Tesco PLC (LON:TSCO)

H2 13/14

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Apr 16, 2014

Well, good morning, everyone, and thank you for joining us. Before I run through this morning's agenda and given the news of Laurie's resignation a week and a half ago, I want to thank him for his contribution and his support over the last five years. We've worked together to strengthen the foundations of the business and to prepare the ground for the transformation which is gathering pace. Laurie, thanks very much. I wish you the very best for the future. I'm glad you're staying around to help us, and what a great three years it's been. I'm now going to turn to the agenda for today. After my short introduction, Laurie's going to cover the financial review, and then I'll complete the presentation with an overview of last year, starting with international, and then a focus on the U.K. Following that, we'll take any questions that you might have. First, the headlines of our results for last year, reflecting both the impact of the transformation and the challenges of the most competitive retail market that we've been trading in. While sales grew slightly to GBP 71 billion, the fall in profits to GBP 3 billion 315 million was the result of the economic challenges of the internet and its impact, and the growth of proximity retailing. The long-run pressures of the Eurozone have led us to impair certain of our store assets there, and also the business performance in Turkey has meant that we've impaired stores there, too. It results in a GBP 801 million non-cash charge, the majority of which is a consequence of the annual impairment review that we're required to undertake. Last year, though, was significant for three other reasons. We completed the exit from the U.S.A. We've stepped up our capital discipline with a significant capital reduction in Europe in particular, and in China and in India, we've established partnerships so we can access these markets in a profitable way. Seven weeks ago, we laid out our accelerated plans for our most important market for the U.K. with Chris, Laurie, and Robin detailing how we're focused on delivering the most compelling offer for our customers, and we're now accelerating that program. I'll be giving an update on what we've done so far with a special focus on the large store transformation work shortly. Since then, we've seen competitors responding in what has been a much weaker market. Our plans, however, remain the same, and you'll see that we've begun implementing them. With our customers in mind, prices have come down, and with an eye on rewarding our most loyal customers, Clubcard Fuel Save has now been launched nationally and is already working well for them. Our new general merchandise, over 4,000 new items, has launched across the length and breadth of the country. As we said back in February, we are going faster. Although it's too early to be definitive about their impact, we're confident about the initiatives that you see listed here. We're monitoring both our progress and the response of our competitors. We're doing that very carefully, and our plans allow us to take further action if we judge it necessary. It's most certainly an interesting and exciting time to be in retail, and we're taking the opportunity to lead, as I will set out shortly. I'm now going to hand over to Laurie, who'll take you through the financial review. Thank you, Philip. Good morning, everybody. Before taking you through the detailed performance, let me run through the headline numbers. Group sales were GBP 70.9 billion, an increase of 0.3% at actual exchange rates. Full-year trading profit for our continuing operations declined by 6% to GBP 3.3 billion, and this was mainly driven by a decline in the U.K. profits and challenges overseas. Specifically, the regulatory impacts in Korea and the political disruption in Thailand and the challenging economic conditions in Central Europe. Our underlying profit before tax, which as a reminder, excludes property profits, is down by 6.9% to GBP 3.1 billion, and the underlying diluted earnings per share was 32.05 pence. Reflecting the challenging economic environment in Europe and its impact on trading profit, we've taken a non-cash impairment of GBP 734 million in Europe. Secondly, we've taken a further GBP 63 million for PPI and customer redress at the bank. I'll cover both of those in more detail in the presentation. As a result, our statutory profit before tax for the year was GBP 2.3 billion. It's actually a positive year-on-year movement, and that's primarily driven by the higher impairments and write-downs being charged in last year's group profit before tax. Our operations in the U.S. and China are shown as discontinued today in the results. During the year, we concluded our strategic review of the United States with the sale of the substantive part of Fresh & Easy's operating business to Yucaipa. It's worth noting that the provisions we took were in advance of the beginning of the Chapter 11 process. We're now coming out of that process, with most of the assets completed in terms of sales, and I'm pleased to say that we're fully provided for. We also announced our partnership with China Resources Enterprise Limited during the year. The process remains on track, and we expect completion in the first half. We commissioned an independent valuation of our Chinese business when we announced the partnership at the interims. We've updated them for the full year, and they will again be updated when the transaction is completed. The most recent exercise resulted in a wider range of valuations. We've decided to reflect the lower end of the range, resulting in a GBP 540 million write-down of goodwill, which you'll see included in discontinued operations. What we've done today is take a prudent approach based on the range of valuations in front of us. It's worth noting synergies have not been included in the valuation. The synergies are expected to be significant and can only be included when the businesses are merged. Turning to the segmental review and our performance in the U.K. Sales growth was up 0.8%, excluding petrol, and our like-for-like sales