Tesco PLC (LON:TSCO)

H2 17/18

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Apr 11, 2018

Nice to see you all. Thank you very much for taking the time to be here with us today. I'm very pleased to say we have, we think, a strong set of results to share with you. We're also very conscious that we're 3 years in, 3 full years into the turnaround of Tesco. It's also the point at which, if you like, it's the last time we're going to talk to you about a completely standalone Tesco set of results, given the Booker merger. We thought what we'd do this morning, as well as sharing with you the results, is share with you a little bit of a perspective of where we think we are 3 years in, before we commence the big opportunity, which is Booker. I'm pleased you'll see in the audience, as always at the prelims, the exec of Tesco is here. When we do get to the Q&A at the end, with the usual rules of one question, not model-driven, strategic, insightful, entertaining questions, if either myself or Alan can't answer those, then I'll call upon members of the exec who are here to add a little color, flavor, and depth if that's helpful to you. Okay? What we're going to do, talk about the results, and I'll pass to Alan immediately to do that, and then I'll come back and give you a perspective on the 3 years, through two lenses, really. The six drivers that we shared a number of years ago, but also from that stakeholder point of view that we've shared previously as well. Then I'll talk a little bit about looking ahead, and particularly about Booker. Okay? Alan, without further ado. Thanks very much, Dave. Good morning, everybody. The full year results. As Dave said, it's been a year of progress, and I'll begin with the group results. We've delivered another strong year of progress and remain firmly on track to achieve our medium-term ambitions. Momentum in sales has continued with positive growth of 2.3% at actual rates. I'm pleased to say the fourth quarter of the year represented the ninth consecutive quarter of sales growth for both the group and our U.K. and Ireland division. We've also delivered strong profit growth, up 28.4% year on year to GBP 1.64 billion, with growth in every segment. The U.K. and Ireland made significant progress in the year, achieving an operating profit of GBP 1.05 billion, up 31.1%. This enabled us to finish the year strongly with an operating margin for the group in the second half of 3%. Importantly, we've had another strong year of retail cash generation, up 21.7% to GBP 2.8 billion. If we now move to the U.K. As you know, we've placed significant emphasis on fresh food as the driver of our recovery over the past few years. We're pleased to have delivered positive fresh food volume growth of 0.7% in the year, driven by continued improvements in our customer offer. As expected, we've continued to see a drag from our efforts to de-emphasize certain parts of our general merchandise business in order to shift the focus to more profitable lines, with GM volumes down 7.2%. We further refined our range, reducing the number of SKUs by 16% and reducing sales in certain categories. An example would be electronics, where it's down more than 10%. We're still focused on driving growth in profitable, sustainable categories of general merchandise. The introduction of our Go Cook and Fox and Ivy ranges has been extremely successful, driving a 14% and 20% increase in customers to our cookware and homeware categories, respectively. Overall, we've seen 260,000 more customers shopping with us year-on-year, with average basket spend up 2.5%. This has enabled us to improve profitability with operating margins for the U.K. and Ireland segment up 50 basis points year-on-year. Looking now at the results for this segment in more detail. We've seen strong like-for-like sales growth of 2.3% for the year, maintaining similar levels throughout every quarter. The fresh food category is strong, and we've seen strong volume growth of 0.7% that I've just mentioned, and this corresponds to market outperformance in fresh food of 1.7%. This is driven by a particularly strong performance in meat, fish, and poultry. Our total food volume outperformance was 1.4%. We've continued to see strong customer take-up of our own brand products, helped by the ongoing relaunch, which started last November. Own brand now accounts for 51% of total sales, up nearly one percentage point year-on-year. As usual, we've included details in terms of like-for-like sales and channel analysis in your packs, from which you'll see that we've had a particularly strong performance in our large stores. Superstore like-for-like sales were up 2.6% and Extra stores were up 1.8%. We saw slightly over 5% growth in Grocery Home Shopping, once again driven by increases in both order numbers and in basket size. As you can see from the waterfall on the right of this chart, operating margin has increased by 50 basis points to 2.3%. Despite the significant investment we made in price in the first half, as we held back more inflation for our customers than the rest of the market, we've seen a net benefit from volume mix and price for the year as a whole. Our cost-saving plan delivered a reduction in costs in the U.K. of GBP 404 million during the year, more than offsetting the cost inflation we've seen. While our operating margin improved significantly year-on-year, given the shape of our investment, this is even more marked in the second half, strengthening nearly 70 basis points to 2.5%. I should note at this point that the U.K. and Ireland operating profit before exceptional items includes transaction costs and fees of GBP 21 million arising from our merger with the Booker Group. This is consistent with the treatment in the prior year where we had GBP 26 million of costs also included in the operating profit before exceptional items. In the year ahead, we expect to see a similar level of transaction costs in respect of stamp duty payable on completion of the merger. If we now move to our Central European segment, we've delivered like-for-like sales growth in food of +1.2%, with fresh food again being a key focus. This strong performance continues to be offset by the drag from general merchandise as we refocus our offer, similar to what we're doing in the U.K. The Czech Republic and Slovakia continue to deliver strong like-for-like growth. We've made good progress in Poland, which continues to be a very competitive market, generating positive like-for-like sales growth throughout the second half of the year. It's too early to assess the full effect of the recent legislation changes concerning Sunday trading in Poland, and they may have some impact in the year ahead. We've seen significant progress in our convenience store format across Central Europe, with all areas contributing positively to a like-for-like sales growth of 3.2%. We've been particularly pleased with the increase in operating profit before exceptional items in the region. Profits more than doubled year on year to GBP 119 million, with operating margin up 87 basis points to 1.8%. Our efforts to reduce costs have made a significant contribution to this improvement in profit, particularly the benefit of more effective stock management. The opening of a new distribution center in Slovakia serving the whole region has allowed continued progress towards operating these four markets as one business. Moving now to our Asia segment. As we've mentioned throughout the year, the headline sales numbers are significantly impacted by the strategic decision taken in Thailand to remove unprofitable bulk selling and mass couponing activities in order to focus on sustainable, profitable sales growth. This change will annualize during this quarter of this year we've just started. The change to bulk selling has driven around a 6% negative impact, with the reduction in couponing driving around another 3% negative impact. When stripping out this impact, Asia's like-for-like sales were down around 1%, largely reflecting our investment in price across the region. You can see the positive impact the strategic decisions have had by turning to the profit waterfall. We've continued to invest in keeping prices low for our customers, and have seen a benefit in both volume and mix. We've also, in Asia, made significant progress on our cost savings program, saving a total of GBP 120 million during the year. Throughout the year, we've seen further improvements in profitability. Despite the full year deflation of around 1%, our operating profit margin is up nearly one full percentage point to 6%. If we now turn to the bank. Tesco Bank celebrated its 20th year of serving Tesco shoppers during the year we just ended. We've continued to strengthen our product and service offering to customers, delivering meaningful little helps along the way, driving a growth in active customer accounts of 4.1% across the primary products in the bank. Operating profit before exceptional items was up 10%, and our headline lending balances have grown 16%. We continue to build the mortgage base, with total mortgage lending up 39%. Secured lending now accounts for 26% of the loan book, up 440 basis points year on year. Tesco Bank recently won the Best Direct Lender award for the third year running, as again, a focus of our commitment to customer and value for our customers. The balance sheet remains strong, with a risk asset ratio of 19.3%. As you may be aware, IFRS 9, Financial Instruments, has come into effect for all accounting periods beginning after 1st January, 2018. As a result, the opening retained earnings for Tesco Bank for the 2018-2019 financial year are expected to be reduced by GBP 166 million. Although the impact of the new impairment requirements in our retail business is immaterial, there may be some increase in the profitability of the bank and volatility of that as we go forward, as the new business is accounted for on an expected losses basis and as we fully understand the implications of IFRS 9. It shouldn't make any impact on the overall results of the business, but the timing of recognition of losses changes as a result of this standard. If we now move to the next slide, you can see the standard bank metrics we always share. I'd like, again, to draw your attention to the differing rates of growth between the secured and the unsecured lending, reflecting the bank's greater focus on secured lending. The improvement in our cost to income ratio to 59.7% follows the restructuring changes we made in the bank last year. If we now move to the sources and uses of cash, and again, this is the way we think about cash within our business, represented on this waterfall. If we begin on the left-hand side, we start with GBP 2.466 billion of cash from retail operations, driven by continued improvements in the profitability of the business. Following this, we've had a very positive working capital inflow of GBP 499 million. I should note that this includes GBP 102 million timing benefit driven by trade payables arising from the Palmer & Harvey administration towards the end of the financial year. We expect this to reverse