Tesco Plc · LSE:TSCO
Tesco — H1 2016/17 Earnings Presentation
80 slides from Tesco's earnings presentation, Oct 5, 2016
Slide 1: Serving Britain's shoppers a little better every day
5 October 2016 Serving Britain's shoppers a little better every day Dave Lewis – CEO, Alan Stewart – CFO 1
Slide 2: Agenda
Agenda • Our three priorities • Detailed results • Building long-term value for our four key stakeholders 2
Slide 3: Three priorities
Three priorities 1 Regaining competitiveness in core UK business 2 Protecting and strengthening the balance sheet 3 Rebuilding trust and transparency 3
Slide 4: UK volume-based recovery
UK volume-based recovery UK like-for-like volume 4.0% 1.9% (7.0)% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 1 4Q 1Q 2Q 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 1. 3Q 2015/16 adjusted for the impact of non-repeated coupons in the prior year. 4
Slide 5: UK transaction growth
UK transaction growth Year-on-year change in UK transactions by quarter % 4.0% 1.6% (4.0)% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2013/14 2014/15 2015/16 2016/17 5
Slide 6: IRI outperformance – Mar 2016 to Aug 2016
IRI outperformance – Mar 2016 to Aug 20161 Value Volume Total Store Total Store Total Food Total Food Fresh Fresh Packaged Packaged General Merchandise General Merchandise 0.0% 0.5% 1.0% 1.5% 0.0% 2.0% 4.0% 6.0% 8.0% 1. Data is for Tesco Weeks 1-26 and is sourced from IRI Retail AdvantageTM, global
Slide 7: More competitive in the UK
More competitive in the UK £46.98 Total switching value Continued £45.48 +201,000 progress in Thailand £43.97 Lower prices1 Increasing footfall2 Switching gains3 1. Price data shows the price paid for a typical basket of products as at August 2014, August 2015 and August 2016. 2. Data from Kantar Wo
Slide 8: A more secure balance sheet
A more secure balance sheet Retail cash Retail cash1 generation generation1 £955m Group 50% 55% £955m £791m £791m £4.4bn UK & ROI 1H 15/16 1H 16/17 41% 48% 1H 15/16 1H 16/17 Generating cash Lower net debt Long-term Defined contribution property pension scheme approach2 1. For continuing operations.
Slide 9: Rebuilding trust and transparency
Rebuilding trust and transparency BrandIndex Index Score – an overall measure of brand health 20.0 0.0 Jan 2014 Aug 2016 Source: YouGov BrandIndex. 9
Slide 10: Rebuilding trust and transparency
Rebuilding trust and transparency Supplier viewpoint2 78% 68% 60% 51% 61% 74% Increasing competition FY 2014 1H 2015 2H 2015 1H 2016 Trust in Trusted by Improved leadership1 suppliers transparency 1. Reflects % of colleagues who trust the decisions made by their country’s board of directors to serve
Slide 11: Three priorities
Three priorities Regaining competitiveness in core UK business Protecting and strengthening the balance sheet Rebuilding trust and transparency 11
Slide 12: Half year results
Half year results 12
Slide 13: Group performance
Group performance Change Change Continuing operations 1H 16/17 constant actual rates rates Group sales (exc. VAT, exc. Fuel)1 £24.4bn 1.3% 3.3% Group operating profit before exceptional items £596m 56.7% 60.2% Exceptional items £(81)m n/m n/m Group statutory operating profit £515m 34.4% 38.4% Group
Slide 14: Segmental performance
