Tesco Plc · LSE:TSCO
Tesco — FY2013/14 Earnings Presentation
69 slides from Tesco's earnings presentation, Apr 16, 2014
Slide 1: Preliminary Results
16 April 2014 PRELIMINARY RESULTS TESCO a a a a ae
Slide 2: Agenda
• Introduction • Financial review • Business review and strategy – International – UK – Multichannel • Q&A 1
Slide 3: Results reflect challenges of transforming Tesco
• Results reflect challenges of transforming Tesco in rapidly changing and challenging trading environment: – Group sales of £71bn, up 0.3% – Group trading profit of £3,315m, down (6.0)% – Non-cash one-off charges of £(801)m • Further strategic progress: – Completed exit from US – Significant capita
Slide 4: Seven weeks ago, we laid out our accelerated plans
Seven weeks ago, we laid out our accelerated plans: 3
Slide 5: Our plan remains the same
• Since February: competitive response, weak market • Our plan remains the same: – Sharper prices, improved quality, stronger ranges, better service – A focus on building customer loyalty – The reinvention of our large store formats – The transformation of non-food – first Clothing and now GM – Conv
Slide 6: Financial Review 2013/14
FINANCIAL REVIEW 2013/14 TESCO a a a a a
Slide 7: Group results 2013/14 vs 2012/13
13/14 vs. 12/13 Group sales £70.9bn 0.3% Group trading profit £3,315m (6.0)% Underlying profit before tax £3,054m (6.9)% (excluding profit/losses arising on from property-related items) One-off items £(801)m n/a Group profit before tax £2,259m 9.8% Net finance costs* £(315)m Increased by 1.9% Underl
Slide 8: United States and China
• United States – Concluded strategic review – Still fully provided for • China – Announced partnership with CRE – Process on track – £(540)m write-down of goodwill 7
Slide 9: UK performance
UK • Weaker market Sales growth • Lower new space contribution 0.8% (inc. VAT, exc. petrol) • Invested in customer offer LFL (1.3)% (inc. VAT, exc. petrol) UK Margin Trading profit £2,191m 6.1% 5.8% 5.2% 5.3% 5.2% Trading profit growth (3.6)% 4.9% Trading profit margin 5.03% Trading margin change (1
Slide 10: Asia performance
Asia • Regulatory impact in Korea Actual Constant • Weaker trading in Thailand FX FX • Negative Q4 currency impact Sales growth 2.7% 1.4% Net new space - Korea, Malaysia, Thailand LFL N/A (4.5)% Trading profit £692m £683m Net new space – m sq ft Trading profit (5.6)% (6.8)% growth Trading margin 6.7
Slide 11: Europe performance
Europe • Challenging conditions Actual Constant FX FX Sales growth* (0.3)% (1.9)% LFL* N/A (3.5)% Trading profit £238m £221m Trading profit (27.7)% (32.8)% growth Trading margin 2.57% 2.42% Trading margin (96)bp (111)bp change * Excluding petrol. 10
Slide 12: Europe trading profit and like-for-like
Europe trading profit* • Stronger second half £m • Invested in the shopping trip +16% Europe like-for-like 2013/14** Q1 Q2 Q3 Q4 (0.6)% (4.3)% (4.0)% (5.5)% * Actual rates. ** 11 Excluding petrol.
