possible manipulation of this income. Manual promotional funding The Group and Company 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. However, 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 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 We performed the following procedures: • obtained the IAS 19 valuation reports produced by the Group’s independent actuaries; • used our internal pensions experts to assess the judgemental assumptions used in calculating the valuation of the pension schemes’ liabilities, including discount rates, inflation and mortality rates; • obtained the detailed reports relating to the valuation of the schemes’ assets and agreed the valuations to third party confirmations; • assessed the membership data used in valuing the schemes’ liabilities and tested any significant changes since the last valuation; and • agreed a sample of contributions made by the Group to bank statements. Based on our work performed, the actuarial assumptions used in calculating the pension surplus were within an acceptable range. We considered management’s assessment of the Group’s right to recognise the net surplus in two of the three schemes by reference to the requirements of IFRIC 14 ‘Limit on defined benefit asset’, including reviewing legal advice provided to management, and satisfied ourselves that it is appropriate to recognise the net surplus on the balance sheet. We performed the following procedures in relation to both commercial income and manual promotional funding: • understood, evaluated and tested management’s key controls, including the monitoring of invoices raised and the accuracy of confirmations received from suppliers; • tested a sample of items to supporting documentation including supplier agreements and confirmations direct from suppliers; • used data analytics to identify any unusual items, where such items were identified these were agreed to supporting documentation; • tested the settlement of a sample of supplier arrangements recognised in the income statement, which included settlement in cash or by off-set to accounts payable; • agreed a sample of accrued income to evidence of post-year end invoicing and tested credit notes raised after the period end in order to identify any subsequent reversals; • assessed the recoverability of unsettled balances included within trade receivables in note 5.3 to the financial statements (where the Group does not have the right of offset against trade creditors); and • considered the adequacy of related disclosure within the Group’s financial statements. No significant issues were identified as a result of this work. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 73 Strategic reportGovernanceFinancial statementsInvestor informationIndependent auditors’ report continued to the members of Wm Morrison Supermarkets PLC Key audit matter How our audit addressed the key audit matter IFRS 16 – Lease Accounting (Group and Company) Refer to page 82 (new accounting standards, amendments and interpretations adopted by the Group), page 83 (critical accounting judgements), notes 3.1 and 6.1 (accounting policies), notes 3.4 and 11.8 (right-of-use assets) and notes 6.4 and 11.16 (lease liabilities) and notes 10.3 and 11.25 (changes in accounting policies). The transition to IFRS 16 ‘Leases’ took place on 4 February 2019 and the Group and Company has adopted the fully retrospective transition approach. Right-of-use assets of £942m for the Group and £1,093m for the Company have been recognised on the Group balance sheet, relating to leasehold land and buildings (Group: £888m, Company £1,009m) and leased plant, equipment, fixtures and vehicles (Group: £54m, Company £84m) with corresponding lease liabilities of £1,376m for the Group and £1,483m for the Company. The transition to IFRS 16 is reliant upon a number of key estimates and judgements including determining the appropriate discount rate for each lease and assessing lease extension options. Additionally, there is a risk that the lease data which underpins the IFRS 16 transition is incomplete or inaccurate. Impairment of intangible assets (Group and Company) Refer to page 84 (sources of estimation uncertainty), note 3.1 (accounting policies) and notes 3.2 and 11.6 (goodwill and intangible assets). Intangible assets of £381m are recognised on the Group balance sheet and £361m on the Company, of which the majority relates to software development costs incurred in connection with the Group’s technology improvement programme. Judgement is required to assess whether the carrying value of the existing capitalised software or systems is impaired. During the year an impairment charge of £15m for the Group and £15m for the Company has been recognised in relation to intangible assets. We have assessed the design and implementation of key controls in relation to the transition to IFRS 16. We have performed the following procedures to assess the key estimates and completeness/accuracy of the underlying lease data: • tested the mathematical accuracy of the schedules obtained; • assessed the discount rates used to calculate the lease obligation, with support from our internal valuation specialists; • confirmed the accuracy of the lease data by agreeing supporting lease documentation for a sample of leases; • tested the completeness of the lease data by reconciling the Group’s and Company’s existing lease commitments to the lease data underpinning the model; • considered management’s assessment for impairment both in the restated prior year opening balance sheet (5 February 2018) and at 2 February 2020 as part of overall impairment assessment for property, plant and equipment and right-of-use assets; • assessed the tax impact, with support from our internal tax specialists; and • reviewed relevant disclosures to ensure in line with requirements of IFRS 16. No significant issues were identified as a result of this work. We consider that the key estimates and judgements underpinning the Group’s and Company’s adoption of IFRS 16, and related disclosures, are appropriate. We have performed the following procedures: • 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; • reviewed management’s assessment of the future expected benefit from capital projects; and • applied our own understanding of both new and existing projects and challenged management as to whether, in our view, any existing software was no longer in use or whether its life had been shortened by development activity. No significant issues were identified as a result of this work. 74 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 which is responsible for the Group’s reporting units. For each reporting unit we determined whether we required an audit of its 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. 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 93% 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 Group financial statements £20.4 million (2019: £20 million). Company financial statements £18.3 million (2019: £18 million). 5% of profit before exceptional items and net retirement benefit interest income. 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. 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. 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 components was £18.3m. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £1m (Group audit) (2019: £1m) and £913,500 (Company audit) (2019: £900,000) 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 Outcome 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 twelve months from the date of approval of the financial statements. 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. For example, the terms of the United Kingdom’s withdrawal from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group’s trade, customers, suppliers and the wider economy. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 75 Strategic reportGovernanceFinancial statementsInvestor informationIndependent auditors’ report continued to the members of Wm Morrison Supermarkets PLC 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 year ended 2 February 2020 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 27 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 30 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 69, 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 40 to 43 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) 76 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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, 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 Directors 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 6 years, covering the years ended 1 February 2015 to 2 February 2020. Andrew Paynter (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Leeds 17 March 2020 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 77 Strategic reportGovernanceFinancial statementsInvestor informationConsolidated income statement 52 weeks ended 2 February 2020 Revenue Cost of sales Gross profit Other operating income Profit/loss on disposal and exit of properties Administrative expenses Operating profit Finance costs Finance income Share of profit of joint venture (net of taxation) Profit before taxation Taxation Profit for the period attributable to the owners of the Company Earnings per share (pence) Basic Diluted Before exceptionals £m 17,536 (16,855) 681 94 – (262) 513 (111) 5 1 408 (94) 314 Exceptionals (note 1.4) £m – (52) (52) – 66 (6) 8 – 19 – 27 7 34 Note 1.2 1.6 6.2 6.2 4.2 2.2 1.5 1.5 2020 Total £m 17,536 (16,907) 629 94 66 (268) 521 (111) 24 1 435 (87) 348 14.60 14.44 Before exceptionals £m 17,735 (17,039) 696 88 – (274) 510 (120) 5 1 396 (93) 303 Exceptionals (note 1.4) £m – (44) (44) – – (34) (78) (33) 18 – (93) 23 (70) 2019 restated1 Total £m 17,735 (17,083) 652 88 – (308) 432 (153) 23 1 303 (70) 233 9.89 9.67 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. All of the results shown above relate to continuing operations. Consolidated statement of comprehensive income 52 weeks ended 2 February 2020 Other comprehensive income/(expense) Items that will not be reclassified to profit or loss Remeasurement of defined benefit schemes Tax on defined benefit schemes Items that may be reclassified subsequently to profit or loss Cash flow hedging movement Exchange differences on translation of foreign operations Tax on items that may be reclassified subsequently to profit or loss Other comprehensive income for the period, net of tax Profit for the period attributable to the owners of the Company Total comprehensive income for the period attributable to the owners of the Company 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Note 8.2 2.3 2.3 2020 £m 231 (38) 193 (57) (2) 10 (49) 144 348 492 2019 restated1 £m 100 (17) 83 9 – (1) 8 91 233 324 78 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Consolidated statement of financial position As at 2 February 2020 Note 2020 £m 2019 restated1 £m 2018 restated1 £m Assets Non-current assets Goodwill and intangible assets Property, plant and equipment Right-of-use assets Investment property Retirement benefit surplus Investment in joint venture Trade and other receivables Derivative financial assets Current assets Inventories Trade and other receivables Derivative financial assets Cash and cash equivalents Assets classified as held-for-sale Total assets Liabilities Current liabilities Trade and other payables Borrowings Lease liabilities Derivative financial liabilities Current tax liabilities Non-current liabilities Borrowings Lease liabilities Derivative financial liabilities Retirement benefit deficit Deferred tax liabilities Provisions Total liabilities 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 3.2 3.3 3.4 3.6 8.2 4.2 3.7 7.3 5.2 5.3 7.3 6.5 3.5 5.4 6.3 6.4 7.3 6.3 6.4 7.3 8.2 2.3 5.5 6.6 6.6 6.7 6.7 6.7 381 7,147 942 58 960 39 71 – 9,598 660 353 1 305 1,319 3 1,322 10,920 (3,051) (237) (72) (36) – (3,396) (1,108) (1,304) (7) (16) (472) (76) (2,983) (6,379) 4,541 240 192 39 2,578 1,492 4,541 404 7,094 929 60 730 47 8 15 9,287 713 344 19 264 1,340 39 1,379 10,666 (3,070) (178) (69) (5) (27) (3,349) (1,110) (1,328) (2) (42) (414) (96) (2,992) (6,341) 4,325 237 178 39 2,578 1,293 4,325 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The notes on pages 85 to 126 form part of these financial statements. The financial statements on pages 78 to 126 were approved by the Board of Directors on 17 March 2020 and were signed on its behalf by: Michael Gleeson, Chief Financial Officer Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 428 7,027 970 69 612 53 8 16 9,183 686 247 15 327 1,275 4 1,279 10,462 (2,921) (72) (59) (13) (15) (3,080) (1,245) (1,354) (1) (18) (415) (99) (3,132) (6,212) 4,250 236 159 39 2,578 1,238 4,250 79 Strategic reportGovernanceFinancial statementsInvestor information Consolidated statement of cash flows 52 weeks ended 2 February 2020 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 disposal of property, plant and equipment, investment property, right-of-use assets and assets held for sale Purchase of property, plant and equipment, investment property and right-of-use assets Purchase of intangible assets Acquisition of business (net of cash received) Net cash outflow from investing activities Cash flows from financing activities Purchase of trust shares Settlement of share awards Proceeds from exercise of employee share options New borrowings Repayment of borrowings Costs incurred on repayment of borrowings Repayment of lease obligations 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 debt2 in the period Net increase/(decrease) in cash and cash equivalents Cash inflow from increase in borrowings Debt acquired on acquisition of business Cash outflow from repayment of borrowings Cash outflow from repayment of lease liabilities Non-cash movements on lease liabilities Other non-cash movements Opening net debt2 Closing net debt2 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 2 Net debt is defined in the Glossary on page 153. Note 5.6 10.1 6.6 6.6 6.6 1.8 6.5 Note 6.5 2020 £m 2019 restated1 £m 1,017 (104) (87) 826 1 9 34 (429) (81) (1) (467) (10) (2) 14 347 (278) – (87) (302) (318) 41 264 305 2020 £m 41 (347) – 278 87 (66) (57) (2,394) (2,458) 977 (120) (76) 781 1 7 22 (381) (77) (3) (431) (9) (5) 20 275 (306) (30) (69) (289) (413) (63) 327 264 2019 restated1 £m (63) (275) (2) 306 69 (53) 10 (2,386) (2,394) 80 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Consolidated statement of changes in equity 52 weeks ended 2 February 2020 Current period At 4 February 2019 (reported) Adjustment on the adoption of IFRS 16 At 4 February 2019 (restated1) Profit for the period Other comprehensive (expense)/income: Cash flow hedging movement Exchange differences on translation of foreign operations Remeasurement of defined benefit 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 share awards Share options exercised Tax in relation to components of equity Dividends Total transactions with owners At 2 February 2020 Prior period At 5 February 2018 (reported) Adjustment on the adoption of IFRS 16 At 5 February 2018 (restated1) Profit for the period (restated1) Other comprehensive income/(expense): Cash flow hedging movement Remeasurement of defined benefit 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 Settlement of share awards Share options exercised Dividends Total transactions with owners At 3 February 2019 (restated1) Note 10.3 8.2 2.3 6.6 1.7 6.6 6.6 2.3 1.8 Note 10.3 8.2 2.3 6.6 1.7 6.6 6.6 1.8 Share capital £m Share premium £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Retained earnings £m Total equity £m Attributable to the owners of the Company 237 – 237 – – – – – – – – – 3 – – 3 240 178 – 178 – – – – – – – – – 14 – – 14 192 39 – 39 – – – – – – – – – – – – – 39 2,578 – 2,578 – – – – – – – – – – – – – 2,578 10 – 10 – (57) – – 10 (47) – – – – – – – (37) 1,589 (306) 1,283 348 – (2) 231 (38) 539 (10) 26 (2) (3) (2) (302) (293) 1,529 4,631 (306) 4,325 348 (57) (2) 231 (28) 492 (10) 26 (2) 14 (2) (302) (276) 4,541 Share capital £m Share premium £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Retained earnings £m Total equity £m Attributable to the owners of the Company 236 – 236 – – – – – – – – 1 – 1 237 159 – 159 – – – – – – – – 19 – 19 178 39 – 39 – – – – – – – – – – – 39 2,578 – 2,578 – – – – – – – – – – – 2,578 2 – 2 – 9 – (1) 8 – – – – – – 10 1,531 (295) 1,236 233 – 100 (17) 316 (9) 34 (5) – (289) (269) 1,283 4,545 (295) 4,250 233 9 100 (18) 324 (9) 34 (5) 20 (289) (249) 4,325 81 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Strategic reportGovernanceFinancial statementsInvestor information 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 00358949). The Company is domiciled in the United Kingdom and its registered address is Hilmore House, Gain Lane, Bradford, BD3 7DL, United Kingdom. Basis of preparation The financial statements have been prepared for the 52 weeks ended 2 February 2020 (2019: 52 weeks ended 3 February 2019) 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, as such, the reporting date for the current period is 2 February 2020. New accounting standards, amendments and interpretations adopted by the Group The following new standards, interpretations and amendments to standards are mandatory for the Group for the first time for the 52 weeks ended 2 February 2020: • IFRS 16 ‘Leases’; • IFRIC 23 ‘Uncertainty over income tax treatments’; • Amendments to the following standards: – IAS 19 ‘Employee Benefits’; – IAS 28 ‘Investments in Associates’; – IFRS 9 ‘Financial Instruments’; and – Improvements to IFRSs (2015-2017). The Group has considered the above new standards, and amendments to published standards, and has concluded that only IFRS 16, IFRIC 23, and the amendment to IAS 19 are relevant to the Group. Only IFRS 16 has a material impact on the Group’s consolidated financial statements. IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ was published in January 2016 and has become effective for the Group for the period beginning 4 February 2019. The standard replaces IAS 17 ‘Leases’, IFRIC 14 ‘Determining whether and Arrangement contains a lease’, SIC-15 ‘Operating Leases-Incentives’ and SIC-27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. The standard applies a single recognition and measurement approach for all applicable leases under which the Group is the lessee. The Group has lease contracts for property and equipment. Before the adoption of IFRS 16, leases in which substantially all the risks and rewards of ownership were retained by the lessor were classified as operating leases; all other leases were classified as finance leases. Under the previous standard, lease payments on operating leases were recognised as rental costs in the consolidated income statement. There was no recognition of the associated assets or liability in the consolidated statement of financial position, except to the extent that there were any prepaid or accrued rents. Upon adoption of IFRS 16, for all leases where the Group is a lessee, the Group recognises a right-of-use asset and a lease liability in its consolidated statement of financial position. The consolidated income statement includes depreciation in relation to the right-of-use assets and a finance charge in relation to the lease liabilities. Lessor accounting is substantially unchanged under IFRS 16, except for sub-leases previously classified as operating leases. These leases have been re-assessed as to whether they are operating or financing in nature, using the requirements of IFRS 16. The transition to IFRS 16 for the Group took place on 4 February 2019 and the Group has adopted the fully retrospective transition approach. In accordance with this transition method, the Group has applied IFRS 16 at the date of initial application as if it had been effective at the commencement date of the existing lease contracts. Accordingly, the comparative information in these financial statements has been restated, unless otherwise stated. The nature and effect of these changes are disclosed in note 10.3. On transition the Group elected to use the practical expedient allowing the standard to be applied only to contracts that were previously identified as leases when applying IAS 17 and IFRIC 4 ‘Determining whether an Arrangement contains a Lease’ at the date of initial application. IFRIC 23 ‘Uncertainty over income tax treatments’ IFRIC 23 ‘Uncertainty over income tax treatments’ was issued in June 2017 and has become 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 HM Revenue & Customs 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. 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. 82 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 New accounting standards, amendments and interpretations adopted by the Group continued IFRIC 23 ‘Uncertainty over income tax treatments’ continued The Group adopted the modified retrospective approach to transition on 4 February 2019. Under this approach, no restatement of comparative financial statements was required. The Group has referred to the IFRIC guidance, including Draft Interpretation DI/2015/1 in previous periods, resulting in the accounting policy prior to the adoption of IFRIC 23 applying similar principles for selecting measurement methods as in the new interpretation. Accordingly, the impact of IFRIC 23 has had an immaterial impact on the consolidated financial statements and there has been no adjustment necessary to the opening statement of financial position as at 4 February 2019. Amendment to IAS 19 ‘Employee Benefits’ An amendment to IAS 19 ‘Employee Benefits’ was published in February 2018 and has become 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 impact of this amendment has had an immaterial impact on the consolidated financial statements. New accounting standards, amendments and interpretations in issue but not yet effective There are a number of standards and interpretations issued by the IASB that are effective for financial statements after this reporting period. Of these new standards, amendments and interpretations, there are none that are expected to have a material impact on the Group’s consolidated financial statements. Basis of consolidation Subsidiaries (including partnerships) are all entities over which the Group has control. The Group has control 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 Group and where necessary, adjustments are made to bring the accounting policies in line with those used by the Group. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated on consolidation. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the reporting date. Gains and losses arising on retranslation are included in the income statement for the period. Fair value measurement All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at the end of each reporting period. 