Tesco Plc · LSE:TSCO
Tesco — FY2017/18 Earnings Presentation
53 slides from Tesco's earnings presentation, Apr 11, 2018
Slide 1: Serving Britain's shoppers a little better every day
Serving Britain’s shoppers a little better every day. 11 April 2018 Dave Lewis – CEO Alan Stewart – CFO
Slide 2: Agenda
Agenda. • Full year results • Three years on: • Six strategic drivers • Four key stakeholders • Looking ahead and Booker 2
Slide 3: FY results
FY results.
Slide 4: A year of progress
A year of progress +2.3% +28.4% +21.7% £2,773m £1,644m £2,279m £1,280m £51.0bn £49.9bn FY 16/17 FY 17/18 FY 16/17 FY 17/18 FY 16/17 FY 17/18 Positive sales growth1 Strong profit growth2 Strong retail cash generation3 1. Group sales growth at actual rates on a comparable days and a continuing operati
Slide 5: UK performance
UK performance +50 bps YoY 2.5% 2.3% +260,000 1.9% 1.9% 16/17 17/18 FY 2H Emphasis on fresh food More customers Improved profitability volumes shopping with us1 1. Kantar data for the 52 weeks to 25 February 2018. 5
Slide 6: UK & ROI
UK & ROI Operating profit and margin1 • Strong sales: – >2% LFL in every quarter; 2.4% in 4Q – UK fresh food volume up 0.7%, £1,053m outperforming the market by 1.7%2 £803m – Own Brand increased to 51% of sales • Improved profitability: 1.8% 2.3% – £404m saved through cost savings plan – 2H operatin
Slide 7: Central Europe
Central Europe Operating profit and margin1 • Focused sales growth: – Food like-for-like sales growth +1.2% – Small store like-for-like sales growth +3.2% • Profit more than doubled to £119m £119m – £70m saved through cost savings plan 1.8% • £389m cash generated from operations £58m 0.9% Central Eu
Slide 8: Asia
Asia Operating profit and margin1 • Strategic actions to focus on sustainable, profitable sales growth – Bulk sales impact of c.(6)% £299m – 44% reduction in short-term couponing £262m • Further improvement in profitability despite full year deflation of c.(1)% 5.0% 6.0% – Operating margin up 99b.p.
Slide 9: Tesco Bank
Tesco Bank • 4.1% growth in active customer accounts • Operating profit before exceptional items up 10% • 16% growth in lending balances, driven by secured lending – Mortgage lending growth of 39% – Proportion of secured lending increased to 26% • Balance sheet remains strong with a Risk Asset Ratio
Slide 10: Tesco Bank
Tesco Bank FY 17/18 Change Lending to customers £11,522m 15.7% Secured lending £3,001m 39.2% Unsecured lending £8,522m 9.2% Bad debt: asset ratio 1.3% (0.2)% Operating profit pre exceptional items £173m 10.2% Cost: income ratio1 59.7% 2.6% improvement Net interest margin 3.9% (0.1)% Tier 1 capital r
Slide 11: Sources and uses of cash
Sources and uses of cash £499m £2,965m £2,773m £2,466m £(192)m £362m £1,377m £(1,190)m £(428)m £(140)m Retail cash Underlying Retail cash Exceptional Retail Cash capex Net Net property Disposals and Retail free generated working generated cash items1 operating cash interest transactions dividends ca
Slide 12: Capital expenditure
Capital expenditure £50m £171m £239m £1.1bn £1.1bn by region £227m by type £677m £133m £701m UK & ROI Central Europe Asia Bank Maintenance/refresh IT/productivity New space/business FY 18/19 onwards capex guidance: between £1.1bn and £1.4bn 12
Slide 13: Pension