declined by 1.3%. At our Christmas update, we highlighted a weakening grocery market, and we've seen further weakness through the remainder of the year. Inflation across the industry as a whole has come down. Along with the continuing drag from our large stores and the general merchandise transformation, this has resulted in a fourth quarter like-for-like sales decline of 3%, or actually 2.9%. The year included a 2.1% contribution from new space, and this is 80 basis points lower than last year, as we reduced our new opening program. We expect it to be lower for 2014/15, given the further reduction in new space we outlined a year ago. Our full-year trading margin was slightly over 5%. However, trading margin declined by 28 basis points in the second half compared to the first half, and this is reflective of our trading performance and our determination to improve and strengthen the customer offer. Although we have strong, high-returning businesses in Asia with leading positions, their performance this year reflects a number of challenges. Sales grew by 1.4% at constant rates. This includes a 5.9% contribution from new stores as we continue to invest in these growth markets. Like-for-like sales declined by 4.5%, driven by two main factors. Firstly, South Korea. Although we've annualized the DDA regulations, the year-on-year changes in the days and hours of closure have continued to impact our sales. Whilst we highlighted an incremental GBP 40 million profit impact in the first half, as we expected, there was no further profit disruption in the second half. We've worked hard to mitigate the residual effects by fully aligning our operations to the current pattern of trading now. The second driver of the like-for-like sales decline was Thailand, where our performance has been held back by our own execution, which we described at the first half, as well as external pressures. We described at the half year how the Thai economy had fallen into recession. This has since been compounded by the effects of a heightened political unrest in the second half. For the full year, Asia's numbers benefited from currency, but in the fourth quarter, we've seen a negative impact, primarily driven by the Thai baht. The overall impact of currency on our Asian sales in the fourth quarter was 5.6%. Whilst it's difficult to predict currency movements going forward, this trend has continued so far into the first quarter. Korea, Malaysia, and Thailand remain markets with significant future potential and opportunities to invest in high-returning stores. We've opened 2.1 million square feet of new space in the market this year, and this reduction is compared to 2.3 million square feet that we opened last year. In the coming year, the plans are even more focused, with just 1.2 million square feet to be opened, and much of it will be in convenience. Turning now to Europe. Conditions have remained challenging, particularly for our large stores. Sales declined by 0.3% at actual exchange rates, and like-for-like sales declined by 3.5%, excluding petrol. Our trading profit for the region was GBP 238 million at a 2.6% operating margin. Following a 68% decline in profits in the first half, second half profits were up by 16%, and second half like-for-like sales have improved. Our decision to invest in the shopping trip through price, quality, range, and service resulted in a stronger second half, and a significant contributor to this was the improvement in Poland. Poland was a particular focus for us in the year. We are pleased with the customer response to our improvements. Like-for-like sales trend has improved through the year. Ireland has continued to be a difficult market, and our weaker trading performance there has had a significant impact on the profit of our European segment this year. We have continued to focus on the heartland of our business in Turkey, and the stores there have contributed to the improvement in performance through the year. Nevertheless, Turkey is still very much a strategic focus, which Phil will expand on in his presentation. Given the scale of the challenge in these markets and the impact on trading performance, we have appropriately revised our long-term forecasts. As you would expect, this has prompted a review of the carrying value of these assets, and this has resulted in a write-down of GBP 734 million, the asset impairment you have seen in this morning's announcements. We have continued to be very disciplined around the allocation of capital to Europe. You can see it here again in the EBITDA to CapEx profile. We have reduced investment in the region by nearly 40% this year and expect to maintain a similar level of lower spend in 2014/15. Capital will only be allocated where it will make a good return. New investment will be scarce and focus only on targeted opportunities, primarily in convenience and online. This year, the bank's trading profit was GBP 194 million, and excluding legacy income and fair value releases, you can see that it grew by 19%. As we have explained in the past, we have two distinct businesses in insurance and banking. Our banking products have performed well. We have seen strong growth in lending, with credit cards up 22% and loans up 14%. In the first full year of trading, mortgage balances have grown to GBP 0.7 billion, and we have helped over 4,000 of our customers to own their own homes. Those customers have borrowed on average of just under GBP 170,000 with a conservative loan-to-value ratio of just over 50%. On the other hand, the profit contribution from our insurance business was down 17%, and this reflects the challenging market conditions with marked reductions in premiums across the industry. The bank will soon complete its suite of products with a current account launching in the first half. We expect the growth in underlying trading profit in 2014/15 to be broadly offset by the investment in our current accounts. The bank's balance sheet remains strong in terms of levels of liquidity. Customer deposits remain the primary source of funding, but the funding base has been diversified during the year with credit card securitization and participation in the Funding for Lending