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 pages 152 to 154. Critical accounting judgements and key sources of estimation uncertainty In the process of applying its accounting policies the Group is required to make certain judgements, estimates and assumptions that it believes are reasonable based on the information available. These judgements, estimates and assumptions affect the carrying amounts of assets and liabilities at the date of the financial statements and the amounts of revenues and expenses recognised during the reporting periods presented. Changes to these could have a material effect on the financial statements. The judgements, estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, consultation with experts and other factors that the Directors believe to be reasonable. Actual results may differ significantly from the estimates and assumptions made, the effect of which is recognised in the period in which the facts become known. Critical accounting judgements The critical judgements made in the process of applying the Group’s accounting policies are detailed below: Profit before exceptionals Profit before exceptionals is defined as ‘Profit before exceptional items and net retirement benefit interest’. For further details, see the Glossary on page 152. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 83 Strategic reportGovernanceFinancial statementsInvestor informationGeneral information continued Critical accounting judgements continued Profit before exceptionals continued The Directors consider that this adjusted profit measure provides useful information for shareholders on ongoing trends and performance. This measure is consistent with how business performance is measured internally by the Directors. Profit before exceptionals and earnings per share before exceptionals measures are not recognised measures under EU-adopted IFRS and may not be directly comparable with adjusted measures used by other companies. The Group’s definition of items excluded, together with details of adjustments made during the period, is provided in note 1.4. The classification of items excluded from profit before exceptionals requires judgement including considering the nature, circumstances, scale and impact of a transaction. Reversals of previous exceptional items are assessed based on the same criteria. Given the significance of the Group’s property portfolio and the quantum of impairment and property-related provisions recognised in the consolidated statement of financial position, movements in impairment and other property-related provisions would typically be included as exceptional items, as would significant impairments or impairment reversals of other non-current assets. Despite being a recurring item, the Group has chosen to also exclude net retirement benefit interest from profit before exceptionals as it is not part of the operating activities of the Group, and its exclusion is consistent with the way it has historically been treated and with how the Directors assess the performance of the business. Leases In determining the value of lease liabilities and associated right-of-use assets, the Group must make an assessment of the lease term. This assessment requires judgement with regard to the likelihood that any extension or break options included in a lease will be exercised. The duration of the lease term can have a significant impact on the amounts recognised in the financial statements for the lease. During the period the Group has applied IFRS 16 ‘Leases’ for the first time which requires that an assessment is made for all existing leases at the implementation date, without the use of hindsight. To assess whether the Group is reasonably certain to extend a lease, or to not exercise a break, all relevant facts and circumstances that create an incentive to continue that lease are considered. Currently only the Group’s leases of stores and depots contain major extension and break options. For these the main factors considered are the lease specific terms and the business forecasts for these stores. At both the implementation date and subsequently for new leases, this has typically led to periods after breaks, which are exercisable in the short-to-medium term, being included in the lease term. The periods covered by extension options, which are normally exercisable in the longer-term, are generally excluded from the lease term. These judgements are re-assessed as required by the Group’s accounting policies for lease liabilities. Further detail is provided in note 6.1. Retirement benefit schemes in surplus Where a defined benefit scheme is in a surplus position, consideration is made as to whether the Group has the right to recognise a surplus or whether it is necessary to restrict the amount of surplus recognised. This requires judgement as to the rights of the Group and Trustees under the terms of the Group’s Schemes. The Directors have concluded that the Group has the right to recognise a surplus, following legal advice received. Further details are provided in note 8.5. Sources of estimation uncertainty The areas of estimation uncertainty the Group believes to have the most significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year are detailed below: Impairment of property, plant and equipment, right-of-use assets and intangible assets and onerous contracts Property, plant and equipment, right-of-use assets and intangible assets are reviewed annually for impairment or where changes in circumstances indicate impairment (or impairment reversal). This requires the carrying value of assets to be compared to the recoverable amount, where the recoverable amount is based on the higher of value-in-use and fair value less costs of disposal. The assessment of value-in-use in the calculation requires expected future cash flows discounted using an appropriate discount rate. Judgement is required in applying estimates to assess the level of provision needed, specifically in relation to discount rates and future growth rates. Further detail is provided in notes 3.1, 3.2, 3.3, and 3.4. Where contracts exist for which expected future cash flows are less than the future contract commitments, an onerous contract provision is recognised. Judgement is required when determining whether a contract meets the definition of being onerous and in making estimates in relation to discount rates of future cash flows. 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 for certain agreements in assessing future sales or purchase volumes and whether performance obligations have been achieved. This is estimated based on historic trends and information on sales or purchase projections. The Group’s recognition policy for commercial income along with areas of estimation is included in note 1.1. Inventories Certain estimates are required to assess the net realisable value of inventories, along with provisions for obsolete and slow moving inventories and inventory loss, where estimation is required. Estimating the level of loss between inventory counts is inherently judgemental and is based on past information of loss rates and other relevant information. The Group’s accounting policy for inventories is provided in note 5.1. Retirement benefit schemes Accounting for defined benefit retirement schemes requires the application of a number of assumptions which have an impact on the valuation of the schemes’ assets and obligations. The significant assumptions include discount rate, inflation, rate of salary increases and longevity. The Group uses an independent actuary to calculate defined benefit obligations. Details of these assumptions are provided in note 8.4. 84 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements 52 weeks ended 2 February 2020 1 Performance in the period 1.1 Accounting policies Revenue recognition Revenue is recognised when the Group has a contract with a customer and a performance obligation has been satisfied, at the transaction price allocated to that performance obligation. The Group does not adjust any of the transaction prices for the time value of money due to the nature of the Group’s transactions being completed shortly after the transaction is entered into with the customer. Sale of goods in-store and online, and sale of fuel For revenue from the sale of goods in-store, fuel and online, the transaction price is the value of the goods net of returns, colleague discounts, coupons, vouchers and ‘More’ points earned in-store, and the free element of multi-save transactions. It comprises sales proceeds from customers and excludes VAT. Sale of fuel is recognised net of VAT and ‘More’ points earned on fuel. Revenue is recognised when the customer obtains control of the goods, which is when the transaction is completed in-store or at the filling station, or in the case of online, when goods are accepted by the customer on delivery. Other sales Other sales include wholesale sales made direct to third party customers, and income from concessions and commissions, and is net of returns and net of promotional funding to customers. Wholesale revenue is recognised when the goods are delivered to the customer. Revenue collected on behalf of others is not recognised as revenue, other than the related commission which is based on the terms of the contract. Sales are recorded net of VAT and intra-group transactions. More points For More points, the fair value of the points is 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 history of actual redemptions. The fair value of More points is recognised once the performance obligation has been satisfied. The fair value is treated as a deferral from revenue, and is deferred until the rewards are redeemed by the customer in a future sale. At the point of issue, the customer has a material right to acquire additional goods and services (but at a future date). 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 reporting 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 Description Recognition Marketing and advertising funding Examples include income in respect of in-store and online marketing and point of sale, as well as funding for advertising. Volume-based rebates Income earned by achieving volume or spend targets set by the supplier for specific products over specific periods. Income is recognised dependent on the terms of the specific supplier agreement in line with when performance obligations in the agreement are met. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 85 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Group financial statements continued 52 weeks ended 2 February 2020 1 Performance in the period continued 1.1 Accounting policies continued Commercial income continued Uncollected commercial income at the reporting date is classified within the financial statements as follows: • Trade and other payables: 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 reporting date is included within trade payables. Any amounts received in advance of income being recognised are included in accruals and deferred income. • Trade and other receivables: Where the trading terms described above do not exist, the Group classifies outstanding commercial income within trade receivables. Where commercial income is earned and not invoiced to the supplier at the reporting date, this is classified within accrued commercial income. • Inventories: The carrying value of inventories is adjusted to reflect unearned elements of commercial income when it relates to inventory which has not yet been sold. This income is subsequently recognised in cost of sales when the product is sold. In order to provide users of the financial statements with greater understanding in this area, additional income statement and statement of financial position disclosure is provided in notes 1.6, 5.2, 5.3 and 5.4 to the financial statements. Other operating income Other operating income primarily consists of income not directly related to in-store and online grocery retailing and wholesale supply. It mainly comprises rental income from investment properties, income generated from the recycling of packaging and certain commissions. 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 All revenue is derived from contracts with customers. 1.3 Segmental reporting The Group’s principal activity is that of retailing, derived from the UK. 2020 £m 13,065 800 13,865 3,671 17,536 2019 £m 13,265 705 13,970 3,765 17,735 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 focussed 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, online operations and wholesale supply. 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 profit before tax and exceptionals as reported in the management accounts. Management believes that this adjusted 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 statement of financial position containing assets and liabilities. 86 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 1 Performance in the period continued 1.4 Profit before exceptionals ‘Profit before exceptionals’ is defined as profit before exceptional items and net retirement benefit interest. Further detail on the definition of profit before tax and exceptionals, profit before exceptionals after tax and earnings per share before exceptionals is provided in the Glossary on pages 152 to 154. The Directors consider that these adjusted profit and adjusted earnings per share measures referred to in the results provide useful information on ongoing trends and performance. The adjustments made to reported profit are to: exclude exceptional items, which are significant in size and/or nature; exclude net retirement benefit interest; and to apply a normalised tax rate of 23.1% (2019: 23.5%). Profit before exceptionals and earnings per share before exceptionals 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 profit before exceptionals requires judgement including considering the nature, circumstances, scale and impact of a transaction. Reversals of previous exceptional items are assessed based on the same criteria. Given the significance of the Group’s property portfolio and the quantum of impairment and property-related provisions recognised in the consolidated statement of financial position, movements in impairment and other property-related provisions would typically be included as exceptional items, as would significant impairments or impairment reversals of other non-current assets. Despite being a recurring item, the Group has chosen to also exclude net retirement benefit interest from profit before exceptionals as it is not part of the operating activities of the Group, and its exclusion is consistent with the way it has historically been treated and with how the Directors assess the performance of the business. Profit after tax Add back: tax charge for the period2 Profit before tax Adjustments for: Impairment and provision for onerous contracts2 Profit/loss arising on disposal and exit of properties2 Store restructuring and closure costs2 Other exceptional items2 Costs associated with the repayment of borrowings2 Retirement benefit exceptional items2 Net retirement benefit interest (note 8.2)2 Profit before tax and exceptionals Normalised tax charge at 23.1% (2019: 23.5%)2,3 Profit before exceptionals after tax Earnings per share before exceptionals (pence): Basic (note 1.5.2) Diluted (note 1.5.2) 2020 £m 348 87 435 (2) (66) 51 9 – – (19) 408 (94) 314 13.18 13.03 2019 restated1 £m 233 70 303 10 – – 42 33 26 (18) 396 (93) 303 12.85 12.57 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 2 Adjustments marked 2 decrease post-tax adjusted earnings by £34m (2019: increase of £70m), as shown in the reconciliation of earnings disclosed in note 1.5.2. 3 Normalised tax is defined in the Glossary, see page 153 for details. Impairment and provision for onerous contracts Following the Group’s annual impairment and onerous contract review a net credit of £2m has been recognised. This includes a net impairment reversal of £15m (£123m impairment reversal offset by £108m impairment charge). The £108m impairment charge includes £59m in relation to property, plant and equipment, £23m in relation to right-of-use assets, £11m in relation to investment property and £15m in relation to intangible assets (see notes 3.3, 3.4, 3.6 and 3.2 respectively). The £123m impairment reversal includes £93m in relation to property, plant and equipment, £24m in relation to right-of-use assets and £6m in relation to investment property (see notes 3.3, 3.4 and 3.6 respectively). A net £2m charge has been recognised in relation to provisions for onerous contracts (see note 5.5). A £10m credit has been recognised following changes to estimates in respect of lease terms. In addition, there has been a charge in respect of amounts provided for onerous commitments and receivables in respect of contract payments of £21m. Impairment and provision for onerous contracts in the 52 weeks ended 3 February 2019 totalled a net charge of £10m. This comprised of a net impairment reversal of £2m (£175m impairment reversal offset by £173m impairment charge), a net £11m charge relating to provisions for onerous contracts, a release of accruals for onerous commitments of £6m, and an increase in other property provisions of £7m. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 87 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Group financial statements continued 52 weeks ended 2 February 2020 1 Performance in the period continued 1.4 Profit before exceptionals continued Profits/loss arising on disposal and exit of properties Profits/loss arising on disposal and exit of properties, net of fees incurred, amounted to £66m (2019: £nil). Of this amount, £64m was realised following the sale of land and buildings in respect of the Camden store (see note 3.5). Store restructuring and closure costs Store restructuring and closure costs recognised in the 52 weeks ended 2 February 2020 totalled £51m (2019: £nil). This includes £46m in respect of restructuring of store management teams (2019: £nil) and £5m of restructuring costs relating to the closure of four stores during the period (2019: £nil). Other exceptional items Other exceptional items include: • a £6m charge, relating to one-off costs associated with improvements to the Group’s distribution network. These costs were incurred as part of a programme to increase network capacity and support the accelerated roll out of wholesale supply (2019: £12m); and • a net charge of £3m relating to costs incurred in relation to legal cases in respect of historic events and costs associated with other restructuring activity (2019: £2m). In the 52 weeks ended 3 February 2019, other exceptional items also included a £28m charge in relation to increased inventory provisioning as the Group continued to automate its ordering systems; leading to operational changes, additional information regarding stock levels, and a change in methodology for estimating inventory provisions. Costs associated with the repayment of borrowings The costs incurred in the 52 weeks ended 3 February 2019 comprised £30m relating to financing charges on redemption of financial instruments (primarily premiums) and £3m of fees and premiums written off on the repayment of bonds. There were no amounts relating to gains or losses reclassified to the income statement on termination of hedging arrangements, which had previously been recognised in reserves. Retirement benefit exceptional items In the 52 weeks ended 3 February 2019, the retirement benefit exceptional items included costs of £19m in relation to an exceptional curtailment charge following the closure of the Group’s Retirement Saver Plan to future accrual in September 2018. In addition, there was a charge of £7m in relation to the estimated cost of the equalisation of guaranteed minimum retirement benefits for men and women, following a ruling by the High Court in October 2018 (see note 8.2). 1.5 Earnings per share (EPS) Basic 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 potentially dilutive ordinary shares. The Company has two (2019: 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 (LTIPs). 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 347.9 – 347.9 2,382.5 26.3 2,408.8 2020 EPS Pence 14.60 (0.16) 14.44 Earnings £m Weighted average number of shares millions 233.1 – 233.1 2,356.8 53.2 2,410.0 2019 restated1 EPS Pence 9.89 (0.22) 9.67 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 88 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 1 Performance in the period continued 1.5 Earnings per share (EPS) continued 1.5.2 EPS before exceptionals EPS before exceptionals is defined as earnings per share before exceptional items and net retirement benefit interest. Basic EPS is adjusted to more appropriately reflect ongoing business performance. The reconciliation of the earnings used in the calculations of EPS before exceptionals is set out below: EPS before exceptionals Basic EPS before exceptionals Profit attributable to ordinary shareholders Adjustments to determine profit before exceptionals (note 1.4) Effect of dilutive instruments Share options and LTIPs Diluted EPS before exceptionals Earnings £m Weighted average number of shares millions 2020 EPS Pence Earnings £m Weighted average number of shares millions 2019 restated1 EPS Pence 347.9 2,382.5 14.60 (34.0) 313.9 – 313.9 – 2,382.5 26.3 2,408.8 (1.42) 13.18 (0.15) 13.03 233.1 69.8 302.9 – 302.9 2,356.8 – 2,356.8 53.2 2,410.0 9.89 2.96 12.85 (0.28) 12.57 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 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) Right-of-use assets (note 3.4) Investment property (note 3.6) Net impairment reversal (notes 1.4, 3.3, 3.4 and 3.6) Amortisation and impairment: Intangible assets (note 3.2) Net impairment charge (notes 1.4 and 3.2) Other lease expenses: Short-term leases longer than one month Leases of low-value assets, excluding short-term Variable lease payments Value of inventories expensed 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Commercial income The amounts recognised as a deduction from cost of sales for the two types of commercial income are detailed as follows: Marketing and advertising funding Volume-based rebates Total commercial income Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2020 £m 2019 restated1 £m 1,845 1,900 371 60 3 (30) 91 15 5 2 – 13,608 2020 £m 78 113 191 348 58 2 (13) 93 11 7 2 1 13,772 2019 £m 51 135 186 89 Strategic reportGovernanceFinancial statementsInvestor information Notes to the Group financial statements continued 52 weeks ended 2 February 2020 1 Performance in the period continued 1.6 Operating profit continued 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 Fees payable to the Group’s auditor for the audit of the Group’s subsidiaries pursuant to legislation Non-audit services Other services 2020 £m 0.8 0.3 0.1 1.2 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. 