H2 19/20

Apr 8, 2020

Very good. Good morning, everybody, and thank you for joining us this morning. As usual, at a safe 2 meters social distance away, I am joined by Alan Stewart as normal. We are both sorry we will not see you in person today, but I am sure you understand why, and we both hope that you are safe and well. Today we are going to announce the results of the year up to February 29. While I am sure we will all agree that February 29 feels like a long time ago, I just wanted to say by way of introduction, that I am very pleased with the performance of the business last year. We finished the turnaround plan that we started five years ago, and indeed, we were able to exceed all of the goals we set. As I say, a lot has changed since February 29. What we are going to do this morning is I am going to ask Alan to take you through the full year results. In the second part of the presentation, I am going to talk to you about COVID-19. What has happened so far, give you some insights there, share with you again, what we are doing, and share with you a little bit about how we are thinking and how we are talking about scenarios in our business to give you some insight about how we are managing and thinking about managing the future. Before we go into any of that business perspective, I just wanted to acknowledge the very real and the very serious human impact of this virus. It affects our whole Tesco family around the world, our colleagues, our customers, their families, and loved ones. Nobody is untouched, and our thoughts are with everyone who has been impacted. With that as a perspective and a background, I am going to hand over straight to Alan to take you through the full year results, and then I will come back and talk about COVID-19 and plans there. Alan? Thanks, Dave, and good morning, everyone. Just to remind you that this was a 53-week year for us in the U.K. and ROI businesses, but the numbers I will talk about today are on a 52-week basis in order to give a proper comparison. If we move to the first slide on group performance. We were pleased with performance in the year with profit growing to GBP 3 billion and retail free cash flow growing to GBP 2.1 billion. Reflecting the performance last year and given our strong liquidity and balance sheet, we are proposing to pay a final dividend of 6.5 pence per share, taking the full year dividend to 9.15 pence per share. The final dividend will result in a cash cost of approximately GBP 635 million payable in the current year. We move to segmental performance. This shows a summary of our key sales and profit numbers by segment. This includes a total for the retail businesses, which we've introduced to give clearer visibility of our different profit streams, where we saw profit growth of 13.9% year-on-year. Taking each of our retail businesses in turn, in U.K. and ROI, sales increased slightly against the backdrop of subdued market growth. Profit growth of 16.9% was driven by improved product mix, our simplified operating model, and strong Booker synergies. In Central Europe, sales and profit growth, particularly in the second half, reflected the significant transformation we undertook within the business. We resized, simplified, and improved the relevance of our businesses in the Czech Republic, Hungary, and Slovakia, and transitioned in Poland to a two format model. This has involved fundamental changes to space store layouts and profit ranges, which are now largely complete. As a result, we're seeing a more efficient operation and improved availability for customers. In Asia, strong profit growth affected our actions to improve product mix and to accelerate cost saving initiatives. You'll be aware that in early March, we announced the proposed sale of our businesses in Thailand and Malaysia, and I'll talk more about this later. Turning to Booker, I'm pleased to say that the benefits we outlined at the time of the merger have now been delivered. We've achieved our three-year target for cumulative synergies one year early. Booker is EPS accretive to the group in its second year, and returns are well in excess of the cost of capital. As anticipated, we had completed the acquisition of Best Food Logistics on March 7, and this will enable more customers to access Tesco's sourcing capabilities. We see many opportunities to unlock further benefits from the merger with Booker as an integral part of our U.K. and ROI business going forward. Moving now to Bank, we continue to focus on providing simple products to our retail customers. In line with this, we sold a mortgage portfolio during the year, which is reflected in lower lending balances. We also closed our current account to new customers. The Bank has a strong balance sheet with a total capital ratio of 23.1%, and its resilience to various stress scenarios is regularly assessed. That being said, the coming year will undoubtedly be challenging. The economic conditions arising from COVID-19 will affect banking profitability across the board, and we expect the bank to be impacted by a reduction income from all of its activities, which together with provisions for potential bad debts, means it's likely that the bank will make a loss in the current year. We expect its capital ratios and liquidity to remain strong. If we turn now to sources and uses of cash, I've shared this waterfall many time, and it represents how we think about these. As a reminder, this reflects our free cash flow definition, including repayments of obligations under leases as required under IFRS 16. I'm going to call out the most notable items, starting with the GBP 4.5 billion of cash we generated from our retail operations. The net inflow from working capital was GBP 163 million, which includes the reversal of last year's GBP 210 million impact, which you will recall related primarily to the implementation of our general ledger. Our planned progress for the year was held back by the timing of non-trade payments, the deleveraging effect of lower sales in Central Europe, and the continued prioritization of availability for our customers. In line with our disciplined approach, cash CapEx came in at just under GBP 1 billion. We have provided the usual breakdowns by region and type in the appendices. Net interest and tax was just over GBP 1 billion, approximately GBP 100 million lower than last year, mainly as a result of the debt maturities and the bond tenders with new issuances at a significantly lower rate of interest than retired debt. The benefit from dividends, acquisitions, and disposals of GBP 345 million primarily relates to GBP 270 million we received from the sale of our 20% share in the Gain Land China joint venture, which we completed just before the year end. Overall, this resulted in the retail free cash flow of GBP 2.1 billion in comparison to GBP 900 million last year. In the current environment, I