in the 2018-2019 year. Aside from this, the key benefit to working capital is from a variety of stock management initiatives across the whole business. Our exceptional cash items result in an outflow of GBP 192 million. These are made up of GBP 149 million of payments in relation to the deferred prosecution agreement with the SFO and the shareholder compensation scheme payments. There are GBP 122 million of restructuring costs and GBP 92 million of onerous lease utilizations. These are offset by GBP 160 million recovered from HMRC regarding the treatment of VAT on Clubcard benefits. HMRC has appealed this decision, so there is the possibility of a cash outflow in the future should their appeal be successful. Overall, this leads to a retail operating cash flow of GBP 2.7 billion, an increase of 21.7% year-on-year. Our cash CapEx of GBP 1.2 billion is up year-on-year and includes around a GBP 200 million impact from the payment this year of prior year accruals. Net interest in tax payments of GBP 428 million were GBP 113 million lower than last year, largely as a result of our maturing debt and the two liability management exercises we undertook during the year. I'll discuss these in more detail shortly. Our net property transactions include 10 store buybacks in the second half of the year, following on from our transaction with British Land at the beginning of the financial year. This is offset by GBP 253 million of proceeds from property sales, including the sale of our Hackney store in the first half and a number of other sites in the U.K. and in Central Europe. We raised GBP 362 million through disposals and dividends received, primarily driven by the sale of our remaining minority stake in the Lazada online business and our opticians business division, as well as the GBP 50 million dividend we received from Tesco Bank. The result in overall free cash flow for the year of GBP 1.377 billion. Moving to capital expenditure, CapEx for the full year was GBP 1.1 billion, in line with our guidance, and continues to be largely made up of maintaining and replacing essential assets. in the U.K., within the GBP 677 million, we have allocated CapEx to repurposing in 20 Extra stores and a small amount of new store openings, primarily in our Express store format. Within the year, we opened over 50 concessions within our stores in the U.K. with Arcadia Group, Holland & Barrett, Dixons Carphone, and Next. The GBP 133 million in Central Europe relates mainly to repurposing of existing stores. In Asia, the GBP 239 million relates to 69 new stores we have opened, mainly in Thailand, and repurposing in 34 stores. Just to reiterate, we continue to expect CapEx to remain between GBP 1.1 billion and GBP 1.4 billion per annum. Based on our current plans and at this early stage in the year, I would expect to see our spend towards the top end of this range in the current 2018/2019 financial year. We covered pensions in a lot of detail at the half year. To recap, the most significant update was the conclusion of the triennial actuarial valuation, confirming the deficit of GBP 3.0 billion. We also, at that stage, confirmed a small increase in the annual contributions of GBP 15 million to GBP 285 million from April 2018, with our long-term funding framework unchanged. We also covered the significant reduction in pension deficit as calculated by IAS 19. I will not repeat all the detail here again, but you can see from the waterfall on this chart that it reduced from GBP 6.6 billion to GBP 3.2 billion pre-tax and to GBP 2.7 billion post-tax over the course of the year. I am pleased with the significant progress we have made over this year towards strengthening our balance sheet with net debt reducing to GBP 2.6 billion. This chart shows the progress over the last three years where we have seen significant improvements. We have also seen a GBP 509 million in the year reduction in our lease commitments, which includes the benefit of the buyback of the 17 stores over the course of the year. Total indebtedness now stands at GBP 12 billion, a GBP 9 billion reduction from 2014, with lower net debt driving around half of this reduction. This slide on debt reduction gives some more color on our progress on gross debt within the year. During the year, we have repaid a total of GBP 2.7 billion, consisting of debt maturities of GBP 1.4 billion and the two bond tenders I previously mentioned. The first tender took place in July 2017, concluding with the repurchase of GBP 500 million of debt. Following this, in October, we repurchased a further GBP 800 million of debt. As you can see from this slide, we have targeted bonds with high coupon rates to maximize the return. The exception to this was our Eurobond maturing in 2019, which we repurchased to help smooth our debt maturity profile. The tenders alone result in annualized interest savings of around GBP 50 million. We're really pleased with the progress we've made on the balance sheet. Our intention remains to return to an investment-grade credit rating with our key threshold metrics being fixed charge cover in excess of 3 times and total indebtedness of less than 3 times EBITDA. These graphs show the significant progress we've already made on both of these metrics, which are our internal metrics and measurable against our internal financial results. Our EPS has improved significantly, up 62.7% to 11.88 pence. In addition to the strong increase in operating profit I mentioned earlier, which resulted in the tax charge increasing, we've also had a large reduction in finance costs, primarily driven by the reduction in debt that I've just discussed. With the continued strengthening of free cash flow that we've delivered, we formalized a commitment that any future dilution from the issuance of new shares to satisfy the requirement of share schemes will be offset by a matching repurchase of shares in the market. Put simply, we want to ensure that the total number of shares in issue stays constant going forward. We expect this will utilize around GBP 150 million of cash per annum, with the exact amount dependent on our performance each year. We're pleased to propose the final dividend of 2 pence per share to be paid on the 22nd of June 2018. This results in a total cash cost of around GBP 164 million, which will be payable during the course of this financial year. We continue to target cover of around 2 times earnings in the medium term. Our full year dividend of 3 pence reflects our continued improvement in performance and the board's confidence in the plans that we've set out. Before I conclude, I have a slide summarizing our guidance for the key financial metrics and how we see our continued progression. The margin cost saving and cash generation targets are directly linked to our 6 strategic drivers. The remaining guidance for pension contributions, CapEx, finance costs, tax, and the dividend remain unchanged from October. We expect the current year's tax charge to be around 24%. I've also included here our debt metrics for total indebtedness, less than 3 times EBITDA, and a fixed charge cover of greater than 3 times. Finally, just to remind you that we'll be consolidating 51 weeks of Booker in the current financial year, following completion of the merger on the 5th of March. In conclusion, the year represents continued strong progress, leaving us firmly on track to deliver our medium term targets. We've delivered another year of growth in sales, profit, and cash. We continue to increase profitability across the group, with our operating margin reaching 3% in the second half. We've also made substantial progress across the group on our cost saving program, with total cost savings of GBP 594 million in the year, and GBP 820 million of savings to date, well in excess of half of the target we've set ourselves. We continue to strengthen the balance sheet with GBP 2.7 billion of debt repaid during the year. And finally, the dividend represents the board's confidence in our ongoing recovery. Thank you for your time. I will now hand back to Dave. Thanks, Alan. Thanks. Okay. As I said, by way of introduction, what we thought would be both appropriate and helpful is to spend a little bit of time talking about the last three years. We do that obviously to give you sight of the progress that we are making, but also recognizing, as Alan says, going forward, we will obviously incorporate Booker. And whilst we will continue to give you clear sight of what the Tesco performance is against the aspirations we have set for ourselves, this is the last time we will be presenting a full set of results that are Tesco standalone. So we wanted to make sure that we give you the best update of that before we move into the Booker place. So it starts with two lenses, really. First, there is the drivers that you are familiar with. So the first of those was to rebuild the brand, a more differentiated brand. You have seen this chart from me before, starting in January 2014 all the way up to February of 2018. And I am pleased to say that the performance of the brand continues to strengthen. If you look at the metrics on the right-hand side, the three that I picked out, again, are the ones consistent with how we have reviewed them over the period. Net promoter score up 15 points. The quality perception of the brand has doubled over that time period, and the value perception of the brand has tripled over that period. So when I measure the brand, there is still more that we can do. There is still more opportunity for Ali, the team, and everyone to add more value to the Tesco brand. But over the last three years, we have definitely seen some progress in rebuilding a more differentiated proposition for Tesco. As Alan says, we're well on our way in terms of the operating cost. GBP 820 million so far. The trajectory ahead of that we shared when we shared the guidance a couple of years ago. On the right-hand side, I've given you a little update in terms of the progress that we're making in the buckets that we shared at that time. So store operating model, lots and lots of changes. We've shared them with you as we have gone through the last three years. But GBP 540 million of that GBP 820 million coming out of the operating model. More than 100 in terms of logistics and distribution, and 174 in that goods not for resale. So really very happy with the progress that we've been making in terms of cost savings, and still an opportunity for us to continue and accelerate what it is the team have been doing. The generation of cash, Alan talked about it in the year. If you look across the three years, the GBP 9 billion that we talked about, well on track to deliver. Very happy with the way that that is coming through. On the right-hand side, and we're trying to give you a little more insight in terms of cash. It's easier to say than it is to do. I suppose it's significant, but it shouldn't be a surprise, but 80% of that cash improvement has come from the profit recovery. Right? So that rebuilding of the profitability of the business comes through in cash very strongly, but also 20% of it has come from a real improvement