Preliminary Results Year to 29 January 2006 23 March 2006
Sir Ken Morrison CBE Chairman Reading
Agenda 2 Overview Sir Ken Morrison Financial Review Richard Pennycook Operational Review Bob Stott Optimisation Plan Richard Pennycook Close and questions Sir Ken Morrison 5
Likely OFT referral to the Competition Commission 3 Morrisons welcomes fair competition planning consents advertising prices advertising savings competitor comparisons Morrisons shares some of the OFT s concerns 5
Board 4 Strengthened and renewed Board New CEO appointment underway Agreed constitution and terms of reference for the Board and its Committees Agreed optimisation plan for 2006/07 and beyond 5
Dividend 5 In line with last year Recommended final dividend of 3.075p Total dividend of 3.7p 5
Richard Pennycook Group Finance Director Hawick
Financial summary 7 m 05/06 04/05 Turnover 12,114.8 12,103.7 Operating profit 111.5 395.4 Exceptional items and goodwill impaired (374.4) (139.2) Net debt 1,147.6 1,160.9 Net assets 3,648.6 4,005.9 Operating cash inflow 311.0 448.0
Profit and loss account 8 m 05/06 04/05 Turnover 12,114.8 12,103.7 Operating profit pre exceptionals 111.5 395.4 Net interest expense (52.2) (65.4) Share of joint venture income after tax 2.2 2.2 Profit before tax, exceptionals and goodwill impaired 61.5 332.2 Effective tax rate 20.0% 45.6%
Operating profit pre exceptionals 9 05/06 04/05 m % m % Gross profit/margin 2,977.8 24.6 3,011.7 24.9 Staff costs (1,630.8) (13.5) (1,536.9) (12.7) Depreciation (256.9) (2.1) (259.2) (2.1) Other costs (978.6) (8.1) (820.2) (6.8) Operating profit pre exceptionals 111.5 0.9 395.4 3.3
Exceptional costs 10 m 05/06 04/05 Redundancy 75.5 23.8 Store conversions (inc payroll) 147.0 57.5 Divestments 11.0 3.0 Loss on disposal of fixed assets 16.7 14.9 Impairment of depots to be closed 21.0 - Safeway integration and conversion 271.2 99.2 Goodwill impairment and brand write off 103.2 40.0 Total 374.4 139.2
Sales bridge year on year 11 m 686 10,940 780 375 148 10,541 687 163 22 2004/ 05 SW 5 weeks pre T/ O Disposals / Closures 04/ 05 Disposals / Closures 05/ 06 Morrisons Safeway unconverted Safeway converted New stores 2005/ 06 Store till takings (excluding fuel)
Profit bridge year on year 12 m 395.4 (89.0) 306.4 132.0 120.0 (49.0) (47.0) 9.0 8.0 (72.0) (30.0) (36.0) 2.1 111.5 (100.0) Core like for like New Stores Extra Weeks Margin Improve -ment 04/05 Accounting 04/05 Operating profit Adjusted Divestments Conversions Distribution Manufacturing Cost Inflation Other 05/06 Operating Profit pre Exceptionals
Cash flow 13 m 05/06 04/05 Cash flow from operations 311.0 448.0 Acquisition costs (15.6) (831.4) Proceeds from disposals 460.2 903.0 Capital expenditure (635.4) (428.3) Sale and issue of shares 18.3 15.8 Tax, interest, servicing of finance (18.4) (247.3) Dividends (97.8) (87.7) Cash flow 22.3 (227.9)
Bob Stott Chief Executive Chippenham
Operational review 15 Calendar 2004 2005 2006 2007 Conversion of Safeway Optimise the new business
The stores estate 16 Newcastle under Lyme Hawick Bristol Chippenham Totnes Reading
The stores estate - size 17 Trading stores Systems converted stores Average store size 03/04 36.5 6 116 05/06 28.1 14 95 57 48 3 39 <20 20-25 25-30 30-40 40+ Sq. feet 000
The stores estate geography 18 378 stores: 275 filing stations Filling stations 42 42 51 34 42 31 33 53 54 61 48 51 54 57 Scotland North Midlands East Midlands West South West South Central South East
Support infrastructure distribution 19 Distribution Profile (sq.ft. 000) Scotland North Midlands East Midlands West South 0 500 1000 1500 2000 2500 Depots at Aylesford, Bristol & Warrington closed annual saving 30m
Support infrastructure manufacturing 20 Fresh food factory Fresh meat processing Bakery Produce packhouse Bos Brothers Holland
Performance update Year to 29 January 2006 21 Like for like Continuing Group > 52 weeks Converted Stores* < 52 weeks Total Core Morrisons Sales 5.1% 6.0% 14.9% 13.4% 0.3% Ex fuel 2.4% 3.8% 13.8% 12.1% (3.4)% Customers 5.3% 1.3% 18.6% 15.8% (1.8)% Other metrics Sales per customer ( ) Sales ( per sq.ft.) Stores 22.21 18.40 365 22.60 19.62 57 20.36 18.19 163 20.68 18.40 220 24.96 20.03 122 *Post conversion period
