Tesco Plc · LSE:TSCO
Tesco — H1 2018/19 Earnings Presentation
49 slides from Tesco's earnings presentation, Oct 3, 2018
Slide 1: Serving shoppers a little better every day
Serving shoppers a little better every day. 3 October 2018 Dave Lewis – CEO Alan Stewart – CFO
Slide 2: Agenda
Agenda. • Half year results • Six strategic drivers • Creating value for our four key stakeholders
Slide 3: 1H results
1H results.
Slide 4: Group performance
Group performance +12.8% +24.4% (1.4)% £933m £1,139m £1,123m £28.3bn £750m £25.2bn 1H 17/18 1H 18/19 1H 17/18 1H 18/19 1H 17/18 1H 18/19 Positive sales growth1 Strong profit growth2 Strong retail cash generation3 1. Group sales growth at actual rates on a comparable days and a continuing operations
Slide 5: UK & ROI performance
UK & ROI performance +47.6% +2.6% (4.8)% £685m Food LFL GM LFL +189,500 £464m 1H 17/18 1H 18/19 Tesco Booker Continued focus on food More customers shopping with us1 Improved profitability 1. KantarWorldpanel UK data for the 52 weeks ending 9 September 2018.
Slide 6: UK & ROI
UK & ROI Operating profit and margin1 • Booker consolidated from 5 March 2018 • Continued strong LFL sales performance; 2.10% 2.66% 1H +3.8%, 2Q +4.2% • Improved profitability: £685m – 1H margin +56bps YoY £464m – £171m saved through cost savings plan • Closed Tesco Direct in July – 1H 18/19 sales:
Slide 7: UK & ROI - Booker
UK & ROI - Booker LFL 14.3% 15.1% £97m £16m 9.9% 4.2% 3.8% 1.3% 1Q 2Q 3Q 4Q 1Q 2Q 17/18 17/18 17/18 17/18 18/19 18/19 Strong sales Profit contribution Synergies on track (pre-synergies)
Slide 8: Central Europe
Central Europe Operating profit and margin1 • Sales impacted by trading laws in Poland 1.90% 1.89% – 13 fewer days impacting CE LFL by (1.2)% – 18 store closures and a further 13 announced £61m £59m • Operating profit £59m – Year-on-year decline reflects £9m property profits last year – £34m saved t
Slide 9: Asia
Asia Operating profit and margin1 • 1Q LFL : (9.0)% 2Q LFL: (4.8)% following annualisation of bulk-selling 5.60% 4.23% • LFL sales in Thailand impacted by: £141m – Significant changes to sales mix and promotional strategy £100m – Government welfare cards c.(2)% LFL – Deflationary effect from price i
Slide 10: Tesco Bank
Tesco Bank • Strong retail banking performance – Operating profit before exceptional items up 6% to £89m • Continued focus on secured lending – Mortgage lending growth of 38% – Proportion of secured lending increased to 29% • IFRS 9 Financial instruments applied from 25 February 2018 – £166m impact
Slide 11: Tesco Bank
Tesco Bank 1H 18/19 Change Lending to customers £12,144m 12.8% Secured lending £3,504m 37.9% Unsecured lending £8,640m 5.1% Bad debt: asset ratio (1.5)% (0.2)% Operating profit pre exceptional items £89m 6.0% 3.3% Cost: income ratio1 56.5% improvement Net interest margin 3.8% (0.2)% Tier 1 capital r
Slide 12: Sources and uses of cash
Sources and uses of cash Working capital £110m £1,299m £1,270m £(139)m £1,123m £(29)m £(147)m £(459)m £54m £99m £404m £(274)m £(139)m Retail cash Underlying Timing Retail cash Exceptional Retail Cash capex Net interest Net property Net Market Retail free generated working impact generated from cash
Slide 13: Capital expenditure
Capital expenditure £13m £86m £109m £0.4bn £0.4bn by region by type £233m £251m £89m £35m UK & ROI Central Europe Asia Bank Maintenance/refresh IT/productivity New space/business FY 18/19 capex guidance: no more than £1.2bn FY 19/20 onwards capex guidance: between £1.1bn and £1.4bn
Slide 14: Balance sheet progress
Balance sheet progress Net debt Lease commitments Pension deficit £7.3bn £7.2bn £6.9bn £3.3bn £3.1bn £2.6bn £2.7bn £2.4bn £2.1bn 1H 17/18 FY 17/18 1H 18/19 1H 17/18 FY 17/18 1H 18/19 1H 17/18 FY 17/18 1H 18/19 1 2 Booker combination impact Booker combination impact 1. Cash outflow of £0.7bn relating
Slide 15: Improving debt metrics
Improving debt metrics Total indebtedness ratio1 Fixed charge cover2 7.0x 4.0x 6.5x 6.0x 6.0x THRESHOLD > 3.0x 3.0x 2.7x 2.9x 5.5x 5.1x 5.0x 5.0x 2.2x 1.9x 1.9x 4.5x 2.0x 4.0x 3.5x 3.3x 3.2x 1.0x 3.0x THRESHOLD < 3.0x 2.5x 2.0x 0.0x FY 14/15 FY 15/16 FY 16/17 FY 17/18 1H 18/19 FY 14/15 FY 15/16 FY 1
Slide 16: Earnings per share
Earnings per share 1H 18/19 % change Operating profit1 £933m 24.4% JVs & Associates1 £20m 66.7% Net finance costs2 £(147)m 25.0% Profit before tax3 £806m 42.4% Taxation £(186)m (45.3)% Profit after tax3 £620m 41.6% Diluted weighted average number 9,753 (19.3)% of shares (m) Diluted EPS3 6.36p 18.4%
Slide 17: Interim dividend