thought it was important to touch on the strength of our balance sheet and our liquidity position. We are a highly cash generative business with significant liquidity. We have GBP 3 billion of committed facilities which are undrawn, and we have proven access to the capital markets in both Euro and Sterling. During the year, we regained our investment-grade credit ratings from Moody's and S&P such that we are now investment grade with all three agencies. In line with how we manage our debt on a portfolio basis, we repaid GBP 1.3 billion of debt during the year through the combination of maturities and some liability management exercises, and we issued around GBP 1 billion of new debt at attractive interest rates. Our total indebtedness was down GBP 900 million since last year at GBP 14.7 billion. This was driven by a reduction of GBP 900 million in our lease liabilities, reflecting the purchase of our partner's stake in the Atrato Property JV, as well as the capital payments we made during the year. This was partly offset by a slight increase in our pension deficit to GBP 2.6 billion, driven by a fall in corporate bond yields. Subject to shareholder and regulatory approval of the sale, we are anticipating using GBP 2.5 billion of the proceeds from the sale of our businesses in Thailand and Malaysia to eliminate the funding deficit. Our total indebtedness ratio has continued to improve to 3.1 times, driven both by an increase in retail EBITDA of GBP 400 million and a GBP 1.1 billion reduction in net debt during the year. We have continued to take further actions to simplify and strengthen our business. As mentioned, the sale of our 20% share in Gain Land resulted in net proceeds of GBP 277 million, as well as giving us the ability to continue to focus on our core operations. We generated GBP 258 million of property proceeds in the year, relating largely to the sale of properties as part of our Central European transformation. Overall, our group freehold property proportion increased to 60%, primarily as a result of the JV buyback of 15 stores and two DCs I mentioned a few minutes ago. On March 9, we announced the proposed sale of the businesses in Thailand and Malaysia. Subject to shareholder approval and regulatory approval in both markets, we expect to complete in the second half of 2020, and we propose to use the proceeds to eliminate the pension deficit, return around GBP 5 billion cash to shareholders, and strengthen the balance sheet. As usual, I have a slide summarizing our key technical guidance based on a normalized year. Please note that the guidance assumes that we complete the disposal of our Thailand and Malaysian businesses in the second half. As we announced in early March, we expect CapEx to be within the range of GBP 900 million to GBP 1.2 billion going forward. There is no change to our guidance for net finance costs. On tax, we now expect the effective tax rate to be around 21% in the medium term, following the reversal of the previously enacted 2% reduction in the rate of U.K. corporation tax. In the coming year, we expect an increase in the effective tax rate to around 24% as we revalue the deferred tax in line with this reversal of the corporate tax rate. We maintain our dividend guidance on a full-year payout ratio of 50%, and we are planning for our interim dividend to be 35% of the prior year's full-year dividend going forward. Following the disposal of the Asian business, we are targeting a total indebtedness ratio of around 2.5 times, and we no longer expect to make pension deficit payments once we have used the proceeds of the Asia transaction to pay off the funding deficit. Our Asia segment will be treated as a discontinued operation for the current year. We have made significant progress in our turnaround over the last five years, focusing on serving our customers better, re-engaging our colleagues, and resetting our relationships with suppliers. As a result, we have added value for shareholders. I want to give you some color on this over the next few slides. You will see that customer perceptions have improved across our range of measures, with a particularly pleasing improvement to +29 in the net promoter score and strong improvements across all measures of brand quality and value. We see similar improvement for colleagues, and our score for Great Place to Work is around 10 points higher than the global retail benchmark. I would also particularly call out the colleagues' feedback on our culture and, importantly, their engagement in our purpose to serve customers a little better every day. Our supplier scores show some of the most marked improvements, reflecting the fundamental changes we have made in our ways of working as we have rebuilt trust and transparency with our supplier partners. Finally, our shareholder metrics reflect the progress on profitability, the cash, and our balance sheet. Our progress through the turnaround across all of our stakeholder groups mean that we are well positioned to deal with the challenges of COVID-19. Looking to the current year, our plan had been for this to be a year of investment, with profit more weighted towards the second half. Clearly, this has changed with the global measures to combat COVID-19. Dave will talk through some of the financial impacts in a moment. In summary, we delivered a strong performance for the year, and our liquidity and funding position remains robust. As we look to the coming year, we continue to operate within our capital allocation framework. The proposed sale of our businesses in Thailand and Malaysia will release material value that allow us to further simplify and focus the business, as well as returning significant value to shareholders and securing the pension scheme for its members. With the turnaround complete and the balance sheet strong, we are well-placed to support colleagues and customers through the current very challenging times, and in the long term, to reinvest into the customer offer. Thank you for your time. I will now hand back to Dave. Alan, thank you very much indeed. We have shared with you the results of last year, but we are also very clear that what will be on your mind is the current situation around COVID-19. The second part of the presentation is to share with you a little bit about what has been happening, what we are doing about it, and a little bit about how we are thinking about the future. Some of this you will know. This is the food sales since our week 46. These are Tesco weeks on the bottom here. As you know, the market was flat, subdued, if you like, coming into the end of our year in the first January, February period. Then we saw a phenomenal spike. When we talk about that, we are talking about a 50% increase in food sales, about a 30% increase in sales for Tesco across those peak weeks. We then saw it go slightly negative as the stay-at-home guidance was