Tesco PLC (LON:TSCO)

H2 16/17

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Apr 12, 2017

Good morning, everybody. Morning. Nice to see you all. There's a bit of refurbishment gone on in here since last time we were here. It's quite difficult to see faces, so apologies for that. It's great that you're here. You have, as always, I brought the majority of the Tesco executive to be here today. It's the one time I ask them to make sure they're available for your scrutiny, your questions, and your probing. Please make use of that, if you haven't already. I'll introduce some of the new members actually in the middle of the presentation, not to embarrass them too much at the start. But I have two apologies, which is Tony Hoggett is on the advanced management program at Harvard, so he sends his apologies, and Matt Davies is celebrating Passover, so Matt's not with us this morning either. But both of them send their regards. Look, what Alan and I are going to do, is take you through, in tried and trusted fashion, how it is we see the results that we've announced this morning, and then give you a chance to ask us some questions. Okay, so without further ado, I'll start by talking a little bit about what we consider to be a year of strong performance. I'll bring you up to date with where we are on the six drivers that we shared in detail in October. Alan will then take you through the detailed results and I'll come back and I'll talk about the four stakeholders that we think through in terms of how it is we're adding value for each of them as we turn our business around. Look, you've seen the numbers. It's a very full pack because you've got all the notes and all the approach to risk from auditors as well. But look, in essence, you'll have seen that sales growth is up 4.3%. Operating profit before exceptionals is up 30%, in the U.K. and Ireland is up 60%. So the operating margin improvement, which is around sort of 46, 48 bips in at a group level, is around 64 bips within the U.K. and Ireland. And you see that we've continued where we started in terms of strong cash generation year on year. In terms of the customer recommends, the net promoter score, it continues to strengthen. Our colleague engagement, despite all of the changes that we're taking into the business, it continues to step up and is at a really high level compared to any benchmarks in the U.K. The supplier viewpoint that we shared through these last three years continues, under Jason's leadership, to go from strength to strength. In the U.K., 1.6% volume growth, so we are into our full second year complete of volume growth. Actually, second half year stronger than the first half year. Transaction growth up 1.7%, and we have about 140,000 more customers year on year. When we talk about volume performance, you have seen this chart from me before, and you see what has happened going all the way back to 2011, 2012. You see the performance over the last two and a half years. So year on year, but year on two years, we continue to perform well. I know you have a question about the fourth quarter, so let me give you a context of that. If you look on the right-hand side, what I have done here is I have taken the IRI data and I have looked at our performance versus the market. What you see on the top is the full year. What you can see is our outperformance on volume versus the marketplace total store is approaching 3%, and in fresh is actually approaching 4%. Across the board, that is where we were. In the fourth quarter, though, you see that total store volume ahead of the market, but it is fair to say, as you would know, market volumes fourth quarter, based on macroeconomics, were more challenged than the previous three quarters. But we did well in food, did particularly well in fresh, and in packaged. Couple of things that affected our fourth quarter growth. General merchandising, we talked about it. End of Q3 into Q4, we changed our trading approach around Boost. I will show you later, we made some other decisions that affected our volume in terms of what promotions we were prepared to chase and which promotions we were not prepared to chase because of their impact on mix. But actually, our relative volume performance continues to be strong, particularly in the key areas for our business, which are food. All right? Now, international. More challenges in international, but when I say that, it is really crystallized around Poland. 18 months of strong performance in Poland. The last six months of last year, significantly more challenging from a competitive lens, and we felt that in the performance of Central Europe because of the size of Poland to that group. Matt and I with the new management team were there last week. Plans are afoot. I am encouraged by what I am seeing in the short term, but we have to go on and we have to deliver those plans. Overall, we still had volume growth in international. But the other thing that we did have with Poland, I should mention, is actually Thailand. Some of you will know about the Thai market from other investments that you make. But the Thai market is depressed versus expectations. There is definitely been a reaction in terms of market momentum to the death of the King. Everybody, ourselves included, being hugely respectful of that. So our like for like is up in Thailand. Our market share is up in Thailand, but the market size in Thailand is not what anybody predicted it to be because of that sad fact. Sales growth still 4% in Asia and slightly up in Europe. You know that we've simplified and completed the Kipa transaction. If I move then to the six drivers, if I were to summarize this in one slide, I'd say, look, we are differentiating the brand. It's a long journey. I'll introduce you to Alessandra Bellini later who will lead the charge on that for us going forward. There's some really strong progress through the course of this year. The YouGov survey that everybody uses, we've kept that as a consistent theme, and I'll show you some of the performance there. So I'm happy with the way that the brand is developing. We set out last October that we would reduce the operating cost by GBP 1.5 billion. We said that by 19/20, so if you like, from October, that's 3.5 years to get us to that GBP 1.5 billion. In the first six months of that period, we've delivered GBP 226 million of those cost savings already, and that's part of a full year, i.e., including what we did before October, a total cost reduction last year of GBP 455 million. So our cost reduction program in really good shape and accelerating versus where we were in October. We brought forward. We're able to bring forward some of the plans that we had, and I'll share those with you in a second. Cash I've talked about. In terms of Maximise the Mix, you've seen where we are. We've taken the group margin from 1.8% to 2.3%. The improvement in the U.K. has been stronger than that group average, so really good progress there. We've released about half a billion from our property portfolio, again, consistent with how we talked about it in October. I'll talk a little bit more about innovation in a second. So when we talk about being ahead of our own expectations, it's the expectations we set in these drivers. Let me share with you a bit more. So in terms of brand, you've seen this chart over the last 2.5 years. We continue to improve, which is important, but also to narrow the gap to the three other big U.K. supermarkets. What it is we need to do is obviously to get those lines to cross. But on that measure, you can see that we're still moving in a positive direction. The things that are driving that, farm brands. We invested GBP 300 million last year. A little bit more than GBP 300 million in the launch of the farm brands in the end. Significant investment for us. So the performance of the businesses with that investment included, obviously. Interestingly, 64%, so nearly two-thirds of all baskets in a Tesco shop now have a farm brand in it. Really strong feedback from customers to the value equation, the quality that they're getting from the farm brands versus other offers in the marketplace. We know that when people fully understand the brand guarantee, it increases their propensity to shop with us by about 15%. That's something unique and differentiating in the marketplace. The good and very important thing is customers are now starting to appreciate the great quality that's in the Tesco product. We've got more to do, but that's starting to come through strongly, and I'll share with you some more of that in a second. Because the YouGov survey, I've kept the same survey. We have lots of different ways of looking at the brand. If you take that YouGov survey and you talk about quality and perceptions of quality, actually between January 2016 and 2017, YouGov, Tesco most improved brand in terms of quality. All right? So already that progress we talked about last year coming through. Interestingly, we earlier this year moved on to another phase in terms of advertising and communication. We brought out the Food Love Stories idea based on a very important insight about the role of food in all of our lives, but also sharing some interesting recipes and solutions, which you will have seen if you've been in our stores are brought alive. Indeed, you'll see some outside. For our customers who walk into our stores desperate to think about what it is they want to cook this evening, desperate for a recipe, this is really helpful, but also an emotionally engaging way. I thought I'd break with tradition and show you the two ads that are going to be used at Easter time, which are consistent with this, but appropriate to the time of year. One of them focuses on our relationship with our suppliers and one with our customers. So can we run the two films, please? I dream of chocolate. You just can't get enough of it sometimes. We've been supplying Tesco for about 25 years. We're constantly checking to make sure the product is the best that we can make. Nice smooth shape, good decoration, a nice velvety taste. I'm a chocolate geek and proud to say it. Food Love Stories, brought to you by Tesco. It was hard when the boys went off to college. I used to love cooking Sunday roasts with all the family around the table. I really miss it. My salsa verde crusted leg of lamb was their favorite. Hello. I brought a couple of pals back. Is that all right? Yeah. It's good to have them back for a couple of weeks. Food Love Stories, brought to you by Tesco. Just an illustration of how we take the campaign on, make it more seasonally relevant, but the feedback that we are getting is fantastic. To carry that trend, you can see what has happened to the quality perception around food in Tesco as we feature it and share the Food Love Stories. Really pleased with the way that that campaign is differentiating the brand. YouGov, if you are interested in these things, campaign talks about it as the brand story of the year. We are actually in a place where we are getting real memorability. The important thing about ad memorability is it builds brand, but it also builds marketing efficiency. This is not something warm and cuddly. The more that we can make our advertising memorable and mean something, then the less quantum you have to invest to get the same marketing result. It is as simple as that. That is where we were in terms of the brand. Operating cost of GBP 1.5 billion. Since October, if you have been tracking it, we have talked about already changing the store operating model in 1,500 stores. We have already announced a simplification to the distribution network, taking out two distribution centers at Welham Green and Chesterfield. We have streamlined already our European transport in part of the goods not for resale that we talked about before. We gave you the buckets when we were together in October. We took the opportunity of advancing the plans from three years into the last six months. Therefore, where we are, giving you the breakdown in the buckets, we have saved around GBP 130 million in our store operating model costs, about GBP 32 million against the targets we set in logistics and distribution, and GBP 63 million in that bucket of goods not for resale. GBP 1.5 billion for basically a three-and-a-half-year plan. First six months, GBP 226 million delivered in this configuration is where we are. As I say, total cost reduction for Tesco last year, GBP 455 million. In terms of cash, we put out new terms. I think we are still the only retailer that publishes all of the terms for all of the categories and all of the partner sizes. Small suppliers, 99.4% of all small suppliers are on those terms and were fully compliant. 93% in terms of the larger ones. If you remember, we set the end of this year in order for everybody to change to move on to it, of the larger ones. We think we will be done by August, Jason. Ahead of the plan, so that working really well. Stock holding has been a phenomenal performer. We talk about where we are in terms of cash, working capital improvement, efficiency, really impressive. We have taken a bit more than GBP 300 million of stock out of the business over the last two years, which is a little over a third. The interesting thing, as you will see in a second, is we have done that and improved our service and improved our availability. All that work that we have been putting into the operating model of the business is allowing us to lower cost, lower stock, but improve availability and improve service levels. And one measure of that is, again, we have improved the availability late at night. This is sales-based availability, 6:00 in the evening of the 1,000 most important lines this year, again, gone from 93% to 96%. Now, this chart. This is the chart we shared with you around how it is we think about mix. To remind you, the colors are an indicative of where a particular category or channel sits relative to the group average. So bottom right-hand corner, which is the group operating margin, as I have said, it has gone from 1.8% to 2.3% this year. The mix in terms of how categories have contributed to that has stayed pretty much the same. So everything has risen, but the relativities have stayed pretty much the same. I am going to give you some illustrations in a second. So if you think about what has driven that, we have done a number of things. Remember, we talked about the different lenses of mix. First of those was channel. If I take the example of the U.K., you will remember, I certainly do, 2 and a half years ago, talking about unprofitable stores within Tesco. We set ourselves a challenge. We closed some, set ourselves a challenge to improve. 