Segmental performance Sales Operating profit before exceptional items Change Change Change Change 1H 16/17 1H 15/16 constant actual 1H 16/17 1H 15/16 constant actual rates 1 rates1 rates rates UK & ROI £18.6bn £18.4bn 0.6% 1.2% £389m £164m 134.1% 137.2% International £5.3bn £4.8bn 3.2% 10.9% £118m £
Slide 15: UK and ROI like-for-like sales performance
UK and ROI like-for-like sales performance1 UK ROI 0.9% 1.0% 0.9% 0.3% 0.3% 0.1% (1.0)% (1.3)% (1.2)% (1.5)% (2.9)% (4.4)% 15/16 15/16 15/16 15/16 16/17 16/17 15/16 15/16 15/16 15/16 16/17 16/17 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q 1. Exc. VAT, exc. Fuel. 15
Slide 16: UK like-for-like sales performance
UK like-for-like sales performance1 Extra Superstore 1.0% 0.5% 0.1% 0.0% (0.2)% (0.0)% (1.4)% (2.6)% (2.4)% (2.6)% (2.5)% (3.6)% 15/16 15/16 15/16 15/16 16/17 16/17 15/16 15/16 15/16 15/16 16/17 16/17 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q Metro Express 4.2% 3.9% 3.8% 3.8% (0.1)% (0.3)% (0.5)% (0.1)% 3
Slide 17: UK & ROI operating profit
UK & ROI operating profit £m 389 164 UK & ROI Lower prices Volume and Net cost Other UK & ROI 1H 15/16 mix benefit savings 1H 16/17 17
Slide 18: International like-for-like sales performance
International like-for-like sales performance1 Europe Asia 4.1% 3.5% 3.3% 3.0% 2.4% 3.5% 3.0% 2.8% 0.1% 1.5% 1.3% (3.4)% 15/16 15/16 15/16 15/16 16/17 16/17 15/16 15/16 15/16 15/16 16/17 16/17 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q 1. Exc. VAT, exc. Fuel. 18
Slide 19: International operating profit
International operating profit £m 122 118 International Lower Volume Other customer Net cost Other International 1H 15/16 prices and mix investment savings 1H 16/17 19
Slide 20: Tesco Bank
Tesco Bank Customer Lending/Deposits • 2% growth in active customer accounts 9.3 8.5 • 12% growth in customer lending 7.7 8.1 7.4 – Launch of premium credit card 6.9 6.9 6.1 – Expansion of mortgage distribution • Operating profit pre-exceptionals up 3.5% 13/14 14/15 15/16 1H 16/17 Customer Lending C
Slide 21: Tesco Mobile
Tesco Mobile Customer Base • Entering 14th year of JV with O2 • UK’s 5th biggest mobile provider and 4.6m 4.8m 4.4m largest MVNO 4.0m • No. 1 provider for customer satisfaction for 3.5m both PAYM and PAYG1 • Which? Recommended Provider six years running • Successful ‘Home from Home’ European roaming
Slide 22: Finance income and costs
Finance income and costs 1H 16/17 1H 15/16 Interest payable £(274)m £(252)m Capitalised interest £3m £6m IAS 19 net pension finance costs £(58)m £(84)m Finance income £83m £44m Net finance costs £(246)m1 £(286)m 1. Statutory net finance costs include a £(200)m impact from FX losses on translation of
Slide 23: Tax
Tax 1H 16/17 1H 15/16 Profit before tax before exceptional items £352m £99m Tax charge £(98)m £(52)m Effective tax rate 28% 53% • Expect full year effective tax rate of c.25% 23
Slide 24: Exceptional items
Exceptional items 1H 16/17 1H 15/16 Restructuring and redundancy £(95)m - Tesco Bank customer redress £(45)m - Property transactions £59m - Total exceptional items in operating profit £(81)m - 24
Slide 25: Pension scheme
Pension scheme • Reduced pension risk with scheme closure • IAS 19 deficit calculation impacted by drop in corporate yields – no change in underlying cash commitments to pension members • Asset de-risking strategy progressing well • Strong performance of scheme assets • Long-term deficit funding pla
Slide 26: Movement in net debt