issued. If I look back to last week, we see us back into growth. So ahead of before the crisis, but obviously at a significantly lower level than what we saw in those peak weeks. Just wanted to give you some insights into how that stockpiling happened, because it informs some of the decisions we took and how it is we run our business. Look, the interesting thing is actually, most of the stockpiling was driven by a small number of customers, and you see from the chart on the left-hand side, 10% of customers took 30% of the volume during that period and a further 20%, so 30% in total took 60% of the volume. We saw that there was a strong correlation between affluence and their ability to stockpile. What you also saw was that while sales were increased across the whole country, they were significantly enhanced in the southeast and particularly around London. If I give you more flavor in terms of what, some of this you will know, but just to give you some examples. Be it baked beans, be it peas, be it toilet rolls, so on and so forth, some phenomenal increases against the typical week in terms of the volume that was purchased. You would have seen the challenge that that was in store and the challenge that was for the food supply chain. I just want to be really clear that the vast majority of these things are now resolved. We chose, because of stockpiling, to introduce the limit. You would know that across the store, and we reduced the promotions because multi-buy promotions against limited supply didn't allow that everybody had access to product. Those are the decisions that we took. The vast majority of categories in our store are now back onto free sell. There are one or two where we need to be careful, but as they recover, we'll take those restrictions off as well. The availability in store is now significantly better and improves every week as the sales normalize. Let me talk now a little bit about the impact on mix, because there's been a lot of conversations about the strong food sales, but I thought I would give you just a little bit more indication. Some of you will know this, but just for the avoidance of doubt. I'm talking now really about the U.K. We did see a strong growth in stores. Total first period store growth, around 10% in the U.K., but the online business significantly ahead of that. As I speak, the online business is growing at closer to 30%. The interesting thing, as you know, is if I take the margin lens to the sales mix, online is less profitable than stores, so the impact on mix here of more online business is negative. When I look at product, food was strong. Now food, in a margin sense, is about the average of the group. If you assume now that it's the average of the group. Clothing, where in the last few weeks, sales have been 70% down, actually clothing margins are accreted to the group, as indeed is the general merchandise that we still sell. We've seen significant declines in general merchandise. Fuel sales, last few weeks, fuel sales with the lockdown are down 70%, but obviously the margin on fuel is very, very small indeed, so not a big impact in terms of margin mix. In Booker, the positive is that the Booker retail business is growing at around 30% as I speak, but the catering business is significantly down nearly 60% down given the closures of some of the businesses that we serve. From a margin mix point of view, you'll remember that actually catering and delivered catering is actually a more profitable part of the Booker mix. The reason for giving you that is you got some insight in terms of how the sales mix is. You can also overlay and think about what the margin mix is, and therefore, there is some challenge in the mix as we go forward. Moving to the next slide. This is how I'm going to attempt to share with you a piece of work that's going on. We have a team within Tesco which is looking at the demand curve for the medium and long term. We have a team in Tesco looking at the supply strategy for the medium and the long term, and we're trying to model what might happen. I think the one thing I have to say as a caveat here is, the one thing that we know is none of the forecasts we have are going to be accurate. As one of my colleagues said when we went through it, they're all precisely wrong. Look, we have to recognize that. Nobody knows. But what we thought we would do is try and share with you the assumptions that we are making. As things unfold, we'll see how those assumptions actually play out. So what you see here is, down the left-hand side, is what are the impacts on our business and what we're assuming. So in terms of stockpiling, you've seen it's in the base case. We think it happens once. That's something that we've seen, and it's been positive in terms of sales over the first period of the Tesco year. The other thing that's significant, obviously, is the shift from eating out of home. As you know from our strategy, the idea of being in home and out of home is that however the market moves, we're in a strong position to be able to service it. I've read a number of reports from different people about how much of food consumed out of home will come into retail. Just to be transparent, we've assumed 25% does in terms of those calories that shift. The biggest single assumption is for how long. There's a base case assumption, and you'll see in a second. We're talking about a base case which has a 12-week impact, a 16-week impact, and then one which is a 20-week impact, and those relate to the three scenarios you see there. So depending on how long pubs and restaurants are closed, we have one, two, or three impacts. The other thing that is significant and we model is what's going to happen to holidays and, to a lesser extent, school closure. So the view is, given the restrictions, that this year is going to be a year of staycation in the U.K., and as a result, obviously, there's more consumption from people staying at home than the loss of tourism into the U.K. Again, if that's the 12-week impact, then we have the first column. If it lasts for longer, then we'll see a benefit that lasts for longer and so on and so forth. General merchandise and clothing we see continues to be negative in terms of sales mix, however long the period is, and likewise, obviously, the impact on fuel. If I present that to you in a slightly different way. This is our sales from the first part of the year, from week 1. You see my base case, the further restrictions, and the longer-term restrictions, and you see what we think might happen in terms of the curve, depending on which of those assumptions play out. I repeat, I'm happy to share with you the assumptions that we're making, but we all are very conscious that we don't have perfect accuracy here and we're going to have to be very adaptable. But I'm sharing with you the scenarios. What I do know for sure is that adapting to