Tesco PLC (LON:TSCO)

H2 15/16

← View all transcripts

Apr 13, 2016

You all right? Okay. Good morning. Good morning. Good morning. Okay. Always a little encouraging for a little bit of audience feedback at the start of the day. About 16, 17 months ago, Alan, myself, and the leadership team of Tesco, who are present here today, set about trying to transform our business. Together with our colleagues, we set ourselves a new purpose, and we talked about what it would mean to put the customer right back at the center of absolutely everything that Tesco does. We write that purpose in terms of serving Britain's shoppers a little better every day, and we use it to guide everything it is we're trying to do as a business. I'm pleased to say that over the first full financial year where we've been following that trajectory, that we've made a significant amount of progress. What I'm going to try and do in the first part of this session is share with you why I think we've made a significant amount of progress. Then what Alan will do is he'll share with you the detailed results. I'll then come back, and I'll share with you what I think the next step is on that journey, because it's only one year of a journey of transformation. There's more that we need to do, and we'll give you some insight into how it is we're thinking about that given the market situation in which we operate. What I'll then do, because every year I ask the exec team to come to the results presentation, it gives you a chance to engage with them. But what we will do is I will invite the three CEOs to join Alan and I for the Q&A so that you can get a chance to ask questions, not just of myself or of Alan, but indeed of Matt, of Trevor, and of Benny, in case there is something in those particular operations that you would like to ask for. I will try and curate that Q&A so that we get the right balance of input and questions. Is that okay? As I say, a year of some significant progress. If you have read the release, and I am sure you have, we talk about a broad-based improvement. You see the trajectory here over 4 quarters for the U.K., which returned to growth in the fourth quarter of last year on a like-for-like basis. Significant improvement in the Republic of Ireland. In fairness to Europe, 4 quarters of growth, but strengthening as we go through the year. You see the turnaround that Trevor and the team in Asia have been able to deliver. So across all geographical segments of Tesco, we have made the U.K. a priority for reasons which we think are obvious, but actually, our improvement geographically is very, very broad-based. That means, therefore, as a group, there is a turnaround in sales momentum. So in the fourth quarter, the group like-for-like was 1.6% positively. At the same time as doing that, we have improved the profitability, and you see here the trajectory from the second half of 2014, 2015, through the first half and into the second half. As we have systematically invested, looked for a return, and then invested again, that has been the cycle through the last year. That is the cycle that we see happening in our business going forward. We have generated significant improvements in our cash. We talked about it at the half year. We have continued to do that. GBP 2.6 billion of retail operating cash generation is up nearly 40% year on year. Very, very, very important, the key stakeholders in our business, customers. Our measure of customer satisfaction is a full 5 points higher year on year as people respond to the improvements and the changes that the team have made. Really significantly, colleagues, what I have shared with you here is our internal employee satisfaction survey. It is called What Matters to You? We run it every 6 months, and I have showed you the trend from 2014 to 2016. Through a year of absolutely huge amount of change, some of which had dramatic impacts in terms of colleagues, numbers of colleagues, entitlements of colleagues, actually what you see is the satisfaction of our colleagues in working for Tesco and recommending Tesco has improved significantly over the last year. Very important for us in terms of the business. Obviously, our suppliers, our partners. We run a viewpoint every 6 months, and what I have shared with you is where we started from full year last year at 51% of our supply partners being satisfied with the relationship that they have with Tesco to a full 68% now saying actually they see a significant improvement in where we are and a greater level of satisfaction. More for us to do, but a very significant bit of feedback from our suppliers in terms of what it is they feel about working with Jason and the whole Tesco business. As you know, we set ourselves three priorities on which to garner our efforts and focus our time. Regaining competitiveness in the U.K. business, protecting and strengthening the balance sheet, and rebuilding the trust and transparency in the Tesco brand. Why don't I update you in the way that I've done a few times about how we've progressed on those? We said our turnaround would be volume-based. All right? Here you've got the volume since Q1 2010-11, and you see the trajectory. In Q4 in the U.K., 3.3% volume growth continues the improvement since the second quarter of 2014, 2015. So a very positive improvement in volume. A very significant increase in the number of transactions in the Tesco business. That's the reason why we talk so openly about more people buying more, more often in Tesco being what's driving the turnaround of our business. But very happy with the trends that Matt and the team are driving in the U.K. business. We've shown you these metrics consistently every time I've been on my feet. Our service levels continue to improve. Our availability continues to improve. Our price perception continues to improve, and our satisfaction with ranges continues to improve. All right? So a consistent set of measures that we set out at the start about how it is we would track the improvement in our offering in the U.K. business, same questions, same consistency, tracked weekly. That's the improvement that the team have been driving through this first year of transformation. The service comes from, I've given you a new term here. Some of you are familiar with it. We talked about the 9,000 extra customer-facing roles that we invested in. It was the first thing that we did in the last quarter, the latter part of 2014. Within Tesco, we take all of the hours that we invest in our stores, and we turn it into, with a number of other things, into what we call a productivity index. When we started this, the productivity index was 114 or so, which is, Tesco, 100 is supposed to be what you need for those who would take the model. Historically, Tesco had always wanted to outperform the model way before my time and would target to be 104 or 105 as a good lean way of running the operation. We've taken that all the way up to 114 or 15. The investments that we've made have taken us back down to that sort of world-class level of 104. So real progress there. I've already said to you about what the colleague engagement is, and the interesting thing is what we see in terms of our customer feedback. Customer satisfaction full year, full 5% better than a year ago. So the customer feedback about their satisfaction of shopping with Tesco is definitely improving. And I've given you there where it was in October of 2014 as a benchmark for where we started from. In terms of availability, we have driven, and the team has driven the availability to new heights. The sales-based availability, if you remember, first time I stood in front of you, we talked about the fact that we were always measuring availability from our availability for grocery home shopping picking, very robust base. But the question was, what does it look like in the evening on a Thursday? We talked about sales-based availability at a more challenging time within the week. When we started that, it was in the low 80s, and we have driven that to about 96%, and that is just about where we would want it to be. Any more than that, we would have unintended consequences around waste, but that is a significant improvement in sales-based availability. All of the work that has been done behind the scenes to put efficiency back in our operation, we have done that whilst we have taken our stock down also significantly, and you have seen that in our working capital. And part of that has been the work that the team have done around ranging, has meant that, and again, forgive the jargon, this idea of optimum shelf fill capacities. How many of the lines that are on a shelf have the right amount of quantity in order to have 40% of weekly sales available without it needing to be replenished? That was down at 82% before we did the range review, and it is now driven back 94%. So we are getting our operation to be leaner, to be simpler in order that we can serve customers better. And so really pleased with what the team have done on availability. On price, I know there was and there always has been this desire in the industry to talk about hundreds of millions that you have invested in price. From day 1, I have always tried to share with you what I think is happening in price in a way that customers understand it. So the basket that we talked about, excuse me, in August of 2014, typical basket in Tesco would have cost you GBP 46.98. If I look at that same basket, same things in February of this year, GBP 44.73. That is a little bit more than 4% reduction in prices in Tesco through the course of the change. We said that we would take indirect money, and we would put it into shelf head prices. In the course of the last year, we have issued 37% less coupons than we did the year before. And interestingly, when it comes to multi-buy promotions, you see what we have been doing in terms of making our promotions more sparing and more specific. And in the fourth quarter, for example, we ran a third less multi-buy promotions in our business than a year before. Everything we said about getting to simpler, lower, more reliable prices is what is being driven through the course of this year and got us to a place where shelf prices are more than 4% lower than they were in August of 2014. We introduced a Brand Guarantee, and Brand Guarantee is unique. I am sure you are familiar with it. But when you look at it through the lens of a customer, brands are incredibly important. You know how strong brands are in this market and indeed all the markets that we operate. We are a big supporter of brands. For customers, knowing that irrespective of what might be happening in some of our competitors, they will walk out of our stores never having paid more for their branded shop is really important and really unique. The fact that they get the discount immediately is seen as a very significant help and appropriate from Tesco. We are delighted with how it is working. It is something unique and helpful from Tesco. We talked about the range. We set ourselves 33 categories for us to review. We have done all of them on time and in full. The average range reduction that has come from that is around 18%, is in fact 18%, after taking account of a little bit more than 2,000 lines that are completely new and a new innovation for customers. You saw in terms of satisfaction, actually, because we thinned it out, because we have given more space to the things that really matter to customers, actually, their feedback on our range is that it is better, simpler to shop and more appropriate for what they want. The final thing I thought I would say in that sense was actually around Christmas. I was thinking about how I could capture this for you, and every time I tried to draw it started looking like an electricity circuit diagram. What we have done is we have thought very clearly and carefully about how it is we work with our suppliers. If I were to show you the KPI there, our forecast accuracy with all of our suppliers over Christmas was 10% better in Q4 this year than it was a year ago. As a result of that forecast accuracy improvement, the stock that we have had has been more appropriate for what it is we wanted. As you walk through every single chain and piece of the supply chain into store and beyond, we have improved the operational metric. Sales forecast accuracy up 10%, availability in store all-time high, a full 4% higher last Christmas than the Christmas before, with significantly lower stock and, not insignificantly, delivering 500,000 more home deliveries as part of our Christmas offering. One of the things people say, what is driven it? The operational, the simplification of the operation, working with partners, flowing it through, has had