Tesco Plc · LSE:TSCO
Tesco — FY2010/11 Earnings Presentation
60 slides from Tesco's earnings presentation, Apr 19, 2011
Slide 1: Preliminary Results
Preliminary Results 19 April 2011
Slide 2: Philip Clarke, Group Chief Executive
Philip Clarke Group Chief Executive 2
Slide 3: 3
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Slide 4: Strong platform
Strong platform • Business built around customers and staff • High quality assets • Multiple opportunities for growth 4
Slide 5: New management structures
New management structures • Equipping the Group for global growth • Big, driving business units – UK, Asia, Europe, US, Services and Property • Supported by integrating functions • New executive team brings this together • New dedicated, experienced UK Board – More focus and energy 5
Slide 6: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 6
Slide 7: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 7
Slide 8: UK environment
UK environment • Consumer environment challenging • Food volumes muted • Inflation low 8
Slide 9: Food inflation – CPI vs. Tesco
Food inflation – CPI vs. Tesco % 7 CPI Food Tesco Food CPI Equivalent 6 5 4 3 2 1 0 (1) Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 9
Slide 10: UK environment
UK environment • Consumer environment challenging • Food volumes muted • Inflation low • Trading up continuing 10
Slide 11: Finest
Finest 11
Slide 12: UK environment
UK environment • Consumer environment challenging • Food volumes muted • Inflation low • Trading up continuing • Non-food more affected – Demand faltered since November – High ticket and non-essential – Not uniform 12
Slide 13: UK – An outstanding business
UK – An outstanding business UK revenue+ UK trading profit+ £bn £bn 50 3.0 40 2.5 30 2.0 1.5 20 1.0 10 0.5 01 02 03 04 05 06 07 08 09 10 11 01 02 03 04 05 06 07 08 09 10 11 UK trading profit margin+ UK ROCE+* % % 7 20 6 5 15 4 3 10 2 5 1 01 02 03 04 05 06 07 08 09 10 11 01 02 03 04 05 06 07 08 09 10
Slide 14: Keeping the UK strong and growing
Keeping the UK strong and growing • Basic operating standards are fine – Good shopping trip – Prices competitive • Successes in the year – New stores performing strongly – Express had outstanding year – Clubcard driving loyalty 14
Slide 15: Keeping the UK strong and growing
Keeping the UK strong and growing • Need to get back to doing things first for customers • Executing better – particularly non-food • Faster innovation • More sharpness in communications to customers 15
Slide 16: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 16
Slide 17: Fresh & Easy
Fresh & Easy • Increased losses in 2010/11 US like-for-like sales % 10/11 LFL • Confident of break-even 35 30 10/11 two-year LFL towards end of 2012/13 25 20 • Key is shop-door profitability 15 10 – Two-year like-for-like c.20% 5 0 – New stores averaging $13 per foot Q3 Q4 per week – Best stores tak
Slide 18: Asia and Europe
Asia and Europe • Over two-thirds of Group profit growth • Like-for-like sales growth strong • Good market share performance • Despite Ireland and Hungary headwinds 18
Slide 19: Asia
Asia • Strong sales and profits growth Market Share Feb 11 Feb 10 Change China+ 2.9% 3.1% (0.2)% • Slower than expected H2 performance in China Malaysia+ 10.3% 9.5% 0.8% Korea* 4.4% 4.3% 0.1% • Good growth in Korea, Thailand and Malaysia Thailand+ 12.6% 11.8% 0.8% • Retail environment in Japan remai
Slide 20: Europe
Europe • Strong growth in Poland, Market Share Feb 11 Feb 10 Change Czech Republic and Slovakia Czech Rep.§ 10.6% 8.6% 2.0% Hungary+ 19.2% 17.9% 1.3% • Hungary: grew well, winning Poland+ 6.5% 6.6% (0.1)% market share Slovakia§ 19.4% 17.2% 2.2% Turkey* 1.5% 1.6% (0.1)% • Extras performing well Irela
Slide 21: International new space pipeline
International new space pipeline • 8.4m sq ft this year • 12% growth overall – 14% in Asia – 9% in Europe – 26% in United States 21
Slide 22: Becoming outstanding internationally
Becoming outstanding internationally • Some businesses already outstanding – Strong in their markets – Growing well – Not reliant on Group to fund expansion – Returns ahead of cost of capital • Way to go in some markets • Profitable at store level in all but two countries 22
Slide 23: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 23
Slide 24: Becoming a multi-channel retailer
Becoming a multi-channel retailer • Compelling appeal of store and online combination • Strategic advantage of existing store network 24
Slide 25: Non-food
Non-food • Going beyond our present range online – Move towards more than 100,000 SKUs – Equivalent of a marketplace • Taking our general merchandise, electricals and clothing offer to the next level, both in store and online 25