these scenarios has some very significant costs. Now, let me share with you a few facts here that we shared on the call. At the moment, we have just under 50,000 colleagues absent from Tesco. We, since March 20, have recruited 45,000 new colleagues. There is a very significant added payroll cost in stores. What you see here is the base case if the restrictions go on for longer, and our longer-term restrictions means that payroll in stores could cost something between GBP 280 million and GBP 405 million. In distribution, that range, because we are recruiting in distribution also, is between GBP 135 million and a worst case scenario, GBP 175 million. Store expenses significantly step forward, and this is everything from hand sanitizers, cleaning, and we can go into some detail if you are interested. There is quite a lot of property and maintenance, increased cleaning routines, the change of property around social distancing. Again, depending how long they go on for, you can see the numbers on the screen. We made some changes in technology, and we have obviously had to increase communication around the changes that we have made. Net, what we can see, depending on how long this scenario carries on, that there could be an incremental cost to the U.K. business of between GBP 650 million and GBP 925 million. They are significant costs. We prioritize always doing the right thing, keeping everybody safe, but keeping the business running. Whilst there is comments, and I am sure you will have questions, I have put that additional cost against the business rates relief that has been offered by the government in England and Scotland. What you can see is it is a contribution, it is a significant contribution. It is welcome, but it is only a part of what we think that this is going to cost, and Tesco is obviously investing significantly as well. That is where we are. What have we been doing? If you have been following the message to customers, you will know some of this, but let me recap. We do believe that if we can engage everybody, our colleagues, our customers, and our suppliers around this, that together we can do this. We focused on four things, food for all, safety for everyone, supporting our colleagues, and supporting our communities. Let me give you a bit of detail as to what that actually means. When we talk about food for all, I have touched already that we introduced a limit initially of three items per customer per product. We have now removed that on the majority of products. We removed many of our multi-buy promotions so that the food could go further. We introduced special hours in store for NHS workers and more vulnerable, disabled, elderly customers. We have expanded the online capacity by 20%, which is nearly 150,000 new slots, and we continue to expand that on a daily and weekly basis. We have worked with the government to prioritize those delivery slots. We have obviously in our store had to change the offer. We have temporarily closed cafes, counters, phone shops, and concessionaires have closed also. Very importantly, it would have been very much easier to run the operation if we had reduced the store opening hours. We did not. We maintained the store opening hours because as we put in things like social distancing and changes, we needed to keep stores open for as long as we could in order to serve as many people as possible. To help that, our office colleagues have been working in store where possible. We have done some work with suppliers to simplify ranges to prioritize volume so that more essential food could reach more people. I picked out because I thought you might be interested what that means in grocery home shopping specifically. Some of you will remember that our capacity and our ongoing normal rate, excluding Christmas, around 660,000 weekly slots going into this crisis. Initially, that capacity went south. It declined. It declined because of two things. The very strong traffic in store meant that our picking capability capacity was affected, but also the number of items that people were ordering was also significant. If I give you some color on that, all of last year, the average items per order would be about 44, 45. At the time of those two week peak, it rose to about 130 items per order, so the orders were significantly larger. We introduced so that we could spread and keep the capacity for all, a limit of 80. But actually, in the last week, the average orders have been more like 61, 62 items per order. So managing that and increasing the amount of picking time, so in some of our 345 .com stores we are picking from 2:00 A.M. We have increased the weekly slots to 805,000 and we will continue to increase that capacity so that we can serve more people. In that increasing capacity, we have been working with the government on their vulnerable list. For those of you who are not familiar, the government have identified 1.3, nearly 1.4 million people in the U.K. who they consider to be clinically vulnerable. Over a million of those have a support network already in place, and they believe there is around 300, maximum 400,000 that they believe have not got that support in place. They came to us and other retailers to say, could we help? On Friday of last week, to give you an example, we received from them a list of 110,000 people on that list. We were able to match in a matter of a few hours 75,000 of those that we had details for within Tesco, meant that they had some contact with Tesco before. We wrote to all of them and offered them the priority slots, and that was all done within 24 hours of reaching that list. If I update you to yesterday, I think because the government continued to send us the list, at the moment something like 95,000 of those 300,000 have been offered a priority slot with Tesco. The stat that sort of brings me sharply into relief is the one at the bottom. At the moment, we are making about 120 deliveries a minute in the U.K. as we speak. So that is what we are trying to do to get food to all. Safety for everyone, crucially important. I do not know how many shops you have been in. If you are doing the shopping, you will have seen the new social distancing measures. We summarized that in a colleague advert that was shot in store overnight with colleagues and one cameraman. We've created one in, one out systems to help us limit flow, and we've created one-way aisles so that customers can safely social distance as they walk the store. There's directional floor markings everywhere to help. I'll show you a picture in a second. We introduced protective screens at checkout. We've enhanced the cleaning routines, and there are new cleaning stations in our store as you walk in. We've encouraged payment by card, and we are progressively introducing a higher contactless payment from GBP 30 to GBP 45 to help that. An interesting stat for you is last week the