Tesco Plc · LSE:TSCO
Tesco — H1 2019/20 Earnings Presentation
69 slides from Tesco's earnings presentation, Oct 2, 2019
Slide 1: Serving shoppers a little better every day
Serving shoppers a little better every day. 2 October 2019 Dave Lewis – CEO Alan Stewart – CFO
Slide 2: Agenda
Agenda. • Performance review – Customer satisfaction – Cash profitability – Cash flow • Growth, innovation and enabling technology
Slide 3: Customer satisfaction
Customer satisfaction.
Slide 4: Outperforming the market - UK
Outperforming the market - UK Promotional participation +0.4% Food Fresh Packaged General Merchandise 17 weeks (0.3)% 0.0% 0.3% 0.6% out 1H of 26 Tesco Competitor M August LY Competitor J August TY Overall volume outperformance1 Focus on food1 Sustainable growth2 1. Volume data for Tesco weeks 1-26
Slide 5: Simplify to serve – customer impact
Simplify to serve – customer impact Easy Shopping Customer experience (NPS) Total Business Year on Year Trip Ease of +296 83.8% shop bps Clean and +77 84.0% tidy bps Get what I NPS +282 80.3% want bps Prices are +173 69.4% good bps I don’t +283 queue 79.5% bps Colleagues +337 are helpful 81.4% bps J
Slide 6: Simplify to serve – all channels
Simplify to serve – all channels Large stores Small stores 65 +4.0 ppts 65 +8.1 ppts 60 60 Fans minus Critics Fans minus Critics 55 55 50 50 45 45 40 40 August 2018 February 2019 August 2019 August 2018 February 2019 August 2019 Large Stores North South Northern Ireland Small stores Central London N
Slide 7: Exclusively at Tesco
Exclusively at Tesco Taste +12 ppts 417 SKUs Quality +11 ppts 79% Price +4 ppts 550 stores Improved customer perception1 Increased distribution Higher customer engagement2 1. Source: Kantar TNS OB Tracker May 18-Jan 19. Customer perception, Exclusively at Tesco vs Everyday Value. % absolute endorsem
Slide 8: Exclusively at Tesco - switching
Exclusively at Tesco - switching Switching into ‘Exclusively at Tesco’ Competitors As, M & J Units (Packs) Competitors Al & L August 2018 February 2019 August 2019 Kantar Worldpanel UK, 12 week ending data for net volume switching to 11 August 2019.
Slide 9: Exclusively at Tesco
Exclusively at Tesco Source of Spend Change for ‘Exclusively at Tesco’ £45m £35m £25m £15m £5m £(5)m £(15)m August 2018 February 2019 August 2019 Switching from competitors Existing customers spending more Kantar Worldpanel UK, 12 week ending data for net switching to 11 August 2019.
Slide 10: Exclusively at Tesco
Exclusively at Tesco £31.01 £31.40 £31.82 + 1.26% + 2.61% 1. Prices based on a basket of 27 products, w/c 30 September 2019. Basket compared to equivalent lines at lowest cost competitors.
Slide 11: ASA - value proposition
ASA - value proposition Ad of: Oct/Nov 2018 Date of ASA ruling: 18 September 2019 Ad of: 21 – 25 March 2019 Complaint Reference: A18-470594 Date of ASA ruling: 11 September 2019 ✓ ✓ Complaint Reference: A19-556151 Ad of: 15 – 19 January 2019 Ad of: 8 December 2018 Date of ASA ruling: 14 August 2019
Slide 12: Celebrating 100 years of great value
Celebrating 100 years of great value 3.1x 68% 3x return on of customers typical sales uplift investment Media effectiveness1 Strong customer engagement2 High promotional uplift3 1. January 2019 Centenary campaign, sales variable profit return on media investment. 2. Percentage of customers who shopp
Slide 13: Clubcard prices
Clubcard prices + 39 >1.5m customers 379 products products £11 +1.5% 6 per week higher spend1 Clubcard penetration 15 categories categories May 2019 Promising early results September 2019 1. Spend from customers participating in Clubcard Prices vs look-a-like customers, comparing the period 7-26 May
Slide 14: Brand attributes – further progress
Brand attributes – further progress +2.8 ppts +6.4 ppts +5.9 ppts 18.6 25.0 25.0 23.4 23.6 22.2 20.3 17.8 17.7 18.6 17.7 15.8 1H 16/17 1H 17/18 1H 18/19 1H 19/20 1H 16/17 1H 17/18 1H 18/19 1H 19/20 1H 16/17 1H 17/18 1H 18/19 1H 19/20 Value perception1 Quality perception1 Trust1 1. Reflects brand per
Slide 15: Brand - further progress: NPS
Brand - further progress: NPS Feb 19 to Aug 19 1 ppt 6 ppts 14 ppts 15 ppts 6 ppts 3 ppts Tesco Competitor J Competitor As Competitor M Competitor Al Competitor L Source: Global Brand Tracker. NPS with a 12 month roll to 2Q 2019/20. Change represents movement from 4Q 2018/19 to 2Q 2019/20.
