2009 financial review and outlook

Outlook

2009 was an excellent year for The Co-operative Group, propelling us back into the Premiership of UK retailing and putting us in great shape to capitalise on the range of opportunities open to us.

Looking ahead, we have to make sure that we navigate the still choppy waters of the recession shrewdly and with prudence. It may be that the UK does not start to see real economic growth until the end of 2010 or as late as the beginning of 2011. Therefore, sustaining the level of success we have enjoyed over the last two years will not be easy. All of our businesses are operating in fiercely competitive markets which will only get tougher in the year ahead.

That said, we will be looking to see our Food and Financial Services businesses enjoy the benefits of greater scale, passing on greater savings and improved products and services to our members and customers. We will also be looking to see our other businesses prosper when the economic climate begins to improve.

Financial review

The financial statements for 2009 reflects an excellent year for the Group. The acquisition of Somerfield and the merger with Britannia and Plymouth & South West Co-operative have provided significant challenges around integration of structure, systems and the brand going forward. These challenges have been addressed and considerable progress has been made to date and full integration planned during 2010.

Revenue

Group revenue before reinsurance premiums was £12.5bn in 2009, an increase of £3.1bn (33%) on 2008. Income in the Trading Group was up by £3bn with most of this due to the Somerfield acquisition in February. However, this year only includes a 51 week trading period compared to 52 last year. Strong performances have been achieved in several Trading areas. Food business like-for-like sales were up 5.5%, and Funerals sales were 5% better than the prior year. A number of smaller businesses, Sunwin Services, Co-operative Legal Services, Co-operative Life Planning and E-Store all achieved significant increases in sales revenue, which compensated for Travel, Motors, Farms and Property which suffered due to the economic climate and market conditions.

Our Financial Services business emerged in good shape from the global crisis prompted by the credit crunch and the subsequent worldwide recession. This was due principally to the business being underpinned by strong capital reserves. Overall Financial Services Revenue (including Britannia from 1 August 2009) but before reinsurance premiums and long-term business was above last year by 8.4% at £1.6bn.

Operating profit

Group operating profit before significant items was £612m, £219m (56%) higher than 2008. This includes a fair value amortisation of £99.1m in respect of the Britannia merger. Trading Group profits of £378m were £103m (38%) up on the previous year. This figure is boosted by a significant improvement in the valuation of investment property (2009: £3.5m gain, 2008: £62m loss) offset by the reduction in one-off profits from the disposal of fixed assets (2009: £36m, 2008: £58m). Excluding these, profits were 21.6% higher than last year’s £278m at £338m, albeit that 2009 was a 51-week trading year versus 2008’s 52 weeks.

The Co-operative Financial Services (CFS) shareholder profit before tax, FSCS levy, significant items, short-term investment fluctuations and fair value amortisation for 2009 was £177m compared with £147m in 2008. These results reflect the business’s success in maintaining profitability despite the continuing weaknesses of the financial services market, while underlying capital and liquidity positions continue to provide the foundations for stable growth.

The CFS retail business remained profitable despite the low interest rate environment and the economic recession. The long-term business which is run in the interests of policy holders achieved target levels across the board, with new business premiums for 2009 13% ahead of 2008. Commercial and Markets profits increased on a like-for-like basis from a £4.4m loss to £113.2m profit, an increase of £117.6m, being driven by improved margins and rigorous cost control but also by the recovery from the investment provision made in 2008.

Significant items totalled a net figure of £109m in 2009 compared with £117m in 2008;
£54m related to integration and restructure costs in CFS. The Trading Group costs of £55m were principally the integration costs relating to Somerfield offset by the disposal of Food stores both compulsory and tactical due to this acquisition. Group operating profit after significant items was £503m, an increase of £228m (83% on the 2008 figure of £275m).

Financial income and expense

Net interest payable was £108m compared with £36m in 2008. This principally reflects the increased levels of borrowings to finance the Somerfield acquisition that took place in February 2009 and the level of refits and rebranding that took place subsequent to this transaction. The structure of this refinancing involved a bridging loan, which was paid back within the timescales required due to planned tactical and OFT disposals. The mark to market movement in 2009 was a charge of £35m compared with a charge of £83m in 2008. This predominantly reflected movements in quoted debt and fixed interest hedging arrangements due to reductions in long-term interest rates, partially offset by gains on foreign currency movements.

Payments to and on behalf of members

The Group paid out over £100m to and on behalf of its members during the year. A dividend of £96m was approved at the June 2009 AGM and a further interim dividend of £11m was approved at the November 2009 half-year meeting, a total of £107m.

The analysis of dividend paid to each of our stakeholder groups is as follows:

 £m
Payments to and on behalf of individual members   54.5
Payments to and on behalf of employee members    23.0
Payments to and on behalf of corporate members  
19.6
Payments to and on behalf of the community and fellow Co-operatives   10.0
107.1

Balance Sheet Capital and Reserves

The Group balance sheet has increased in both size and strength from £3.9bn to £4.6bn. This is due to the CFS merger with Britannia as well as the retained profit for this period offset by actuarial losses on the Pension fund.The Trading Group fixed assets as mentioned have grown principally due to the acquisition of Somerfield, the merger with Plymouth society and the increased refit and brand activity on the newly-acquired stores. Working capital levels have increased year on year to deal with requirements of the larger business.

The key banking covenants that were introduced on the restructuring of the Trading Group’s finance for the Somerfield acquisition were all comfortably satisfied with significant headroom.

The Co-operative Financial Services has maintained a strong balance sheet continuing to pursue a policy of financial prudence, maintaining high levels of capital and excellent liquidity and funding levels. The Bank has a capital ratio of 13.6% after the deduction of fair value merger adjustments. The tier 1 ratio is 9% with a core tier 1 of 8.6%. These ratios have all increased since 2008, again demonstrating the strength of the merged business. Meanwhile the Bank has maintained its high level of customer deposits to loans ratio of 104%.


At 31 December 2009 the realistic working capital within the Co-operative long-term business fund, being the excess of the realistic values of assets over the realistic value of liabilities, stood at £1,008m compared to £573m at the start of the financial year. Excluding the effect of gilt repos and reassurance collateral arrangements; this represents a working capital ratio of 7.2% compared to 3.7% at 10 January 2009.

The Balance Sheet performance for the Corporate banking operation indicates that we have continued to develop the lending side of the business. The business is focused on a tight lending policy, a selective lending approach and supporting existing and long-standing customers. Meanwhile deposit growth is strong, indicating that customers remain confident in CFS.