amount of payments in Tesco that were done by card reached 80%, which is a significant increase on where we were before. I thought I'd put, given that not everybody would've been there, is if you walked into one of our Tesco stores, these are the sorts of things you would see. Outside in the queue, there are 2 meter lines, but when you come in there are sanitization systems, so your trolley and your basket is cleaned for you, and then passed to you, loaned to you in most cases. Then we encourage customers to follow the flow, and the markings on the floor keep people 2 meters apart. As you can see, we've got a one-way system operating so that people don't collide. Let me move to colleagues, because this is obviously crucial as well. Let me tell you about the approach that we took. When this became the crisis that it became, it was very important to all of us that we never had a colleague that felt compromised between what they needed financially and a decision about whether they should go to work or not. So immediately, we instituted that colleagues would get full pay from the very first day of absence, not waiting for the normal 3-day period. We were very clear with all vulnerable colleagues that the 12 weeks self-isolation that they were required to do would be paid. As you know, we've introduced a bonus for colleagues, and we did it quite a while ago, to say thank you to colleagues working across stores, distribution, and the customer engagement centers. We've introduced new school closure leave policy so that we can help families who are isolating with young children at home. As I said earlier, 45,000 new colleagues have joined us since March 20, including pickers, drivers, store colleagues, distribution centers. We have extended the colleague discount to 15% and made that for the whole of the month of April to support our colleagues, too. Now look, if you'll allow me, this feels like the time to say a word, a personal word about our colleagues. What I've seen over the last few weeks, I've always been proud of being part of the Tesco team, but never more so than the last few weeks. What they've done is nothing short of awesome. Their commitment, their courage, their empathy with the situation is humbling. I've seen it firsthand. I've seen how it is that Tesco colleagues have tried to look after the customers and tried to look after each other, and I'm just so proud of what they're doing and the way that they are doing it. Given the size of our business, we know that we don't get it right every time in every situation. Customers have been fantastic. Colleagues have been amazing. I think it's interesting, there's a pride in Tesco for what's being done today. I've seen huge challenges as I continue to visit stores and distribution centers across the country, but I've also seen a humanity that I haven't seen for a long time, and I'd just like to say very clearly, very publicly, I could not be more proud of the team that are leading and operating the business of Tesco today. Now, look, you will have seen through all of the presentations that Alan and I have given over five and a half years, that supporting the communities in which Tesco operates has always been a key part of what we've done. But at times like this, you do more. So we have, as you know, 3 million. In any ongoing month, we donate about GBP 3 million worth of food via the Community Food Connection and our distribution centers, and we carry on, and we carried on doing that. But we boosted it with 15 million more of food over the next 12 weeks, and we also gave GBP 1 million to help cover the extra operating cost of FareShare and Trussell Trust because their demand is obviously higher as well. We're focusing the GBP 2 million funding from Bags of Help to charities helping the most vulnerable, and we're building on the partnership that we have with the British Red Cross, donating GBP 2 million to support those in need. And we've given GBP 1 million of funding to stores to help the most needy of local causes. You would have read this week, we donating food for 1 million meal parcels for NHS workers, so supporting the Salute the NHS initiative that Ron Dennis set up. And we're constructing our first dedicated NHS Nightingale Hospital pop-up store in Birmingham, and we have plans to do more. I suppose the one out of this that is worth focusing on is the food donations. As I say, we do 3 million a month, any month. We've boosted that with 15 million over the next 12 weeks, and we've made that contribution to operating costs. So this year, over 50 million will be invested in making food donations to the community partners that we have had and some new, very needy institutions as well. Let me look ahead, if I may. Look, there are material impacts from COVID-19. We know that we're incurring significant additional costs, particularly in payroll, but literally across the whole of the U.K. operation. The precise impacts, I'm sure, I hope you appreciate, are hard to predict. I've shared with you the range of scenarios, both in terms of time period, which is the most significant assumption in all of them, but also in terms of those features and how they might affect us, in terms of the sales rate going forward. We don't give guidance. It's not prudent to provide profit guidance for 2020 and 2021. What I can tell you is, though, if we based ourselves on a scenario that returns to, let's call it, normal customer behavior by August, we believe that the retail impact that we're experiencing could be broadly offset by, yes, some volume increases in food, the support that we're getting from the business rates relief, and some prudent operational decisions that we can take as management and we need to make as management in order for us to cover all of the costs that we have. With that, let me try and summarize. Over the last five years, we have focused on Serving customers better, reengaging our colleagues, resetting the supplier relationships, and creating value for shareholders. In Alan's presentation, he gave you some of the KPIs of how we compare last year versus five years ago. I have to say, if I'm allowed, I'm really pleased and really proud of what the team delivered last year. It means that we're in a very strong operational and financial position to deal with COVID-19, but we do have significant extra costs in feeding the nation, and they're only partially offset by the business rates relief. I've seen, as I said already, an outstanding contribution from colleagues, and I can tell you there's a very strong belief inside the business that if we all continue to engage, stay flexible, understand that things change, that together we can indeed do this. Thank you very much for that. We're going to now open it up to questions. Can we try and observe, as we were in the stock exchange, we tried to give you a full presentation. Can we still keep to