Scheme. Now moving on to property, interest and tax. Property profits and related costs declined by GBP 180 million this year. Historically, by acquiring and developing high-quality stores, we grew the value of our property significantly and unrealized property profits built up. We have had an active program of releasing value from the property portfolio over many years. We have released over GBP 7 billion in the last five years alone. We said last year that we'd accelerate the scaling back of our sale and leaseback program in parallel to the reduction of our new space development. You can see that happening in the results today. We continue to look at our property portfolio and how to maximize the value in the most appropriate way for the business as a whole. This year, we focused on Korea and completed a sale and leaseback in January comprising of four Homeplus stores and their accompanying mall space. Underlying net interest increased by GBP 6 million to GBP 315 million. This increase is driven by lower capitalized interest as we reduced our CapEx. Underlying interest has reduced as last year's number carried an additional cost of debt pre-financing, something I talked about at the half year. Tax has been charged at the effective rate of 15.4%. This reflects the impact of the lower U.K. corporation tax and the one-off impact this has on our deferred liabilities. In 2014/15, we expect our effective rate to be around 22%. Our underlying diluted earnings per share was 32.05 pence, a decline of 7.3%, similar to the decline in underlying profit before tax. This is calculated at constant tax rates. Using the actual tax rate, it would have declined by 5%. Free cash flows increased by GBP 680 million, driven by an improved cash flow from operations, lower capital expenditure, and an improvement in working capital of GBP 280 million. You'll recognize this slide on CapEx from our investor event just seven weeks ago. As we said then, we're reducing our CapEx to no more than GBP 2.5 billion for at least the next three years. This year, we spent GBP 2.7 billion or GBP 3 billion, including China. As we said back in February, a greater proportion of our reduced overall spend is devoted to our existing stores. We are accelerating our refresh program in the U.K., and we're also maintaining a higher level of spend on technology to ensure that we have the necessary capabilities for a truly multi-channel offer. We're spending significantly less on new space. In the U.K., we've already reduced our investment from 2.5 million square feet at peak. In the coming year, we'll just open 0.9 million square feet of net new space. This includes 200,000 square feet of franchise space in One Stop. In Europe, we'll open just 275,000 square feet of net new space and focus more of our investment on high returning opportunities in Asia. Completing my review of the cash flow, an almost GBP 800 million reduction in profit proceeds has been offset by lower cash losses in Fresh & Easy, lower CapEx, and improved working capital. This has all resulted in net debt remaining flat year-on-year in spite of a decline in trading profit. As you know, two metrics that we use to guide our internal decisions and which support the discipline to maintain a strong investment-grade credit rating are net indebtedness and fixed charge cover. This year, net indebtedness has risen to 3.16 times, reflecting the profit performance I've already described. The fixed charge cover has remained stable at 3.4 times, with China excluded as a discontinued operation this year. When we complete our partnership with CRE, our group ROCE will reflect our share of the partnership's assets and profits or losses. Given that we expect to complete the partnership later in this half, we've shown a pro forma group ROCE, including our Chinese business. On this basis, our ROCE is 12.1%, and based on current accounting treatment as a discontinued operation. The 12.1% would've been directly comparable to 12.7% last year. If we exclude China, and based on the current accounting treatment of this discontinued operation, our group ROCE would've been 13.6%, a year-on-year reduction of 91 basis points. The U.K. continues to earn the highest returns in the group, and our business in Asia are high returning. Europe's returns remain below the cost of capital, which explains why the capital being allocated to the region has been significantly reduced. To close, I'd like to spend a few moments on the financial framework. We shared it with you last April, although, of course, it's already been informing our decisions and continues to do so. The framework helps ensure an appropriate balance of growth, returns, and cash generation. It tells you what to expect of Tesco from a financial perspective in the medium term. The changes announced to CapEx underpin the commitment to this framework. They move CapEx to the bottom of the 4% down to 3.5% of sales guide rail. This even greater focus on capital discipline will help maintain the commitment to generate positive free cash flow, maintain a strong balance sheet, and in particular, maintain a strong dividend. The proposed final dividend is 10.13 pence per share, and this gives a full year dividend of 14.76 pence per share, in line with last year, on a cover of 2.1 times. Now let me hand back to Phil. Thanks, Laurie. Tesco's got three clear priorities. Continuing to invest in the U.K., leading in multi-channel retailing, and being increasingly disciplined as we pursue international growth. I want to start my review today with the international businesses, and most of you will be familiar with the way in which we categorize them. The first group, Korea, Thailand, and Malaysia, are market leading businesses, or very close to, with economies that have got strong prospects for growth, and where modern retail does not yet have a large share of the total retail. There's opportunity for us to grow because the economies are going to grow, and for us to grow because modern retail itself can take a greater share. The second grouping is largely the Eurozone countries or those very close to it. They've suffered the long-run impact of the economic uncertainties and