1.7 Employees and Directors Employee benefit expense for the Group during the period Wages and salaries Social security costs Share-based payments Retirement benefit costs 2020 £m 1,605 126 24 90 1,845 2019 £m 0.6 0.2 0.1 0.9 2019 £m 1,643 129 34 94 1,900 In the 52 weeks ended 2 February 2020, there was £49m of restructuring costs in addition to the employee benefit expenses shown in the table above (see note 1.4). This amount included £2m in the form of share-based payments. Average monthly number of people, including Directors Stores Manufacturing Distribution Centre 2020 No. 81,092 9,373 5,763 2,391 98,619 2019 No. 86,552 8,799 6,004 2,275 103,630 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 59). There are no Executive Directors (2019: none) who have retirement benefits accruing under any of the Group’s defined benefit retirement 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 Retirement benefit costs 2020 £m 19 4 8 1 32 2019 £m 17 4 12 1 34 90 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 1 Performance in the period continued 1.8 Dividends Amounts recognised as distributed to equity holders in the period: Final dividend for the period ended 3 February 2019 of 4.75p (2018: 4.43p) Special final dividend for the period ended 3 February 2019 of 4.00p (2018: 4.00p) Interim dividend for the period ended 2 February 2020 of 1.93p (2019: 1.85p) Special interim dividend for the period ended 2 February 2020 of 2.00p (2019: 2.00p) 2020 £m 113 95 46 48 302 2019 £m 104 94 44 47 289 The Directors propose a final ordinary dividend in respect of the financial period ended 2 February 2020 of 4.84p per share which will absorb an estimated £116m of shareholders’ funds. Subject to approval at the Annual General Meeting (AGM), the final dividend will be paid on 29 June 2020 to shareholders who are on the register of members on 22 May 2020. The dividends paid and proposed during the year are from cumulative realised distributable reserves of the Company. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 91 Strategic reportGovernanceFinancial statementsInvestor information Notes to the Group financial statements continued 52 weeks ended 2 February 2020 2 Taxation The Group takes a compliance-focussed 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 Audit Committee, who also review updates on tax compliance and governance matters. 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 £0.7m were paid during 2020 (2019: £1.6m); • Hong Kong: Offices in Hong Kong were established in 2011 and source many of the Group’s non-food products. Local corporation taxes of £0.5m were paid during 2020 (2019: £0.4m); and • Isle of Man, Jersey and Guernsey: The Group’s insurance company was based in the Isle of Man for regulatory reasons but is no longer active. Companies based in Jersey and Guernsey hold UK property assets with a net book value of £53m 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 Uncertain tax positions are assessed in line with IFRIC 23 ‘Uncertainty over income tax treatments’ which provides guidance on the determination of taxable profit and tax bases. The Group uses in-house tax specialists, professional advisers and relevant previous experience to assess tax risks. 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. 92 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2 Taxation continued 2.2 Taxation 2.2.1 Analysis of charge in the period Current tax UK corporation tax Foreign tax Adjustments in respect of prior periods Deferred tax Origination and reversal of timing differences Adjustments in respect of prior periods Tax charge for the period 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 2.2.2 Tax on items charged in other comprehensive income and equity Remeasurements of defined benefit retirement schemes Cash flow hedges Share-based payments Total tax on items included in other comprehensive income and equity (note 2.3) 2020 £m 2019 restated1 £m 60 3 (4) 59 22 6 28 87 2020 £m 38 (10) 2 30 79 4 7 90 (25) 5 (20) 70 2019 £m 17 1 – 18 2.2.3 Tax reconciliation The reconciliation below shows how the tax charge of £87m (2019: £70m) has arisen on profit before taxation of £435m (2019: £303m). The tax for the period is higher (2019: higher) than the standard rate of corporation tax in the UK of 19% (2019: 19%). The differences are explained below: Profit before taxation Profit before taxation at 19% (2019: 19%) Effects of: Recurring items: Expenses not taxable/deductible for tax purposes Disallowed depreciation on UK properties Deferred tax on Safeway acquisition assets Non-recurring items: Profit on property transactions Adjustments in respect of prior periods Exceptional costs Tax charge for the period 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2020 £m 435 83 (5) 24 (6) (3) 2 (8) 87 2019 restated1 £m 303 58 (1) 18 (2) (1) 12 (14) 70 93 Strategic reportGovernanceFinancial statementsInvestor information Notes to the Group financial statements continued 52 weeks ended 2 February 2020 2 Taxation continued 2.2 Taxation continued 2.2.3 Tax reconciliation continued Factors affecting current and future tax charges The effective tax rate for the year was 20.0% (2019: 23.1%). The normalised tax rate for the year (excluding the impact of property transactions, store restructuring and other adjustments) was 23.1% (2019: 23.5%). The normalised tax rate was 4.1% above the UK statutory tax rate of 19%. The main factor increasing the normalised tax rate is disallowed depreciation on UK properties which reflects the Group’s strategy to maintain a predominantly freehold estate. Legislation to reduce the standard rate of corporation tax to 17% from 1 April 2020 was included in Finance Act 2016 and was enacted in a previous period. Accordingly, deferred tax has been provided at 19% or 17% depending upon when the temporary difference is expected to reverse (2019: 19% or 17%). The March 2020 Budget cancelled the planned reduction to 17% so the UK statutory tax rate will remain at 19% from 1 April 2020. The legislation was not enacted during the year so deferred tax has been provided using the 17% rate. If deferred tax was calculated using the 19% rate, the net deferred tax liability recognised at the reporting date would be increased from £472m to £527m. 2.3 Deferred tax liabilities Deferred tax liability 2020 £m 472 2019 restated1 £m 414 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 4 February 2019 (restated)1 Charged to profit for the period Charged/(credited) to other comprehensive income and equity At 2 February 2020 Prior period At 5 February 2018 (restated)1 Credited to profit for the period (restated)1 Charged to other comprehensive income and equity At 3 February 2019 The analysis of deferred tax liabilities are as follows: Deferred tax liability/(asset) to be settled within 12 months Deferred tax liability to be settled after more than 12 months Property, plant and equipment £m Retirement benefit obligation £m Other short-term temporary differences £m 349 3 – 352 355 (6) – 349 117 4 38 159 101 (1) 17 117 (52) 21 (8) (39) (40) (13) 1 (52) 2020 £m 12 460 472 Total £m 414 28 30 472 416 (20) 18 414 2019 restated1 £m (3) 417 414 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 94 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 (CGUs) that will benefit from the synergies of the business combination for the purpose of impairment testing. Other intangible assets (software development costs and licences) Costs that are directly attributable to the creation of identifiable software, which meet the development asset recognition criteria, as stated 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. 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 different. 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 is charged from when the asset is available to use. Depreciation rates used to write off cost less residual value on a straight line basis: Freehold land Freehold buildings Leasehold property improvements Plant, equipment, fixtures and vehicles Assets under construction 0% 2.5% 2.5% or the lease term if shorter 10% to 33% 0% Depreciation expense is primarily charged in cost of sales with an immaterial amount in administration expenses. Right-of-use assets Right-of-use assets are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include the initial amount of the lease liability, any initial direct costs incurred, and an estimate of any applicable dilapidation costs. Also included are the costs of lease payments made, less any lease incentives received, at or before the commencement date. Depreciation is charged from the commencement date which is when the underlying asset is made available for use. Depreciation rates used to write off cost on a straight line basis: Leasehold land Leasehold buildings Leased plant, equipment, fixtures and vehicles The lease term 2.5% or the lease term if shorter 10% to 33% or the lease term if shorter Depreciation expense is primarily charged in cost of sales with an immaterial amount in administration expenses. Subsequent to initial measurement, the right-of-use asset is also adjusted for certain remeasurements of the associated lease liability and provision for dilapidations, details of which are provided in note 6.1 and note 5.1 respectively. Investment property Property held to earn rental income is classified as investment property and is held at cost less accumulated depreciation and impairment. This includes leasehold properties which are held as right-of-use assets. 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. The classification of assets as non-current assets held-for-sale is re-assessed at the end of each reporting period. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 95 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Group financial statements continued 52 weeks ended 2 February 2020 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 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 profit before exceptionals. Trade and other receivables Leases – Group is the lessor Where the Group is a lessor, the Group classifies each lease at lease inception either as a finance lease or an operating lease. Leases in which substantially all the risks and rewards of ownership are retained by the Group 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. The risks and rewards of ownership considered for sub-leases are those granted by the underlying lessee agreement rather than the underlying assets. Operating lease payments are recognised as income on a straight-line basis over the term of the lease. At the commencement date of finance leases the Group recognises a receivable equal to the discounted contractual lease payments receivable and any residual value of the asset. The discount rate uses the interest rate implicit in the lease or, if that rate cannot be readily determined for a sub-lease, a rate based on the head-lease discount rate. Each lease payment is allocated between the capital repayment of the receivable and the finance income element. The finance income is recognised over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the receivable for each period. Other receivables Other receivables that are financial assets are initially recognised at fair value and subsequently held at amortised cost. Provision for impairment of other receivables is based on expected credit losses (ECL) at each reporting date. Other receivables that are non-financial assets, such as deferred non-cash sale consideration, are recognised at fair value. 3.2 Goodwill and intangible assets Current period Cost At 4 February 2019 Additions Interest capitalised Disposals Fully written down assets At 2 February 2020 Accumulated amortisation and impairment At 4 February 2019 Amortisation charge for the period Impairment Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Goodwill £m Other intangibles £m 10 – – – – 10 – – – – – – 10 741 82 2 (32) (58) 735 347 91 15 (31) (58) 364 371 Total £m 751 82 2 (32) (58) 745 347 91 15 (31) (58) 364 381 96 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 3 Operating assets continued 3.2 Goodwill and intangible assets continued Other intangibles include software development costs and licences. Within this asset class, there are assets under construction of £73m (2019: £30m). The net book amount of licences at 2 February 2020 was £15m (2019: £16m). The Group has performed its annual assessment of its amortisation policies and asset lives and deemed them to be appropriate. 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 £15m (2019: £11m) has been recognised in relation to intangible assets. This has been excluded from profit before exceptionals (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. Software development costs The cumulative interest capitalised in respect of software development costs included within other intangibles is £43m (2019: £42m). The cost of internal labour capitalised during the year is not material for separate disclosure. Prior period Cost At 5 February 2018 Additions Interest capitalised Disposals Fully written down assets At 3 February 2019 Accumulated amortisation and impairment At 5 February 2018 Amortisation charge for the period Impairment Disposals Fully written down assets At 3 February 2019 Net book amount at 3 February 2019 Goodwill £m Other intangibles £m 10 – – – – 10 – – – – – – 10 714 79 1 (18) (35) 741 296 93 11 (18) (35) 347 394 Total £m 724 79 1 (18) (35) 751 296 93 11 (18) (35) 347 404 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 97 Strategic reportGovernanceFinancial statementsInvestor information Notes to the Group financial statements continued 52 weeks ended 2 February 2020 3 Operating assets continued 3.3 Property, plant and equipment Current period Cost At 4 February 2019 (restated1) Additions Transfers to assets classified as held-for-sale Disposals Fully written down assets At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Depreciation charge for the period Impairment Impairment reversal Transfers to assets classified as held-for-sale Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Assets under construction included above Freehold land £m Freehold buildings £m Leasehold property improvements £m Plant, equipment, fixtures and vehicles £m 3,846 2 (2) (5) – 3,841 479 – 11 (50) – (1) – 439 3,402 3 4,153 56 (4) (1) (12) 4,192 1,769 107 9 (32) (3) – (12) 1,838 2,354 6 629 17 – (8) (2) 636 378 16 8 (7) – (8) (2) 385 251 – 1,947 323 – (28) (123) 2,119 855 248 31 (4) – (28) (123) 979 1,140 19 Total £m 10,575 398 (6) (42) (137) 10,788 3,481 371 59 (93) (3) (37) (137) 3,641 7,147 28 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The Group has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. There have been no changes made to asset category 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. 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 (2019: £199m). Impairment The Group considers that each store is a separate 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 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 store cash flows over the next three years by applying forecast sales and cost growth assumptions; • project cash flows beyond year three, for the life of each store by applying a long-term growth rate; • discount the cash flows using a pre-tax rate of 9.0% (2019: 9.0%). The Group takes into account a number of factors when assessing the discount rate, including the Group’s WACC and other wider market factors. The Group has evaluated its discount rate following application of IFRS 16 and has concluded that the discount rate applied is appropriate. The Group will continue to assess this as market practice as this area develops; and • consideration is given to any significant one-off factors impacting the stores during the current year and any strategic or market factors which may impact future store performance. 98 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 3 Operating assets continued 3.3 Property, plant and equipment continued ‘Fair value less costs of disposal’ is estimated by the Directors based on their knowledge of individual stores, the markets they serve and likely demand from grocers or other retailers. This assessment takes into account the continued low demand from major grocery retailers for supermarket space, when assessing rent and yield assumptions on a store by store basis. In certain years, the Directors also obtain store level valuations prepared by independent valuers to aid this assessment. When assessing the assumptions at individual store level the Directors take into account the following factors: • 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 £34m (£93m impairment reversal offset by £59m impairment charge) during the year in respect of property, plant and equipment (2019: net £63m impairment reversal; £155m impairment reversal offset by £92m impairment charge). This movement reflects fluctuations from store level trading performance and local market conditions. At 2 February 2020, the assumptions to which the value in use calculation is most sensitive are the discount and growth rates. The Group has estimated a reasonably possible change of +/- 1% in either would result in a change in impairment of c.£60m. Prior period (restated1) Cost At 5 February 2018 Acquisition of business Additions Reclassifications Transfers to right-of-use assets Transfers from investment property Transfers to assets classified as held-for-sale Disposals Fully written down assets At 3 February 2019 Accumulated depreciation and impairment At 5 February 2018 Depreciation charge for the period Impairment Impairment reversal Reclassifications Transfers to right-of-use assets Transfers to assets classified as held-for-sale Disposals Fully written down assets At 3 February 2019 Net book amount at 3 February 2019 Assets under construction included above Freehold land £m Freehold buildings £m Leasehold property improvements £m Plant, equipment, fixtures and vehicles £m 3,898 – 3 (2) (13) 6 (28) (18) – 3,846 572 – 15 (85) – (13) (2) (8) – 479 3,367 2 4,189 4 7 – – – (26) (13) (8) 4,153 1,737 102 13 (55) – – (11) (9) (8) 1,769 2,384 1 625 – 12 7 – – – (3) (12) 629 381 15 6 (10) 1 – – (3) (12) 378 251 0 1,736 1 375 (5) – – – (44) (116) 1,947 731 231 58 (5) (1) – – (43) (116) 855 1,092 4 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Total £m 10,448 5 397 – (13) 6 (54) (78) (136) 10,575 3,421 348 92 (155) – (13) (13) (63) (136) 3,481 7,094 7 99 Strategic reportGovernanceFinancial statementsInvestor information Notes to the Group financial statements continued 52 weeks ended 2 February 2020 3 Operating assets continued 3.4 Right-of-use assets Current period Cost At 4 February 2019 (restated1) Additions Transfers from investment property Disposals Fully written down assets At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Depreciation charge for the period Impairment Impairment reversal Transfers from investment property Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Leasehold land and buildings £m Leased plant, equipment, fixtures and vehicles £m 1,739 39 14 (17) (6) 1,769 844 44 23 (24) 14 (14) (6) 881 888 78 36 – (5) (12) 97 44 16 – – – (5) (12) 43 54 Total £m 1,817 75 14 (22) (18) 1,866 888 60 23 (24) 14 (19) (18) 924 942 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The Group has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. There have been no changes made to asset category lives during the year. 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. Impairment Having applied the same methodology and key assumptions as for property, plant and equipment as set out in note 3.3, the Group has recognised a net impairment reversal of £1m (£24m impairment reversal offset by £23m impairment charge) during the year in respect of right-of-use assets (2019: net £49m impairment; £69m impairment charge offset by £20m reversal of impairment). This movement reflects fluctuations from store level trading performance and local market conditions. At 2 February 2020, the assumptions to which the value in use calculation is most sensitive are the discount and growth rates. The Group has estimated a reasonably possible change of +/- 1% in either would result in a change in impairment of c.£15m. 100 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 3 Operating assets continued 3.4 Right-of-use assets continued Prior period (restated1) Cost At 5 February 2018 Additions Transfers from property, plant and equipment Disposals Fully written down assets At 3 February 2019 Accumulated depreciation and impairment At 5 February 2018 Depreciation charge for the period Impairment Impairment reversal Transfers from property, plant and equipment Disposals Fully written down assets At 3 February 2019 Net book amount at 3 February 2019 Leasehold land and buildings £m Leased plant, equipment, fixtures and vehicles £m 1,694 39 13 (2) (5) 1,739 757 44 57 (20) 13 (2) (5) 844 895 56 27 – – (5) 78 23 14 12 – – – (5) 44 34 2020 £m 39 3 (39) 3 Total £m 1,750 66 13 (2) (10) 1,817 780 58 69 (20) 13 (2) (10) 888 929 2019 £m 4 41 (6) 39 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 3.5 Assets classified as held-for-sale At start of period Transfers from property, plant and equipment at net book value Disposals At end of period On 13 December 2019, the Group disposed of £38m of assets previously classified as held-for-sale in relation to its Camden site. The consideration includes £85m in cash (£25m received in the period, with a further £20m due in 2020 and the remaining £40m due in 2025) together with £34m in non-cash consideration due by 2024 (representing the undiscounted value of the future lease of a new store on part of the same site). The total consideration has been discounted, resulting in a profit on disposal of £64m after disposal costs in the 52 week period ended 2 February 2020. Consideration receivable as at the period end is included within both current and non-current trade and other receivables, on a discounted basis. Assets with a cost of £6m and accumulated depreciation of £3m were transferred from property, plant and equipment to assets classified as held-for-sale in the 52 weeks ended 2 February 2020 (2019: £54m and £13m respectively). Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 101 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Group financial statements continued 52 weeks ended 2 February 2020 3 Operating assets continued 3.6 Investment property Current period Cost At 4 February 2019 (restated1) Additions Transfers to right-of-use assets Disposals Fully written down assets At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Depreciation charge for the period Impairment Impairment reversal Transfers to right-of-use assets Disposals Fully written down assets At 2 February 2020 Net book amount at end of period Freehold £m Leasehold £m 45 – – (2) – 43 19 1 4 (3) – (1) – 20 23 172 7 (14) (2) (2) 161 138 2 7 (3) (14) (2) (2) 126 35 Total £m 217 7 (14) (4) (2) 204 157 3 11 (6) (14) (3) (2) 146 58 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Included in other operating income is £15m (2019: £12m) of rental income generated from investment properties. At the end of the period the fair value of freehold investment properties was £37m (2019: £44m), with leasehold investment properties supported by their value in use. Freehold investment properties are valued by independent surveyors on a vacant possession basis using observable inputs (fair value hierarchy level 2). Prior period (restated1) Cost At 5 February 2018 Additions Transfers to property, plant and equipment Disposals At 3 February 2019 Accumulated depreciation and impairment At 5 February 2018 Depreciation charge for the period Impairment Disposals At 3 February 2019 Net book amount at end of period Freehold £m Leasehold £m 52 – (6) (1) 45 19 – – – 19 26 191 1 – (20) 172 155 2 1 (20) 138 34 Total £m 243 1 (6) (21) 217 174 2 1 (20) 157 60 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 102 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 3 Operating assets continued 3.7 Trade and other receivables – non-current Finance leases – Group is lessor Other receivables 2020 £m 8 63 71 2019 restated1 £m 8 – 8 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The Group is the lessor on a number of property leases – many of which contain rent review terms that require rents to be re-assessed on a periodic basis. The rent re-assessments are normally based on changes in market rents or capped increases in measures of inflation. Finance leases The table below summarises the maturity profile of undiscounted finance lease payments due to the Group. Less than one year After one year but not more than five years More than five years Total undiscounted lease payments Unearned finance income Net investment in the lease 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Finance lease income of £1m (2019: £1m) has been recognised in the 52 weeks ended 2 February 2020. Operating leases The table below summarises the maturity profile of undiscounted minimum operating lease payments due to the Group. Less than one year One to two years Two to three years Three to four years Four to five years More than five years Total undiscounted lease payments receivable 2020 £m 1 4 7 12 (4) 8 2020 £m 10 9 6 5 4 17 51 2019 restated1 £m 1 4 8 13 (5) 8 2019 restated1 £m 12 10 9 5 4 21 61 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Operating lease income of £15m (2019: £12m) has been recognised in the 52 weeks ended 2 February 2020. This includes £1m (2019: £1m) relating to variable lease payments that do not depend on an index or rate. Other receivables Other receivables comprise deferred consideration due after more than one year in relation to the disposal of the Camden site (see note 3.5). The amount includes £33m of deferred cash consideration on a discounted basis and £30m representing the fair value of a future lease of a newly constructed supermarket and convenience store on part of the site. As at 2 February 2020, none of the other receivables were past due and have not been impaired. The carrying value of the deferred cash consideration approximates to its fair value. The fair value of the future lease is based on the net present value of observable market rentals for similar developments in the surrounding locality (fair value hierarchy level 2). 3.8 Capital commitments Contracts placed for future capital expenditure not provided in the financial statements (property, plant and equipment, right-of-use assets and intangible assets) Contracts placed for future leases not provided in the financial statements Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2020 £m 37 34 2019 £m 36 – 103 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Group financial statements continued 52 weeks ended 2 February 2020 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. 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. 4.2 Investment in joint venture The Group and Ocado Group plc are sole investors in a company (MHE JVCo Limited), which owns the plant and equipment at the Dordon customer fulfilment centre. The Group has a 51.1% interest in MHE JVCo Limited (2019: 51.1%). Decisions regarding MHE JVCo Limited require the unanimous consent of both parties. The Directors have considered the requirements of IFRS 11 and determined that the Group continues to jointly control MHE JVCo Limited. MHE JVCo Limited Non-current assets Current assets Current liabilities Net assets Group’s share of net assets Profit Group’s share of profit 2020 £m 55 22 (1) 76 39 2 1 2019 £m 71 22 (1) 92 47 2 1 4.3 Business combinations There were no new business combinations in the 52 weeks ended 2 February 2020. During the period, the Group paid £1m deferred consideration relating to the prior year acquisition of Chippindale Foods Limited. This was part of the total consideration of £5m. During the 52 weeks ended 3 February 2019, the Group acquired 100% of the ordinary share capital of Chippindale Foods Limited, a leading supplier of free range eggs. Total consideration was £5m net of amounts due from the Group. The fair value of net assets acquired was £5m, including property, plant and equipment and net current assets. Goodwill recognised in the transaction was negligible. 104 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 5 Working capital and provisions 5.1 Accounting policies Inventories Inventories represent 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 inventory losses relating to shrinkage and obsolescence. Losses relating to shrinkage in stores are based on historical losses, verified by physical inventory counts conducted by an independent third party. Provision is made for obsolete and slow moving items. Trade and other receivables Trade and other receivables are initially recognised at fair value, which is generally equal to face value, and subsequently held at amortised cost. Provision for impairment of trade receivables is recognised based on lifetime expected credit losses at each reporting date, 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, bank overdrafts and deposits readily convertible to known amounts of cash. In the statement of financial position, 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 payables Trade and other payables are initially recognised at fair value, which is generally equal to face value of the invoices received, and subsequently held at amortised cost. Trade payables 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. Supply chain financing The Group offers suppliers the option to access supply chain financing through certain third party providers. These facilities allow suppliers to receive payments earlier than the contractual payment terms. The Group does not receive any fees or rebates from the providers where the suppliers choose to utilise these facilities. Payment terms continue to be agreed directly between the Group and suppliers, and is independent of supply chain financing being available. The Group makes an assessment of its supply chain finance arrangements to determine if the associated balance is appropriately presented as trade payables or as borrowings. This assessment considers factors such as the commercial purpose of the facility, the nature and specific terms of the arrangements and the credit terms in place with the banks and suppliers. Based on this assessment, the Group has determined that it is appropriate to present amounts outstanding through the supply chain financing arrangement as trade payables. 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 a requirement for repairs or reinstatement is identified. Provisions for 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 Group assesses the appropriateness of each of these provisions each year. 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. 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 Group’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 Group does not recognise contingent liabilities but does disclose any such balances (see note 10.2). 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 or the Group cannot measure reliably. 5.2 Inventories Finished goods Unearned elements of commercial income are deducted from finished goods as the inventory has not been sold. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 2020 £m 660 2019 £m 713 105 Strategic reportGovernanceFinancial statementsInvestor information5 Working capital and provisions continued 5.3 Trade and other receivables Commercial income trade receivables Accrued commercial income Other trade receivables Less: provision for impairment of trade receivables Trade receivables Prepayments and accrued income Other receivables 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The carrying amounts of trade and other receivables approximates to their fair value at 2 February 2020 and 3 February 2019. Current period Expected credit loss rate Gross carrying amount – trade receivables Provision for impairment of trade receivables Prior period Expected credit loss rate Gross carrying amount – trade receivables Provision for impairment of trade receivables Current %/£m 0% 191 – Current %/£m 0% 192 – 1 to 30 days past due %/£m 6% 15 (1) 1 to 30 days past due %/£m 6% 2 (0) 31 to 60 days past due %/£m 22% 2 (1) 31 to 60 days past due %/£m 25% 1 (0) 61 to 90 days past due %/£m 51% 1 (1) 61 to 90 days past due %/£m 41% 1 (1) 2020 £m 7 28 175 (4) 206 116 31 353 91 days plus past due %/£m 100% 1 (1) 91 days plus past due %/£m 100% 3 (3) 2019 restated1 £m 4 28 167 (4) 195 132 17 344 Total £m 210 (4) Total £m 199 (4) As at 2 February 2020 and 3 February 2019, trade receivables 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 receivables do not contain impaired assets. As at 15 March 2020, £6m of the £7m commercial income trade receivables balance had been settled and £20m of the £28m accrued commercial income balance had been invoiced and settled. 5.4 Trade and other payables Trade payables Less: commercial income due, offset against amounts owed Other taxes and social security payable Other payables Accruals and deferred income 2020 £m 2,467 (21) 2,446 131 58 416 3,051 2019 restated1 £m 2,449 (27) 2,422 113 109 426 3,070 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Included within accruals and deferred income is £1m (2019: £1m) in respect of deferred commercial income. Amounts accrued in relation to store restructuring activity are included within accruals and deferred income at 2 February 2020. As at 15 March 2020, £17m of the £21m commercial income due above had been offset against payments made. 106 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20205 Working capital and provisions continued 5.5 Provisions At 4 February 2019 (restated1) Charged to profit for the period Utilised during the period Released during the period Unwinding of discount At 2 February 2020 Onerous contracts £m 74 16 (30) (14) 2 48 Other provisions £m 22 9 (3) – – 28 Total £m 96 25 (33) (14) 2 76 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Included with the above balance at 2 February 2020 is £16m (2019: £33m) relating to a balance due within one year. The provision is revised regularly in response to market conditions. During the period, a net £2m charge (£16m charge offset by £14m release) has been recognised in respect of onerous contract provisions due to changes in circumstances or performance relating to certain contracts. Other provisions include a petrol filling station decommissioning reserve for the cost of decommissioning petrol tanks, a provision for costs relating to recent store closures and provisions for dilapidations on certain leased buildings, for the cost of restoring assets to their required 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 Gain arising on reduction of lease terms Defined benefit scheme contributions paid less operating expenses Share-based payments charge Decrease/(Increase) in inventories2 Increase in Trade and other receivables2 Increase in Trade and other payables2 Decrease in provisions2 Cash generated from operations 2020 £m 348 87 87 (1) 521 525 108 (123) (66) (10) (5) 26 53 (14) 29 (27) 1,017 2019 restated1 £m 233 130 70 (1) 432 501 173 (175) – – 21 34 (27) (89) 114 (7) 977 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Total working capital inflow (the sum of items marked 2 in the table) is £41m in the year (2019: £9m outflow). This includes £2m (2019: £12m) as a result of the current year charges in respect of onerous contracts and accruals of onerous commitments and £63m of non-cash exceptional charges (2019: £nil), net of £41m (2019: £6m) of onerous payments and other non-operating payments of £1m (2019: £5m). When adjusted to exclude these items, the operating working capital inflow is £18m (2019: £10m outflow). Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 107 Strategic reportGovernanceFinancial statementsInvestor information6 Capital and borrowings 6.1 Accounting policies Borrowings Interest-bearing loans and overdrafts are initially recorded at fair value, net of attributable transaction costs and fees. Subsequent to initial recognition they are measured at amortised cost, with 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% (2019: 5%). Capitalised interest is included within interest paid in cash flow from operating activities. Lease liabilities For leases where the Group is a lessee, the Group recognises a right-of-use asset and a lease liability at the commencement date of the lease. Lease liabilities are initially measured at the present value of the lease payments due during the lease term but that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise fixed payments and applicable variable lease payments (which depend on an index or a rate). The exercise price of purchase options are also included if reasonably certain to exercise the option. The lease term includes periods covered by extension and break options if the Group is reasonably certain to extend the lease or to not exercise the break. The incremental borrowing rates are determined through a build up approach, starting with a risk-free rate specific to the term and economic environment of the lease, adjusted for both the credit risk of the lessee and other characteristics of the lease (for example the quality of the underlying assets). The inputs used to determine the rates are regularly re-assessed, based on historical experience and other factors which the Directors believe to be reasonable. Each lease payment is allocated between the capital repayment of the liability and the finance cost element. The finance cost is charged to the consolidated income statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities are remeasured when there is a change in future lease payments arising from a change in an index, rate or a lease modification. When purchase, extension or break options are exercised, (or not exercised) in a way inconsistent with the prior assessments of those options, or if those assessments are changed, then lease liabilities will also be remeasured. The likelihood of options being exercised will only be re-assessed on the occurrence of a significant event or change in circumstance within the control of the Group (for example when a final decision to close or vacate a site is made). The Group has elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’). Lease payments on short-term leases and leases of low-value assets are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. 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 statement of financial position 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, lease liabilities and derivative financial instruments (stated at current fair value). 108 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20206 Capital and borrowings continued 6.2 Finance costs and income Interest payable on short-term loans and bank overdrafts Interest payable on bonds Interest on lease liabilities Interest capitalised Total interest payable Provisions: unwinding of discount (note 5.5) Other finance costs Finance costs before exceptionals2 Costs associated with the repayment of borrowings (note 1.4) Finance costs Bank interest and other finance income Finance lease income Finance income before exceptionals2 Net retirement benefit interest (notes 1.4 and 8.2) Finance income Net finance costs 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 2 Net finance costs before exceptionals marked 2 amount to £106m (2019: £115m). 6.3 Borrowings The Group had the following current borrowings and other financial liabilities measured at amortised cost: Current €282m euro bond 2.25% June 2020 Other short-term borrowings The Group had the following non-current borrowings and other financial liabilities measured at amortised cost: Non-current €282m euro bond 2.25% June 2020 £250m sterling bonds 4.625% December 2023 £250m sterling bonds 3.50% July 2026 £250m sterling bonds 4.75% July 2029 £350m sterling bonds 2.50% October 2031 Revolving credit facility 2020 £m (4) (43) (63) 2 (108) (2) (1) (111) – (111) 4 1 5 19 24 (87) 2020 £m 237 – 237 2020 £m – 249 269 245 347 (2) 1,108 2019 restated1 £m (3) (48) (66) 1 (116) (3) (1) (120) (33) (153) 4 1 5 18 23 (130) 2019 £m – 178 178 2019 £m 247 249 272 245 – 97 1,110 On 24 September 2019 the Group issued a £350m sterling bond at a fixed interest rate of 2.50% expiring October 2031. This was issued under the Group’s £3bn Euro Medium Term Note Programme. Borrowing facilities In addition to the bonds detailed in the table above, the Group has the following borrowing facilities. The Group has a syndicated committed revolving credit facility of £1.35bn. During the 52 weeks ended 2 February 2020, the Group extended this facility by a further year, resetting its five-year term and resulting in a maturity date of June 2024. The revolving credit facility incurs commitment fees and interest charges at a spread above LIBOR. The Group had £1.35bn of undrawn committed headroom available on this facility as at 2 February 2020. In addition the Group has £100m 364 day committed revolving credit facility which matures in July 2020. The facility was undrawn as at 2 February 2020. In the prior period, the Group entered into an additional £250m revolving credit facility to provide flexibility on refinancing the €282m euro bond when it matures in June 2020. As a result of this bond having been refinanced during the year through the issuance of the £350m bond, this facility has subsequently lapsed and is no longer available as at 2 February 2020. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 109 Strategic reportGovernanceFinancial statementsInvestor information 6 Capital and borrowings continued 6.3 Borrowings continued Borrowing facilities continued In the event of default of covenants, the principal amounts of borrowings and any interest accrued become repayable on demand. The Group has a number of uncommitted facilities which are available to meet short-term borrowing requirements, and incur interest charges according to usage. 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 in the statement of financial position for borrowings. Trade and other payables (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 2020 £m 280 41 41 290 29 978 2019 £m 216 282 32 32 381 587 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 borrowings: non-current and current Amortised cost £m 1,345 2020 Fair value £m 1,475 Amortised cost £m 1,288 2019 Fair value £m 1,360 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 Lease liabilities Current lease liabilities Non-current lease liabilities Maturity of lease liabilities The table below summarises the maturity profile of the Group’s lease liabilities based on contractual, undiscounted payments. Less than one year One to two years Two to three years Three to four years Four to five years More than five years 2020 £m 72 1,304 1,376 2020 £m 131 125 120 113 106 1,601 2019 restated1 £m 69 1,328 1,397 2019 restated1 £m 130 125 119 114 107 1,719 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. The interest expense on lease liabilities during the periods ended 2 February 2020 and 3 February 2019 are shown in note 6.2. The value of contracts placed for future leases not provided in the financial statements is disclosed in note 3.8. Other information The Group is the lessee on a diverse portfolio of leases for property and equipment, with the vast majority of lease liabilities relating to property (see note 3.4 and note 3.6). Certain property leases contain rent review terms that require rents to be adjusted on a periodic basis which may be subject to market rent or capped increases in inflation measurements. In addition, certain property leases contain break clauses that would allow the Group to exit leases early. The depreciation expense for leases during the periods ended 2 February 2020 and 3 February 2019 are shown in note 1.6. This note also includes the expense of variable lease payments incurred during the periods and expenses incurred on both low value leases and short-term leases longer than one month. The total cash outflow for leases was £157m (2019: £145m). 110 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20206 Capital and borrowings continued 6.5 Analysis of net debt1 Cross-currency interest rate swaps3 Fuel and energy price contracts Non-current financial assets Foreign exchange forward contracts Fuel and energy price contracts Current financial assets Bonds3 Other short-term borrowings3 Cross-currency interest rate swaps3 Lease liabilities3 Foreign exchange forward contracts Fuel and energy price contracts Current financial liabilities Bonds3 Revolving credit facility3 Lease liabilities3 Fuel and energy price contracts Non-current financial liabilities Cash and cash equivalents Net debt1 Note 7.3 7.3 6.3 6.3 7.3 6.4 7.3 7.3 6.3 6.3 6.4 7.3 2020 £m – – – – 1 1 (237) – (4) (72) (17) (15) (345) (1,110) 2 (1,304) (7) (2,419) 305 (2,458) 2019 restated2 £m 9 6 15 3 16 19 – (178) – (69) (4) (1) (252) (1,013) (97) (1,328) (2) (2,440) 264 (2,394) 1 Net debt is defined in the Glossary on page 153. 2 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. Total net liabilities from financing activities (the sum of items marked 3 in the table) is £2,725m in the 52 weeks ended 2 February 2020 (2019: £2,676m). Of the £49m increase (2019: £42m decrease) in net liabilities from financing activities, £67m (2019: £56m) relates to non-cash movements offset by £18m (2019: £98m) related to cash movements. Cash and cash equivalents include restricted balances of £nil (2019: £3m) which is held by Farock Insurance Company Limited, a subsidiary of Wm Morrison Supermarkets PLC. 6.6 Called-up share capital At 4 February 2019 Share options exercised and shares issued under LTIP schemes1 At 2 February 2020 Number of shares millions 2,368.3 36.7 2,405.0 Share capital £m 237 3 240 Share premium £m 178 14 192 Total £m 415 17 432 1 The £3m movement in share capital has been rounded down to ensure that the total movement and total share capital positions, are correctly stated. All issued shares are fully paid and have a par value of 10p per share (2019: 10p per share). The Group did not acquire any of its own shares for cancellation in the 52 weeks ended 2 February 2020 or the 52 weeks ended 3 February 2019. 