the idea of, if there are detailed modeling questions, let's pass those to Chris and Sarah in subsequent conversations, and one significant question each, please. Thank you. If you wish to ask a question, please use the phone line and press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. The first question comes from the line of Andrew Gwynn from Exane. Please go ahead. Hi, good morning, all. Just come back to the charts, if you will. So very useful. Thank you very much for providing those. Scale would always be nice, but I guess that's normal form. The 25% out of home consumption transfer into store sounds to me pretty conservative. I'm just wondering what your thinking is behind that, and loosely what that equates to in terms of the like-for-like sales up there. Thank you. Yeah. Andrew, good morning. Look, I've got a very delicate line to follow here, which is how do I give you insight so that you can understand, but without giving away competitively sensitive information. Hopefully that's been a path we've tried to walk before, and we'll continue to walk through it here, hence the way that we presented the chart. The 25% is based on looking at the mix of what it is we sell to Booker, to the different customers, and look at each of those occasions and saying what of those would become a retail event, and then what it is we would satisfy. There's some very detailed work behind that. As I say, all I can tell you is it will be precisely wrong. But I think what we have to recognize is that there's an element of out-of-home food consumption, which is just not happening at all and will be lost consumption because those occasions are not there. I think when you look at the total market, you need to discount the total market for that. I think the thing that's interesting is, whilst we've seen a big impact on those catering businesses, we also see some of them start to experiment with ways that they can open up. Prezzo opening five stores which have social distancing and trying to find different ways. Again, we've got different assumptions about how that sector evolves. But I can completely accept that you might disagree with the 25%. I'm just telling you which assumption we have made. Okay. That's all clear. Thank you. Cheers. The next question comes from the line of Andrew Porteous from HSBC. Please go ahead. Andrew, are you there? Muted. Hello, Andrew. Your line is open. Hi. Sorry, I was muted. Hi, guys. Just thinking about a couple of issues. Could you tell me how supplier income works in this sort of environment? Things like overrides and the like, do you have to renegotiate them, or does that sort of continue as normal? The second question was really on the non-food side of the business. Could you talk perhaps through inventory risk and markdown risk as we move through the year on that, given the sales declines that you are seeing there, particularly in clothing? Okay. So look, why don't I talk about supplier income and I'll let Alan say something around inventory and non-food. The truth of it is most of our commercial income, you know that we move most of our commercial income from so-called back margin to front margin. So most of our commercial income now comes through the case price, straight case price. Those elements which are override written, and there are still some for sure, we would operate those as normal. So we've not renegotiated overrides as a result of this. They operate as normal. The bigger question in the area of supply has been about capacity planning and being able to source. So there has been some conversations about simplification of range, prioritization of pack sizes, volume, so on and so forth. But the work that we've done over the last five years to build strategic relationships with partners so we understand each other's business is really helping us as we recover the supply chain. But it's not a fundamental change in commercial practices or commercial gross margin. Alan, do you want to say something about? Yeah. For us, Andrew, you actually asked two questions, but we will answer them. The general merchandise and clothing are obviously non-perishable, but clearly there are If demand isn't there, then we have to think about when we turn that stock into cash. And particularly general merchandise, no real risk. There's generally we can store it, and that's what we will do. Clothing is a little bit different. But for us, they are relatively small part of our business. As Dave said, from a mix perspective, they are margin enhancing, and therefore there's a negative, there's a drag if we're selling less than them. But for us, I wouldn't call it out as a significant risk up against our overall business. Even clothing, you can always put into storage and bring out, if there's seasonal elements of clothing. But we'll manage it very much as the market develops. Okay. Thanks, Andrew. The next question comes from the line of Xavier Le Mené from Bank of America. Please go ahead. Yes. Good morning, gentlemen. Just a quick one for me actually on Europe. Can you give us a bit more color on the recovery you are potentially experiencing or what you are expecting or what are the first signs since you significantly changed the business over the last 12 months? Yes. So it is a great question. So look, we have made significant changes in Europe. By far and away, the most significant of those is in Poland. So as Alan says, we have sold a number of stores in Poland. We basically reset our whole Polish business model around two formats, so a supermarket format and a convenience format. We have effectively sold out of our hypermarket business. We have significantly reduced the cost of running the Polish business as a result and changed the offer very fundamentally for our customers. We saw a big impact in that in the second half of the year as we went through it, and in terms of its impact into the Christmas trading period, quite frankly and honestly, it was a little bit more than we had anticipated, so we had to face into that. Elsewhere in Central Europe, we continue to make the simplification changes. We've taken a lot of excess space out, so a big program in Hungary in particular around downsizing. In places like Czech, we've come out of department stores. Xavier, there's been a huge amount of change within Central Europe. I'm pleased with the way that we're coming out of it. It's hard for me to delineate some of the things which are COVID related into the sales trends now. But if I look at the changes that we made to the offer, to the sales space, to the cost base of the business, we managed to execute through a very difficult situation, the change that we wanted. I suppose we'll have to give you an update in October as to what a more normalized sales level would be, because at the moment, whilst there's been a positive impact on sales in Central Europe, it's been nothing like