of the squeeze on disposable incomes. These markets are working hard to protect their current positions, to improve the offer for customers, and we're managing them to ensure that the cash flow comes from them, and that our returns improve. The third group, three exciting markets, China, India, and Turkey, have very long-term prospects, very positive long-term prospects. But we don't have a profitable model for growth. We're focused in those markets on finding a means of accessing it and doing so in a capital light way. I want to turn now to our largest market, to South Korea. The challenges of regulation have been well aired at these meetings and elsewhere, and they're not quite behind us yet, but I'm pleased that sales and profits are now in line with the trends seen by our listed peers. As we expected, there wasn't any additional profit impact in half two from those regulations. The team there are focused on two important strategic initiatives. Firstly, the hypermarket refresh program, which has started to reap benefits. I was in Seoul just in February, had the chance to see a newly opened hypermarket, which was downsized from the original plan of 12,000 sq m to 9,000 sq m. It has a bigger mall, which we are the landlord of. It was put together beautifully well and trading in line with our expectations as a store, but of course, with better income stream from the mall, which is a better and more attractive offer than it would have been otherwise had we implemented the original plan. Then I happened to see two hypermarkets that have been refreshed. Similar principles, really. Tighten up the space, add more complementary retail. They are doing very well, I am pleased to say. All in all, we have refreshed seven hypermarkets in the last year, and the cash return on investment of those looks like it is going to approach 30%. So the team are focused hard on ensuring that the capital that goes in gets a return, customers enjoy it, and returns and profit improves. The second important initiative is the franchised 365 format, of which there are now 80. We have been working on this format since 2011. Those 80 are going to plan, and we are going to open another 200 in 2014. Homeplus is a great business, and we see enormous opportunity for growth and for increasing returns, despite the challenges we faced in the last couple of years. Particularly excited by the way the offer is improving and the opportunity to extend franchising. Our second largest market is Thailand, which had a tough 2013. The political uncertainties actually heightened in the second half. Despite the strengthening of our team that we discussed last time we met at our interims, the headline like-for-like actually deteriorated from half one. Again, the team have got a very clear plan, multiple facets to it, but three big opportunities, which are now beginning to show early promising signs. Hypermarket refreshes in Bangkok. I was recently in Bangkok and had the opportunity to visit some of them. Again, the stores tend to get a bit smaller, averaging 12 coming down to between 8,000 and 10,000 sq m. Bigger malls, better food courts, improved sales, improved profitability. Well worth the investment. It drives more traffic to a refreshed store. The convenience expansion is the second strategic opportunity, not just through Express. We opened the first of several 365 stores in Bangkok, and we expect to see them becoming more of a feature of the way we access growth in this exciting market in the years ahead. Capital light, of course. Thirdly, grocery home shopping. We have a blueprint, as you know, for international grocery home shopping now features in 11 of our 12 markets. It started very well indeed. We are pleased with how customers are taking to it. We are adapting it as we go. Again, we expect to see growth from that during the years ahead. In line with how we think about delivering value in a capital-light way, we announced two partnerships in China and in India. China Resources Enterprise chose us for our know-how and for our expertise. We partnered with them for their excellent local management and their strong network of stores. We are expecting MOFCOM approval in the first half of this year when the two businesses will be combined. Together, we will operate more than 3,000 stores across the effectively eastern seaboard of China, moving slightly inland. We are looking forward to helping them grow their business and to take the synergies which we fully expect we can do over the next 2 to 3 years. In India, we have made a relatively small, we think low risk investment with a very strong local partner. Laurie and I have been working with Tata since 2008, and we have helped them build their Star Bazaar business to a point where stores are now opening profitably. What we will be able to do is help them to run and to grow that business in Mumbai and in and around Bangalore. It is a great relationship. We formalized it. We think it will give, again, access to years of growth, but in a capital disciplined way. You will know that across Europe we have got pretty strong positions in markets that are attractive over the long term. With that, with those market leading positions, comes scale within the region that can bring advantage. When you add to the scale of Tesco to our 33 sourcing hubs around the world and our 70 buying groups, it can really give advantage. The team under Ken are focused on a Pan-European program, which will leverage the skill and the scale of Tesco, both within the region, added to the U.K. and Ireland, and the group. I am pleased the performance stabilized in quarter 4, and that is thanks to a strength in fresh and grocery performance as we buy more together. General merchandise improvements as we build stronger events that are across the whole region, not each country doing their own thing, and a much better Cook & Dine offer. The continuation of the excellent performance of F&F that really has grown over the years has also helped. Grocery Home Shopping, which is now in each of the markets, largely focused on the capital cities, but extending around particularly Poland and Hungary. A strong early start. Poland is a really