Slide 16: Customer satisfaction - Booker
Customer satisfaction - Booker Choice +1.8 Choice +1.9 +1.7% Price +2.4 Satisfaction: +1.1% Price +3.7 Satisfaction: +2.2% YoY Speed +1.2 (88.3%) Speed +1.9 (79.1%) Helpful driver Helpful driver +2.6 +2.9 Overall Caterer Retailer Source; ESA Retail, Customers recommend 2Q 2019/20 vs 2Q 2018/19.
Slide 17: Summary
Summary • Customer satisfaction improving across all measures and all channels • Outperforming the market • Exclusively at Tesco winning volume share • Celebrating 100 years of great value with customers • Strong brand progress
Slide 18: 1H Results
Intro slide for AS as requested 1H Results.
Slide 19: Cash profitability
Cash profitability.
Slide 20: Sales performance
Sales performance £22.4bn £2.8bn £2.6bn £0.6bn +0.2% CE(7.0)% +8.4% +2.8% £(x)m UK & ROI CE Asia Tesco Bank Sales exclude VAT and fuel. Sales change shown at actual exchange rates and on a comparable days basis.
Slide 21: Better sales mix
Better sales mix Food GM Food GM Food GM +0.3% (4.6)% (2.1)% (13.2)% +0.3% (9.0)% UK & ROI CE Asia Like-for-like sales change.
Slide 22: Better sales mix – UK general merchandise
Better sales mix – e.g. UK general merchandise Electricals Home Fox & Ivy Go Cook (12.0)%1 +8.8%1 +12.5%pts2 +18.8%pts2 Stepping away from Increasing sales in relevant, Margin accretive margin dilutive sales food-adjacent ranges 1. Like-for-like sales change. 2. Compared to the average commercial gr
Slide 23: Cost effectiveness
Cost effectiveness Cumulative cost savings Cost savings to date £1.6bn By type: £1,642m 1.5 £1,352m £1,215m £117m £310m £1,061m 1.0 Store operating Logistics and Goods not for £820m model distribution resale £485m By geography: 0.5 £226m 0.0 £1,021m £338m £283m 1H FY 1H FY 1H FY 1H FY 16/17 16/17 17
Slide 24: Cost effectiveness – Central Europe
Cost effectiveness – e.g. Central Europe range 45k lines 24% downsizing repurposing 34k lines 20% lower 0.8m 0.7m more pallet distribution sq. ft. sq. ft. volume costs refitting more one touch 1.2m 1H 18/19 1H 19/20 replenishment sq. ft. GM Clothing Food Addressing c.2.7m sq. ft. Food-focused, targe
Slide 25: Synergies - Booker
Synergies - Booker c.£200m serving 25 760 One Stop c.£140m Bookers supplied £79m £54m saving 443 £5m p.a. £16m 18/19 19/20 20/21 Fuel forecourts 1H FY supplied Synergies on track Distribution efficiencies Supporting Tesco
Slide 26: Tesco Bank
Tesco Bank 1H 19/20 Change • Focus on right products and services Lending to customers £12,379m 1.9% for Tesco customers Secured lending £3,690m 5.3% • Operating profit1 reflects: Unsecured lending £8,689m 0.6% • Investment in competitiveness of insurance offer Bad debt: asset ratio 1.8% (0.3)% • In
Slide 27: Operating profit
Operating profit1 £1,085m £63m £171m £87m +28.4% +1.3%2 +54.1% (3.3)% CE £(x)m UK & ROI CE Asia Tesco Bank Group operating profit1 £1,406m, up 25.4% 1. Operating profit before exceptional items and amortisation of acquired intangibles; change shown at actual exchange rates. 2. Growth is shown exclud
Slide 28: Group income statement
Group income statement 1H 19/20 % change1 Group sales £28,296m 0.1% 4.51% Operating profit2 £1,406m 25.4% 3.73% post-IFRS 16, incl. Booker pre-IFRS 16, Margin (%) 4.41% 87bps excl. Booker 4.61% 4.41% JVs and associates2 £10m (44.4)% 3.79% Net finance costs3 £(377)m 13.1% 3.67% Profit before tax3 £1,
Slide 29: Cash flow
Cash flow.
