Tesco Plc · LSE:TSCO
Tesco — FY2011/12 Earnings Presentation
81 slides from Tesco's earnings presentation, Apr 18, 2012
Slide 1: Preliminary Results 18 April 2012
Preliminary Results 18 A Aprilil 2012
Slide 2: Philip Clarke, Group Chief Executive
Philip Clarke Group Chief Executive
Slide 3: TESCO
TESCO
Slide 4: The first year – Decisive action taken
Th fi The firstt year – Decisive D i i action ti taken t k • Got Fresh & Easy moving towards break-even • Announced our decision to exit Japan • Slowed down Bank migration to focus on reliability • Significant step in the UK on price position • Addressing underperformance in the UK 4
Slide 5: UK industry – Running up the down escalator
UK industry i d t – Running R i up the th ddown escalator l t • Industry space growth too fast • Additional very big stores not the answer any more • Customers moving faster to smaller stores and internet • Social media soon to be as influential as press advertising 5
Slide 6: Following the customer
F ll i the Following th customer…. t A new approach: • Slower new space growth • Fewer bigger new stores • More M convenience i • More online • More personalisation • More localisation 6
Slide 7: Building a better Tesco
B ildi a better Building b tt Tesco…. T • Put more back in for customers • Get back to driving profits through sales • Make multi-channel a profitable reality • Act decisively to tackle underperformance • Strike a better balance between growth and returns for shareholders 7
Slide 8: Laurie Mcilwee, Chief Financial Officer
Laurie Mcilwee Chief Financial Officer
Slide 9: Financial performance
Fi Financial i l performance f • Group headlines • Segmental performance • Balance sheet • Cash flow • Key financial metrics 9
Slide 10: Group performance
G Group performance f 11/12 vs. 10/11 Group sales* £72.0bn 7.4% Group trading profit £3.8bn 1.3% Underlying profit before tax £3.9bn 1.6% Group profit before tax £3.8bn 5.3% Underlying diluted EPS 37.41p 2.1% ** Full-year dividend 14.76p 2.1% Net debt £6.8bn £0.0bn Return on capital employed 13.3% 4
Slide 11: Group performance
G Group performance f • In line with revised market expectations* • Demonstrates breadth of Group • Strong performances internationally • Delivering profit growth despite: – Challenging year in the UK – Impact of PPI+ * Source: Vuma consensus estimates, estimates published February 2012 + PPI (Payme
Slide 12: UK
UK • Strong total sales growth UK • Good new store performance Sales growth (inc. petrol) 6.2% • Like-for-like sales weakened during H2 LFL (exc. petrol) 0.0% • Some improvement post-Christmas post Christmas Trading profit £2,480m Trading profit growth (1.0)% gp Trading profit margin g 5.79% Trading
Slide 13: Asia
A i Asia • Good performance across all markets Asia • Solid like-for-like growth Sales growth (inc. petrol) 10.5% • Thailand returning to strong growth LFL (exc. petrol) 1.9% post-floods • Margins up Trading profit £737m – Thai insurance cover – Good growth in Korea and Malaysia T d profit Trading f
Slide 14: Europe
Europe • Resilient overall performance Europe Inc Tax Ex Tax • Two impacts: – £(38)m Hungary crisis tax Sales growth (inc. petrol) 7.7% – Poland – distribution centre disruption & non-food stock write-off LFL (exc. petrol) 0.9% • Double-digit profit growth in Central Trading profit £529m £567m Europ
Slide 15: US
US • Strong top-line performance US • Reduced losses by nearly 18% Sales growth (inc. petrol) 27.1% • First full-year reduction in losses since LFL (exc. petrol) 11.9% entry Trading profit £(153)m Trading profit growth 17.7% Trading gpprofit margin g (24.29)% Trading profit change 1,329bp 15
Slide 16: US – Improving store profitability
US – Improving I i store t profitability fit bilit Store profitability – grouped by weekly contribution cohorts 70 60 50 ores No. of sto 40 30 20 10 0 <(30) (30)-(25) (25)-(20) (20)-(15) (15)-(10) (10)-(5) (5)-0 0-5 5-10 10-15 15-20 20-25 25+ EBITDA ($k/wk)* * Trading profit before depreciation and
Slide 17: Tesco Bank
T Tesco B Bank k • Baseline profit increased by 29% to Strong baseline profit growth £203m* 250 • FFair i value l releases l reduced d d from f £155m to £22m 200 £203m • Trading T di profit fit off £168m £168 150 +29% £158m • Capital position improved 100 – Risk asset ratio now 16.0% • Liquidity als
Slide 18: Japan – Discontinued
J Japan – Discontinued Di ti d 11/12 (£m) 10/11 (£m) Revenue 436 476 Trading loss (25) (35) Non cash impairment (77) (55) Restructuring (20) (9) Other (property and interest) (3) (7) Loss before tax (128) (106) Tax (14) 0 Loss after tax (142) (106) 18