in working capital performance, and we continue to see opportunities for us to do that even better going forward. Everybody remembers this matrix from October of 2016. The bit that I update is the bottom right-hand corner at this point, which is second half of 2014, 2015, the margin for the group was 0.8%. Full year was 1.8%. And you've seen stable first year, 2.3%, 2.9%. Exit the year, just above 3% is the trajectory at total group level of total margin. I thought I'd give you two other examples about how it is we think about mix geographically. So what you see here is by half year, the three business units that we have. On the left-hand side, the U.K. and Republic of Ireland, and you'll remember as well as I do that in the second half of 2014, 2015 the U.K. and Ireland was negative in terms of its profitability, and is at 2.5% in the second half of this year. We made lots of changes in Central Europe during the period of time we've been here. Really, really, really pleased with the plan that Matt and his team have put in place and the performance of the business in the last year in Central Europe, doubling the profit, and getting the growth that we want, and with some really strong plans for how we go forward. As Alan says, the profit performance in Asia has been very good indeed, but required us to do some strategic management of the mix that we were selling. I suppose that's the thing that I think when we talk about managing the mix, being prepared to walk away from unprofitable sales once we've first taken out the cost of delivering those unprofitable sales, is something we've been prepared to do in order to enhance the quality and the sustainability of the business model. Asia probably is the biggest single example of that, whilst we've been doing quite a lot of it in the U.K. around certain categories of general merchandise as well. The other thing I'd do is give you a sense of mix. We talk about food. We've talked very clearly, I think for three years, about the importance of food in terms of the turnaround of the business. What I've done here is break down, back to the U.K., what's driving our growth versus what's driving growth in our competitive set. The dark blue is food, and whether you take the four week ending to the end of February or the 12 week ending, you see that our focus is on food and our outperformance versus the market continues to be in food. That's deliberate, we're no surprise. But actually, when people ask me, am I happy with the performance in the U.K. as prices move and other things, I'm very happy with the performance in the U.K. We continue to outperform the market in terms of volume over the period, and regain food market share in the U.K. in the year. That's because that's where our focus is. But the mix of growth in the U.K. market across the competitive set is actually quite different. Anyway, moving on. Steve and the team have done a remarkable job in property, released more than GBP 1.4 billion worth of value. Lots and lots and lots of activity. Really very impressive. The things that you will have seen over three years, freehold proportion has gone above 50%, so we've been quite active in buying back property that we felt were part of the sustainable future of the business. We've released that 1.4, and at the same time repurposed more than 2.6 million square feet of space. A lot going on in the property world in Tesco. Finally, innovation, which is where I never say anything which is on the left-hand side, but happy to talk about things that are on the right-hand side. Look, I suppose the one, if I think back over three years, whilst there's an awful lot, there's one that stands out as being quite a pivotal moment for us. The decision to invest in the Farms brands was a big deal. It was an awful lot of money at the time against a strategy that was, at that time, not proven. If you look at the top there, the picture of the Farms brands, just give you a little insight. In the 12 months that we're just reporting, sales of the Farms brands in the U.K. were GBP 550 million. We sold more than 750 million units, i.e. package or loose. It's been a phenomenally successful activity for us in the way that we've repositioned not just the category, but the value perception of the total brand. But there's been a lot of innovation, and dare I say, there's an awful lot more to come. The three that I pick out, that you should be watching out for now is in own brand. Right? Hopefully some of you saw on the way in, if you've not been seeing in store, some of you came to the launch of what we call Project Atlas, which is the relaunch of Tesco's own label across all three tiers of the brand. We're about 1,300 SKUs into a total that Ali and the team have to manage, which is more, and Jason, of more than 10,000. We'll get about 95% of the way through by the end of Q3, and you'll see some of that thinking and that execution play out in other parts of our international business through the course of this year. So far, we've launched five more exclusive brands that replace the value tier, and you will have seen some of those in the foyer as we go. A lot going on on Tesco own label. Alan said 51% participation in the U.K., growing at more than 4%. Really very happy with the work that is going on own brand. Clubcard relaunched in the year, to be contactless. It gives us a lot more capability going forward. It's reinvigorated engagement with Clubcard. There's been some work around partnerships and how we use it for reward. We've got some more plans for Clubcard going forward. I'll link also to what it is we've got going in Pay+. Pay+ now has gone through the half, the 500,000 users of that Pay+ app within the Tesco business. Really very successful launch, recognized by the Finance Institute as the best payment and loyalty app available. Just some examples of what's current, if you like, in terms of that three-year trend on innovation. Those were the six drivers. That brings you up to date in terms of where we are with each of them. We've also tried to always, through that four years, three years, share with you, through the lens of the four stakeholders we consider in our business. If I start with customer, the net promoter score I've touched on already. A very significant improvement in the feedback and the recommendation that we're getting from customers who are visiting, prepared to recommend others to come back to Tesco, very significant. If I go back to August of 2014, i.e. the period before we started here, our market share was declining by a little more than one and a half percent. If I come all the way forward to February of 2018, actually we're gaining market share again. For those who remember, in October of 2014 we said there were three immediate priorities for the U.K. business, which was to regain competitiveness. I think we can safely say, whilst it's definitely not done and it's always a challenge, we're more competitive now than we were three years ago. If I take the Kantar measure of loyalty, and this is heavy loyalty, we see a strong improvement in the loyalty profile of Tesco shoppers also across that three-year period. If you encapsulate that all in the six factors that go together in the YouGov brand survey on brand perception, we have more than tripled the positive perception of the brand across, if you can see down at the bottom, quality, value, reputation, satisfaction, are all the things that drive brand perception. And there's a more than threefold improvement in the brand as judged by the customers over that period. If I talk about colleagues, look, there's been an awful lot of change for Tesco colleagues over the 3 years, not all of it easy by any stretch. Interestingly, through that period, as fed back by our colleagues, a great place to work has gone from 70% to 83%. A great place to shop has doubled. Still lower than I would like it to, but it's doubled. And anybody in retail knows that your colleagues are by far and away your harshest critics. They're also your most knowledgeable customers. Listening to colleagues is really, really helpful in terms of the things we have to do. So getting recognition back from our colleagues as a great place to shop and a place they recommend was very important to us, and there's been strong progress in that over the 3 years. So I had to give you an insight into transformation, what's really happened, because I'm very conscious that when we make a change, everybody talks about that one particular change. If we go back to, this is looking at colleague hours. There's been a lot of change. But between August of 2014 and now, with all of the changes that we've done, we have more than 18,000 more customer-facing roles. As we've made lots and lots of changes around what we've been doing, if you remember in those early presentations, how did we increase the amount of Tesco talent and resource which is serving customers? We have increased the percentage of our people who are serving customers really quite significantly. At the same time, though, if I look at the management numbers, and for us that's work level 3 and above, and the management changes we've taken, the number of management roles in our business, same time period, is 6,000 less. It's been really quite a dramatic shift. If you look at the structure of our business now, and if I think about what Matt and Tony and others drove in the U.K. and what we did in our head offices around, it's really quite a radical transformation. But the interesting thing is, and not often reported, is actually the number of colleagues who are serving customers has increased 3 years in, net net, and actually it's in other structures that we've taken roles away from the business in order to simplify. The investment in colleagues. We had a pay freeze 3 years ago. No investment in the pay at all, given the situation the business found itself in. And what you see there is the trajectory in terms of base pay. There's also been a bonus based on performance introduced for colleagues in the U.K. We have a 10.5% pay deal agreed for the next, which covers this year and next year. So we've continued to invest in that colleague relationship with Tesco as the business has improved. Suppliers. Obviously, a very difficult place a little over 3 years ago. I have nothing but admiration for what Jason and the team have done in rebooting, if you like, the relationship that we have with our suppliers. We stepped back and said we want to do this really very differently. Now has responsibility for end-to-end product life cycle. The supplier viewpoint in terms of satisfaction three years on has moved from 51 to 78. We have 10,500 users of the supplier network that we put in place. This is all about helping suppliers understand how it is they should work with Tesco, how it is they can best extract value and work effectively with us. Externally, you see that change in the way that we approach has come through in the Advantage survey, where we were definitely middle of the pack in 2014/2015, but have been first as voted by our suppliers for the last two years. Obviously, we talked about a volume-led