Tesco Plc · LSE:TSCO
Tesco — 1H 2017/18 Earnings Presentation
46 slides from Tesco's earnings presentation, Oct 4, 2017
Slide 1: Serving Britain's shoppers a little better every day
Serving Britain’s shoppers a little better every day. 4 October 2017 Dave Lewis – CEO Alan Stewart – CFO
Slide 2: Agenda
Agenda. • Six strategic drivers • 1H results • Creating long-term value for our four key stakeholders 2
Slide 3: A differentiated brand
A differentiated brand Jan 2014 – Aug 2017 1H 17/18 30 BrandIndex Score • NPS + 11 YoY 1 25 20 • YouGov Most Improved Brand 2 15 • Value perception +2.9 points 3 10 5 • Quality perception +1.9 points 3 0 Jan 2014 2014 2015 2016 2017 Aug 2017 Tesco Other UK supermarkets 1. Reflects % of Fans minus Cr
Slide 4: Reduce operating costs by £1.5bn
Reduce operating costs by £1.5bn Jan 2015 – Aug 2016 Cumulative cost savings from Oct 2016 £1.5bn target Cumulative cost savings prior to £1.5bn target 1.5 1.0 £629m £485m £400m 0.5 £250m £226m 0.0 Announced Updated Achieved 1H FY 1H FY 1H FY 1H FY Jan 15 Apr 15 by Aug 16 16/17 16/17 17/18 17/18 18/
Slide 5: Generate £9bn cash from operations
Generate £9bn cash from operations Feb 2016 – Aug 2017 1H 17/18 Cumulative retail cash generated from operations1 • £237m working capital inflow 2 • Further £71m reduction in stock 3 £3.8bn £9.0bn • One-touch replenishment now running at c.100 million cases p.a. Cumulative FY 18/19 to 1H 17/18 1. Cu
Slide 6: Maximise the mix to achieve a 3.5% - 4.0% margin
Maximise the mix to achieve a 3.5% - 4.0% margin Oct 2016 1H 17/18 Fresh Packaged GM Clothing Total • Group 2.2% 2.7%, up 50bps Large stores Small stores • UK&ROI 1.8% 2.1%, up 32bps Online • Central 0.6% 1.9%, up 132bps Total 1H X%17/18: 2.7% Europe 1H 16/17: 2.2% • Asia 4.1% 5.6%, up 146bps 1H 15/
Slide 7: Maximise value from property
Maximise value from property Feb 2015 – Aug 2017 1H 17/18 Cumulative value from property proceeds1 £1,288m £1,113m • £175m value released inc. £55m from Hackney ‘air rights’ £817m Store buyback from BLT 2 £568m • 3 Extras, 4 superstores; 665k sq.ft3 £147m • 410k sq.ft repurposed e.g. H&M, Decathlon,
Slide 8: Innovation
Innovation Ideas Feasibility Capability Pre-launch Launch Execution prep 8
Slide 9: 1H results
1H results.
Slide 10: First half progress
First half progress +3.3% +27.3% +19.3% £1,139m £25.2bn £24.4bn £759m £596m £955m 1H 16/17 1H 17/18 1H 16/17 1H 17/18 1H 16/17 1H 17/18 Positive sales growth1 Strong profit growth2 Strong cash generation3 1. Group sales growth at actual rates on a comparable days and a continuing operations basis. 2
Slide 11: UK performance
UK performance +0.3% total 84% +298,000 full price sales +1.5% fresh Volume growth1 Improving the customer offer2 Better sales mix3 1. Excluding tobacco and fuel. 2. Bakery Industry Awards. 3. Percentage of clothing sales at full price. 11
Slide 12: UK & ROI
UK & ROI Operating profit and margin1 • Strong like-for-like sales growth, up 2.1% • Lower level of inflation than market £471m • Extra LFL: +1.6%; Online grocery: +4.6% £389m • Positive fresh food volume +1.5% • More selective in General Merchandise 1.8% 2.1% • Significant cost reduction of £181m U
Slide 13: Central Europe
Central Europe Operating profit and margin1 • Improving like-for-like sales growth – 1Q: (0.4)%; 2Q: +0.6% • Ongoing investment in offer • Significant cost reduction of £42m £61m • Working closely with suppliers to mitigate inflation 0.6% 1.9% £17m 0.6% Central Europe Price Volume and Cost Cost Cent
Slide 14: Asia
Asia Operating profit and margin1 • Like-for-like sales reflect decision to stop unprofitable bulk selling £141m • 1H LFL excluding this impact: c.(2)% • Significant reduction in short-term £101m couponing, particularly in 2Q • Improved mix 5.6% 4.1% Asia Price Volume and Cost Cost inflation/ Asia 1
Slide 15: Tesco Bank
Tesco Bank • 2.6% growth in active customer accounts • 16% growth in lending balances, with an increasing focus on secured lending – Mortgage lending growth of 37% – Increased proportion of secured vs unsecured lending up 4% to 24% • Operating profit before exceptional items down (3.4)% – Strong ret
