Co-op.gp. 25 Regulatory News (42TF)

News release

5 April 2019

Annual Results Announcement: 52 Weeks to 5th Jan 2019

Co-op growth and community impact soars

Total revenue up 14%, Food like-for-like sales up 4.4%, Profit before tax up 27%

£79 million returned to Co-op members and their communities

Co-op difference highlights 2018: growing member value and social impact

· We rewarded our members and their communities for trading with us as we returned £79m to them - £60m directly to members and £19m to over 4,000 community projects across the UK.

· We launched our Safer Colleagues, Safer Communities campaign, aimed at ensuring colleague safety in the communities they serve and to help identify the root causes of community crime.

· We introduced the UK's first compostable carrier bags as part of our initiative to tackle plastics which will see the Co-op stop using hard-to-recycle plastics within five years.

· Our pension fund is responding to the UK's social housing crisis, by looking to invest up to £50m within the social and affordable housing market.

· We continued to grow the Co-op's investment for, and in, future generations:

o Six new Co-op Academy Schools were added in 2018.

o More than 1,000 apprentices worked within the business in 2018.

· We continued to champion the causes that matter to our members by tackling issues including Modern Slavery and loneliness and driving the ongoing success of Fairtrade.

Financial and operational highlights: delivering a stronger Co-op

· Total revenues grew by 14% to £10.2bn, driven by our acquisition of Nisa and a strong performance from Food.

o Like-for-like revenues continued to grow in Food (+4.4%) and the Co-op has now enjoyed 5 consecutive years of like-for-like revenue growth.

o Funeralcare and Life Planning revenue reduced year-on-year (-1.0%), reflecting the change in customer trends within the funeral sector.

· Profitability exceeded expectations, reflecting the growth in overall revenues, whilst still incorporating the £79m of member and community reward.

o Profit before tax from continuing operations was up 27% to £93m.

o Underlying profit before tax remained flat at £43m.

· Capital expenditure of £414m ensured that the Co-op is well positioned for future growth:

o This included £326m within our Food business as we invested in new stores, refits and new infrastructure.

o To further strengthen our Funeral & Life Planning business, we invested £43m in infrastructure and technology during 2018.

· Net debt rose due to the Nisa acquisition, but remained below our £900m debt ceiling target.

· Surplus on pension schemes increased by £300m to £1.8bn (2017: £1.5bn).

Serving our members by growing our scale and ambition

Our Stronger Co-op, Stronger communities plan has gone from strength to strength in 2018 with the Co-op further aligning our business to our members' needs and significantly broadening the positive impact we can have on society.

· Community Wellbeing Index developed to deepen our understanding of what communities need to help them thrive; three main areas identified where future Co-op Investment can make a significant difference:

o Physical and mental wellbeing

o Education and skills

o Community space

· Our Local Community Fund helped every part of the UK, returning more than £19m to 4,087 local causes, with each receiving on average more than £4,500.

· The relationship between the Co-op and our members continued to strengthen, with growing engagement in our campaigns and Local Community Fund and sales to our members growing to 35% of total sales, in line with our targets.

· Our 300 Member Pioneers are bringing people together around our stores and funeral homes to discuss what matters most to their community and how the Co-op can help improve their wellbeing.

· We partnered with Neyber, a financial wellbeing company, to offer our colleagues financial planning advice and an affordable practical alternative to payday loans.

· In Food, we saw our fastest growth in seven years.

o Like-for-like sales were up 4.4%.

o We invested £75m into opening more than 100 new food stores, refitted 138 existing stores and created 1,600 new jobs.

o The successful acquisition of Nisa and expansion of our wholesaling business has significantly grown our footprint and capacity, making Co-op products available to many thousands of new customers.

o We instigated major changes to supplier governance and processes and introduced a new supplier charter in line with the findings of a report by the Groceries Code Adjudicator into historical supply practices at the Co-op.

o We strengthened our commitment to UK farming and British produce with 100% of our fresh and frozen meat now coming from British farms.

· In challenging market conditions for Funerals & Life Planning, we responded to changing market and member needs with the launch of our direct to cremation service.

o Efforts to tackle funeral affordability saw the cost of our Simple Funeral reduced in England and Wales by £200 for members and £100 for non-members.

o Simplify Probate successfully integrated into the business, making Co-op the UK's largest single provider of probate services.

o We have worked closely with the CMA on their market study into funeral services and inputted into HM Treasury's consultation on funeral plan regulation.

· In Insurance, we are clear in terms of our strategic direction and the best means of creating increased value for our members and their communities.

o The planned sale of our insurance underwriting business for £185m will allow us to focus on our strategy of providing a broader range of insurance products for members, via our distribution business.

o The sales and profit figures for our insurance business are therefore not included within our Profit Before Tax line, but within discontinued items. The loss of £230m includes the write-down of net assets but does not reflect the anticipated value to be generated from the 13 year distribution agreement included within the sale proceeds.

o We launched a market-disrupting Travel insurance product that covers people of any age and health condition and was built with input from members.

o Our 'Guarantee to beat' offer for Co-op members on home insurance renewals has seen a 24% increase in member sales during 2018.

· In New Ventures, the acquisition of Dimec, a healthcare technology platform, will provide the Co-op with the building blocks for a digitally enabled healthcare service for our members.

o The service will connect patients to their GPs so they can order repeat prescriptions online, helping to take pressure off the NHS.

Outlook

· As we enter the 175th anniversary of UK consumer co-operation, we remain focused on the long-term growth of the Co-op and the positive role we can play in communities. Despite a challenging political and consumer backdrop, we are confident that we can continue to drive the Co-op's commercial success and increase our social impact in the process.

Steve Murrells, Chief Executive of the Co-op, said:

"Over the past year we have continued to successfully transform the Co-op, leading to a 14% increase in revenues to £10.2bn and the return of £60m directly to our members and £19m to over 4,000 community projects across the UK.

"The acquisition and integration of the Nisa wholesale business has been a game changer in expanding our food footprint and we have also set out the path by which we can offer our members a broader range of compelling Co-op solutions in Insurance and Health.

"We continue to demonstrate that the Co-op is a good business that does good for society as we lead on issues including single use plastics, funeral affordability and social housing. It is this determination to make a positive difference for all of our stakeholders which will ensure that we fulfil our ambition to build a Stronger Co-op and Stronger Communities."

Allan Leighton, Independent Non-Executive Chair of the Co-op, said:

"A year into launching our Stronger Co-op, Stronger Communities ambition and we continue to grow both sales and social impact. We have also made significant investments to further align our business with the needs of our members and deepen our understanding of the communities in which they live.

"In these uncertain economic times we have the opportunity to demonstrate that the Co-op Way of doing business has never been more relevant than it is today. With the continued support of our colleagues, members and communities, I have no doubt that we will thrive in the years ahead. I am confident and excited about the path we are following and the greater social impact we can create for our members and their communities."

Ends

Media Enquiries:

The Co-op

Jon ChurchTel: 07545 210812

Russ Brady Tel: 07880 784442

Tulchan Communications

Jonathan Sibun Tel: 020 7353 4200

About the Co-op:

The Co-op is one of the world's largest consumer co-operatives with interests across food, funerals, insurance, legal services and health. It has a clear purpose of championing a better way of doing business for you and your communities. Owned by millions of UK consumers, the Co-op operates 2,600 food stores, over 1,000 funeral homes and it provides products to over 5,100 other stores, including those run by independent co-operative societies and through its wholesale business, Nisa Retail Limited. It has more than 63,000 colleagues and an annual revenue of over £10 billion.