107 stores that were not profitable a year ago are now profitable. That is about two-thirds of the ones that we had set ourselves to improve. You would have picked up that we have changed the convenience model in our Express store. So that is about 1,700 stores that are changing. And you have seen what it is we have done in terms of online to make that a more customer-centric but much more commercially sustainable business model. So in terms of channels, this is where we basically improve the operating efficiency of the channel. Almost regardless of the category, we are lowering the cost and the margin therefore benefits as a result of doing that. When it comes to category, we have some choices, and this is where it gets interesting. I have picked an example here. Obviously, I have kept the competitors anonymous. You can guess who is who later. The thing that is interesting here, because it illustrates something, is so Tesco on here, total growth getting towards 2%, good balance between food, good balance between drink, because this is a period up to January, so it is December. It is 4 weeks in December, and I was really interested in the balance between food and drink. Because what you can see is what happened in December, happens in a number of Decembers, is there was a beer price battle. Now, anybody who looks at the beer market and looks at the slabs of beer, the cans of beer, there is no profit there, none at all. But they are a significant volume driver. We were competitive, quite happy with where we got to in terms of beers, wines, and spirits through the period. But as the prices got closer to Christmas and people chased it for volume, we did not. We did not. It was the equivalent of blowing your brains out. We did not do that. We did not feel we had to do that. So we became more choiceful. That's a concept that I need to be able to share with you in a better way, which is as we start to build mix and we move from getting volume momentum just to move the business forward, we now start thinking more choicefully about which are the right categories to be putting discretionary effort into in order to drive a sustainable volume improvement that enhances mix. This is an example at a category level where what Jason did was play the category differently. Part of that is what we did in the product part of that category. To see it all the way through, if you've not seen it, there's a range reset in our beers, wines, and spirits fixture. We changed the range and the space for spirits, for sparkling, including some British sparkling offers, and also enhanced the space for low alcohol, all of which enhance margin mix for that category. Own brand performance, and little tip for those in the room, there's a range of finest wines with that little silver shield on the top. We've mentioned this to some before. There's a whole new range. My little tip to you is try them. The price range is between GBP 8 and GBP 20, but spectacular wines for really good value. Our own brand performance is up 8% in this category. Interestingly, craft beer. A subject and a category very close to the Chief Product Officer's heart. Actually interestingly, we changed our approach in Express on craft beer, and you see also in our large stores. It doubled the like-for-like of craft beer in our Express offer. Just trying to give you a sense for how it is our category directors need to think about the category and the product mix in order for volume to contribute to that margin expansion. In terms of property, you will have seen through the year we bought back 16 stores. We've announced this morning that we've bought back seven more stores from the last joint venture we have with British Land. That takes us to 23 stores. The impact on our rent is what you see on the chart there. I think the number I was going to call your attention to here is actually the U.K. and Ireland percentage of our estate, which is now freehold. Two years ago, only 41% of our business in the U.K. was freehold owned by Tesco. Through the actions we've taken over the last two years, that's back to 51%. Either you say 10 points higher or the other way of looking at it is 25% more than it was two years ago. Again, back to that point about how do we improve the future potential of our business to sustain the margin improvement when it's commercially right and advantageous for us to buy back. We're interested in buying back stores that we really would want to own, and we've continued to do that, in terms of maximizing the value from property. The other things that have been going on by Steve and his team, we've repurposed over 1 million sq ft of our space across the business. That is either in terms of taking space and subletting it, and you saw some of that in October that Trevor shared from Asia, or indeed some of the subletting that we have done with Arcadia and other partners. These are the partners that we have worked with around the group. I have to say, if we take the U.K., the partnerships that we are having with Holland & Barrett and with Arcadia, and indeed with a couple of others, working very well for us, working very well for them, and that gives us an opportunity to continue that, and Alan will talk to you about the performance of large stores in his presentation. Because people ask me, I will put it up there. Last year, we refurbished 202 Tesco stores as part of our refurbishment program. We did release value, about half a billion of value. We put Nairn on here as a very specific, so where we have been able to raise value from the portfolio. Steve has done a fantastic job. We talked to you about air rights in October, and for those who are very eagle-eyed, but I do not think you will get it from the computer, that is Hackney. We just announced, it is not particularly in the public domain. We sold the Hackney store, for GBP 55 million to the Borough. We will get back a store at an advantageous rent for ourselves, and they will build affordable housing above that store. So that is the first of the air rights that we talked about, of what it is we were doing when we saw you in October. In terms of optimizing land, I do not think you will be able to tell which this one is, I hope, from where it is. But this is part of the car park development that we shared with you. There are about 17 of these in advanced negotiation at the minute, which is how we can use excess car parking space to actually sublet and use. Given that you cannot tell where it is, there will be a McDonald's drive-thru in that car park in the very near future. Just examples of what we talked about in October of what we are doing to realize value from our property portfolio. In terms of innovation, PayQwiq is rolled out. PayQwiq is rolled out, and I am pleased to say one is used every 5 seconds. More than 1 million a day is paid for on PayQwiq and growing really very quickly. Last year, just under 2,500 new products. Whilst we have continued in our range optimization, we have not stopped innovation. Last 2 years, 4,500 new products. You see I put prepared meals in here, but freefrom, we continue to be the country's leading freefrom retailer, and pleased to see that we got that award for the third year running. Lots of innovation going on, and obviously, Booker, which I will talk about at the end. That is in summary where I see the year, how we have done against the 6 drivers we shared with you in October. Now I will pass on to Alan to take you through the detailed results. Thanks. Great. Thanks. Thanks. Morning, everybody. In terms of the results for the year, obviously, during the year, we had the impact of the change in the inflation rate with the sterling depreciating, and that has mixed our results. We began to see that in our half-year results, but fully coming through in the second half of the year. Overall sales up 1.1% at constant rates and 4.3% at the actual currency at the year-end. Operating profit, GBP 1.28 billion, a 30% increase year on year and in actual rates and 25% at constant rates. A significant step up in our operating performance, which I'll go into more detail. The exceptional items, there will be more detail, but the primary element here is the GBP 235 million charge, which we took and announced a couple of weeks ago with the SFO and FCA settlements, which have now concluded with the court order on Monday this week. That's the key element of our exceptional profits. A significant increase in the group profit before tax and before exceptional items and net pension costs up 72%. This is a key element of our EPS, and again, I'll talk back to that later. In terms of the segmental performance, we've seen, as Dave said, a strong step up in the U.K. business, and some mixed performance in the international businesses. U.K. and ROI, I think the key element is, as Dave said, the increase in margin. Margin recovery is 68 basis points in the U.K., and we're at 1.84% margin in the U.K. ROI segment as of at the moment, with profit improvement from GBP 500 million up to GBP 800 million in the year. The international margin was down 42 basis points to 2.81%. As you can see, still ahead of our overall group margin, but a bit of a drag in the current year. The markets were, particularly in Poland, challenging. Profits in that segment were GBP 320 million year on year, which was flat at the actual recorded currency. Bank margin, much less relevant to the bank because of the way that the bank business runs, but down 145 basis points at 15.5%. The bank results, again, I'll talk on later. Overall group margin, up strongly to 2.3%, which is along the ambition towards the 3.5%-4% margin by the 2019-2020 financial year. We have spoken before about volume and how important volume to us is in the U.K. We have also told you, on a number of occasions, that the way that historically we had measured volume was not really where we would start, but in order to create a clear trend, we continued with that. Today, we are shifting to what we believe is a clear indication of volume, which is the scanned singles going through the till. This is the way that the product people look at it is the way our colleagues look at it, and it is the way our suppliers look at it. So it really aligns with the way we are looking at the business. As you can see from this, the trend line is pretty much the same as you go across the different elements. The green line is the previous measure. The major difference is down to mix. Going forward, if mix is an important part of what we are looking at in terms of that scanned singles transaction volume base, we will highlight it. From now on, we are going back to that. Importantly, volume remains critical to our business recovery. As Dave said, we will be choiceful and mindful about it as we look forward as well. Transaction growth, another key part of it, and as Dave also said, 140,000 new customers. This is the number of customers going through the checkout, and we have seen strong transaction growth year on year. Continued and pleasing trend in that line. Looking between the two elements of the U.K. ROI segment, as you can see, the U.K. continued growth. We have spoken about Q4, we have spoken about some of the choices we make, and this is the first reported full year growth since 2009-10 year. So a year which is important in terms of that turnaround of the overall business. The Ireland business, really pleased with the results. It is not what the chart shows, but we are really pleased with that because the volume growth in the Irish business is significantly above the market. In Q4, there was a strong impact from the deflation we were putting into the market in order to maintain that competitive position. There is a small element in Q4 in Ireland relating to the industrial action which we have got there. It is about 1%, but we are pleased with the Irish business performance, which is lagging slightly behind where we are in the U.K. So very encouraged by the way that market is developing as well. As Dave said, again, as usual, we look at within the U.K., the like-for-like sales performance. You can see that across all formats, we maintain the encouraging trend. I am going to talk on the next slide about Extras, so I will not say anymore, but Superstores, Metros, and Express continue to see good growth. Dave has spoken about the grocery home shopping and the growth in the online business. We are encouraged by that. Basket size is up, loyalty is up, and we are continuing to see a very strong customer loyalty through the saver delivery. General merchandise and clothing, as we saw at the half year, some impact from moving to the new website. F&F moved onto the same site as the general merchandise business. Again, some impact as we shift and look at improving the profitability within the general merchandise part of the business. But overall, a year where across all of the formats and the way that we are engaging with customers continue to make good progress. The like-for-like, and this goes right back to the 2014-2015 year, you can see that around June 2014-2015, we were really at more than 7.5% negative growth in terms of that business. Since then, a strong and continuing improvement in that business. Remember that a lot of our general merchandise performance also comes through these large Extra stores. So there is an element in that as well. But encouraged by the continued performance, again, you can see that in the store profitability, which Dave referred to. In terms of profits, this is the key build within the U.K. ROI segment. Starting at the GBP 503 million we delivered last year. You can see that we invested more than that in lower prices in the year. GBP 300 million of that or so is the farm brands, which we launched early in the year. But across all of the categories, we continue to invest in price in order to maintain that competitive position. We get a volume and mix benefit, and you can see that. We made some other custom investment. This is some of the range reset and the recent Food Love Stories in particular we would highlight. Underpinning all of the margin recovery, as we have set out over our ambition, is the net cost savings. This includes the store operating model, distribution savings, and the marketing savings, which we have spoken about before. Finally, the other category takes us to that GBP 803 million of overall profit delivery, up very strongly year on year. The international like-for-like sales performance, Dave has referenced the competitive position in