Movement in net debt1 £m £105m IMPROVEMENT IN WORKING CAPITAL 131 955 9 964 850 (26) 27 758 236 (220) 292 203 (541) Cash flow from Impact from Underlying Retail cash Turkey retail Retail cash Interest and Capex Free cash Net impact of Property Other Reduction in continuing exceptionals working gener
Slide 27: Total indebtedness
Total indebtedness Net debt Lease commitments Pension deficit £9.1bn £8.6bn £7.8bn £7.8bn £5.9bn £5.1bn £4.4bn £4.2bn £2.6bn 1H 15/16 FY 15/16 1H 16/17 1H 15/16 FY 15/16 1H 16/17 1H 15/16 FY 15/16 1H 16/17 27
Slide 28: Liquidity position
Liquidity position • Strong liquidity • £5.2bn available cash • £5.0bn in committed facilities • £1.2bn redeemed in September 2016; £2.2bn maturities in the next 18 months • Focused on improving debt metrics 28
Slide 29: Financial summary
Financial summary • Broad-based sales growth • Further progress in rebuilding profitability • Strong liquidity • More secure balance sheet 29
Slide 30: Big 6 Half Year Performance
Big 6 Half Year Performance Customers Customers recommend recommend Grow Grow us and come us and come sales sales back time and back time and again again Colleagues Colleagues Deliver The Big 6 across recommend us as a great Deliver The Big 6 across recommend us as a great profit the Group place to
Slide 31: Building long-term value for our four key stakeholders
Building long-term value for our four key stakeholders 31
Slide 32: Over the last two years
Over the last two years Customers Colleagues Supplier Shareholders partners 32
Slide 33: Customers
Customers ANG A 777114
Slide 34: Better service
Better service +12,000 2.9 No.1 million 57,000 More colleagues Listening to Empowering in store customers1 great service 1. Reflects number of customers who have given feedback since the launch of Customer Viewpoint in 2014. 34
Slide 35: Record availability
Record availability 46.98 +9% Stock down 93.2% 95.6% £45.48 16% 1H 14/15 1H 16/17 Sales-based “Everything Clearer availability1 available”2 backrooms3 1. Sales-based availability 1H 14/15 to 1H 16/17. 2. Reflects customers’ response to “Was everything you wanted to buy available?” as part of the per
Slide 36: Clearer, lower and more stable prices
Clearer, lower and more stable prices Over 6% 37% lower Price investment1 Promotional New shelf labels count2 1. Price data shows the movement in price paid for a typical basket of products from August 2014 to August 2016. 2. Reflects the two year movement in the number of products on multibuy promo
Slide 37: Right range for customers
Right range for customers 23% +8% +3,194 Simpler more Increased own New product relevant range label space development 37
Slide 38: Right range for customers
Right range for customers 85% Was everything you wanted available? (three period rolling) 70% 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 2014 2015 2016 Competitor 1 Competitor 2 Competitor 3 Tesco Competitor 4 Competitor 5 Competitor 6 1. Reflects customers responding positively to “Was
Slide 39: Improved overall shopping experience
Improved overall shopping experience +13 NPS +6% +7% 2H 14/15 1H 16/17 FY 13/14 1H 16/17 FY 13/14 1H 16/17 Customers Better shopping Helpful recommend1 experience2 colleagues3 1. Reflects % of Fans minus % of Critics answering the question “Based on your visit, how likely is it that you would recomm
Slide 40: Little helps
