MRW.L Regulatory News (MRW)

News Release

Release date: 13 September 2018

INTERIM RESULTS FOR THE HALF YEAR TO 5 AUGUST 2018

Accelerating growth

Financial summary 

Strategic and operating highlights

Financial targets update

Andrew Higginson, Chairman, said:

"With each passing quarter, the Morrisons team is building a better and better business. New customers try Morrisons and tell us they really enjoy shopping with us: our friendly colleagues, the quality of our fresh food and our low prices. We look forward to more and more customers trying Morrisons."

David Potts, Chief Executive, said:

"Strong growth, including our best quarterly like-for-like sales for nearly a decade, together with another special dividend for our shareholders, shows how new Morrisons can keep improving for all stakeholders.

"Morrisons continues to become broader, stronger and a more popular and accessible brand, and I am confident that our exceptional team of food makers and shopkeepers can keep driving the turnaround at pace."

Outlook

We are confident that Morrisons has many meaningful and sustainable sales and profit growth opportunities ahead. We also expect free cash flow generation to remain strong and sustainable. Reflecting this progress and our expectations, we are today announcing a further special dividend of 2.00p per share. As we stated at the 2017/18 preliminary results, we will retain a strong and flexible balance sheet, and we will be guided each year by the principles of our capital allocation framework in assessing the uses of free cash flow.

During Q2, we progressed our wholesale supply partnership with McColl's more quickly than initially expected. As a result, we now expect to achieve our target of £700m of total annualised wholesale supply sales ahead of our initial end-2018 guidance. Our plan for £1bn of annualised wholesale supply sales in due course remains unchanged.

This speeding up of wholesale supply to McColl's, plus investments in store-pick and the new Erith customer fulfilment centre (CFC) for Morrisons.com, means we incurred some extra start-up costs in the first half. We expect these costs to reduce during the second half and beyond. In addition, during the second half we will annualise last year's relaunch of our Home & Leisure range, and expect improved performance year on year.

Net incremental profit from wholesale, services, interest and online was £4m during the period, bringing the cumulative total so far to £46m. We remain on track for our £75m-£125m medium-term target.

Net debt ended the first half lower than end-2017/18. We expect it to remain at a low level, consistent with our capital discipline and the principles of our capital allocation framework.

After a successful £233m bond tender offer during the first half, we now expect 2018/19 underlying net finance costs to be £60m-£65m.

Figure 1 - H1 2018/19 profit reconciliation

* Adjusted in underlying profit before tax, but not underlying operating profit

Figure 2 - LFL sales performance (ex-VAT)

Reported in accordance with IFRS 15

1 Includes supermarkets and Morrisons.com sales. Morrisons.com sales through Dordon CFC contributed 0.2% in Q2 2018/19

2 Wholesale comprises sales to third parties, including those via our manufacturing business

Figure 3 - Summary of retail operational key performance indicators3

3 Excludes Morrisons.com sales through Dordon CFC

This announcement includes inside information.

Alternative Performance Measures

Guidelines on Alternative Performance Measures issued by the European Securities and Markets Authority came into effect for all communications released on or after 3 July 2016 for issuers of securities on a regulated market. The key alternative performance measures identified by the Group and contained in this announcement are detailed below.

The Directors measure the performance of the Group based on the following financial measures which are not recognised under EU-adopted IFRS, and consider these to be important measures in evaluating the Group's results and financial position.

Definitions and additional requirements:

A full glossary of terms and alternative measures is provided in this announcement. The Directors believe the key metrics are the ones outlined below because: they are used for internal reporting of the performance of the Group; they provide key information on the underlying trends and performance; and they are key measures for director and management remuneration.

(1) Like-for-like (LFL) sales: 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.

A reconciliation between LFL sales and total revenue is provided in the glossary at the end of this announcement.

(2) Underlying profit before tax (UPBT), underlying operating profit, and underlying earnings per share (EPS): excludes impairment and provision for onerous contracts, profit/loss on disposal and exit of properties and sale of businesses and investments, the impact of pension volatility, and other exceptional items which are significant in size and/or nature.

A reconciliation between reported and underlying profit before tax and operating profit is shown in Figure 1. See Note 8 for a reconciliation between basic and underlying EPS.

After a review of emerging practice around Alternative Performance Measures, starting from the full-year 2018/19 results 'Profit Before Exceptional Items' will replace 'Underlying Profit' as our key measure of adjusted profit. In making this change, we will also move to a three-column presentation approach, with exceptional items in a separate column on the face of the income statement.

(3) Free cash flow: movement in net debt before the payment of dividends. Free cash flow for the period is £242m (2017/18: £352m), being the movement in net debt of £44m (2017/18: £262m) adjusted for dividends paid of £198m (2017/18: £90m).

Enquiries:

Wm Morrison Supermarkets PLC

Media Relations

Management will host an analyst presentation this morning at 09:30 at the London Stock Exchange.

*** Pre-registration is required to attend the meeting. ***

If you are not already registered and would like to attend, please email Dawn Kershaw by 09:00 this morning (dawn.kershaw@morrisonsplc.co.uk)

A webcast of this meeting is available at https://www.morrisons-corporate.com/investor-centre/ 

Dial-in details:

Replay facility available for 7 days:

- ENDS -

Certain statements in this financial report are forward looking. Where the financial report includes forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including both economic and business risk factors that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standards, the Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Financial overview

Our sales performance was strong and accelerated during the period. Total revenue was £8.8bn, up 4.5% year on year. This included a contribution of 0.3% from net new space, which was slightly higher than guided as our two new stores, in Abergavenny and St Ives, Cambridgeshire, got off to a better-than-expected start. Total revenue excluding fuel was £6.9bn, up 5.3%.