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 £30m (2019: £21m) in respect of own shares held at the reporting date. This represents the cost of 14,215,041 (2019: 9,885,248) of the Group’s ordinary shares (nominal value of £1.4m (2019: £1.0m)). 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 2 February 2020 was £26m (2019: £23m). 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 4,881,284 (2019: 3,945,258) of its own shares to hold in trust for consideration of £10m (2019: £9m), and utilised 551,491 (2019: 1,721,480) trust shares to satisfy awards under the Group’s employee share plans. Proceeds from exercise of share awards The Group issued 8,532,407 (2019: 12,440,132) new shares to satisfy options exercised by employees during the period in respect of the Group’s Sharesave schemes. Proceeds received on exercise of these shares amounted to £14m (2019: £20m) and these have been recognised as an addition to share capital and share premium in the period. In addition, the Group issued 28,166,736 (2019: nil) shares under the Group’s Long Term Incentive Plan (LTIP) scheme for nominal value. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 111 Strategic reportGovernanceFinancial statementsInvestor information6 Capital and borrowings continued 6.6 Called-up share capital continued Settlement of share awards During the 52 weeks ended 2 February 2020, the Group has settled 551,491 of share options out of trust shares which have vested during the period net of tax. The Group paid the £2m (2019: £5m) in cash on behalf of the employees, rather than selling shares on the employees’ behalf to settle the employees’ tax liability on vesting of share options. 6.7 Reserves Capital redemption reserve Merger reserve Hedging reserve Retained earnings Total 2020 £m 39 2,578 (37) 1,529 4,109 2019 restated1 £m 39 2,578 10 1,283 3,910 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 10.3. 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 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. 6.8 Capital management The Group defines the capital that it manages as the Group’s total equity and net debt balances. 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 52 weeks ended 2 February 2020, net debt has increased by £64m. Throughout the period, the Group has comfortably complied with the gearing and fixed charge cover covenants attaching to its revolving credit facility. 112 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20207 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 economic relationship between the hedging instrument and the hedged item, the risk management objective and strategy for undertaking the hedge. This includes an assessment of whether changes in fair values or the cash flows of the hedging instruments are expected to offset changes in the fair values or cash flows of hedged items. 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. When option contracts are used to hedge forecast transactions, both the intrinsic and time value of the options are designated as hedging instruments. Gains or losses relating to the effective portion of the change in fair value of the options are recognised in the cash flow hedge reserve within equity. Any changes in the fair value of the option premium is recognised in other comprehensive income. When forward contracts are used to hedge forecast transactions, the Group designates the change in fair value of the forward contract as the hedging instrument. Gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. 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. 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 reasonably possible change (+/-10%) in the US dollar and euro exchange rates would equate to a £7m post-tax profit or loss exposure in relation to the euro and £4m 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 £34m for the hedged amount. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 113 Strategic reportGovernanceFinancial statementsInvestor information7 Financial risk and hedging continued 7.2 Financial risk management continued 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 facilities, enable the Group to manage its day-to-day liquidity risk. Any short-term surplus is invested in accordance with Treasury Policy. Some suppliers have access to supply chain finance facilities, which allows these suppliers to benefit from the Group’s credit profile. The total size of the facility at 2 February 2020 was £1,078m across a number of banks and platforms. The level of utilisation is dependent on the individual supplier requirements and varies significantly over time, dependent on suppliers’ requirements. 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. 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 reporting date, 100% (2019: 78%) 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 The majority of the Group’s revenue is received in cash at the point of sale. 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 principal areas of credit risk relate to financial institution and trading counterparties such as wholesale customers. The Group has well established credit verification procedures in place for key exposures. Limits on the total exposure to a counterparty or Group of connected counterparties are established within the Treasury Policy. Compliance with limits is regularly monitored. With respect to wholesale customers, the Group establishes a credit limit for each individual entity, which takes into account a number of factors including the level of credit insurance in place, the customer’s payment history, third party credit reports and other relevant factors including the Group’s rights within the specific terms of the contract. 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 reporting date would affect other comprehensive income by £6m (2019: £12m) for the hedged amount. 114 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20207 Financial risk and hedging continued 7.3 Derivative financial assets and liabilities Derivative financial assets Current Foreign exchange forward contracts Fuel and energy price contracts Non-current Cross-currency interest rate swaps Fuel and energy price contracts 2020 Fair Value £m 2020 Notional Value £m 2019 Fair Value £m 2019 Notional Value £m – 1 1 – – – 32 1 33 – – – 3 16 19 9 6 15 112 55 167 240 38 278 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 Cross-currency interest rate swaps Foreign exchange forward contracts Fuel and energy price contracts Non-current Fuel and energy price contracts 2020 Fair Value £m 2020 Notional Value £m 2019 Fair Value £m 2019 Notional Value £m 4 17 15 36 7 7 240 411 53 704 35 35 – 4 1 5 2 2 – 262 3 265 18 18 The amounts disclosed in the table below are the contractual undiscounted derivative cash flows and therefore differ to those in the statement of financial position. 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: (Outflow)/inflow < 1 year £m (247) 242 (443) 426 2020 £m 1-5 years £m – – – – < 1 year £m (7) 6 (374) 372 (15) (7) 15 2019 £m 1-5 years £m (247) 253 – – 4 Cash flow hedges At 2 February 2020 and at 3 February 2019, the Group held cross-currency swaps designated as cash flow hedges. The notional principal amount of the outstanding cross-currency swaps at 2 February 2020 was €282m (2019: €282m). The fuel and energy price contracts and foreign currency derivatives are designated as cash flow hedges. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 115 Strategic reportGovernanceFinancial statementsInvestor information 8 Retirement benefits 8.1 Accounting policies A defined contribution scheme is a retirement 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 Retirement scheme assets are valued at fair market value as required by IAS 19. Retirement benefit 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 retirement benefit deficit or surplus recognised in the consolidated statement of financial position 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 income statement and consolidated statement of cash flows and is part of adjusted earnings. Net interest income/expense is calculated by applying the discount rate on liabilities to the net retirement benefit deficit or surplus (adjusted for cash flows over the accounting period) and is recognised in finance costs or income and excluded from profit before exceptionals. Expenses incurred in respect of the management of scheme assets are included in the consolidated statement of comprehensive income as a reduction in the return on scheme assets. Other scheme expenses are recognised in the consolidated income statement 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 the consolidated statement of 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 consolidated 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 retirement 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 RSP was closed to future accrual in September 2018 (see note 8.6). The position of each scheme at 2 February 2020 is as follows: CARE Schemes RSP Net retirement benefit surplus The disclosures below show the details of the schemes combined: Statement of financial position Fair value of scheme assets Present value of obligations Net retirement benefit surplus/(deficit) Income statement: Current service cost – recognised in cost of sales Current service cost – recognised in administrative expenses Past service cost (guaranteed minimum pension) Administrative costs paid by the Schemes – recognised in administrative expenses Settlement and curtailment gain Curtailment loss from closure of the retirement scheme Net interest on net retirement benefit surplus/deficit – finance (income)/expense Total expense (credited)/charged to income statement Statement of other comprehensive income: Remeasurements in other comprehensive income – credit 2020 £m 960 (16) 944 2019 CARE £m 4,471 (3,741) 730 2019 CARE £m – – 7 2 (2) – (18) (11) (100) 2019 £m 730 (42) 688 2019 RSP £m 349 (391) (42) 2019 RSP £m 35 18 – 1 – 19 – 73 – 2020 CARE £m 5,013 (4,053) 960 2020 CARE £m – – – 2 – – (20) (18) 2020 RSP £m 389 (405) (16) 2020 RSP £m – – – 1 – – 1 2 (204) (27) 116 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20208 Retirement benefits 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 losses in the 52 weeks ended 3 February 2019 include a £19m exceptional charge as a result of the closure of the RSP to future accrual in September 2018. The Group recognised a past service cost of £7m in the 52 weeks ended 3 February 2019 in relation to the estimated cost of the equalisation of guaranteed minimum retirement benefits for men and women, following a ruling by the High Court in October 2018 (see note 8.7 of the Group’s 2018/19 Annual Report and Financial Statements). 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), income assets (comprising credit investments and corporate bonds) and protection assets (comprising a liability driven investment (LDI) portfolio and the two buy-in annuity policies), 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) Diversified growth funds (quoted) Credit funds (unquoted) Liability driven investments (unquoted) Annuity policies (unquoted) Cash (quoted) 2020 CARE £m 574 511 – 466 2,782 649 31 5,013 2020 RSP £m 158 – 40 – 190 – 1 389 2019 CARE £m 507 442 120 444 2,264 665 29 4,471 2019 RSP £m 135 – 76 – 137 – 1 349 Liability driven investments 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 LDI, whose main goal is to align movements in the value of the Schemes’ 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 The Safeway Scheme has two buy-in annuity policies that provide 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 117 Strategic reportGovernanceFinancial statementsInvestor information8 Retirement benefits continued 8.3 Scheme assets continued 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. 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. 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 Benefits paid Administrative expenses Fair value of scheme assets at end of period 2020 CARE £m 4,471 121 554 8 – (139) (2) 5,013 2020 RSP £m 349 9 70 1 – (39) (1) 389 2019 CARE £m 4,542 124 (53) 7 – (147) (2) 4,471 2019 RSP £m 315 9 (6) 49 3 (20) (1) 349 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 retirement benefit 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. 118 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20208 Retirement benefits 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 Past service cost (guaranteed minimum pension) Interest expense Actuarial gain – demographic assumptions Actuarial (loss)/gain – financial assumptions Actuarial gain – experience Settlement and curtailment gain Curtailment loss from closure of the retirement scheme Employee contributions Benefits paid Defined benefit obligation at end of period 2020 CARE £m (3,741) – – (101) 92 (592) 150 – – – 139 (4,053) 2020 RSP £m (391) – – (10) – (58) 15 – – – 39 (405) 2019 CARE £m (3,930) – (7) (106) 123 30 – 2 – – 147 (3,741) The durations of the defined benefit obligations at the end of the 2020 reporting period are: RSP 20 years; Morrison CARE 23 years; Safeway CARE 20 years. The weighted average duration of all three Schemes is 21 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 2020 CARE 1.8% 2.9% 2020 CARE 20.9 22.3 22.6 24.2 2020 RSP 1.8% 2.9% 2020 RSP n/a n/a n/a n/a 2019 CARE 2.8% 3.2% 2019 CARE 22.0 23.3 23.7 25.2 2019 RSP £m (333) (53) – (9) – 3 3 – (19) (3) 20 (391) 2019 RSP 2.7% 3.2% 2019 RSP n/a n/a n/a n/a For deriving discount rates, the Group estimates these rates with reference to high quality corporate bonds. 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. The Group believes that this approach appropriately reflects expected yields on high quality corporate bonds over the duration of the Group’s retirement schemes, as required by IAS 19. Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The mortality tables used for the 52 weeks ended 2 February 2020 are the S2PMA/S2PFA-Heavy mortality tables (males/females) based on year of birth with a scaling factor of 110% applied to the mortality rates in both the Morrison and Safeway Schemes, with CMI 2018 core projections and a long-term rate of improvement of 1.5% p.a. For the 52 weeks ended 3 February 2019, the Group used the S2PMA/S2PFA-Heavy mortality 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 2017 projections and a long-term rate of improvement of 1.5% p.a. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 119 Strategic reportGovernanceFinancial statementsInvestor information 8 Retirement benefits continued 8.4 Present value of obligations continued 8.4.1 Significant actuarial assumptions continued Related actuarial assumptions (expressed as weighted averages) Rate of increase of retirement benefits in payment: RPI inflation capped at either 2.5% p.a. or 5% p.a. (% p.a.) Rate of increase of retirement benefits in deferment: CPI inflation capped at either 2.5% p.a. or 5% p.a. (% p.a.) CPI inflation (% p.a.) 2020 CARE 2020 RSP 2019 CARE 2.0%/2.8% – 2.1%/3.1% 2019 RSP – –/2.0% 2.0% 2.0%/– 2.0% –/2.1% 2.1% 2.1%/– 2.1% 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 2020 CARE £m -/+85 +/-65 +145 2020 RSP £m -/+8 +/-7 – 2019 CARE £m -/+90 +/-80 +155 2019 RSP £m -/+7 +/-7 – 120 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 20208 Retirement benefits continued 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 participated in the RSP until its closure. 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 was 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 2019 for the Safeway Scheme and 5 April 2019 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 £518m, £157m and £7m 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 2019 actuarial valuations for the CARE Schemes have been used and updated for IAS 19 ‘Employee benefits’ purposes for the period to 2 February 2020 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 2 February 2020, schemes in surplus have been disclosed within the assets in the consolidated statement of financial position. The Group obtained legal advice with regard to the recognition of a retirement benefit 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 concluded that the above accounting treatment should not be materially affected by the 2015 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 3 February 2020 is £9m (2019: £7m). This estimate includes amounts payable from the SLP. 8.6 Defined contribution scheme The Group opened a defined contribution retirement benefit scheme called the Morrisons Personal Retirement Scheme (MPRS) for colleagues during the 53 weeks ended 4 February 2018. The MPRS became the auto enrolment scheme for the Group. 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 52 weeks ended 2 February 2020, the Group paid contributions of £78m to the MPRS (2019: £28m), and expects to contribute £80m for the following period (2019: £79m). Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 121 Strategic reportGovernanceFinancial statementsInvestor information9 Share-based payments 9.1 Accounting policy 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 £26m (2019: £34m). 9.2 Sharesave schemes All employees (including Executive Directors) are eligible for the Sharesave schemes 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 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 17 May 2019 £2.11 £6.3m £1.78 4.6% 0.71% 20.61% 15 May 2018 £2.55 £13.2m £1.87 3.96% 0.56% 24.9% 16 May 2017 £2.44 £16.5m £1.84 2.08% 0.30% 28.1% 16 May 2016 £1.91 £5.1m £1.70 2.62% 0.87% 26.8% 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. The requirement that the employee has to save in order to purchase shares under the Sharesave 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 2020 Options thousands 47,570 20,905 (8,532) (8,637) 51,306 19 Weighted average exercise price in £ per share 1.75 1.87 1.64 1.82 1.83 1.64 Weighted average exercise price in £ per share 1.83 1.78 1.70 1.82 1.83 1.70 2020 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 Weighted average share price at date of exercise £ 2.03 Weighted average option price at date of exercise £ 1.70 Number of shares thousands 8,532 Weighted average share price at date of exercise £ 2.51 Weighted average option price at date of exercise £ 1.64 2020 £1.70 to £1.87 1.44 years 2019 Options thousands 44,676 22,166 (12,441) (6,831) 47,570 14 2019 Number of shares thousands 12,441 2019 £1.64 to £1.87 1.64 years 122 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 2020 9 Share-based payments continued 9.3 Long Term Incentive Plans (LTIPs) The LTIP 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. The schemes granted in 2016 all vested during the 52 weeks ended 2 February 2020. All 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 determine it are as follows: Grant date Option fair value at grant date Fair value of share awards 14 Oct 2019 £1.96 £1.0m 19 April 2019 £2.23 £27.2m 18 Sept 2018 £2.62 £0.9m 22 March 2018 £2.09 £27.3m 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 April 2016 £2.00 £73.6m Movement in outstanding share awards Outstanding at start of period Granted Exercised Forfeited Outstanding at end of period Exercisable at end of period 2020 Share awards thousands 2019 Share awards thousands 54,168 12,714 (28,167) (4,730) 33,985 – 47,967 13,386 (3,474) (3,711) 54,168 – The weighted average remaining contractual life of the share awards is 1.2 years (2019: 0.9 years). 9.4 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 Exercise price Fair value of share awards granted Movement in outstanding share awards Outstanding at start of period Granted Exercised Outstanding at end of period The weighted average remaining contractual life of the share awards is 1.0 year (2019: 1.3 years). 2019/20 scheme £2.25 £nil £1.7m 2018/19 scheme £2.09 £nil £2.8m 2020 Share awards thousands 2019 Share awards thousands 3,549 771 (947) 3,373 2,491 1,355 (297) 3,549 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 123 Strategic reportGovernanceFinancial statementsInvestor information10 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 retirement benefit 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 52 weeks ended 2 February 2020, the Group received a dividend of £9m (2019: £7m) from MHE JVCo Limited. The Group has a 51.1% interest in MHE JVCo Limited (see note 4.2). 10.2 Guarantees and contingent liabilities Following the disposal of the land and building of its customer fulfilment centre at Dordon to a third party, the Group continues to guarantee the lease in respect of this site through until 2038. If the lessee were to default during the period of guarantee, their lease obligations could revert back to the Group under the terms and become a liability of the Group. Should the lessee default, the additional future commitment is estimated at up to £30m (2019: £31m). 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 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 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 appeals have been concluded. During the 52 weeks ended 3 February 2019 the High Court rejected this appeal and the Group appealed to the Supreme Court. The Supreme Court hearing took place in November 2019 and the Group is waiting for the decision. 