Tesco Plc · LSE:TSCO
Tesco — H1 2013/14 Earnings Presentation
96 slides from Tesco's earnings presentation, Oct 2, 2013
Slide 1: Interim Results
2 October 2013 INTERIM RESULTS 0
Slide 2: Building a Better Tesco
Building a Better Tesco • 530,000 colleagues • More than 70m customers per week • 6,900 stores • 12 countries • Multiformat, Multichannel 1
Slide 3: Progress
Progress • Invested for customers in every market • Opening fewer new, large stores • Increasing investment in digital capability • Accelerated transformation of general merchandise business 2
Slide 4: Challenging conditions
Challenging conditions 3
Slide 5: UK consumer confidence: at a glance
UK consumer confidence: at a glance 4 Source: A quarterly insight into the mood of the British Shopper, May – July 2013 (dunnhumby). 4
Slide 6: Challenging conditions
Challenging conditions Ireland in recession again: Poland slowdown: Thailand in recession: personal consumption year-on-year change in GDP quarter-on-quarter change in expenditure GDP € 5.0% 12% 22,500 10% 22,000 4.0% 8% 21,500 3.0% 6% 21,000 4% 20,500 2.0% 2% 20,000 1.0% 0% 19,500 Q1 13 Q1 12 Q2 12
Slide 7: Progress
Progress • Invested for customers in every market • Opening fewer new, large stores • Increasing investment in digital capability • Accelerated transformation of general merchandise business • UK business getting stronger • Right direction, journey underway 6
Slide 8: Our approach to growth and returns
OUR APPROACH TO GROWTH AND RETURNS Financial disciplines Guiderails Generate positive free cash Trading profit growth flow • Mid-single digit Allocate capital within Sustainable ROCE range of 4% down to 3.5% of sales • 12 - 15% range Maintain a strong Dividend growth investment grade credit • In lin
Slide 9: The leading multi-format retailer in China
The leading multi-format retailer in China 8
Slide 10: Compelling offer for customers
Compelling offer for customers Coventry, UK Rama IV, Thailand Budaors, Hungary 9
Slide 11: H1 Performance
H1 PERFORMANCE 10
Slide 12: H1 2013/14 – Financial progress
H1 2013/14 – Financial progress • UK profit up • Cash flow growing • Disciplined approach to investment • Removed drag of US losses • Partnership with CRE provides platform for profitable growth in China 11
Slide 13: Group performance
Group performance 13/14 vs. 12/13 Group sales £35,582m 2.0% Group trading profit £1,588m (7.6)% Underlying profit before tax £1,466m (7.4)% (excluding profit from property-related items) 12
Slide 14: Underlying profit before tax
Underlying profit before tax £m 2000 1800 1600 1400 1200 1000 800 600 400 200 0 H1 10/11 H1 11/12 H1 12/13 H1 13/14 exc. US and China Property-related profits Underlying profit before tax exc. property-related profits 13
Slide 15: Group performance
Group performance 13/14 vs. 12/13 Group sales £35,582m 2.0% Group trading profit £1,588m (7.6)% Underlying profit before tax £1,466m (7.4)% (excluding profit from property-related items) Group profit before tax £1,387m (23.5)% Net finance costs £151m Reduced by 7.9% Underlying diluted EPS 14.88p (7.