Group LFL excluding fuel was up 4.9%, comprising contributions from retail of 2.1% (supermarkets 1.9%, online through Dordon CFC 0.2%) and wholesale of 2.8%. Wholesale sales strengthened during the period, largely due to an acceleration in the roll-out programme to supply McColl's. Inflation was broadly flat, with strong volume growth throughout.

Fuel sales were up 1.6% to £1.9bn, with LFL of 1.4%.

Q2 Group LFL was 6.3%, the best since Q2 2009/10, with retail contributing 2.5% and wholesale 3.8%. As well as the accelerating McColl's roll-out programme lifting wholesale sales, retail sales were strong and in part assisted by favourable weather and the football World Cup.

Underlying operating profit(2) was up 4.2% to £223m (2017/18: £214m), with margin flat at 2.5%. Underlying EBITDA margin was 5.1%, up 13 bps. Operational leverage from the strong sales growth flowed through. We again invested in becoming more competitive for customers and, in addition this period, in both the start-up of our new store-pick capability and the new Erith CFC for Morrisons.com, and the accelerated roll-out of wholesale supply to McColl's. We expect these online and McColl's start-up costs to reduce from H2 2018/19 and beyond.

Underlying net finance costs were £31m (2017/18: £38m).

Reported profit before tax (PBT) was down 29% to £142m (2017/18: £200m).

Underlying profit before tax was up 9.0% to £193m (2017/18: £177m).

Adjustments recognised outside UPBT were £51m, as listed in Figure 1, comprising £33m previously announced one-off costs in relation to successful tender offers completed in the first half, £8m net pension income, and a net £26m of other exceptional items. Other exceptional items included £28m in relation to increased stock provisioning. During the period, we continued to automate our ordering systems. This has led to operational changes and additional information regarding stock levels, and a change in the methodology for estimating stock provisions. Other exceptional items also include £2m legal costs, and £4m release of a restructuring provision.

The net incremental UPBT from wholesale, services, interest and online was £4m during the period, bringing the total cumulative profit so far to £46m. We remain confident of our medium-term target of £75m-£125m incremental profit from these four areas.

Underlying basic EPS was up 8.5% to 6.28p (2017/18: 5.79p).

Cash capital expenditure was £185m (2017/18: £191m).

Free cash flow(3) was £242m (2017/18: £352m), which included £30m cash costs associated with repayment of borrowings (2017/18: nil), and £89m lower disposal proceeds year on year (2018/19: £4m, 2017/18: £93m) due to the timing of property transactions.

Group net debt fell to £929m, down £44m since the end of 2017/18.

The proposed interim ordinary dividend is up 11.4% to 1.85p. In addition, we are again proposing a special dividend of 2.00p per share, which will take the total interim dividend up 132% to 3.85p (2017/18: 1.66p).

Two new stores were opened during the period, adding 54,000 square feet.

Return on capital employed (ROCE) was 8.0%, up from 7.8% for H1 2017/18.

Strategy update

Our turnaround strategy to Fix, Rebuild and Grow Morrisons, driven by our six priorities, has now been ongoing for more than three years. The three phases are well established and concurrent and, as new Morrisons continues to become broader and stronger, we are increasingly confident of driving multiple growth opportunities.

UK food retail continues to be highly competitive and dynamic, and there is some continuing consumer, economic and political uncertainty, particularly as Brexit approaches.

While this is important context for us, we believe our success remains firmly in our hands. By continuing to listen to colleagues and customers, we are improving the shopping trip and becoming more competitive. Our brand is more accessible and more popular, and we are broadening the markets we operate in, as evidenced by the wholesale supply roll-out to 1,300 McColl's stores during the first half.

We have made significant progress for all our stakeholders. Sales, profit and ROCE have grown consistently, and we have generated a total shareholder return of 57% since we announced our strategy three years ago. Debt is down from a peak of £2.8bn to £929m and cumulative free cash flow is £2.9bn since the start of our improvement programmes.

We have invested in our front-line colleagues, with hourly pay increasing 27%, from £6.83 to £8.70, over the last three years, and the average colleague bonus more than doubling since 2015/16. We are listening and responding, and our colleague engagement remains high.

For suppliers, we have fundamentally changed the way we buy, stock and sell, building stronger, more mutually beneficial relationships.

Most importantly, for customers, our Fresh Look programme has extended to over half of our stores, we have made significant improvements in range, the Morrisons price list, and customer service, and have also developed our offers in online, wholesale, local and in-store services. Customers have responded, with LFL now positive for eleven consecutive quarters, first-half LFL transactions up almost 10% over the last three years, and customer satisfaction improving 16 percentage points since the start of 2015/16.

However, we are still only part-way through our turnaround strategy. Capability - of people, technology and data - continues to improve. We are accessing substantial cost-saving and productivity opportunities, and there is still much to do to keep improving the customer shopping trip. We made good progress with all of these during the first half, once again growing sales, profit and ROCE.

Importantly, Morrisons growth opportunity remains meaningful and sustainable, and is built on strong free cash flow and balance sheet foundations, in accordance with our capital discipline and the principles of our capital allocation framework. Reflecting these principles and our commitment to review the uses of free cash flow each year, we are today announcing a further special dividend of 2.00p per share.

Six priorities update

1. To be more competitive

Morrisons operates in a competitive and dynamic market. During the first half we reacted well to industry trends and created our own opportunities, once again investing in the Morrisons price list and improving our relative competitiveness. Inflation was broadly flat throughout the period and volume growth was strong in the supermarkets, online, and for the fast-growing wholesale business. Strong total sales and volume growth remain an ongoing opportunity for Morrisons.