Slide 19: Cash flow and balance sheet
C h flow Cash fl and d balance b l sheet h t • Net debt remained stable at £6.8bn • Group capital expenditure slightly below guidance at £3.8bn • Retail operating cash flow £3.8bn* * Cash generated from retail operations excluding Tesco Bank 19
Slide 20: Releasing value from property
R l i value Releasing l from f property t • Successful year – £376m property profits – £1bn disposals • Tesco Lotus Property Fund, Thailand – Raised £379m from 17 stores and malls after the 2011/12 year-end – Priced at top end of range – Strong demand – 11 times over-subscribed – Initial trading ahe
Slide 21: Cash flow and balance sheet
C h flow Cash fl and d balance b l sheet h t • Net debt remained stable at £6.8bn • Group capital expenditure slightly below guidance at £3.8bn • Retail operating cash flow £3.8bn* • £ 1bn property proceeds; £376m property profits • Net IAS19 pension deficit (post-tax) increased to £1.4bn • One-off
Slide 22: Key financial metrics
K fi Key financial i l metrics ti X Return on Capital Employed Fixed Charge Cover: EBITDAR/(Interest + Rent) X 13.3% 14.6% 8 6.3 12.1% 12.9% 5.5 6 4.2 3.7 3.9 3.9 4 2 0 FY 09/10 FY 10/11 FY 11/12 FY 14/15 Target FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 Target to hit 14.6% ROCE by 2014/1
Slide 23: Philip Clarke, Group Chief Executive
Philip Clarke Group Chief Executive
Slide 24: A tough year
A tough t h year • Strong International performance only just compensated for UK • Difficult environment for consumers at home • Important financial consequences • Decision to give up some short-term short term profit to safeguard the long-term long term 24
Slide 25: Diagnosis
Di Diagnosis i • Pace of change needed to accelerate • Inherited a great business • Built around customers and staff • High quality assets • Multiple opportunities for growth • Recession hit hard – longer and deeper than expected 25
Slide 26: Driving change – Decisive action
D i i change Driving h – Decisive D i i action ti 1. Putting more back into the UK business 2. Reducing the drag : – United States – Japan – Bank migration 3. Increased focus on remaining well-positioned for the opportunities and challenges of the internet 26
Slide 27: Team priorities
T Team priorities i iti Becoming Becoming a Keeping the UK outstanding multi-channel strong g and internationally, y, retailer growing not just wherever we successful trade Delivering on the potential of Applying Delivering retailing Group skill and higher returns services scale l – The Bank 27
Slide 28: International performance strong
I t International ti l performance f strong t • Total profit growth 22%* • Despite very tough economic conditions in several markets * Pre-Hungary crisis tax 28
Slide 29: Fresh & Easy
F h & Easy Fresh E • Reduced losses, more progress • Decisive change of trend • Customer offer significantly improved • Two year like-for-like over 20% • Focus on store profitability • Measured approach to new capital 29
Slide 30: Market share growth – Good progress
M k t share Market h growth th – Good G d progress Asia Market Share Change Europe Market Share Change Poland § 6.9% 0.4% South Korea* 5.7% 0.1% Hungary § 20.0% 0.8% Thailand ± 13.0% 0.6% Czech C h∞ 11 2% 11.2% 1 0% 1.0% Slovakia ∞ 20.3% 1.2% Malaysia y + 10.2% ((0.1)% ) Turkey μ 1.7% 0.0% China +×
Slide 31: Thailand
Th il d Thailand 31
Slide 32: Smaller formats driving growth
S ll fformats Smaller t ddriving i i growth th Total international space – as at Feb 2012 New international space – forecast 12/13 Small Large 49% 51% 32
Slide 33: The hypermarket – more to come
Th h The hypermarket k t – more to t come • 31 conversions to Extra in Europe, 3 in Asia • 17% cumulative improvement in sales • Food and service-focused, tight general merchandise assortment, strong clothing offer 33
Slide 34: Poland
Poland Dove. nowy ove 4 MENS MEN+CARE
Slide 35: China
China Chi • Tough environment – Slowing economy – High inflation and wage costs • More cautious stance – No new substantial freehold commitments – Holding back on leasehold hypers for the time being – 16 new hypers in 2012/13 • P Potential t ti l engine i off growth, th constrained by short term cha
Slide 36: Korea
Korea 36
Slide 37: Tesco International – Rapid growth
T Tesco IInternational t ti l – Rapid R id growth th O Operating/trading ti /t di profit fit £m 1,200 1,113 1,000 800 600 400 200 0 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 Note 1: 11/12 is on a continuing operations basis; all other years are as reported N