Poland, and we saw that during the year. In Asia, as we have seen, the fourth quarter and the third quarter were impacted by the events, particularly in Thailand. But market share is strong in that market, and a business which is viewed very strongly from a customer perspective. Again, the chart of the operating profit, as I said, flat from GBP 320 million to GBP 320 million. Some investment in low prices, more than offset by volume and mix benefits. Other customer investment is in availability, which was one of the key areas within the European market we spent on availability and some increased marketing spend. Then we made some cost savings in that market. Store operating model is again an area of focus. In a number of stores, we have closed unprofitable counters. Dave has referenced the distribution savings we made in Poland. Not only have we moved to different distributors, we have also closed and then moved to a new center in Poznań for distribution with a significant saving in terms of our distribution costs. So overall, a business performance which is one which is mixed, but one where we have clear plans for the future. In terms of the bank, the bank performance is one which, again, we are pleased with. Different metrics, obviously, from a bank perspective. We have seen 3.5% growth in our active customer accounts. This is now very clearly the bank for Tesco customers, and that is the purpose of Tesco Bank. We are encouraged by the growth in current accounts. We recently relaunched the offer, having had a very strong reaction and positive reaction to the offer, which we launched pre-Christmas. We've recently relaunched that with the take-up in line with our expectations. The other thing I would highlight about the bank results is that, of course, this is the year that the bank bore the full impact of the change in the interchange fees. On an underlying basis, the performance is strong at 29% up. Clearly, banking markets change, conditions change, but it was a year where the bank delivered a good set of results. Strong lending growth in line with the bank's aspirations, and it's being funded as the bank expects through customer deposits. So good growth in lending and in deposits. Underpinned by an ongoing cost-saving program. The capital and lending ratios remain strong. Net interest margins slightly down, in line with the desire to become more competitive. The cost-income ratio at an underlying basis, 62% compared with 66% if you take out the impact of the one-off customer redresses, which now with the PPI claims, with a finite endpoint, we can begin to see when that will end. Then the bad debt to asset ratio, slight shift, but one which is perfectly acceptable from the bank's perspective. So overall, a bank with strong capital ratios and a business performance with which we're pleased. Tesco Mobile continues to be a really outstanding part of our portfolio. From customer perspective, it is again focused on Tesco customers. It's the fifth-largest mobile network in the U.K. and the largest virtual network, voted for the number of years as a recommended provider. It's picked up the lowest customer complaints. In fact, in December, there were zero customer complaints for Tesco Mobile, and it's got a very high customer satisfaction. So a strong business delivering continued growth in a market which is competitive, but where Tesco Mobile has a very strong and established position. I said I'd give you a little bit more color on the exceptional items, and this really breaks them out. Net impairment is a mix of a number of things. Obviously, having taken a significant impairment charge in the 2014-2015 financial year, we need to recalculate that every year across the whole of our business, and there will always be movements in this provision. Net in the year, when you take into account owners' lease provisions, impairments, et cetera, a very small movement, but there's quite a lot of work goes into that from an accounting perspective. I wouldn't be at all surprised if annually we have a movement in that net impairment. The restructuring and redundancy, we've spoken about the changes in the distribution network, we've spoken about the changes in the store colleague structures, and we've also spoken about the cost-saving measures in the bank, and those are the key elements of that GBP 199 million restructuring and redundancy charge. The bank, as I've mentioned, took a GBP 45 million charge for PPI customer redress. That scheme is now one which is visible towards the end. There's a date in 2019 by when all claims have to be in, and as I say, we can now begin to see the end of that. Offsetting that, we had GBP 57 million from an interchange settlement, which was pleasing to have resolved a long-running dispute. We generated GBP 165 million net from our property transactions. Dave mentioned 500. This is net of the, we also buy back properties, so this is the net number. We have made the provision for the SFO and FCA. That leaves the total to GBP 263 million. We continue to call out in the exceptionals issues which are significant and material to the results. We also seek to run the business with as few exceptional items as possible. If we move now below the operating profit to the finance income and costs, the first line here of interest received is as near as we can get to a cash element. We had more cash. We managed that cash as well as we could in a very low interest environment across the course of the year, and we generated GBP 48 million from it. IAS 32 and 39 movements are mark-to-market movements, non-cash, generated by the market changes in respective risks across some of our hedging instruments. That year-on-year gave us a GBP 61 million credit compared with GBP 19 million. I would stress that they are non-cash. Interest payable went up year-on-year, principally because as part of our property buybacks, we do very often take debt on with that. During the year, in February last year, we acquired a number of stores, 49 stores and two DCs, and that came with some debt. We repaid a lot of that, but that was a lot later in the year. So year-on-year, we carried more debt within our balance sheet. We do really continue to focus on the cost of whatever debt we are carrying and seeing how we can minimize that. Finally, IAS 19 pension costs reduced year-on-year. This is set, as you know, at the start of the year in relation to the pension deficit at the start of the year. So it is a very mechanical non-cash element and unwind. It came down because our pension deficit was down as of February last year. This February with a higher pension deficit, we expect this charge non-cash in the current year to be around GBP 165 million. So overall, that gave us the net finance costs of GBP 521 million compared with GBP 629 million. Happy to go into more detail separately because I know that there is a big mixture here between cash and non-cash, and cash is one of the things which we focus on strongly. The tax rate of 25.4% is up significantly from last year. This is higher than the U.K. statutory rate. The banking supplementary tax surcharge of 8% ran through the whole of the year. We also continue to have some assets which do not qualify for tax relief. Looking forward to the year that we are just starting, we expect this to be around 25% in the full year as well, and we will continue to update that as we go through the year. Earnings per share, I mentioned before the GBP 842 million of profit before tax and exceptional items and finance costs up 71%. The diluted earnings per share is at 7.9 pence is up 40%, mainly because of the change in the tax between profit and tax. That is why the 71% does not come through. But it is a strong increase in terms of this important EPS measure. Again, going forward, we will come back and talk more about EPS because it is the way in which we will increasingly want to be judging our performance. Very happy to go into some of the movements between that as well. Principal movement between operating profit and PBT is the finance costs, which we have spoken about, and then the losses and costs of our JVs and associates, which were around GBP 30 million. But an important improvement in that EPS underlying measure. We have spoken a lot over the last 2 and a half years of the importance of getting our movement in net debt to a degree that we can manage, generate cash, then spend that cash and end the year with an improvement in our overall cash position. This bridge really takes it through. These 2 lines are the cash from retail operations. GBP 200 million is adding back the way that we account for the FCA and SFO settlement. You could really add these together. There is a very small impact from Turkey. Around GBP 1.9 billion of cash from our trading operations and then GBP 387 million of underlying working capital improvement in the year. We focus on working capital. Dave referenced the stock improvements, and that continues to be a focus in the underlying working capital. We did call out in the announcement that there was a fuel payment in that number. It is contained within that. It is somewhat north of GBP 150 million. It will be a benefit for us for at least the next 3 years. It is linked to the timing of the calendar month payment of this fuel supply compared with our year end and when it pays. It will be a timing benefit, which will continue to feed through into working capital for 3 years, and then we would expect it to reverse. That gave us significant retail cash from operations, interest and tax charges of GBP 582 million in tax terms. CapEx in terms of the normal business CapEx, GBP 950 million. The CapEx through the accounts in the year was GBP 1.2 billion, which was slightly less than we had targeted at GBP 1.25 billion and indicated, giving us free cash flow of GBP 744 million. We then generated some cash from the disposals of the business, principally Harris & Hoole, Dobbies, the Giraffe business we sold in the year, and then right at the end of the year, we sold the Turkey business. Then through property disposals, Dave mentioned GBP 500 million we generated from property disposals. Against that, in this chart, we offset the cost of properties we have bought back. Net-net, we are still generating more than GBP 130 million of cash from our property portfolio, having bought back those number of stores. Finally, other movements take us to a total reduction in net debt of just under GBP 1.4 billion in the year. Give you a little bit more shape behind our CapEx. As I said, we spent around GBP 1.2 billion in the year on CapEx. in the U.K., by far, the majority of this is on our existing space. There is some element of new space and new business CapEx of the total of GBP 731 million. Europe, all on our existing business, GBP 141 million. In Asia, about 40% of our CapEx is on new stores and business expansion, and that is 40% of the GBP 262 million. Again, focusing our spend on CapEx where we can see returns, where we can be sure and clear that we will get the necessary returns and get them in a way that generates value for the business and our shareholders. We are pleased with the reduction in our indebtedness. Again, just really want to look at this in the three ways that I think about this, because they are very different characteristics. Net debt, significant reduction over the last two years from GBP 8.5 billion to GBP 3.7 billion of net debt as of the end of this year. This is what is on our balance sheet. It is the bank and bond financings we have, and we will talk a little bit about that on the next slide. We then also have lease commitments as we go through leases. As we buy back properties, obviously these reduce. Equally, with a portfolio as big as ours, every year we come to decisions we have to make about lease renewals. If we renew a lease, then obviously we take on new lease commitments. We see that coming through the numbers as well. Again, a significant reduction in our lease commitments over the last two years from GBP 9.4 billion to GBP 7.4 billion. Then finally, the pension deficit, which I will talk about again. As you know, the primary driver for the wave of the IAS 19 measurement of the pension scheme, which is at GBP 5.5 billion at the year-end, pretty much the same as it was at the half year. The primary driver is the drop in corporate yield. Despite that significant increase year on year, there has been no change in the underlying cash commitments, which we are required to make to our pensioners and future pensioners. During the year, we have focused on de-risking the investment side of that portfolio, and we have made good progress in that, and that has now come to an end in terms of the asset de-risking strategy. We have had good performance from the scheme assets, which is why year on year, from the half year to now, we have not seen significant change. We continue to have the long-term deficit funding plan of GBP 270 million, which we set up two years ago with the trustees, and which was designed to work through changes in market conditions and importantly, through changes and triennial valuations. That has just started. We are very closely involved with the trustees on that, and they have told us that they are wanting to get the pension triennial valuation resolved as soon as possible off the March year end. Equally importantly, they have confirmed that they are working within the framework that we set out two years ago. We will come back and update on that as we have more progress, but it is very much starting from the perspective that we set up a predictable cash flow to fund the deficit of GBP 270 million per annum. As I say, we will come back to that. Dave mentioned the property portfolio in terms of how that has shifted. These are numbers as at the end of February, so the 1% in Dave’s numbers is not in here. That is the British Land transactions. But we are really pleased both when you look at it on a space perspective and a value perspective in terms of how we've shifted that and are really shifting properties which we want to own back into the ownership of the business in order to be able to run those without being concerned about the rentals that might otherwise be a drag on the business. The liquidity is strong. We've got GBP 3 billion of available cash. On top of that, we've got the cash which we've set aside, GBP 760 million for the fulfillment of the Booker cash consideration. So the GBP 3 billion excludes that, just under GBP 800 million. We've got GBP 4.4 billion in facilities which mature over the next three years, four years, and we