We have started the journey towards more fully integrating our manufacturing and retail operations, through investing in improving quality and price for customers, removing third party middle-men and agents, and helping our food makers and shopkeepers drive sales. New first-half initiatives included: producing pitta bread and crumpets at our Rathbones bakery; increased direct sourcing in areas such as nuts, bananas and fish; and showcasing our market street counters and food experts through a wider programme of in-store tastings and food maker demonstrations.

We also made further good progress with new product development. For example, we launched our new 'Wonky' brand of low-priced, good quality fruit and vegetables, which minimises waste and more fully utilises the whole crop. We also launched a new look 'Savers' range, our lowest-priced own-brand, and extended 'Nutmeg' Womenswear into almost 250 stores. In addition, our new Home & Leisure range, re-launched towards the end of 2017, is now showing good year-on-year growth and, we expect, will help improve Group performance during the second half.

This strong product pipeline was recognised by Morrisons being named Innovative Own Label Retailer of the Year at the Grocer Food & Drink Own Label Awards, with several of our own-brand products winning individual awards. In addition, during the first half we won awards at the World Steak Challenge, including a gold medal for our 'Best' shorthorn rib-eye steak. We were also named Sandwich Multiple Retailer of the Year for the second year running and Supreme Retailer of the Year at The International Cheese Awards. Our £10 Sauvignon Blanc was voted best supermarket wine at the 2018 Decanter World Wine Awards.

2. To serve customers better

As we more fully integrate our manufacturing and retail operations, we are finding more ways to serve customers better. For example, during the first half we introduced local loose eggs in 200 stores, improving customer choice and emphasising Morrisons provenance. We also removed film packaging on several vegetables such as cucumbers, turnips and swedes, and began introducing recyclable paper bags in our Fruit & Veg departments, thereby reducing plastic waste which is very important to both us and our customers.

In online too, Morrisons is serving customers better. Morrisons.com is adding substantial new capacity, and has now extended its reach to over 75% of British households. Through a combination of more store-pick capability and transitioning to the newly opened Ocado CFC in Erith, we have significantly expanded our online delivery catchment area to include South London, Surrey, and Kent, plus the south coast and Devon. We have also taken Morrisons.com to Scotland for the first time, now serving our customers online in Edinburgh and Glasgow. As we increase our Morrisons.com capability and scale, we expect our CFC/store-pick hybrid model to enable us to plan better for more profitable online growth.

After the end of the first half, we launched 'Eat Fresh', our new online nationwide recipe box service. Customers can order a wide variety of fresh meals to be delivered direct to home, with each 'Eat Fresh' box providing the fresh ingredients for up to four great value, nutritious, easy-to-cook recipes.

All of our work to broaden the offer and improve the customer shopping trip is making Morrisons more accessible and popular with customers. LFL transactions have now been positive for eleven consecutive quarters and are up almost 10% over the last three years. Our overall customer satisfaction score - measuring service, quality, range, availability and price - continued to improve, up another 4% during the first half, and now up 16 percentage points since the start of 2015/16.

3. Find local solutions

We are becoming renowned for 'local', and customers increasingly regard it as a distinguishing attribute of Morrisons.

During the first half we continued to expand our local offer: around 350 stores now sell seasonal local Fruit & Veg; our stores in the South West are now supplied direct with almost 30 varieties of locally caught fish from the ports in Newquay, Plymouth and Brixham; and all block cheese in our Welsh stores is produced by dairies in Wales.

In addition, we hosted a further six regional food maker roadshows around Britain, as we continue to look for the best local products from growers, farmers, fishermen and other food makers. Recent successes include Yorkshire Squeaky Cheese, first seen by our team at a roadshow in June, and in 40 local stores in July.

Sales of local suppliers' products were up a further 30% during the first half.

We are using our More Card data to refine each Fresh Look refit, defend against the impact of competitors' new store openings, and assist with local marketing. Work also continues around tailoring our offer to local events, demographics, and seasons.

In addition, we are becoming more integrated into our local communities: each store has a dedicated Community Champion whose role includes hosting local events and community groups, helping local charities, and volunteering in the local community.

4. Develop popular and useful services

Pick-up services are very popular with Morrisons customers. Amazon lockers have been rolled out across almost the entire estate, and Doddle too is now expanding very quickly. Doddle is now in 240 Morrisons stores, up by 80 during the first half, and with more roll-out plans ahead.

Timpson at Morrisons continues to expand, and is now in over 200 stores, with many more still to come.

We have also been working with various partners to develop new foodservice units on our surplus land. The first of these, a drive-thru McDonald's, opened in August. We have plans for further sites and further partners.

We now have 34 Morrisons Daily stores on our own forecourts, offering customers a full convenience range.

In addition, we continue to trial various opportunities for popular and useful services in areas such as car care, tyre change, and travel exchange.

5. To simplify and speed up the organisation

Simplifying and speeding up Morrisons is leading to improved productivity. Various initiatives are now well under way across many different work streams, and we expect these to continue to yield significant cost savings and productivity improvements for many years to come.

For example, in-store automated ordering is enabling us to introduce a new end-to-end forecasting system which will more accurately manage stock throughout our supply chain, including improving the efficiency of our 18 manufacturing sites. We are also trialling a new checkout configuration, with a greater component of self service, different payment options, and more efficient dual checkouts.

Within manufacturing, we are introducing improvements to the way we manage the flow of fresh commodities, which improves delivery accuracy and product quality. The system is mutually beneficial to Morrisons and our suppliers, and also reduces food waste.

During the first half we completed the process of simplifying our in-store structures. With improved systems and capability we require fewer managers, and have removed 1,500 managerial roles. The process to create around 1,700 front-line customer service roles is ongoing.