important market and one where we made a very big effort last year. We saw some very promising results. I think it is helpful to look at the results of that decisive reset, which began a year ago, a reset focused on fresh foods and on prices. Not only are the sales improving as the charts show, but customer metrics, especially on price value, on service, and fresh, have improved. It is great to see customers responding positively. I have to give credit to the team, given we did not start the year terribly well. I knew that they would do better, but 7% like-for-like in Q4 is better than I expected out of the small stores. At a total level, approaching 2% like-for-like in the fourth quarter is good. Hard won, requiring a significant effort. Another feature of our businesses in Europe is the opportunity which remodeling provides. Early-stage experiments have delivered value for customers and also value for shareholders in terms of profitability. What you can see here is the Tesco Budaörs. It is a 146,000 sq ft hypermarket with a mall, just outside Budapest, trading up against a 190,000 sq ft Auchan on the other side of the motorway. We downsized it to 100,000 sq ft, pulled the store in, added two complementary tenants, Sports Direct, which has done very well, and H&M, which has done even better. You can see that we got a like-for-like sales uplift despite the store being 30% smaller. A profit improvement comes from lower operating costs, less heating, less power used, less colleagues in the store needed. Because again, we got so far to March with the product, got less checkouts. The mall, the addition of those two tenants with a mall refresh and a better food court, makes it a more attractive destination. You drive more traffic to the store. It is one of 12 stores that the team were downsizing last year, listed here, and we plan to learn more from them and do more in the years ahead. Ireland is another market with a challenging macro environment. Whilst the country might be out of recession, consumers are not. Seven years of consumer pressure have led to intense competition, and in Q4, very high levels of vouchering by all of our competitors. We have got a real focus on our customers, and with the launch of Price Promise against the discounters, we did see some improvement in the fourth quarter. The team there are very focused on making the most of their points of difference. The very wide range of added value, convenience, fresh foods. F&F, our clothing brand. General merchandise. The Grocery Home Shopping for Dublin, it is particularly good there. Ireland is very carefully constrained on capital. Few stores will open for us. Our effort is to defend our position and to do the right things for customers, but to do it in a capital light way. I will end my review of Europe with Turkey, where our focus is on finding a profitable model for a country with excellent long-term potential. The team have done a really good job to stabilize the business. You can see how the like-for-like is trending, and their key programs are starting to deliver. We are in early-stage discussions with potential partners. Should that prove to be not successful, we have got a range of realistic alternative options. To summarize on international, all of the teams are focused on improving performance, and we have seen early signs of improvement. We can get real competitive advantage from our skill and from our scale, and we are all working hard to do that. Whilst the second half performance is better and helped by our efforts on store remodels, there is a lot more that we are doing and a lot more that we must do. All of it with a focus on customers, with a focus on capital discipline, and a determination to deliver real value. I now turn to the U.K. business. Chris Bush describes it in this way: If we are going to win, there are five areas which are going to make the difference. Sharper prices, improved quality, stronger ranges, better services. The differentiated added-value products that Tesco has in its family of brands and its range of capabilities. Continuing our leadership in convenience and in online. Adding to our 1,750 convenience Express stores and our 700 One Stop stores. Building on our market-leading position in grocery home shopping. Making our general merchandise online offer more attractive for customers. Making the most of the opportunity of Clothing at Tesco. All brought together with a seamless multi-channel experience on a phone, on a tablet, on a desktop. I am going to focus on the fifth, loving the stores that we have, large stores that are worth the trip. As you remember, we laid out at the end of February that we have a high level of exposure to larger stores, nearly 730. Thankfully, all in prime locations across the U.K. And we have set ourselves the task of refreshing them over three years. Missions and propositions are at the heart of those store refreshes. From analysis of customer behavior and competitors in the catchment, we establish what customers are seeking, that is the missions, and then we tailor the propositions, whether it should be a big food store, a general store combining the best of Tesco, or a destination hypermarket. Each will get a very tailored solution of range, of space, and of service. These ingredients to success have been tested over the last two years, piloted in some cases, and started to roll out in some. And I am delighted that they will be coming to even more stores across the country this year. These physical ingredients that are shown here on this chart are complemented by our virtual capabilities, by the 4 million customers who carry a Tesco Mobile, by Click+ Collect for food and for general merchandise and for clothing, and by our loyalty programs that we are increasingly making more use of. We are bringing these ingredients to more stores every week. We have 482 superstores, and we are going to refresh 50 of these this year. These stores are between 20,000 sq ft and 50,000 sq ft, and their refresh will make them the best food store in their locality. Food is the priority for these, and generally, they have limited general merchandise and clothing. Whitchurch and Stoke-on-Trent