the level that we've seen in the U.K. and Ireland. Okay, thank you. The next question comes from the line of Rob Joyce from Goldman Sachs. Please go ahead. Hi, Rob. Sorry. Hey, sorry, similar mute issues, I am afraid. Just one clarification from me and a question, if you do not mind. Thanks very much for taking these and congrats on all the work you are doing at the moment. On the clarification side, just so I understand, under your base case scenario as it stands, your best guess is that after the benefit of the rates relief, the retail business in FY 21 is broadly neutral based on the COVID-19 impact, with potentially an additional GBP 200 million or so negative impact from the bank? That is just a clarification on that. The second one is just could you give us, Brian Hilton said online sales now running at around 30% growth. Are you seeing significantly different growth levels in the different channels of your business, convenience superstores and extra hypermarkets now as we settle down into a more normalized trading period? Thank you. Okay. So very cheeky. Got a clarification and a question. The clarification is, look, we always intended to split out retail profitability and banking profitability so that you could see the dynamics, and we have done that. In terms of the retail part of it, look, if I use the calendar, so it helps. The base case assumption is end of July, medium assumption is end of August, and the longest is the end of September. As I say, we do not know whether they are right or not. We are just sharing with you the assumptions that we have made. Look, what I said was whichever of those assumptions the combination of some food volume, the help that the government are putting in, and other decisions that we might take, we hope to get ourselves to a place that on a 52-week basis, we can offset the challenges for the business at a retail operating level. That is what we aspire to do, but there is obviously a lot of moving parts. In terms of channel specificity, and then I will let Alan talk about the bank. Look, it is exactly as you would expect. We have seen a very significant growth in food sales across every channel, large stores, small store convenience, and indeed online. The large stores are obviously affected by the GM and the clothing, so the headline number will be slightly lower. But we have seen convenience shopping also increase as people use their local store for a bigger basket. So look, I'm trying to think of numbers I can give you would be helpful. In that period, across that period, we talked about a 30% growth number. Food was significantly ahead of that. We talk about large store food sales through the whole of the first period, the five weeks of being just under 10%. And we talk about online food being closer to 30, I mentioned, and convenience sales between those two. Interestingly, if you take the Booker angle, Booker retail partners, which are convenience stores through Londis, Budgens, Premier, growing at 30% as we speak. That's a little sense of how the channels are. Alan, do you want to talk about the bank? Yeah. In terms of the bank, in terms of the clarification, yes, the bank, we fully expect it to come back in the year after this. But the bank, its activities are impacted. To the extent that customers take advantage of the moratorium on paying interest, that obviously impacts their income as well, the bank's income. And then, of course, there's IFRS 9, where all potential bad debts are taken upfront rather than on an as incurred basis, which was the old standard. So there is a pretty big one-off potential bad debt charge which is taken. But I think the other thing just to remind you about the bank is that the bank, we operate totally separately. We only expect a dividend of GBP 50 million per annum in terms of the cash flow contribution. Whilst there is an earnings and operating profit impact, the cash impact on the group is relatively minor. And the bank, obviously we will take decisions on the bank's dividend as we do each year. We receive the dividend in respect of the year ended last year, and we'll see what happens. But it's a relatively small contribution to the cash flow of the PLC. Thanks, Alan. From memory, the bank dividend's about GBP 50 million, right? It is GBP 50 million. That is what we factor in, and that is the basis on which the bank operates on growing its own business normalized. In terms of the group cash flow, that is, dare I say, a relatively small part of overall cash flow to the group. The bank board makes that decision each February. Yeah. Yeah. Okay. Thank you very much. The next question comes from the line of Victoria Petrova from Credit Suisse. Please go ahead. Good morning, gentlemen. Thank you very much, especially for scenario analysis. It is extremely helpful. I have also a clarification question. You mentioned that business rates relief should be around GBP 585 million, and as far as I understand, last year it was around GBP 650 million. Where does the difference come from? Do you expect any other form of state support, maybe some compensation of salary payments or maybe even some lease payments or any other form where the government could support you in the current environment? Thank you very much. Okay. Let me give you some of the breakdown on business rates, Victoria, and then I will talk about the state support in a second. Our total business rate is a little more than GBP 700 million. That is total, total. All payments, all property, all geographies. The element which pertains to our retail stores on which the relief is given is a little bit more than GBP 600 million. If you are aware, the Welsh Government took a decision not to support the U.K., so our stores in Wales will not get this relief. That brings it in England and Scotland down to the number of GBP 585 million of relief that we anticipate. That is the delta between the two. In terms of state support, no, we do not anticipate anything else. We appreciate what is here. Your question allows me to say very candidly, we have not furloughed anybody inside the Tesco business. We have given 12-week full paid sickness to our colleagues, and we have taken on 45,000 new colleagues, so employing people who have been laid off elsewhere into our business. Also, I do not know if you heard me talk earlier this morning about where other forms of state aid are available, and the one I was thinking of was VAT. The government have given the ability to delay, defer VAT payments. Because of the financial strength of the business that we talked about, we have chosen not to take advantage of that. Last week at the end of the month, we paid GBP 200 million of VAT to the government as we normally would. Our working assumption is, we will take the business rates relief, but that will be the extent of it. Thank you very much. Thank you. The next question comes from