6. To make core supermarkets strong again

Around 30 Fresh Look refits were completed in the first half, with a similar number expected in time for Christmas. Over half of our stores have now been through the Fresh Look programme.

As we continue to apply the learnings from Fresh Look across the estate, an additional 120 new Nutmeg womenswear departments were introduced taking the total to almost 250, the final 80 Fruit & Veg departments were updated, and 45 new- look Home & Leisure fixtures were introduced. In addition, an extra 95 Garden Centres were introduced for the summer season in stores where space in foyers, or outside under canopies or in trolley storage areas could be temporarily utilised.

Two new stores opened during the first half, in Abergavenny and St Ives, Cambridgeshire. Both have got off to a strong start and include our latest ideas, which are providing learnings that we can apply across our estate in future. These innovations include a café featuring a new menu and food order point, and a larger petrol station convenience store with a much broader range. Our third new store, in Birmingham, opened today.

Wholesale supply

Wholesale supply sales improved during the first half, with Q2 wholesale LFL of 3.8%, up from 1.8% in Q1. This was mostly due to an acceleration in the programme to supply McColl's. After the initial programme of around 25 shops a week from January, the roll-out was accelerated: we now supply around 1,300 McColl's stores and expect to achieve our target of £700m of annualised wholesale supply sales ahead of our initial end-2018 guidance. We still expect to supply McColl's remaining c.300 convenience stores in due course, and our target of £1bn annualised wholesale supply sales is unchanged. The new Safeway range of up to 400 fresh, frozen and ambient products is now available in all the 1,300 McColl's stores.

So far, nine Sandpiper CI stores in the Channel Islands have converted to Morrisons Daily, selling both Morrisons own brand and national brands. During the remainder of 2018 and 2019, many of the remaining Sandpiper CI stores will convert to Morrisons Daily. We have also started to supply Safeway products to some non-converted Sandpiper CI stores.

Rontec now owns and operates more than 40 Morrisons Daily stores on its forecourts, with five added in the first half and plans for more during the remainder of the year.

In addition, during the first half we continued to increase the number of branded and Morrisons own-brand items that we supply to Amazon's customers across its various channels. For 'Morrisons at Amazon', the same-day store-pick delivery service, there are now over 10,000 items available to be ordered and delivered to customers within one hour.

Since the end of the first half, we have agreed new deals with two new wholesale supply partners: MPK Garages and Big C in Thailand. MPK operates around 30 forecourt fuel/store sites, primarily in the Midlands, most of which will be converted to Morrisons Daily stores over the coming months. The new owner of MPK, Stratford Retail Group Ltd, has expansion plans for many new forecourt sites, which will offer further opportunities for Morrisons Daily. For Big C, in the coming months we will begin exporting a range of around 100 Morrisons own-brand items to Big C stores in Thailand to form part of the company's international offer.

Financial strategy and update

Capital allocation framework

The capital allocation framework is unchanged. Our first priority is to invest in the stores and infrastructure and reduce costs. Second, we will seek to maintain debt ratios that support our target of an investment-grade credit rating. Third, we will invest in profitable growth opportunities. Fourth, we will pay dividends in line with our stated policy, and then any surplus capital will be returned to shareholders.

Shareholder returns

Our policy is for the ordinary annual dividend to be sustainable and covered around two times by underlying earnings per share. The 2018/19 interim ordinary dividend will be 1.85p, up 11.4%.

We remain confident that Morrisons has many meaningful and sustainable sales and profit growth opportunities ahead. We also expect free cash flow generation to remain strong and sustainable. Reflecting this progress and our expectations, the Board is proposing a further special dividend of 2.00p per share in addition to the interim ordinary dividend. This takes the total interim dividend to 3.85p, an increase of 132% on last year. As we stated at the 2017/18 preliminary results, we will retain a strong and flexible balance sheet, and we will be guided each year by the principles of our capital allocation framework in assessing the uses of free cash flow.

Both the ordinary interim and special interim dividends of 1.85p and 2.00p per share respectively will be payable on 5 November 2018 to shareholders on the share register at the close of business on 28 September 2018.

Cash flow and working capital

Free cash flow was £242m, bringing the total to £2.9bn since the start of 2014/15.

Operating working capital generation was £40m and is now £989m since the start of the programme. This was another strong performance, despite the previously guided adverse impact of first-half payroll timing, due to last year's 53rd week, which more than offset some trading benefit from fuel.

Disposal proceeds were £4m, bringing the total to £1,005m since we started the programme. We still expect to achieve our £1.1bn target.

Capital expenditure/depreciation and amortisation

Cash capital expenditure was £185m (2017/18: £191m). As previously guided, we expect c.£500m for the full year. In addition, we incurred £8m of onerous payments, and still expect c.£60m for the full year.

We still expect 2018/19 depreciation/amortisation to be £440m-£450m.

Debt and interest

Group net debt again fell, to £929m, down a further £44m since the end of 2017/18.

We expect net debt to remain low. As well as the reversal of the impact of the first- half payroll payment timing, we are planning for continued robust trading and expect some further opportunities for working capital improvements beyond our £1bn target. The cash outflow from the total interim dividend is expected to be £91m in the second half.

Underlying net finance costs were £31m (2017/18: £38m), down compared to last year as expected. During the first half we completed tender offers for £233m across three sterling bonds. One-off costs relating to these debt repayments were £33m as previously announced, and have been recognised outside of UPBT. As a result of the tender offer, we now expect 2018/19 underlying net finance costs to be £60m-£65m.

During the period we refinanced and extended the term of our £1.35bn revolving credit facility. The new facility was secured on attractive terms and runs until 2023, with options to extend.

