Tesco Plc · LSE:TSCO
Tesco — Investor Presentation (February 2019)
21 slides from Tesco's investor presentation, Feb 15, 2019
Slide 1: Introducing IFRS 16
Introducing IFRS 16. 15 February 2019 Alan Stewart – CFO
Slide 2: Agenda
Agenda. • Introduction • Key principles of IFRS 16 • Impact on reporting of our financial statements • What happens next? • Q&A 2
Slide 3: Key messages
Key messages • No impact on: – Our economics – How we run the business – Cash • Significant impact on reporting of our financial statements: – Leases brought on balance sheet, including extensions (where ‘reasonably certain’) and contingent commitments – Shape of income statement changes significant
Slide 4: Our approach
Our approach • Two options available for IFRS 16 adoption: – Fully retrospective and modified retrospective • Elected to use a fully retrospective approach – As if IFRS 16 had always applied – Most comprehensive and representative view – Comparative year (2018/19) accounts restated • Comprehensive a
Slide 5: IFRS 16 key principles - Balance sheet
IFRS 16 key principles - Balance sheet Example 1: 20 year lease with fixed annual rentals • Aligns presentation of leased assets more closely to owned assets Asset depreciates evenly over life Liability decreases by cash rental payments • Brings both an asset and liability on balance sheet net of in
Slide 6: IFRS 16 key principles - Income statement
IFRS 16 key principles - Income statement Example 1: 20 year lease with fixed annual rentals • Straight-line operating lease rental expense replaced by: – depreciation on right of use asset, straight-lined over lease term EPS dilutive at beginning of lease… – interest charge on lease liability which
Slide 7: Understanding our lease portfolio
Understanding our lease portfolio • Relatively immature: – Around one-third expired – Average total lease length of 26 years • 67% of liabilities relate to standalone leases, 33% to leases with JVs • 77% of liabilities subject to RPI-linked rental uplifts 1400 1200 Lease liability £m 1000 800 600 40
Slide 8: Calculating our IFRS 16 lease liability
Calculating our IFRS 16 lease liability • The lease liability is greater than currently disclosed minimum lease commitments due to: 1. 1 Inclusion of contingent lease commitments 2. 2 Inclusion of extension or post-break periods, where reasonably certain 3. 3 Application of lease-specific discount r
Slide 9: 1. Inclusion of contingent lease commitments
1. Inclusion of contingent lease commitments 9 Extract shown: Note 21 of the 2018/19 Interim Results statement
Slide 10: 2. Inclusion of extension or post-break periods, where reasonably certain
2. 2 Inclusion of extension or post-break periods, where reasonably certain • Currently, disclosed lease commitments are based on rent due during the non-cancellable period of leases – i.e. the minimum amount required to be paid • The IFRS 16 lease liability includes all amounts ‘reasonably certain’
Slide 11: 3. Application of lease-specific discount rates
3. 3 Application of lease-specific discount rates • Discount rate for each lease dependent on: 1 – lease start date Euro country Gov. bond specific risk – lease term yields – currency Unique • Based on rate implicit in lease if can be determined discount (e.g. where Tesco is involved in the related
Slide 12: Our lease liability – as at 25 August 2018
Our lease liability – as at 25 August 2018 PRE-IFRS 16 POST-IFRS 16 £1.0bn £10.6bn1 £1.0bn £1.4bn £7.2bn Operating lease Include contingent Include extension and Application of lease- 'New' IFRS 16 commitments commitments post-break periods where specific discount rates lease liability (discounted)
Slide 13: Balance sheet – as at 25 August 2018
Balance sheet – as at 25 August 2018 £7.8bn1 right of use asset net £14.4bn of impairment Lease liability Right of use £9.0bn brought on asset brought £0.3bn £13.0bn balance sheet £0.2bn on balance sheet £(1.2)bn Primarily We have paid Rent prepayments and reallocation of more tax to accruals no lon
Slide 14: Income statement – for 26 weeks to 25 August 2018
Income statement – for 26 weeks to 25 August 2018 • Rental charge replaced by depreciation on right of use asset and interest on lease liability IFRS 16 impacts (non-cash) Pre- Exclude: Include: Include: Post- £m Other IFRS 161 rent depn. interest IFRS 161 Revenue 31,734 31,734 No change Other opera
Slide 15: Retail cash flow – for 26 weeks to 25 August 2018
Retail cash flow – for 26 weeks to 25 August 2018 • Cash flows reclassified between operating and financing activities • No change to net cash flow … as ‘interest’ Pre- Reclassify rent Post- £m & ‘capital IFRS 16 payment… IFRS 16 repayments’ Retail operating cash flow 1,123 566 1,689 Operating lease
Slide 16: Impact on KPIs
Impact on KPIs • All current KPIs maintained • Retail free cash flow definition amended to include cash rental payments Pre- Post- Change IFRS 16 IFRS 16 statement Operating margin1 2.94% 0.59% 3.53% Rent removed and only part replaced by depreciation Income Due to combination of depreciation and in
Slide 17: Impact on debt metrics
Impact on debt metrics • Metrics redefined post-IFRS 16: – Total indebtedness ratio = Net debt + defined pension deficit (net of tax) / EBITDAR – Fixed charge cover = EBITDAR / (Net finance costs1 + cash rent) Total indebtedness ratio2 Fixed charge cover3 4.6x 3.0x 2.9x 4.4x 4.2x 2.9x 4.2x 4.0x 4.0x
Slide 18: What happens next?
What happens next? Today • Sharing 1H 18/19 income statement and cash flow on IFRS 16 basis • Sharing opening (Feb 18) and 1H (Aug 18) balance sheet on IFRS 16 basis 18/19 Prelims (10 April 2019) • Results continue to be reported on pre-IFRS 16 basis • Headline summary of IFRS 16 impact on FY18/19 f
Slide 19: Key messages
Key messages • No impact on: – Our economics – How we run the business – Cash • Significant impact on reporting of our financial statements: – Leases brought on balance sheet, including extensions (where ‘reasonably certain’) and contingent commitments – Shape of income statement changes significant
Slide 20: Q&A
Q&A. 2 0
Slide 21: 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", “shoul