Chairman's introduction

'A way of doing business that looks increasingly modern, relevant and urgent'

Our Co-op is more than just a business, or even a family of businesses. It's a belief that business should serve people and not the other way around.

In 2019 we're marking the 175th anniversary of the consumer co-operative movement in the UK. But it's not a moment for looking back. With our nation deeply divided over Brexit, and with so many challenges needing long-term solutions, co-operative thinking is not just modern and relevant to our current needs, but increasingly urgent.

Co-operation provides us with an outlook on business that offers a holistic response to the needs of people and the communities in which they live. It's a way of working that can tackle long-term challenges with an ethical and sustainable response.

Our own Co-op Society is taking the best traditions of our past and applying them to the world today. We are an organisation that's commercially driven and community focused and we're addressing the needs and concerns of the millions of Co-op members who collectively own us. Our job is to create value for our members. That means creating products and services that meet a genuine need and doing this in an efficient and commercially successful way. Through business success we're then able to address the wider issues and concerns of our members such as supporting British farmers, expanding our Co-op Academy schools or reducing our use of plastic.

It's important to understand that our Co-op's commercial activity and its community and campaigning work go hand-in-hand. It's beyond philanthropy and traditional social responsibility programmes. The support we give to local community causes or the campaigning we do on modern slavery and tackling loneliness are as important as running our food business or selling insurance cover. For us, doing the right thing makes good commercial sense.

At the start of 2018 we launched our Stronger Co-op, Stronger Communities ambition. We see the relationship between our business and the communities we serve as mutually beneficial. The stronger our Co-op becomes, the more good we can do for the communities we trade in. We also believe that strong communities which see the value of co-operation will decide to choose our Co-op more often. This creates a virtuous co-op circle.

Let me take this opportunity to thank my fellow Board Directors, our Executive team, our Council President and Vice Presidents and all of our National Members' Council for their work as we continue to strengthen all aspects of our Co-op in this anniversary year.

Allan Leighton

Co-op Chair

Chief Executive's introduction

'Our strategic initiatives are setting us up for long term success'

It's been a busy and productive first year for our Stronger Co-op, Stronger Communities five-year ambition as we work to create value for our millions of members.

· we began our plan to treble the number of Co-op Academy schools we support

· we launched a new campaign to help make our colleagues and communities safer

· we expanded our support for British produce and to Fairtrade farmers

· we reduced our use of plastic in food packaging

· we lessoned our carbon footprint

· we responded to funeral affordability

· we supported our colleagues facing financial pressures

· and our Co-op pension trustees announced their decision to invest up to £50 million into the social and affordable housing market over the next 12 months.

And in addition, in 2018 we gave back nearly £60 million to our members through the 5% member reward. £19 million also went to 4,000 local community causes through the 1% member reward that creates our Local Community Fund plus additional funds from the sale of carrier bags.

In the summer we launched our Future of Food ambition setting out our ethics and sustainability priorities through to 2030. The agenda we've set for ourselves recognises the need to integrate our thinking across all aspects of food retail so that we can make the greatest impact for our members and customers.

These are just some of the examples that prove that our Co-op is a different way of doing business. It's a business which puts people and communities first because that's what we were set up to do. Success for us goes beyond bottom-line profit. Our social purpose means our ambitions are far greater.

But any Co-op must also stay commercially-focused and efficiently-run if it's to thrive for the long term.

In 2018 we made strategic changes in Food, Insurance, and Funeral & Life Planning which will set our business up for long-term success. It's these decisions that will enable us to serve the needs of our members and give value back to them and their communities for decades to come.

Commercial performance

Our Group turnover was £10.2 billion, boosted by our acquisition of Nisa in the spring, and our Group underlying profit before tax was £43 million in line with our 2017 performance. This profit measure represents the core trading performance of our business and reflects the £60 million charged to profit which we generated and returned to members through our Co-op membership rewards.

There are five notable business headlines to report

· the outstanding year for our food stores

· the challenging year for our funerals business

· our acquisition of the Nisa wholesale business

· the sale of our insurance underwriting business

· and the purchase of the Dimec platform to prepare for our return to healthcare services

Food had an excellent year with the best growth in seven years. Underlying operating profit was up 12% to £204 million.

The hot summer and a good England performance in the World Cup certainly made a difference, but we wouldn't have been able to take advantage of this if it hadn't been for great products, good planning and our ever improving logistics network.

Our ambition to be the number one convenience food retailer remains on track, driven by our 'Closer' strategy: closer to where are customers are; closer to what they need; and closer to what they care about.

Our acquisition of Nisa wholesaling and the additional deal we've made to supply Costcutter Supermarkets Group, were significant strategic decisions for our food business. This is a rapid expansion of our wholesaling that means we'll reach hundreds of thousands of new homes with our Co-op products and increase the scale of the relationship with our suppliers.

Food retail remains one of the most competitive environments in the UK economy and we are not just holding our own but leading the way through innovation, expansion and a commitment to responsible sourcing.

We remain the number one funeral and life planning business in the UK market. However, that market is changing rapidly.

Choice and price are critical for our clients and in 2018 we responded to these trends with new ways to commemorate the life of a loved one and a continued commitment to improve funeral affordability. We also invested heavily in infrastructure, technology and standards and put in place changes to roles and responsibilities for our colleagues.

However, we saw a sharp drop in underlying operating profit (down £17 million on 2017) and a reduction in the number of funerals we carried out. The reduction in profit was in part caused by the growth in sales of our most affordable funerals. The sale of funeral plans was also down reflecting a drop in the funeral plan market as a whole. This was driven largely by negative media commentary on the value and transparency of such products, even though our own plans have received outstanding recognition from industry experts. We've contributed our views to the Treasury consultation on the regulation of pre-need funeral plans and have responded to the Competition & Markets Authority (CMA) on its study into at-need funerals and crematoria. We welcome improved regulation for the industry and the CMA's decision to launch an in-depth market investigation into the funerals sector.

Meanwhile, we saw significant growth in other parts of the funeral and life planning business, in particular probate and will writing. 2018 saw the successful integration of Simplify Probate which we acquired in the spring.

We need to take stock of the changes we've made over the last few years and understand in more depth the market dynamics in play. In particular we need to see how our Co-op values and way of working can be made clearer to our clients and ensure that our offer remains attractive and relevant.

For Insurance during 2018, the priority was to develop plans for the future of the business by removing the underwriting risk and moving to a distribution model. This will allow us to provide more of our members with a broader range of insurance products while at the same time managing financial risk.

At the beginning of 2019 we announced the sale of our insurance underwriting business to Markerstudy for £185 million and, subject to regulatory approval, the deal should be completed by summer 2019. Markerstudy will protect the jobs of many of our existing insurance colleagues.

Part of the sale is to put in place a new long-term arrangement for distributing Co-op branded motor and home insurance products underwritten by Markerstudy. Meanwhile, we'll continue to work with other partners to further develop our range of policies.

Our accounts for 2018 show our insurance underwriting business as a discontinued operation but the loss shown does not include the income we'll receive from the sale which relates to the distribution agreement in future years. Our strategy is expected to create sustained long-term returns for our insurance distribution business.

The approach we've been moving to with Insurance was illustrated by the launch of our new Travel insurance policy. It was the first new product from our Insurance business for several years and was built with input from our members and by using an external underwriter. On launch of the policy we were recognised as a Which? Recommended Provider.

In 2018 we carried out a strategic review of Co-op Electrical and closed this part of our business in March 2019. Our decision reflects the small scale of our online electrical offer which accounts for less than 1% of annual Co-op turnover. Our review showed that significant capital investment would be needed to expand the business in a market which is facing significant challenge and uncertainty.