Pension

The net pension surplus increased from £594m at the end of 2017/18, to £834m at the end of the first half of 2018/19. Net pension income was £8m, reported outside UPBT.

During the first half, we announced the proposed closure of the Retirement Saver Plan pension scheme to new members and future accrual. A further update will be provided after the outcome of the consultation period has been agreed.

New space

Two new stores opened during the first half, in Abergavenny and St Ives, Cambridgeshire, adding 54,000 square feet. A third new store opened in Birmingham today. Both stores opened in the first half have got off to a better-than-expected start. We are increasing 2018/19 net new space sales guidance from 0.2% to 0.3%.

Future reporting

After a review of emerging practice around Alternative Performance Measures, starting from the full-year 2018/19 results 'Profit Before Exceptional Items' will replace 'Underlying Profit' as our key measure of adjusted profit. In making this change, we will also move to a three-column presentation approach, with exceptional items in a separate column on the face of the income statement.

The new IFRS 16 lease standard comes into effect from 2019/20, and will represent a significant change in the accounting for and reporting of leases. We expect to adopt the fully retrospective approach on transition, and are in the process of quantifying the financial impact.

People update

We are committed to building the capability of our colleagues. Our focus on early careers has been a particular success, supporting a further 60 degree apprentices this year into full-time employment, alongside fully funding a degree in Business Administration and Management. We are now one of the largest retail sponsors of degree apprentices, having supported 150 young entrants over the last three years. At the 2018 School Leavers Awards we were voted top employer in retail, third best employer overall, and topped a list of all companies in the UK to win the award for best training programme.

Around 300 colleagues are progressing well through our craft apprenticeships scheme, and will be joined by around 270 more this year, further improving the butcher, baker and fishmonger food maker skills within our stores and manufacturing businesses. In addition, as part of the process to better integrate retail and manufacturing, we have combined the leadership of the two teams, aiming to minimise wasted effort and operate a more end-to-end Fresh business.

'My Morri', our digital communication platform for colleagues, has been expanded to allow individuals more personalised information and administration. Through 'My Morri', we have also successfully trialled a Produce category community which connects front-line colleagues to the centre and to each other: colleagues can share information, access updated briefs and bulletins, post and see pictures of best practice, give and seek feedback, and ask for advice about their category. We are rolling out this concept to all of our food and non-food categories.

The national 'Your Say' forum has continued to be very well received by colleagues, and now includes a non-executive board director, as well as executive board members, to ensure listening is independent and at the highest level.

Corporate responsibility and community

Our corporate responsibility programme ensures we operate in a way that is right for our customers, colleagues, suppliers and shareholders while making a positive contribution to society and taking good care of the environment.

Changing our use of plastic

We are committed to reducing unnecessary packaging, using recyclable or recycled material wherever possible, and working with suppliers on packaging innovation to ensure our packaging is only there to protect and preserve the product it contains.

We have signed up to the UK Plastics PACT, a collaborative commitment which joins up all stakeholders in the plastics system - businesses, government, local authorities, environmental organisations, and the wider public - to ensure that by 2025, all own-brand plastic packaging will be recyclable, reusable or compostable.

We have a variety of initiatives in place to reduce plastic use: we have removed single-use carrier bags from sale across all stores and replaced plastic bags for loose fruit and vegetables with recyclable paper bags; customers can now use their own reusable containers at our meat and fish counters; and we are trialling reverse-vending machines to incentivise customers to return plastic bottles.

Supporting the Global Ghost Gear Initiative

In April 2018, we became supporting members of the Global Ghost Gear Initiative to help address the issue of lost fishing gear. We will be working to introduce best practice in our supply chains through improvements in reporting, traceability and recovery of lost gear, and encouraging the use of gear with inbuilt escape mechanisms to prevent animal entanglement if lost.

Unsold food programme

Through our unsold food programme, our stores partner with local community groups to donate any unsold food that is safe to eat. Since the programme began in 2016, we have donated over four million unsold food products, involving 80% of our stores working with over 420 community groups.

In our manufacturing sites and distribution centres, we work with Company Shop and FareShare to redistribute edible surplus food that can't be used through our own operations. Working with these organisations, we distribute tonnes of surplus food that would have otherwise been wasted.

CLIC Sargent and Charities

Our national charity partnership with CLIC Sargent launched in February 2017, with the aim of providing support for young cancer patients and their families. So far our colleagues, customers and suppliers have raised over £5m. We also support other national charity appeals: we raised over £600,000 for the Marie Curie Daffodil Appeal over one weekend in March; and introduced a 'veterans pie' to celebrate Armed Forces Day in June and raise funds for Walking With The Wounded.

Our stores also play an active role in the community, with an emphasis on supporting local good causes. So far this year stores have raised over £2.5m for local charities and groups and donated over £500,000 worth of Morrisons products.

Foundation

The Morrisons Foundation continues to provide vital funding for local charities. So far this year, over £3m has been donated in grants and colleague match funding. The majority of donations have been awarded to charities close to a Morrisons store, supporting our aim to make a positive difference in the local communities we serve.

Quieter Hour

In July we became the first supermarket to introduce a Quieter Hour across all stores. Between 9am and 10am every Saturday morning we create a quieter and calmer environment in store to help customers with additional sensory needs, such as those with autism. This includes dimming the lights, turning our music off and avoiding announcements, as well as limiting the movement of stock around the shop floor.