Slide 13: Europe: Poland, Ireland, Turkey
Europe • Poland Actual Constant – Focus this year FX FX – Pleased with customer response Sales growth* (0.3)% (1.9)% • Ireland LFL* N/A (3.5)% – Difficult market Trading profit £238m £221m – Significant impact on trading profit Trading profit (27.7)% (32.8)% • Turkey growth – Heartland improved Trad
Slide 14: EBITDA and capex
FY 2012/13 FY 2013/14 EBITDA (£m) Capex (£m) EBITDA (£m) Capex (£m) 13
Slide 15: Tesco Bank
Deduct: 2012/13 legacy Add back: 2013/14 fair • Good banking performance insurance run off and fair value release value release £m • Challenging insurance market 200 191 22 189 5 194 +19% • Current account launch in H1 11 158 • Strong balance sheet 150 • Diversified funding 100 50 0 Trading Profit T
Slide 16: Property-related profits
• Scaling back Profit/losses arising on property-related items £m • Maximise value in most appropriate way 432 • Korea 397 377 370 – Four Homeplus stores and malls 180 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 10/11 exc. Japan. 15 11/12 and 12/13 exc. US and Japan. 13/14 exc. China, US and Jap
Slide 17: Finance costs, tax and EPS
13/14 vs. 12/13 • Lower sale and leaseback Profits/losses arising on £180m (57.0)% • Reduced capitalised interest property-related items • Lower UK tax rate Increased Net finance costs* £(315)m by 1.9% Effective tax rate 15.4% n/a Underlying diluted EPS 32.05p (7.3)%** * Underlying. 16 ** Underlying
Slide 18: Retail cash flow
Total retail operations 13/14 12/13 Cash flow from operations excluding working capital £4,327m £3,889m (Increase)/decrease in working capital £280m £(1)m Cash generated from operations £4,607m £3,888m Interest and tax paid £(1,102)m £(988)m Capex £(2,774)m £(2,850)m Free cash flow £731m £50m 17
Slide 19: Capex
Capex (bn) 4.7 3.7 3.8 3.0 3.1 3.0 (inc. China) no more than £2.5bn 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Allocate capital within range No more than £2.5bn capital of 4% down to 3.5% of sales expenditure 18
Slide 20: Capex by category
Capex (bn) 4.7 3.7 3.8 3.0 3.1 3.0 (inc. China) no more than £2.5bn New stores Technology Existing Stores 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Allocate capital within range No more than £2.5bn capital of 4% down to 3.5% of sales expenditure 19
Slide 21: Cash flow and free cash flow
Total retail operations 13/14 12/13 Cash flow from operations excluding working capital £4,327m £3,889m (Increase)/decrease in working capital £280m £(1)m Cash generated from operations £4,607m £3,888m Interest and tax paid £(1,102)m £(988)m Capex £(2,774)m £(2,850)m Free cash flow £731m £50m Net ac
Slide 22: Net debt (£bn)
£bn 10 9.6 9 7.9 8 6.8 6.8 7 6.6 6.6 6 5 4 3 2 1 0 08/09 09/10 10/11 11/12 12/13 13/14 21
Slide 23: Adjusted net debt
** *** ** *** * Adjusted net debt equals statutory net debt plus pension deficit plus NPV of lease obligations. ** 22 12/13 excludes US as a discontinued operation. *** 13/14 excludes US and China as discontinued operations.
Slide 24: Group and segmental ROCE
Group ROCE, %* Segmental ROCE, %* UK 12.7% 12.1% 15% Asia 10% 5% Europe 0% 12/13 13/14 * The pro-forma Group ROCE of 12.1% includes our Chinese business to provide a comparable figure to the previously 23 disclosed 2012/13 figure. It is otherwise calculated on a continuing operations basis, excludin
Slide 25: Financial framework
Generate positive free cash flow • Mid-single digit Allocate capital within range of 4% down to 3.5% of sales • 12 - 15% range Maintain a strong investment grade credit • In line with underlying EPS rating • Target cover of more than two times 24
Slide 26: Business Review and Strategy
BUSINESS REVIEW AND STRATEGY TESCO a a a a ae
Slide 27: Driving sustainable growth
DRIVING SUSTAINABLE GROWTH 1. Continuing to invest in strong UK business 2. Establishing multichannel leadership 26
Slide 28: Pursuing disciplined international growth
Pursuing disciplined international growth 27
Slide 29: International growth strategy
Pursuing disciplined international growth Significant future potential Improve returns, hold position Refocus on more profitable approach to growth 28
Slide 30: Korea
Pursuing disciplined international growth • Sales and profit performance in line with peers • Regulatory restrictions on opening hours – Continued sales volatility – As expected, no incremental H2 profit impact • Refreshed seven larger hypermarkets – average CROI of over 29% • Smaller ‘365 plus’ for
Slide 31: Thailand
Pursuing disciplined international growth • Political uncertainty further impacting consumer spending • Corrective action taken to improve our offer • Strengthened team • Better placed despite tougher market • Focus on: – Hypermarket refresh – Convenience expansion – Grocery home shopping 30
Slide 32: China and India partnerships