A new venture in healthcare

In 2018 we re-entered the healthcare market in an innovative and capital light way, through the acquisition of the digital start-up Dimec.

With an increasingly ageing population with complex health needs, we believe there should be a co-operative and digital solution to the health challenges faced by our members and customers today and in years to come. Our acquisition of Dimec gives us a proven digital platform to help patients connect to their GPs which makes ordering repeat prescriptions easier and takes some pressure off the NHS. This new venture will begin trading nationally in 2019.

Like other businesses, we've been preparing as best we can for the possibility of a no deal departure from the European Union. Our commitment to British farming provides our members and customers, as well as our suppliers, with some welcome protection from any increase in tariffs. However, we still source many of our fresh food products from the EU and we are making contingency plans to the best of our ability. Our priority is to do our best for our members and customers through what could be a challenging time for the whole nation.

Overall, we're confident about the progress we've made in 2018 and the investment decisions we've taken. But there's still much to do to achieve our Stronger Co-op, Stronger Communities ambition.

In 2019 we want to further develop our community work through a deeper understanding of the needs and challenges faced by our members. Our plan is to create practical resources, founded on co-operative thinking, to help local communities thrive.

We'll also continue to grow our business and reach more customers with our Co-op difference. We'll do this by opening more Co-op Food stores, through revitalising our Funeralcare business, through developing more Co-op Insurance products, and via our new Healthcare venture. And we'll start telling our story to members and customers with renewed pride and conviction.

I'd like to thank our colleagues across the business for their continued hard work and commitment and for being the greatest advocates for our Co-op.

Steve Murrells

Chief Executive

Stronger Co-op

To make our Co-op stronger we must grow, compete and innovate while all the time doing business in a responsible way. To deliver our business strategy we need our colleagues to be our greatest advocates.

Growing

To create a stronger Co-op we want to grow our business by attracting more members and customers. That means investing in better infrastructure and technology, developing new products and services, and finding new ways to share our Co-op difference.

New Food stores

During 2018 we invested £75 million into opening 102 new food stores, including 30 in London, and carried out 138 refits of existing stores. This expansion created 1,600 new jobs. We've now opened 417 new stores in the last four years at a time when other retailers are being forced to abandon the high street. We now have 2,582 Co-op Group food stores. The new stores we've been opening have been more profitable than the ones we opened in 2012. We put this down to improved location and the ever-improving range and quality of our products.

In 2018 the first Co-op franchise store opened, owned by the Costcutter Supermarket Group. The Co-op branded store in Guiseley, near Leeds, has a wide range of Co-op products and offers membership benefits. This includes a 5% reward when shoppers buy own-brand products and services, with a further 1% donated to local causes through our Local Community Fund. Our first franchise store on a university campus opened in Leeds in February 2019 staffed by students.

Attracting a younger generation

It's vital that we attract a younger generation of Co-op members and customers who may not be familiar with who we are or the values we stand for. In March 2018 we announced an exclusive partnership with Live Nation to become the first UK food retailer to have a supermarket at four major summer music festivals: Download, Latitude, Reading and Leeds. At each festival we set up a 6,000 square foot shop to cater for 200,000 festival goers. Each store stocked a wide range of items, including food, water, beer and wine, toiletries, medicines and, to cover all eventualities, both sun cream and rain ponchos.

Logistics investment

We've committed £28 million to expansion and modernisation of our logistics and store estate in Scotland, including £6 million for our new Dalcross distribution centre outside Inverness. We committed over £20 million to invest in our Wellingborough distribution centre to support our members and customers in Central, East and South East England.

In November 2018 we announced plans to build a new £45 million distribution centre in Biggleswade in Bedfordshire just off the A1. When it opens in 2022 it will create 1,200 jobs.

Wholesale

Our biggest investment towards long-term growth came from the rapid expansion of our wholesaling operation beyond supplying other co-ops. In May we completed our acquisition of the Nisa wholesale business. Nisa Partners own and operate their own stores and these remain independent from our Co-op.

The acquisition means we're now supplying 4,000 stores serviced by Nisa across the UK. From the spring we also became the exclusive wholesale supplier to Costcutter Supermarkets Group and the Costcutter, Mace, Simply Fresh, Supershop and Kwiksave convenience stores it operates.

The Nisa and Costcutter stores mean our award-winning Co-op branded food, with its commitment to ethical and sustainable sourcing, will reach hundreds of thousands of new homes across the country. Often in places where we have no existing Co-op stores. During the second half of 2018 we aligned Nisa with our existing wholesale work and we're now supplying more than 850 Co-op branded products to Nisa and Costcutter stores.

Funeral & Life Planning, and Insurance

We opened 16 new funeral homes and refitted another 55. We now have 1,049 funeral homes. Over the last few years we've been re-branding our private named funeral homes in England, Scotland and Wales as Co-op Funeralcare as part of our commitment to transparency and to maximise the value of our national brand. In November the last privately named home in Wales (Pontypool) made the switch. We also opened two new state-of-the-art mortuaries at Fareham and Reading and installed refrigeration at 237 funeral homes.

In April we acquired Simplify Probate, the UK's second largest provider of probate advice and support to families. We've now successfully integrated the business adding to our existing services including Will writing, lasting power of attorney and funeral plans. The deal makes us the UK's largest single provider of probate services. Our clients are already benefiting from faster distribution of estate proceeds. In 2019 we'll continue to offer probate services as part of our funeral support to families.

In Insurance we launched our first new product for many years with our new Travel offer. This has paved the way for an expansion of insurance products during the first four months of 2019.

Competitive

All the markets we trade in are highly competitive, with price the deciding factor for many consumers. To stay relevant and strong we've invested in keeping prices down in all areas of our Co-op.

We are committed to offering customers value for money and we're always investing in price as we react positively to the challenges of the retail sector. Last year we invested £50m into cutting the price of hundreds of food products as part of our ongoing investment strategy.

We've been addressing funeral affordability for the last few years and offering greater choice in funeral arrangements. Our national survey into death and bereavement, the biggest ever carried out in the UK, suggested that four million people suffered financial hardship after bereavement. In September, as a response to these findings, we made further changes to our funeral prices in particular for our members. In addition, the growth of our probate work is making it easier for families to pay for a funeral from the estate of the deceased.

In Insurance we promised to beat the renewal quotes of our Co-op members for their home and contents insurance, which led to an increase in renewals. Our offer of Co-op Food vouchers for new Home, Motor and Pet insurance customers also worked well and helped us increase new business overall.

Innovative

No business can stand still and stay successful. Across the decades our Co-op has always been at its best when we've understood the changing needs of our members and anticipated social trends.

In 2019 we'll re-enter the healthcare market. But we won't be on the high street. Instead, we want to develop a digital approach that will give us flexibility to test our ideas quickly without the need for large-scale capital investment.

In September we bought the healthcare start-up Dimec, a digital platform developed by a team of doctors as a way to connect patients to their GPs so they can order repeat prescriptions online. With an ageing UK population, we recognise that more and more of our members, and other customers, could benefit from this. Currently, there are 1.1 billion prescriptions written annually in England. We believe this kind of online innovation will also take pressure off the NHS.

The co-founders of Dimec are working with our new ventures team on the development of the platform and we've created a national medicine distribution hub within our Lea Green food depot in Merseyside.

We've been introducing new technology across every part of our Co-op during 2018. In Funeral & Life Planning we completed the national roll-out of our industry-leading Guardian funeral arrangement software which streamlines processes and reduces internal bureaucracy. The Guardian technology also has the potential to become customer-facing as it evolves. Most importantly, it gives our colleagues more time to serve the needs of bereaved families.