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 Changes in accounting policies The Group has adopted the fully retrospective approach to transition for IFRS 16 ‘Leases’ and under this approach, the opening consolidated statement of financial position as at 5 February 2018 and the comparative consolidated statement of financial position as at 3 February 2019 have been restated. Impact on the consolidated income statement The adoption of IFRS 16 resulted in changes to the consolidated income statement, as previously recognised straight line rental costs were removed and replaced with a depreciation charge on the right-of-use assets and a finance cost on the lease liabilities. The impact of IFRS 16 in the 52 weeks ended 3 February 2019 was to change each line as follows: Cost of sales Gross profit Profit/loss on disposal and exit of properties Administrative expenses Operating profit Finance costs Finance income Profit before taxation Taxation Profit for the period attributable to the owners of the Company Earnings per share (pence) Basic Diluted Before exceptionals £m 45 45 – – 45 (56) 1 (10) 2 (8) Exceptionals £m – – (2) (5) (7) – – (7) 4 (3) 2019 Total £m 45 45 (2) (5) 38 (56) 1 (17) 6 (11) (0.45) (0.44) During the 52 weeks ended 3 February 2019, the following lines in the consolidated income statement were principally impacted by IFRS 16: Impact on profit before exceptionals after tax: • cost of sales – a net credit of £45m was recognised, being the reversal of previously recognised rent payments (£103m) offset by the depreciation charge on the right-of-use assets and leased assets in investment property (£58m); • net finance costs – additional finance costs of £55m were recognised on IFRS 16 lease liabilities; and • the net impact of all of the adjustments in the table above reduced reported profit before tax and exceptionals by £10m and profit before exceptionals after tax by £8m. 124 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 202010 Other continued 10.3 Changes in accounting policies continued Impact on the consolidated income statement continued Impact on exceptional items: • profit/loss on disposal and exit of properties – an additional £2m of lease disposal costs were recognised; • administrative expenses – an additional £5m net charge was recognised being the net impact of additional impairment from applying IFRS 16 of £53m (being £49m charge for right-of-use assets, £3m charge for property, plant and equipment and £1m charge for investment property) offsetting the reversal of previously recognised onerous lease provisions and amounts provided for onerous commitments (£48m); • the net impact of all of the adjustments in the table above reduced exceptionals after tax by £3m; and • all of the above items were classified as exceptional items in line with the Group’s policy (see note 1.4 for further details). Impact on the consolidated statement of financial position Upon adoption of IFRS 16, the Group recognised right-of-use assets (representing the right to use the underlying assets) and lease liabilities for lease payments on the discounted future obligations. The impact of IFRS 16 as at 5 February 2018 and at 3 February 2019 was to change each line as follows: Assets Property, plant and equipment Right-of-use assets Investment property Trade and other receivables Non-current assets Trade and other receivables Current assets Liabilities Trade and other payables Lease liabilities Current liabilities Lease liabilities Deferred tax liabilities Provisions Non-current liabilities Net assets Shareholders’ equity Retained earnings and other reserves Total equity attributable to the owners of the Company 2019 £m (218) 929 34 8 753 (3) (3) 15 (69) (54) (1,328) 69 257 (1,002) (306) (306) (306) 2018 £m (216) 970 36 8 798 (3) (3) 60 (59) 1 (1,354) 63 200 (1,091) (295) (295) (295) As at 3 February 2019, IFRS 16 principally impacted the following lines in the consolidated statement of financial position: Right-of-use assets of £929m (2018: £970m) were recognised and presented separately in the consolidated statement of financial position. Included within this balance were assets reclassified from property, plant and equipment of £218m (2018: £216m) and additional accumulated impairment of £386m (2018: £352m). Investment property right-of-use assets of £34m (2018: £36m), have been recognised in respect of leasehold investment property. Included within this balance was additional accumulated impairment of £75m (2018: £96m). Lease liabilities of £1,397m (2018: £1,413m) were recognised and split between current and non-current on the face of the consolidated statement of financial position. Deferred tax liabilities decreased by £69m (2018: £63m) in relation to the tax relief available for the transition adjustment that will be realised over the remaining life of the leases. Provisions reduced by £257m (2018: £200m) as onerous lease provisions are derecognised on application of IFRS 16. The net impact of all of the adjustments in the table above has decreased retained earnings and other reserves by £306m (2018: £295m). Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 125 Strategic reportGovernanceFinancial statementsInvestor information10 Other continued 10.3 Changes in accounting policies continued Impact on the consolidated cash flow statement The net cash movement has not changed following the adoption of IFRS 16. However, the presentation in the consolidated cash flow statement has changed, with lease payments, which were previously recognised within cash flows from operating activities, being split between the interest element (which remains within cash flows from operating activities) and the capital element (now disclosed within cash flows from financing activities). This is detailed below: Cash flows from operating activities Cash generated from operations Interest paid Net cash inflow from operating activities Cash flows from financing activities Repayment of lease obligations Net cash outflow from financing activities Net movement in cash and cash equivalents During the 52 weeks ended 3 February 2019, the following lines in the consolidated cash flow statement were principally impacted by IFRS 16: • cash generated from operations – increased by £135m as straight line rent payments are no longer recognised; • interest paid – £66m of interest payments were recognised relating to the finance element of lease payments; • repayment of lease obligations – £69m of payments were recognised relating to the capital element of lease payments; and • there was no net impact of these adjustments on cash flow in the period. 2019 £m 135 (66) 69 (69) (69) – 126 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Notes to the Group financial statements continued52 weeks ended 2 February 2020Wm Morrison Supermarkets PLC Company statement of financial position As at 2 February 2020 Fixed assets Intangible assets Property, plant and equipment Right-of-use assets Investment property Investments Investment in joint venture Current assets Inventories Debtors due within one year Debtors due after more than one year 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 Lease liabilities 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 Lease liabilities 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 reserves2 Total shareholders’ funds Note 11.6 11.7 11.8 11.9 11.10 11.11 11.12 11.13 11.20 11.17 11.17 11.14 11.16 11.17 11.15 11.16 11.17 11.20 11.18 11.19 11.21 11.21 11.22 11.22 11.22 2020 £m 361 2,258 1,093 18 6 39 3,775 409 5,757 8 364 1 – 218 6,757 (4,050) (120) (36) (4,206) 2,551 6,326 (1,108) (1,363) (7) (16) (118) (58) (2,670) 3,656 240 192 39 940 2,245 3,656 2019 restated1 £m 384 2,219 1,136 19 6 67 3,831 447 5,744 8 284 19 15 169 6,686 (3,691) (106) (5) (3,802) 2,884 6,715 (1,110) (1,452) (2) (42) (86) (79) (2,771) 3,944 237 178 39 1,202 2,288 3,944 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. 2 Included within Retained earnings and other reserves is loss after tax of £33m (2019: £156m). After adjusting for exceptionals, profit before exceptionals after tax is £66m (2019: £4m). The accounting policies on pages 129 to 131 and the notes on pages 132 to 146 form part of these financial statements. The financial statements on pages 127 to 146 were approved by the Board of Directors and authorised for issue on 17 March 2020. They were signed on its behalf by: Michael Gleeson, Chief Financial Officer Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 127 Strategic reportGovernanceFinancial statementsInvestor information Wm Morrison Supermarkets PLC Company statement of changes in equity 52 weeks ended 2 February 2020 Current period At 4 February 2019 (reported) Adjustment on the adoption of IFRS 16 At 4 February 2019 (restated1) Loss for the period Other comprehensive (expense)/income: Cash flow hedging movement Remeasurement of defined benefit 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 share awards Share options exercised Tax in relation to components of equity Dividends Realisation of merger reserve Total transactions with owners At 2 February 2020 Prior period At 5 February 2018 (reported) Adjustment on the adoption of IFRS 16 At 5 February 2018 (restated1) Loss for the period (restated1) Other comprehensive income/(expense): Cash flow hedging movement Remeasurement of defined benefit schemes Tax in relation to components of other comprehensive income Total comprehensive income/(expense) for the period Purchase of trust shares Employee share option schemes: Share-based payments charge Settlement of share awards Share options exercised Dividends Realisation of merger reserve Total transactions with owners At 3 February 2019 Note 11.25 11.20 11.18 6.6 11.5 6.6 6.6 11.18 1.8 11.22 Note 11.25 11.20 11.18 6.6 11.5 6.6 6.6 1.8 11.22 Share capital £m Share premium £m Capital redemption reserve £m 237 – 237 – – – – – – – – 3 – – – 3 240 178 – 178 – – – – – – – – 14 – – – 14 192 39 – 39 – – – – – – – – – – – – – 39 Share capital £m Share premium £m Capital redemption reserve £m 236 – 236 – – – – – – – – 1 – – 1 237 159 – 159 – – – – – – – – 19 – – 19 178 39 – 39 – – – – – – – – – – – – 39 Attributable to the owners of the Company Hedging reserve £m Retained earnings £m Total shareholders’ funds £m 10 – 10 – (57) – 10 (47) – – – – – – – – (37) 2,569 (291) 2,278 (33) – 100 (17) 50 (10) 11 (2) (3) (2) (302) 262 (46) 2,282 4,235 (291) 3,944 (33) (57) 100 (7) 3 (10) 11 (2) 14 (2) (302) – (291) 3,656 Attributable to the owners of the Company Hedging reserve £m Retained earnings £m Total shareholders’ funds £m 2 – 2 – 9 – (1) 8 – – – – – – – 10 2,568 (290) 2,278 (156) – 49 (8) (115) (9) 16 (5) – (289) 402 115 2,278 4,608 (290) 4,318 (156) 9 49 (9) (107) (9) 16 (5) 20 (289) – (267) 3,944 Merger reserve £m 1,202 – 1,202 – – – – – – – – – – – (262) (262) 940 Merger reserve £m 1,604 – 1,604 – – – – – – – – – – (402) (402) 1,202 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. The accounting policies on pages 129 to 131 and the notes on pages 132 to 146 form part of these financial statements. 128 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Wm Morrison Supermarkets PLC Company accounting policies 52 weeks ended 2 February 2020 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 52 weeks ended 2 February 2020 (2019: 52 weeks ended 3 February 2019). 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) IFRS 16 ‘Leases’: (i) paragraph 52 (single lease disclosure note); (ii) paragraph 58 (maturity analyses); and (iii) the second sentence of paragraph 89, paragraphs 90-91, 93 (lessor disclosures); e) 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’; f) The following paragraphs of IAS 1 ‘Presentation of financial statements’: (i) 10(d) (statement of cash flows); (ii) 40(a) (third balance sheet on restatement); (iii) 111 (cash flow statement information); and (iv) 134-136 (capital management disclosures); g) IAS 7 ‘Statement of cash flows’; h) IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (paragraphs 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; i) 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. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 129 Strategic reportGovernanceFinancial statementsInvestor information Wm Morrison Supermarkets PLC Company accounting policies continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.2 Basis of preparation continued 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 82 in the Group financial statements. New accounting standards, amendments and interpretations adopted by the Company The following new standards, interpretations and amendments to standards are mandatory for the first time for the 52 weeks ended 2 February 2020: • IFRS 16 ‘Leases’; • IFRIC 23 ‘Uncertainty over income tax treatments’; Amendments to the following standards: • IAS 19 ‘Employee Benefits’; • IAS 28 ‘Investments in Associates’; • IFRS 9 ‘Financial Instruments’; and • Improvements to IFRSs (2015-2017). The Company has considered the above new standards, and amendments to published standards and has concluded that only IFRS 16, IFRIC 23, and the amendment to IAS 19 are relevant to the Company. Only IFRS 16 has a material impact on the Company’s financial statements. Although IFRIC 23, and the amendment to IAS 19 are relevant to the Company for the 52 weeks ended 2 February 2020, the Directors have concluded that these do not have a material impact on the financial statements of the Company. For more details on this assessment and the conclusions made by the Directors, see pages 82 and 83 in the consolidated financial statements. The transition to IFRS 16 for the Company took place on 4 February 2019 and the Company has adopted the fully retrospective transition approach. In accordance with this transition method, the Company has applied IFRS 16 at the date of initial application as if it had been effective at the commencement date of the existing lease contracts. Accordingly, the comparative information in these financial statements has been restated, unless otherwise stated. The nature and effect of these changes are disclosed in note 11.25. On transition the Company elected to use the practical expedient allowing the standard to be applied only to contracts that were previously identified as leases when applying IAS 17 and IFRIC 4 ‘Determining whether an Arrangement contains a Lease’ at the date of initial application. Accounting reference date The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year. 130 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 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: Investment property (3.1); Impairment of non-financial assets (3.1); 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) Right-of-use assets (3.1); i) j) k) Lease – Group is the lessor (3.1); l) m) Trade and other receivables (5.1); n) Cash and cash equivalents (5.1); o) Trade and other payables (5.1); p) Provisions (5.1); q) Borrowings and borrowing costs (6.1); r) Lease liabilities (6.1); s) Share capital (6.1); t) Derivative financial instruments and hedge accounting (7.1); u) Pensions (8.1); and v) Share-based payments (9.1). Inventories (5.1); 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. 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. Impairment losses or reversals of previous impairment losses are presented in the profit and loss account in the period they arise. Amounts owed to/by Group undertakings Amounts owed to/by Group undertakings are initially recorded at fair value, which is generally the proceeds received. They are subsequently carried at amortised cost. The amounts are non-interest bearing and repayable on demand. 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 11.24). 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 131 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements 52 weeks ended 2 February 2020 11 Company financial statements continued 11.4 Profit and loss account The loss after tax for the Company for the 52 weeks ended 2 February 2020 was £33m (2019: £156m adjusted for IFRS 16). After adjusting for exceptional items, profit before exceptionals after tax is £66m (2019: £4m adjusted for IFRS 16). The profit before exceptionals after tax in the 52 weeks ended 2 February 2020 includes dividends received from subsidiary undertakings of £23m (2019: £nil). Employee benefit expense for the Company during the period Wages and salaries Social security costs Other pensions costs Share-based payments 2020 £m 866 72 51 11 1,000 2019 £m 863 70 50 16 999 The average monthly number of people, including Directors, employed by the Company is 50,527 (2019: 52,078). The Company’s auditor, PricewaterhouseCoopers LLP charged £0.6m (2019: £0.5m) for audit services in the year and £0.1m (2019: £0.1m) 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. These awards are issued by the Company to employees of other Group companies and during the year these have been cross-charged to the relevant company. 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 £11m (2019: £16m). 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 4 February 2019 Additions Interest capitalised Disposals Fully written down assets At 2 February 2020 Accumulated amortisation and impairment At 4 February 2019 Amortisation charge for the period Impairment Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Other intangibles £m 726 80 2 (32) (57) 719 342 89 15 (31) (57) 358 361 Total £m 726 80 2 (32) (57) 719 342 89 15 (31) (57) 358 361 132 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.6 Intangible assets continued Other intangibles include software development costs and licences. Within this asset class, there are assets under construction of £73m (2019: £30m). The net book amount of licences at 2 February 2020 totals £13m (2019: £14m). The Company has performed its annual assessment of its amortisation policies and asset lives and deemed them to be appropriate. 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 Company’s annual impairment review, an impairment charge of £15m (2019: £11m) 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 £42m (2019: £42m). Interest is capitalised at the effective interest rate of 5% (2019: 5%) incurred on borrowings. 11.7 Property, plant and equipment Cost At 4 February 2019 (restated1) Additions Transfers from right-of-use assets Disposals Fully written down assets At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Depreciation charge for the period Impairment Impairment reversal Transfers from right-of-use assets Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Freehold land £m Freehold buildings £m Leasehold property improvements £m Plant, equipment, fixtures and vehicles £m 873 1 – (5) – 869 151 – 7 (16) – (1) – 141 728 1,543 21 – – (7) 1,557 714 38 8 (10) – – (7) 743 814 513 15 – (7) (1) 520 288 12 3 (10) – (7) (1) 285 235 859 137 24 (22) (51) 947 416 98 14 (3) 14 (22) (51) 466 481 Total £m 3,788 174 24 (34) (59) 3,893 1,569 148 32 (39) 14 (30) (59) 1,635 2,258 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. The Company has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. There have been no changes made to asset category 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 £869m (2019: £873m) relating to non-depreciable land and £17m (2019: £3m) of assets under construction. 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 £71m (2019: £73m). Interest is capitalised at the effective interest rate of 5% (2019: 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 £7m (£39m impairment reversal offset by £32m impairment charge) during the year in respect of property, plant and equipment (2019: net £6m impairment reversal; £54m impairment reversal offset by £48m impairment charge). This movement reflects fluctuations from store level trading performance and local market conditions. At 2 February 2020, the assumptions to which the value in use calculation is most sensitive to are the discount and growth rates. The Company has estimated a change of +/- 1% in either would result in a change in impairment of c.£30m. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 133 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.8 Right-of-use assets Cost At 4 February 2019 (restated1) Additions Transfer from investment property Transfer to property, plant and equipment Disposals Fully written down assets At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Depreciation charge for the period Impairment Impairment reversal Transfer from investment property Transfer to property, plant and equipment Disposals Fully written down assets At 2 February 2020 Net book amount at 2 February 2020 Leasehold land and buildings £m Leased plant, equipment, fixtures and vehicles £m 1,985 27 14 – – (6) 2,020 941 66 15 (19) 14 – – (6) 1,011 1,009 206 36 – (24) (5) (30) 183 114 34 – – – (14) (5) (30) 99 84 Total £m 2,191 63 14 (24) (5) (36) 2,203 1,055 100 15 (19) 14 (14) (5) (36) 1,110 1,093 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. The Company has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. There have been no changes made to asset category lives during the year. Fully depreciated assets are retained in the Company’s fixed asset register. In order to provide greater understanding of the Company’s annual depreciation charge, assets which have been fully depreciated in the year have been removed from both cost and accumulated depreciation. Impairment Having applied the methodology and assumptions set out in section 11.7, the Company has recognised a net impairment reversal of £4m (£19m impairment reversal offset by £15m impairment charge) during the year in respect of right-of-use assets (2019: net £31m impairment; £68m impairment charge offset by £37m reversal of impairment). This movement reflects fluctuations from store level trading performance and local market conditions. At 2 February 2020, the assumptions to which the value in use calculation is most sensitive to are the discount and growth rates. The Company has estimated a change of +/- 1% in either would result in a change in impairment of c.£15m. 134 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.9 Investment property Cost At 4 February 2019 (restated1) Additions Transfers to right-of-use assets Disposals At 2 February 2020 Accumulated depreciation and impairment At 4 February 2019 (restated1) Impairment Reversal of impairment Transfers to right-of-use assets Disposals At 2 February 2020 Net book amount at end of period Freehold £m Leasehold £m 24 – – (2) 22 10 4 (1) – (1) 12 10 97 3 (14) (2) 84 92 3 (3) (14) (2) 76 8 Total £m 121 3 (14) (4) 106 102 7 (4) (14) (3) 88 18 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Included in other operating income is £8m (2019: £6m) of rental income generated from investment properties. At the end of the period the fair value of investment properties was £17m (2019: £18m). Investment properties are valued by independent surveyors on a vacant possession basis using observable inputs (fair value hierarchy level 2). 11.10 Investments Net book amount At start of period Additions At end of period 2020 £m 6 – 6 2019 £m – 6 6 On 19 February 2018, the Company acquired 100% of the ordinary share capital of Chippindale Foods Limited, a leading supplier of free range eggs. Total consideration was £6m. In addition to the investment detailed above, the Company continues to hold investments in other related undertakings, which in aggregate are less than £1m as at 2 February 2020. The Directors believe that the carrying value of these investments is supported by their underlying net assets. A list of all of the Company’s related undertakings at the reporting date is shown on page 147. 11.11 Investment in joint venture The Company’s interest in joint venture comprises its interest in MHE JVCo Limited, which is jointly owned and controlled with a third party, Ocado Operating Limited. The carrying value of the Company’s investment in the joint venture at 2 February 2020 is £39m (2019: £67m). The Company has assessed this investment for impairment as at the reporting date and accordingly recognised a £28m impairment (2019: £nil) in respect of its investment. This impairment has arisen as a result of an evolution in the operation of the joint venture. The Directors believe that the carrying value of these investments is supported by their underlying net assets. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 135 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.12 Debtors – amounts falling due within one year Trade debtors Amounts owed by Group undertakings Current tax asset Prepayments and accrued income 2020 £m 181 5,333 140 103 5,757 2019 restated1 £m 174 5,341 135 94 5,744 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Amounts owed by Group undertakings are unsecured and repayable on demand. Provision for impairment of amounts owed by Group undertakings have been assessed based on lifetime expected credit losses. As all balances are repayable on demand, and the Company expects to be able to recover the outstanding intercompany balances if demanded, no provision has been recognised in the 52 weeks ended 2 February 2020 (2019: £nil). 