Performance update 7 weeks to 19 March 2006 22 Group like for like Year to 29 January 7 weeks to 19 March Sales 5.1% 5.7% Ex fuel 2.4% 3.2% Customers 5.3% 4.6% Other metrics Sales per customer ( ) 22.21 21.81 Sales ( per sq.ft.) 18.40 18.78
Scotland the story so far 23 Sales Growth* Like for like sales* 21.2% 22.5% 11.5% 14.5% 6.5% 9.1% Q3 05/ 06 Q4 05/ 06 7 wks 19 March 2006 Q3 05/ 06 Q4 05/ 06 7 wks 19 March 2006 *Excluding fuel
An improving story Year-on-year trends Grocer share % 0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0-16.0-18.0-20.0 12 w/e Periods 24 24 Apr 05 22 May 05 19 Jun 05 17 Jul 05 14 Aug 05 11 Sep 05 09 Oct 05 06 Nov 05 04 Dec 05 01 Jan 06 29 Jan 06 Source TNS March 2006
Trading indices 25 Product range Chilled olives 227 Cooked poultry 165 Chilled bakery products Fresh meat Fresh fish Fresh poultry & game 116 113 113 113 Product category Total household 109 Total ambient groceries 103 Total toiletries 75 Total healthcare 66 Source TNS January 2006
The Olive Index 26 25 Sainsbury % Class AB 20 15 Asda Total Co-op Somerfield Tesco Aldi 10 Tot Indepts Iceland Netto Lidl Kwik Save 5 10 30 50 70 90 110 130 150 170 190 Olive Trading Index Source TNS January 200652 w/e Feb 27 2005
The Olive Index 27 Waitrose 25 Sainsbury % Class AB 20 15 10 Tesco Asda Total Co-op Aldi Somerfield Lidl Tot Indepts Iceland Netto 5 Kwik Save 10 60 110 160 210 260 310 360 Source TNS January 200652 w/e Feb 27 2005 Olive Trading Index
Morrisons - value 28 I get good value for money Morrisons Asda Netto Lidl Aldi Tesco Iceland Kwik Save Farm Foods Total Co-op M & S Waitrose Somerfield Safeway Sainsbury 108 106 105 103 101 101 98 97 97 95 94 91 91 88 87 Source TNS Outlet share index 52 w/e Nov 6 2005
Morrisons brand qualities 29 Value for our customers above all Outstanding quality Great customer service Integrity in everything we do The Best Grocer in Town
Optimisation Plan Richard Pennycook Newcastle under Lyme
Optimisation plan - themes 31 Context Directional guidance on sales Firm guidance on margins and costs Exceptionals coming to an end Cash under control and no increase in net debt
Optimisation plan what it is (and is not) 32 Objective Ò ptím ísátión Apply, and adapt where necessary, the 125 store Morrisons model to the new 374 store world. In order to optimise business performance over a 3 year programme get the most out of modifying to achieve maximum efficiency acting as an optimist Tactical profit recovery, not strategic repositioning
Applying the Morrisons model 33 I get good value for money Morrisons Asda Netto Lidl Aldi Tesco Iceland Kwik Save Farm Foods Total Co-op M & S Waitrose Somerfield Safeway Sainsbury 108 106 105 103 101 101 98 97 97 95 94 91 91 88 87 03/04 Performance Reminder Sales per square foot 19.94 Margin % 25.5 Staff cost % 11.5 Depreciation % 2.4 Overheads % 5.4 Return on Sales % 6.2 Industry leading performance Grocer award for service Grocer award for availability Source TNS Outlet share index 52 w/e Nov 6 2005
Adapting where necessary 34 New to Morrisons 5.5m customers per week 90,000 colleagues (2 in every 3) 5.6m square feet of space, 3.4m in stores below 25,000 sq ft 4.3m in Scotland and the South 05/06 Performance 05/06 03/04 Sales per square foot 17.69 Margin % 24.6 19.94 25.5 11.5 Staff Cost % 13.5 Depreciation % 2.1 2.4 Overheads % Return on Sales % 8.1 0.9 Wholly unacceptable performance 5.4 6.2 Converted stores Core Morrisons 87% 13% 32% 29% 68% 71% Scotland North Midlands East 71 Stores 101 Stores 97% 97% 3% 3% 58% 42% Midlands West 51 Stores 88% 12% 86% 87% 14% 13% South West South Central 116 Stores 75% 25% South East 21% 18% 79% 82% < 20 20-25 25-30 30-40 40+ Store size sq ft 000 s 39 Stores
Delivering the plan our goals 35 Back to the day job building on our strengths Swift execution of obvious things Careful thought where solutions aren t obvious Bigger questions wait until later