Our new Shifts App in Food is making it easier for colleagues to access their work schedules and plan their week. It's a significant advance in giving colleagues greater control and flexibility over their work life. We've also been trialling 'pay in aisle' technology for our Food stores and robotic home delivery.

In May we launched our new Cremation Without Ceremony funeral costing £1,395 (£1,230 in Scotland), for those who would like a simpler choice for their funeral without compromising on high standards of care.

Cremation Without Ceremony has been brought to the public's attention by both David Bowie and novelist Anita Brookner's funeral wishes. The ceremony is different from a traditional funeral as there are no mourners present at the cremation. The popularity comes from more people choosing celebratory gatherings, rather than a traditional funeral service. For most of our clients the decision is less about cost and more about how they want to remember their loved one.

Responsible

At the Co-op we've always believed that 'doing good' and 'doing good business' go hand-in-hand. We see commercial responsibility as central to our business model, so strengthening our ethics and sustainability will help us to become a Stronger Co-op.

You can read more about our economic, social and environmental commitments in this year's Co-op Way report.

Our new Future of Food strategy brings together and extends our existing work on the environment, sustainability, sourcing, plastics, waste management, animal welfare and how we treat our suppliers.

100% of our energy is from renewables

We recognised the need to act on climate change long before most businesses and we've reported on our climate impacts since 2005. Our long-term aim was to halve our direct Green House Gas emissions by 2020 compared to 2006. We achieved this target three years early, in 2017. We're now going even further, and aiming to halve our direct emissions again by 2025 compared to 2016.

100% of the electricity that powers our business, including all of our stores, funeral homes and our Manchester Support Centre, is generated from UK wind farms.

The UK's first compostable carrier bag

A key priority is to improve the recyclability of our product packaging. Our long term target is for all our own-brand packaging to be 'easy to recycle' by 2023, and 80% (by product line) to be 'easy to recycle' by 2020. By the end of 2018 we'd made good progress, having reached 75% (2017: 71%).

In November we introduced the UK's first compostable carrier bag to 1,400 Co-op stores replacing conventional single-use plastic carrier bags. The new bags can be used to take your shopping home, then as a liner for your food waste bin. This change will remove 60 million conventional plastic carrier bags a year and support local authorities to increase food waste collection. As more local councils roll out food waste collection we'll supply the bags to more of our store estate.

The new material is a bioplastic and starch mix, produced in Italy, which is as strong as conventional plastic bags. In the spirit of co-operation we're sharing the information needed to bring this to market with anyone who wants it.

All our pork is now outdoor-bred

We know our members and customers are concerned about animal welfare and where the food they buy comes from. Respecting animal welfare is an important part of our work in agriculture. For all our Co-op branded fresh, frozen and prepared meat and poultry products, our minimum welfare standard, and our main focus, is Red Tractor. For higher welfare, we use RSPCA Assured or equivalent. In 2018, we developed our Co-op Pork Farming Group and moved to 100% RSPCA Assured, Outdoor-Bred pork.

All our fresh and frozen meat is British

Since 2015, we've spent £2.5 billion on British meat, produce and dairy products as part of our commitment to British farming. All of our Co-op branded fresh meat is British including the meat used in our sandwiches and ready meals. In 2018 we extended this commitment to frozen products.

We've continued to support British farming financially and through activities like sponsoring Love British Food. We've also expanded our Farming Pioneers programme, where we work with the next generation of farmers to build their skills.

In 2018 the first group of 20 young farmers graduated from a two and half year programme with some great success stories of personal and business development. We're now taking on a fourth cohort of youngsters in 2019, with an ambition to roll this programme out to 100 young farmers.

Fairtrade - we're enabling women to become leaders

At Co-op we remain fully committed to Fairtrade at a time when other retailers are pulling back or creating alternative ethical brands which can take autonomy away from the suppliers themselves. In 2018 we increased our Fairtrade sales by 6.3% while the UK market overall fell by 8.3%. In 2019 we'll be celebrating the 25th anniversary of the Fairtrade mark.

In March, during Fairtrade Fortnight, we announced that all the Fairtrade bananas, tea and coffee used as ingredients in Co-op products would now also benefit Fairtrade producers and their communities.

Since we announced in February 2017 that all the cocoa sourced for use in Co-op own brand products would be done so on Fairtrade terms the amount of Fairtrade cocoa sourced has increased by over 400%.

Many of the new generation of female farmers in West Africa face legal, social and cultural barriers to working in the cocoa industry. This means the younger generation are choosing to move away from cocoa farms and into the city.

As part of Co-op's commitment to Fairtrade, we're funding the Fairtrade Africa's Womens' leadership school projects, which are working with women in Côte d'Ivoire to empower them as future leaders. The projects train them in business skills such as decision making, resource management and leadership. We're also working with Kuapa Kokoo, a cocoa growing co-op in Ghana, to give their women workers access to training.

We're already the world's largest seller of Fairtrade wine. In May we announced that we'd switched more of our Co-op South African wines to Fairtrade terms, giving hundreds of vineyard workers in South Africa improved rights and farmers a guaranteed minimum price for their grapes. It's one of the biggest-ever Fairtrade wine deals in the UK and will mean another 2.5 million litres of Fairtrade wine will be sold in 2019.

All our palm oil is sustainable

We use sustainably-sourced palm oil in our products. Palm oil production has impacts on communities, deforestation, as well as climate change and habitat loss. To make sure we don't contribute to this, 100% of the palm oil in our food products has been certified by the Roundtable on Sustainable Palm Oil since 2012, and non-food has been included since 2016.

A safe used car for your new family

For the last three years Co-op Insurance has been researching the safest used cars to buy for different groups of drivers. In July we revealed our findings for first-time parents. Research showed that 60% of new parents buy a new car before their first baby is born and one of the top criteria is safety. Our own research carried out with new parents revealed that 75% would like to know more about safety issues when they buy.

Our pension fund is investing in social housing

In November our Co-op pension trustees announced their decision to invest up to £50 million into the social and affordable housing market over the next 12 months. This will provide much-needed support for a sector where demand is clearly outstripping supply.

Across the UK, there are an estimated 1.15 million households on waiting lists for social homes. Many of these are key workers who exceed the income threshold to qualify for social housing, but struggle to afford to buy their own home near to where they work.

An initial investment in 50 units at the Fair Acres development, in Dunbar, Scotland, is being made, which upon completion, will be let to East Lothian Council. 48 units in Glasgow and 71 units in Yorkshire will also be built. The £50 million investment will eventually provide 350 units.

Colleagues

Our colleagues are the greatest advocates for our Co-op and we continue to make every aspect of their wellbeing a high priority. To build a stronger Co-op we need colleagues who feel listened to, respected and valued.

Consistently high engagement

At 76% (up 1% on 2017) engagement has now stayed relatively stable for four years in a row. This continues to be above the benchmark for other retailers (72%). There was an improvement in colleagues' sense of belonging to our Co-op too. The annual Talkback colleague survey focused on leadership and there was positive feedback by colleagues on their team leaders - especially about leaders keeping their promises, recognising success and encouraging team members to have their say.

But there was clear room for improvement on involving colleagues in decision making. Building on our annual Talkback survey, in 2018 we introduced more regular 'Talkback Pulse' surveys. This has helped us listen more carefully to colleagues in particular parts of the business and address specific areas of interest or concern.