Slide 30: Sources and uses of cash
Sources and uses of cash Net working capital inflow £114m £210m £2,237m £2,123m £2,121m £(96)m £(116)m £(389)m £12m £(529)m £(24)m £(52)m £814m £(325)m Retail cash Timing impacts Underlying Retail cash Exceptional Retail Cash capex Net interest & Net property Net Market Repayments Retail free cash g
Slide 31: Year-on-year free cash flow
Year-on-year free cash flow £70m £87m £126m £31m £814m £(38)m £(43)m £(123)m £307m +105% +£417m £397m 1H 18/19 retail Increased profit Working capital Lower capex Lower net Lower interest Lower market Increased Other (inc. 1H 19/20 retail free cash flow inflow property and tax share purchases repaym
Slide 32: Capital expenditure
Capital expenditure £19m £25m £42m £91m £35m £0.4bn £0.4bn by region by type £256m £276m UK & ROI Central Europe Asia Bank Maintenance/refresh IT/productivity New space/business FY 19/20 capex guidance of c.£1.1bn
Slide 33: Property proceeds
Property proceeds 1H: £8m 50 site 1H: £65m disposals of c.£145m agreed1 Realising value Group cash proceeds CE store disposals 1. Aggregate proceeds due to be received in the second half of this financial year and beyond.
Slide 34: Financial Discipline
Financial -— < Discipline ar Ag
Slide 35: Balance sheet progress
Balance sheet progress Total indebtedness1 £15.8bn £15.5bn £14.7bn £2.1bn £2.3bn £2.1bn £10.7bn £0.9bn £10.5bn £10.3bn since year end £3.0bn £2.7bn £2.3bn 1H 18/19 FY 18/19 1H 19/20 Underlying net debt Lease liabilities Pension deficit 1. Total indebtedness post-IFRS 16 comprises Net debt (inc. leas
Slide 36: Debt reduction
Debt reduction • Re-paid £1bn of outstanding debt during 1H 19/20: - €0.7bn maturity (1.375%) - £0.3bn GBP bonds repaid early (4.875%-6.125%) • Issued 6 year GBP £0.4bn in May (2.5%) • Received second investment grade rating and assigned positive outlook from third agency 1.8 Remaining Debt Maturiti
Slide 37: Improving debt metrics
Improving debt metrics Total indebtedness ratio1 Fixed Charge Cover2 7.0x 3.5x 6.5x THRESHOLD > 3.0x 6.0x 3.0x 5.5x 5.0x 2.5x 4.5x 4.0x 2.0x 3.5x 3.0x 1.5x TARGET RANGE 3.0x to 2.5x 2.5x 2.0x 1.0x FY FY FY FY FY HY FY FY FY FY FY HY 14/15 15/16 16/17 17/18 18/19 19/20 14/15 15/16 16/17 17/18 18/19 1
Slide 38: Earnings per share and interim dividend
Earnings per share and interim dividend Diluted earnings per share1 Interim dividend per share 2.65p 8.17p +58.7% +49.8% 5.45p 1.67p +67.0% 1.00p 1H 18/19 1H 19/20 17/18 18/19 19/20 1. Headline earnings per share measure excludes exceptional items, amortisation of acquired intangibles, net pension f
Slide 39: Guidance
Guidance Working capital Underlying decrease of around £0.2bn Pension deficit contribution £285m per annum from April 2018 Capex £1.1bn - £1.4bn per annum; current year c.£1.1bn Net finance costs1 Less than 4% of long-term debt per annum Effective tax rate Decreasing to c.20% over medium term; curre
Slide 40: Financial summary
Financial summary • More profitable sales mix • £290m cost savings in 1H; £1.6bn savings to date • Margin ambition achieved; 12-month margin 3.73% (pre-IFRS 16, excl. Booker) • Operating profit1 +£285m; driven by cost savings and an improved product mix • Free cash flow +£417m; +105% • EPS2 +49.8% t
Slide 41: Growth, Innovation & Enabling technology
Growth, Innovation & Enabling technology.