the line of Nick Coulter from Citi. Please go ahead. Hi. Good morning. Thank you for taking the question. Could I ask about the sales shape projections? I guess it's slide 27 of 44. I guess that's GB and N.I. As you have quite rightly articulated, they are precisely wrong. Could you talk through the shape over the extended projection? It looks like you go into sales declines on that projection. So I just wanted you to clarify that and your thinking with respect to that shape and how out of home impacts and what the drivers are. Then if I may, it'd be interesting to get some comments on the present run rates in the bank. Thank you. Great. Let me take the first one and Alan can talk about the bank as well. Look, Nick, as I say, they're precisely wrong, but the assumption is this. There are two things that I could say to you which are interesting is, we've seen the pattern of trade change. Since we've gone into lockdown, social distancing, all the changes I mentioned, what we're seeing is a much more even trade over the week. So it's daily. What we're seeing at the moment is Monday, Tuesday, Wednesday, Thursday are bigger than before, but weekends are actually lower than they were before, as people are basically shopping the trip. The number of transactions is declining, but the size of the basket is increasing. So if I take last week, because those numbers are on the top of my head, number of transactions down 48%, basket size up 50%, so that's where the growth comes from. The assumption is that sort of flat pattern. Because of the out of home lack of holidays, the things I mentioned, we see some growth in each of those scenarios for the next 12, 16, 20 weeks. But we're also clear that when it comes off of that element of growth, that there really is some stock that's in people's homes that they will begin to use up. So there is an assumption, Nick, that when we do get back to that so-called normal state, that people will run down some of the stocks that they have built up through this period. But that's the assumption, Nick, and if you press me on the precision of all of it, I would struggle. But there is an assumption that not everybody has eaten all of the beans that they bought so far, and that therefore, we've built into our assumption that maybe there is a dip after we come out of this as they're stockpiling unwinds. So that's the main thing. We also have a small assumption that actually people may choose to go out of home a little bit more than they did, given that they've been in a different scenario for a number of weeks. But those are our assumptions, mate. That's all I can say. Alan, you go on. In terms of the bank, the bank is focused on customers, and the bank is focused on treating customers appropriately and properly and supporting customers at this time. The lines of activity that the bank runs are broadly their loans, their credit cards, there is travel money, there is ATMs, and there is insurance. Those are key elements, and all of those are impacted. Insurance being a seasonal or annual is less so at the moment, difficult to really draw anything. Loans, quite significantly down. Credit cards, people obviously are not spending as much because they are at home, and therefore credit card balances are, and volumes are quite significantly down. There is no travel going on, as you can expect, and you have read about some of the providers in that market. ATM activity is significantly down because people are not out and about raising money. Plus, as Dave mentioned earlier, there is a shift towards cashless from cash. On top of that, there is the moratorium on payment. If you feel that you are under some stress of payment, then you can apply to the bank and not pay interest on your outstanding balances. So those all impact the volumes that the bank is seeing. Again, very difficult to project what will change. That is behind the thinking of the call out on the bank one-year profitability impact. Then you have got the bad debt on top of that. Super. Thanks, gents. All the best. Perfect. Once again, if you have a question, please press 01 on your telephone keypad now or press 02 to cancel. The next question comes from the line of Maria R. Adurno from Morgan Stanley. Please go ahead. Thank you very much for taking my question. Based on the current scenario that you are actually running, I was just wondering if from a CapEx standpoint, we could actually expect this to come down for this year? Alan, do you want to? Our guidance, difficult to say. We would expect not. As Dave said, there are some costs which we will incur because of the extra volumes that are going through. We have not, at this point, factored in any expectation of that GBP 900 million to GBP 1.2 billion changing. But obviously, as the year goes on, we will see. But again, just to stress that where CapEx is necessary and more than 50% of our CapEx is maintenance CapEx, we will continue to spend that. Okay. Any more questions? No? Is that the end of the questions? Just checking. There will be a brief silence while participants register for questions. Thank you. There are no further questions registered. I will return the call back to you. Thank you very much indeed, and thank you everybody again for taking the time this morning for joining Alan and myself. What we tried to do is obviously share with you the results of last year, and I emphasize I was very pleased with the way the business performed. We did deliver and exceed all of the turnaround goals we set for ourselves. The business has moved on, the world has moved on, and we are now facing a completely different situation. We tried to share with you what is going on and how we are thinking about the future. I know we all like a more exact, more predictable future, but that is not the case. What we tried to do was share with you the assumptions that we are making, but also safe in the knowledge that we know that they won't be exact. The last few weeks have been extraordinary in lots and lots and lots of ways at every level. I have been hugely proud with the way that the whole of the Tesco team have stepped forward, and it has been nice to see the pride that Tesco colleagues have taken in serving Britain shoppers this week. I feel extremely proud to be part of the team. There is lots of change to come, and we will continue to be agile, we will continue to be flexible. But we will continue to play a very active part in however it is we can help the country deal with this crisis. Our criteria will stay food for everybody, safety, supporting our colleagues, supporting our communities, and protecting the business for all of the stakeholders in it. Stay safe, and I hope I will see you all soon. This now concludes our meeting. A replay and transcript of this call will be available on the Tesco PLC website shortly. Thank you all for joining. You may now disconnect your line.