repaid GBP 1.9 billion in the year with a relatively low level of maturities this year and in each of the next two years. So from a profile perspective, we feel that we're well set up with a significant reduction in our overall indebtedness, strong cash position, and facilities which back it. Our metrics have improved. The key metric of net debt to EBITDA has dropped from last year 2.7 times to 1.6 times. Fixed charge cover has increased from 1.9 to 2.2 times. And our total indebtedness ratio is slightly improved from 5.1 to 5 times. If you hold the pension deficit flat year on year, then the indebtedness ratio has dropped from 5.1 to 4.2 times. So strong underlying improvement if you hold the pension deficit. Now, I accept that the pension deficit measured is as it is, but that's very separate in terms of the way that we think about it. So an improvement in our debt metrics. So before I hand back to Dave, group sales up 4.3%. A profit recovery which continues with profits up 30% in terms of our core operating profit metric. Our EPS is up 41%. Our cash generation is strong. We've repaid the GBP 1.9 billion of maturities, and we have a strong liquidity position. Thanks very much. Thanks, Alan. Cheers. Thank you. Okay. Last little bit from me. Consistent with what we have been doing for the last two years is to make sure that every bit of communication about the performance of the business, both inside and outside the business, is aligned. At 7:00 this morning, as we released to the market, one minute later, everything goes to all colleagues so that everybody gets to hear from us first what is happening. In the same way, we share with you how it is we feed performance back to the colleagues in the business. This is what we call the Big Six. You have seen it at each results presentation. One of the reasons that we say we are ahead of the expectations we set for ourselves is you can see that both in the group and against the U.K. and Ireland, we have exceeded the target we set for ourselves on the three financial measures on the left-hand side and indeed on the customer, colleague, and partnership measures on the right-hand side. That is another good performance by all parts of the business. The one thing I would draw your attention to, you see it in the little asterisks here, is we made one change in the course of a year you should be aware of. When we set out our cash flow, we had an assumption that the U.K. turnaround bonus would be paid in shares, and actually, the election of colleagues was to pay it in cash. That cash flow is after we made that adjustment. It was something we decided to do after we had set the targets, but in the spirit of true transparency, we made that change. It is actually beneficial for all parties that we made that change, and we were happy to do it. That is the performance. We talked in October about the way we think about how it is we build value for the four key stakeholders in the business. What I thought I would do to conclude is take you back to that and talk through the lens of customer, colleague, supply partners, and obviously our shareholders. When I look at it through a customer lens, we have seen a continued step up in our service. What you see here is, as you know, in addition to our own testing and surveying of ourselves, we obviously do that amongst our competitors. We call it the spotlight. What you can see here is in terms of the speed of service, we continue to lead the market and have advanced that. Interestingly, as we differentiate the brand and Every Little Helps, helpfulness of colleagues is a key part of what it is we want to build in our business, helpfulness in a way that our customers appreciate. What we see is that 80% of our customers are recognizing that, and that makes us, at the end of our year, we were leading the market on colleague helpfulness for the first time in our history. All right? So a very strong performance there. Interestingly, people talk to me about the shift of nights to twilights in the way that we change and some of the changes that we've put into the Express format. It's meant quite a lot of change in our estate, that's for sure. It's changed our operating model. Think about it this way. It's put nearly 130,000 more colleague hours on the shop floor, facing customers, serving customers, as we change the operating model. Right? The interesting thing about that is, I've talked to you about before, when I look at how I assess the whole thing, is around the questions that say, "When I come to Tesco, was everything I wanted available?" Right? What you see here is the progress of Tesco versus the Big Four on that measure over the last 2 years. So when we put service and availability at the core of that very first presentation, we've continued to drive that. Yeah, we will continue to drive that. That's what we mean when we talk about putting the customer at the heart of everything we do. So I'm really, really pleased with that. The availability I've touched on. I've given you the details of food stock. I gave you the details for the total business, but in the core element of food, we were carrying something like GBP 935 million of stock full year 14/15. That's down now to GBP 755 million of stock. So better service, better availability, but from lower working capital. Interestingly, if you look on the right-hand side is look at the availability at all times, not just any time, all times, and you see a very strong improvement from our colleagues, but also a very significant difference between our competitive set as we make sure everything that people want is available at the time that they most want to shop. So this is what's been happening in the way that we've changed our model. People appreciate the prices. For those who remember all of the detail we present, last time we were here, we talked about prices being nearly 7% lower. The fact that they're 6% lower, we've kept the start point the same, but that relates to that 0.6% of inflation that we've seen. But we're still talking about our basket size being 6% lower than it was in September 2014. We continue to reduce the number of promotions, so participation continued to decline, as did the depth of the promotion. We might talk about that when you ask me questions about inflation later, as I'm sure you will. What we've seen in the marketplace is, as there's been some cost inflation, there's also been an increase in promotions happening as part of that negotiated way that cost increases can sometimes happen. We continue to prefer lower, stable, more consistent pricing for our customers. Therefore, whilst the market has got more promotionally active recently, our trend is still for us to be lower. Be interesting to see how the market goes in the next three or four months, but that is the trend that we set, and that is how we have delivered against it for customers. Trust in our pricing is growing because we are doing that. The range continues to reduce and optimize. We are talking about a further 7% versus 2015/2016. We have been able to increase the space that we have given to own label. That has helped our participation. It is also helping the margin position. For those who were in in October, we talked about our move on one touch replenishment. 7% of all cases, which when you move as many cases as we do, is an awful lot of cases, are only touched once from the back of the store to serving a customer, and that helps us run the business more efficiently. We started with big stores 2 1/2 years ago, for reasons that Alan touched on the performance of, and this year we have been taking all of that thinking to our Express estate. Our assortment in Express had ballooned, it is fair to say, even more than it had in the rest of the estate. We have taken the assortment down by 46%. In terms of range in stores, we are talking about adding new range. So there has been quite a lot of change of category for the particular missions in an Express outlet. We changed and cleared 1,200 sort of freestanding displays and other things that were being pushed into a convenience outlet that really are not part of a convenience shop. We have seen that work very well for us. So across all of our business, customer at the heart, very strong feedback. Every single customer service measure improved last year versus a year ago. Colleagues, lots of changes for colleagues. A huge amount of change for colleagues over this last 2 1/2 years. Cannot begin to tell you how much engagement there is with colleagues on that change agenda. It is easy for me to stand here and say, "Oh, we changed the store operating model from night to day." The amount of change that that involves for individuals and for the operation is enormous. Absolutely enormous. If you want to, I can share with you some of the details of that outside, as indeed can my colleagues, but do not underestimate the amount of change. The interesting thing is, colleagues stay highly engaged. Again, 2 1/2 years ago, we talked about actually having lost a little bit of that colleague engagement. Actually, even with all the change that we are bringing in, we have managed to hold a very high level versus any competitive set you pick in terms of engagement. It is pleasing to see that 65% in our survey this year said, "Actually, you have made the job simpler." It goes back to what we talked about before. How do we simplify everything so that they can serve customers a little better? Still means that 35% did not think we did, so we have still got some way to go, but it is not a bad start. The important thing, and the bit that was, let's be honest, a little bit difficult for us is, 2 and a half years ago, not many colleagues were recommending Tesco as a place to shop. That has changed dramatically over the last 18 months. I am pleased to see that starting to come through. We continue to invest in colleagues. You will read in our annual report, we will be very clear, our stated intention at every level in our business. The one thing that you will see from how we engage on reward is the principle applies to every colleague. Myself, to a colleague serving customers on the store, and everyone in between. We want the best people to perform the best within Tesco, and we want to be able to offer them a reward which is in the top 25% of a competitive set within the marketplace. You will see us report against that for all of us. So committed to that. That is where we are for our colleagues. If you take the base pay of colleagues and the fact that we still do pay some premiums, not everybody does now, but we still pay some premiums. If you monetize all of that, at the moment, our colleagues get about GBP 9.04 an hour versus the minimum wage that you would refer to. We also have the pay review, which is in the middle of this year. We have a very strong and very demanded, if you like, from our colleagues, the benefit program that we put together. We have done an awful lot this year on health and wellbeing. One of the things that we talk about inside Tesco is nobody should get hurt working or shopping in Tesco, but also we think that there are things that we can do to help and invest in the health, the wellbeing, and the vitality of our colleagues. January inside our business was our own termed Health Month, and we engaged in a whole series of things with our colleagues for their own personal health and wellbeing, which was phenomenally received. One example that we just put on here is the free fruit that we give to children in store, we gave to colleagues through that month in terms of encouraging them to engage with five a day. We gave 1.8 million pieces of free fruit to colleagues in that month of January just. The other very important thing, and not so often talked about in Tesco, is it definitely is a place where people can get on. I will talk about a couple of those examples in a minute. There have been 4,000 promotions since we last spoke to you about this. 2,500 apprenticeships this year. We are, and we talk very openly about wanting to be a diverse and inclusive employer. I know, and we can talk about the diverse bit in terms of gender, but for me, that is a very small part of this whole point. The point in Tesco is everybody is welcome. Everybody is welcome, and we can talk about that if you like later. Talking about colleagues and talking about strengthening the team, this is where I get to embarrass a few people in the room by showing their picture. These are the changes that have happened in the senior team since we last spoke. Jane, you will have got to know by now, who leads the communication function, joined us from Coke, but leading communications. Alessandra Bellini, who you may not have met because she has only been with us six weeks, so very much new in that sense. Alessandra joins us as Chief Customer Officer, was previously with Unilever. Matt Simister, most of you will know. Matt is sitting down here. Matt is one of those people that has been in Tesco quite a long while. I am pleased to say he joins the executive to run Central Europe. Tony Hoggett, who was the Chief Operating Officer in the U.K. until a few days ago, is in Harvard. Tony joined Tesco, I think, 25, 26 years ago. In fact, the same time as Mr. Tarry at the back there, and he will take over as the CEO in Asia. You may not know the gentleman on the right, that is Guillaume, who is taking over as the CEO of Dunnhumby. He is with Google at the moment. We are at a place where our opportunity to invest and grow Dunnhumby significantly as a standalone business inside the Tesco Group. You will see some changes in how it is we go to market with Dunnhumby and a whole different offer based on Guillaume, his team, and his expertise. Just wanted to say hello and welcome to that. Please, if you have not, I will get them to answer questions you have got for me later, but get a chance to say hello to the team. Moving on to suppliers. One of our young farmers there. In terms of simpler ways of working, 94% of our suppliers are now engaged in the supplier network and telling them it is a very helpful way in which they can understand how it is they should, could, do business with us. We run a huge amount of supplier training programs in order, again, that they can understand and we can understand them better. We have run over 1,000 inductions where we allow people to come in, invite them in, and understand how it is Tesco works so that they can customize and indeed make their business proposition an easier fit in terms of how it can work through Tesco. It is all part of getting that joint understanding