Slide 16: UK
UK • Continued to Build a Better Tesco UK • Improved like-for-like sales growth Sales growth 1.7% in Q2 (exc. petrol, exc. VAT) – Food – major driver Trading profit £1,131m – Q2 Food like-for-like +1% Trading profit growth 1.5% Trading profit margin 5.2% Trading margin change 2bp 15
Slide 17: General merchandise transformation
General merchandise transformation • Reflected in declining like-for-like, REFOCUSING OUR EXISTING SPACE as expected • Low margin categories deprioritised • Focus on more profitable categories • ‘Food First’ approach 16
Slide 18: Improving full price sales
Improving full price sales • Strong, improving, profitable sales 80 growth 78 76 • Improved margins 74 % Full price (volume) – Lower level of markdown 72 70 – Proportion of full price sales 68 increased 66 64 62 60 20-Jan-13 05 Aug 12 04 Aug 13 17-Feb-13 14-Apr-13 25-Nov-12 23-Dec-12 28 Oct 12 17-Ma
Slide 19: Asia
Asia Asia sales Asia trading ROCE 12/13* (inc. VAT) profit £m £m 14,000 700 12,000 600 10,000 500 UK** UK** Asia Asia 8,000 400 15% 15% 6,000 300 10% 10% Europe 4,000 200 Europe 5% 5% 2,000 100 -0 0 0% 0% 07/08 FY 12/13 FY 07/08 FY 12/13 FY * Excludes one-off items (5)% ** Excludes the positive impa
Slide 20: Asia
Asia • Korea Asia – Continued impact of regulations Actual Constant – Expect H2 profit growth FX FX Sales growth 7.7% 2.0% LFL N/A (3.7)% Trading profit £314m £297m Trading profit (7.4)% (12.4)% growth Trading margin 6.0% 6.0% Trading margin (98)bp (99)bp change 19
Slide 21: Asia
Asia Thailand in recession: quarter-on-quarter change in GDP • Korea 12% – Continued impact of regulations 10% – Expect H2 profit growth 8% • Thailand – Moved into recession 6% – Competitor openings have increased 4% – Clubpack issue in H1 2% 0% Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 -2% -4% Source: Of
Slide 22: Europe
Europe Ireland in recession again: Poland slowdown: personal consumption expenditure year-on-year change in GDP € 5.0% 22,500 22,000 4.0% 21,500 3.0% 21,000 20,500 2.0% 20,000 1.0% 19,500 19,000 0.0% Q3 11 Q1 11 Q2 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q2 10 Q4 07 Q2 08 Q4 08 Q2 09 Q4 09 Q4 1
Slide 23: Europe
Europe • Like-for-like sales down (5)% Europe • Improving through half Actual Constant FX FX • Margins impacted Sales growth* 1.2% (3.0)% LFL* N/A (5.0)% Trading profit £55m £50m Trading profit (67.8)% (70.8)% growth Trading margin 1.2% 1.1% Trading margin (256)bp (262)bp change * Excluding petrol 2
Slide 24: Europe
Europe Trading Profit, £m £171m Impact of LFL decline Customer investment in Poland £55m Turkey H1 12/13 H1 13/14 23
Slide 25: Poland
Poland Poland LFL by format - H1 2013/14 • Investment in our offer 10.0% • Showing encouraging signs 5.0% • Smaller formats exited H1 with positive like-for-like sales growth 0.0% • Overall like-for-like sales in positive -5.0% territory in first few weeks of H2 -10.0% -15.0% Large format -20.0% Sma
Slide 26: Turkey
Turkey • Heartland region – Better economics – Improved through H1 • Non-heartland – Largest stores – Lower sales densities – Closed 8 stores in H1 • Changes made to the business • Improving like-for-like sales trend Heartland Izmir Non-heartland Non-Izmir 25
Slide 27: Disciplined approach in Europe
Disciplined approach in Europe • 75% reduction in net new space; focused on online and convenience • Positive cash flow profile, despite challenges: H1 2012/13 H1 2013/14 EBITDA (£m) Capex (£m) EBITDA (£m) Capex (£m) 26
Slide 28: Europe
Europe • Like-for-like sales down (5)% Europe • Improving through half Actual Constant FX FX • Margins impacted Sales growth* 1.2% (3.0)% • Remained cash flow positive • Better profitability expected in H2 LFL* N/A (5.0)% – Strong plans in Ireland Trading profit £55m £50m – Benefits of investment co
Slide 29: Tesco Bank performance
Tesco Bank performance Deduct: 2012/13 legacy insurance run off and fair value release 94 17 3 88 +21% 85 6 71 Trading Profit Legacy Fair Value Profit after Trading Profit Fair Value Trading Profit H1 12/13 Insurance adjs. H1 exc. FV H1 H1 13/14 12/13 13/14 28