Pension Movement in IAS 19 deficit • Triennial pension review concluded £6.6bn – Small increase in annual contributions to £285m p.a. from April 2018 – Actuarial deficit as at March 2017: £3.0bn £3.2bn • IAS 19 pension deficit reduced to £2.7bn £2.7bn • Discount rate more appropriately reflects corp
Slide 14: Balance sheet progress
Balance sheet progress Net debt Lease commitments Pension deficit £7.8bn £7.4bn £6.9bn £5.1bn £5.5bn £3.7bn £2.6bn £2.6bn £2.7bn FY 15/16 FY 16/17 FY 17/18 FY 15/16 FY 16/17 FY 17/18 FY 15/16 FY 16/17 FY 17/18 Total indebtedness £12bn (down from £21bn in 2014) 14
Slide 15: Debt reduction
Debt reduction • Repayment of £2.7bn of outstanding debt during FY 17/18: – £1.4bn maturities – Tender offers in July (£500m) and October (£800m) – c.£50m annualised interest savings 1.50 Remaining Debt Maturities Paid off within FY 17/18 5.5% 1.00 1.38% 6.15% 0.50 5.13% 5.0% 5.2% 6.0% 5.13% 4.88% -
Slide 16: 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 5.5x 2.7x 5.1x 5.0x 5.0x 2.2x 1.9x 1.9x 4.5x 2.0x 4.0x 3.5x 3.3x 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 FY 14/15 FY 15/16 FY 16/17 FY 17/18 1. Ne
Slide 17: Earnings per share
Earnings per share FY 17/18 % change Three year progress4 Operating profit1 £1,644m 28.4% 11.88p JVs & Associates1 £(6)m 80.0% Net finance costs2 £(356)m 24.1% 7.30p Profit before tax3 £1,282m 63.5% 5.79p Taxation £(309)m (64.4)% Profit after tax3 £973m 63.3% Diluted weighted average number 8,192 0.
Slide 18: Final dividend
Final dividend • 2p final dividend • Ex-dividend date 17 May 2018; Payment date 22 June 2018 • Total cash cost of c.£164m (payable in FY18/19) • Targeting cover of around two times earnings in medium term 18
Slide 19: 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 20: Financial summary
Financial summary. • Continued strong growth in sales (+2.3%), profit (+28.4%), cash (+21.7%) and earnings (+62.7%) • Increased profitability 3.0% Group operating margin in second half • £594m cost savings in year; £820m savings to date • £2.7bn debt repaid in year • Total indebtedness down £4.4bn t
Slide 21: Three years on
Three years on. 21
Slide 22: Six strategic drivers
Six strategic drivers. 2 2
Slide 23: A differentiated brand
A differentiated brand Jan 2014 – Feb 2018 14/15 17/18 Change BrandIndex Score 30.0 NPS1 38.7 53.7 +15.0 25.0 Quality 20.0 12.5 24.7 +12.2 perception2 15.0 Value 6.5 18.8 +12.3 perception2 10.0 5.0 0.0 2014-01-01 Jan 2014 2015-01-01 2016-01-01 2017-01-01 2018-01-01 Feb 2018 Tesco Other UK supermarke
Slide 24: Reduce operating costs by £1.5bn
Reduce operating costs by £1.5bn Cumulative cost savings Cost savings towards £1.5bn target 1.5 £541m £174m 1.0 £541m of £104m £174m of £820m £550m £500m £485m 0.5 £226m Store operating Logistics and Goods not for model distribution resale 0.0 1H FY 1H FY 1H FY 1H FY 16/17 16/17 17/18 17/18 18/19 18
Slide 25: Generate £9bn cash from operations
Generate £9bn cash from operations Feb 2016 – Feb 2018 Sources of cash – three years to Feb 2018 Cumulative retail cash generated from operations1 £1.4bn 19% £5.6bn £9.0bn £6.2bn £2.5bn 81% FY 16/17 FY 17/18 FY 18/19 Improved profitability Working capital inflow 1. Cumulative retail cash generated f
Slide 26: Maximise the mix to achieve a 3.5% - 4.0% margin