a material impact in the numbers that you are seeing today, with more for us to do. Second priority of the balance sheet. You know we talked about the pension. The transition is complete. Alan will take you through the numbers in a second, but that is now complete. We have completed the sale of Homeplus, as you know, and we have been very disciplined in capital. We spent exactly as we said we would and driven a return on that capital much more aggressively. Let me say a little bit more. The other thing that we have talked about is our strategy on product. You have a chance to talk to Steve if you would like. In March, we talked about the 21 superstores that we bought back. In October, we talked about actually what we had done in terms of selling some of those sites that we had decided not to develop. In February this year, we acquired actually two joint ventures, which brought another 36 superstores and another 13 Extras back into our own ownership. That allows us to control our future costs in the way that we talked to you about before. In fact, over this period, we've increased, in the U.K., the proportion of our sales space, which is freehold versus leasehold by 6%. So we've invested in our future by buying back good stores so that we own them and give ourselves some insulation from those upward only rent reviews. With our suppliers, we announced during the year a transparent, open set of trading terms. We said for any, and we've got many suppliers who are 100,000, that we would pay them in 14 days. As of this last period, I can confirm to you that 100% of our suppliers who are this size have been paid in 14 days. Our on-time payment across our whole business, in terms of numbers of invoices, is in excess of 98%, significant improvement. We've worked with every one of our suppliers to get this right, and that's part of Jason's push to simplify the commercial approach. A new partnership arrangement, moving from back to front, moving from 24 forms of commercial income towards the destination of 3. We built a supplier network. It has more than 5,000 suppliers in 50 countries. It's a way of suppliers being able to share their experience of working with us and actually sharing ideas, much appreciated by them. We also offer supplier training, a gateway into Tesco, helping suppliers understand how our business works. We are a big business. We need to recognize that. We help our suppliers understand it. As I say, there's encouraging progress in terms of the supplier viewpoint in the last year. The feedback we're getting from our suppliers is significantly more positive than where we were a year ago. When it comes to the brand and the trust and the transparency, you know about the charity partnerships. It's something that's very important to us at Tesco. Every colleague, very active. A very significant partnership we have with Diabetes UK, British Heart Foundation. We've made a very big commitment in terms of our community food program. The commitment from Tesco is that no food which is safe for human consumption will be wasted in our stores by the end of 2017. We're the only people that actually issue a food waste in our own operation report. We've been doing it for a number of years. We're actually world-class as a percentage, but a very small percentage applied to a very big business is still too much food waste. As a team, we don't want to do that. We built, in a very innovative way, a way of providing food which we can no longer sell because it's reaching the end of its code, is donated directly to charity and therefore is not wasted and is safe for human consumption. We've rolled it out to 100 stores. It'll be in every large store by the end of this year, and it'll be through the estate by the end of 2017. You will have seen our Bags of Help local community scheme, where all of the money that comes from the bag levy is put back into local community projects voted for and chosen by customers in that particular store. Now, people measure this in very different ways. I've seen a number of you use different sources. I've kept this consistent with every one we've used in previous. It was all about the brand index score, which is an overall measure of brand health. If you remember from January 2014, October is the dip post announcements around the accounting issue that we've had. What you've seen is through the course of this year, all the way to February, that we've managed through our actions, through the experience that people have had of Tesco, to start to rebuild back that trust. We get ourselves to a place in February of this year where we're ahead of where we started in January 2014. Lots more to do, lots more to do. But considering where we started this in October of 2014, actually, some indication that we're getting some things right some of the time. Against those three priorities, have we regained competitiveness in the U.K.? We think we have. The transaction growth that you see in the fourth quarter, one indication of that. Have we protected and strengthened the balance sheet? Look, Alan will take you through the numbers, but our total indebtedness is down by GBP 6.2 billion in the year, by about 40%. That's after we took more than GBP 1 billion onto the balance sheet as we bought back the properties that I've just talked about. So a significant amount of work and good work in that space. In terms of trust and transparency, customer, colleague, and supplier measures have all improved through the year. So when we say in the announcement it's a year of significant progress, that it's broad based, it's the U.K., it's international, it's all channels, and it's against the three priorities we set for ourselves, that's the basis on which we make that statement. With that, I'm going to pass over to Alan, who'll take you through the full year results. There you go, mate. Thanks, Dave. Morning, everybody, and thank you very much. How do the priorities translate into the results? You've seen the numbers. I think first thing to say is that we're comparing against a 53-week last year, which was our statutory week. But wherever we need to adjust, we will compare on a like-for-like 52-week basis. Therefore, throughout all of this, we will compare wherever we should in terms of profit and loss against 52 weeks. The other thing is, obviously, currency is part of our results, and where necessary, we will compare against constant currency. The main issue and weakness we had in currency was the relative sterling/euro change, which happened during the course of the year. Sales, constant currency, just up 0.1%, and our profits up 1.1% to GBP 944 million. We have some exceptional items, and I'll come back and talk about them. A credit this year compared with a very significant debit last year. We have our statutory operating profit, which is at just over GBP 1 billion. The EPS we will come back to as well. Segmentally, we look at it across the three key parts of our business, the U.K. and the Republic of Ireland, the international business, and the bank. The U.K. and Republic of Ireland had a margin recovery. We had 81 basis points recovery from first half into second half. Again, I will come back and talk to you a little bit more about that. In the international, we saw an even stronger recovery in the first half to second half, with 138 basis points improvement from H1 to H2. The bank results saw the impact, the beginning of the impact, of the interchange fee. We did talk about this at the half year, and this is something which will go into the full-year results and into this current year as well in terms of the impact of lower interchange revenue from the bank perspective. Overall, good performance across all parts of our business in terms of what we see. Looking specifically at the U.K. and ROI segment, you see a strong trend, a continuing trend, which Dave has spoken about. We moved into a 0.9% like-for-like positive, first time in many, many quarters in the U.K. business. Equally in the Irish business, we saw like-for-like positive for the first time since 2012. This is by focusing on what the customer needs, the issues that Dave has spoken about in terms of service availability, range, and price, and a positive good performance in a market which continues to be deflationary. We have spoken before about the formats. We continue to see good format performance. The Extras were almost positive in the quarter. You will recall that in Christmas they were positive, but almost positive in the quarter. Good performance across all other categories. Our Express convenience format continues to show strong growth, albeit what we are seeing from customers is that when you give them the reason to shop in a single location, our Extra stores, that is where they very often choose to shop, and we see it in the numbers. In terms of some of the other smaller parts of the business, the online performance we split out here between grocery, clothing, and general merchandise. We are focused on getting the right value equation from a customer perspective, so the economics for us are important. We are making it a more sustainable offer which customers really value. We have seen some impact in terms of the grocery growth. Still healthy growth at just under 9%. General merchandise, we are focusing, again, on profitability in this sector. Some small reduction year-on-year. Clothing, a good performance in a clothing market which externally we have seen challenges. Our clothing performance focusing on full price sales, getting the right margin and availability right. We saw good performance. If we now move to the profitability, you will recall that we set out to rebuild the profitability in the U.K. This is the full-year build, trying to give you a sense of the building blocks to rebuild and increase the profitability from the GBP 498 million in 2014/2015 through to the GBP 505 million in 2015/2016. We have invested very significantly in prices. You can see that. This is always an estimate in your graphs. It is shaded out in terms of here. This is the best estimate we can get for what the lower price is that we've invested. Against that, we see volume and mix benefit, and we will continue to drive this. We also will invest in the customer offer. A lot of what we're investing is in terms of service. We're looking at the costs of the offer. We took out Fuel Save during the year. We took out some of the couponing, which Dave has spoken about. We've also made some quite significant savings in our overhead costs. Net-net, we get a small increase in the profits, but a very healthy underlying. In the other column, that includes the Dunnhumby business, which you'll recall we restructured in the beginning of the year with the change in the arrangements with Kroger in the U.S. Overall, a good year-on-year performance with some very significant price investment. Much more importantly, though, is how did that move in the second half? Because in the second half of the prior year, we made a loss, and it's that base that we're coming off. Continued investment in prices. In the second half, a positive volume and mix benefit. So we're beginning to see some rebuilding of profitability with the investment in price. We saw some good cost savings, the GBP 400 million cost savings we set out a year ago. We've delivered what we set out to. We're on track for the full GBP 400. We got about a GBP 300 million benefit in the year. On top of that, we also see some benefits in terms of some of the marketing spend, where we're putting our money in terms of the costs. Then in other, we do get some small benefit on the retail side from the interchange fee. So we earn less in the bank, but we pay less in the retail business. But overall, from a GBP 45 million loss to a GBP 339 million profit, and a half and half. This gives us confidence in terms of our longer term profitability and that we're doing the right thing, not only for the customers, but also for the shareholders and the business. Internationally, very much the same performance. We saw market share gains in five of our seven markets. We're doing the same things, and Trevor can talk about that in the Q&A afterwards. We saw strong volume growth, and we saw strong cash generation. Cash has been a key part of our overall business focus this year. Operating cash is up 87%, and in the international business, we took six days out of our stock by focusing on the stock that we're holding, where we're holding it, and how we're buying to replenish. Again, looking at the two different segments in the international business, the same trends. European business, good like-for-like from a low base in third quarter 2014/2015. We see continued growth in like-for-like. In Asia, a