of how our businesses work so that we can create new opportunities together. Give you an example, try and always give you at least one example. You know about farm brands, but here is an example from meat. An example from meat. We introduced Boswell Farms, as you know. In the last year, the volume of steak sold by Matt and the Tesco team is up 22%. More affordable because we changed the envelope in terms of pricing, different cuts, different offer, but 22% up. The interesting thing is the impact of that volume on the savings and the efficiency of the supplier. That volume allowed this supplier to invest GBP 1 million in a piece of packaging equipment that increased their speed by more than 25% and the cost benefit from it. If you want an example of how more volume can lead to benefits all the way through, customer got a better deal on steak. We actually grew our volume, enhanced our margin through the operational leverage of that volume, and they were able to enhance their profitability by changing the way they serve that volume. Interestingly, this particular supplier, interestingly, this supplier, in their results announcement this year, put down to their improved performance the change in the relationship with Tesco and the opportunity that Tesco afforded as one of the reasons why their performance had exceeded the expectations of the marketplace. Just one example of how we can work with suppliers in really quite a different way. I am really, really pleased with the progress that we are making there. You see that in trust. Simple, transparent, and easy to deal with. Communicates well and treats me fairly. All right? It is difficult, right? There is inflation there. There are some difficult conversations that are happening and have been happening over the last 6 or 8 months. This is not the easiest of environments in which, but the way that Jason and his team have engaged with our supply partners around that. Our view is we do not want inflation. We want to work together to mitigate it. Let us sit down and say how it is we can do everything, and I mean everything, before we think about having to increase prices to customers, and still be building these sorts of relationships, I think is a testament to the team and the way that they have gone about what has been a very important but not easy transformation in the way that we have dealt with suppliers over the last 2 and a half years. Finally, shareholders. We set out a plan. We set out a plan in October last year. We were running to that plan beforehand. We shared with you the 6 things that were driving our activity and what it is it meant in terms of delivering a margin aspiration of 3.5% to 4%. We are in a good place against that. We are ahead of the milestones we set for ourselves, and we are confident about the plan that we have got and its ability to deliver, even in the environment that we are in. Right? We have announced the dividend policy, and Alan touched on it a little. That is again, a reflection of where we are and where the board is in terms of the turnaround of the business. Now we will recommence in 17-18, and we will grow progressively. The idea in the medium term is that we get to 2 times earnings per share. That is a measure of the confidence that we have in the turnaround of the business and sharing what that means for our shareholders. Right? So that is the business. That is where we are. That is what we have done in terms of performance. That is where we are on the strategic drivers, and that is what it means for 4 key stakeholders in our business. What I will conclude with now is that bit, which is on top of that. Right? It is on top of the plans that we shared with you. Nothing of what we have talked about now is dependent on unlocking the growth that comes from the merger with Booker. It is a very important distinction. Right? It is a very important distinction. In January, we announced a merger with Booker, and we talked about that very clearly in terms of unlocking growth potential for both businesses. We completely believe in that growth opportunity. The work we continue to do about the market, the evolution tells us that opportunity is there and that together we can be a very competitive and compelling force in that marketplace. I will not repeat everything we have said about that. We are at the very start of this journey. This is a conversation that will go on. We will engage completely in the competition review, and then after that is done, obviously, we will take it to shareholders for a vote. But what I thought I would do is just try and illustrate in a slightly different way what it is we have been talking about. You have seen from me, if you were in October, you saw this chart before. We see three ways of creating value in the Tesco business. Product, everything that Jason is responsible in terms of the range that we buy, the category plans that we build for our channels. The operating models in each of the channels. So you go back to our mix diagram, which is there are four categories, there are three channels in the Tesco business. And obviously, we then have the customer. All three of those pillars can create value to the Tesco business. Two and a half years ago, we changed the organization at the top of our business to have a Chief Product Officer, to have somebody chief running the channels, and Chief Customer Officer. So we have been designing this for two and a half years. That is what we have been building in our business for that time. What Booker does is it adds a channel. It has the channel of wholesale, and it adds one more category, which is that element of professional, particularly for professional cooking and cleaning, which is a specialty which exists very well within the Booker business. So what we are doing is we are adding channel expertise, number one U.K. wholesaler, and we are adding some product expertise in terms of that professional offering for food service and indeed for household cleaning into our business. And we think that that matrix is perfect in terms of dealing with customers, be they consumers who come to our stores, buy food for in-home, or actually those people that are involved in that out-of-home consumption in food. And remember, for those who are not familiar, in-home consumption, i.e., grocery shopping, GBP 110 billion a year in the U.K. and flat. In fact, last two years, deflation, so flat. Out of home, GBP 85 billion opportunity growing at 4% with a margin which is higher than the retail offer. So it is the addition from a Tesco point of view of an GBP 80 billion market which is growing and has a profit pool which is greater than retail. Now, the way that we see it is that growth. In the document you would have seen, we have put our GBP 25 million of growth we have put there. We think there is many more. There is much more growth here. We have to prove it and we have to be able to quantify it, so there are hurdles for us to do that, and that is what we will do. The time between now and then, we can look at how it is we can share with you more of those growth opportunities in a way that we can quantify and then declare. We said there are at least GBP 175 million of synergies, and that's after very good due diligence and third-party review. The way that we look at it, I read, like you do, all the different ways of looking at this deal, we're very confident about the synergies. We really are very confident about the synergies. The way that we look at it is post synergies, the multiple here is a little over 9 times. In terms of the value of the proposition, we think it's very compelling, and we intend to build that proposition up to past competition review and ultimately into a shareholder vote. Finally, in order for you to think the way we think about it, because people ask me, how do you think about it? I look at it this way, which is geographically, it's our core, it's the U.K. From a product point of view, it's core because it's food. The channel is new. What we're doing here is we're putting our hand up and saying, actually, there is expertise in running a wholesale food service channel, and actually Booker have it, Tesco don't. We bring together. That's the uniqueness that comes. We think the expertise is leading. It's the leading retailer and wholesaler. We return our WACC after 2 years. There are not many mergers, acquisitions, use your phrase, that gets you to that level. As I say, it's an GBP 85 billion market growing at 3.8%, and we think there's an opportunity to put a very compelling proposition there together that couldn't be done by either alone. That's where we are on Booker, but we're at the start of that particular journey. Ahead of our own expectations, we're being candid with you about that. Profit increase at the group level of 30%, but 60% in the key U.K. and Irish business. We do believe we are creating long-term value for all of our stakeholders, and we'll continue to drive those 6 drivers. We think we're well-positioned. We're not at all naive about the challenging environment we faced, but our supplier relationships have never been stronger. Our control of our cost is very good and getting better all the time. Therefore, actually, how we keep putting the customer at the center of that and make ourselves more competitive, we think we're well-placed to be able to do that. We believe that the proposed merger with Booker unlocks new growth, which comes on top of the plans that we've already shared in detail with the market back in October. With that, I'll stop and invite you to ask us any questions you may have. Was that a yawn? Mr. McCarthy, first up. I didn't know if you were stretching or putting your hand up there. Come on. Bit of both. Yeah, hi. It's Dave McCarthy at HSBC. I wanted to ask you about how you're managing cost inflation. Historically, the industry has always done the cost plus margin approach. If you've got, let's just say, 5% cost inflation coming through, including cost of goods sold, do you think you would pass on 5% or less than that? I'll give the general answer, and Jason, I'm going to ask you to add onto that a little. We start from a place which is First of all, we do reserve the right to challenge whether the 5% is justified. Yeah. Okay. It's actually quite important because otherwise, I think you get some slippage, which is just opportunistic, and we don't think that's right. There's some which should be resisted. But then it's a question of, if that's real, how do we together mitigate it? Actually, that end-to-end review of how can we lower the way we work together in order to make sure that that cost inflation is not passed on in its entirety in the way. Then there's a question, which is, if it can't be completely mitigated, there's a question obviously for our supply partner in terms of the price they choose to charge. Then we have to decide whether it is something that we have to absorb and offset from our other cost-saving program, because actually we don't want to have that position in the marketplace. Everything is about reducing it. Jason, do you want to be more specific than me? Well, I think you've given a very good summary actually, Dave, and that's exactly the approach that we are taking. Anything unjustified gets pushed back. Anything else where we see real cost price inflation, what can we do together, looking at it together, in order to be able to mitigate against it? And that might be looking at the range that we have together, looking at the processing costs, looking at the input costs, and we do take positions and take a view on when we should buy and how long we should buy for. There's a lot that we can do together, and we are, because we don't think it's a good thing, and we're trying to keep it under control as much as we possibly can. Dave, to your point, give you a data point to help you. I've seen two different market views about inflation in March and up to March. One at 2.3 and actually one at just over 3. I've not had a chance to look at both of the bases of those, but let's say it's somewhere in that range. Against that, we're at 0.6. And if you look at, we track the inflation in the basket, take out the promotions in the basket. We think we're the lowest of the Big Four in a measurable way as a result of not wanting to pass on everything. You believe you've got a competitive advantage in dealing with cost inflation and that this period of inflation you can use as a competitive weapon to improve your position? I completely agree with what you just said. You're everything. It's completely consistent with what we've been saying. We've taken our prices down by 6%. The way we can enhance our competitiveness versus the marketplace is not to let prices rise as much as everybody else does, and we think we're well-placed to do that. Okay. Go ahead. Why don't you just pass it? We'll start at the front and work backwards this time. It's been the other way. Thank you. It's Dan Eckstein from UBS. I've got two questions. Firstly, on Project Reset. I think this time last year you said you were down 18% in terms of SKU count. You said a further 7% today, I think. How much further is there to go there? I guess both in sum and across the different categories within the business. Secondly, on CapEx. CapEx guidance for this year is 15%-20% below where you said you thought it would be, and you called out cloud technology. I thought that was interesting. Is there an opportunity for the business to become structurally less capital intensive than in the past through application of that? Thank you. Okay. Jason, do you want to talk about range and Alan, you pick up on CapEx? Is that okay? Get the experts. Yeah. So quite rightly, over the last 2 years, sort of cumulative 24%. The good news is actually our range perception's improved over that period of time. That is also linked to availability improvements in Get What I Want. But actually, the feedback is that our perception has That it's easier to shop, the choice is clearer to see. We think there's more to do, so it's a bit like you keep opening the curtains and seeing something new. So we still believe there's a bit more to go. The big step was in year 1 where we were sort of 18%. You saw what we've done in the last year, and it'll be single digit again, I think, in terms of the opportunity going forward. But still a bit more to do and even so, retain our perception leadership. Yeah. That's right. It's like gardening, isn't it? You're constantly pruning and rotating. Yeah. In terms of the CapEx, yes, we guided and in fact continue to guide to an average of GBP 