Wm Morrison Supermarkets PLC

Condensed consolidated financial statements

Consolidated statement of comprehensive income

26 weeks ended 5 August 2018

Consolidated balance sheet

5 August 2018

Consolidated cash flow statement

26 weeks ended 5 August 2018

Reconciliation of net cash flow to movement in net debt1 in the period

1 Net debt is defined in the Glossary.

Consolidated statement of changes in equity

Consolidated statement of changes in equity (continued)

1. General information and basis of preparation

General information

Wm Morrison Supermarkets PLC (the 'Company') is a public limited company incorporated in the United Kingdom (Registration number 358949). The Company is domiciled in the United Kingdom and its registered address is Hilmore House, Gain Lane, Bradford, BD3 7DL, West Yorkshire, United Kingdom.

The 2018/19 interim financial report does not constitute financial statements within the meaning of Section 434 of the Companies Act 2006 and does not include all of the information and disclosures required for full annual financial statements.

The condensed consolidated interim financial statements for the 26 weeks to 5 August 2018 are unaudited. However, the auditor, PricewaterhouseCoopers LLP, has carried out a review of the condensed consolidated interim financial statements and their report is included in this interim financial report.

The comparative financial information contained in the condensed consolidated interim financial statements in respect of the 53 weeks ended 4 February 2018 has been extracted from the 2017/18 Annual Report and Financial Statements. Those financial statements have been reported on by PricewaterhouseCoopers LLP, and delivered to the Registrar of Companies. The report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498 of the Companies Act 2006.

The 2018/19 interim financial report was approved by the Board of Directors on 12 September 2018.

The Directors' assessment of the Group's ability to continue as a going concern is based on cash flow forecasts for the Group and the committed borrowing and debt facilities of the Group. These forecasts include consideration of future trading performance, working capital requirements, retail market conditions and the wider economy.

The Group remains able to borrow cash at competitive rates and 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 reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial report.

Basis of preparation

The condensed consolidated interim financial statements of the Group for the 26 weeks ended 5 August 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority and the requirements of IAS 34 'Interim Financial Reporting' as adopted by the European Union. It should be read in conjunction with the 2017/18 Annual Report and Financial Statements which have been prepared in accordance with IFRSs as adopted by the European Union. This is available either on request from the Company's registered office or to download from www.morrisons-corporate.com/annual-report-2018

Significant accounting policies

Except as described below, the accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements in the 2017/18 Annual Report and Financial Statements.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual profit or loss.

Adoption of new accounting standards

From 5 February 2018 the following standards, amendments and interpretations were adopted by the Group:

IFRS 9 'Financial Instruments' replaces IAS 39 'Financial Instruments: Recognition and Measurement' and is applicable to financial assets and financial liabilities. During the 53 weeks ended 4 February 2018, the Group assessed in detail the impact of the new standard on the consolidated financial statements and concluded the impact on transition was immaterial. Accordingly, in the condensed consolidated interim financial statements the Group has not restated prior year comparatives and no adjustment to the opening balance sheet at 5 February 2018 has been recognised. Whilst the impact of the new standard is immaterial, the Group has updated its accounting policy for the establishment of provisions against trade receivables to reflect the lifetime expected loss model (consistent with the simplified approach under IFRS 9).

IFRS 15 'Revenue from Contracts with Customers' replaces IAS 18 'Revenue', IAS 11 'Construction contracts' and related interpretations. The standard requires that revenue should only be recognised when a customer obtains control of goods or services and has the ability to direct the use and obtain the benefits from the goods or services. During the 53 weeks ended 4 February 2018, the Group assessed in detail the impact of the new standard and concluded that the adoption of IFRS 15 had an immaterial impact on the consolidated financial statements as the majority of transactions (volume and value) are for sale of goods in stores, online or to wholesale customers where the transfer of control is clear (either at the till or on delivery of goods). Accordingly, in the condensed consolidated interim financial statements the Group has not restated prior year comparatives and no adjustment to the opening balance sheet at 5 February 2018 has been recognised. As part of the exercise of assessing the impact of IFRS 15, the Group reviewed its accounting policies and disclosures around each of its income streams. Following the exercise, the Group reclassified £9m of commission income to other operating income in the period, which in the 53 weeks ended 4 February 2018 and the 26 weeks ended 30 July 2017 was included within other sales in revenue (30 July 2017: £9m, 4 February 2018: £18m). There has been no reclassification for the 53 weeks ended 4 February 2018 and for the 26 weeks ended 30 July 2017 as the adjustment is immaterial and presentational only.

New standards and interpretations not yet effective and not adopted

There are a number of standards and interpretations issued by the International Accounting Standards Board (IASB) that are effective for the Group's financial statements after this reporting period. These are:

IFRS 16 'Leases' was published in January 2016 and will be effective for the Group from the period beginning 4 February 2019, replacing IAS 17 'Leases'. The main principle of the standard is to eliminate the dual accounting model for lessees under IAS 17, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases, and to provide a single model for lessee accounting. IFRS 16 requires lessees to recognise right-of-use assets and lease liabilities for leases. Accounting requirements for lessors will be substantially unchanged from IAS 17.

The standard represents a significant change in the accounting and reporting of leases for lessees and it will impact the income statement and balance sheet as well as statutory and alternative performance measures used by the Group. The impact on the financial statements on transition to IFRS 16, where the Group is the lessee, will depend on the approach taken by the Group. The Group has undertaken a review and intends to apply the fully retrospective approach on transition. The Group is currently in the process of fully quantifying the financial impact and preparing for the application of the new standard. This work includes updating current processes and systems, updating accounting policies and calculating appropriate discount rates required under IFRS 16. It is not possible to fully quantify the impact of IFRS 16 at this stage.

Judgements and estimates

In preparing the condensed consolidated interim financial statements, management are required to make accounting judgements, assumptions and estimates. The judgements, assumptions and estimation methods are consistent with those applied to the 2017/18 Annual Report and Financial Statements.