11.13 Debtors – amounts falling due after more than one year Finance leases – Company is lessor 2020 £m 8 2019 restated1 £m 8 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. The Company is the lessor on a diverse portfolio of leases for property – for example retail units located by stores. Most property leases contain rent review terms that require rents to be adjusted upwards on a periodic basis. The increases are normally either to market rent or to follow capped increases in inflation measurement. Finance leases The table below summarises the maturity profile of undiscounted finance lease payments due to the Company. Less than one year After one year but not more than five years More than five years Total undiscounted lease payments receivable Unearned finance income Net investment in the lease 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Finance lease income of £1m (2019: £1m) has been recognised in the 52 weeks ended 2 February 2020. Operating leases The table below summarises the maturity profile of undiscounted operating lease payments due to the Company. Less than one year One to two years Two to three years Three to four years Four to five years More than five years Total undiscounted lease payments receivable 2020 £m 1 4 7 12 (4) 8 2020 £m 5 4 3 3 2 8 25 2019 restated1 £m 1 4 8 13 (5) 8 2019 restated1 £m 5 4 4 3 3 10 29 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Operating lease income of £8m (2019: £6m) has been recognised in the 52 weeks ended 2 February 2020. This includes £nil (2019: £nil) relating to variable lease payments that do not depend on an index or rate. 136 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.14 Creditors – amounts falling due within one year Trade creditors €282m euro bond 2.25% June 2020 Other short-term borrowings Amounts owed to Group undertakings Other taxation and social security Other creditors Accruals and deferred income 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Amounts owed to Group undertakings within one year are unsecured and repayable on demand. 11.15 Creditors – amounts falling due after more than one year €282m euro bond 2.25% June 2020 £250m sterling bonds 4.625% December 2023 £250m sterling bonds 3.50% July 2026 £250m sterling bonds 4.75% July 2029 £350m sterling bonds 2.5% October 2031 Revolving credit facility 2020 £m 2,264 237 – 1,025 125 54 345 4,050 2020 £m – 249 269 245 347 (2) 1,108 2019 restated1 £m 2,220 – 178 779 94 85 335 3,691 2019 restated1 £m 247 249 272 245 – 97 1,110 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. As at 2 February 2020, there are £978m (2019: £587m) of contractual, undiscounted creditor payments (including interest) falling due after more than five years. If lease liabilities are included on a consistent basis, the amounts falling due after more than five years are £2,469m (2019: £2,218m). On 24 September 2019 the Company issued a £350m sterling bond at a fixed interest rate of 2.5% expiring October 2031. This is part of the Company’s £3bn Euro Medium Term Note Programme. In addition to the bonds detailed in the table above, the Company has the following borrowing facilities: The Company has a syndicated committed revolving credit facility of £1.35bn. During the 52 weeks ended 2 February 2020, the Company extended this facility by a further year, resetting its five year term and resulting in a maturity date of June 2024. The revolving credit facility incurs commitment fees and interest charges at a spread above LIBOR. The Company had £1.35bn of undrawn committed headroom available on this facility as at 2 February 2020. In addition, the Company has a £100m 364 day committed revolving credit facility which matures in July 2020. The facilities were undrawn as at 2 February 2020. In the prior period, the Company entered into an additional £250m revolving credit facility to provide flexibility on refinancing the €282m euro bond when it matures in June 2020. As a result of this bond having been refinanced during the year through the issuance of the £350m bond, this facility has subsequently lapsed and is no longer available as at 2 February 2020. In the event of default of covenants the principal amounts of borrowings and any interest accrued become repayable on demand. The Company has a number of uncommitted facilities which are available to meet short-term borrowing requirements, and incur interest charges according to usage. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 137 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.16 Lease liabilities Current lease liabilities Non-current lease liabilities 2020 £m 120 1,363 1,483 2019 restated1 £m 106 1,452 1,558 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. The Company is the lessee on a diverse portfolio of leases for property and equipment, with the vast majority of lease liabilities relating to property (see notes 11.8 and 11.9). Certain property leases contain rent review terms that require rents to be adjusted on a periodic basis which may be subject to market rent or capped increases in inflation measurements. In addition, certain property leases contain break clauses that would allow the Company to exit leases early. Total cash outflow for lessee leases Interest expense on lease liabilities Expense for short-term leases longer than one month Expense for leases of low-value assets, excluding short-term Expense of variable lease payments 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. 11.17 Derivative financial assets and liabilities 2020 £m 196 63 5 2 – 2019 restated1 £m 202 66 6 2 1 Assets due within one year Foreign exchange forward contracts Fuel and energy price contracts Assets due after more than one year Cross-currency interest rate swaps Fuel and energy price contracts Liabilities due within one year Cross-currency interest rate swaps Foreign exchange forward contracts Fuel and energy price contracts Liabilities due after more than one year Fuel and energy price contracts 2020 Fair Value £m 2020 Notional Value £m 2019 Fair Value £m 2019 Notional Value £m – 1 1 – – – 4 17 15 36 7 7 32 1 33 – – – 240 411 53 704 35 35 3 16 19 9 6 15 – 4 1 5 2 2 112 55 167 240 38 278 – 262 3 265 18 18 Further details of the derivative financial instruments are provided in note 7, including significant assumptions underlying the valuation; and fair value and the amounts recognised in profit and loss. 138 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.18 Deferred tax liabilities Deferred tax liability Deferred tax asset Net deferred tax liability 2020 £m 192 (74) 118 2019 restated1 £m 166 (80) 86 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. 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 4 February 2019 Charged to profit for the period Charged/(credited) to other comprehensive income and equity At 2 February 2020 Prior period (restated1) At 5 February 2018 Charged/(credited) to profit for the period Charged to other comprehensive income and equity At 3 February 2019 Property, plant and equipment £m Pensions £m Other short-term temporary differences £m 125 8 – 133 124 1 – 125 41 1 17 59 36 (3) 8 41 (80) 14 (8) (74) (75) (6) 1 (80) 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. 11.19 Provision for liabilities At 4 February 2019 (restated1) Charged to profit for the period Utilised during the period Released during the period Unwinding of discount At 2 February 2020 Onerous contracts £m 66 16 (27) (14) 2 43 Other property provisions £m 13 4 (2) – – 15 Total £m 86 23 9 118 85 (8) 9 86 Total £m 79 20 (29) (14) 2 58 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. Included with the above balance at 2 February 2020 is £11m (2019: £29m) relating to a balance due within one year. The provision is revised regularly in response to market conditions. During the period, a net £2m charge (£16m charge offset by a £14m release) has been recognised to onerous contracts provisions due to changes in circumstances or performance relating to certain contracts. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 139 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.20 Pensions 11.20.1 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 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, which is revalued each year in line with inflation subject to a cap. The RSP is not open to new members and was closed to future accrual in September 2018. The position of each scheme at the reporting date is as follows: CARE Scheme RSP Net pension asset Statement of financial position: Fair value of scheme assets Present value of obligations Net pension asset/(liability) Income statement Current service cost – recognised in cost of sales Current service cost – recognised in administrative expenses Past service cost (guaranteed minimum pension) Administrative costs paid by Schemes – recognised in administrative expenses Curtailment loss from closure of the pension scheme Net interest on net pension (asset)/liability – finance (income)/expense Total expense (credited)/charged to income statement Statement of other comprehensive income: Remeasurements in other comprehensive income – credit 2020 £m 364 (16) 348 2019 CARE £m 1,261 (977) 284 2019 CARE £m – – 2 1 – (6) (3) (49) 2019 £m 284 (42) 242 2019 RSP £m 349 (391) (42) 2019 RSP £m 35 18 – 1 19 – 73 – 2020 CARE £m 1,468 (1,104) 364 2020 CARE £m – – – 1 – (8) (7) (73) 2020 RSP £m 389 (405) (16) 2020 RSP £m – – – 1 – 1 2 (27) 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 losses in the 52 weeks ended 3 February 2019 include £19m as a result of the closure of the RSP to future accrual in September 2018. The Company recognised a past service cost of £2m in the 52 weeks ended 3 February 2019 in relation to the estimated cost of the equalisation of guaranteed minimum retirement benefits for men and women, following a ruling by the High Court in October 2018. 140 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.20 Pensions continued 11.20.2 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), income assets (comprising credit investments and corporate 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) Diversified growth funds (quoted) Credit funds (unquoted) Liability driven investments (unquoted) Scottish Limited Partnership (unquoted) Cash (quoted) 2020 CARE £m 212 119 – 178 924 26 9 1,468 For definitions of liability driven investments, diversified growth funds and credit funds, 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 Benefits paid Administrative expenses Fair value of scheme assets at end of period 2020 CARE £m 1,261 35 204 – – (31) (1) 1,468 2020 RSP £m 158 – 40 – 190 – 1 389 2020 RSP £m 349 9 70 1 – (39) (1) 389 2019 CARE £m 187 103 120 163 657 26 5 1,261 2019 CARE £m 1,249 33 7 2 – (29) (1) 1,261 2019 RSP £m 135 – 76 – 137 – 1 349 2019 RSP £m 315 9 (6) 49 3 (20) (1) 349 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 141 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.20 Pensions continued 11.20.3 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 Past service cost (guaranteed minimum pension) Interest expense Actuarial gain – demographic assumptions Actuarial (loss)/gain – financial assumptions Actuarial gain – experience Curtailment loss from closure of the pension scheme Employee contributions Benefits paid Defined benefit obligation at end of period 2020 CARE £m (977) – – (27) 27 (162) 4 – – 31 (1,104) 2020 RSP £m (391) – – (10) – (58) 15 – – 39 (405) 2019 CARE £m (1,019) – (2) (27) 31 11 – – – 29 (977) The durations of the defined benefit obligations at the end of the 2020 reporting period are: RSP 20 years; CARE 23 years. The weighted average duration of the Schemes is 22 years. 11.20.4 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 2020 CARE 1.9% 2.9% 2020 CARE 20.9 22.3 22.6 24.2 2020 RSP 1.8% 2.9% 2020 RSP n/a n/a n/a n/a 2019 CARE 2.8% 3.2% 2019 CARE 21.4 22.8 23.2 24.7 2019 RSP £m (333) (53) – (9) – 3 3 (19) (3) 20 (391) 2019 RSP 2.7% 3.2% 2019 RSP n/a n/a n/a n/a For deriving discount rates, the Group estimates these rates with reference to high quality corporate bonds. 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. The Company believes that this approach appropriately reflects expected yields on high quality corporate bonds over the duration of the Company’s pension schemes, as required by IAS 19. Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The mortality tables used for the 52 weeks ended 2 February 2020 are the S2PMA/S2PFA-Heavy mortality tables (males/females) based on year of birth with a scaling factor of 110% applied to the mortality rates, with CMI 2018 core projections and a long-term rate of improvement of 1.5% p.a. For the 52 weeks ended 3 February 2019, the Company used the S2PMA/S2PFA-Heavy mortality tables (males/females) based on year of birth with a scaling factor of 110% applied to the mortality rates, with CMI 2017 projections and a long-term rate of improvement of 1.5% p.a. 142 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.20 Pensions continued 11.20.4 Significant actuarial assumptions continued Related actuarial assumptions (expressed as weighted averages) Rate of increase of pensions in payment: RPI inflation capped at either 2.5% p.a. or 5% p.a. (% 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.) 2020 CARE 2.0%/2.8% 2020 RSP – –/2.0% 2.0% 2.0%/– 2.0% 2019 CARE 2.1%/3.1% –/2.1% 2.1% 2019 RSP – 2.1%/– 2.1% 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 2020 CARE +/-25 +/-20 +40 2020 RSP +/-8 +/-7 n/a 2019 CARE -/+25 +/-20 +50 2019 RSP -/+7 +/-7 n/a 11.20.5 Funding The CARE Scheme is entirely funded by the Company. The Company along with other subsidiaries of the Group participated 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 2019 for the CARE Scheme and the RSP. The valuations indicated that, on the agreed funding basis, the CARE and RSP Schemes had surpluses of £157m and £7m 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 2019 actuarial valuations for the CARE Scheme have been used and updated for IAS 19 ‘Employee benefits’ purposes for the period to 2 February 2020 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 2 February 2020, schemes in surplus have been disclosed within the assets in the Statement of financial position. 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 CARE 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 concluded that the above accounting treatment should not be materially affected by the 2015 exposure draft of the 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 2 February 2020 is £3m (2019: £3m). This estimate includes amounts payable from the SLP. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 143 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.20 Pensions continued 11.20.6 Defined contribution scheme The Company opened a defined contribution pension scheme called the Morrisons Personal Retirement Scheme (MPRS) for colleagues during the 53 weeks ended 4 February 2018. The MPRS has become the auto enrolment scheme for the Company. 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 52 weeks ended 2 February 2020, the Company paid contributions of £50m to the MPRS (2019: £21m), and expects to contribute £50m for the following period (2019: £52m). 11.21 Share capital At 4 February 2019 Share options exercised At 2 February 2020 All issued shares are fully paid and have a par value of 10p per share (2019: 10p per share). For further details on share capital and share premium, see note 6.6. 11.22 Reserves Capital redemption reserve Merger reserve Hedging reserve Retained earnings Total Number of shares millions 2,368.3 36.7 2,405.0 Share capital £m 237 3 240 Share premium £m 178 14 192 2020 £m 39 940 (37) 2,282 3,224 Total £m 415 17 432 2019 restated1 £m 39 1,202 10 2,278 3,529 1 For further details on the restatement of the reported results for the 52 weeks ended 3 February 2019 from adopting IFRS 16 ‘Leases’, see note 11.25. 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 balance is settled in qualifying consideration, the same proportion of the merger reserve becomes realised. During the 52 weeks ended 2 February 2020, this intercompany loan balance was partially settled through £262m of qualifying consideration (2019: £402m). As a result, £262m of the merger reserve balance was realised in the period (2019: £402m). Hedging reserve This represents the gains and losses arising on derivatives used for cash flow hedging. 144 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 11 Company financial statements continued 11.23 Capital commitments Contracts placed for future capital expenditure not provided in the financial statements (property, plant and equipment, right-of-use assets and intangible assets) Contracts placed for future leases not provided in the financial statements 2020 £m 31 34 2019 £m 32 – 11.24 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 2 February 2020 was £nil (2019: £nil). 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 at Dordon to a third party in the 53 weeks ended 4 February 2018, 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 £30m (2019: £31m). The Company has an ongoing legal case brought by a number of current and former colleagues relating to employee data theft in the 52 weeks ended 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 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 appeals have been concluded. During the 52 weeks ended 3 February 2019 the High Court rejected this appeal and the Company appealed to the Supreme Court. The Supreme Court hearing took place in November 2019 and the Company is waiting for the decision. It is the Directors’ view that at this stage of the process the Company cannot 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 145 Strategic reportGovernanceFinancial statementsInvestor informationNotes to the Company financial statements continued 52 weeks ended 2 February 2020 11 Company financial statements continued 11.25 Changes in accounting policies The Company has adopted the fully retrospective approach to transition for IFRS 16 ‘Leases’ and therefore the comparative consolidated statement of financial position as at 3 February 2019 has been restated. Impact on the consolidated income statement The adoption of IFRS 16 resulted in changes to the consolidated income statement, as previously recognised rental costs were removed and replaced with a depreciation charge on the right-of-use assets and a finance cost on the lease liabilities. The impact of IFRS 16 increased the loss after tax for the Company for the 52 weeks ended 3 February 2019 by £1m. After adjusting for exceptionals, the impact on profit before exceptionals after tax was a reduction of £3m. Impact on the consolidated statement of financial position Upon adoption of IFRS 16, the Company recognised right-of-use assets (representing the right to use the underlying assets) and lease liabilities for lease payments on the discounted future obligations. The impact of IFRS 16 as at 3 February 2019 was to change each line as follows: Fixed assets Property, plant and equipment Right-of-use assets Investment property Current assets Debtors Other debtors Creditors Lease liabilities Net current assets Total assets less current liabilities Creditors Lease liabilities Deferred tax liabilities Provisions Net assets Shareholders’ equity Retained earnings and other reserves Total shareholders’ funds 2019 £m (136) 1,136 4 1,004 (193) 8 (185) 67 (106) (224) 780 88 (1,452) 59 234 (291) (291) (291) As at 3 February 2019, IFRS 16 principally impacted the following lines in the statement of financial position: Right-of-use assets of £1,136m were recognised and presented separately in the statement of financial position. Included within this balance were assets reclassified from debtors of £192m and property, plant and equipment of £136m. Investment property right-of-use assets of £4m have been recognised in respect of leasehold investment property. Lease liabilities of £1,558m were recognised and split between current and non-current on the face of the consolidated statement of financial position. Included within this balance were liabilities reclassified from creditors of £130m. Deferred tax liabilities decreased by £59m in relation to the tax relief available for the transition adjustment that will be realised over the remaining life of the leases. Provisions reduced by £234m as onerous lease provisions are derecognised on application of IFRS 16. The net impact of all of the adjustments in the table above has decreased retained earnings and other reserves by £291m. 146 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 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 2 February 2020 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 Chippindale Foods Limited De Mandeville Gate Management Limited Dordon SPV Limited2 Farock Insurance Company Limited3 Fisherdale Properties Limited Flower World Limited Ipsolus Limited MHE JVCo Limited4 MoClo Limited Neerock Farming Limited5 Perimeter Holdings Limited Wm Morrison (HK) Limited6 Wm Morrison Nominee 1 Limited Wm Morrison Nominee 2 Limited Wm Morrison Nominee 3 Limited Wm Morrison Pension Trustee Limited Wm Morrison Property Investments Limited7 Wm Morrison Supermarkets Holdings Limited Country of incorporation Netherlands United Kingdom United Kingdom United Kingdom Isle of Man 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 Principal activity Acquirer of food products Supplier of eggs Property maintenance Lease company Insurance company Dormant Dormant Dormant Joint venture with Ocado Dormant Dormant Property development Acquirer of non-food products 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 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 Newincco 1072 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 Jersey United Kingdom United Kingdom United Kingdom United Kingdom Jersey Guernsey United Kingdom United Kingdom United Kingdom United Kingdom Principal activity Dormant Dormant Dormant Dormant Dormant Dormant Property investment Dormant Dormant Dormant Property maintenance Dormant Manufacturer and distributor of fresh food products Dormant Dormant Dormant Property investment Dormant Preparation and supply of seafood Dormant Dormant Property investment Investment company Dormant Dormant Fresh meat processor Property development Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Interest 100% 100% 51% 100% 100% 100% 100% 100% 51% 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% 147 Strategic reportGovernanceFinancial statementsInvestor informationRelated undertakings continued Related undertakings of other Group companies continued Name Oldwest Limited7 Optimisation Developments Limited Optimisation Investments Limited Presto Stores (LC) Limited Presto Stores Limited Rathbones Bakeries Limited Rathbone Kear Limited RP (No. 37) Limited8 Safeway (Overseas) Limited Safeway Development Limited Safeway Food Stores Limited Safeway Limited Safeway Pensions Trustees Company Limited Safeway Pension Trustees Limited Safeway Properties Limited Safeway QUEST Trustees Limited Safeway Stores (Gibraltar) Pension Trustees Limited10 Safeway Stores (Ireland) Limited Safeway Stores Limited Safeway Trustee (FURB) Limited Safeway Wholesale Limited Simply Fresh Foods Holdings Limited Stalwart Investments Limited8 Stores Group Limited The Home & Colonial Stores Limited The Medical Hall Limited11 The Morrisons Foundation Tower Centre Hoddesdon Limited Trilogy (Leamington Spa) Limited Velligrist Limited Wm Morrison At Source Limited Wm Morrison Bananas Limited Wm Morrison GP 1 Limited Wm Morrison GP 2 Limited Wm Morrison GP 3 Limited Wm Morrison Growers Limited Wm Morrison LP 1 Limited Wm Morrison LP 2 Limited Wm Morrison LP 3 Limited Wm Morrison Produce Limited Wm Morrison Property Partnership LP7 Wm Morrison Property Partnership 1 Limited Partnership Wm Morrison Property Partnership 2 Limited Partnership Wm Morrison Property Partnership 3 Limited Partnership Wm Morrison Supermarket Stores Ltd Country of incorporation United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Jersey United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Gibraltar United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Jersey United Kingdom United Kingdom Gibraltar 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 United Kingdom United Kingdom Principal activity 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 Property investment Dormant Dormant Dormant Grocery retailer Dormant Dormant Dormant Property investment Investment company Dormant Pharmaceutical licence holder (Gibraltar) Charity Dormant Property development Dormant Technical testing and analysis Property investment Dormant General partner in a partnership Dormant Acquirer of fresh produce Dormant Limited partner in a partnership Dormant Produce packer and purchaser Scottish Limited Property Partnership Dormant Property partnership Property partnership Dormant 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% 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, Goldie House, 1-4 Goldie Terrace, Douglas, Isle of Man, IM1 1EB. 