All our support through one colleague app

At the beginning of the year we launched LifeWorks, our new wellbeing mobile app for Co-op colleagues. The app gives easy-to-access support on a whole range of wellbeing topics, both inside and outside of work - including health, wellbeing, family life, work issues and money matters. It also makes it easier to access our Co-op Employee Assistance Programme, where colleagues can talk to experienced advisers in confidence 24/7.

The LifeWorks app also includes some great perks - with big discounts and cashback deals from hundreds of high street and online shops.

Celebrating our colleagues

In 2018 we introduced new, practical ways for colleagues and managers to simply say 'thank you' for a job well done both face to face and online. All colleagues are encouraged to show the ways they appreciate their colleagues every day which helps them to be at their very best.

Last year we launched our first ever #BeingCoop Awards to celebrate outstanding achievements from our colleagues that make a real difference to peoples' lives. Nominations were open to both colleagues and Co-op members.

£2 million of affordable loans

As part of our commitment to supporting our colleagues outside of the workplace, we partnered with Neyber, a financial wellbeing company which helps UK employees better manage their finances including debt. We wanted to offer our colleagues a practical alternative to pay day loans and other kinds of high cost borrowing. Neyber provides access to fair and affordable loans that colleagues can repay directly from their salary. Since we launched the scheme Neyber has given loans to 433 colleagues totalling £2 million.

In 2019, we'll launch a Workplace ISA (a tax-efficient savings plan) and continue our close relationship with Co-op credit unions, which also provide savings and lending services to our colleagues.

1,000 apprentices

By the end of 2018, we'd met our goal to have 1,000 colleagues on apprenticeship programmes across the business, including 572 colleagues who began their training during the year. We'll continue with this commitment in 2019 and expand opportunities in our IT, Finance and Logistics teams. Our apprenticeship programmes go right up to degree level in our Food business and we pay the going rate for the job and provide permanent contracts.

In 2018 we won a number of awards for our apprenticeship programmes. Jasmine Joynt, one of our Insurance apprentices recruited from a Co-op Academy, won the RateMyApprenticeship Outstanding Intermediate Apprentice of the Year award and was also highly commended in the region for the National Apprenticeship Awards. Rachel Lee in our Food business won the Retail Week Apprentice of the Year award. We were also named as a Top 100 employer of apprentices by RateMyApprenticeship.

We're tackling gender equality

Over the last few years we've championed gender diversity across the business. We have one of the UK's few female retail CEOs in Jo Whitfield, who leads our Food business, and our Executive team is now four women and three men. Our Aspire Network for women in the business has 1,000 members and is growing. In April we were named in The Times Top 50 Employers for Women for the second time.

Throughout 2018 we began the implementation of our new diversity and inclusion strategy, adopted in 2017, focusing on building a culture that's equal, diverse and inclusive for all colleagues including those with disabilities. On the issue of gender pay gaps, we continue to be better than the national average and have made further progress in closing the gap over the last 12 months. However, like other large employers, there's still progress to be made. Details on gender pay can be found in the remuneration report in our 2018 Annual Report.

A bigger voice for colleagues

In July we started our new Colleague Voice Forum made up of 35 colleagues from across our Co-op. The group will meet quarterly to develop new colleague initiatives. A pilot for the Forum has already helped develop our colleague recognition scheme, our new style of wage slips, and our performance process.

Strengthening membership

A Stronger Co-op must also mean a stronger relationship with our members. Not only do we want to grow our membership, we want to give our members an active role in our business and our governance.

Member Sales Penetration across all our business areas by the end of the year was 35% of sales.

2018 ended with more than 670,000 local cause selections made by our members. Since we relaunched our membership proposition at the end of 2016 1.2 million members have selected a local cause at least once.

Our online platform for members to participate "Join in" has become increasingly popular in 2018 amongst members and with business teams across the Co-op.

To date the team has delivered 200 opportunities for members to participate in their Co-op. Over 125,000 members have participated on these projects and the numbers continue to grow. The introduction of a new monthly "Join in" email to all marketable members in 2018 has been a powerful driver for participation.

Some examples of 2018 "Join in" opportunities:

· our first ever survey on death and bereavement saw 11,000 members responding

· 14,000 members took part in our test of new digital coupons

· our Insurance team has researched and developed six new products including travel insurance, car care and life policies with the help of members

· members nominated almost 1,000 colleagues for our #BeingCoop awards in 2018

Following a full review of the Co-op Young Members' Board at the start of 2018, the Exec approved the CYMB's proposal to restructure and refocus their activity. The Board's new role will be focused on encouraging a wider group of young people and acting as a gateway for the Co-op to engage with them. Recruitment took place during the second half of the year and a new Co-op Young Members' Group began its work recently on two projects exploring a "Curriculum for Life" for our Community team and engaging more young people in our festival activity for our Food team.

You can read about the work of our National Members' Council in the Council President's report in the 2018 Annual Report.

Stronger Communities

Our Co-op was set up to address a social purpose through a successful commercial enterprise. Today we express this as building 'stronger communities'. There are many ways in which we do this and we fulfil our commitment in a local, national and global way.

Our Local Community Fund helps every part of the UK

The most far-reaching example of how we're strengthening local communities is the work we're supporting through our Local Community Fund. In 2018 we returned more than £19 million to 4,087 local causes across the country. Each received, on average, more than £4,500. That's significant money for small organisations often under huge funding pressures.

As we've evolved the Fund's work we've looked to encourage projects which build resilience and togetherness through co-operation in ways that touch all parts of our society.

In Bromley in South London we're helping 'Living Well' which works to tackle loneliness, homelessness and debt by providing foodbanks, community lunches and group activities. With Co-op help, Living Well is funding a local community choir. 'Dundee Bairns' in Scotland is using our support to run a Fun and Food project for children during the school holidays who in term time receive free school meals. 'On Trak' in Bradford is teaching teenage boys struggling with school life how to do bicycle maintenance. In Manchester, 'City of Sanctuary' works with refugees and asylum seekers and is using the money to pay for teaching English to the new arrivals. These are just a handful of examples of how the Local Community Fund is enabling members to support local causes that enrich lives across the UK.

We shortlist projects for our members to choose from which bring people together and address the root causes of social difficulties across the country. We want to prioritise projects which help the most marginalised and isolated.

We know that members who choose a local cause are likely to go on to shop with us more. They see the link between doing good and choosing Co-op. It's the reciprocal relationship of Stronger Co-op, Stronger Communities in action.

Deepening our understanding of community need

The next stage of our community work is to deepen our understanding of what communities most need to help them thrive. In December we asked our Co-op members to try out a new tool we've created to measure wellbeing in communities throughout the UK.

The Community Wellbeing Index, an idea developed with our Council members, provides a snapshot of how communities score in nine key areas - everything from education and skills to equality, participation and trust. We've built it as a resource for communities to use, but it's also been extremely valuable to us as we set out to develop the next phase of our community programme.

The index has already helped us identify areas where we think Co-op community investment can make a difference and we have chosen to prioritise three:

1. Physical and mental wellbeing

2. Education and skills

3. Community spaces

We'll have more to say about the Community Wellbeing Index and how it's shaping our community plans in the coming months.

Our Member Pioneers are connecting local communities

A unique aspect of our community work is the role of Member Pioneers. These are paid, part-time roles rather than add-on responsibilities for our existing colleagues. We had 300 Member Pioneers in place in 2018 with the aim to significantly grow this number in the coming years. Our Member Pioneers are bringing people together in the communities around our food stores and funeral homes. They get people talking about what matters most in their local community and work with other Co-op members, our Council, colleagues and the local causes we support to tackle issues, make connections and get things done.