Slide 16: Tesco Bank
Tesco Bank 1H 17/18 Change Lending to customers £10,762m 16.2% Secured lending £2,542m 37.0% Unsecured lending £8,220m 11.0% Bad debt: asset ratio 1.3% 0.4% Operating profit pre exceptional items £86m (3.4)% Cost: income ratio1 59.6% 2.6% improvement Net interest margin 4.0% 0.1% Tier 1 capital rati
Slide 17: Sources and uses of cash
Sources and uses of cash £237m £1,386m £1,149m £1,139m £(247)m £277m £586m £(606)m £(173)m £(51)m Retail cash Underlying Retail cash Exceptional Retail operating Cash capex Net Net property Disposals and Retail free 1 generated from working generated from cash items cash flow interest transactions d
Slide 18: Capital expenditure
Capital expenditure £26m £53m £74m £427m £103m £427m by region by type £45m £282m £271m Maintenance/refresh IT productivity UK Central Europe Asia Bank New space/business FY 17/18 capex guidance: c.£1.1bn FY 18/19 onwards: between £1.1bn and £1.4bn 18
Slide 19: Triennial pension review
Triennial pension review • Triennial pension review concluded • Annual contributions to increase by £15m to £285m p.a. from April 2018 • Long-term framework unchanged • Actuarial deficit as at March 2017: £3.0bn (March 2014: £2.75bn) 19
Slide 20: IAS 19 pension deficit
IAS 19 pension deficit Movement in IAS 19 deficit • IAS 19 pension deficit reduced to £2.4bn £6.6bn • Discount rate more appropriately reflects corporate bond yields over life of liabilities • Latest industry life expectancy tables applied £2.9bn • Actual scheme experience favourable £2.4bn versus M
Slide 21: Balance sheet progress
Balance sheet progress Net debt Lease commitments Pension deficit £7.8bn £7.4bn £7.3bn £5.9bn £5.5bn £4.4bn £3.7bn £3.3bn £2.4bn 1H 16/17 FY 16/17 1H 17/18 1H 16/17 FY 16/17 1H 17/18 1H 16/17 FY 16/17 1H 17/18 Total indebtedness decreased from £21bn in 2014 to £13bn in Oct 17 21
Slide 22: Improving debt metrics
Improving debt metrics 1H 17/18 FY 16/17 1H 16/17 Net Debt/EBITDA1 1.3x 1.6x 2.1x Fixed Charge Cover2 2.4x 2.2x 2.0x Total indebtedness ratio3 3.7x 5.0x 5.6x 1. EBITDA is based on continuing operations (excluding Turkey). 2. EBITDAR/(Interest + Rent). 3. Net Debt + pension deficit + NPV of lease obl
Slide 23: Earnings per share
Earnings per share 1H 17/18 % change Operating profit1 £759m 27.3% JVs & Associates £12m 500% Net finance costs2 £(195)m 19.4% Profit before tax3 £576m 61.8% Taxation £(130)m (35.4)% Profit after tax3 £446m 71.5% Diluted weighted average number of shares (m) 8,175 0.4% Diluted EPS3 5.46p 71.2% 1. Be
Slide 24: Dividend
Dividend • 1p interim dividend • Ex-dividend date 12 October 2017; Payment date 24 November 2017 • Total cash cost of £82m • Intend to reach targeted cover of around two times earnings in the medium term • Reflects improved performance and Board confidence 24
Slide 25: 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 26: Financial summary
Financial summary. • Strong financial performance across the Group – 3.3% sales growth – 27% increase in operating profit; margin up 50bps – 19% increase in retail cash generation • Balance sheet significantly strengthened – Net debt reduced by £469m from FY 16/17 – £1bn of debt repaid including £50
Slide 27: Creating long-term value for our four key stakeholders
Creating long- term value for our four key stakeholders. 27
Slide 28: Customers
Customers “Everything I wanted to buy was available”1 Market outperformance2 86 84 Food 82 80 Fresh 78 76 Packaged 74 72 General Merchandise 70 1H 14/15 1H 15/16 1H 16/17 1H 17/18 -3.5% -2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% Tesco Market 1. Reflects customers responding positively to “Was everything
Slide 29: Colleagues
Colleagues A great place to work1 1H 17/18 79% • 10.5% pay increase2 78% • Simpler structures 76% • >45,000 more hours to serve customers3 1H 15/16 1H 16/17 1H 17/18 1. Reflects % of colleagues recommending Tesco as a great place to work as part of our ‘What Matters To You?’ survey undertaken every
Slide 30: Suppliers