Pursuing disciplined international growth • Blending Tesco retail know-how with local expertise of our partners • Accessing fast-growing and high potential markets in a capital disciplined manner • China: – Final stages of approval process – Completion expected in the first half • India: – Formalise
Slide 33: Europe overview
Pursuing disciplined international growth • Very tough backdrop • Pan-European programme, leveraging skill and scale • Stabilised performance • Stronger customer offer: – Fresh food – General Merchandise – Clothing • Grocery home shopping in every country 32
Slide 34: Poland
Pursuing disciplined international growth Total Poland like-for-like sales growth 2013/14 • Decisive reset Q1 Q2 Q3 Q4 • Sharper prices, stronger fresh • Sales improving, share stabilising 1.9% • Small stores recovered (0.7)% • Customer metrics improving (4.5)% (8.2)% Small store Poland like-for-lik
Slide 35: Budaors, Hungary
Pursuing disciplined international growth Budaors, Hungary +2.4% like-for- like sales uplift from c.30% smaller store 256,000 sq ft repurposed to mall space to date: Aydin Praha Zlate Cesky Banska Turkmall Skalka Budaors Piesky Tesin Bystrica Ostrava Brno Karlovy Cheb Košice Hrabova Videnska Vary Me
Slide 36: Ireland
Pursuing disciplined international growth Ireland like-for-like sales growth 2013/14 • Seventh year of consumer pressures • High level of vouchering by all competitors • Focus on value: Price Promise and our points of difference • Capital carefully constrained 35
Slide 37: Turkey
Pursuing disciplined international growth Turkey like-for-like sales growth 2013/14 • Making progress: Q1 Q2 Q3 Q4 – Like-for-like trend improving 1.7% – Rationalised head office – Nine loss-making stores closed (3.5)% • Key programmes starting to deliver (10.7)% • Early stage discussions with (15.5
Slide 38: International priorities
Pursuing disciplined international growth • Focus on improving performance • Leveraging skill and scale • Store remodels driving customer metrics and improved returns • Focus on customers • Focus on capital discipline • Determination to deliver real value 37
Slide 39: Continuing to invest in strong UK business
Continuing to invest in strong UK business 38
Slide 40: Continuing to invest in strong UK business
Continuing to invest in strong UK business 39
Slide 41: Refreshing larger UK stores
Continuing to invest in strong UK business • 247 Extras and 482 Superstores • All in prime locations • Three year programme will complete the refresh of all of these 729 larger stores • Ingredients of success are clear • Missions and propositions store-by-store 40
Slide 42: 'Ingredients'
Continuing to invest in strong UK business ‘Ingredients’ Food to Go New Food F&F Experiences Produce Compelling Fresh food destinations Services New look Beauty GM 41
Slide 43: 'Ingredients'
Continuing to invest in strong UK business ‘Ingredients’ Food to Go New Food F&F Experiences Produce Compelling Fresh food destinations Services New look Beauty GM 42
Slide 44: Stores c.20,000 to 50,000 sq ft
Continuing to invest in strong UK business c.20,000 to 50,000 sq ft • Focus on fresh: the best food store in town • A store based around the family • Everyday needs under one roof • With appropriate services • Only add General Merchandise / Clothing if there is space and a need 43
Slide 45: Stores c.50,000+ sq ft
Continuing to invest in strong UK business c.50,000+ sq ft • Stores which are worth the trip • Food First • Food to Go in specific locations • Destination Clothing • General Merchandise • Appropriate and relevant New Food Experiences 44
Slide 46: Focus on Fresh and Food to Go
Continuing to invest in strong UK business Focus on Fresh • Better products, better packaging, better merchandising • Re-launched finest* and Healthy Living • Significant investment in colleagues • Stronger counters: improved range, better service • New fixtures: lower-level racking, wider aisles, i
Slide 47: Clothing 'Next Generation' offer
Continuing to invest in strong UK business • ‘Next Generation’ offer now in 104 stores – Average like-for-like sales growth of 10.6% – 50 introduced as part of wider refresh – 42 individual department remodels – Introduced F&F to 12 additional stores • 200bps gross margin improvement • Plans for a f
Slide 48: New food experiences
Continuing to invest in strong UK business • Suite of tailored, compelling food offers • In 2013/14 we introduced: – 4 Giraffe restaurants, 3 Decks carveries – H+H coffee outlets in 15 stores – 9 in-store bakery offers • Very positive customer response • 2014/15: – 80 new family dining offers (Giraf
Slide 49: General Merchandise ranges
Continuing to invest in strong UK business • New Spring/Summer 2014 ranges in store now – reflecting transformation work • Focus on Home, Cook & Dine, Party • Introduced over 4,000 new products • Space reallocation work well underway – completion mid-2015 48
Slide 50: Store refresh programme