Our Co-op Foundation empowering young people

The Foundation is the Co-op's own charity, which helps communities work together to make things better. The Foundation is governed by trustees from our Council, colleagues, and independent trustees with significant experience of the charity sector.

 In 2018, more than 63,000 Co-op Members chose to give a total of £238,192, through their 1% reward, to support the Foundation's Belong programme tackling youth loneliness. This UK-wide network of projects has already made a measurable impact, connecting and empowering more than 1,100 young people. This has been achieved by developing young people's confidence and skills to navigate challenging life transitions, such as leaving care, as well as creating more opportunities for young people to become active citizens who contribute to their communities.

In June, the Foundation announced a £2 million match funding partnership with the government, the Building Connections Fund Youth Strand, tackling youth loneliness among groups such as young carers and those with disabilities or experiencing bereavement. Delivering on a key commitment in its new loneliness strategy, in November the government awarded the Foundation a further £1.4 million to extend this fund, with a focus on making community spaces more inclusive for young people. Building on its existing partnership with the #iwill Fund in England, and its support for similar projects in Scotland, Wales and Northern Ireland, the Co-op Foundation is now the UK's leading charity tackling youth loneliness.

Other Foundation activities which launched in 2018 included: a new offer of interest-free loans and grants to help community spaces improve their financial sustainability; and support for charities and social enterprises to make better use of technology to meet the needs of communities.

Campaigning - we're tackling loneliness for thousands of people

In 2015, our members told us that loneliness is an issue that is affecting communities across the UK. Since then we've raised £6.7 million to help thousands of people reconnect with their communities. And we've secured lasting change on the issue through our British Red Cross Community Connector services in 38 locations across the UK. The results have been overwhelmingly positive, with over 7,000 people supported to date to reduce their loneliness.

Moreover, we saw the first-ever Minister appointed with responsibility for loneliness and, in October 2018, the government's first ever Loneliness strategy was launched. Our campaign - marked by how we have brought more than 40 organisations together in the Loneliness Action Group which the Co-op co-chairs - has been at the very forefront of making loneliness a national issue to which the government has responded. The Loneliness Action Group is a key part of the government's plan to deliver its strategy. In addition, we've shared more than £6.6 million between 2,634 local projects that are responding to loneliness and promoting social inclusion in their communities through our Co-op Local Community Fund.

Campaigning - we're helping the victims of modern slavery rebuild their lives

For the past two years we've been raising awareness of modern slavery and campaigning for better support for survivors, and we've been recognised as one of the leading British businesses on the issue and the only one to date to receive the Thomson Reuters Stop Slavery Award.

Central to our campaign is our Bright Future programme which offers victims of modern slavery a paid work placement and the opportunity of a permanent job. Since its launch in 2017, our partnership with the charity City Hearts has grown into a multi-charity, multi-business partnership, coordinated through a 'National Matching System' - with the needs of slavery survivors at its heart.

Our focus in 2018 was on creating new work placements within the Co-op and with our new Bright Future Business Partners and encouraging other businesses and charities to join us. 42 organisations are now co-operating to support victims into work throughout the UK. We have seen 77 survivors referred with 61% of those who take up a placement finding a full-time permanent role at the end.

Without changes to the wider support available to victims from the government, thousands of individuals are at risk of homelessness, poverty and re-trafficking. During 2018 we continued to push for change through new partnerships, forums and targeted campaigns, including joining the 'Free for Good' coalition to support Lord McColl's 'Modern Slavery (Victim Support) Bill' to increase government support for victims.

Campaigning - we're creating safer communities for colleagues, members and customers

Creating safer communities, starting with our own Co-op colleagues in stores up and down the country, has become our latest campaign and another way in which we'll help to build stronger communities.

In 2018 we spent £4.5 million introducing new headsets for Food store colleagues which help to improve safety and security in our stores. Thanks to our members, we've invested £3.9 million in over 1,200 local causes addressing some of the underlying issues that are fuelling rising crime across the country.

We'll continue to invest in innovative measures to keep our colleagues safe at work and we're urging the government to do more to protect our colleagues through increased law enforcement and criminal justice responses.

In the autumn we supported David Hanson MP's amendments to the Offensive Weapons Bill. This would make attacks on shop workers selling age-restricted goods an aggravated offence, carrying heavier sentences. In November, we supported Usdaw's 'Respect for Shop Workers' week, hosting 48 MPs in our Co-op Food stores as part of our activity. These visits have helped MPs understand the realities our colleagues face and our determination to protect them. We've also received strong support from Co-op Party representatives.

However, we know that as well as doing all we can to protect our colleagues, we also need to use our assets to help tackle the root causes of the crime we see in our stores. We've already launched two pilots in London and Manchester to support grassroots groups who are working to help people make choices which lead them away from a life of violence and crime. We aim to develop best practice by working in partnership with local charities and other organisations to tackle the root causes of crime in our communities which we'll share with the government, MPs and other relevant groups sharing our concerns.

At the end of the year our Members' Council approved the activity to tackle crime and violence as an official Co-op campaign.

Our Safer Colleagues, Safer Communities report sets out why tackling crime against colleagues and the communities in which they live is so important to our Co-op, and shows what we will be doing in the coming months and years.

We want to give 40,000 children a better start in life

In March 2018 we announced a huge expansion of our support for the Co-op Academies Trust with a further £3.6 million over the next four years to kick start the next phase of growth. Since then six new academies, two secondary and four primary, have joined the trust bringing the number to 18. Our ambition is to have 40 academy schools in 2022. The Trust divides the academies, which are mainly in economically deprived areas, into three hubs: Greater Manchester, West Yorkshire, and Merseyside and North Staffordshire.

The Co-op academies inspected by Ofsted in the past two years have all received at least a "good" rating. This shows the success the Trust has had in turning around the predominantly weak schools it has taken on. Radically improving attendance has been a notable achievement in the schools. In December, the influential Sutton Trust's annual report on the performance of academy chains showed that for the fifth year in a row the Co-op Academy Trust achieved above-average outcomes in terms of progress for disadvantaged students.

Our vision is to inspire a new generation of high-achieving, aspirational, skilled and confident young people. We continue to provide governance expertise from our business, including 50 governors who are Co-op colleagues.

Looking ahead

Stronger Co-op

We know that Brexit is likely to cause us some uncertainty in 2019 and we continue to plan for the various scenarios as best we can. More information can be found in the Risk Management section in the 2018 Annual Report.

Our Food business will continue to grow with more new stores planned to open in 2019, showing our commitment to the communities we serve. We'll continue with our aim to become the number one convenience retailer in the UK by achieving our 'Closer' strategy: closer to our customers through more stores, closer to the products our customers need, and closer to the causes they care about.

As well as new stores, we'll increase our reach through our expanded wholesale network and through franchising. We're innovating our formats and exploring new ways to connect with customers and members.

We'll remain focused on the things that our members and customers care about, building on our commitment to sustainability through our Future of Food programme, reducing plastics and improving the recyclability of our packaging. We've already made sure all of our palm oil is from sustainable sources and this year we'll extend that commitment to soya. We'll continue to make sure none of our products are contributing to deforestation. We'll also maintain our commitment to reducing plastic and improving recyclability of our packaging. Having launched our Future of Food ambition in 2018 we plan to take a 'one co-op' view of the whole of our business and take a consistent and holistic approach to all aspects of sustainability.