recovery. You see on the right-hand side, we had seven years of volume decline in our business. That really affects the relationship we have with our suppliers. Arresting that decline, getting ourselves back to competitive levels of growth is something that our suppliers clearly appreciate. Always remember that 1% of growth from a Tesco point of view is significantly more than 1% of growth elsewhere, given the size of our business. So quite a fundamental change in the way that our relationships with suppliers are seen. I suppose finally, obviously very importantly, our shareholders. We started from a place where we were losing share to everybody. Those charts, if you remember, about where everybody said you had a particular problem coming in. Actually, our problem was bigger because we were losing share to everybody. We are now gaining share in food, full year U.K. We were loss-making in the U.K. The group margin is now exiting the year at just above 3%. We are generating a significant amount of free cash flow and can see that improving further. As Alan touched on, net debt was GBP 8.5 billion three years ago. We finished the year at GBP 2.6 billion. Total indebtedness is down from GBP 21 billion to GBP 12 billion. The capital discipline. The last three years, we have been very tight with capital. Changed the metrics that we use, changed the payback periods we look for, and actually have been very tight in the way that we look at capital across. If you look at the three years before that, the level of CapEx was nearly three times higher. Really interesting, Alan and I, before Charles arrived, we sat down with the U.K. business and looked through their detail in their capital plan. One of the things that was really interesting for me was that a little bit more than 80% of the capital that was being proposed for investment in this year had a return of less than two years. Now, I tell you already, I think Charles may sharpen that payback period even tighter. I think Booker was 18 months. I am quite happy for that challenge to come in. I suppose from a Tesco perspective, getting that percentage under two years, hopefully gives you an insight into the discipline and the respect that we have for capital investment in the business. EPS, Alan has touched on, and dividend, you are familiar with. So that was just trying to put together, through those four stakeholders, what we think has happened over three years. So that is done. That is three years. We are where we are. Pleased with the progress. Much more to do. Challenges and opportunities, but motivated by what comes next. What comes next, I suspect, is dominated by what it is we've done in the merger of coming together with Booker. I suppose what I would do, it was in the release this morning, the Booker results from Charles and his team finish only on March 31. They're not fully audited at this point. We have to make sure that that's closed off properly. Please, they're not fully audited, but we've obviously got a pretty good steer. I'm pleased to say that a very strong performance from the Booker team, and that trajectory that you saw through last year carries on. Customer satisfaction, the most important metric, continues to strengthen, up again to 85.7. Like for like, just under 10%, and a very strong performance in terms of GBP 195 million of operating profit and GBP 120 million of net cash. The performance of the Booker business has been fantastic over the long period, but it's also been fantastic as we've gone through the merger process. More customers, the Retail Club is working particularly well. Actually, just the level of satisfaction that is within Charles' customer base is impressive, and we hope to build on that yet further. As you know, we've had a small team of people working across the two businesses. We call it Joining Forces, looking at how it is we get the complementary skills of both businesses and how we could try and get fast out of the gate in terms of realizing some of the opportunities. We delivered the merger on time, exactly as we proposed it, even though it was more than a year earlier. I'm very pleased with the way that both teams worked together on that merger, and I see the benefits of that as we start operating together. We have GBP 175 million, at least, of significant cost synergy potential, and we put in GBP 25 million of growth synergy opportunity. That was in the prospectus. We've said that all the way through. We're five weeks in. We're five weeks into the merger, and we are focused on delivering that. I think, what are we doing? Trying to give you a little bit of flavor. What have we actually been doing over those five weeks? We know, we're really clear that there are some opportunities in the complementary nature of the two ranges across the two businesses. A little insight into what does that mean. We identified in Tesco what might be the 30 SKUs that Booker customers would really like to have, but they don't have access to now, and vice versa. What are the 30 things in Booker that might be very good for Tesco customers that they currently don't have access to? It was easier for us to make Booker a customer of Tesco, so we actually started in a couple of stores, right out of the bat, having 30 of those lines in a few of our stores. Five weeks in, really very happy with the sales performance. That range, as Jason was telling me only yesterday, justifies itself from a sales density point of view already, and there's very little, if any, communication about that. It's very early days. We'll now put the Tesco SKUs into the Booker offer, and we'll see how that builds. But when we look at range optimization, we see some really complementary opportunities. Before you ask me the question later, it really is in that sort of catering opportunity, catering pack sizes of brands that people know, or catering executions that actually Tesco customers in large stores seem to instinctively find appealing. So when we talk about range optimization, that's one of the things that we see as an opportunity. Some of you may have visited Cambridgeshire in the last five weeks. In our store in Bar Hill, we launched a Chef Central at the very end of February. Now, why Bar Hill? I have to say, partly from customer and market opportunity, but partly on a very practical basis. For those who have ever been to Bar Hill, don't know how many have, we used to have a Dobbies in Bar Hill. When we sold Dobbies, there's a part of the store which is already completely cordoned off and separate. So as part of Joining Forces, on a tenancy basis, we started to prepare for Booker to become a tenant inside a Tesco store in order for us to test this proposition. That's what we opened as Chef Central right at the very end of February. It's been running now for six weeks. We'll do the full review at the end of this week with Charles and the team. If you walk in there, that's a professional offer. It's a professional offer that doesn't exist in that neighborhood. You can see the sales begin to grow. It's also an offer that Tesco shoppers can avail themselves to if they want to come out of our Extra store and go into the Chef Central proposition. Okay? Now, really very interesting for us. The other thing that's been interesting about this is it's allowed us to have the conversations that we've been having with our supply partners about the growth opportunity that we see bringing together the country's leading retailer and wholesaler in one place by physically walking. So all of the conversations that have happened with the first sort of 39 supply partners about the opportunity of working together with a new group have been taking place in Bar Hill around Chef Central so we can talk about it live and with reality in terms of what it is we're thinking about the opportunity going forward. The other, and again, we touched on this in prospectus, is we do see a big opportunity for us to expand our delivery offer. If you think about that Chef Central example I've just given to you, we haven't done this yet. Okay? So just being really clear, we haven't done this yet. But would it be possible for our Grocery Home Shopping delivery vehicles to pick up from Chef Central and deliver to professional customers from that site? Yes, it would. Yes, it would. That would allow us to utilize those delivery vehicles at a time of day that they currently stand idle. We haven't done that yet, but that's one of the expanded delivery options by putting those ranges together that we see as an opportunity. We see huge opportunity in terms of Click+Collect network, be it with independent retail customers that come with a Booker operation or indeed some of the businesses that Booker serve. How do we expand our Click+Collect reach, and how do we use some of the mobile and banking apps that I've talked about for the Booker customers and indeed the customers of Booker's customers? That's what we're working on. We're five weeks in. I think we're pretty fast out of the gate in terms of the range and Chef Central and the relationships with suppliers. But it's the start of what we think is really quite a big opportunity. To scale that for you and just to help in terms of how we think about it, the GBP 200 million of synergies we talked about is over three years. We've also said it's going to be our aspiration is GBP 60 million in the first year, GBP 140 million in the second, and GBP 200 million in the third. Right? So we're giving you the aspiration, and we're giving you the breakdown of how we see it across the plan so that you've got transparency. We included in the prospectus, an exceptional cost of up to GBP 145 million over those three years to deliver all of those benefits. The bit that wasn't in the prospectus, because you have to obviously prove everything in terms of any growth that you put in, is the number that's on the right-hand side. The GBP 2.5 billion of revenue opportunity is what we see. As management, we see a GBP 2.5 billion growth opportunity of these two businesses coming together. This is the number that we shared with our supply partners. This is where those growth opportunities start to move us towards. I suppose, if you want my simple view on this, because everybody does ask me, and I understand why you ask me about synergies is, look, our first job is to deliver the GBP 200 million. If we identify any that are more than that, please be rest assured, we'll go after them. Right? Will we try and do it quicker? We will try and do it quicker. Will we try and do it for less than GBP 145 million? We will try and do it for less than GBP 145 million. We have an aspiration of growth, which is GBP 2.5 billion. If there's more to go for, you can be rest assured, we'll go for it. But if we hit GBP 2.5 billion, we should all be very happy about that. That's the result of, just to be clear, strengthening the core offer to our existing customers. You can see that already in parts of the business and some of the new growth opportunities that I've mentioned and other plans that we've got, which, as usual, you're going to have to wait to see them before I'll talk about