very strong performance in those markets, Thailand particularly being the market, which we've seen a very good response to the focus on fresh, focus on availability, and focus on the right product for the customer. Overall, in Q4, we've seen a continuation of those trends in the international business. Looking at it again by format across the international businesses. We look at store formats slightly differently. Hypermarket, superstores, and convenience. The hypermarkets internationally are around 75% of our business. Internationally, that is really where the bulk is, and you can see strong growth there. The convenience sector is by far the majority of the balance. Superstores are a small part of it. Across both large segments, hypermarkets and convenience, good growth, and superstores also. In Thailand, to pick out one market as an example, we saw double-digit like-for-like growth in that market, where in 100 lines we invested strongly in quality and customers. You will recall at Christmas, we spoke about achieving the highest-ever market share in Thailand in Q3, and we have continued to hold our position in that market. If we look at the profit build internationally, we have also seen an increase in profitability. We have, again, invested in price. We have seen lower prices. We have seen a volume and mix benefit. This is on a full-year basis. We have invested in the customers, whether that is in areas like communications, whether it is in the way we engage and target our loyal customers. We have had some investment, and we have taken cost out of the business. Very significant restructuring in One Europe, where we are operating now, and we have spoken about this a number of times over the last 12 months. We now are operating as one management team running those four markets. In Thailand, we are also focusing on efficiencies within the Thai operation. The supply chain is again an area where we have seen opportunity and we have seen some cost savings. Then in other, we have had some investments in some restructurings, particularly in the Turkish market, where in the head office we took out about 50% of the people in the head office operation. Focusing on efficiency but at the same time, investing in the customer and driving volume and mix. The bank, which is the third segment I called out. A good performance. We have seen the profitability go backwards, but the underlying performance of the bank remains very strong. We are also, as ever, focused on the customer. We launched engagement and communication with the customers, where we show them how much interest they have forgone. We were the first bank to do that. We have given them free access to a credit report. We have won a number of awards from external commentators, from MoneyNet to Your Money in terms of customer service and how the bank is viewed. Increasingly, we are very clear that in the bank, the purpose is to be the bank for Tesco customers. Active customers are up 1% in the year, and lending has increased by just under 11%. At the same time, the core capital ratio, which in the bank is a key part of it, has continued to strengthen, and we are now well ahead of 16% in terms of the core capital ratio. Overall, in a challenging and challenged banking environment, the bank is delivering for our customers what we set out to do with a very strong balance sheet and funding behind it. Tesco Mobile is a business which we have not spoken about before, and I think it is important for you to understand that it is a valuable asset. It forms part of our business. It is the largest MVNO, mobile virtual network operator in the U.K. It has grown very significantly over a number of years, and it is a successful joint venture with O2. We saw 5% growth in customer numbers. We are now well over 4.5 million customers in the U.K. Again, from an external perspective, it gets very strong recognition. It is the recommended provider by Which? for the fifth year running. It has got a good balance of business between the pay-as-you-go, which is the historic way that mobile operators worked, and increasingly, and now more than 50% of the customer base is the pay monthly market, which is where the long-term value is from customer. It is operated through more than 400 stores in our network. Clearly, there is an industry which is going through potentially some significant change, and we are very well positioned within that industry, not only to protect the business but also to grow the business. That change creates options and potential for Tesco Mobile. If we now move to below the operating part of the results into the finance income and costs, and I know this is an area where a number of you will ask questions. The interest payable is down year on year. We saw a reduction in the interest paid on our bonds, so a good reduction in interest paid on bonds. That is offset in accounting terms by the interest element of the onerous lease discount. It is very technical. Very happy to take it and talk to you about it behind, but what you see as a GBP 30 million reduction is an underlying stronger reduction in terms of cash, but there is an accounting element which masks some of that. There is movement in terms of the IAS 19 and 39, 32 and 39 numbers. Not a huge movement, and then we get to the pension deficit finance costs. This is set by reference to the deficit at the start of the year and the market rates at the start of the year. So we saw about a GBP 20 million increase in that year on year. As we go into 2016-2017, which we have now started, I expect most of that increase we saw last year to come back. Maybe even more in terms of because we have made significant reduction in the deficit. So we should see some reduction in the pension interest finance cost as it flows through our results. It is not the number I focus on. I focus much more on the cash that we are paying to the trustees, and we are going to come onto that. Finally, in terms of the movements in the net finance costs, finance income came down by about GBP 50 million, primarily because of the way that swaps, which are part of our hedging for our bonds, but the swap accounting for that impacts through this line as well. So some movement within the overall interest finance cost line. Underlying it, interest payable was down, and that is an important message. The other point I would make is that within the results today, in the exceptional item, we have recognized an accounting GBP 220 million charge on the translation of the sterling, the proceeds we received on the sale of Korea. It is a non-economic impact. It is an accounting technicality, but it is within our results overall. There is no economic cost to us within the group. Tax line. Again, the interest here really is what is the cash we are paying for tax from your perspective, and it is masked by, I am afraid, a number of different movements. The profit before tax, before exceptionals of GBP 280 million, saw a 2.7% effective tax charge. Why is that so much different from the underlying rate? We had a number of things that changed. The U.K. future rate for corporate tax has decreased to 18%, and we have to take that through deferred tax as an adjustment. It comes through in the annual charge, and that has impacted. More importantly, we sold assets which had a higher tax value than a book value. So we have a differential between the book tax and the tax that we are paying and being charged on it, and that gave us a benefit in terms of the effective tax rate. Finally, in respect of the exceptional item, we have closed a number of earlier years, and we have agreed those with the revenue, and that gave us a benefit, not only in terms of the rate, but we managed to carry back the losses that we had last year, and we have got some cash in terms of the tax cash. Looking into this year, best estimate I have today with, as you can see, a number of moving parts, and we still have some years open, but the best estimate we have today is a 30% underlying tax charge for the year that we are now in. The exceptionals against just under GBP 7 billion of exceptional write-offs last year, we have few. You will remember that what we set out to do is we do not want to be operating with exceptionals, but if there are items which are significantly large and significantly material enough to call out, then we will treat them as exceptionals. We have a GBP 408 million net impairment. By far, the majority of this is around GBP 270 million, is moving to the single online platform. From a customer perspective, we have looked at the way we operate our different websites, and we have decided that it is much better for a customer and for us to operate off one website. That has resulted in a GBP 275 million write-off. We have also continued to look at some of the work in progress, and we have got GBP 133 million write-off down in the carrying value. These are non-cash items, I would stress, in respect of that. The property transactions, which Dave has mentioned, have generated a profit against the book value that we are carrying them at of GBP 156 million. Finally, we got a non-cash credit of GBP 480 million because of the way that the actuarial deficit is now calculated on the CPI, consumer price index, as previously calculated on the RPI, and that is a non-tax credit. But again, as I would say, it is very much an accounting entry, but a recognition of that change. So net GBP 102 million of exceptional items as a positive this year, compared with GBP 6.7 billion last year write-off. If we move to total indebtedness, and I will take us through a number of different ways of looking at that. Overall, we have seen a GBP 6.2 billion total reduction in indebtedness, as Dave has said. The elements of that are the change in net debt, change in the discounted operating leases, significant reduction in the pension deficit. We sold Korea, we had the property transactions, and we end up with closing net indebtedness, total indebtedness of GBP 15.5 billion compared with the opening GBP 21.7 billion. There are different parts moving within that. The way that I think about the indebtedness, and I think this is important that you understand the way that we look at this, is that there are three different parts of it. There's the pension deficit, there's the discounted operating leases, and there's the net debt. Each of those, we've seen a significant improvement year on year. The pension deficit is down GBP 1.3 billion. The discounted operating leases are down GBP 1.5 billion. The net debt, which is the balance sheet net debt, is down GBP 3.4 billion. The movement in net debt, which is the GBP 3.4 billion improvement, comprises the cash we generate from our retail operations, the improvement in working capital, and then what we pay it off on. We generated GBP 2.2 billion cash from our retail operations. We generated a GBP 350 million improvement in working capital. But within that, there were some elements which were negatives, and really one-offs. We spent GBP 91 million of cash on the exceptional charge we took last year. You'll remember at the interims we spoke about the change in the supplier payments, and that the final part of the unwind of those reciprocal deals was a GBP 230 million net outflow at the interims. No change in that, but we had an underlying GBP 230 million outflow. Within the Korean business we sold, we generated up until the point of sale, GBP 280 million of working capital. Which means that the net underlying working capital improvement from our business operations was just under GBP 400 million in the year. Which gave us the total of GBP 2.6 billion, GBP 2.581 billion retail cash generated from operations. We spent just under GBP 300 million on interest and tax, and we spent a billion on our CapEx, consistent with what we set out to do. From the Korean disposal, we raised GBP 3.3 billion net in terms of the sale of that business. We brought onto the balance sheet GBP 1.6 billion of liabilities, of debt with those properties that we brought back. Economically the right thing to do. We saved GBP 115 million of current value of rent, and we've protected the business from the future RPI or upwards-only rent reviews on that. Overall, we generate GBP 3.3 billion reduction in net debt. The property metrics, we haven't got a specific target in terms of improving the freehold leasehold mix. But whether you look at it by the selling space owned, or whether you look at it by value, and both of them are measures which I think are important to us, we've seen a really strong improvement. Dave referenced the 6% improvement in the U.K. business in terms of the property ownership. As I say, whether you look at it by space or by value, we've seen a