Maximise the mix to achieve a 3.5% - 4.0% margin Fresh Packaged GM Clothing Total Large stores Small stores Online Total FY X% 17/18: 2.9% FY 16/17: 2.3% FY 15/16: 1.8% FY 14/15: 1.8% Matrix as shared in October 2016. Colour of boxes illustrates indicative margin percentage relative to total (blue –
Slide 27: Maximise the mix to achieve a 3.5% - 4.0% margin
Maximise the mix to achieve a 3.5% - 4.0% margin 2.5% 6.5% 2.1% 2.7% 6.0% 5.8% 1.9% 5.6% 5.6% 1.8% 1.6% 1.9% 1.7% 4.2% 4.1% 1.6% 1.3% 0.8% 1.0% 0.6% (0.2)% 2H 1H 2H 1H 2H 1H 2H 2H 1H 2H 1H 2H 1H 2H 2H 1H 2H 1H 2H 1H 2H 14/15 15/16 16/17 17/18 14/15 15/16 16/17 17/18 14/15 15/16 16/17 17/18 UK & ROI
Slide 28: Maximise the mix to achieve a 3.5% - 4.0% margin
Maximise the mix to achieve a 3.5% - 4.0% margin Contribution to Growth % - 4 we1 Contribution to Growth % - 12 we1 4.0% 3.5% 3.5% 3.0% 2.5% 2.5% 2.0% 1.5% 1.5% 1.0% 0.5% 0.5% 0.0% (0.5)% (0.5)% (1.0)% (1.5)% (1.5)% Tesco Competitor 1 Competitor 2 Competitor 3 Tesco Competitor 1 Competitor 2 Competi
Slide 29: Maximise value from property
Maximise value from property Feb 2015 – Feb 2018 Three year progress Cumulative value from property proceeds1 £1,404m • Freehold proportion2: 41% to 52% £1,113m • Proceeds released: £1.4bn £568m • Space repurposed: 2.6m sq.ft FY 15/16 FY 16/17 FY 17/18 1. Proceeds from sale of property, plant and eq
Slide 30: Innovation
Innovation Ideas Feasibility Capability Pre-launch Launch Execution prep 30
Slide 31: Innovation
Innovation Own Brand Clubcard Pay+ 31
Slide 32: Our four key stakeholders
Our four key stakeholders. 3 2
Slide 33: Three years on: Customers
Three years on: Customers Aug 14 Feb 18 2.4% 6.8 22.7 +0.4% 38.7 53.7 (1.5)% Net promoter score1 Food market share2 Loyalty3 Brand perception4 1. Reflects % of Fans minus Critics answering the question “Based on your visit, how likely is it that you would recommend the following to a friend or colle
Slide 34: Three years on: Colleagues
Three years on: Colleagues Customer-facing +10.5% colleagues 18,443 70% 83% 23 46 +3.1% Management roles 5,900 0% Great place Great place Transformation3 Investment in to work1 to shop2 colleagues4 1. Reflects % of colleagues recommending Tesco as a great place to work as part of our ‘What Matters T
Slide 35: Three years on: Suppliers
Three years on: Suppliers Food LFL Volume 17/18: 1st 4.0% 0 10,500 16/17: 1st 51% 78% users 15/16: 4th (7.0)% 14/15: 4th Q1 10/11 Q4 17/18 Supplier Viewpoint1 Supplier Network Supplier Advantage Growing volumes3 survey2 1. Reflects % of UK suppliers responding positively when asked ‘Overall how sati
Slide 36: Three years on: Shareholders
Three years on: Shareholders 3.0% Group £(2.6)bn operating margin net debt Gaining share £1.4bn in Food free cash flow 2H 2H 2H 2H FY 15/16 FY 16/17 FY 17/18 14/15 15/16 16/17 17/18 £1.4bn Losing share Loss-making free cashfree Negative flow £(8.5)bn to all in UK cash flow Net debt 36
Slide 37: Three years on: Shareholders
Three years on: Shareholders £12bn Capital discipline Dividend 11.88p total Reinstated: £1.1bn - £1.4bn/yr EPS indebtedness 3.0p/share Significant £21bn capital expenditure 5.70p Dividend total £5bn EPS cut indebtedness £0bn 08/09 10/11 12/13 14/15 37
Slide 38: In the UK, creating the leading food business
In the UK, creating the leading food business. 3 8
Slide 39: Booker results (unaudited)