them. But that's the way that we're thinking about coming together in the merged entity. The other bit of insight I thought I would give you, people say, "How are the two businesses going to work together?" Now, we had a long time to talk about this merger between ourselves, and one of the things we talked about is fit, cultural fit. How does it work? Actually, the thing that's really interesting, there's a longer presentation for employees about actually some of the language that the two businesses use are ever so slightly different. When you look at the intent, it's amazing. Amazing how actually aligned they are in terms of priorities, values, and wishes. So what we chose to do for our own employees is share, and I've simplified for you here. If you think about the combined business, the idea of serving Britain customers a little better every day fits perfectly. Now, if anybody who's visited Charles as a Booker investor over the last 10 years, he would have talked to you about health, safe, and legal, customer satisfaction, cash profitability. Same thing. What do we talk about? Customer at the heart of everything we do, magnetic north for every decision we take. Healthiest place to work and shop, safest place to work and shop. So serving Britain's customers a little better every day is the magnetic north of the combined organization. Really very happy that the three values as articulated currently in Tesco apply almost exactly to Booker. So we adopt that language for both. If you like the operating principles, again, we use ever so slightly different language, but health, safe, and legal we think is the better articulation, so we adopt that across the business. Customer satisfaction is there for both. Cash profitability is there for both and has been throughout. This idea, and again, we pick up the Booker expression of that, which is, how do you get maximum benefit from minimum change? How do you do 20% of the investment for 80% of the result? How do you do it in 20% of the time and get 80% of the way there? This idea, we're really very clear. People always ask me about integration. It's one team. It's exactly how we've been running the other parts of Tesco, which is, but with very special channel expertise. Booker is a brilliant wholesaling business. We don't want to change that at all. We just want to try and augment it. Likewise, Tesco's not a bad retailer either. So we now have large stores, small stores, online, wholesale, four channel. One team, but with specialist capability in each of those outlets. For those who are long in the tooth or who have read the history of Tesco and Jack Cohen, he had this little acronym at the bottom that some of you will know. The thing that Charles and I wanted to, and the team wanted to put forward to the operations of the business was get on with it. Speed. We're not spending a lot of time integrating businesses. Actually, we want to get to the growth quickly. So for those who are not familiar, we bring back and put into the operating principles a Cohen edict, which means, if you're not familiar, the letters mean, "You can't do business sitting on your ass." Right? Which seemed like a very good way of encapsulating the need for speed. I think in terms of shareholders, you've heard us talk in Tesco about medium-term ambitions of 3.5-4, GBP 9 billion of cash, GBP 1.5 billion of costs. You've had all of that. That's been our articulation of what it is philosophically we wanted to be doing. I think if you ask us what that underlying philosophy is, and again, we've touched on this a couple of times, but it's also manifested in the Booker business, is an absolute focus on cash profitability. I know that when we come and we talk to the City, we convert it into a margin. Just let me repeat, in Tesco today, nobody has a percentage margin target. Never have had, never will have. It's an outcome. The only time we calculate it is when we get ready to share it with you. All the things are set at quantum cash profitability. We'll carry on doing that. It's very consistent with how Booker works, and that's what we will do going forward. Our underlying philosophy is cash profitability. How do we grow the earnings, and how do we generate free cash flow? Hopefully over the three years you've seen that from Tesco. You've seen it for longer after Booker. You put the two businesses together, and that's what you're going to see for us. We'll continue to report on the Tesco numbers so you can see our performance in the way that I've tried to give you a three-year update. If you want to know how it is we're going to think as a leadership team about driving the whole business going forward, it's cash profitability quantum, it's earnings growth, it's free cash flow generation. So that's it. We're delivering against the six drivers. We're happy with the momentum in terms of the performance. Sales, profit, cash are all up. Thankfully, debt is down. We continue to shift the mix, and we will continue to shift the mix as we think about what the right offer is. The balance sheet is significantly strengthened. Very happy and confident with the opportunity that's now afforded to us in the U.K. by coming together with Booker. We talked about a volume-led recovery that was then helped by cost effectiveness and management of mix in terms of margin recovery. To that, we now add significant growth opportunity as the other lever. With that, we're managing to generate an improving shareholder return. So that was all I was going to say by way of presentation. Now we'll open it up to questions. As I say, at this point, I should say there are two people in the audience who have never, from a Tesco point of view, been in the audience before. One is obviously Charles, but he's not a stranger to any of you or to this sort of forum. Charles, officially welcome. Ian, who's sitting at the back. Ian, you may not know, Ian is the interim CEO for the bank. If there are any detailed banking questions, I'll be calling on Ian to help. I think you also know all the other Tesco exec colleagues who are in the room. So we'll move to questions. Again, based on the feedback I've had before, can we keep it to one question each? If it is a question about sort of detailed modeling assumptions or technical accounting, then I'm probably going to push it into Chris's direction to solve and answer after the meeting. And for the questions, Alan and I will try and answer them, but if we need some help or we think we can give you better color with the exec, I will call on the exec to augment and add to the answers. Is that okay? If you want to put up a hand, we will get some microphones going. Why don't you go? Morning. Stewart McGuire from Credit Suisse. Just one question from me. Good. If the little dot chart on page 34, you actually show your food like-for-like volumes. And if that is accurate, it looks like it is zero. So you have been able to generate your improved profitability without any food like-for-like volume growth, which was traditionally, a key part of your strategy. Can you continue to grow profitability in a zero growth volume? So the short answer to that question is yes. As Alan said, he talked about it in the U.K. in particular, the volume outperformance versus the market in the full year was 1.7%. So the critical thing for us is, do we outperform the market in food volume in order to have the conversations with suppliers that we have had in the past? And we continue to do that. But the other thing that your question allows me to talk about, as I said at the end, is we talked about a recovery, which was led by volume, then augmented by mix, cost effectiveness, and then new growth. So there are four levers by which we can recover margin, not just one. Right? So the critical thing for us was to arrest the decline. We did. We have put in growth over the three years we have. Then we need to outperform the macro environment in volume is the way our suppliers understand it. I am really quite happy that there is still opportunity for us to do more of that going forward. Okay. Yeah, pass it on. Rob Joyce, Goldman Sachs. Just on the number you put up there, the GBP 2.5 billion- Yeah in terms of additional revenue, hoping to get. With the original prospectus, I think you had 25 million. Yeah of your cost saving synergies coming from revenue. What revenue number was that based on? We didn't give one. Look, I think, Robert, the distinction here is between what you can put in prospectus and you have to be able to demonstrate and prove versus actually what is an aspiration for us as a. All we're trying to do is now that we're not in that stage, is share with you a little bit what is management aspiration for growth. The management aspiration for growth that we set for ourselves over the medium term is GBP 2.5 billion. But you shouldn't try and translate that too much to what it is that element that we put in, 'cause that was a known item that was very discreet. The GBP 2.5 billion is business we've still got to build. Okay, so maybe a follow on quickly on that. Does that mean we should look at that as it's incremental revenue? Does that drop through at a pretty healthy margin? How we think about it? No, look, I think the hardest bit, what you should think about is the GBP 200 million that we talked about, and we can see and how it is we might sort of choose to invest that in enhancing the offer versus dropping through to the bottom line. We're really clear about that. We've given you a three-year view about how we see it. The opportunity on top of revenue growth is depending which of those initiatives work, will depend on the margin profile. So at this point, for me to say it's gonna be X would be premature. I just wanna give you a sense for the optimism that we have for the coming together. Thank you. Okay. Why don't we just pass it? Should we pass it down the line? Efficient. A question for Alan, actually, from me. Good, great. Thanks for the help on the Booker numbers in terms of last year and synergies and whatever. Could you give some indication of how you see the group balance sheet being this time next year after the equity issue? Maybe a comment on working capital, free cash from Booker, so we get a better feel just at this stage rather than throwing darts in the dark as usual as to how the group's going to look. Yeah. So as Dave said, we are absolutely focused on free cash flow as the measure by which we want to be judging, and that's something which then creates the opportunities for us as a business, and that's after the CapEx, et cetera. In terms of the Booker impact, the GBP 120 million which comes onto the balance sheet at the time that of the merger is a number which is after paying away the dividend, the final dividend for Booker, so it's really augmenting our cash. We still have cash in our balance sheet, and we'll continue to look at the balance sheet efficiency of that cash. Obviously, being conscious of the fact that we want to run a business which is secure and strong and stable, but we'll continue to look at that. Going forward then, we get to the debt metrics that we've set out