are good examples. Whitchurch in Shropshire opened in 1983. It has been the only store really in that town for 41 years. Its proposition is to be the very best food store, but it has F&F because it has the space to accommodate it, and because its location is near the high street, and because of its customer profile, lots of young families. Stoke-on-Trent, very similar. Bigger town, greater population, a store that opened in the 1980s, 1981 in fact, and it has strong food, but a very good F&F and general merchandise because again, it has the space. But food is our priority for superstores. It can be different with Extras. I will turn to them then. We have nearly 250 of those, very well located. They tend to be between 50,000 and 80,000 sq ft. Some of them are as big as 120,000 sq ft. Here, our refresh work is really focusing. We are going to refresh 110, and we are aiming to make them stronger destinations. More of the ingredients that I showed you earlier is going to appear in these larger stores, and typically, they will feature a strong destination clothing department, an appropriate general merchandise department focused on families, Cook & Dine, toys, stationery, party, smaller consumer electronics, as well as tailored new food experiences, whether it is Giraffe, Euphorium, Harris + Hoole, Dex, or a Tesco Café. It is all dependent upon their location and on the missions of the customers. One such store that you will all be familiar with, I guess, is Bar Hill in Cambridge. It is going to be downsized. It is going to have a Dobbies, and it is going to have a big refresh in 2014. We talked before about the concept of food first. We've worked hard to create the best ranges of fresh foods, to improve the service, to train our colleagues so they can serve with confidence and knowledge, and we're looking forward to accelerating the appearance of these features in more stores over the next 3 years. Food to Go, trialed in Regent Street and in Kensington, now features in 5 Expresses, in 10 Metros, in 3 superstores, and 16 Extras. It's very popular with customers. It's a wide selection of food from salad bar to sushi, to pizza and breakfast items, dependent upon the time of day and the customer missions of each particular store. It's going to feature in many more this year. Another important ingredient, and one I've referred to before, of this large store transformation is a much more comprehensive clothing offer. Here, I must pay a tribute to the outstanding work of Jason Tarry and the F&F team. Over 3 years, they've relaunched this brand in the U.K., continued to run it in Europe, and taken it to Asia. They've built out the ranges here in the U.K. They've grown market share, and they've improved profitability. F&F is affordable fashion. You could be forgiven for thinking it's just a supermarket brand. Well, it is now in 11 of our 12 markets, so it is. But it's franchised standalone in 10 others. You might have seen reports that we've got a new partner for F&F in the U.S.A. It's a very capital light way of extending the brand and of delivering value for shareholders. The F&F franchise will extend to more countries over the next 2 years. More exciting for me is that the Clothing at Tesco website will be launched in Ireland and in Poland this year, so F&F will become a multi-channel business in those markets, with more to come over the years ahead. Next generation clothing is now in 104 stores in the U.K., and it's already delivered strong sales improvements and good commercial gross margin improvements. It's going to another 140 stores in the U.K. this year. Let's move on to new food experiences. We've been testing these for 2 years now, and the customer response has been overwhelmingly positive. Good food, good coffee, great cake is what many customers want, and typically, an H+H like this one in Sunbury Extra generates sales 3 times the level of an old style Tesco Café. Sunbury is one of those stores that stands alone, hidden from the Staines Road. Now, thanks to H+H, it's becoming a brunch destination on a Sunday, just as Brookfield Farm in Chesham has become that for the Clarke family when we're home at the weekends, as it has been for many customers. It wasn't something that my daughter would do, pop down to Tesco, to the café, to get a bacon sandwich. But she does that now with her boyfriend on a Saturday and a Sunday. This year, we plan 80 of these new family dining offers in our existing stores. Adding to that 50 Harris + Hoole and 110 Euphorium or Bakery Project bakeries. This is a marked acceleration. The last 2 years have seen our thinking about the role of general merchandise and electrical solidify. Following the groundbreaking pilot in the summer of last year, we are clear about the range, and we are clear about the space that we need, and each refresh store will get new space, new equipment, so they can display the new ranges. I mentioned earlier, 4,000 new products. It is 1,300 new Home and 600 new Cook & Dine products. 200 stores are going to get our new package of space, equipment, and product this year, and another 200 will get them next year. If you take a hypermarket like the one in Chesterfield, I think it is a good example. Electrical space falls by 20%. Home entertainment space halves. Home space increases by 60%, Party by 75%. Cook & Dine doubles. Sales increase, profit improves. Importantly, these changes give more space to the product ranges which have tended to be least affected by online. If you think about it, when you are in a store shopping, there are things that you want to browse, you want to touch, you want to feel. Bed linen, cookware. Consider whether it looks good in your home or not before you buy it. They do not tend to fly to digital that quickly. I have got a couple of further important slides on the large store refresh to give you an overall flavor of our thinking. Stevenage Extra opened in 1988. I was the new store opening manager. I was there for three months, seeing it through its startup, largely because it was very near Ian McLeod's home, and they wanted me to make sure it was right when he came in. I think it is very typical of the transformation we are going to