Slide 38: Tesco Bank
T Tesco B Bank k • Migration project almost complete • Low cost model • Robust, modern systems • Good market positions • 75% of business online • New products appearing soon • Well-placed p to deliver good g growth g 38
Slide 39: Keeping the UK strong and growing
Keeping the K h UK strong and growing 39
Slide 40: UK performance
UK performance f UK S Sales l and dPProfit fit G Growth th – 2006/07 to t 2011/12 Trading Profit Margin LFL £m % % 3,000 , 7 UK Trading Margin 6 2,500 LFL 5 2,000 4 1,500 3 1,000 2 500 1 0 0 06/07 07/ 08 08/09 09/10 10/11 11/12 40
Slide 41: Productivity index too high
P d ti it index Productivity i d too t high hi h St Store P Productivity d ti it Index I d (PI) – Total T t l store t Index 108 106 104 102 100 06/07 07/08 08/09 09/10 10/11 11/12 41
Slide 42: UK
UK 42
Slide 43: Customer perceptions
C t Customer perceptions ti Shopping Trip – Long Term Performance Summary Promise Every Little Helps Measure 2002 Position 2007 Position 2011 Position Price 2nd 2nd Prices are good Promotions Food Range 1st 1st 1st I can get what I want Food Quality 2nd 2nd A il bili Availability 1 1st 2 d 2nd I don
Slide 44: The UK Plan – Building a Better Tesco
Th UK Pl The Plan – Building B ildi a Better B tt Tesco T 1. Service & Staff 2. Stores & Formats 3. Price & Value 4. Range & Quality 5. Brand & Marketing 6. Clicks & Bricks 44
Slide 45: Service & Staff
S i & Staff Service St ff • Putting P i staffing ffi levels l l back b k in i • Particularly in fresh areas & large stores • Recruiting, training, equipping 8,000 staff • Our biggest ever service investment: over £200m • Dedicated staff in key departments – Produce – Meat – Chilled convenience food
Slide 46: Service & Staff – Encouraging results
S i & Staff Service St ff – Encouraging E i results lt +1.2% +1.1% LFL LFL Mystery y y shopper pp scores 7.8% higher than control group All invested stores to date 16 Stores after 200 Stores after 31 weeks* 17 weeks *16 stores include 4 stores live for 42 weeks & 12 stores live for 31 weeks 46
Slide 47: Stores & Formats
Stores & Formats Welcome to TESCO a a eT 47
Slide 48: Stores & Formats
Stores & Formats TESCO 48
Slide 49: Stores & Formats
St Stores &F Formats t 49
Slide 50: Stores & Formats
Stores & Formats — ne < aiS ane bane: a, | PL ear ate ( aa MERE SP ae Uhm FS
Slide 51: Stores & Formats
Stores & Formats 51 TESCO
Slide 52: Stores & Formats
Stores & Formats c 4 : r he | Peat - “a 7q am ~ 5 ae —_= el = TEAM LEED — en __ a.) = a a ——— 244g a ei eiaa) A A 4) ie Te aged SERRE ; c UL vars 2 + mal ! «What ‘| LT OT AS ”
Slide 53: New space – A fundamentally new approach
N space – A fundamentally New f d t ll new approach h • Less L new space overallll • 1.5m sq ft new space in 2012/13 – nearly 40% less than last year • Reflecting growing importance of online • Focusing on most productive use of capital • Continued growth in all formats; some clear priorities: – Exp
Slide 54: The hypermarket
Th h The hypermarket k t • Extra – still an opportunity for growth Proportion of Extra stores by size • New stores smaller on average 10 stores t • Food, services and clothing-focused over 100k 42 stores • Reflecting rapid growth of non-food between 80k & 100k online • Existing estate profitable and
Slide 55: Price & Value
P i &V Price Value l Big Price Drop Loyalty Value for money Coupons Promotions 55
Slide 56: Range & Quality
Range & Quality Pure Orange Juice From concentrate & white bread medium sliced we iui eas (Same ie TESCO 56
Slide 57: Ranging – More store and format-specific
R Ranging i – More M store t and d format-specific f t ifi 57
Slide 58: Brand & Marketing
Brand & Marketing Price va OY, Pricesaredropping.on Sux ( voTeNow
Slide 59: Clicks & Bricks
Cli k & B Clicks Bricks i k • Strategic opportunity of internet for business with our scale, reach and capability • Well-placed to prosper • Grocery G fi firstt – Profitable – Advantage g in international markets from our UK model 59
Slide 60: Clicks & Bricks
Cli k & B Clicks Bricks i k • Total online sales of £2.8bn • Profits up, despite development cost h d i d headwind • UK grocery accelerating its growth • Tesco Direct – step-change in offer 60
Slide 61: Grocery online – UK
G Grocery online li – UK • Sales grew 10%; profits increased • Investment in offer well-received: – More capacity – More delivery slots – Flexible delivery charges • Click & Collect Grocery now in 45 stores 61
Slide 62: dotcom-only store network