Little helps Never beaten on Free fruit Helpful brands for kids technology 40
Slide 41: Colleagues
_—_ a i al | wee Colleagues
Slide 42: A great place to work
A great place to work +8% +13% +19 NPS 1H 1H 1H 1H 1H 1H 1H 15/16 1H 16/17 14/15 15/16 16/17 14/15 15/16 16/17 Engaged Motivated to go A great place colleagues1 the extra mile2 to shop3 1. Reflects % of colleagues recommending Tesco as a great place to work as part of What Matters To You? survey und
Slide 43: Investing in colleagues
Investing in colleagues +3.1% base rate 5% turnaround bonus Getting the Fairer pay model Valued rewards basics right 43
Slide 44: Closer to customers
Closer to customers 91% 96% 300 stores 88% A shared purpose1 Consistent New scheduling management system structures 1. Reflects % of UK colleagues responding positively to the questions “I understand what our Tesco purpose is”, “I understand how I help serve shoppers a little better every day” and “
Slide 45: Opportunities to get on
Opportunities to get on 3,000 apprentices Over 3,700 1,000 450 promotions new starts graduates Training Developing programmes talent 45
Slide 46: A great place to work
A great place to work A new home One Team Inclusion 46
Slide 47: Supplier partners
Supplier partners 47
Slide 48: New commercial approach
New commercial approach 24 3 91% New approach Back to front Standard payment margin terms 48
Slide 49: New commercial approach
New commercial approach Supplier Supplier Supplier Supplier network helpline Protector Line training 500+ calls 99.95% 20 issues 1,238 courses 5,000 members resolved in 7 days resolved completed Buyer training Payment terms 8,978 courses 100% <100k completed In 14 days 49
Slide 50: Supplier viewpoint
Supplier viewpoint1 72% 73% 67% 66% 61% 60% 55% 57% 49% 44% 36% 36% FY 2014 1H 2015 2H 2015 1H 2016 FY 2014 1H 2015 2H 2015 1H 2016 FY 2014 1H 2015 2H 2015 1H 2016 Simple, transparent Communicates well Treats me fairly & easy to deal with & available when needed 1. Reflects % of UK suppliers respond
Slide 51: UK Groceries Code Adjudicator 27 June 2016
“…most retailers have improved their behaviour in the past year with the highest performer identified as Tesco – 65% of those supplying the retailer saying its practices had improved…” UK Groceries Code Adjudicator 27 June 2016 51
Slide 52: End-to-end partnerships
End-to-end partnerships - Varietal Global supply Pack & consolidate development security at source Joint risk/cost Category management 52 leadership
Slide 53: End-to-end partnerships
End-to-end partnerships - + 2 days £5m +11% Fresher for Supply chain Sales growth customers saving 53
Slide 54: End-to-end partnerships
End-to-end partnerships Reducing surplus Lower system Improved production waste quality 54
Slide 55: Crop flushes
Crop flushes 29p 810 tonnes1 29p 100%2 95%3 +72%4 1. Increase in UK volumes of cherries. 2. Percentage of oversupply of grapes sold. 3. Percentage crop utilisation of strawberries. 4. Data is for Tesco Week 20 and is sourced from IRI Retail AdvantageTM, global insight providers to the retail industr
Slide 56: Exclusive fresh food brands
Exclusive fresh food brands 7% 114.6 meat 110.6 109.8 81% 102.2 4% 101.1 produce 100.0 Consistently high Overall category Leading on price2 quality1 price reduction 1. Reflects % of customers satisfied with the quality of meat and poultry as part of the weekly exclusive fresh food brands survey. 2.