Interim dividend • 1.67p interim dividend, up 67% • Ex-dividend date 11 October 2018; Payment date 23 November 2018 • Total cash cost of c.£164m • Targeting cover of around two times earnings in medium term
Slide 18: Guidance
Guidance Operating margin 3.5% to 4.0% Group operating margin by 19/20 Operating costs Reduce operating costs by a further £1.5bn by 19/20 Retail cash generation Generate £9bn of cash from operations by 18/19 Working capital Underlying decrease of around £0.2bn per annum Pension deficit contribution
Slide 19: Financial summary
Financial summary. • Strong financial performance in UK & ROI • Specific challenges in Poland and Thailand • Booker ‘Joining Forces’ synergies on track with £16m in 1H • On track to achieve 2019/20 £1.5bn cost savings target – £241m cost savings in 1H; cumulative savings of £1.1bn • Continuing impro
Slide 20: Six strategic drivers
Six strategic drivers. 2 0
Slide 21: Our six strategic drivers – a progress update
Our six strategic drivers – a progress update 1. A differentiated brand • Quality perception up +3.6, stable value perception 2. Reduce operating costs by £1.5bn • Further cost savings of £241m achieved in 1H • Cumulative cost savings of £1.1bn 3. Generate £9bn cash from operations • £7.2bn cumulati
Slide 22: Brand progress
Brand progress 30.0 Jan 2014 – Sept 2018 BrandIndex Score 25.0 20.0 Exclusively at Tesco Weekly Little Helps 15.0 Food Love Stories Farm Brands 10.0 5.0 0.0 January September January September January September January September January September 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Tes
Slide 23: Our four key stakeholders
Our four key stakeholders. 2 3
Slide 24: Customers
Customers 5,038 completed 72% Own Brand re-launch Exclusively at Tesco Customer penetration1 on track 1. Represents the percentage of customers who have bought at least one ‘Exclusively at Tesco’ product in the last 12 weeks.
Slide 25: Customers
Customers Range Food Brands Quality Price Overall Relaunched to Architecture @ Tesco Benchmark Benchmark Preference date Market leader in 638 products “Best” Finest quality by food category No Limit 10 / 10 72% 4,076 products “Better” Tesco Sainsbury’s Asda 8 / 10 47% Exclusively 324 products “Good”
Slide 26: Exclusively at Tesco
Exclusively at Tesco Find our best value brands in-store today. §
Slide 27: Exclusively at Tesco
Exclusively at Tesco at TESCO aaa | Exclusively a TESCO a a a Find our best value brands N in-store ‘ey A Find our best value brands K in-store today ‘| ,
Slide 28: Exclusively at Tesco
Exclusively at Tesco £30.58 £32.41 £32.68 Competitor A Competitor L Prices based on a basket of 28 products as at 24 September 2018. Basket compared to equivalent lines at lowest cost competitors.
Slide 29: Customers – Celebrating 100 years of great value
Customers – Celebrating 100 years of great value Champion for customers 324 of c.400 10-15 stores launched c.£20m total capex
Slide 30: Colleagues
Colleagues 84% Motivated by 84% 79% 80% +4 ppts +1 ppts +2 ppts our purpose 69% UK 83% ROI 81% Bank 76% 75% 84% +16 ppts +1 ppts +1 ppts Performance Inclusive Europe Thailand Malaysia reviews that culture 1H 17/18 1H 18/19 Top Retail inspire 76% 96% 93% quartile market average Great place to work1 I
Slide 31: Colleagues
Colleagues 4,500 £8.18 £8.42 Mini-health checks per hour per hour c.1,000 17,000 17,500,000 plus benefits plus benefits Accessing mental health apprenticeship opportunities training Free fruit to 10,000 colleagues Largest ever workplace July 2018 Nov 2018 young people survey Competitive pay1 Employa
Slide 32: Suppliers
Suppliers 18/19: 1st 5 Tesco 98 supplier Product 17/18: 1st [50]% 100% partners Partners grown 16/17: 1st >2x volumes volumes “Best in Class >10% overall Retailer” Supplier Advantage survey1 Long-term relationships Project Reset 1. Third party organisation, Advantage, run an annual report to capture
Slide 33: Advantage Report 'Best in Class' Retailer
Advantage Report ‘Best in Class’ Retailer 50 45 40 35 30 25 [50]% 20 15 100% 10 5 0 Overall Business Personnel/ Category/ Retail execution Supply chain Payment Retailer own label performance relationship organisation business management processes capability development Average of all retailers Tesco
Slide 34: UK quantum sales growth (actual/Kantar estimate)
UK quantum sales growth (actual/Kantar estimate) Tesco £668m JS £70m Other Big 4 Morrison £148m Asda £226m Aldi £384m German retailers Lidl £270m Source: Tesco actual sales inc Booker; competitor data per KantarWorldPanel UK data for the 26 weeks Total Till Roll ending 26 August 2018.