Booker results (unaudited) • Q4 customer satisfaction up further 0.3% on Q3, to 85.7% • Q4 like-for-like sales up 9.9% • c.£195m FY 17/18 operating profit before exceptional items • c.£120m FY 17/18 net cash 39
Slide 40: Joining forces
Joining forces Distribution & At least Procurement fulfilment At least £175m £25m Central Significant cost Significant revenue On time, as proposed synergy potential growth potential 40
Slide 41: Unlocking new growth
Unlocking new growth Range New innovative Expanded Click & Collect, optimisation formats delivered offer Mobile, Banking 41
Slide 42: Synergies and exceptional costs
Synergies Central £200m over 3 years c.£200m < £145m Procurement c.£140m over 3 years £2.5bn c.£60m 18/19 19/20 20/21 Synergies Exceptional costs Revenue aspiration 42
Slide 43: Minimum change, maximum impact
Minimum change, maximum impact Purpose ‘Serving Britain’s Customers a little better every day’ Values 1. No one tries harder for customers 2. We treat people how they want to be treated 3. Every little help makes a big difference Operating Principles Health Safe + Legal Customer satisfaction Cash pr
Slide 44: Sustainable value creation for shareholders
Sustainable value creation for shareholders Cash 3.5% to 4.0% profitability Earnings Free £9bn £1.5bn growth cash flow Tesco medium-term Underlying philosophy ambitions 44
Slide 45: Summary
Summary. • Delivering against our six strategic drivers • Continued momentum in our performance – Sales up, profits up, cash up, debt down – Shifting the mix and more customers are shopping at Tesco – Balance sheet significantly strengthened • Very confident that the UK’s leading food business can u
Slide 46: Q&A
Q&A. 4 6
Slide 47: Appendix
Appendix.
Slide 48: Segmental performance
Segmental performance Sales Operating profit before exceptional items Change Change Change Change FY 17/18 FY 16/17 constant actual FY 17/18 FY 16/17 constant actual rates1 rates1 rates rates UK & ROI £38.7bn £37.7bn 2.2% 2.5% £1,053m £803m 30.3% 31.1% Central £6.3bn £6.0bn (1.6)% 6.1% £119m £58m 89
Slide 49: Margin progression
Margin progression Group UK & ROI 3.0% 2.9% 2.7% 2.5% 2.3% 2.2% 2.4% 2.3% 2.1% 2.3% 1.8% 1.8% 1.9% 1.9% 1.4% 1.6% 1.2% 0.8% 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY FY 15/16 FY 16/17 FY 17/18 FY 15/16 FY 16/17 FY 17/18 Central Europe Asia 6.5% 5.8% 6.0% 5.6% 5.6% 4.9% 5.0% 4.2% 4.1% 2.7
Slide 50: Like-for-like sales performance
Like-for-like sales performance1 UK ROI 5.3% 2.3% 2.3% 2.3% 2.1% 1.8% 3.3% 2.0% 0.7% 0.5% 0.2% 16/17 16/17 17/18 17/18 17/18 17/18 (1.3)% 16/17 16/17 17/18 17/18 17/18 17/18 3Q 4Q 1Q 2Q 3Q 4Q 3Q 4Q 1Q 2Q 3Q 4Q Central Europe Asia 0.7% 0.8% 0.6% 0.4% 0.5% 0.4% (0.4)% (6.0)% (0.8)% (9.6)% (10.7)% (14.
Slide 51: 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% 1.7% 1.8% 1.7% 1.2% 1.4% 1.1% (0.2)% 16/17 16/17 17/18 17/18 17/18 17/18 16/17 16/17 17/18 17/18 17/18 17/18 3Q 4Q 1Q 2Q 3Q 4Q 3Q 4Q 1Q 2Q 3Q 4Q Metro Express 4.0% 2.0% 3.1% 2.6% 2.8% 1.5% 2.3% 1.2% 1.7% 0.8% 0.
Slide 52: Exceptional items
Exceptional items FY 17/18 FY 16/17 Restructuring and redundancy £(102)m £(199)m Property transactions £79m £165m Disposal of opticians business £38m - Interchange legal settlement - £57m Amounts (provided)/released in relation to SFO and £25m £(235)m FCA obligations Profit on the sale of Lazada £12
Slide 53: 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