Principal risks and uncertainties

The principal risks and uncertainties set out in Wm Morrison Supermarkets PLC's Annual Report and Financial Statements for the 53 weeks ended 4 February 2018 remain the same for this interim financial report. Those risks and uncertainties can be summarised as follows:

The Board believes that since the publication of the 2017/18 Annual Report and Financial Statements there has been no material change to the Group's principal risks and appropriate mitigating actions are in place to manage them.

The Board continues to monitor all the risks in the business closely, in particular the potential impact of the UK's decision to leave the European Union (EU). The result of the UK referendum to leave the EU in June 2016, and the subsequent triggering of Article 50 on 29 March 2017, has created a period of uncertainty in particular in relation to the impact on imported food prices, potential border restrictions and potential changes to EU labour. The Board will continue to closely monitor the impacts of the ongoing negotiations and will react accordingly. Whilst our priorities remain unchanged the impact on our Company, and the Group risks, will continue to be monitored by the Board.

More information on the principal risks and how the Group mitigates those risks can be found on pages 24 to 25 of the 2017/18 Annual Report and Financial Statements. You can view the 2017/18 Annual Report and Financial Statements online on our corporate website, www.morrisons-corporate.com/annual-report-2018

The Board

The Board of Directors that served during the 26 weeks to 5 August 2018 and their respective responsibilities were:

Andrew Higginson - Chairman*

David Potts - Chief Executive Officer

Trevor Strain - Chief Financial Officer

Belinda Richards *

Paula Vennells*

Rooney Anand*

Neil Davidson*

Tony Van Kralingen*

Kevin Havelock*

* Non-Executive Director

Forward looking statements

Certain statements in this interim financial report are forward-looking. Where the interim financial report includes forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including both economic and business risk factors that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standards, the Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

2. Segmental reporting

The Group's principal activity is that of retailing, derived from the UK.

The Group is required to determine and present its operating segments based on the way in which financial information is organised and reported to the chief operating decision-maker (CODM). The CODM has been identified as the Executive Committee as this makes the key operating decisions of the Group and is responsible for allocating resources and assessing performance.

Key internal reports received by the CODM, primarily the management accounts, focus on the performance of the Group as a whole. The operations of all elements of the business are driven by the retail sales environment and hence have fundamentally the same economic characteristics. All operational decisions made are focused on the performance and growth of the retail outlets and the ability of the business to meet the supply demands of the stores.

The Group has considered the overriding core principles of IFRS 8 'Operating segments' as well as its internal reporting framework, management and operating structure. The Group has considered all of its operations and the Directors' conclusion is that the Group has one operating segment, that of retailing.

3. Underlying profit

The definition of underlying profit is provided in the Glossary.

The Directors consider that the underlying profit and underlying earnings per share measures referred to in the results provide useful information for shareholders on underlying trends and performance. Underlying profit before tax is reported profit before tax excluding impairment and provisions for onerous contracts, profit/loss on disposal and exit of properties and sale of businesses and investments, the impact of pension volatility and other exceptional items, which are significant in size and/or nature. Underlying profit after tax is underlying profit before tax adjusted for a normalised tax rate of 23.5% (30 July 2017: 23.8%, 4 February 2018: 23.8% (see note 6)).

1 Adjustments marked 1 increase post-tax underlying earnings by £54m (30 July 2017: £26m decrease, 4 February 2018: £26m decrease), as shown in the reconciliation of earnings disclosed in note 8.

2 Normalised tax is defined in the Glossary.

There has been no charge (30 July 2017: £nil, 4 February 2018: £6m credit) for impairment or provision for onerous contracts. It is the Group's policy to review for impairment annually and there have been no indicators of impairment in the 26 weeks ended 5 August 2018. The credit in the 53 weeks ended 4 February 2018 consisted of a net impairment reversal of £7m (£126m impairment reversal offset by a £119m impairment charge). The £119m impairment charge includes £118m in relation to property, plant and equipment and £1m in relation to intangible assets. The £126m impairment reversal relates entirely to property, plant and equipment. A net £1m credit was also recognised in the 53 weeks ended 4 February 2018 in relation to provisions for onerous contracts (£22m charge offset by £23m release) and amounts provided for onerous commitments increased by a net £2m.

Profit/loss on disposal and exit of properties, net of fees incurred, recognised in the 26 weeks ended 5 August 2018 was £nil (30 July 2017: £13m, 4 February 2018: £19m).

Costs associated with the early repayment of borrowing facilities and other refinancing activities total £33m (30 July 2017: £nil, 4 February 2018: £16m). This includes £30m relating to financing charges on redemption of financial instruments (primarily premiums) (30 July 2017: £nil, 4 February 2018: £17m) and £3m of fees and premiums written off on the repayment of bonds (30 July 2017: £nil, 4 February 2018: £1m). 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 (30 July 2017: £nil, 4 February 2018: £2m credit).

In the 53 weeks ended 4 February 2018, the pension scheme set-up credit of £13m (30 July 2017: £10m) related to back dated contributions in respect of the Group's defined contribution scheme which was established during that period. The credit represented the difference between the expected back dated contributions and the cost based on actual participation rates.

Other exceptional items of £26m (30 July 2017: £4m, 4 February 2018: £25m) includes a £28m charge (30 July 2017: £nil, 4 February 2018: £nil) in relation to increased stock provisioning, partially offset by a net £2m credit from restructuring and other exceptional costs (30 July 2017: £4m charge, 4 February 2018: £25m charge).

Other exceptional items include £28m in relation to increased stock provisioning. During the period, we continued to automate our ordering systems. This has led to operational changes and additional information regarding stock levels, and a change in the methodology for estimating stock provisions.