Slide 26: Multi-channel – International
Multi-channel – International • Important steps internationally – Dotcom grocery in Prague in next few months and Warsaw early 2012 – Sizeable online non-food launch planned in Korea Insert picture 26
Slide 27: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 27
Slide 28: Tesco Bank
Tesco Bank • New IT platforms fully operational • Migration from RBS to be completed in the next few months • Launched our first new products • Tesco Bank customer services centres fully operational 28
Slide 29: Tesco Bank – Trading performance
Tesco Bank – Trading performance • Savings book grown strongly – up by over £500m • Loan book has grown – with improved margins • Excellent year in credit cards – transaction value up 20% • Motor insurance book growing again • Visibility of good underlying progress will begin to show 29
Slide 30: Telecoms
Telecoms • Good progress • Broaden offer into attractive contract mobile market – Customer numbers up 24% – Fastest growing network in UK • Launch of iPhone 4 Insert pic • Profit held back by initial costs of handset subsidy 30
Slide 31: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 31
Slide 32: Applying Group skill and scale
Applying Group skill and scale • Better buying – £2bn of product sourced at cost through sourcing hubs • Infrastructure sharing – 2010/11 saving from Bangalore support centre of £100m • Operating model – Just £0.5m cost to put Clubcard into new market – £2m cost to install sales based ordering vs. £
Slide 33: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 33
Slide 34: 34
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Slide 35: Delivering higher returns for shareholders
Delivering higher returns for shareholders Return on capital employed 14.6% 12.9% 12.1% 09/10 10/11 14/15 Target Target to hit 14.6% ROCE by 2014/15 35
Slide 36: Immediate team objectives
Immediate team objectives Becoming Becoming a Keeping the UK outstanding multi-channel strong and internationally, retailer growing not just wherever we successful trade Delivering on the potential of Applying Group Delivering Retailing skill and scale higher returns Services 36
Slide 37: What to expect from me
What to expect from me • Focus, energy, intensity • In the stores – close to customers, close to colleagues • Willing to engage • Discuss what’s not so good, as well as the many good things • It’s all about performance – that’s what we intend to deliver 37
Slide 38: Laurie Mcilwee, Chief Financial Officer
Laurie Mcilwee Chief Financial Officer 38
Slide 39: Group performance
Group performance 10/11 vs. 09/10 Group sales* £67.6bn 8.1% Group trading profit £3.7bn 7.8% Underlying profit £3.8bn 12.3% Underlying diluted EPS 35.72p 10.8%** Full-year dividend 14.46p 10.8% Net debt £6.8bn £1.1bn Return on capital employed 12.9% 80bp * Group sales (inc. VAT) exclude the accounti
Slide 40: UK
UK • Sales growth of 5.5% – Consumers impacted by high petrol prices and increased taxes • Margin stable at 6.1% – Despite increased rents from sale & leasebacks and additional investment in Clubcard – Profits grew by 6.4% excluding the impact of the higher rents 40
Slide 41: Asia
Asia • Sales growth of 22% – Strong like-for-like recovery vs. 2009/10 • Margin up 0.4% to 5.6% – Increases in Thailand, Malaysia and Korea – Back to pre-recession levels Trading profit margin % 5.5% 5.6% 5.2% 5.0% 07/08 08/09 09/10 10/11 41
Slide 42: Europe
Europe • Sales up 6% – Strong like-for-like recovery vs. 2009/10 • Strong market share gains • Margin up 0.3% to 5.7% Trading profit margin % 5.8% 5.6% 5.7% 5.4% 07/08 08/09 09/10 10/11 42
Slide 43: US – Fresh & Easy performance
US – Fresh & Easy performance £m (constant currency) 23 (165) (30) (9) (181) Losses 09/10 Improvements in Impact of recent Campus Losses 10/11 LFL and Margin stores* * Stores opened in 09/10 and 10/11 43
Slide 44: Tesco Bank
Tesco Bank • Strong trading performance Operating Tesco BankProfit operating profit Provision adjustments • Bad debt charge down 26% Baseline profit £264m • Good improvement in baseline £250m + £155m fair value provision profitability release + £50m PPI + £118m £106m fair value provision release • C
Slide 45: Group balance sheet
Group balance sheet • Net debt reduced by £1.1bn to £6.8bn • Group capex £3.7bn, 5.5% of sales • Future capex to be 5.0 to 5.5% of sales Capital expenditure as % of Group sales % 10 9.0% 8 6 5.5% 4 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 45
Slide 46: Group balance sheet (cont.)