Slide 30: Tesco Bank
Tesco Bank • Strong growth in consumer lending – Supported by Funding for Lending Simple products in complex Online and mobile Scheme markets • Challenged insurance market – Market motor premiums down (15)% • 90% of new insurance business from Tesco Bank Attractive rates Current accounts Driving Loy
Slide 31: Strategic moves: Fresh & Easy
Strategic moves: Fresh & Easy • Concluded strategic review • Fresh & Easy sold to Yucaipa • Total cash cost of exit no more than £150m – Includes loan to Yucaipa of c.£80m • No ongoing liabilities • US losses will cease 30
Slide 32: Strategic moves: China
Strategic moves: China • Entering into partnership with CRE • Once completed, results will be shown on JV and associates line • China business now accounted for as a discontinued operation* • Exchange losses for share of partnership result • ROCE accretive • Merged entity will be self-funding *In ac
Slide 33: Our approach to growth and returns
OUR APPROACH TO GROWTH AND RETURNS Financial disciplines Guiderails Generate positive free cash Trading profit growth flow • Mid-single digit Allocate capital within Sustainable ROCE range of 4% down to 3.5% of sales • 12 - 15% range Maintain a strong Dividend growth investment grade credit • In lin
Slide 34: Financial disciplines
Financial disciplines Generate positive free cash • Trading profit decline offset by working flow capital inflow 33
Slide 35: Financial disciplines
Financial disciplines Generate positive free cash • Trading profit decline offset by working flow capital inflow Allocate capital within • Reduction of over £200m vs H1 2012/13 range of 4% down to 3.5% of sales • Moving into targeted range in 2014/15 34
Slide 36: Financial disciplines
Financial disciplines Generate positive free cash • Trading profit decline offset by working flow capital inflow Allocate capital within • Reduction of over £200m vs H1 2012/13 range of 4% down to 3.5% of sales • Moving into targeted range in 2014/15 Maintain a strong • Net debt £7.0bn – down £0.2bn
Slide 37: Our approach to growth and returns
OUR APPROACH TO GROWTH AND RETURNS Financial disciplines Guiderails Generate positive free cash Trading profit growth flow • Mid-single digit Allocate capital within range Sustainable ROCE of 4% down to 3.5% of sales • 12 - 15% range Dividend growth Maintain a strong investment grade credit rating •
Slide 38: Sustainable growth
Sustainable growth Higher rate of growth Asia UK Europe Lower rate of growth 37
Slide 39: Our approach to growth and returns
OUR APPROACH TO GROWTH AND RETURNS Financial disciplines Guiderails Generate positive free cash Trading profit growth flow • Mid-single digit Allocate capital within range Sustainable ROCE of 4% down to 3.5% of sales • 12 - 15% range Dividend growth Maintain a strong investment grade credit rating •
Slide 40: ROCE
ROCE 12.7% 12/13 ROCE Japan US Pro-forma 11/12 Exit 13/14 Exit US 13/14 Pro-forma ROCE inc. Japan formation of ROCE for Japan & US JV with CRE cont. ops. 39
Slide 41: Our approach to growth and returns
OUR APPROACH TO GROWTH AND RETURNS Financial disciplines Guiderails Generate positive free cash Trading profit growth flow • Mid-single digit Allocate capital within range Sustainable ROCE of 4% down to 3.5% of sales • 12 - 15% range Dividend growth Maintain a strong investment grade credit rating •
Slide 42: Summary
Summary • Good progress despite challenging conditions • Expect better H2 performance – Continued UK progress – Improving international trends • Committed to medium-term guidance and financial framework • Focus on: – Disciplined capital allocation – Free cash flow generation – Improving returns 41
Slide 43: Update on Group Strategy
UPDATE ON GROUP STRATEGY 42
Slide 44: Driving Sustainable Growth
DRIVING SUSTAINABLE GROWTH 43
Slide 45: Driving Sustainable Growth
1. Continuing to invest in strong UK business DRIVING SUSTAINABLE GROWTH 44
Slide 46: UK – Building a Better Tesco