as threshold metrics. Beyond that, we're not there yet. We'll see where we get to. Critically, the focus on capital discipline, free cash generation, paying a dividend which over time is twice covered. We are just under four times covered today, so there's a lot of growth potential within that dividend, putting aside earnings growth, which actually gives us the potential to increase the dividend. We then end up, I think, with a balance sheet, which is a strong balance sheet, sustainable with a business which is generating very strong cash. The GBP 195 million of cash which Booker generated, which is again, an underlying number, is something which as we've seen from Booker's track record, operating profit translates pretty closely into cash from a Booker perspective. In our business, there are some timing elements around the actual year-on-year net debt, but I'm really clear that we've got about GBP 200 million per annum of working capital benefit on top of the free cash we're generating from the business. Put that with the tax interest reduction from liability management exercises we've done, and we have a very strong cash generation in our business. Don't know if that helps, Clive. Sort of. Got to put it together a little bit, Clive. Yep, do you want to pass? Why don't we just logistically go that way? Thank you. Good morning. James Tracy from Redburn. One question for Charles, if I can. I don't know if he's answering questions or maybe to you, Dave. Yeah, sure. But what do you intend to do differently as CEO of Tesco UK Retail? Definitely can't answer that one, Charles. Yeah. James, I'll answer a question that I got asked in coffee first of all, and then come on to yours. First of all, what did I see in Tesco which was a surprise that was bad? I did a lot of due diligence before we joined forces. I visited 200 stores before we came together, and actually, what you see with Tesco is pretty much what you get. What was the pleasant surprise of joining Tesco, because I've now been here about 5 and a half weeks, is actually the people. Tesco people tend to keep themselves to themselves. And so I had a good understanding of the business, but I didn't really know Jason. I didn't know Matt. I didn't know Ali. I didn't know the rest of it. The leadership team is really strong. When you're in stores, we've got some very, very strong store operators. And Jason and I have had the privilege of working together with some of the buying teams, and the Booker buying teams and the Tesco buying teams getting on very well in Bar Hill because we're winning together. What I saw when I came was the great work that Dave, Alan, and the rest of the leadership team have done on culture. Because the culture in Tesco is really, really good progress, and that is the great progress. When you ask me what am I going to do different, it is an evolution. There is some great work going on in this company and building on the good people that we have got, building on what we are doing. What you are seeing, and credit to Matt Davies, he has done a good handover and very grateful for the business we have received, of making sure we trade business as usual. Tesco does a good job for Tesco. Booker does a good job for Booker customers. Five and a half weeks in, we have made good progress on that. Then we are starting to say how we build on that good work to deliver what Dave and Alan have been articulating. James, I hope that answers. Perfect. Thank you. Thanks, Charles. Do you want to pass? Is that okay? Yeah, thanks very much. Charlie Muir-Sands from Deutsche Bank. You showed a chart showing how you deliver cost savings ahead of your original dot line plan. I just wondered whether you could reflect on how much of that you think is a pull forward as opposed to finding more opportunities than you had initially hoped that were there, and whether you reinvested more or less of that than you had originally planned either as well. Why don't I start, and you can add if that's the case. I think, look, we were very clear about where we thought the GBP 1.5 billion was going to come from. We gave three buckets of that. I think what we're seeing now is actually our progress on stores has been ahead of what we had originally thought. And we have seen some opportunities there that we didn't see at the start, and we have realized them and got on. I think in other parts, some of the opportunities we saw actually were harder to get to than always the nature of these things. It never lands the way that you do. So in logistics and distribution, actually principally because of Palmer & Harvey, and now obviously with Booker, we're having to think again a little bit around what the changes in distribution and logistics are. I'm happy with where we are on goods not for resale. I think the only thing I can say to you is we're happy with the GBP 1.5 billion target. It's largely in the way we thought it would be, but there have been some changes within. If the question is, will we try and get that sooner? We'll always try and get it sooner. Will there be other opportunities after we've done that? Yes, we think there will be. But we're not at a place where we can articulate those for you. We need to concentrate on delivering the other half of what we've got. In terms of reinvestment, I think this is where it gets difficult because we need to put some of the volume leverage, some of the cost, and some of the other things and the mix changes into that investment. But we have invested back. The most significant was the investment we made in Farms brands. We made it ahead of, but you could actually, if you equate it at the time, in the end it was more than GBP 300 million of investment, and that was paid for through a number of ways, not least of which, a significant part of it was volume leverage and the cost savings. So that is where we are. That is how we see it. Slightly different from what we planned. We will try and do it quicker. We are not at a place yet where we are going to raise the guidance because we have got to get on and get from 822 to 1.5. The only thing I would add is that what we set out and what we showed when we first spoke about that was a plan to which we have been working for some time. And clearly the world has changed since that time. Dave mentions Palmer & Harvey. Inflation is certainly a lot higher than anything that was anticipated. And that flows through into our cost base. But no change. The graph we were pretty clear was indicative and should not be plotted. It is nice to be ahead of the one that we plotted because clearly there was some thought behind the plot that we did. But we are really confident that the 3.5%-4% margin, despite all the changes, is something which we are well on track to deliver in the timeframe that we set out. Okay. Very good. Thank you. Good morning. Bruno Monteyne from Bernstein. Given your scale, given your reach, given your own background as your previous consumer group companies, Dave, is it right that your branded index is below your peers? If not, what you are doing about that, and what would the business look like financially and as a shape if you are able to get your brand index ahead of your peers? It is a great question. I have talked about the progress from where we were to where we are. I think I would, I know Ali would, I think we all still see there is still significant opportunity for the brand in total, to your point, and that is why it was the first of the drivers we talked about. The way that I would see it, as I know with brands, it is always very easy to talk about improvements. It is not always easy to deliver improvements, and that is why I think what the team have done is so significant over three years. But look, the theory of marketing is such that the more value you add to a brand, the more engagement and loyalty you have, allows you more discretion in terms of pricing. If you add value to a brand, then it is repaid in that way. We are not at that place yet because of the things that you mentioned. But do we get to a place where actually, as we continue to add uniqueness and relevance to the brand, that can change the economic model of Tesco? But we are not there yet. You would have seen on the way in. If you did not look at the own label, relaunch activity, you would have also seen the Wicked Kitchen activity, completely exclusive, unique to Tesco, bringing 44% new people into the category, something they cannot get anywhere else. Absolutely bang on trend. That is something exclusive that is relevant to Tesco that actually customers value. And ultimately, in marketing theory, that plays into price positioning, and that is the opportunity for adding value to the brand, and that is why it is so important to us. But it is a big brand to improve. That is where we are. Do you want to pass back behind you, and then we will come? Yes, thank you. Xavier Le Mené from Bank of America. I'd like to go back to slide number 5, actually, of the U.K. on ROI profit. If I look at what you are printing today versus what you printed in the first half, we saw significant reversal with prices. It was a negative impact in H1. It is a positive for the full year. For the mix, actually, it was a significant positive in H1, and it seems to be a small positive for the full year. I know the scale is different, but can you elaborate on the trends in H2 versus H1 of the significant changes that the charts are highlighting? I think that the biggest driver, clearly, which we have highlighted, is our price positioning in H1 relative to price positioning in H2. In H1, we took a very active decision in terms of the, as inflation came through into the market, a number of us, of participants had hedged to a certain degree. That hedge began to unwind, and we saw inflation coming into the market, and it was pretty strong. We held back. We worked with our suppliers to try to absorb that for as long as possible. Frankly, we absorbed a lot of it ourselves, what we couldn't work with suppliers. That impacted very positively in terms of our perception. But clearly, there was some cost to us in terms of the business. We got a volume benefit from that, and that played through. As we then moved to the second half of the year, Question the price positioning and the inflation, we didn't hold back on as much. As some people have commented, some of that was passed through into the market. Important there, and this is what Dave spoke about, is the relativity. As a customer, I'm buying today, relative to what else I can buy today. The fact that 6 months ago it was different is interesting, but I can't buy it. It's really important, how am I relative to what else are my choices in that day? That's what we've seen. To the point of second half, first half, we definitely had we were more aligned with the market in terms of the inflation, but we continued to grow the volumes, relative to the market over the full year, that 1.7% that Dave spoke about. Then you have some timing impacts in respect of when cost saving initiatives happened, when they didn't. But overall, that's, I think, the biggest trend I'd call first half, second