Group balance sheet (cont.) • Statutory Net Debt set to fall Fixed Charge Cover further EBITDAR/(Interest + Rent) x 7 6.3 6 5.5 • More focus on Fixed Charge 5 4.2 3.9 3.7 Cover and Adjusted Net Debt 4 3 – Fixed Charge Cover target of 2 1 4.0 to 4.5x 06/07 07/08 08/09 09/10 10/11 – Adjusted net debt/
Slide 47: Property is an integral part of our strategy
Property is an integral part of our strategy Objective: to ensure we have the best properties from which to retail • We also create value developing our own property • 5-year divestment programme completed on track: – > £5bn cumulative proceeds – £1.3bn cumulative profits – Funded £1.1bn of share bu
Slide 48: Value creation through property
Value creation through property Only releasable through sale Available to shareholders via trading profits Build cost/ Development Vacant Tesco Increase in Market value book value value possession value covenant rentable value when sold once mature value over time 48
Slide 49: Tesco's development activities should generate c.£400m per year
Tesco’s development activities should generate c.£400m per year £ million 3,000 Target return of 8% on £31bn of assets* Rent + implied rent + tenant income by country 2,000 2,500 Target £400m return 1,000 from development 400 0 Target pre- UK Czech Hungary Poland Republic Slovakia Turkey China Malay
Slide 50: Development profit/loss at maturity
Experience shows on average we achieve 10-15% uplifts on development projects Average ‘profit’ on a UK development . . . and in our overseas developments the project is c.10% . . . uplifts can be higher Analysis of Extras and Superstores in the UK Analysis of freehold assets in Thailand 80% 80% Deve
Slide 51: What is a sustainable level of property profits?
What is a sustainable level of property profits? Targeting 8% return on assets requires 10-15% typical development c.£400m from development uplift generates £250-400m £2,500m £400m £250-400m Sustainable range for profits going £2,100m £2,500m forward to be £250- 350m per year Expected Rent, Expected
Slide 52: Mall development opportunity in Asia & Europe
Mall development opportunity in Asia & Europe Expected financial returns from an example mall re-development Increase in space Space (sq ft 000s) 700 600 500 400 Mall 300 Financials £m £m 200 Net operating income 2.4 10.7 Mall Market value of property 31 142 100 Hyper Hyper Redevelopment capex – 56
Slide 53: 2010/11 improvement in ROCE
2010/11 improvement in ROCE 0.4% 12.9% 12.1% 0.3% (1.4)% 1.5% 2009/10 Change in capital Profit growth Working capital Sale & leasebacks 2010/11 employed (exc. working capital, sale & leasebacks) 53
Slide 54: ROCE improvement to 14.6%
ROCE improvement to 14.6% 14.6% 12.9% 2010/11 Change in capital Profit growth Working capital Sale & leasebacks 2014/15 employed (exc. working capital, sale & leasebacks) 54
Slide 55: Components of Group ROCE
Components of Group ROCE* ROCE (%) 25 20 • Infrastructure in place • Good market positions 15 • Building • Group scale/skill to come infrastructure • Immature capital 10 UK* • Sub scale Leading 5 (Bank, Ireland, Korea, Developing Thailand, Hungary) (Poland, Czech, Slovakia, Malaysia) 0 (5) Immature
Slide 56: Improving UK return on capital
Improving UK return on capital Key drivers of last 5 years Asset Turnover • Asset turnover Index Sales densities Build cost/sq ft 100 101 100 – Sales densities / sq ft stable 93 – Lower build cost per square foot • Margin 05/06 Average 06/07 Average – Leverage, scale benefits last 6 years last 5 yea
Slide 57: Conclusion
Conclusion • Steady profit growth in UK • Outstanding growth in Asia and Europe • Progress in China and US, but more to do • Improving underlying performance of Tesco Bank • Excellent property portfolio releasing sustainable property profits • Further strengthening our balance sheet • Increasing Ret
Slide 58: Q&A
Q&A TESCO 58
Slide 59: Preliminary Results
Preliminary Results 19 April 2011
Slide 60: Slide 60