Slide 35: Shareholders - Joining Forces with Booker
Shareholders - Joining Forces with Booker +15.1% 8 more 2 depots stores 3,000 products Booker 2Q LFL planned Driving faster growth Gallions Reach Utilising spare capacity Top 30 products 70 stores Big Pack offer Key services brought together
Slide 36: Shareholders – further strategic progress
Shareholders – further strategic progress +22% customer growth Carrefour Tesco Direct dunnhumby
Slide 37: Thailand
Thailand Most profitable market No. 1 market Opportunity position to grow Repositioning customer offer Realigning commercial model Attractive returns
Slide 38: Central Europe
Central Europe Market pos. #1 or 2 Market pos. #4 Sales: £2.0bn • Store closures Sales: £0.9bn • Range reset Profit: £91m Profit: £(32)m • Operating cost saving Margin: (3.2)% Margin: 4.3% • Asset disposal programme Operating cash: £39m Operating cash: £215m Czech Republic + Poland Hungary + Slovaki
Slide 39: Sustainable value creation for shareholders
Sustainable value creation for shareholders Achieve Cash profitability1 3.5% to 4.0% £1.5bn Group margin Reduce Earnings Free Generate operating growth cash flow £9bn cash costs by 18.4% £404m £1.5bn Tesco medium-term Underlying philosophy ambitions 1. Cash profitability refers to 1H 18/19 EBITDA.
Slide 40: Summary
Summary. • Good start to the year – growth in sales, increased profitability and strong cash flow • Continuing to invest in the quality and value of our offer • Strong start ‘Joining Forces’ with Booker • Addressing specific challenges in Poland and Thailand • On track to deliver our medium-term amb
Slide 41: Q&A
Q&A. 41
Slide 42: Appendix
Appendix.
Slide 43: Segmental performance
Segmental performance Sales Operating profit before exceptional items and amortisation of acquired intangibles Change at Change at Change at Change at 1H 18/19 1H 17/18 constant actual 1H 18/19 1H 17/18 constant actual rates1 rates1 rates rates UK & ROI £22.4bn £19.0bn 17.7% 17.7% £685m £464m 47.0%
Slide 44: Margin progression
Margin progression Group UK & ROI 2.65% 2.94% 2.66% 2.18% 2.10% 1.82% 1 1H 16/17 2 1H 17/18 3 1H 18/19 1H 1H 16/17 1H1H 17/18 1H 1H 18/19 Central Europe Asia 5.60% 4.14% 4.23% 1.90% 1.89% 0.56% 1H 1H 16/17 1H 1H 17/18 1H 1H 18/19 1H 1H 16/17 1H 1H 17/18 1H 1H 18/19 Operating margin shown before exce
Slide 45: Like-for-like sales performance
Like-for-like sales performance1 Tesco UK ROI 2.5% 5.3% 2.3% 2.3% 2.3% 2.1% 2.1% 3.3% 3.0% 3.1% 2.0% 0.2% 17/18 17/18 17/18 17/18 18/19 18/19 17/18 17/18 17/18 17/18 18/19 18/19 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q Booker 15.1% 14.3% 18/19 18/19 1Q 2Q 1. Exc. VAT, exc. Fuel.
Slide 46: Like-for-like sales performance
Like-for-like sales performance1 Central Europe Asia 0.6% 0.8% 0.4% (0.4)% (1.0)% (4.8)% (6.0)% (2.0)% (9.0)% (9.6)% (10.7)% (14.0)% 17/18 17/18 17/18 17/18 18/19 18/19 17/18 17/18 17/18 17/18 18/19 18/19 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q 1. Exc. VAT, exc. Fuel.
Slide 47: UK like-for-like sales performance by format
UK like-for-like sales performance1 by format Extra Superstores 2.9% 2.8% 2.3% 2.3% 2.3% 2.5% 1.8% 2.1% 1.4% 1.7% 1.3% 0.9% 17/18 17/18 17/18 17/18 18/19 18/19 17/18 17/18 17/18 17/18 18/19 18/19 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q Metro Express 5.9% 4.0% 2.8% 2.8% 2.0% 2.1% 2.3% 1.7% 1.2% 1.2% 0.8%
Slide 48: Exceptional items and amortisation of acquired intangibles in operating profit
Exceptional items and amortisation of acquired intangibles in operating profit 1H 18/19 1H 17/18 Tesco Direct closure costs £(57)m - Net restructuring and redundancy costs £(22)m £(63)m Provision for customer redress £(7)m - Release of amounts provided in relation to FCA obligations £15m - Property
Slide 49: Disclaimer
Disclaimer. This document may contain forward-looking statements that may or may not prove accurate. Forward-looking statements are statements that are not historical facts; they include statements about Tesco’s beliefs and expectations and the assumptions underlying them. For example, statements re