1.4 billion of CapEx over the three years. But in the year ahead, important that we've always said we will give more specific guidance in terms of the year we're just entering, and that's the GBP 1.25. From a structural perspective, we definitely are wanting to shift what historically would've been capitalized technology spend into expensed technology spend, and that's consistent with the way the technology market is going. We are moving more to cloud-based services. I think from a business perspective, it gives us a greater flexibility as well, because you're not carrying the drag of that inflation. You're able to respond more quickly in terms of where you're wanting to spend money. I think, we will always be a business in which there's quite a lot of CapEx development. Opening a store, keeping a store has got a lot of CapEx. But wherever possible, having less CapEx invested in the business is somewhere we would go. But structurally, depreciation this year is at GBP 1.18 billion, so it's GBP 1.2 billion. We're pretty much aligned with depreciation and CapEx now. But that's really where it is. All of our CapEx needs to hit the returns. Cash payback continues to be one of the key, if not the key metric that we look at in CapEx, yeah. Thank you. You want to just pass it? Well, shall we go by row just to keep the logistics easy? Go for it. Hi. Good morning. Andrew Gwynn from Exane. Just on the, I forget the chart it was, but obviously the volume momentum in the U.K. business is a bit softer. Are you still of the view that now is the right time to recover the margin, the 3.5%-4% margin? I suppose the connected question to that is, what are the circumstances where you take a step back and put the ambition maybe a little bit further out? Look, it is very clear. We are very straightforward. Market momentum in terms of volume was more challenged in Q4 than the rest of the year. Our performance versus the market was still outperforming in that plays into the importance with which volume is a key part of our business model. Does volume stay a focus? Absolutely it does. I think the only nuance we would give you is not all volume is equal. We used to have a measure of volume that sought to aggregate large screen televisions with cans of baked beans. We think there is a more sophisticated way of doing that, and we will go to the scan singles way so that we actually drive volume in a way which does unlock the leverage that we are talking about. We think that is just the next level of finesse and specificity. To your point about margins, the way that I look at it is, if we declare GBP 1.28 billion of profit this year, and we think that we have got GBP 1.5 billion of profit opportunity, of which there is still GBP 1.3 billion left to go, we can get to our margin aspirations through cost, and keep Jason and the others focused on making sure we are competitive to drive the volume. So volume is an important part, but we think we have got enough opportunity in our cost base and the plans that we have got in that GBP 1.5 billion to be able to continue to say the 3.5% and 4% can be delivered from the business, even when the market is a little bit more challenging. Okay? If volumes go negative, is there a point at some point where you just say, "Look, maybe we will kick out that margin ambition a bit further? Well, we'll continue. So again, a bit like to Dave's question is how do we think about cost increases is if we think, and the reason that we don't, remember, we don't target our category guys on percentage margin. If people believe that actually a lower price or lower percentage margin drives volume and the equation is better, they're perfectly at liberty to do that. So that will be how Jason and the others have to think about how it is we play in the market, depending on how it unfolds through the inflationary cycle. I suppose the bit to take is it's a very open, very transparent conversation and decision now where the percentage margin is not the key driver of the decisions that the buyers are making. Right? Go for it. Good morning. Stewart McGuire from Credit Suisse. Two questions from me. On Extra stores, do you think that they need to be improving at a faster clip in order to actually get the volume recovery that you're hoping for, given that they're still quite flat with the exception of Q3? Yeah. A question for Alan. On the pension, you've increased the discount rate by 40 basis points in the last six months, which I think should have about a GBP 2 billion improvement in the deficit, but it only improved by about GBP 350 million. Can you give us some color on that, please? Thank you. Large stores. Actually, I think started at 7.5 negative to get to flat and growing, we think is progress. We think we can enhance the offer in large stores, so they will improve. I think if you take out general merchandising from large stores and you look at the food element of it, you see the growth that we are talking about. That comes to also how it is we augment the mix. That is how we think about the partnerships and how it is we do. Without drawing attention to, we have put a couple of different trial propositions in the marketplace recently that we will look at how it is we play large stores ever so slightly differently. Duncan Hoy, who works in format in the U.K., runs the large stores. He is completely focused on how it is he builds that proposition to improve the performance. To be honest, the critical thing at the moment is that people do not appreciate there was a myth that these were a drag on our performance. They are not a drag on our performance. In the way that we see them in core food, not at all. Do you want to talk about pension? Yeah. A couple of points on pension. This is a market measure, and so in that sense, it increases as the market increases and as yields in the market shift. So it is something which we just reflect the market measure. I have said a number of times, and I will say it again, I think the IAS 19 measure is the least relevant measure of any of our pension, ways of looking at pensions. But it is there and therefore right that we talk about it. But it is very much outside our control because it is market bonds. Then the other side of it, of course, is the asset performance. The asset performance is one which is there for the long term, and therefore the long-term delivery of the pension obligations which are there. They will move out of line at times, and it is very much totally outside our control. We will continue to try to get the most accurate measure of what is the right discount to use for that liability. But it is something which may well move by the sort of quantum that you have seen this month, maybe this period, maybe even more. Really important for us is the predictability of those pension deficit payments. Okay. Alan. Sorry, Edouard Aubin, Morgan Stanley. Sorry, don't sit down. No, sit. You did not show us a table comparing and contrasting your cash flow generation in 2017 versus 2016. I think, very back of the envelope calculation, if you strip out exceptional items, cash, and discontinued operations, I think your free cash was down around GBP 300 million-GBP 400 million. Could you just come back on the different moving parts? You mentioned the cash bonus, for example being one of them Yeah and petrol and so on. If you could just elaborate on that. Yeah. Really the exceptionals this year created, it's an accounting noise, it's a technical noise because in truth, the cash was generated in the business, but the way it comes through the results is that left-hand column is reduced by it because we've taken the charge. Which is why I added those two together. The GBP 2.3 billion of cash generation includes the GBP 387 million of working capital. We are focused on that very strongly, and the cash generation is up 9% year-on-year. There will be some shifts. Sometimes we're dealing with quite large outflows in payments. This year, cash flow, the year we've just entered, we will have the payment of the elements in relation to the SFO and FCA settlement. Those will come through this year. But in a principal basis, we're looking to generate from the cash we make, what we then spend in terms of the CapEx, and the interest in tax, plus any other activities which we have, such as property buybacks. We want to end the year with a positive cash flow and continue to be able to reduce our debt. There'll come a point at which the GBP 3.7 billion of net debt is one which we look and say, "Well, actually, within our capital structure, that's the right level of debt." We're not there yet, but as the business performance increases and as we've got meet our aspirations, that point is certainly one that we can begin to think about. So that's the way we think about it, generate cash year on year. I get what you're saying in terms of it. Last year I did talk about, you'll remember at the prelims last year, we spoke about that we'd done very well in terms of the working capital generation because some of our activities had yielded results earlier than we'd planned. So in a sense, we captured it last year. That doesn't mean we're any less focused on capturing it in the year we've just closed and indeed in the year we've just started. For this year, I know you're constrained in terms of your guidance, but do you expect the underlying free cash to be up or down versus 2017? You're going to have to run it through your own model in terms of what it is. We're focused on generating the cash. We're focused on increasing the, building the margin in line with the aspiration that we've set out, and we've been very clear in terms of where we think the CapEx this year is about GBP 1.2 billion. Yeah. So that commitment to the GBP 9 billion doesn't change. Yeah. GBP 1.2. Just to be clear, GBP 1.25 for the year that we've just set out is what it is. Go ahead. Sorry. Rob Joyce, Goldman Sachs, and sorry, Alan, still standing. Dave's always happy when- Oh, Dave just loved the- there are only two questions nine billion mention. I mean, I guess the question just leading on from Edouard's is on an average basis, over those nine billion, three years of retail cash what does that free cash flow number average out on an annual basis? Running it through my model, I'm getting kind of GBP 800 million a year type number. Is that ballpark? Look, it's a difficult question to answer, but your model, if you look at where you are and you look at how you face, then we're focused on doing what you do. You've got the redemption schedule of our bonds. You know what we're expecting to spend. I've said that the CapEx average will be 1.4. So providing nothing changes, I'd expect a bit of step-up in CapEx next year, the 2018-2019 year, but any more than that, I can't really help you, I'm afraid. Okay. Maybe the Generating free cash, really important to the ability to run the business. Could you give us any details on the sort of the working Cap you expect over the next three years? Average tax and then the sort of restructuring charges? Just send the spreadsheet, and we'll Send it to Chris. He'll fill it in later. Fair enough. Hi. Good morning. It's Sreedhar Mahamkali from Macquarie. Okay. Couple of questions, please. We talked about volume, and you've given a couple of examples Yeah of how and why volume is very important. Clearly, volume isn't quite there. In that context, can you talk about relative volume versus absolute volume? The value growth, just physical GBP. Right. Okay. Value growth and how that helps the margin in question. You talked about cost, I get the point. Talk about P&L leverage in terms of relative volume and in terms of value growth. Okay. That is the first question. Okay. No, go on. Give them all. Yeah. The second one is just in terms of rent savings, you talked about, I don't know, GBP 152 million rent savings in the year. But I remember from the investor day, you told them GBP 176 million back then. Am I missing something here or is it now this year Time period is it going to get to 176? One was a target, one was what we've delivered. Okay. Okay. This year, what kind of number should we be thinking about? This year, can you- Well, look, Please What we have done in terms of the British Land transaction is sub GBP 20 million in terms of the improvement in rent. But for most of last year, we actually had it for most of the year because we bought the majority at the start of the year. So there is very little annualization impact in terms of what we have done. But we will continue to look at it. And finally, I will come back to the one other thing which we should not ignore in terms of that free cash generation or the cash generation, is the property side of it. Because as you have seen, we generated significant value from our property. Some of that we chose to invest back in the property buybacks. But that is a key part of our cash generation to generate value as well and in terms of debt reduction. Mm-hmm. This is the last one then probably we will come back to. Yeah. No, I am with you. Go on. Well with Alan. Going back to Edouard's point, can you quantify the cash bonus? Is that possible or is that? In terms of the The cash bonus what Dave referenced as Yeah, exactly. It's- Versus stock. Yeah, I think it was about 77 million. Delta. About. Okay. Is that right, Kate? Where's Kate? Right at the back. It's a bit more, isn't it? Or That, yeah. Last year was more than that. Oh, it is more than that. But going forward, Last year, it will be about that. Yeah. So we should give the number. Yeah. Because we are talking about the turnaround bonus for last year, which was higher than the ongoing level. Yeah The number I have in my mind is around GBP 130 million. GBP 135 million, I think. Right? Was that twist of equity cash. That's the delta. Yeah, indeed. Sure. Okay. Thanks. Now, going forward. Sorry, I'm looking to the year ahead. Should we go back to Yeah. You were asking about the year. And what we can do on rent is we will take what is delivered in this year, and we add them together and you will be quite happy against the 170, I think. So back to relative volume, and I am going to look at Jason and probably Matt because they can help me with some examples. So the way that we look at it is this. People have modeled this, right? We are pretty confident to the extent of our ability that our absolute size allows for an advantage in buying relative to others, particularly in food. Okay? Now, we have a view as to what that advantage is. We have never said it. It is competitively sensitive, and you would not expect me to reveal