In March 2019 the Groceries Code Adjudicator (GCA) found that we had contravened the Groceries Supply Code of Practice in relation to delisting and variation of supply agreements without reasonable notice. We've sent a full apology to our suppliers following the findings and had already taken decisive steps during 2018 to ensure we treat suppliers fairly, including providing refunds to those wrongly impacted by the introduction of charges. We welcomed that the GCA found that we had not been, "malicious," or acted in a way, "intended to result in gain." You can read more about our response to the GCA report in our 2018 Annual Report.

In the first few months of 2019 we're taking stock of the changes we've made to our Funeral business over the last few years. We're looking in more depth at the factors that are rapidly changing the marketplace with the aim of putting even greater focus on the needs of our clients and their communities.

We'll recover ground lost in 2018 in funerals and the sale of funeral plans and we'll continue to grow our probate services and inheritance planning by integrating them into our funeral provision. We're also looking for new ways to help clients cope with funeral costs through integrating our probate work with our funeral services and through alternative payment options including instalment plans.

We're committed to transparency and in 2019 all of our services and prices will be available to view and buy through a relaunched website. An all-channel approach to marketing and a stronger use of our Co-op brand will help us reach new clients and compete effectively against independent operators. We'll continue to focus on the needs of our Co-op members where we've seen significant growth.

We'll continue to work with the Treasury on regulation of pre-need plans and with the CMA following the launch of their investigation into the funerals and crematoria markets.

Our new insurance model means we can continue to provide our members and customers with an increasing set of high quality products, which will maintain their distinctive Co-op character and difference. In 2019 we've returned to providing a Life cover product, working with Royal London, which will cover serious illness as well as death. We've also just launched a new digital product for student renters which allows them to cover mobile phones, laptops and bikes. Our new Co-op Car Care product, covering servicing and MOTs, is now available across the UK.

Using our new Dimec digital platform we'll begin to roll-out our online repeat prescription business using part of our Lea Green depot as a distribution hub.

Stronger Communities

Connecting our communities

This year we want to move to the next phase of our support for local communities by using the data we're building through our Community Wellbeing Index. We'll be talking to more of our members to understand how we can best prioritise the three main issues that are emerging: physical and mental wellbeing, community spaces, and education and skills. We're also looking at digital ways to connect communities facing similar issues so that they can share experience, learning and solutions.

Campaigning

We'll continue to campaign on modern slavery and loneliness and look for more businesses to join our Bright Future programme. Our new Safer Colleagues, Safer Communities campaign will become our main focus in 2019. We'll build partnerships with colleagues, communities, Usdaw, the police and politicians to develop our thinking, share knowledge and strengthen our resources to tackle crime. Our aim is to start creating a best practice model that helps tackle some of the root causes of violence and crime that can then be taken up by others.

Co-op Academies Trust

In 2019 we aim to add a further nine schools to the Co-op Academies Trust. Connell College will be the first sixth form college to join the Trust and we'll be offering paid work experience to its students as well as guaranteed interviews for our apprenticeship schemes.

The new Director of the Trust, Chris Tomlinson, currently Regional Director (Secondary), for Harris Federation, will take up the post in the summer following the retirement of Frank Norris.

Telling our story

We're convinced that co-operative ways of doing business are relevant now more than ever, and have the ability to address many of the challenges we face in society. We want our business to be an inspiring example of a successful co-op that puts people and communities first.

In 2018 we made significant progress on our Stronger Co-op, Stronger Communities ambition. In 2019 we want to show to our members, customers and the UK public that co-operative thinking can make a significant different to their communities and the challenges we face as a nation.

So we're going to tell our story with greater clarity, conviction and emotion so more and more people understand how the Co-op brings people together and keeps them together.

Our financial performance

Our sales increased in 2018 by £1.2 billion (14%) to £10.2 billion. £1 billion of this increase came from the acquisition in May of Nisa's wholesaling operations and Food added £0.2 billion of sales from excellent like for like sales growth.

Profit before tax was £93 million, up from £73 million in 2017. It's easier to understand our profit performance by breaking profit before tax into two parts. The first and most important part is our underlying profit before tax which was £43m, in line with 2017. This measure represents the core trading performance of our businesses of £107 million less underlying interest of £64 million. Underlying profit is after we have charged £60 million (2017 £61 million) returned to our members through the 5% member reward. Our underlying profit performance is discussed in more detail within the 'How our businesses have performed' section below.

The second part of our profit before tax is made of non-recurring items that don't come from trade with customers, like profits or losses on the sale of properties we no longer need for trading, or valuation changes on our debt or investment properties. These are discussed in more detail below.

We announced on 18 January this year that we'll be selling our insurance underwriting business, CIS General Insurance Limited ('CISGIL'), to Markerstudy and putting in place a long-term arrangement to distribute insurance products under the Co-op brand. The sales and profits of CISGIL are therefore not included within our profit before tax number and instead they are moved to the bottom of the income statement into the 'loss on discontinued operations' line. The loss of £230 million also includes the write-down of the net assets of the insurance business together with some costs relating to the sale. More details of the loss on discontinued operations are shown below.

How our businesses have performed

While overall underlying profit before tax was flat year on year, our Food business had an excellent year with like for like sales growth of 4.4% driving an increase of £22 million (12%) in underlying segment operating profits. This is particularly pleasing as food retail remains one of the most competitive environments in the UK economy.

Our wholesale business started this year with our acquisition of Nisa wholesaling and the additional deal we've made to supply Costcutter Supermarkets Group. The underlying loss of £11 million was in line with our expectations and includes initial set-up and acquisition costs as we deliver better products and pricing into the business.

Our funeral and life planning business had a difficult year in a market that is experiencing unprecedented rapid change. We saw a sharp drop in underlying segment operating profit, down £17 million to £25 million reflecting a reduction in the number of funerals we carried out (down 3,000, or 3%, on 2017 adjusted to a 52 week basis as 2017 was a 53 week accounting year). Sales of funeral plans were also down (12,000 fewer than in 2017 on a 52 week basis).

In contrast, other parts of the business saw significant growth, in particular probate and will writing. Also 2018 saw the successful integration of Simplify Probate which we acquired in the spring.

The way we report our funeral and life planning business results has changed from last year following the adoption of a new accounting standard, 'IFRS 15 Revenue from Contracts with Customers'. We no longer record any profit when we sell a funeral plan. Instead we only record the profit when the funeral takes place. This has reduced funeral and life planning sales and profits by around £20 million each year as currently the number of plans sold is higher than the number of plans redeemed. We have adjusted the 2017 results so that they are prepared on the same basis as 2018. More information on this change is provided in the restatements note in the general accounting policies section.

During 2018 we launched our 'Fuel for Growth' initiative looking at ways to drive efficiencies through changing the way our organisation is set up and how and where we spend our money. We aim to achieve annual savings of over £100 million over the programme. In 2018 this delivered around £30m of savings allowing us to invest in the business as well as reducing our costs across all business areas. Costs of supporting functions reduced by £7m in the year mainly reflecting Fuel for Growth savings.

One-off items, non-trading items and joint ventures

The table shows how we get from reported profit before tax to underlying profit before tax, adding back losses and subtracting gains.

One-off items of £9 million mainly relate to two pension items that net off to a gain of £11 million overall. A £24 million gain arising from changes in expected pension benefits is partially offset by a £13m charge for the cost of aligning guaranteed minimum pensions following a recent High Court judgement affecting a large number of pension schemes.

The £38 million gain in the value of our investment properties included £25m on three sites, two where planning permission was received and one that was sold for a development opportunity. The remaining increases arose from the year end valuation exercise.

Property and business disposals are shown below:

Property and business disposals and closures include costs of £8 million relating to the closure in 2019 of Co-op Electrical and a provision increase of £26 million for rent and other holding costs arising from leases we are committed to on buildings that we no longer use.