achieve through the refresh program. It was transformed in just four weeks. It has got the latest clothing and the latest general merchandise. After it opened, they went straight to the top of the sales league for their region. Because it is on the edge of the town center, near the railway station, it has got a Food to Go, complete with salad bar and hot food offer. And checkouts just for that area. It has got a much stronger fresh food focus with better counters, retrained colleagues. It has got a phone shop, a pharmacy. It has got Click+ Collect for GM and for food, with a new café opening just after Easter. It has only really been trading six weeks. Sales and profits are tracking ahead of our plan. But we are not ruling anything out as we look at the larger stores. Of the 730, perhaps 50 to 100 are going to need more radical work. Just as in Europe and Asia, we have begun to pilot the downsizing. And one of the first was at Newport, Spytty. It is shown here. We took a 94,000 sq ft store that sits on a secondary retail park on the west of the river, and we downsized it to 83,000 sq ft. We basically repurposed the surface general merchandise space, added a discount department store, the factory shop, and a soft play center for kids, and we added a Dex. You can see that in the bottom right-hand corner. Sales were flat before and after, but profit has nicely improved. And you can see how the profit progression is year-on-year. Commercial gross margin improves. You have got less markdowns, and you have got more high margin sales. Payroll expenses fall. Again, the store has got smaller. Then waste, shrink, and other costs, such as lighting, heating, and power, they fall. Then in comes the tenant income. GBP 3 million capital. We anticipate in 3 years' time, the ROI will be more than 50% in that year. What I like most about this is we're learning from it. Customers tell us what they like, tell us what they'd like to see more of. They take a bit too long to do, so you have too much disruption. We're working hard on that. This will be a feature of Tesco in the U.K. in the years ahead. There are 5 more of these downsizes planned for the year that we're in. Any of you who know our store in Leigh, in Manchester, it's currently an 82,000 sq ft store. It's a good store. It's coming down to 70,000 sq ft, a 15% reduction. Oldham, currently 101,000 sq ft, coming down to 90, an 11% reduction, and the addition of more complementary retail. Glasgow St. Rollox Extra, currently 101, coming down to 90, an 11% reduction again. Prescot, near my home city, the shop my dad goes to, currently 100,000 sq ft, coming down to 89,000 sq ft. One of the best stores we have in the group, Culverhouse Cross in South Wales, that started as a 40 when I was on that new store opening unit in 1988, that went to 60, that then became 80, that then went to 100, coming back down. Coming back down to 83,000 sq ft. We'll have more complementary retail and new food experiences alongside it. We'll be watching those very carefully, and we'll let you know how they are performing. As I say, over the next 5 to 10 years, maybe we have to do this to between 50 and 100. But we have to make sure that we minimize the disruption because it's been too heavy in Newport and in Stockton. We're learning the lessons, and the man who's in charge of making sure that happens, Tony, is in the room. In summary, we're on track to complete 50 refreshes of Extra stores in the first half alone. In fact, Tony was telling me yesterday we're on site with 15 right now. We're all looking forward to bringing a new Tesco to 650 neighborhoods this year. We've never tried to do anything on this scale before, but we're better able to do it because of the lessons of the last couple of years and because we've dramatically slowed down our new store opening program. That means important resources in our construction partners, the architects in our new store opening unit teams, can be repurposed into this huge effort. On new stores, it is worth saying that if you look at the pack that you've got, I think towards the back, we provide the details of the new store program for the U.K. You'll see we're opening 12 large stores in 2014/15. If you exclude 2 of them, which I think you should, Lincoln, which is a replacement for a store that's been in need of replacement probably since the '90s and Rotherham, you're left with 10. The average size of those stores is less than 30,000 sq ft. So our large store program is largely a super store program. If you look at where those stores are, there's a good reason for each and every one of them. We have called an end to the space race. I do not want anyone to be in any doubt that we have not. We are going to reduce the number of new stores to a trickle. We are going to put them where we have got opportunities to bring great food to neighborhoods with good returns. Otherwise, we will not be. I think, by the way, Lincoln and Rotherham will be amazing for those communities who have stayed with us but have seen retail move on and those stores not. Another important component of the Tesco transformation is our effort to achieve multi-channel leadership. The new era of retail means that customers can shop in-store, they can shop online, they can shop in an Express or an Extra, in fact, any which way they want. Our job is to make sure that we are there for them, this seamless multi-channel experience. The reasons for that are clear. Robin set them out in February. Customers really value customers who get this right. Only 4% of our customers today shop across stores, online grocery, and online GM. They spend nearly three times that of in-store customers only. I am going to just run you through three slides now on what is coming next and why these improvements really matter. Firstly, our current account, not just our white label account. It is designed by Tesco. It is designed for our customers, and of course, you will forgive me, they are going to be the first to see it. It is an account where customers win when they spend and win when they do not. Spend, they get Clubcard points. Save, they get interest. It will have one of the very best apps that the banking