Slide 57: Outperformance in meat and produce
Outperformance in meat and produce Value Volume 4.0% 8.0% 0.0% 0.0% 2Q 15/16 3Q 15/16 4Q 15/16 1Q 16/17 2Q 16/17 2Q 15/16 3Q 15/16 4Q 15/16 1Q 16/17 2Q 16/17 1. Data from IRI Retail AdvantageTM, global insight providers to the retail industry. IRI market definition excludes Aldi and Lidl. 57
Slide 58: Shareholders
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Slide 59: Our business model
Our business model Continued positive volume growth Margin Operational recovery leverage Customer investment 59
Slide 60: Six strategic drivers
Six strategic drivers 1. A differentiated brand 2. Reduce operating costs by a further £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5 – 4.0% Group margin 5. Maximise value from property 6. Innovation 60
Slide 61: 1. A differentiated brand: Long-term value creation
1. A differentiated brand: Long-term value creation 61
Slide 62: 1. A differentiated brand: Purpose
1. A differentiated brand: Purpose Every little helps serve Britain’s shoppers a little better every day 62
Slide 63: 1. A differentiated brand: Proposition
1. A differentiated brand: Proposition Unique Value Equation Tesco offering 63
Slide 64: 1. A differentiated brand: Proposition
1. A differentiated brand: Proposition Range Service Price 64
Slide 65: 1. A differentiated brand: Own label
1. A differentiated brand: Own label Entry Core Finest 65
Slide 66: 2. Reduce operating costs by a further £1.5bn
2. Reduce operating costs by a further £1.5bn c.£550m c.£450m c.£500m Store operating Logistics and Goods not model distribution for resale 66
Slide 67: 2. Reduce operating costs: Store operating model
2. Reduce operating costs by a further £1.5bn: Store operating model Operational improvements without risking service • Moving from nights to day • Changes in trading hours • Single customer service desk c.£550m • c.£450m Replenishment savings • Scan as You Shop Store operating model 67
Slide 68: 2. Reduce operating costs: Logistics and distribution
2. Reduce operating costs by a further £1.5bn: Logistics and distribution Optimise range, stock flow and fulfilment • Partnerships, sales forecasting and lower stock holding • Lower fulfilment costs • Opportunities to integrate supply and logistical systems c.£450m • Common international systems • I
Slide 69: 2. Reduce operating costs: Goods not for resale
2. Reduce operating costs by a further £1.5bn: Goods not for resale Leveraging organisational scale • Single procurement policy • Finance transformation • IT systems c.£500m • Functional roadmap Goods not for resale 69
Slide 70: 3. Generate £9bn cash from operations
3. Generate £9bn cash from operations Capital budget Financial returns 3.5-4.0% c.£400m c.£1.4bn pa Post investment reviews Margin Stock reduction Capital discipline improvement 70
Slide 71: 3. Generate £9bn cash from operations: capital discipline
3. Generate £9bn cash from operations : capital discipline Capital expenditure on loss-making businesses £700m £0m 09/10 10/11 11/12 12/13 13/14 14/15 15/16 1H 16/17 71
Slide 72: 4. Maximise the mix to achieve a 3.5–4.0% Group margin
4. Maximise the mix to achieve a 3.5 – 4.0% Group margin x% x% + y% Geography Channel Product 72
Slide 73: 4. Maximise the mix to achieve a 3.5–4.0% Group margin
4. Maximise the mix to achieve a 3.5 – 4.0% Group margin Fresh Packaged GM Clothing Total Colour of boxes illustrates Large stores indicative margin percentage relative to total = < x% Small stores = x% = > x% Online Total X% 73
Slide 74: 4. Maximise the mix to achieve a 3.5–4.0% Group margin
4. Maximise the mix to achieve a 3.5 – 4.0% Group margin Example: Channel-wide programmes • Optimisation of our operational model • Repurposing space • Specific focus on low-profitability Example: Focus on single channel, across two categories • Convergence of GMO and F&F website • Grow delivery sav
Slide 75: 5. Maximise value from property
5. Maximise value from property 1H 16/17 £121m £240m Rental insulation1 Property asset Non-core property optimisation assets 1. Annualised savings of property buybacks. 75
Slide 76: 6. Innovation
6. Innovation Never beaten on Exclusive fresh Food waste Technology brands food brands With much more to come… 76
Slide 77: Six strategic drivers
Six strategic drivers 1. A differentiated brand 2. Reduce operating costs by a further £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5 – 4.0% Group margin 5. Maximise value from property 6. Innovation 77
Slide 78: Summary
Summary • Broad-based improvement across the Group • Strong progress against all three priorities • Investment in fresh food brands is succeeding • Six strategic drivers • Delivering value for our four key stakeholders • Confident despite a tough market environment 78
Slide 79: Q&A
Q&A 79
Slide 80: Disclaimer
Disclaimer This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "antici