half. I'm going to pass to your right and then we'll come forward, and we'll just- Good morning, Fabienne Caron, Kepler Cheuvreux. We have got a boring question for Alan. IFRS 16 will be implemented in January 2019. Have you decided yet which method will you use? Can you give us a feeling of the increase of the NPV of the operating lease following IFRS 16? I can answer part of that question. Yes, we have decided. Very deep in the detail of the press release, we have confirmed that we will adopt the fully retrospective basis for IFRS 16. We feel that this best aligns the future with the past and gives the best reference point for the comparison as we go, and we restate. It is effective in the 2019/2020 year. The year we have just entered will be the comparator year. We will be restating. There is a huge amount of work across the Tesco group to do to understand all of that. We are well in track on that, but we are not able to quantify that yet. As you know, it will impact our assets, our liabilities, our depreciation, our interest. No cash impact, but as soon as we are able to quantify and give more color on it, that is what we will do. We have confirmed that we are going the fully retrospective route. Okay, but we should still go for an increase in your operating lease commitment and when you will use IFRS 16 compared to what you published today? The way we disclose our Yes. There are differences. Under the current lease obligations, the standards require that we take the lease obligations and discount them to lease breaks. IFRS 16 puts the asset onto the balance sheets effectively forever, and that will be a change. Within our notes, we do have what we capitalize on the balance sheets, and we show discounted, or that, and then we also have the future lease commitments shown in our notes. If you add the sums together, you can begin to get to that. Obviously, the rating agencies have their own metrics, which try to get to it as well, but it is pretty technical, pretty complex. Fundamentally, cash does not change. Okay. Thank you. It's Dusan from Berenberg. I just had a question for Charles. It's kind of a bit of a hypothetical question, but what is the operating leverage effect in the Booker business for incremental unit of growth that you've seen over the years? It's not a hypothetical question because it's easier to draw off history. Yeah. Where we were converting was pretty much 10% growth in sales would equate to about a 12% growth in earnings, which would come through to the cash bottom line pretty hard and fast. That's what you've seen over the last five years. Thank you very much. Do you want to pass the microphone forward, and I'll go back? There we go. There are Charles. I think you might keep hold of it. Thank you. It's Dan Eckstein from UBS. A question around procurement. Hope it meets your expectations in terms of quality. I'm interested particularly around supply negotiations post the Booker deal. You do have a target for procurement Yeah gains, and I know you hope to outperform that. I mean, are we simply thinking about a case of going one price list versus the other and, you know, ticking off the differences? Or is it going to be more a case of starting from a position of zero with, you know, your key suppliers and thinking more holistically about the retailer-supplier relationship? with what's, you know, a very different group, particularly in terms of points of presence with the customers? If it's the latter, then if I'm a supplier, how should I think about maximizing my relationship with Tesco Booker in a profitable way? Great. Why don't I give you an introduction and Jason give you one-minute warning that I'm going to ask you to add something to it. I think, look, Charles and Jason have started the conversations with 39 of the largest supply partners we have. I think it's fair to say that always, when something like this happens, there is an element of looking at the price file and looking at the relative prices between the two businesses and seeing where there are opportunities. That's a relatively straightforward thing to do. Then there has to be a conversation about how things like that can be resolved. Jason can talk about the approach that we have to doing that. I think you should know, I hope over the last three years, we talked about how it is we want to work with suppliers in true partnership. We're going to take that principle forward, and it works even better with the enlarged group than it did even on a Tesco standalone basis. The bit that I would say before I pass to Jason to give you a little bit more insight into it is, if I were a supplier, and I was sitting here now, I would be sitting at home saying, "Just a second. I've got the largest retailer in the U.K. that's growing again. I've got the largest wholesaler in the U.K. that continues to grow very strongly. I'm looking for growth in my business, and they're saying that their own aspiration is to grow another GBP 2.5 billion in revenue?" I'd be sitting down thinking how it is I align my plans with the opportunity that full channel business affords me, and actually, how can I change my business to work with that more efficiently and better. I've said before, the happy days were when I was a chairman of Unilever in the U.K. Tesco were by far and away my toughest partner in terms of negotiation. They got the best terms, but they were also my most profitable customer because I was able to change my business to work with them more efficiently. That's part of where we want to be with all of our supply partners, and coming together with Booker doesn't change that. It just enhances it. Is that enough warning, Mr. Tarry? Yeah, as ever, Guv, you seem to have answered the question and left me not to. I think it is a good question. I think it is worthwhile outlining the approach actually, which is we met the suppliers in Bar Hill very deliberately because what we wanted to do is talk to them about growth and talk to them about speed and show them some tangible examples of that. That was absolutely our approach. That is what we did. We showed them around Chef Central. Charles and I talked them through the growth opportunities as we saw it. Then we talked about the fact that we have found some anomalies around the price files. Two businesses, two price files. One business, one price file. Actually, the approach is very much to focus on the growth opportunities, the bigger holistic opportunity, and let us get going quickly and at speed into getting after those growth opportunities together. I think your point as well around reach is very interesting. If you actually add up the distribution points, either directly or indirectly through Charles' customer base, it does give us quite unparalleled reach in the U.K. Definitely, you can see the suppliers seeing the opportunity of that. Good. Okay. Who was there, David? Should we go? We'll finish one down here. I think we'll Yeah. I'm just going to finish this row. Oh, okay. Then we'll go backwards there. There we go. Yeah, it's Dave McCarthy at HSBC. Just want to come back on that synergies. You've given a figure of GBP 60 million for the first half. Sorry, first full year. Year The equalization of terms is going to be pretty huge, I would expect. If we take the figure you've given, it's suggesting, to do the maths, and I won't run you through it now, but it's suggesting that Booker was only paying about 1% more for products than Tesco was. Which doesn't sound right, and what we've got from published statements and statements by competitors, that figure is actually closer to 10%. Why is that figure so low when the equalization should be so much higher? I think we will have, and I suspect we will have a more detailed conversation about it, David. The only thing I would say to you is, I think when I look at some of those publicly quoted things, there's a coach and horses that I could drive through it in terms of actually how the market works, but that's my own personal point of view. Having seen the price file, all I would say to you, and I won't go any deeper because it gives off some sort of competitively sensitive thing. It's nowhere near as neat and tidy as you think it is. But equally, Nowhere neat and tidy as you think it is. There's going to be a number of lines where Booker was buying cheaper than you, and you get 10 times the- There are opportunities. There are definitely opportunities. Jason and the team have to realize the opportunities. We've got to remember, it's always with the supplier to set the price of their product. Not us. We can ask, but there's a subject of negotiation, and we've been very clear about. We don't set that, they set it. They have to decide whether they want to address some of the differences that might be in either part. So let's see how we go. We've got a series of assumptions. We shared with you the assumptions, and as I've said, try and beat them. Try and beat them. But we need to get on with it and realize something, and then we'll share it with you when we've done it. Right. Should we go backwards? Emma, why don't you pass that one around there, and then we can try and pass to the next person who's going to get it as well. Hi. Good morning. Sreedhar Mahankali from Macquarie. One question and a very short follow-up, if I'm allowed. The question is, you've talked quite a lot about first half, second half, shape of last year in the U.K., the puts and takes. But as you look forward, does the second half that you've just finished, does that represent more accurately the year ahead? How do we think about it in terms of puts and takes, or do you see slightly greater need for reinvestment back in the offer? Okay. The follow-up is the GBP 2.5 billion. Yeah. Is there any way you can give us some kind of magnitude? Booker versus, presumably you will report Booker sales as Booker. How much of that we should be looking to see in Booker and how much in Tesco, for instance? Right. So take the follow-up first. At this stage, I cannot break that down. I will not break that down. It is going to be as a combined business, because I absolutely want to keep the businesses together. That is new opportunity that comes from both being together. So it is GBP 2.5 billion for the combined group. When we come to report actual performance, we will give you the insight, but there is no breakdown of GBP 2.5 billion because it is only facilitated by both businesses being together. In terms of how you should Sorry, just absolutely. The profit from that is not in the GBP 200 million. Whatever profit you generate out of GBP 200 million GBP 25 million of that Yeah is in the GBP 200 million. Okay. All right? We've now got to get a growth trajectory above. We think it's GBP 2.5 billion. Okay. Okay? So GBP 25 million profit out of GBP 2.5 billion. Yeah. So we're 175 of cost, 25 of- You're putting it at 1% margin. Exactly. Got it. To your earlier question, what do we see? We see inflation being lower going forward than we saw last year at a consumer price. When we look at commodities and we look at, I think the last month was 0.8 versus 3% for last year. You can