Other exceptional items also include a net credit of £2m, primarily in relation to previously recognised provisions for restructuring (£4m credit), and costs incurred including in relation to legal cases in respect of historic events (£2m charge). The credit recognised in respect of restructuring costs represents the difference between the expected costs recognised based on estimates and the actual cost incurred.

The adjustments above are classified within the consolidated statement of comprehensive income on the following lines:

4. Revenue

5. Finance costs and income

1 Underlying net finance costs marked 1 amount to £31m (30 July 2017: £38m, 4 February 2018: £73m).

6. Taxation

Tax charged within the interim financial report has been calculated by applying the effective rate of tax of 33.8% which is expected to apply to the Group for the period ending 3 February 2019 using rates substantively enacted by 5 August 2018 as required by IAS 34 'Interim Financial Reporting'. This includes the impact of an adjustment in respect of prior periods.

The normalised rate of tax of 23.5% (30 July 2017: 23.8%, 4 February 2018: 23.8%) has been calculated using the full year projections and has been applied to the underlying profit for the 26 weeks ended 5 August 2018. The standard rate of corporation tax of 19% (30 July 2017: 19%, 4 February 2018: 19.16%) for the 52 weeks ended 3 February 2019 has been applied to the exceptional profits and losses on an item by item basis for the 26 weeks ended 5 August 2018.

Legislation to reduce the standard rate of corporation tax to 17% from 1 April 2020 was enacted in the Finance Act 2016. Accordingly, deferred tax has been provided at 19% or 17% depending upon when the temporary difference is expected to reverse (30 July 2017: 19% or 17%, 4 February 2018: 19% or 17%).

Factors affecting current and future tax charges

The normalised tax rate applied is 4.5% above the UK statutory tax rate of 19%. The main item increasing the normalised tax rate is disallowed depreciation on UK properties which reflects the Group's strategy to maintain a majority freehold estate. The Group considers its normalised tax rate to be sustainable so it is expected to reduce over the medium term in line with the planned reduction in the UK statutory tax rate. There has not been any further announcement of changes to the rate of corporation tax after 1 April 2020.

7. Dividends

Amounts recognised as distributed to equity holders in the period:

The Directors propose an interim dividend of 1.85p per share, which will absorb an estimated £44m of shareholders' funds. The Directors also propose a special dividend of 2.00p per share, which will absorb an estimated £47m of shareholders' funds. These dividends will be paid on 5 November 2018 to shareholders who are on the register on 28 September 2018.

The dividends paid and proposed during the year are from cumulative realised distributable reserves of Wm Morrison Supermarkets PLC.

8. Earnings per share

Basic earnings per share (EPS) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period excluding shares held in trust. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of potentially dilutive ordinary shares.

The Company has two (30 July 2017 and 4 February 2018: 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).

9. Goodwill and intangible assets

The carrying value of goodwill and intangible assets principally consists of software development costs of £391m (30 July 2017: £416m, 4 February 2018: £404m).

10. Property, plant and equipment

Acquisition of business relates to £5m of property, plant and equipment acquired on the purchase of Chippindale Foods Limited on 19 February 2018.

In the 53 weeks ended 4 February 2018, the Group sold the land and buildings of its customer fulfilment centre (CFC) at Dordon to a third party for cash consideration of £92m (30 July 2017: £92m). This disposal resulted in a profit of £14m (30 July 2017: £14m) and was included in profit/loss on disposal and exit of properties as an adjustment to underlying earnings.

Included within the above are leasehold land and buildings held under finance lease with a cost of £293m (30 July 2017: £293m, 4 February 2018: £293m) and accumulated depreciation of £76m (30 July 2017: £73m, 4 February 2018: £75m).

11. Investment property

12. Assets classified as held-for-sale

13. Pensions

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 Morrisons and Safeway Schemes provide pension benefits based on either the employee's compensation package or career average revalued earnings (CARE) (the 'CARE Schemes'). The CARE Schemes are not open to new members and have been closed to future accrual since 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 disclosures below show the details of the Schemes combined:

The movement in the net pension asset during the period was as follows:

13. Pensions (continued)

At 5 August 2018, schemes in surplus have been disclosed within the assets on the balance sheet. The Group has taken legal advice with regard to the recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 'IAS 19 - The limit on a defined benefit asset, minimum funding requirement and their interaction'. This advice concluded that recognition of a surplus is appropriate on the basis that the Group has an unconditional right to a refund of a surplus. In respect of the RSP this is on the basis that paragraph 11(a) of IFRIC 14 applies enabling a refund of surplus during the life of the RSP. In respect of the Morrisons 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 Schemes, 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 affected by the current exposure draft of the revised wording to IFRIC 14.

Of the £2m settlement and curtailment gains recognised in the 26 weeks ended 5 August 2018 (30 July 2017: £9m, 4 February 2018: £10m), there are no gains relating to the settlement of retirement benefits resulting from actions taken to further de-risk the Group's pension schemes (30 July 2017: £8m, 4 February 2018: £8m).

During the 53 weeks ended 4 February 2018, the Group updated the methodology for deriving the discount rate assumption used in valuing the pension scheme liabilities. This methodology has also been used in the IAS 19 valuation at 5 August 2018. The Group believes that this approach better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes, as required by IAS 19. The previous methodology used in the 26 weeks ended 30 July 2017, and previously, estimated the discount rate with reference to both corporate bond and gilt yields. The updated method uses high quality corporate bond yields where available. At very long durations, where there are no high quality corporate bonds, the yield curve is extrapolated based on available corporate bond yields of mid to long duration.

Retirement Saver Plan