Continuing to invest in strong UK business Less capital-intensive: £1.5m • Transformed – four-week rolling programme minimising disruption – Latest Clothing and GM offer – Food to Go – Particular focus on fresh food and services • Produce, counters, bakery • Pharmacy, Tesco Phone Shop • Uplifts trac
Slide 51: Newport store
Continuing to invest in strong UK business Downsized by 12% • Reduced GM and Electrical space, better choice • ‘Next Generation’ F&F Clothing • Complementary retail tenants Café • Five similar schemes planned for 2014/15 Newport profit progression year-on-year Decks £3m capital CROI > 50% Profit LY
Slide 52: Roll-out programme
Continuing to invest in strong UK business Roll-out programme To date^ Refresh roll-out Format Total number Refresh 14/15 Ongoing per of stores* stores year Extra 247 82 c.110 c.60 Superstore 482 178 c.50 c.100 Metro 195 46 c.40 c.50 Express 1,672 309 c.450 c.375 Capex c.£400m c.£500m c.£500m • On t
Slide 53: Establishing multichannel leadership
Establishing multichannel leadership 52
Slide 54: Average annual spend with Tesco
Establishing multichannel leadership 2.98x Average Annual Spend with Tesco 4% of customer count 2.04x +17% customer growth* Similar growth across all affluences* In-store only In-store + online grocery In-store + online grocery + general merchandise online In-store Online grocery General merchandise
Slide 55: Current account launch
Establishing multichannel leadership • Current account launching in first half • Strategic building block to offer full range of banking services • Tailored to what matters to our customers • Simple, transparent, convenient • Rewards customers every day • Strengthens loyalty and engagement with Tesc
Slide 56: Products and services only Tesco can offer
Establishing multichannel leadership • Broader range of products and services that only we can offer • Brought together in a seamlessly and connected way • Enriching relationships with our customers • Unrivalled digital capabilities • Hudl – access to online shopping and digital services • Added-val
Slide 57: Average annual spend with Tesco
Establishing multichannel leadership 2.98x Average Annual Spend with Tesco 4% of customer count 2.04x +17% customer growth* Similar growth across all affluences* In-store only In-store + online grocery In-store + online grocery + general merchandise online In-store Online grocery General merchandise
Slide 58: An unrivalled family of brands
An unrivalled family of brands dunnhunby © 0 TESCO finest Ox an] Superstore TESCO Be TESCO ee piss Everyday Value thenutricentre TESCO i = The most compelling offer for our customers aa blinkbox TESCO TESCO _— direct cLUBCARD F&F extra . Third party giraffe marketplace * TESCO Bank Sellers at Tesco
Slide 59: Customer service and staff helpfulness
Overall customer service and staff helpfulness is excellent 140 136 131 100 Sept Feb Aug Feb 58
Slide 60: Customer loyalty priorities
• Retaining loyal customers • Attracting more new customers • Shopping across our channels • And across our brands 59
Slide 61: Clubcard fuel savings
customers have already average saving in the increase in Clubcard increased fuel volumes* saved money on fuel first month signup * Based on Welsh trial. 60
Slide 62: Prices down and staying down
Peppers down and staying down only 98p Si down and staying down Spring onions down and staying down bee Spring Onions Bunch only49p ESCO Ein te alge 61
Slide 63: Prices down and staying down
4 pint milk down and staying down y 4 Free range eggs down down and staying down and staying down € ar unt, only £1 TESCO PRICE pt 4 PROMISE Ein ttle bales instore online mobile | tesco.com/groceries 62
Slide 64: Prices down and staying down
Beef mince down and staying down Tesco British or Irish Beef Mince 500g only £2 PRICE fue Carrots down and staying down Carrets tka only 0p TESCO Bing tie balgs Chicken breast portions down and staying down Tesco British Chicken Breast Portions 5719 only £4 TESCO PRICE ns 9 Eragy Wate bulge ir line
Slide 65: More to come: a bold plan for 2014
More to come A bold plan for 2014 SHARPER PRICES Market-leading delivery pricing Free Click & Collect—including Grocery Delivery Saver guarantee Added-value subscriptions BETTER SERVICE Twice the number of Click & Collect locations Alternative Click & Collect locations ADDED-VALUE PRODUCTS AND SERVI
Slide 66: Customer expectations are changing
• Customers’ expectations are changing • We are firmly focused on the most compelling offer • Customer focus will drive success • Increasing loyalty is key • Pace is accelerating 65
Slide 67: Summary
• Ingredients developed, roll-out underway • Progressing towards multichannel leadership • Bringing the new Tesco to communities across the UK • Focused on the long-term success of Tesco • Cash focus, returns focus, customer focus 66
Slide 68: Q&A
Q&A TESCO a a ae a a
Slide 69: Forward-looking statements
This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward- looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well