Slide 42: Well-positioned for sustainable, profitable growth
Well-positioned for sustainable, profitable growth Group operating profit1 Growth. Enabling Innovation technology 1H 1H 1H 1H 1H 15/16 16/17 17/18 18/19 19/20 June 2019 Strong financial position Opportunities set out Focus on delivery 1. Excludes amortisation of acquired intangibles and excludes exc
Slide 43: Growth: small stores - Asia
Growth: small stores - Asia 16% reduction 50% fixed work removed +750 153 129 Improved 1.5% stores delivery operating (50 in 19/20) schedule 2018/19 2019/20 margin Total build cost (£k) Reduced capital Operating model Three-year plan intensity redefined
Slide 44: Growth: small stores - UK
Growth: small stores - UK 33% 200 bps 150 achieved 20% new stores CGM operating cost improvement 1 reduction1 40% Accretive to <3 year targeted Group margin payback Reduced capital Operating model Three-year plan intensity redefined 1. Express figures from a 20-store trial.
Slide 45: Growth: Superstores – UK & ROI
Growth: Superstores – UK & ROI 80:20 Food : GM . 4 stores 15% 65% 7% one touch reduction in replenishment operating costs3 2 3-5 year payback Reduced capital Operating model Approved to date intensity1 redefined 1. Reduction in fit out costs vs standard superstores. 2. Percentage of ambient products
Slide 46: Growth: online
Growth: online £3.2bn Pick rate Sales growth % 9% 7.4% sales 37m 99.7% Delivery Cost per 3.0% annual coverage productivity1 order orders 6% 4% 1H 18/19 1H 19/20 Strong base + unrivalled reach Better economics Re-acceleration 1. Number of deliveries per van shift.
Slide 47: Growth: online
Growth: online utilises Potential: 3 UFCs by Summer 2020 10-15k sq. ft. 15% (West Bromwich by March 2020) existing space of sales 3 yr plan: 2-3x +2m >25 UFCs more efficient new customers Investing in technology Capital efficient solution Future opportunity
Slide 48: Growth: loyalty
Growth: loyalty 19m Split into three: 60%, Clubcard 19m, 8+ items households 60% 8+ of UK extra items in population are weekly active users baskets +£8.681 Unrivalled base Most valuable 74,000 customers colleague trial 1. Increase in weekly spend on groceries.
Slide 49: Loyalty – enhancing the offer
Loyalty – enhancing the offer Tesco Collect £100 spend in Tesco = 100 points Fuel Pumps, Tesco Bank, Tesco Mobile + Save money Member pricing Receive vouchers Convert to air cash value miles Spend Spend at Tesco Spend at Spend with air 1% at face partners 3x the miles value points
Slide 50: Slide 50
Slide 51: Clubcard
Clubcard Fancy even more value from your Tesco shop? FOX§IVY GS COOK 10% off 2 big shops in-store 10% off your favourite Tesco Double data from No foreign exchange fees abroad brands in-store, all the time Tesco Mobile credit card from Tesco Bank Enxctusions and limits eppty Conditions apply Subject
Slide 52: Growth: Booker
Growth: Booker Catering 760 443 200 Top Up at BOOKER.CO.UK supplied supplied stores Tesco relaunch January 2020 (regional) Supporting Tesco growth Growth that leverages Channel opportunity Group in 2H
Slide 53: Growth: Booker
Growth: Booker Sales c.£7.4bn £5.5bn £1.1bn sales 17/18 20/21 Opportunity to become Transformational growth India #1 catering supplier Subject to review by the Competition and Markets Authority.