see that. That is partly competitively driven as much as just cost price driven. I think the market stays competitive in that sense. I think the other thing that we should see, and we see, is there are some challenges in terms of some of the cost sides of the business. For us, the one that is most on our minds at the moment is distribution. As we go through Palmer & Harvey, bringing Palmer & Harvey into Tesco is definitely a non-cost for us. We had it where it was for a reason. We need to work that through, thinking through the Booker network, Tesco network, OneStop, to find the right way to do that, because it is very clear that that complexity does affect our operation, and we need to find the right way to do that. That is a challenge that we have. I think that is exacerbated, and you will have seen this elsewhere, by particularly in the transport sector. There is pressure in terms of transportation now, in terms of drivers and cost. That is a feature, that is a new headwind, if you like, that the industry will see a little bit of as we go forward, and we have got plans to mitigate that. The only new feature I see going forward is that unique dynamic we have about what the right distribution and logistics makeup is as we bring the groups together, and there is a lot of detail work going on that. Specifically in terms of your pricing position versus your competitors- Well- you're happy with the way you're positioned? Azan touched on actually that. We're very happy. People will talk about points of inflation. If I look at where we are in terms of price relativity, as we exited our financial year, happy where we were. Is there competitive activity in the marketplace? There is. As always, we'll decide how it is we choose to react. I think the most important thing, and the thing that's worked so well for us over three years, is we've decided what it is we want to do for our shoppers, right? So actually most of our pricing decisions are based on the conversations with our shoppers. We've got away from reacting to all little initiatives and big initiatives that go everywhere else. That's what we'll continue to do. That's exactly how we see it. Inflation, we don't see it being as big as it was last year. There's still some pressure there. So we'll be in the usual game of deciding actually how it is we can manage, invest, deliver the profit. That's just our normal. There's nothing new that I would talk about in that offer going forward at this stage. Thank you. In terms of shape, first half, second half, what we've done is we've grown and we've grown. We're exiting with 230 base, 2.3% margin in the U.K. business, group of 3%, and that's a firm base to which to start this year. That's right. That's very helpful. Thank you. Cool. Cheers, Sridhar. Morning all. Borja Olcese from J.P. Morgan. One for Alan. Your retail free cash flow, GBP 1.4 billion in the year included GBP 500 million working cap and almost GBP 400 million from disposals. These are big numbers, obviously. How do we think of these two, in particular, going forward? Mm-hmm. There are some timing impacts in that which we highlighted. We spoke about the Palmer & Harvey administration. We also spoke about and highlighted in our release the fact that there is still GBP 60 million to pay in respect of the compensation scheme. There are some, and there's potential outflows in relation to the HMRC. There are moving parts, and one of the difficulties about Tesco is that the numbers are very big, and they can be quite lumpy, and we just have to recognize that. Equally, the timing of when some of our coupon payments and our bonds might well impact year on year. But overall, I think the way that I think about it is grow the operating cash from the business, manage the cash flow on CapEx, which we had a bit of an outflow last year, the GBP 200 million that I mentioned. But generally, I would expect and hope that providing our CapEx is stable year on year, our cash utilization should be pretty much the same year on year. That was this year, GBP 1.1 billion. indicated a little bit more is what we are targeting now. But generally, in year, that should be about the same level. Then the other impact that we, as I look forward, obviously, as we make more profit and we utilize past tax losses, we pay more cash tax. Then just again, a flag, this is going to impact everybody in the market. HMRC in the U.K. are bringing forward the payment on account regime, and we will impact. That is effectively a permanent outflow from a working capital perspective, and that will impact over the next couple of years. But broadly, the way we think about it is generate the cash from the business, spend it wisely within it, and then get to a free cash flow. I think this year there was some favorable elements in it. Then the lumpy elements also will be some of the property and other items which we do not have a huge amount of control over, but we choose to invest to make money or invest it, as the circumstances arise. Very good. Thank you. Go ahead. So Central from Exane. I am going to be the person that asks about Asia again. Sure. You flagged the two factors, 6% wholesale, 3% from lower vouchering. If we look at the Q4 performance, minus 14, that obviously leaves about five percentage points of Yes like for like. I'm just wondering what's happening there, because obviously the profit is growing. Forget the margin, the absolute currency adjusted profit is growing, and yet you've got some very weak underlying like for like, unless there's something else going on that I'm missing. No. Go ahead. Yes, the key drivers that I would highlight are the ones we have spoken about, the 6%, the 3% and the 1% deflation. There is, and again, we try to be as clear as we can be in terms of the numbers. As we looked around the group, and the way that we were accounting for some small elements of sales, particularly in the Asian business, to a lesser degree in the European business, an element of previous full sales are now being accounted for as a consignment basis. Again, no change to the cash that we are receiving. There is an element of that if you look at the specifics and the numbers. In the back of the deck, we have highlighted the adjustments we have made, and Chris and the team can take you through that, but that is probably part of what we are pointing at. I suppose the simple question is, what is the underlying like for like within Asia? Within Q4. If you strip out the numbers, I am looking at Tony if he wants to add to something as we talk. I think we see at the moment, and again, if I look at the last month, which is on my mind, I think our food sales are up over 3% like for like in Asia as we come out that annualizing of that. The market is deflating. If you look at the Thai market, not just ourselves, but everybody else, there is deflation in the marketplace. There is some government couponing that we need to understand in terms of what the impetus of that is going to be on the marketplace. But in the core bits of the turnaround of the Thai business and the restructuring of the whole proposition, if I look at core food, last four weeks, 3.2% like for like gives you the best indication stripping out all the bulk and the couponing. Is that, Tony, do you want to say anything else on top of that? Like before, I think you have answered it. But I think it would be just to reiterate, this is a volume recovery, volume growth and quality of growth going forwards. Big traditional market, which is about half the market, and part of that sale that you have seen come out was driving that market, was going into that market and was not profitable. Yeah. As you see the year ahead, growing profits, growing sales in a profitable way. That is it. Okay. Do you want to go? Hi, it is Nick Coulter from Citi. Just a point of clarification, if I may. Similar to the GBP 1.5 billion target that you have out there, could I clarify that the GBP 175 million target is your gross savings target from the Booker merger? Which of course you will probably beat and you will probably retain, but just to check that the GBP 175 is gross rather than net. Correct. Thank you. Please. Hi, everyone. It is James Britney here from Jefferies. Very quick question, strategic question, really. As the free cash flow profile of your U.K. business really improves, does that open up options, strategic options for the more cash generative businesses outside the U.K. I am thinking particularly Thailand. Can you say some more about what I am not sure I got the last bit of what you said. Does it provide opportunities for? Strategic options in terms of international businesses, the more cash generative international businesses. Look, I think what we think is getting ourselves back to, as what I tried to say is, our intention through driving cash profitability, the earnings growth and the free cash flow, enhances again the balance sheet and gives us all sorts of optionality as we do that. I don't think you should at this point take that trajectory to, in any way infer that there will be a change in the international strategy that we have laid out. We are still in a place which is we see big growth opportunity in Thailand that returns very well, and we continue to invest, and we continue to open stores in Thailand. In Central Europe, what Matt is doing is reshaping that portfolio. We have closed unprofitable stores. We are thinking about different propositions that can work better in a couple of those key markets. That keeps us absolutely busy, all right? What we have got going on in Ireland, that keeps us absolutely busy. I wouldn't at all infer on how it is we philosophically see the improvement of both, not just the U.K., but the group into a change in international strategy at this point. Not at all. Very clear. Are you working on a new discount chain for the U.K.? Never, ever comment on any innovation, ever. I will give the qualification to that because people always, you get into a no-win situation, which is, "Well, he did not say this," or, "He did say that," and people second guess, and you get yourself into all sorts of things. So flat no on anything that is in that innovation bucket, whether it is a good idea or a bad idea, yes or no comment. You cannot read anything into it, ever. All right? At least I have been consistent about that for three years. I am not just starting now. Thank you. Is that it? I do not see any more arms in the air. Hopefully, we have answered all of your questions. I am sure we will talk more over the days and the weeks to come. Thank you very much for listening. As I say, two things from me. Strong set of results. Very pleased for the Tesco colleagues and what they have managed to deliver together over the last 12 months. Hopefully you see that over three years, that is a consistent trajectory, and we are really, really very excited to have Booker and Tesco UK together and the opportunity that that can bring in terms of new growth, new thinking to our largest business in the group. Thank you very much for your time and your attention. Jim

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