that. It is fair to say that by where we were 3 years ago, we had lost that advantage and position in the way that we were dealing with our suppliers. We've, under Jason's leadership, got that back in the way that we've changed the engagement throughout. I do believe that we have a relative benefit in volume that comes in a lower cost price that gives us greater optionality in terms of how we price in the marketplace. In terms of cash, the thing that's really interesting in terms of how this works, and the example I'm going to use, but I'm going to look at Jason and Matt, because they can give you more flavor if you need is, I've seen it work out in agriculture, very starkly. Which is we had a situation before, which is if you were our farmer, we'd agreed with you what the specification was. During a point in time, we gave you a volume demand, which had some tolerances in it, of a certain specification that you were invited to hit. So we might take 60% of your crop because it fell within that specification at the time when we were demanding the volume. As a farmer, your problem is, what do I do with the rest of the volume that came at that time, right? Or indeed, those that are outside the specifications that you've agreed with Tesco. What we've done over this period is work with them to say, actually, how do we increase with our select partners, how do we increase the volume we take? So increasing the crop utilization is the way we talk about it. But also through our proposition in terms of Perfectly Imperfect and others, take a greater range of specification. The things that have really struck me is when there are crop flushes. So we did, I think we said 9 last year. We've done 3 or 4 already this year, so cauliflowers and carrots are the last couple. There've been some on English strawberries just recently. An opportunity where a farmer will come and say, "Actually, sun's earlier, crop's earlier, there's more volume." For the farmer, that's a nightmare. Because the opportunity is either I give you the 60% you wanted and the rest is wasted. Terrible. So profitability, but also environmentally wasted. Or they discount to the marketplace in order to sell that volume. So what we've been doing is saying, actually, we'll take the volume. So we get the benefit of a lower actual price because we take a greater volume. The farmer gets certainty because he sells all the crop. We then open our stores to give the customer a better deal in terms of strawberries or cauliflower or carrots. So that's when we see absolute So with the last crop flushes we see, I get a piece of paper that says, benefit for the farmer, benefit for Tesco in terms of GBP, right? Also what the benefit is for the customer. So that's where we start to see the relative volume opportunity that we are for our suppliers translate into real money in terms of a benefit that we can enhance the margin with. Right? I'm looking at the experts in the room in terms of Matt and Jason to either correct me or build on me if I've got it wrong. No, you have been listening very well, Dave. Fair enough. All right. Clive Black from Shore Capital. You can have a rest here, Alan, as I do not have a spreadsheet. Okay. Sit down. Following on from Dave McCarthy's question, Dave. In terms of inflation, managing inflation, it is interesting you said you are inflating more than the Big Four, but you did not mention the discounters. I just wondered in that respect, how you expect customers or shoppers in the U.K. to face into inflation. In that respect, what do you see in your range from a proposition perspective, more private label, fewer international brands, more British brands? Yeah. I think what I said was that we were inflating less than the Big Four, not just to correct. So it is less than the Big Four. But Clive, you are spot on. We can see what is happening in terms of customer buying behavior against the discount offer as people feel the pinch in terms of inflation. The opportunity for us is what do we do about that? We did it with farm brands, and that is using an exclusively own brand to access a price point in order to offer customers, and we have been very successful with that. We have got some thoughts and ideas about what it is we need to do to be competitive, because whilst we make the reference here, just to be really clear, we see all of that as the competitive set. We, like I suspect others, need to think about how it is we. At the end of last year, we could see switching in favor of Tesco from all of our competitive set. In the first part of this year, we have seen that be different across the marketplace against some of the discount offers. So we need to sit down, and we need to be clear about how it is respond. But you know that I am not going to tell you exactly what I am going to do about it. I will stop just there. Go for it. Hi, Dave. Hi, Alan. James Tracey from Redburn. Two questions from me. The first question is on the U.K. profit bridge. It looks like most of the cost savings were reinvested back into price. The improvement in margin could be put down to improving volumes and mix. Given that is the case and volumes have slowed a bit, is it fair to assume that you need to have positive volume growth to get to the long-term target, or are there other levers you can pull? The second question is on the Tesco Bank. Lending growth was 17% over the full year. Have you seen a slowdown in the exit rate of lending growth? I am basically asking, are you becoming a bit more cautious when it comes to lending money, given that the bad debt ratio is starting to tick up and the economy seems to be getting a bit more difficult? Thank you. I am going to ask Benny to answer the second question, if that is okay. Sure. Because Benny is- Where is Benny? I know he's here. There you go. Let me answer the first one in terms of the. It's interesting. Most people, James, talk about it and say the only way that we're achieving it is through cost savings, whereas you've gone the other way. I think there is definitely some and some, and that's something which we definitely have to look at. We've spoken about the volume, we've spoken about the importance of it, and we've also spoken about within Maximise the Mix, how increasingly we will be selective and choiceful as to how we improve the overall business performance by looking at those different channels and categories. I expect to see there will be elements of both as we go through, but the core underpin, and this is really important, the way we look at it, the core underpin to everything we're doing is those cost savings, and we've made the GBP 226 million towards the GBP 1.5 billion. And we'll continue to look at those and to try to achieve them as quickly as we can and as effectively as we can. Mm-hmm. Benny, go ahead. Yeah, sure. On lending our appetite, we've had a very conservative risk appetite on lending, both unsecured and secured lending. We're able actually to continue to grow the lending and the number of customers we serve without in any way breaching that risk remains really very prudent. We wouldn't see a slowdown for us, even if there's a market slowdown. Okay. I'm going to keep moving back. I'll come back to you at the Could you do me a favor and pass back? Sorry, Bruno. I set a trend, so it might mean you get the last word. Niamh McSherry, Deutsche Bank. I have three questions. Actually, I did look at the chart and see it a little bit differently to James. My question was on the volume and mix benefit of about GBP 500 million in that chart, it looks pretty good for a 0.9% like for like in the U.K. and ROI. Is that the type of volume and mix benefit that you might be looking for going forward, or was this year exceptional? That was the first question. Mm-hmm. Okay, Niamh McSherry. The second one was actually about expensing IT spend versus capitalizing it. Give us any indication of the magnitude in millions of GBP of that kind of shift in approach. The third one is on your Maximise the Mix chart, can't help noticing that online as a channel is still all red. You've made a lot of changes in the last 18 months. Are there more changes that you can make to move some of those boxes out of red? Why don't I take one and three, and you take two. How's that? You're right about the volume and the mix against the like for like. The way that we see it now, but the market may change given on Clive's question, is we set ourselves a point, which is how do we rebuild the volume in total and now more selectively and more appropriate by product category because that's where the real leverage is. We need to get more deliberate and choiceful about how we do that, and I'm pleased with the progress that we're making there. But the way that the plan worked, the way that we'd set the work was actually we were 7%, 8% more expensive than where we wanted to be for customers. Every bit we saved and every volume that we grew went into funding that 6% price reduction that you've seen over those two years, right? The idea was that as we then carried on making those savings and keeping that volume, that actually more of that saving could go to being able to recover the margin because our price position was again competitive. Now, everything's dynamic in retail in that sense. So we were really happy with where we got to, and in our plans, that's exactly how it plays out. And we have the wherewithal to be able to change that cost saving into more competitiveness to get the volume and the mix right against the 3.5% and 4%. Now, if the markets move, we will have to adjust, and we will have to think about how it is we drive volume differently in order to get that element and the contribution from that, or indeed, how we save more money in terms of cost in order to be able to give us the optionality. That is how we think about it. It is fair to say that the market is moving, particularly this in the last couple of months, and we will need to think about whether we have to adjust it. Based on last year, we were happy with the balance that we got. What was the third one so I can do them both at the same time? The third one was online. Mix. Online. Look, online, remember red is less profitable than the average, not loss-making. I suppose the way that I would look at it is very happy with what we have done on grocery home shopping. Really very happy with what we have done on grocery home shopping. The particular challenge in online for us is still in general merchandise. We have made some changes. Price Lock and other things, we have made some changes. We have also made some changes in terms of the impact of indiscriminate promotional activities, so a Boost in that sense and what the impact of that is. Do we lose less than we did a year ago? Yes, we do. Do we get to a place where we would want it to be? No, it is not. There is quite a big program of work going on to address it. Within it, I am really quite comfortable with where we are on food, more challenged in the general merchandising space. Okay. In respect of the technology and the spend, we originally expected CapEx to be GBP 1.25. It came in at GBP 1.2, so it is tens of millions. Much more conceptually is within the technology area, we are trying to expense rather than to capitalize because of the flexibility it gives us. Over time, there clearly are elements of CapEx and technology CapEx, which you are required to capitalize. So it will be some and some. In the year, it was probably tens rather than anything more. Tens, but probably going up. Mm-hmm. Directionally going up. Yeah. Always consistent within everything we have said in terms of our ambition as well. We give the best possible view as well. Do me a favor and pass back that way. Sorry. Welcome. Thanks. Good morning. It is James Grzinic from Jefferies. I had a couple. I guess firstly for Ireland, given that Dave is distracted a bit. Sorry. Cash exceptionals. The year ahead, are they going up or down relative to the year just past? Let me talk about rather the year past had some definitely. The cash exceptionals this year, we know that we have got the GBP 235 million, which will come in the current year. Okay. The others will flow through to a certain degree. Some of them are bank. We called out the two bank exceptionals. That was in aggregate about GBP 80 million of the exceptionals. So by far, the majority of those are either bank related and therefore, if you like, separated from the retail cash flow. I can clearly see the GBP 235 million coming through. Little of the other restructuring will be carried over into the year that we have just entered. There will be some, but a lot of it has been spent in the year. Fair. For Dave, first question is, have you recovered any of the scale advantage on sourcing at all since you have been at Tesco? Is the 3.5%-4% ambition underpinned by going back to the historic advantage Tesco had from a sourcing perspective? Lastly, it is very evident that consumers are changing, switching. Over the past three or four months, are you seeing a change in behavior in your stores as well? Okay. Look, I'll look to Jason. I think what we've done, if you remember, is we went through a difficult process of streamlining the number of supply partners in terms of setting out how we want. So actually, for those supply partners who are now able to rely on the growth opportunity of Tesco, we think we're restoring some of that benefit in terms of supply cost. We think that there's more that can be done there, but it's much more in terms of how it is we run the business together. So the examples we shared with you all the way through last year about how it is we took stockholding points out between ourselves and our fresh food supply partners, so that actually we could flow straight from Spain into store, take out 2 days, take out stock, benefit to everybody. Those are the things that we think we now need to focus on in order to rebuild an advantage which is unique and exclusive to ourselves. By taking more of the crop into the Tesco offer, we do reduce that opportunity for the market to benefit from the marginal volume that Tesco doesn't take. That's a very deliberate and very important program of work we've got. The reason I say that is it's not just about a scale buying advantage. It has to be an advantage which is from how we run the business together, so that you've got that meat example where, it's interesting, our supply partners are saying, "My business is now more profitable because of the way Tesco runs its relationship with me." That's as important to me as rebuilding our profitability in