Suppliers Growing volumes with supplier partners Contribution to volume growth No. of partners Volume growth 95 >100% 185 >50% 330 >25% 568 >10% Range review New product Growth of core development Data is as presented at IGD Tesco update in May 2017, showing volume growth for the last 12 months. 30
Slide 31: Shareholders - a structurally advantaged business
Shareholders - a structurally advantaged business 3,582 >99% 16m active stores coverage households Unrivalled store network Unparalleled online reach Loyal customer base 70% 67 c.50% strategic one touch of sales replenishment partners Supply chain expertise1 Unique own label capability Long-standing
Slide 32: Shareholders – January 2015 internal plan
Shareholders – January 2015 internal plan Sales base Levers Ambitions Volume Reduce costs £50bn exc. fuel by £1.5bn £56bn 3.5% - 4.0% inc. fuel Mix operating margin Assuming ongoing sales £9bn retail deflation cash flow Costs 32
Slide 33: Shareholders - a sustainable model to deliver strong returns
Shareholders - a sustainable model to deliver strong returns Ambitions Financial efficiency Outcome Uses of cash Capital discipline: Shareholder returns Reduce costs £1.1bn - £1.4bn p.a. by £1.5bn • Significant EPS growth • Dividend around 2x cover in medium term 3.5% - 4.0% Significant Optimise wor
Slide 34: Capacity to innovate
Capacity to innovate Market Tesco AB 25.0% 26.0% C1 27.1% 27.4% C2 20.4% 20.3% D 15.2% 15.2% E 12.6% 11.4% Breadth of appeal1 Own label Loyalty Truly multichannel 1. Kantar Worldpanel data as at September 2017. 34
Slide 35: Creating the UK's leading food business
Creating the UK’s leading food business 35
Slide 36: Creating the UK's leading food business – CMA timetable
Creating the UK’s leading food business – CMA timetable • Provisional findings by end of October 17 • Final report due by end of calendar year 36
Slide 37: Summary
Summary. • Delivering against our six strategic drivers • Continued momentum in our performance – Sales up, profits up, cash up – More competitive offer, more customers shopping at Tesco – Balance sheet significantly strengthened – Dividend reinstated • A sustainable model to deliver strong sharehol
Slide 38: Q&A
Q&A 3 8
Slide 39: Appendix
Appendix
Slide 40: Segmental performance
Segmental performance Sales Operating profit before exceptional items Change Change Change Change 1H 17/18 1H 16/17 constant actual 1H 17/18 1H 16/17 constant actual rates1 rates1 rates rates UK & ROI £19.0bn £18.6bn 1.8% 2.2% £471m £389m 20.3% 21.1% Central £3.1bn £2.8bn (0.9)% 9.2% £61m £17m 235.3
Slide 41: Margin progression
Margin progression Group UK & ROI 2.7% 2.1% 2.2% 1.8% 1.4% 0.8% 1H 15/16 1H 16/17 1H 17/18 1H 15/16 1H 16/17 1H 17/18 Central Europe Asia 5.6% 1.9% 4.2% 4.1% 1.0% 0.6% 1H 15/16 1H 16/17 1H 17/18 1H 15/16 1H 16/17 1H 17/18 Operating margin shown before exceptional items. 41
Slide 42: Like-for-like sales performance
Like-for-like sales performance1 UK ROI 2.0% 2.3% 2.1% 1.8% 0.5% 0.3% 0.2% 0.1% 0.9% 0.7% 0.3% (1.3)% 16/17 16/17 16/17 16/17 17/18 17/18 16/17 16/17 16/17 16/17 17/18 17/18 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q Central Europe Asia 2.8% 3.3% 3.0% 0.4% 0.5% 1.3% 0.7% 0.6% (6.0)% (0.4)% (0.8)% (10.7)% 1
Slide 43: UK like-for-like sales performance by format
UK like-for-like sales performance1 by format Extra Superstores 2.3% 2.3% 1.7% 1.7% 1.4% 1.3% 1.2% 1.1% 0.5% 0.3% 0.1% (0.2)% 16/17 16/17 16/17 16/17 17/18 17/18 16/17 16/17 16/17 16/17 17/18 17/18 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q Metro Express 4.2% 4.0% 2.0% 2.9% 3.1% 2.6% 1.5% 1.2% 1.7% 0.5% 0.
Slide 44: Exceptional items
Exceptional items 1H 17/18 1H 16/17 Restructuring and redundancy £(63)m £(95)m Property transactions £65m £59m Profit on the sale of Lazada £124m - Tesco Bank customer redress - £(45)m Total exceptional items in operating profit £126m £(81)m 44
Slide 45: Strong liquidity position
Strong liquidity position • £3.8bn of cash and short term investments1 • £4.4bn undrawn committed facilities expiring 2019-21 Weighted Average Maturity: c.8 years 2.0 1.5 1.0 Debt Repaid 0.5 - 1. Retail cash excluding overdraft and cash set aside for Booker. 45
Slide 46: 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", "antic