strong underlying improvement. That's the case internationally as well with the sale of the Korea business. We've improved those metrics. Heading in the right direction, good progress to make, but as ever, we will weigh the economic cost of what we're doing compared with the benefit of the rentals that we're saving. The pensions, we have closed the scheme. We've protected the benefits that we have promised in the past, and we've introduced the new defined contribution pension scheme. We saw an overall GBP 1.3 billion reduction in the deficit, and that's a combination of the credit, which I spoke about, GBP 408 million. GBP 480 million net in terms of the payment that we made on the transfer. It's also to do with the asset performance and the way the liability is measured. We're working with the trustees to ensure that the risk of the deficit widening over time is significantly reduced. We're trying to ensure that the assets that we've got will not significantly widen against the liabilities as we go through time. That will mean that there's a much greater predictability on the cash flow contributions we make. The one year into the pension deficit funding plan we agreed with the trustees, we're pleased with the progress, they're pleased with the progress, and it feels as if it's working out well. We've got a strong liquidity profile. Again, we've spoken about this in the past. At this year-end, we've got GBP 4.4 billion of available cash. In the balance sheet, you will see more than that. You'll see about GBP 5.7 billion of cash. The way we look at our available cash is we've got around GBP 500 million of cash in the bank, and we've also got about GBP 750 million of cash in our float in the tills around the business, which is cash in transit. Whether it's in the tills or whether it's cash in transit, we've got about GBP 750 million. So we view our available liquidity as about GBP 4.4 billion. On top of that, we've got GBP 5 billion of undrawn facilities, GBP 2.6 billion of revolving credit facilities, and GBP 2.4 billion of the bilaterals. Then if you look at the debt repayment schedule, we've set out here in a graphical form where the bonds that are on balance sheet fall due for renewal. As you can see, they're well-spaced in time. There isn't a significant amount of liquidity that we have. We have what you'd expect, an element of debt which falls due over the next five or six years, and then the balance is well spaced out. But all of those are well capable of being funded either from the liquidity we have or by going to the markets. We've seen an improvement in our underlying debt metrics. Now, we remain of the view that we would want to be an investment-grade credit. We haven't put a specific time on that, but that's the way that we view ourselves. We recognize that the two ways of improving these ratios are by reducing the indebtedness and increasing the profitability in the business. The one which has the greatest impact on the ratio is the business performance, but we will continue to focus on both elements of that equation. Whether you look at it as total indebtedness or as a fixed charge cover, we have made improvement year on year underlying. The 1.9 is a slight improvement. These are our numbers, and the way we look at them. The rating agencies have their own ways of looking at them, but this is the way we look at them, and they're seeking to address the same calculations, albeit clearly, slightly different methodologies. Looking at the financial summary, over the year, we have seen positive sales momentum across the group. We have rebuilt the profitability, particularly looking second half into second half. We have seen a strong and improving cash generation. We have made significant progress in reducing our total indebtedness. We have a strong liquidity position, and the summation of that is that we have a strengthening balance sheet. I will now hand back to Dave. Thanks, Alan. Thanks. Okay. I suppose just to round that up, we have in the last two results announcements shared with you the big six and the performance of the group in exactly the same way that we talk internally inside the business. It is something that is all the way across the Tesco business globally, with Trevor reviewing with his team individual countries. At a group level, I am absolutely delighted that on the six things that we said, either sales, profit, or cash flow, or what it was we were doing for customers, colleagues, and the partnerships with suppliers, we met or exceeded the targets that we set for ourselves in the year. I am delighted for the colleagues inside Tesco that is what together we have been able to achieve. That is what we are sharing with our teams today and over the next few days in terms of the review of the performance of the business. That is why we started, and that is why we said in the results presentation, we think it is a year of significant progress. It is very broad-based across our business. It is volume driven by putting the customer at the center of everything that we do and regearing all of our business to serve them a little better every single day. All right? That is what we will do going forward as well. What I thought I would do now against that is tell you a little bit about what the next step looks like. I am sure you will ask me questions about outlook statements and, Alan, about the outlook statements in a second. Let me try and lead into that. The one thing that you must, and the reason I started this presentation so deliberately is in an uncertain market, whatever happens in the markets we operate, the one thing you need to understand from me and my direct team and everybody that works in Tesco is the customer is the number one priority always. All right? Everything we do is geared by how it is we can serve them a little better, irrespective of what is going on in some of the macroeconomic arena. What we're trying to do, and this is the reason that I keep saying that what we're doing is focusing on Tesco. Everybody asks me competitive questions. We focus on Tesco, is that actually what we're trying to do is remove any reason for anybody who shops with Tesco currently shopping anywhere else. That's the lens through which we've looked at it last year. It's the lens we'll look at it through this year for sure. And we're looking for those things that make Tesco more unique. I'll say a little bit about that in a second. As we do that, we'll rebuild the profitability in the way that Alan's described this year. It's important. We can see how we rebuild that long-term profitability, but we do need to still invest in the business in what is still a very challenging, there are people in this room who have been in the retail industry much, much, much longer than I. It's a very challenging, uncertain situation. There's a period of deflation, which is unprecedented. We don't see that going away from a macro point of view, or indeed, the need for us as Tesco to invest. One of the things that we did last year, and you came with us on that journey, was we had to make some investments in order to drive the recovery. All right? We're still very much in that space, and we'll continue to be so. Now, what I thought I'd share with you is what we're doing in that particular space, because that's probably the most material thing we've done recently and will impact on our business in the year ahead. When we talk about serving Britain's shoppers a little better every day, our value equation, the value equation that we really want to build, is a combination of the following. Brands, those things which are consistent wherever it is you might choose to buy them, we guarantee that Tesco will always be competitive on price on the things that are the same across the industry. That's why Brand Guarantee is so unique, and that's why we give that reassurance to our shoppers about things that matter to them. We differentiate ourselves in the unique Tesco offering. Now, part of that is obviously our own label. You can only buy it in Tesco, so that range is very important to us. The service that we give, very important. But also, a range of exclusive brands that are not available anywhere else. So that combination of, if it's the same, be the best in the industry at it, and then differentiate yourselves on those things which are unique in Tesco is what we're trying to do. Now, not shown a chart like this before, right? If I go back for a second, if you remember when we talked about what was going to be the turnaround, we talked about the reasons why people were not shopping with Tesco when we arrived, and we talked about poor availability, poor service, poor range architecture, and poor price. We put all of our effort into doing that first. The other reason why they weren't shopping with us was inconsistent pricing, particularly around brands, because they could understand what the price relativity was, because they knew the brands were the same. We dealt with one bucket, we dealt with another bucket, and then we come to the third, which was, there was a certain set of categories. What this chart does is it looks at what, to use jargon, over and under trade. These categories that are in green, Tesco as a business, we over-trade. We have a share in excess of ours in those categories. So that's for us to protect. That's where we do better. There are four categories on there where, against a couple of competitors, actually, we under-trade. That means that our customers have chosen to buy those categories somewhere else. Right? And this is us trying to be very specific in saying, these are customers that have shopped with us already, who have chosen to take part of their shopping mission somewhere else. How is it we can address and make it more convenient and bring that back into the Tesco basket? Serve them a little better every day. Time-starved people needing to shop in two locations, we want to do something about that. And that's why we did this. Right? It's a very important set of categories for customers. It's a place where we were under-trading, particularly against a different set of the markets, and we set ourselves a challenge to say, what can we do about it? For those who've been following closely, the first thing we did in the fourth quarter of 2014 was focus on fresh produce. The examples I gave, I remember them all, were all about lettuce and what it was we were doing to get that supply chain right. We've worked with that supply base in advance of everything else. Our supply base have been really involved in creating these brands. Right? One of the results of the supply partnerships that we set up is being to sit down with our farm and produce suppliers and say, "How can we reconfigure what it is we do together to increase crop utilization, to increase the efficiency and translate that into an offer that can be consistent and great value for our customers?" We launched these seven exclusive brands. Now, I'm not shy about the fact that all good marketing will always polarize. I've heard some of the debate, I've read some of the debate, I've listened to some of the debate that's involved, and I get it. I understand it. The only thing I would say to you is, for somebody who I think can say has been involved in marketing for a reasonable amount of time, whilst people will debate, the most important thing is what the customers think. We develop these with customers. We develop them with customers and our partners. Let me tell you a little bit, just so I can inform you in this particular space, because I do get some questions about it. I am sure Matt does, and you can ask him a question directly yourself when you get a minute, is when we talk to customers, what do they say? They tell me that they complete because I think some of the commentators don't really give credit for how marketing savvy U.K. customers are. I can say this with some certainty, by far and away the most developed marketing understanding audience in the world. Do they know that one single farm is not big enough to be able to supply Tesco? They do. They really do. Do they know that one single farm does everything across all product forms? No. Because they know something about what the crops are. What they say to us when we developed this, and we had the conversation that everybody is talking about, which is actually, what was really important to them is, do they come from farms? Clearly they do. To use the marketing jargon, the intrinsic product truth is all of this produce comes from a farm. Second thing that is important is, and about the marketing savviness is, actually when you look for a brand name, you look for something that can stand for a consistent offering of quality and value. Here