Last year's results also included a £12 million profit from our investment in NOMA, a property joint venture to redevelop a number of ex Co-op buildings and sites in central Manchester in which we had a 50% share. We sold our stake in NOMA at the end of 2017.

Finance income and non-cash finance costs

The table below shows what we include in finance income and non-cash finance costs, excluding the underlying finance interest of £64m in both 2018 and 2017.

The main difference in our financing costs from 2017 is the fair value movement on our quoted debt. The fair value movement depends on the market value of some of our debt and so can be income or a cost depending on what is happening in the financial markets. In 2018 this was income of £37 million whereas in 2017 it was a cost of £11 million.

During the first half of 2018, we adopted a new accounting standard, IFRS 9 Financial Instruments. The main impact of this relates to how we value our quoted Eurobond debt. Previously this was revalued every month according to its value in the financial markets. With the adoption of IFRS 9 we now record some of this debt (the portion that is not matched by interest rate swaps) at 'amortised cost'. Amortised cost means we don't revalue the debt every month. We aren't required to restate last year's accounts for the IFRS 9 change and so they aren't directly comparable. You can find out more about this change on page 67.

Other non-underlying interest mainly relates to discount unwind in the year. Discount unwind is explained in the jargon buster at the back of this report.

Loss on discontinued operations

We announced the sale of our insurance underwriting business, CIS General Insurance Limited ('CISGIL'), to Markerstudy in January this year. In November 2018 our Board gave us the go ahead to explore the sale in detail with Markerstudy and at that point CISGIL became classified as a 'discontinued operation' in the accounts. This means that we no longer treat CISGIL as an ongoing business operation of Co-op and its results are not included within profit before tax but instead shown at the bottom of our income statement within the 'loss on discontinued operations' line.

At the point CISGIL became classified as discontinued, we are required to write down the value of its net assets to the amount we expect to receive when we sell it. We agreed a price of £185 million for the sale of CISGIL (£150m payable on sale and £35m deferred). As part of the sale we put in place a long term distribution arrangement for home and motor products marketed under the Co-op brand. Once the arrangement completes Markerstudy will underwrite Co-op insurance products, as well as looking after the sales and service and claims handling. These products will be marketed and distributed by Co-op.

In accounting for the sale we treat the £185 million proceeds as being £84 million for the distribution arrangement and £101 million for the net assets of CISGIL. The £84 million of value from the distribution arrangement can only be recognised once the sale completes and therefore the impairment of £207 million shown in the table below does not reflect £84m of value in the deal for Co-op.

The £29m trading loss in the year was largely caused by the impact of the significant weather event the 'Beast from the East' in early 2018 that increased the cost of home and motor claims.

The analysis of the amounts included within loss on discontinued operations is shown below.

The proposed sale will generate £125m cash for Co-op as shown below:

Financing and cashflow

Net debt was £792 million at year end up from £775 million last year (details of what is included in net debt are provided in note 9).

The £775 million of net debt in 2017 included £74 million of CISGIL debt that in 2018 has been transferred into liabilities held for sale. The like for like increase in debt is therefore £91 million and this reflects our investment in the business, particularly arising from the Nisa acquisition on 8 May 2018. We acquired £65 million of Nisa debt and paid £26 million of consideration in 2018 with a further £108 million (pre discounting) payable over 4 years as explained in note 14. As we realise all of the buying and working capital benefits the impact of the acquisition on debt will be minimal.

We invested £414 million of capital expenditure in 2018 principally on Food refits (£93 million) and new stores and extensions (£92 million). We also invested £43 million in our funerals business and £67 million in technology mainly upgrading IT systems to improve supply chain and service to stores in the Food business. This capital spend was partly funded by £81m of cash from disposals, mainly property sales.

Underlying interest payable was flat year on year at £64 million.

The Trading Group is comfortably within the ratios of debt and interest agreed with our banks and our funding position is strong. A £450m tranche of our Eurobond expires in July 2020, our intention was to partially re-finance this bond but the on-going uncertainties around Brexit has meant we have not been able to access the capital markets to issue a bond at a pricing level we would be comfortable with. As an alternative approach we have reached an agreement with our banks to provide a £180m liquidity facility to provide us with additional headroom. We will continue to monitor the markets and will look to issue a bond depending on market conditions.

Tax

We won't be paying corporation tax in respect of the year because we've brought forward capital allowances and tax losses in excess of the taxable profit. These allowances and losses are explained in more detail in notes 5 and in the 2018 Annual Report. In 2018 we paid £196 million (2017:£201 million) to the government in respect of VAT, business rates, Stamp Duty Land Taxes and Employers' National Insurance.

We retained the Fair Tax Mark accreditation in 2018 showing that we put our purpose, Co-operative Values and Principles into action in the way we do business. Our tax policy can be found here: www.co-operative.coop/ethics/tax-policy/.

Pensions 

The surplus on our pension schemes on an accounting basis increased by £300 million from £1.5 billion to £1.8 billion. The main reason for the increase is that the interest rate used to discount and value the pension scheme liabilities has increased from 2.6% to 3% which reduces the valuation of the liabilities. The interest rate we use is advised by our actuaries and is linked to the same market data every year so is consistently applied.

It's important to remember that the way we value our pension scheme for our accounts is determined by accounting rules and is different to the way the pension trustees have to value the scheme (the 'funding valuation'). The latest funding valuation of the PACE scheme, which is by far the largest scheme, was carried out at 5 April 2016. It showed a funding level of 103% and a surplus of £251 million. We don't pay any contributions into PACE because it is in surplus but we have some smaller schemes in deficit into which we are currently paying £50 million per annum.

During 2018 we completed the legal 'sectionalisation' (effectively separation) of the pension assets and liabilities of PACE between those relating to the Co-operative Bank and those relating to the Group. This was a major achievement being one of, if not the, largest pension scheme sectionalisations ever completed.

Balance sheet

Our total equity increased by £54 million to £3.1 billion with the main changes being the £300 million increase in the pension valuation partly offset by the £207 million write down of the net assets of the insurance business discussed in the discontinued items note earlier.

The assets and liabilities of the general insurance business were reclassified as held for sale on our balance sheet as a result of the decision to sell the business. This means that the assets and liabilities for 2018 are no longer split out on the balance sheet but are included within two lines 'assets held for sale' of £1.1 billion and 'liabilities held for sale' of £1 billion. The 2017 balance sheet comparatives for CISGIL are not restated so that's why there is a large year on year reduction in other investments and insurance contracts

Contract liabilities have increased by almost £200 million to £1.48 billion. These relate to funeral plan sales and represent the value of the future funeral we will perform for the plan holder. The increase represents the value of new plans sold in the year less plans redeemed. The increase in liabilities is matched by corresponding increases in funeral plan investments, shown within 'Other investments' in the balance sheet, and increases in instalment debtors (included within 'Trade and other receivables') where customers pay by instalment rather than lump sum. Note 13 in the 2018 Annual Report shows that we have a healthy surplus of funeral plan investments above the cost of delivering those funerals for the plan holder.

Intangible assets increased largely as a result of the acquisition of Nisa which added goodwill of £75 million and other intangibles of £47 million. More details of the acquisition are shown in note 14 to the accounts.

 Outlook

We have made great progress in 2018 but there's no doubt 2019 will be challenging with Brexit uncertainty, intense competition in Food retail and a rapidly changing funerals market. However we are well-placed to meet these challenges. Our Food business continues to deliver strong sales and we have exciting new businesses opportunities we believe can grow rapidly with limited capital investment.

Notes to the financial statements