1. Continuing to invest in strong UK business UK – Building a Better Tesco Service & Staff Stores & Formats Price & Value Range & Quality Brand & Marketing Clicks & Bricks 45
Slide 47: Food sourcing
1. Continuing to invest in strong UK business Food sourcing • 100% fresh British chicken • 100% British or Irish beef across fresh, frozen and ready meals • Producer Network extended to all dairy farmers • Appointed new agricultural director 46
Slide 48: Love Every Mouthful
1. Continuing to invest in strong UK business Love Every Mouthful 47
Slide 49: Love Every Mouthful
1. Continuing to invest in strong UK business Love Every Mouthful 48
Slide 50: Love Every Mouthful
1. Continuing to invest in strong UK business Love Every Mouthful Customer response 70% 60% 50% % agree 40% 30% 20% 10% 0% Makes me think more positively about Tesco when it comes to quality Source: Base LEM Manifesto Recognisers 49
Slide 51: Tesco in Society
1. Continuing to invest in strong UK business Tesco in Society 50
Slide 52: UK – customer feedback
1. Continuing to invest in strong UK business UK – customer feedback Length of wait at our checkouts Staff are very welcoming is very good 121 116 110 +5 108 Overall customer service and +2 100 100 +16 staff helpfulness is excellent +8 136 131 +5 Sept Feb Aug Sept Feb Aug Staff are very helpful Avai
Slide 53: UK – customer feedback
1. Continuing to invest in strong UK business UK – customer feedback Length of wait at our checkouts Staff are very welcoming is very good 121 116 110 +5 108 Overall customer service and +2 100 100 +16 staff helpfulness is excellent +8 136 131 +5 Sept Feb Aug Sept Feb Aug Staff are very helpful Avai
Slide 54: Range & Quality
1. Continuing to invest in strong UK business Range & Quality 53
Slide 55: Continuing to invest in strong UK business
1. Continuing to invest in strong UK business 54
Slide 56: Continuing to invest in strong UK business
1. Continuing to invest in strong UK business 55
Slide 57: Continuing to invest in strong UK business
1. Continuing to invest in strong UK business 56
Slide 58: Price Promise
1. Continuing to invest in strong UK business Price Promise 57
Slide 59: Price perception improvement
1. Continuing to invest in strong UK business Price perception improvement +5% +11% +5% Agree that “I trust what the Strongly agree that “I can rely on the “The prices of products I buy store says about its prices” store to be competitive on price” regularly” are excellent or good Price Promise laun
Slide 60: Refresh
1. Continuing to invest in strong UK business Refresh 59
Slide 61: Refresh
1. Continuing to invest in strong UK business Refresh Average cost of Average refresh 1 uplift 2 £1.6m c.5% Extra Sq. ft. refreshed and remodelled • Highest ROCE Refreshes since March 2012 • Includes Watford, Purley and Coventry pilots Superstore £1.2m c.3% • Strongest results from most recent Refre
Slide 62: Refresh
1. Continuing to invest in strong UK business Refresh 61
Slide 63: London
1. Continuing to invest in strong UK business London 62
Slide 64: From Regent Street…
1. Continuing to invest in strong UK business From Regent Street… 63
Slide 65: …to Upton Park
1. Continuing to invest in strong UK business …to Upton Park 64
Slide 66: General merchandise transformation
1. Continuing to invest in strong UK business General merchandise transformation • Better, more sustainable margins REFOCUSING OUR EXISTING SPACE • Better cash profit • Stronger sales densities • Stronger profit densities • New ranges more resilient to online 65
Slide 67: General merchandise transformation
1. Continuing to invest in strong UK business General merchandise transformation 66
Slide 68: General merchandise transformation
1. Continuing to invest in strong UK business General merchandise transformation 67
Slide 69: Transformed
1. Continuing to invest in strong UK business transformed 68
Slide 70: New space
1. Continuing to invest in strong UK business New space Gateshead Sunderland West Bromwich 69
Slide 71: Sunderland Extra
1. Continuing to invest in strong UK business Sunderland Extra Initial plan Tesco 101k sq. ft. Tesco Gym 67k sq. ft. Final scheme: 30% less Tesco space 70