is where I make an industry comment, which is we are not the first, and I suspect we will not be the last, where we have chosen to use a brand name. We have been very open about the fact that this is creation. We are creating and launching these brands. What we are doing is, in some cases, we have used brands that were owned by our suppliers to create this, is to make Rosedene stand for a level of quality that is consistent. Any of the farms that support and provide for that Rosedene brand name must hit a quality specification that we set. If you think about a lot of food brands, if you think about the history of food marketing in this country, that is exactly the model that allows for a consistent branded value equation in how you build brands. That is what we did here. Despite what you might read in some places, more than 95% of all the commentary by customers is neutral or positive about what it is we have done. Yes, there are a couple that are asking, why did we do that? The only thing I would say to the detractors is please, and if you have a chance, have a look around in what we have put outside. On every single one, we are absolutely clear about where that product is sourced from. Absolutely clear. Customers definitely get it. I thought I would say that, so it might answer some of the questions you are going to ask later. If you want to ask Matt as well, you can get his point of view on it also. What I thought I would share with you, though, is, because I have always struggled that people sort of struggle to see the sort of before and after in a way that is easy to compare, because obviously we replace one with the other. What we have done, everybody talks about the farmers' brands, and I get it. They are a significant investment. I'll give you a clue to that in a second. What they don't talk about is what we've done here. The architecture in Tesco, which is good, better, best, is an architecture which served us well and it will serve us well into the future. As we've worked with our supply base to add value in terms of Redmere Farms here, we've also invested in our own core own label line in the way that you see here. Basically, I show you a series of pictures. They're all set up in the same way. What was Everyday Value in terms of an exclusive farm brand, what it was in terms of our core, in terms of the relaunch that we've done. Okay? That's carrots. Potatoes. Now, if you really want me to, I'll go into the marketing about the design, but I don't think we've got time. Where we are in terms of mince, where we are in terms of apples. What customers are saying to us is they understand both of those expressions. They understand the care that's going into the core. They understand what it is we're doing in terms of Rosedene Farms, and they see the price tiering much, much clearer than it was before. Around meat, in terms of pork, in this case. What I thought I'd do, I'm going to introduce this chart very specifically. There are 76 lines that we've introduced as part of this exclusive farms range. What I'm going to do in a minute is I'm going to show you a basket. I'm going to show you a basket which takes, I think it's 51 of those lines, for which there is a direct competitor alternative in our cheapest competitor. Okay? I'm going to show you what that looked like before we made this investment, before we launched this range, and what it looks like now. Okay? Before, if I take the Everyday Value and the range that we had, those 51 lines, if you bought every one of those lines, would have been GBP 103.11. Nobody buys 51 lines. This is hypothetical to give you a sense. If you bought that in our cheapest discounter alternative, those lines would have been GBP 89.06. If you take the 51 lines and you look at what we've now offered as a result of the partnerships with our suppliers and the unique brands that we've put in, actually, you could buy that basket in Tesco at GBP 86.35. I've always resisted to talk about the investment we've made in price in tens of hundreds of millions, and always wanted to talk about in terms of what's in it for the customer. This is what's in it for the customer in those two categories where I showed you we under trade historically. We're trying to deal with that in a way which allows our customer to shop those categories with us in order to make it more convenient. We've designed a range with them and our partners to meet that opportunity. We've just done it. It is by far and away, the most significant thing that we have done so far. We are a few weeks into it. Results are encouraging, but we have got to let see how customers behave on a longer-term basis. All parts serving Britain shoppers a little better every day. My last slide is to summarize, which is broad-based improvement across the group. I hope you will agree with that. I am pleased. People ask me, am I? Yes, I am pleased. As a CEO, you are never completely satisfied. My team will tell you about that as well. We have made significant progress across all of the key priorities. We have delivered or exceeded on everything we said we would do, and as we want to build confidence in our business, that is an important step for us. More customers are buying things more often in Tesco. I have given you some of the stats. Our team are reinvigorated around the purpose and the direction that the leadership team and myself are asking them to support. The market is challenging, it is deflationary, it is uncertain. As we keep making the investments we think we need to make, what we are trying to do in sharing with you about the business is be considered about actually what those investments return and the timing with which they return. I think our biggest concern here is that based on what I think everybody would accept is a lot of progress in one year, that we draw that a wonderful, smooth, straight line of improvement as we go ahead. It will not be like that. It will not be like that. It has never been more challenging to be in the market, and we are investing in that deflationary cycle. What the outcome is the uncertainty, and we are just sharing that with you. What we are doing, and the most important thing, is that we continue to invest in a way which we think for medium and long-term shareholder value is the right thing to do and is a sustainable model. Right. That is it from Alan and I. What I am going to do now is ask Matt, Benny, and Trevor to join us. Take a seat, fellas. We will do some Q&A. Robin, can I give you that? Why do not we do it this. What I am going to suggest is, we had some feedback from other previous questions, which is the positive was, you liked the fact that we answered every question there was in the room. The negative was, maybe it took a little longer than it might. What I am going to try and do is I am going to try and curate. If it is a question for me, I will take it. I am going to give you some experts. If that is the question, I will pass it to them. What I am going to suggest is, if it is a question of a very technical nature. If you are sitting there desperate to know what the IAS 19 impact on the numbers Alan said were, I may, in the interest of time, park that with Mr. Griffith because he will be better able to do it. I will not, for those sorts of very specific technical questions, I am going to try and channel those to Chris and allow us to talk perhaps more at the strategic questions elsewhere. Is that People are nodding because that is the bit of feedback you gave us. Maybe we got a little bit too technical in that. I'm going to ask you to try and keep it to one question, please, and then I'll direct it to the person. That's the hardest. That's the hardest bit of this quest. And I'll direct it to who I think is the best person, either the guys here or indeed any of the other executive in the room. Okay? Cool. I'm going to do this in a systematic way. Gentlemen, right at the back. See, Bruno, I'll leave you to last again. No, I'm sorry. All right. So one question it is then. It's Sreedhar Mahamkali from Macquarie. Alan, I kind of get where you're getting, sorry, where you're coming from in terms of the profit bridge. And I can see, Dave, your points on the investment you're making in farm brands and stuff. But help us perhaps reconcile second half profit bridge. Why is that not a good representative of way to think about for 2016/2017? What am I thinking about specifically? I'm thinking about the PI you've talked about, which is where it looks like it should be. Your volume growth is continuing to build. You're continuing to do pricing, but to me, designing something for a lower price doesn't necessarily equate a price cut. Correct me if I'm wrong. Your cost savings continue to come through. So why isn't second half the right way to think about 2016/2017? That'll be my- What I the only question. I will say, it is a great question. I think the significant difference, I think first of all, our aspiration to grow profit year on year is absolutely there. Absolutely there. So it is a question about what the degree is, and it is also about what the shape of that is. I think to the point about the investment that we have made now, which I have said is one of the most significance we made. I think it all depends on what the impact of that is. And you might design for it, but you do not always get it initially. It depends on what the volume and the outturn is. So that is why the uncertainty is actually what does the market and how does the market react, and what will the mix be across the different layers. So that is where we need to see what the impact would be. So it is right what you say, it is just maybe there is an issue in terms of the timing of how it is delivered. Alan, I do not know if you want to I think that is it. If you look at what we have said in terms of the outlook, we have spoken about the longer term, we have spoken about the current year, and we have spoken about the first half, and those are the elements of it. There is a wide range out there. There is a wide range out there. Yeah. Is there anything specifically you are seeing in the first half that we should perhaps pay more attention to? Well, the continued investment that we have in the offer. The Farms brand is by far and away the most significant, but there are other things that we want to do and continue to do. If you track what we did last year, we made a whole series of investments and choices, and we had to repurpose money, and it was always we talked very openly about volatility last year, and that was about how we changed the promotional mix and what have you. We have a different sort of uncertainty as we change the offer and we invest. Matt and the team have other things that they would want to invest in. But we have to make sure that we generate the space to be able to do that so longer term, we have a trajectory of profit, which we think is the right one. It is more about timing and certainty of delivery rather than medium term ambition. Got it. In the interest of time. Thank you. Please. Let's come right down to the front. I'll try and mix it up rather than just work back to front, if that's okay. Yeah, why don't you go and then to the lady in front. Perfect. Sandra Gwyn from UBS. I suppose one A and one B, very cheeky. Presumably- I'm not surprised. Yeah. You expect no less. Yeah. Presumably it's nothing to change your long term view of an industry leading margin. No. That's 1A, so that's easy. Yeah. 1B would be just in terms of the gross margin outlook. I get what you've just said to Sridhar is maybe a little bit of investment here, but what's the long term view on gross margin? What are the key moving parts? Well, look, we don't give any sort of guidance on gross margin. I suspect Matt's not going to change that by attending today. I think, look, the critical thing for us is the mix around price and the ability we're able to negotiate for the range and the way we work with our partners. We started a whole different way of doing that. For those who are long-term studiers of Tesco, this ability to work with partners to reduce cost that allows us to invest that back in the customer is at the very center of what we do. That's what we're going to carry on doing. Price, working with partners and the store operating costs are our three big levers, and we've got some things that we still want to change in the way that we do that. I don't know, Matt, if you want to add anything at all to that. Matt, you? I think you covered it. How far are you through that program of renegotiating with suppliers? Well, look, you saw some of the feedback in terms of their satisfaction of it. I think in certain areas, we started at different times in different places. To be