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 19/F Millenium City 2, No 378 Kwun Tong Road, Kowloon, Hong Kong. 7 Registered address Capella Building (Tenth Floor), 60 York Street, Glasgow, G2 8JX. 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 1EW. 10 Registered address Suites 41/42 Victoria House, 26 Main Street, Gibraltar. 11 Registered address 1st Floor, 5 Secretary’s Lane, Gibraltar GX11 1AA. 148 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Five year summary 52 weeks ended 2 February 2020 Consolidated income statement Revenue Cost of sales Gross profit Other operating income Profit/loss on disposal and exit of properties and sale of business and investments Administrative expenses Operating profit Finance costs Finance income Share of profit of joint venture (net of tax) Profit before taxation Taxation Profit for the period attributable to the owners of the Company Profit before tax and exceptionals3 Profit before exceptionals after tax3 Earnings per share (pence): Basic Diluted Basic earnings per share before exceptionals3 Dividend per ordinary share (pence) 1 Reported on a 53 week basis. 2 Not restated for the impact of IFRS 16 ‘Leases’, these years are presented as reported, under IAS 17. 3 For definitions, see the Glossary on pages 152 to 154. 2020 £m 17,536 (16,907) 629 94 66 (268) 521 (111) 24 1 435 (87) 348 408 314 14.60 14.44 13.18 8.77 Restated 2019 £m 17,735 (17,083) 652 88 – (308) 432 (153) 23 1 303 (70) 233 396 303 9.89 9.67 12.85 12.60 20181,2 £m 17,262 (16,629) 633 78 19 (272) 458 (94) 14 2 380 (69) 311 374 285 13.30 13.03 12.19 10.09 20172 £m 16,317 (15,713) 604 76 32 (244) 468 (160) 15 2 325 (20) 305 337 253 13.11 12.95 10.86 5.43 20162 £m 16,122 (15,505) 617 72 97 (472) 314 (112) 13 2 217 5 222 242 181 9.51 9.47 7.77 5.00 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 149 Strategic reportGovernanceFinancial statementsInvestor informationFive year summary continued As at 2 February 2020 Consolidated statement of financial position Assets Goodwill and intangible assets Property, plant and equipment Right-of-use assets Investment property Retirement benefit surplus Investment in joint venture Investments Trade and other receivables Derivative financial assets Non-current assets Current assets Assets classified as held-for-sale Liabilities Current liabilities Other financial liabilities Lease liabilities Deferred tax liabilities Retirement benefit deficit Provisions Non-current liabilities 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 1 Not restated for the impact of IFRS 16 ‘Leases’. 2020 £m 381 7,147 942 58 960 39 – 71 – 9,598 1,319 3 (3,396) (1,115) (1,304) (472) (16) (76) (2,983) 4,541 240 192 39 2,578 1,492 4,541 Restated 2019 £m Restated 2018 £m 404 7,094 929 60 730 47 – 8 15 9,287 1,340 39 (3,349) (1,112) (1,328) (414) (42) (96) (2,992) 4,325 237 178 39 2,578 1,293 4,325 428 7,027 970 69 612 53 – 8 16 9,183 1,275 4 (3,080) (1,246) (1,354) (415) (18) (99) (3,132) 4,250 236 159 39 2,578 1,238 4,250 20171 £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 20161 £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 3,756 150 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Supplementary information 52 weeks ended 2 February 2020 (Decrease)/increase on previous year % Revenue Operating profit before exceptionals Profit before taxation Profit after taxation Profit before taxation and exceptionals Diluted earnings per share Ordinary dividend per share % of revenue Operating profit before exceptionals Profit before taxation Profit after taxation Retail portfolio Total number of stores Petrol filling stations Total sales area (000s square feet)2 Total supermarket takings ex fuel (gross) £m3 Average takings per store per week ex fuel (£000)3 Average number of customers per store per week3 Average take per customer (£)3 Employees Full time Part time Total Full time equivalent (average) Average per FTE employee: Revenue (£000s) Operating profit before exceptionals (£) Employee costs (£) 2020 20191 20181 20171 20161 (1.12) 0.59 43.56 49.36 3.03 49.33 2.58 2.93 2.48 1.98 492 335 14,880 13,735 535 23,673 22.60 37,924 60,695 98,619 71,263 246 7,199 25,890 2.74 14.61 (20.26) (25.08) 5.88 (25.79) 8.37 2.88 1.71 1.38 494 335 14,884 14,023 547 24,399 22.52 39,581 64,049 103,630 72,120 246 6,448 26,345 5.79 3.01 16.92 1.97 10.98 0.62 12.15 2.58 2.20 1.80 491 334 14,094 14,061 540 24,164 22.36 40,162 65,325 105,487 73,210 236 6,078 26,472 1.21 27.43 49.77 37.39 39.26 36.74 8.60 2.65 1.99 1.87 491 334 14,094 13,591 531 23,532 22.62 42,054 70,311 112,365 77,300 211 5,589 24,900 (4.13) (23.30) (127.40) (129.17) (29.86) (129.17) (18.32) 2.10 1.35 1.38 498 336 14,142 13,700 521 22,573 23.44 47,925 72,988 120,913 82,992 194 4,085 23,424 1 2019 restated for the impact of IFRS 16 ‘Leases’. 2016-2018 not restated. 2 During the 52 weeks ended 3 February 2019, we adjusted the internal sales area of several stores to incorporate refits, re-configurations and other changes in gross to net space. 3 Excludes convenience and online. The impact of week 53 in the period ended 3 February 2018 was to increase revenue by £318m and increase profit before taxation by £5m. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 151 Strategic reportGovernanceFinancial statementsInvestor informationGlossary 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. On transition to IFRS 16, the definitions of net debt and return on capital employed (ROCE) changed. Net debt now includes current and non-current lease liabilities. Previously, ROCE took into account the operating lease rentals charge (on land and buildings) as part of the return and a lease adjustment (10 times rent charged) for the capital employed element. Following adoption of IFRS 16 and the recognition of lease liabilities and assets, these adjustments are no longer necessary in the ROCE calculation. Amounts relating to these measures included within this statement have been restated unless detailed otherwise. Closest equivalent IFRS measure Definition and purpose Reconciliation for 2019/20 Group measures1 Measures Profit measures Like-for-like (LFL) sales growth Revenue 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 ongoing sales performance. It is also a key measure for Director and management remuneration. See page 58 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 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 58 in the Directors’ remuneration report for more information. Profit before tax and exceptionals is defined as profit before tax, exceptional items and net retirement benefit interest. This excludes exceptional items which are significant in size and/or nature and net retirement benefit interest. This measure is a key measure used by the Directors. It provides key information on ongoing trends and performance of the Group and is used for Director and management remuneration. See page 58 in the Directors’ remuneration report for more information. Profit before tax and exceptionals after a normalised tax charge. This measure is used by the Directors as it provides key information on ongoing trends and performance of the Group, including a normalised tax charge. Total sales growth Revenue Profit before tax and exceptionals Profit before tax Profit after tax Profit before exceptionals after tax Operating profit before exceptionals Operating profit2 Reported operating profit before exceptional items, which are significant in size and/or nature. This measure is used by the Directors as it provides key information on ongoing trends and performance of the Group. Net finance costs before exceptionals Finance costs Reported net finance costs excluding the impact of net retirement benefit interest and other exceptional items, which are significant in size and/or nature. This measure is used by the Directors as it provides key information on ongoing cost of financing excluding the impact of exceptional items. Group LFL (exc. fuel) Group LFL (inc. fuel) Net new space (inc. fuel) Total revenue year-on-year 52 weeks ended 2 February 2020 % (0.8)% (1.1)% (0.0)% (1.1)% 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. £314m being profit before tax and exceptionals (£408m) less a normalised tax charge (£94m) (see note 1.4 of the financial statements). £513m being reported operating profit (£521m) less profit/loss on disposal and exit of properties (£66m), and impairment and provisions for onerous contracts (£2m), plus store restructuring and closure costs (£51m) and other exceptional items (£9m). A reconciliation of this measure is provided in note 6.2 of the financial statements. 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. 152 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Measures Closest equivalent IFRS measure Definition and purpose Profit measures continued Reconciliation for 2019/20 Group measures1 Earnings before interest, tax, depreciation and amortisation (EBITDA) before exceptionals EBITDA margin before exceptionals Operating profit2 Operating profit before exceptional items including share of profit from joint venture, before depreciation and amortisation. This measure is used by the Directors as it provides key information on ongoing trends and the performance of the Group before capital investment and financing costs. £1,039m being operating profit before exceptionals (£513m), plus share of profit from joint venture (£1m), plus depreciation (£434m) and amortisation (£91m). No direct equivalent EBITDA before exceptional items, as a percentage of revenue. This measure is used by the Directors as it provides key information on ongoing trends and the performance of the Group before capital investment and financing costs. 5.9% being EBITDA before exceptional items (£1,039m) divided by revenue (£17,536m). Interest cover No direct equivalent Operating profit before exceptionals divided by net finance costs before exceptionals. This measure is used by the Directors as a measure of the Group’s ability to meet its financing costs. 4.8x being operating profit before exceptionals (£513m) divided by net finance costs before exceptionals (£106m). Basic earnings per share before exceptionals Basic earnings per share Basic earnings per share based on profit before exceptionals 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 ongoing trends and performance of the Group and is used for Director and management remuneration, and in setting the dividend policy. See page 58 in the Directors’ remuneration report for more information. Diluted earnings per share before exceptionals Tax measures Normalised tax Diluted earnings per share Diluted earnings per share based on profit before exceptionals 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. 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 exceptional items and net retirement benefit interest. 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 Adjusted free cash flow No direct equivalent Net debt Gearing No direct equivalent 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. 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. Net debt is current and non-current: borrowings, lease liabilities and derivative financial assets & liabilities; net of cash and cash equivalents. Net debt as a percentage of net assets. This measure is used by the Directors as a measure of the capital structure of the Group and its ability to maintain its credit ratings and covenants. £238m being the movement in net debt (£(64)m) before payment of dividend (£302m). See page 58 in the Directors’ remuneration report. A reconciliation of this measure is provided in note 6.5 of the financial statements. 54% being net debt (£2,458m) as a percentage of net assets (£4,541m). 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 153 Strategic reportGovernanceFinancial statementsInvestor informationGlossary continued Measures Closest equivalent IFRS measure Definition and purpose Cash flows and net debt measures continued Reconciliation for 2019/20 Group measures1 Working capital movement Operating working capital movement No direct equivalent No direct equivalent Movement in inventories, trade and other receivables, trade and other payables and provisions. A reconciliation of this measure is provided in note 5.6 of the financial statements. Working capital movement adjusted for onerous contract charges, onerous payments and other non-operating payments. A reconciliation of this measure is provided in note 5.6 of the financial statements. Other measures Return on Capital Employed (ROCE) No direct equivalent 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. ROCE is calculated as return divided by average capital employed. Return is defined as annualised profit before exceptionals after tax adjusted for net finance costs before exceptionals and operating lease rentals (on land and buildings). Capital employed is defined as average net assets excluding net retirement benefit surplus and deficit, less average net debt. This measure is used by the Directors as it is a key ratio in understanding the performance of the Group. Onerous payments No direct equivalent Payments made to settle onerous contractual commitments, includes amounts paid to exit ‘pipeline’ sites or sums paid to exit onerous contracts early (e.g. leases). ROCE (7.0%) equals return divided by average capital employed: Return (£420m) = Profit before exceptionals after tax annualised (£314m) adjusted for annualised net finance costs before exceptionals (£106m). Average capital employed (£6,043m) = Average net assets excluding the net retirement benefit surplus (£3,617m) and average net debt (£2,426m). Onerous capital payments (£41m) plus payment to exit leases (£17m), included within repayment of lease obligations in the consolidated cash flow statement. 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). 154 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Investor relations and financial calendar Financial calendar 2020/21 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 Financial year end 12 May 2020 22 May 2020 11 June 2020 29 June 2020 2 Aug 2020 10 Sep 2020 25 Sep 2020 30 Oct 2020 31 Jan 2021 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 11 June 2020 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. ‘My Share’ Corporate Sponsored Nominee Account Morrisons and Equiniti Financial Services Limited have set up a Corporate Sponsored Nominee Account called ‘My Share’. By transferring shares into this account shareholders will still enjoy the benefits of owning shares. Shareholders will retain the right to receive dividend payments and the Company will make available financial information and arrange for attendance at and voting on matters put to general meetings of the Company. The benefits of using ‘My Share’ instead of paper certificates are: • there are no certificates to lose providing protection against lost certificate fees; • increased privacy as shareholder details are taken off the register; • access to competitive dealing rates and faster settlement; • simplified personal records with regular share statements; • benefits from the reassurance of regulation by the Financial Conduct Authority (FCA); and • it’s free to join and there are no annual charges, although a fee may apply if shareholders do not hold all their share certificates. More information is available at www.shareview.co.uk/info/csn/ or by Equiniti directly (see page 156). 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 Equiniti, our 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 2019/20 Annual Report is also available to view in HTML format at www.morrisons- corporate.com/investor-centre/financial- reports/ 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 2019/20 Annual Report and our communications with shareholders, 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. To change your communication preferences please contact Equiniti using the details on page 156. 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. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 155 Strategic reportGovernanceFinancial statementsInvestor informationInvestor 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, ‘My Share’ Corporate Sponsored Nominee Account, and the dividend reinvestment plan should be directed to: Solicitors Ashurst LLP London Fruit & Wool Exchange 1 Duval Square London E1 6PW Eversheds Sutherland (international) LLP 1 Wood Street London EC2V 7WS Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0333 207 6513 Overseas: +44 (0) 121 415 0992 We are open between 09:00 am – 17:30 pm, Monday to Friday excluding public holidays in England and Wales. Web: www.shareview.co.uk 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 2 February 2020 was 36,349 (2019: 39,090) and the number of shares in issue was 2,404,954,127 (2019: 2,368,256,205). Analysis by shareholder (type) Private shareholder Nominee companies Limited companies Other institutions Bank and bank nominees Investment trusts Pension funds Analysis by shareholder (holding) 1–1,000 1,001–10,000 10,001–1,000,000 Over 1,000,000 Number of holders 33,440 1,056 1,774 57 8 9 5 Number of holders 19,940 13,874 2,352 183 % holders 92.00 2.91 4.88 0.16 0.02 0.02 0.01 % holders 54.86 38.17 6.47 0.50 Balances at 2 Feb 20 90,026,709 2,132,681,676 152,336,211 28,113,938 1,760,099 11,845 23,649 Balances at 2 Feb 20 8,203,213 42,944,118 183,417,309 2,170,389,487 % capital 3.74 88.68 6.34 1.17 0.07 0.00 0.00 % capital 0.34 1.78 7.63 90.25 156 Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 Information at your fingertips Customers Our website, www.morrisons.com, allows customers to shop online, search thousands 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 90% of Great Britain. The geography that we cover is growing all the time, with more areas in Scotland and England opened up to customers in the last 12 months. A postcode checker makes it easy to see if customers are eligible for our home delivery service. At Morrisons.com customers can: • purchase over 28,000 Morrisons grocery products, including over 750 ‘Best’ products and 4,000 General Merchandise branded products; • navigate from our home page to all our various websites, including 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; • sign up for our latest offers and our marketing by email; • find recipes based on our ingredients and inspired by our campaigns and events; and • read content on healthy eating, reducing food waste and our support for various charitable causes such as CLIC Sargent or the Morrisons Foundation. Customers can also sign up to and manage their ‘More’ Card account on our website, and earn points on all their purchases. In our dedicated area, customers can find out what our loyalty card scheme has to offer, check their 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 customers can do this on the website through a desktop, a smartphone (using our App) and even using their voice through an Alexa device. Customers 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 customers can find details of their 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 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.jobs Media centre Latest releases about the growing estate of Morrisons, along with promotions and product news. Corporate responsibility 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-corporate. com/cr/corporate-responsibility/ Investors Presentations, announcements and financial reports can be quickly and easily downloaded or viewed on-screen as PDFs. Investors can easily navigate around the Annual Report and Financial Statements 2019/20 on-screen, viewing only the parts they want to, at www.morrisons-corporate.com/investor- centre/financial-reports/ Presentations An audio-cast of the Directors delivering the preliminary results for 2019/20 on 18 March 2020 is 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, shareholders will receive an email to let them 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/investor- centre/shareholder-information/shareholder- communication/ and follow the investor eComms link. Designed & Produced by Printing by Radley Yeldar ry.com Photography Geoff Neal Group Paper stock: This report is printed on Revive 100 Offset uncoated, a 100% recycled paper. Board and Executive Committee portraits by Chris Leah Photography Revive 100 Offset is manufactured to the certified environmental management system ISO 14001. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2019/20 157 Wm Morrison Supermarkets PLC Hilmore House, Gain Lane Bradford BD3 7DL Telephone: 0845 611 5000 Visit our website: www.morrisons.com

Continue reading text version or see original annual report in PDF format above