Slide 72: Driving Sustainable Growth
2. Establishing multichannel leadership DRIVING SUSTAINABLE GROWTH 71
Slide 73: Extra remodel: Watford
2. Establishing multichannel leadership Extra remodel: Watford 72
Slide 74: Extra remodel: Watford
2. Establishing multichannel leadership Extra remodel: Watford 73
Slide 75: Extra remodel: Watford
2. Establishing multichannel leadership Extra remodel: Watford 74
Slide 76: Extra remodel: Coventry
2. Establishing multichannel leadership Extra remodel: Coventry Before After 75
Slide 77: Extra remodel: Coventry
2. Establishing multichannel leadership Extra remodel: Coventry Before After 76
Slide 78: Extra remodel: Coventry
2. Establishing multichannel leadership Extra remodel: Coventry Before After 77
Slide 79: Extra remodel: Coventry
2. Establishing multichannel leadership Extra remodel: Coventry Before After 78
Slide 80: Convenience
2. Establishing multichannel leadership Convenience • Fast growing and a key focus in majority of markets • Represented c.30% of UK net new space in H1 • Even larger proportion of new international space UK new openings sq. ft. International new openings sq. ft. Smaller formats Smaller formats Extra
Slide 81: UK grocery home shopping
2. Establishing multichannel leadership UK grocery home shopping • UK sales up nearly 13% • Market leader • Click & Collect now in nearly 200 locations • Sixth dotcom-only store opens later this month Improved Better Better delivery customer availability service satisfaction 80
Slide 82: International grocery home shopping
2. Establishing multichannel leadership International grocery home shopping • Now in more than 50 cities, across in nine markets outside the UK Tesco Malaysia Tesco Poland 81
Slide 83: Digital entertainment
2. Establishing multichannel leadership Digital entertainment 82
Slide 84: Establishing multichannel leadership
2. Establishing multichannel leadership 83
Slide 85: Establishing multichannel leadership
2. Establishing multichannel leadership 84
Slide 86: 76% of UK households don't yet have a tablet
2. Establishing multichannel leadership 76% of UK households don’t yet have a tablet Source: OFCOM, August 2013 85
Slide 87: Driving Sustainable Growth
3. Pursuing disciplined international growth DRIVING SUSTAINABLE GROWTH 86
Slide 88: Disciplined international growth
3. Pursuing disciplined international growth DISCIPLINED INTERNATIONAL GROWTH Korea, Malaysia, Significant Thailand future potential Ireland, Czech, Improve Hungary, Poland, returns, Slovakia hold position Refocus on China, India, more profitable Turkey approach to growth 87
Slide 89: The leading multi-format retailer in China
3. Pursuing disciplined international growth The leading multi-format retailer in China 88
Slide 90: Better Life Together
PY 2... Metter Life Together @ Ability to become the best operator = TE TESCO ¥ Huge customer base ¥ Know-how of global best retail practices Y Portfolio of well recognised and leading formats Y IT systems v Deep understanding of local customers alfa ¥ Customer analytics ¥ Established nationwide inf
Slide 91: The leading multi-format retailer in China
3. Pursuing disciplined international growth The leading multi-format retailer in China • Huge opportunity • New model for Tesco • Active partnership – Two seats on the board – Clearly defined rights • Clear route to sustainable, profitable growth 90
Slide 92: Investment in Poland
3. Pursuing disciplined international growth Investment in Poland 91
Slide 93: Investment in Poland
3. Pursuing disciplined international growth Investment in Poland 92
Slide 94: Building a Better Tesco
Building a Better Tesco • Difficult conditions in many markets • We are focused on delivering changes required • Strategy is on track, financial discipline in action • Creating the most compelling offer for customers wherever we operate • Boldness, discipline, imagination: foundations for success 93
Slide 95: Q&A
Q&A 94
Slide 96: Disclaimer
Disclaimer 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", "anticipa