honest, we're never through. If we do this right, they're long-term relationships where we commit ourselves to long-term improvements. And honestly, I've been delighted with the way that our suppliers, particularly because we started there in terms of produce and you see some of the results of that. They've worked with us hand in glove in terms of thinking about how it is end to end, we can reduce supply chain waste in order to be able to put that into an offer for customers, which is more compelling and more competitive than the past. We'll continue to do that, and we'll never get through it. I hope we just continue to do it year after year after year. Do you want to pass the microphone forward? Thanks. Niamh McSherry, Deutsche Bank. Given I'm limited to one question, I'm going to ask about a path to reinstating a dividend. I think you've mentioned before that investment grade in itself is not an absolute necessary for reinstating the dividend. But now that the balance sheet is stronger and the business more stable, maybe you can give us some criteria that you might look at for that. Yeah. Look, it's a great question. Because the dividend and the investment grade, it should be absolutely clear, one doesn't have to follow the other, and the other way around. But they are linked because we have shareholders, and we have investors. And the one thing that we wouldn't want to do is to get into a position that we're paying a dividend, which is then damaging the long-term health of the business because of the capital structure being inappropriate. We balance those, and we've seen really good progress in terms of the balance sheet strengthening. We've seen the rebuilding of the profitability, particularly in the U.K. business in the second half. And we feel that the building blocks for both of those elements are ones which we've made good progress on, but we'll get to those at the right time to talk about them. I can't be more specific, but we absolutely keep both of those in mind as we think about it. Okay. Even though they're not dependent on each other, you might consider the company, the metrics to be in a similar place perhaps when you're Yeah. Just to add, one of the decisions is within our control. One of them is absolutely outside our control. We put up the way we look at the metrics. But ultimately, the rating that others give us is a function of their view of us. Now we can have our own view of us, and we can try to do that. But it is, and rightly so, it's the rating agencies who determine that view. We look at the commitments we've got, whether that's the lease commitments, the pension commitments, or the net debt. We look at how those are viewed, and we look at the earnings and the cash in the business and the liquidity, and those are the things we factor in. But we are wanting to be in a position where we are viewed externally as investment-grade credit. It doesn't have to follow that dividends and investment-grade credit follow in a particular order. Thanks. Okay. Why don't we just keep coming forward, right? Ease of passing the microphone around. Morning. Stewart McGuire from Credit Suisse. Like-for-likes in the U.K. up 90 basis points. Well done. When I look at the breakdown, Extra, Superstore, and Metro, all negative like-for-likes in Q4. Can you give us some color as to the way customers are shopping, why Express is driving those like-for-likes, and the online business, where does the online growth get counted? Does that get counted within the separate stores, or is that separate? Matt, do you want to? Yeah. Okay. Morning. First let's take the formats. You're right in terms of what you say around the individual formats. Let's not lose perspective, especially from an Extra's perspective in terms of where Extras were and where Extras are now. We do not need to go back too far and right at the start of that chart, we see a format which is going back the rate of 6%. We actually drove positive growth over Christmas, and we're very close to positive now. We're really comfortable with the progress that we're making of reestablishing our Extras as a destination for people to shop at. A lot of the work that we're doing is all about supporting our customers being able to get everything they want under one roof. You then move through to convenience, and we continue to generate good single digit convenience growth in a market which is actually pretty tough. There's some operators out there that are doing a really good step change job at operating a convenience business and delivering a convenience proposition. From an online perspective, as we talked about, we are very much balancing the growth that we are aspiring for against the long-term profitability that we're looking to achieve in that channel. You see that very clearly coming through in terms of our non-food performance online, where some balancing is going on, and that's causing us to be less aggressive around some categories that we were more aggressive about historically. You're seeing a little bit of negative growth coming through there. Online remains a fundamental part of our proposition going forward. Clarification. Sure. It's not a second question. Quick. Go on. It's just the same question. Does online get allocated to the Extra stores? Is that where the sales are counted? Yes. Okay. I'll end it there. You'll stop there. I'll stop there. That's very good. Because I was shaking my head, so you don't get a second one. There you go, Bruno. Good morning. Bruno Monteyne from Bernstein. If I think about the last 12 months, you did price investments, loads of staff investments initially. Very tough conditions. You also had cost savings and good volume growth, and it allowed you to have two consecutive half years of 80 basis points margin improvement twice in a row. This year, from everything you described, isn't really that different. Might be a little bit less staff investment, but more in the farm lines. You have material tailwinds. You have less rent to pay because the leases you bought back, you did some write-downs. You probably have lower operating costs from the smaller ranges, higher volume growth. How come as you suddenly go from two twice 80 basis points up sequentially to going flat? What has really changed in the next 12 months that suddenly stops that margin improvement going forward, and why would it suddenly come back later again? Why don't I start, and then I'll pass to either Alan or Matt, who might want to add to it. Bruno, I think it all comes down to timing and ease. I don't think we feel that the headwinds have got less. I think we would add to your list, we talk about where wage inflation is coming in. We talk about what the rates review may or may not happen. We would see a need for us to offset some of the investments we have by further cost initiatives, but they're not as easy, and as straightforward, and as quick as the GBP 400 million that we delivered this time. It's a question of investment ahead of being able to generate the return in a time period that you might like to report on. Therefore, we're just being clear about the fact that we're not waiting. We're going to start the year with quite a significant investment. It is a significant investment, and that will have an impact in terms of the delivery. It doesn't change our aspiration to grow the profit. But the range that's out there, in terms of your views about the profitability, I think, is one bit of feedback that says, actually, the market understands that there's quite a lot of uncertainty about what the investment return would be. We've just tried to give some contribution to that debate in terms of, we don't think it's a straight line improvement in the way your question suggests. I don't know if Alan or Matt or any of the guys want to add to that. I'd pick up your word feel and talk about the three emotions that I feel sat here today. Number one, I feel immense proud for the half a million people across Tesco that have worked relentlessly to deliver the numbers that we're talking about today. Yeah. Number two, I feel very confident actually around a lot of the initiatives that we have underway across the business to support what we're talking about. But then the other emotion is one of wariness. Because the market's incredibly competitive. It's deflationary, and we're very clear that we are going to continue to do what we believe is right for our colleagues and our customers, because we believe that's the right route to drive medium and long-term sustainable value for our shareholders. That's where we are. Very well said. Do you want to pass it back? If we go back via Clive, sorry. I will come back. Sorry. I have plotted my course. Clive from Shore Capital. Can you tell us what your strategy is with respect to non-food at a group level? I think, well, I will give a little, and then I am going to ask Trevor and Matt to speak about it. Look, we are really clear that what we want to be is an offering which is food and, to use your words, non-food. So actually, we think we have got a very good business there. I think, Clive, if this is where your question is going, are we happy with the profitability that is in that part of the business? No, we are not. Do we think there is more that we could do in the way that we buy and the way that we operate? Yes, we do. It is some of the improvements that Matt was talking about. It is a big and important part of our business, but it is also a place where we think that there is more that we could do to improve it. Trevor, why don't you say a little bit about that? Yeah. I think there's two things. In international, there's definitely an opportunity of buying GM more with the U.K., and in Malaysia and Thailand, actually buying a lot of that together. I think there's some real buying synergies still to be had. The second thing is we've done quite a lot of work understanding where the growth's going to be on non-food and how do we go faster with that, and also where the growth's going to deteriorate, so we actually need to make sure we correct the size, that part of the size in the store, just to make sure we get the right profit mix. Mm-hmm. Matt, from the U.K.? We're working collaboratively across the global Tesco business on delivering the right non-food proposition for our customers. A lot of that flows through an offer that we'll deliver ourself, and there's some finessing going on there. Another element of it flows from some of the work that we're doing around repurposing in some of our larger stores. You look at some of the work that we're doing with Arcadia and how we're supplementing the F&F business in our stores. That's also part of how we are thinking about our overall non-food offer going forward because that's what customers are telling us that they're looking for. Mm-hmm. Okay. Do you want to pass back? Just go back. Go this way. Right here. Hi. James Tracey here from Redburn. Question from me is on operating costs. Could you please tell us what your U.K. operating cost base is, and also where the biggest areas are to reduce that in future? No. Might as well be. No, I'm not. You should know by now, anything that I think is competitively sensitive, I'm not going to talk about in the context of here, and I certainly wouldn't ask my colleagues to either. Do I think that there are opportunities for us to lower our operating cost base? Yes, I do. But consistent with what we've done over the last 16 months, we'll deliver and then we'll report. I'm not going to give anything out that I might think is competitively sensitive. I'm sorry, it's not a number I'm going to give. Thank you. Do you want to pass across? Morning. Rob Joyce, Goldman Sachs. My question is on the long-term strategy for the bigger stores. Just some clarification. Basically, it looks like you are buying back some of the bigger stores, but then the press are reporting that you seem to be looking to exit the stuff that you are going to put in the bigger stores to drive footfall. Just wondering what your vision on the longer term is of how these big stores will look, and whether you will have the same number of those stores in, say, 5, 10 years' time. Well, I think there's two parts to it. So, actually, the gentleman in front of you to your left is Steve Rigby, who's our Group property leader. Let me tee up something I'd like Steve to talk about, and then we'll come to the mix of what's in the store from maybe Matt, because I think your question is more a U.K.