Slide 54: Innovation: creating value in Poland
Innovation: creating value in Poland Compact hypers 7.5m sq. ft. 41k 11-13k 17 £156m SKUs SKUs sites proceeds Supers 3.9m sq. ft. 8k 4k SKUs SKUs Realising value Right-sizing Right-sizing from property the space the range
Slide 55: Innovation: creating value in Poland
Innovation: creating value in Poland £2bn 71 219 compact supers From: hypers c.25% c.(29)% CGM op. cost loss-making 63 hypers c.£1bn sales 97 216 c.25% c.(22)% To: standard standard CGM op. cost c.3% compact hypers supers operating margin Profitable Relevant Sustainable
Slide 56: Innovation: product
Innovation: product F&F sustainable Whole fabrics crop utilisation Fox & Ivy Go Cook
Slide 57: Innovation: plant-based food
Innovation: plant-based food 94% appeal1 56% increase 6 new brands – in range 90 products 1. Source: Quantitative analysis carried out in March 2019. % of respondents who answered ‘Very appealing’ or ‘quite appealing’ to the question ‘Which of these best describes how you feel about the idea?’
Slide 58: Innovation: plastic
Innovation: plastic We don’t sell air We don’t move/store air We don’t want to package air Closed loop approach Sustainable 4 Rs Tackling excess packaging design packaging
Slide 59: Enabling technology: growth
Enabling technology: growth 1.5m users 440bn data points +77% YoY Cost to serve Seamless shopping Clubcard app
Slide 60: Enabling technology: cost efficiency
Enabling technology: cost efficiency +6.7% c.£40m +18% Fresh sales forecast accuracy saving transactions New algorithms Stock control Pay+
Slide 61: Enabling technology: simplification
Enabling technology: simplification £25m Saving faster cash >30,000 ~2m hours active leases management Scheduler MyProduct Thailand lease management
Slide 62: Sustainable value creation for shareholders
Sustainable value creation for shareholders £2.3bn Cash profitability1 3.5% to 4.0% +8 pts2 Customer £9bn £1.5bn 49.8% satisfaction £814m EPS Free cash growth flow Medium-term ambitions Underlying philosophy 1. Cash profitability refers to 1H 2019/20 EBITDA. 2. UK Multichannel tracker. Based on your
Slide 63: Our priorities for allocating capital
Our priorities for allocating capital 1 Reinvest in business & customer offer 2 Maintain leverage at 3x to 2.5x Total indebtedness/EBITDAR1 3 Grow and then maintain dividend at 50% pay-out ratio1 4 Consideration of inorganic growth opportunities that may arise 5 Return surplus cash to shareholders 1
Slide 64: Summary
Summary • Delivered every element of turnaround plan • Customer satisfaction improving across all measures and channels • Strong increase in profitability • Significant improvement in cash generation • Positioned well for profitable growth in years ahead
Slide 65: Q&A
Q&A. 6 6
Slide 66: Appendix
Appendix.
Slide 67: Segmental performance
Segmental performance Sales Operating profit before exceptional items Change Change Change Change 1H 19/20 1H 18/19 constant actual 1H 19/20 1H 18/19 constant actual rates1 rates1 rates rates UK & ROI £22.4bn £22.4bn 0.2% 0.2% £1,085m £845m 28.4% 28.4% Central £2.8bn £3.0bn (6.3)% (7.0)% £63m £75m (
Slide 68: Exceptional items
Exceptional items 1H 19/20 1H 18/19 Net restructuring and redundancy costs £(75)m £(22)m Impairment of assets in Poland £(71)m - Impairment of investment in India joint venture £(47)m - Property transactions £24m £13m Booker integration costs £(6)m - Provision for customer redress £(45)m £(7)m Bank
Slide 69: 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", “should