d t dotcom-only l store t network t k • Enfield opened January 2012 • Offering greater range to diverse London market • Freeing up room for existing store growth • Last two London locations open by end 2013 62
Slide 63: International dotcom
I t International ti l dotcom d t Prague • Existing operations performing well dotcom grocery – Korea operation doubled profit in H2 • Strong start in Prague – ahead of plan • Warsaw to launch soon 63
Slide 64: Tesco Direct
T Tesco Di Directt • New website launched – More content – Doubling range to over 75,000 75 000 SKU’s SKU s – First stage of Marketplace – Phased improvements throughout year • Click & Collect in nearly 800 stores – 70% of non-food online volume – In 70 Expresses now – 700 by year-end 64
Slide 65: The UK Plan – Building a Better Tesco
Th UK Pl The Plan – Building B ildi a Better B tt Tesco T 1. Service & Staff 2. Stores & Formats 3. Price & Value 4. Range & Quality 5. Brand & Marketing 6. Clicks & Bricks 65
Slide 66: The UK team
Th UK team The t Chris Bush David Hobbs Mike Iddon Nigel Jones Judith Nelson Philip Clarke UK COO UK Operations Planning & UK Finance UK Commercial UK & ROI Personnel Strategy Director Director Director Director Steve Rigby John Scouler Ken Towle David Wood Andrew Yaxley UK Property Director UK Comm
Slide 67: UK – Summary
UK – Summary S • We know what the issues are and we know how to fix them • Pilots encouraging • Execution is key • Getting the UK back to form: the priority • Strong, hand-picked management team • Confident we can get the business leading, performing and growing 67
Slide 68: Laurie Mcilwee, Chief Financial Officer
Laurie Mcilwee Chief Financial Officer
Slide 69: Outline
O tli Outline • Financial implications of UK plan • Financial strategy – Capital expenditure – Space – Returns – Cash 69
Slide 70: UK – Financial implications
UK – Financial Fi i l implications i li ti UK Trading T di Profit P fi Margin M i % % 7 6.2 6.1 6.0 6 5.6 Consensus* 5 4 3 H1 10/11 H2 10/11 H1 11/12 H2 11/12 FY 12/13 70
Slide 71: Financial Strategy – Group capex
Fi Financial i l Strategy St t – Group G capex • Group capital expenditure will reduce to £3.3bn in 2012/13 • Going forward, less than 5% of sales • New phase of growth • Businesses competing for capital • Balancing growth and returns 71
Slide 72: Financial Strategy – Capex and space
Fi Financial i l Strategy St t – Capex C and d space • Greater share of Group capital expenditure into smaller, higher-returning formats • UK: – Less overall capital expenditure – Less new space – New stores: smaller, more focused on food than non-food • More on existing stores – over £200m in enlar
Slide 73: Financial Strategy – Capital work-in-progress
Fi Financial i l Strategy St t – Capital C it l work-in-progress ki • Pipeline – around £2bn UK work-in- progress • Reduction R d i going i forward f d – Building out pipeline faster than adding new sites – Key contributor to UK space growth – Completion of mixed use schemes, with build phase in 201
Slide 74: Financial Strategy – Cash
Fi Financial i l Strategy St t – Cash C h • Overall reduction in Group capex • Return to growth in cash contribution from UK • International businesses making increasingly positive contribution • Strong plans to improve working capital inflow • Outlook for Tesco: increasingly cash-generative 74
Slide 75: Maintaining ROCE target of 14.6%
M i t i i ROCE target Maintaining t t off 14 14.6% 6% Return on capital employed ROCE (%) 25 20 0 • Infrastructure I f in i place l • Good market positions 15 • Group scale/skill to come • Building infrastructure 10 • Immature capital UK* • Sub scale Leading 5 (Bank, Ireland, Korea, Developing Thail
Slide 76: Summary
Summary • Greater capital discipline and restraint • More sustainable level of growth • Less capital-intensive investment – Less new space – More focus on existing stores – More new small stores – More online • Reduced non-productive capital and higher hurdle rates for new opportunities • Higher ret
Slide 77: Philip Clarke, Group Chief Executive
Philip Clarke Group Chief Executive
Slide 78: Summary
Summary • Great business – UK’s biggest retail company – Record Group profits • Confident we can get UK business where we want it to be – Innovating, Innovating changing, changing adapting to meet customers customers’ needs – Leadership in new era of retailing • Focus on what we have • Making sure e
Slide 79: Building a better Tesco
Building a better Tesco TESCO LT OT AS
Slide 80: Q&A
Q&A
Slide 81: Preliminary Results April 2012
Preliminary Results 18 A Aprilil 2012