-driven one. Yeah. So look, the first thing is, consistent with what we said 16 months ago, is we need to think about property differently. It's been a very significant part of what we've been doing over 16 months. We brought to that a completely different, sort of commercially savvy lens in terms of investment and return. We have been prepared to walk away from things which were not profitable or couldn't be made profitable. And that means, so some of the dynamic that you see in terms of buying back stores and closing others, is about the team, principally led by Steve, looking property by property and saying, "What is the value of this store?" And actually, if it is something that we've leased, sold and leased back, but actually is a store that we'd ideally like to own, for the right consideration, we're interested. Right? That doesn't mean that actually, when we have a store where we can't make that work, we're not prepared to walk away from it. We think that's a different approach. I don't know, Steve, if you want to say anything more in terms of how it is we look at the buying and the selling part of the property portfolio. No, I mean, in terms Sorry, thank you. In terms of buying back our stores, we're clearly looking at the profitability of those stores. We're also looking at how long the lease is and the rent review mechanisms, whether they're fixed uplifts, RPIs, or open market in terms of determining which ones we should buy. This year we've spent a lot of our focus on buying joint ventures, which have the stores in those have those qualities. And also that helps to simplify our business operation. Sorry, very quick, just on the final click on that. Are there many stores that still have that kind of profitability where you think you'd like to be moving out of? Well, we obviously have a significant rent roll in our business. There are many more stores that are leased that we would like to buy. Yeah. We'll buy them as they become available and as we have the money to to s- Yeah to spend on them. We constantly look at that. As long as the deal is attractive, if it's a good financial deal is the other side of it. Look, I'm going to go Trevor, in terms of how it is we use the space, do you want to say a little bit about some of the stuff you've done in Thailand in terms of repurposing large stores? Because you've actually got more large stores as a percentage than anybody else. Then Matt, if you want to make a comment on top, then great. Yeah. I mean, the history in international is that when we opened the, you know, the first hypermarkets or the first 15 years' worth of hypermarkets, they were always big stores with big warehouses because actually a lot of the deliveries were direct. Now 20 years later, it's all centralized. We don't need the stores or the back rooms to be so big. We spent quite a lot of work in international looking at the way we do the supply chain. By half year of this year, probably about 67% of our SKUs will be single picked. So where you've got a slow-moving line, things like health and beauty will be single picking, which is a big change international because the case sizes tend to be twice the sizes of what you'd see in U.K. and Ireland. Infrastructure-wise, there's lots of opportunities and we've got about 1.8 million sq ft of space that we think over the next 2 to 3 years that we can actually repurpose. What we've been doing in Thailand is we've done about 22 stores now. We've got the ideal store size, which is around 60,000 sq ft. That frees up about, you know, up to 40,000 sq ft per store. We've done 2 things, really. We've got, you know, we've got a little bit of a partnership with Decathlon, so they've come along and taken 40,000 sq ft of the store. It's a really good rent opportunity for us. Actually what's really important, it gives us the opportunity to use a really big player to bring a halo effect to the store. What we are seeing is a halo effect to the overall shoppers to the mall. We have got some big malls in international. We see a halo effect onto our own store. What we are fast seeing is the customers are seeing a really good Tesco store the right size and a really good anchor, more anchor tenants in the mall. All comes together with more income as well as more customer satisfaction. As I said, we have got an opportunity for about 1.8 million sq ft, and that is in Central Europe, Malaysia and Thailand. Matt, for the U.K.? Yeah, I mean it is about supporting the destination status of our largest stores. Focus on food and freshness and loving and living food. Then two words, both end in ship. One is ownership, one is partnership. We are very, very clear that we do not need to own everything to support the destination status of our stores. We will continue to explore partnership opportunities as well as ownership and that will help us provide the overall compelling proposition that our customers are asking us for. Hmm. Okay. Do you want to Where's the microphone gone? There we go. Gentleman in the white shirt in the middle, and then we'll go up the back there. From that side, mate. There you go. Going to end up with two now. Hi. Two microphones. Thank you. Nick Coulter from Citi. Could you talk about how you see the hierarchy of own brands evolving? I don't know if Jason's here today, but I think he recently spoke on that. I'm guessing your thoughts are aligned. He certainly commented that he didn't see it as simplistically as good, better, best going forward. He's actually the one of us who's on a much-deserved holiday, so he's not here. To sit in for him, I think the thinking, we use good, better, best on the point that says, actually, we think the segmentation is right. But how it is we've satisfied good, better, best, we think that there are different ways of doing that. Will we develop uniqueness in partnership with our suppliers in order to replace where we think we can do a better job than where we were in value? Yes, we will. Will we continue to invest at Finest at the other end? Yes, we will. So we do see that there will be three tiers in the own-label offering from Tesco. We also see that we will look at exclusive brands like F&F, which are unique and differentiating for the Tesco offering in total. That's what Jason was saying in the presentation you were talking about. Do you see the balance between those brands or levels changing? No, as I said, the value equation for us will be a combination of brands which are consistent and readily available everywhere, will be very competitive, then we will develop our own unique offerings. Then depending on what customers and stock, the mix will be different depending on. That is the way we will put our value equation together. Okay? Thank you. Gentleman, back right on the fourth row, please. We will come back. I will not forget. You can move on anyway. Morning. It's James Grzinic from Jefferies. I had really a follow-on clarification from Nick's question, so I won't count it. I had my own question. But we might. Okay, fair enough. Okay. The tiering on price, on what you relaunched, how did you change the better and best? You said you made it a lot clearer. Yeah. It would be great if you could be a little bit more specific in how the pricing gaps changed. The cost change. Yeah. My own question was, can you be more specific about the Phoenix and the BA transaction dynamics? Because they were very different from the British Land one. Because basically, that is buying back an annuity as opposed to the British Land, I see you surrendered some development potential. And presumably, there was a knock-on impact on the yield you got for that. So if you do the Thank you. farms brand, then I'll do the Yeah, why not? Look, I think, so what we did, in the seven brands that we talked about, a rough average, if you take the basket I gave you, it's about a 17% reduction on our entry-tier exclusive brands. That's what we did. We kept about the same, the investment in what we call better, so the core and the ranges that I showed you, around where we were before. So we opened up a gap that was not as wide historically by the launch of a cheaper exclusive Farms brands range. That's what we did in those cases of the 76 lines. So in terms of the properties, you're right, they were different, but the way we think about them and thought about what we're acquiring is really the same. The British Land, we happened to have, there were two JVs. One had predominantly stores, one had predominantly shopping centers, so we did a swap. They paid us GBP 100 million, and we got 21 stores, and we disposed of another JV which had predominantly shopping centers with, I think, nine stores in it. But the way that we started by looking at them is exactly the same, is that it starts with, as Steve and Dave said, is this a store which we would want to be owning or want to be trading from for a long time because it's a successful store? If the answer to that is yes, and it's subject to upward-only or RPI-linked rentals, which over time will potentially put pressure on the operating performance of our business, and we can buy it back at an attractive rate, then we're interested in buying it. With the two that we did in February, because they were bundles of assets, they came with some existing debt against those assets. So we brought onto the balance sheet, and we were conscious in this that we did bring onto the balance sheet GBP 1.5 billion of borrowings which were sitting behind that asset base. Now, it's a very conscious decision. We're swapping, in this case, GBP 80 million of rental savings on those two assets for bringing on longer term certainty as to no more rent, but some debt which sits against the properties. Now, the properties have value. Because we're going to trade from them, they have value. But it's not an easy, necessarily simplistic equation that we're making because you're trading short term, but potential upwards-only rents for debt, which over time will also need to be repaid and/or refinanced. But that's the way we look at it, and we're very clear that economically, we've made the right decision for the business, even though there is a GBP 1.5 billion. Flip side is that the GBP 6.2 billion of reduction in total indebtedness would have been GBP 1.5 billion less had we not brought that debt-- greater had we not brought that debt on. So the underlying improvement, in the absence of that, would have been a lot stronger. So we're making long-term decisions for the good of the business and the good of the shareholders, at the expense of short-term indebtedness in that equation. The two sides of the equation are 80 million and 1.5. Is the 1.5 the full EV for those two transactions? Yeah. It's around 5% yield. I'm just trying to understand what- Commercial- I know that in time, that yield will go up inevitably because you're avoiding future- What I'm going to suggest is, why don't you pick that with Chris and go through the detail in as much detail as you like. He likes that detail. We'll let you do that with Chris. But in the interest of time, I'm going to ask you to pass the microphone. Okay. Thank you. Next row. The lady directly behind you, and then Dave, you're next on that row. It's Bilkees from J.P. Morgan Asset Management. Hi. I was just wondering, clarification on the Farm brands. You said that suppliers have to match a certain consistent quality, specification- to be included in those farm brands. Can you just give a sense of whether that quality specification is the same as the previous quality specification for the opening price point products, or whether it now matches Aldi and Lidl on the one- avocado or whatever that they have? Do you want to. Why don't you go, Simon? Effectively we started from scratch, and we've challenged ourselves as to, what is the right specification and what is the right price point looking across the market, and then delivered products accordingly. It's a competitive benchmark. Yeah. It's Dave McCarthy, HSBC. I'm interested on how you measure deflation, because your answer is going to tell us some very interesting things about your company. Where do you include the impact of Brand Guarantee? Because every measure of inflation that's done externally, everyone, by your competitors, doesn't, and is unable to take account of any rebates that you give at the till. Last year, you were giving vouchers. It was 25% reduction, I think was the figure you gave. Now you've got 100% reduction. effectively for that rebate. Are you understating what your true level of deflation, or if you have included it, then clearly it does not have that big an impact on the basket. Yeah, understood. Yeah. I agree with you. You cannot have it both ways, is what I am going to say. You used Brand Guarantee, but Brand Guarantee, do you want to say a little bit about how we account for it and how it impacts on assessment of deflation? Yeah, Brand Guarantee is money off at the till. It is effectively a reduction in the