meat as well. There's a lot of programs there, and that's what Jason and the team are focused on. In terms of changing behavior, we've definitely seen some. We've seen some basket composition changes. I think what we've seen, as well as the things that are evident is, as there's been cost inflation, we've seen different activity. We've seen an increase in promotional activity across the piece, and that normally comes in the form of a supplier saying, "We need this cost increase, but here's an increase in the promotional investment to try and" And you get really big sort of swings in terms of promotional activity after that sort of cost increase. We've not done that. We haven't done that. We've said, "Actually, we don't want" Because, to be honest, all you're doing is increasing the cost increase to pay for the promotional activity. We want to be lower for more consistency, so we don't want that base inflation. We've seen, therefore, activity around promotions, which is driving some behavior, and we can see that in how our brand guarantee responds as people get the equalization from us. That's the bit that we're watching. That's the bit that we're watching, because history suggests that that's a 3-month phenomena, and then the supply partner pulls the promotional investment, and the price has to settle. We've committed ourselves to try and belong to. If it doesn't, if it carries on, then we'll have to think about whether we change. That's where we are. That's the dynamic. Thank you for that. Are customers starting to trade down within your offer? Are you seeing This- picking up on that? The last data I have seen, I cannot say to you that there has been a trade down. But what I can tell you is the increase in own label participation has increased, but that is on the three tiers. So it is not a trade down, I think, in the way that your question means. But there is a movement in the mix towards own label as we improve that offer. Jason, is that right? Yeah? Yeah, I mean, Easter moving obviously makes a big Yeah, big difference. Yeah. difference. Yeah. Customers are more able to do a bit of Easter shopping with us than the other three rather than in the discounters. You, because that is moved out of the period, you will see. Let us put it this way, it will be a very interesting mix really for us. Yeah. Thank you. Okay. I missed down here. My apologies. Please. Mike Dennis from Lazarus. I fail to see where the operational leverage is in the second half of Tesco U.K., and I was wondering if you could help me. You state in your slides that rents have gone down. You have increased subletting. You have got more ATM income. You have got less CapEx going into the U.K. You have got lower amortization. I cannot quite see in the second half where any of the operational leverage, given you have talked about higher volumes is. Going forward into 2017, without any volume growth out there in the market, that is the whole market, I am failing to see where the operational leverage is on the business. That is the first question. The second question is, given that and what you gave on the Capital Markets Day, is it a fact that the cost of sales ratio in the U.K. is just significantly too high, like at 31% cost of sales? What you really need to do is go back to looking at the stores and FTEs again and saying, "I have got to take this whole business down a whole level- in order to make it operationally viable in a market where Aldi operates on a vastly lower level of operational costs. I was just wondering on those two questions if you had any thoughts. Look, the two bits of it, the way that we look at the leverage in the U.K. in the second half, the bit that you didn't talk about is what it is we've been doing in terms of enhancing the offer. Actually, the gains that we've made, we've invested GBP 300 million inside the U.K. in terms of farm brands. We saved GBP 455 million in cost in total, and you've seen the profit enhancement. We can see the leverage in how it is we run the business. If you go to your second question, I don't disagree with your cost to serve idea. That's where the 1.5 billion thought came from in terms of benchmarking the marketplace. You've seen, we announced after October, changes to the store operating model. We've given you what the detail of that is. We've just announced a change and a further rollout of that to more stores in the U.K., so that plays into this year, and we've now started to do the same thing in our Express offer. We're quite confident about the things that we have that either lower our cost or improve our relative leverage in the U.K. business. But it isn't, because the 31% has stayed the same. The annualized GBP 500 million is really a cover for the increase in the underlying costs. Do you want to I don't see where the progress. I'm just trying to work out exactly where the progress is. Well, the progress is clearly, Mike, from GBP 500 million of profitability to GBP 803 million of profitability. That's the progress. We can talk about different elements of it, but fundamentally what we're doing is we're reducing the cost of our business by making it simpler. There will be some elements where costs go up. There will be some where costs go down. But we're overall aimed at reducing the costs of our business. We recognize that some of our competitive position needs to become better, and that will reduce the overall margin that we make from what we sell. But we recognize that by becoming more competitive, we sell more, so we get some of the uptick. But that's where we are. We've increased it by 60% year-on-year. We've rebuilt from a base of zero, and we're confident about the year ahead. Yeah, but if I'm wrong, then in the cashflow, the retail cashflow wouldn't go from GBP 1.3 billion down to GBP 500 million ex the bank. The cashflow turnaround is massive in the U.K. retail business, according to your figures. If you're right, the cashflow should be going up or sideways or- Sorry, I'm genuinely not getting what you're saying because we've set out, we've shown you One of them isn't right. Yeah, okay. Either you're not making the cash from the retail operations in the way, or the one-off costs going through your business, the cost benefits are the cost benefits to the retail operating profit, and the operating leverage is quite small. Which would mean that in going forward, if the retail sales don't pick up, then you're not going to have much operating leverage going forward, therefore, retail margins should go down. Yeah. We're confident. We'll come back and talk about it next time. I'm getting the 5-minute tick. Can I just check how many more questions there are in the room? I know Bruno's got one. How many more burning questions, because we're Is that okay? Mike, what I suggest we do is we follow you in detail with Chris to try and triangulate the question you've got. Should we Is that it? Are we now just Bruno? Perfect. Oh, 2 more. 2 more. Yes, please, and then pass the microphone down here, Steve. Thank you for taking my question. Yeah. Xavier Lemonnier from Bank of America Merrill Lynch. One question about the international, actually, because we focus mainly on the U.K. Yeah. Can you elaborate a bit more? It seems like U.K. being the focus has been that international is less important to you, and then if you were to potentially look at the different countries, can we get a bit of insight of where you think you are very committed and where you are less committed? Okay. So after the business review, we have a retail operation, which is U.K. and Ireland, Central Europe, Asia. We are committed to all. We changed the management team so that he is responsible now completely for Central Europe, Tony Hoggett for Asia, and Matt Davies for the U.K. and Ireland. We have got a plan as a business that creates value in all three of those businesses going forward. First time we have had that in Tesco for quite a long while. The levers we need to pull, different in different places. If I talk about Central Europe, what we have got is we have got three markets in terms of Hungary, Czech, and Slovak, which are growing share, doing really very nicely. We had a competitive reaction in Poland because we had 18 months where we did really well, and now we have seen a market reaction, and we need to think about how best we do that. That is what Matt Simister is going to do. The fact I was there last week thinking through those plans tell us we are going to respond in Poland, and we have a plan that we have to deliver. In Asia, we see lots of growth opportunity, and that is where Tony Hoggett is. Thailand is our second largest business and indeed our most accretive to margin. So there is a return to be had there. We are growing share there. The market is a little bit softer than we thought because of what has happened there, and it is definitely a one-off. We have made a really quite a big turnaround in terms of the financial performance of the Malaysian business. So actually, there is not any more focused here than there. I am really quite happy with the portfolio we have got, with the management we have applied, and the plans that we have got. We have just got to get on and deliver them. Absolutely no issue in terms of something becoming less in focus as a result of what we just talked about in the U.K. Okay, Bruno Monteyne, last but not least. Good morning. Bruno Monteyne from Bernstein. Two for me. Could you comment a bit about how the market is changing? I mean, for at least three or four years, there was always somebody losing very badly in the market, one or two. Now all the Big Four are growing at least one. No, only one is fairly close to that, so. The discounts are still growing. So what is changing in the way customers are shopping or the way the retailers are competing that suddenly means everybody is doing relatively well? The second one is to have your margin target of 3.5%-4% out there. If I can check, that is two years away from now. Should we expect relatively equal pacing between today and then of getting there? I think we are all still seeing a change in the dynamic of the marketplace. I think there are still sources of volume that are out there, in terms of sources of business for both the Big Four and indeed, the discounters. But it is dynamic. I am a bit where Jason is. I am going to wait until Easter is gone and have a look at the whole basket, because at the minute, we are reading periods which are not like for like. What we should do is take a look post-Easter and actually then have enough to say, "Has there been a shift that requires a change in approach from us?" But at the minute, if I look at our business in terms of customers, if I look at the penetration, if I look at the frequency, and if I look at the basket, the dynamics have not changed massively from where we have been. I think the challenge for all is in the penetration as choice gets fuller. But we will see. That is why we need to build a more differentiated brand, i.e., a reason why they are in Tesco and not somewhere else. But I think to your question, I think we should probably follow that up probably in 4, 6, 8 weeks' time, because I think we would be able to give you a better answer, I think, to your question. Do you want to? Yeah, look. We have set out ambition. As you say, there is less time remaining between now and then than when we announced it 6 months ago. We are aiming to improve our business year on year. How that falls exactly, we cannot give color to it, but it would be very surprising if from 2.3 to 3.5 or 4 all happened in the final year. It would be really surprising. Look, to Alan's point, I think what we can and what we should say is, are we confident about the 3.5 or 4 even with a challenging environment? Yes, we are. Yes, we are. First step, another good step in the right direction, ahead of where we said we would be, and therefore, all other things being equal, we should be more confident about getting there than less. And we are. We're not in the game of sort of giving detailed month-by-month, year-by-year, quarter-by-quarter progression, because I want to have the flexibility to deal with the market that you just talked about. Point to point, are we clear that by 19/20, we get ourselves to that place? Yes, we're clear. And we're confident about this year. Yeah. Right. Ladies and gents, thank you very much indeed. My parting thought for you is this. 2.5 years ago, when we first spoke to you, we had a business that was clearly challenged in lots and lots and lots of ways. It was struggling. We went through a process of stabilization, and then we went through a process of saying, what is the medium-term aspiration for this business that could create value? We shared that with you in October, and we articulated it into six strategic drivers in order that you could understand what it was we were trying to do as management. Importantly, that plan, when we deliver it, creates a huge amount of value. Right? A huge amount of value. And let me tell you, we are completely and utterly focused on delivering that value. The first step of that, since we talked in October, we think is ahead of where we said for ourselves, and that just makes us more confident about this year and the year ahead against the aspirations we set for our business. On top of that, thinking about the medium and the long term, we are opening up the opportunity of greater growth in what we think will be a margin-accretive space with a merger with Booker. We are at the start of that journey. We will continue to have a very small group of people that are working on developing those opportunities, in the same way we have managed other issues through the course of the last two and a half years. Then we will bring that to our shareholders at the right time, post the competition review, for them to vote on. The management team, and I am not just talking about myself, as a management team, we are completely energized and excited by the opportunity that that affords us, and actually very confident that when the deal is done, actually that opens up a real big opportunity for Tesco into the medium term. My aspiration is not just the improvement in the next two years, it is about how we set this business up to be a long-term, growing, sustainable business in the U.K. Booker, for me, is a really very important and key part of doing just that. Thank you very much for your time, your effort, your questions, and your support. Appreciate it.

Data Source: Quartr Last updated: Apr 12, 2017

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