A critical change challenge 36 Preserving the strengths Tightly focused top team, huge experience, centralist culture Simple processes, clear accountability, one way of doing things Quick decision making based on instinct Enjoying being the best Very low cost Adapting to the new world New experience and thinking coming into the team, more empowerment to manage change required A more complex business, with 90,000 new colleagues needing to learn More analysis and support required where instinct is not enough Determination to once again be the best Cost of change, some structural
A critical change challenge 37 Preserving the strengths Adapting to the new world Sales led Value driven Trading mentality Customer focused Great shopkeeping No change
Original Morrisons stores back to best 38 Sales per square foot up 0.5% over 2 years Performance impact of cannibalisation, tightening in customer spending, management distraction 122 stores 4.5m square ft 4.7bn takings Cost base impact of minimum wage, business rates, fuel prices % like for like Inc Fuel 2003/4 2004/5 2005/6 Exc Fuel
Large converted stores up to best 39 Sales per square foot 05/06 23% below original Morrisons Gross profit performance 70 bps below original Morrisons Staff costs 250 bps above original Morrisons 73 stores 2.2m square feet 1.9bn takings Sales increase from point of opening Converted Stores New Morrisons Stores 46% 39% (Stores >25,000 sq. feet) 17% 27% 2.1m hours to be saved in current year, from natural staff turnover Year 2 Year 3 Year 4 Year 5
Smaller converted stores forward to best 40 Sales per square foot up 0.5%, higher densities needed to cover semi-fixed costs Gross profit performance 30 bps below original Morrisons Staff costs 310 bps above original Morrisons 147 stores 3.0m square feet 2.9bn takings (Stores <25,000 sq. feet) Smaller stores project underway 5 workstreams offer, range, operations, supply chain, equipment 16 initiatives going on trial 3.9m hours to be saved current year, from natural staff turnover
Trading and marketing 41 Reinforce our position as best for value real value is strong on price, great on quality Exploit Market Street as a point of difference Buyers and merchandisers back to product innovation and range development e.g. health & beauty Average week year on year volume growth % Market Street in the South 90 bp margin improvement over 3 years above price investment Total Non Market Street Total Market Street Salad Bar Sandwiches Freshly Made Pizza Deli Counter Freshly Baked Pies Cooked Meats Patisserie Continental Meats Source: company data, January 06
Distribution 42 Southern distribution - a medium term solution Systems programmes for transport and warehousing will provide 07/08 benefits Management strengthening required to implement the programme Depot closures already announced will deliver 30m benefit 06/07 Distribution Profile Scotland Midlands East Midlands West Sq.ft. 000 North South Distribution Stores 0 1000 2000 3000 4000 5000 Costs per case 05/06 57p, versus 40p in 03/04
In support 43 One head office and better ways of working together New accounting system installed 30m of cost savings Capex to match depreciation in 06/07 1,600 colleagues under one roof from June 06
Restoring pride in Morrisons 44 We have a clear plan, to fix the basics: 6m store staff hours saving target, approximately 50m this year, 90m full year effect 90 bps margin target over three years 30m distribution saving this year 30m central cost saving this year Capital expenditure to match depreciation, this year We do not underestimate the competition, but much of the recovery is in our hands Our plan will evolve, and strategy awaits the new CEO
Summary 45 2005/06 a difficult year but conversion an outstanding achievement Business has stabilised 7 week trading results encouraging Confident that the worst is over Much more to do - optimisation plan provides a blueprint to drive the recovery
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