revenue. What you would have paid, is effectively just never there because it is a reduction. It serves what we do not do is to work out, is to gross up and say that that is an element of it, because that is, you are getting into a world which is a bit like an opportunity cost. So, it is a reduction. We know what we are paying. We do know what we are paying, clearly, because we can track that. But it is important. I think the important thing about the Brand Guarantee is that before we launched it, what we wanted to do was to ensure that we were competitive. The important thing in launching it is not to show how much we are giving back. It is how much we are, how well we are doing competitively in any event. To get the product pricing right beforehand, then to give the underpin of, you will not get this brand more cheaply elsewhere on the day that you are shopping, is the important thing. So it is that trust in terms of the brand that Dave speaks about, rather than the quantum that we are not recognizing through revenue. Which in a coupon accounting world, would get into all of those IFRIC 13 adjustments and all of that. Mm-hmm. Anything you want to add? Just the power of Brand Guarantee and how valued it is by our customers. The frustration of 50% of the time losing that coupon and moving to a point where all the time customers understand the Brand Guarantee there is a defensive mechanism. Our focus is being right to start with in terms of the pricing of brands across our business, and we are doing a really good job of that. But because of the way promotions move all the time, what customers are telling us, they really value the fact that they do not have to go and shop across different stores to get the best promotions because it is all available in one shop, at Tesco. Does that give you specifically what you are looking for? No, it does not. Because, I get all that, and that is well understood. But what I want to know is, that reduction that the customer gets, they have got a bill for GBP 100. Say it costs GBP 98 in Asda, GBP 100 with you. You are giving them GBP 2 back. Asda are looking at this and saying, "Hey, we are cheaper than Tesco." Your customers are saying, "No, you are not," and it is great for us because it is GBP 98. Last year, you did not do it the same way. But it's got to be accounted for in some way. because you're giving more. So is it in your Are you understating your volume because your inflation's No not the right figure? Because, as you just said, Alan, it's not allocated anywhere. No. I think it's a really important point if you're understating your volumes. I think what we should do is, again, give some real detail. Dave, what we see and what Matt sees is we see what the cost of Brand Guarantee is. So customers see it as a revenue reduction, but we actually track it as a budget inside the business in terms of how much we are having to invest at any one period of time, depending on what the baskets are that we are selling. But I think there is a bit more technicality behind it, so I will point you to Mr. Griff's area. I think the short answer is, it is deflation. It is deflation, but- It is included in your deflation number. Yeah, it is. The short answer is it is. Yeah, because we are looking at what is actually paid. Do you want to? Yes, I cannot see, but there is a hand up behind you. Oh, yeah. Hand up. Yep. Yeah. John Kershaw at Exane. I am going to do the same follow-up and ask a question. Can you tell us what percentage of baskets actually qualify for Brand Guarantee? Because obviously you need 10 items. Yeah Just to follow up from Dave's question. Coming to the farm fresh, the farm brands. Talk us through a bit more big picture on it. First of all, is the 76 items it, or is there much more to come? It looks very much targeted at what Aldi and Lidl are, particularly Aldi's pushing fresh. But in many ways, you need to go up the basket or to cover off your A and B competitor sets. So talk more broadly on how you grow that rather than just Or is farm just it? I don't think we've ever said I'm looking. I don't think we've ever said about the number of baskets that qualify for Brand Guarantee, have we? No? We won't ask you. Look, I mean, No? For me, it's commercially sensitive. No to your first question. I mean, it's commercially sensitive, all I would say is that. It would be commercially sensitive, I think. I think we'll reflect on it. If we come back, we'll make an. I don't think we will. Just rather be straight with you, John. Look, I think, why don't I answer this, just in the interest of time. I think we'd say it's the first step on a journey. I think it comes back to the point which is we see ourselves wanting to offer John, it's customer centricity. I showed what it was we were doing in terms of under, over-indexing. We clearly had an issue in terms of the entry price point in these particular categories and their big categories, so we started there. And what we have, first in the U.K., but Trevor would say the same for international, do we have a commitment for investing in our own label so that we can offer to what you call the AB customer as well? Absolutely. By the way, there's actually quite a lot of AB customers buying the Farm brand, right? It's not as linear as price to social class. I know you know that, but it's just worth saying. Will you see us invest in the things that differentiates us as Tesco and are unique as us? Absolutely, you will. Absolutely, you will. That's the bigger picture, and we'll take it step by step. It comes back to the comment I was making before. There's more we'd like to do, but the timing and the sequence and the deliberateness with which we do that is one of the things that we've been navigating. All right. Look, two or three more hands up. I'm going to come here, and then we're going to finish with Yes. Oh, you finished with a finance question. Fantastic. Well, you get one more, and then we'll finish down here. Please. Hi. Xavier Le Mené from Bank of America, Merrill Lynch. One question, actually, on online. It seems that you have been increasing the basket to qualify for low delivery prices. You're also increasing the prices of delivery. We think that all the sign we've got imply that it's not a profitable business and you're trying to make it more profitable, potentially, at the expense of the customers. What are you trying to do here? We are sort of balancing growth and profitability to support a sustainable, medium and long-term business. I think the three things you're talking about is, yes, we have introduced a minimum around Click and Collect. Yes, we have put a revised minimum in place, a GBP 30 minimum around a grocery basket. And we've also done a very small amount of finessing around our pricing architecture. But we'll continue to challenge ourselves as to what's the best way of operating that business, supporting customers get incredible service, but at the same time, making sure that it's sustainable for us as a business. Just maybe one quick follow-up. You are doing that at a time Amazon seems to be pressing more on the food market. Sure. I think that is a great question, which is why I very deliberately used the word finessing. If you look at what we are doing around our pricing architecture on deliveries, there is some very small finessing, and we will clearly reflect the overall competitive environment, as we take that business forward. Is finessing up or down? It means both, actually. Okay. It does. It means the finessing is. Well, I suppose just to supplement what Matt says is, left to our own devices, and your second part of the question means that we may not be left to our own devices. Do we think that there's a simpler, more straightforward value equation that should go across whether customers come to our store and do the shopping themselves, or whether we pick it and deliver it at home? Yes, we do. We want to get ourselves back to being clear about what the value equation is to customers across the whole offering, and that's the finessing and changing that Matt talks about. But that's notwithstanding, it's a very dynamic market. Things change an awful lot. I think what we did say is, left to our own devices, a single-minded pursuit of exceptional growth in that space, right, in a way which maybe is not adding to the profitability of the business, is not something we're seeking to do. We're trying to be much more measured about how it is we do that. All right? Last question, down at the front. Yeah, sorry. A quick question for Alan on cash flow. In the first half of the year, you had a fairly significant improvement in terms of your working capital. I think it was above GBP 400 million. Much less so it looks like in the second half. If you could just come back as to why so, and what should we expect in terms of working capital in flow for next year? Or this year, sorry. Yeah. Edward. The couple of points in terms of the working capital, as you can see, there are different moving parts in it. In the first half, we did still have the GBP 280 million from the Korean business in that working capital, which was a benefit. And what we've seen across the business is the combination of the business performance, and combined with the stock improvement, and that's the effectively getting a better stock turn, and that's where we will continue to focus. We do believe that there is opportunity, and good opportunity, in working capital management in terms of the cash generation. The one thing I would point out, though, and this is just a function of the way that the accounting works, is that because we have certain onerous leases which shield our profit, because we took the impairment last year, our profitability and our cash generation has got a drag on it. So cash generated isn't necessarily the same as profit because of that onerous lease within our operating profit line. Against that, of course, if you're growing your business, what we all know is that we're in a business which has got a positive working capital cycle, so important that we grow the business from an overall working capital perspective. Net, where does that end up? Good and continued focus, not only on cash from operations, but working capital. It's a key part of the business focus, not only in the U.K. business, but international. International, as we saw also, had six days stock turn improvement in the year. So a real opportunity. In terms of figures, sorry, for the current fiscal year? Look, last year was a good year. We had a good business focus. We had a good performance. I think in terms of your model, it'll really depend on what you put in for your own parts of the business. But we're focused on it. You'll remember, it is one of our long-term measurements is cash generated, which is a function of operating and working capital. We made good progress in the first year. We're not going to take our foot off that particular focus as we go into this year. Yeah. Okay. Thank you, guys. Thank you very much. Benny. Nobody had any questions for Ben, but I've got a few for you, but I'll ask you later. Look, thank you very much indeed. What would I say in summary? I think where I started from, really, I think we do think, in fact, we know it's a year of significant progress. We put the customer at the heart. Volume has recovered. We've allowed ourselves to grow our business again, recover our profitability, generate some cash, pay down our debt whilst protecting a little bit of the future of the business, and we continue to invest. Now we've been considered and deliberate and wary, to use Matt's word, about what the next 6 months hold for us. Our aspiration has not changed. We do want, and we are confident that we can be an industry-leading margin again, but we're just being really candid and objective with you about the investments we're making and what they can mean to the trajectory, the gradient and the speed of that recovery as we seek to invest in what is a challenging, uncertain and deflationary marketplace. Final thing I'd say, I hope it gets picked up, is 500,000 people have worked really, really hard over the last 16 months to deliver the results that you see there, and it would be completely inappropriate if I didn't finish by paying tribute to every one of them. In a year of massive transformation, we would not be sharing these results with you if they hadn't been, quite simply, outstanding. So thank you very much, and we'll see you soon, probably. All right.

Data Source: Quartr Last updated: Apr 13, 2016

Earnings call transcripts are provided by Quartr and are published within hours after each earnings call.

Update frequency:

Quarterly

Data Sources Report a data error

• Slides
• Annual report