industry has seen globally. It will strengthen loyalty and engagement with Tesco, and it will be coming sometime in the first half of the year. I have to be careful when I say when it is because it is a regulated industry. We need the approval of the regulators before we launch. It would not be right for me to say when we think it is. It would be right for them to confirm that it is okay for us to do it, but it is coming soon, and it is terrific. Terrific. No branches, by the way, in Tesco stores. We do not need them. It is a digital bank. It has got a call center behind it, where our colleagues are not rewarded on the basis of how many accounts they get. They are rewarded on the basis of the quality of the service that they provide. Then there is something else we have been working on for more than three years. We were the first to see the potential and the opportunity of internet grocery home shopping. We have developed a set of digital capabilities which I think rival the best pure plays. Of course, we have something else. We have a great network of stores. We develop great products and services as well. We have got our own device, the Hudl. Sold over half a million, selling 8,000 a week. The beauty of that is you can shop groceries, you can shop clothing, you can shop GM. In a minute, there will be an app for you to do your current account banking. We have just completed the blinkbox trilogy, music, movies, and books. Now on a Hudl, but on practically any device. We are launching value-added subscriptions later this year, rewarding customers for the loyalty that they show to Tesco. All of this is terribly important for the long-term sustainability and competitiveness of a business like Tesco. It is also important because customers who choose to use streaming movies spend another 13% at Tesco than those who do not. Just showed you that chart 2.98 times. Now, another 13% on top. That is only movies because music has been in beta and books, really, we have launched very quietly because that is the way we do it. Do it quietly, test it, make sure it works, and then roll it out. This unrivaled family of brands which we have put together gives us a source of advantage against our competitors. Using our missions and propositions model, they will be deployed where they can get the best effect for our customers. But customers want more than just the right brands in a well-presented store. Customers simply expect more. The 21st century, connected, smart, savvy consumer has got higher expectations of business in general and an industry-leading retailer in particular. They want brilliantly informed service. They want advice, and they want engagement. That is why we have launched a new leadership skills training program. That is why 70% of our leaders have already attended a three-day Leaders at Tesco program. Over 250,000 of our U.K. colleagues have received Making Moments Matter training. We know that our colleagues do work that really matters. They serve millions of customers, and we want them to be more confident. They need to be better led. They need to be able to serve with a smile. We have shown you this chart before. It is just the start, really. That leadership extends to a culture which must put back more than it takes out. From our supportive food banks, where we and our customers donated 8 million meals last year, to Diabetes UK, our charity partner, where we helped raise more than GBP 10 million in one year alone, to the Eat Happy Project, where we will take 1 million schoolchildren on a farm-to-fork trail to connect the better with food. Tesco is making a significant contribution, as it always has, but it is starting to be recognized now for doing so, as our customers expect us to. All of these programs, from Refresh to multi-channel to service and community, are aimed at improving loyalty. Loyalty has always been important to Tesco. In simple terms, everything we are doing is designed to retain our most loyal customers, to attract more new ones, to have more customers shop across our channels. You can see the reason for that with that multiplying effect chart. To get them to shop across our brands. That is how companies can build enduring like-for-like sales. Because, as you know, greater loyalty delivers greater lifetime value, loyalty will always be important to Tesco. It is a KPI we focus on when we are driving this transformation. It is going to be another three years before we have completed that transformation. But each year from now, we will feel the progress. Customers will, too. In the U.K., expect 2014 to be a year where like-for-like is held back by the changes we are making. General merchandise in half one, electrical space reduction all year, the deflationary pressures that are coming in food, the Refresh disruption, and the year-on-year reduction of above-the-line vouchering that we have been making since January. We will, however, be making progress each and every day for customers, creating more value for them in their store, creating more value for them online, driving more loyalty. Just look at the additional steps we have already taken with Clubcard Fuel Save. Already, 3 million customers have saved 6 pence off each liter of fuel. We have signed up 22% more Clubcard customers than we did in the equivalent period last year. If the Welsh trial is repeated, we will see an 8% increase in our fuel sales. It is a program that is unique to Tesco. It is made possible by our 484 petrol stations on our large store car parks. Price is about loyalty, too. Prices have come down for our most loyal customers. Prices are down on the products which matter most to customers. There is more to come very soon. We are also going to make the cost of home shopping lower and make Click+ Collect much more convenient and affordable for more of our customers. Loyalty matters. What it all boils down to is that these improvements are measured responses to changing customers' expectations. We are firmly focused on delivering the most compelling offer for our customers. Hope you have got a flavor for the ingredients and a sense that the pace is increasing. Many of my senior team are here today. They are excited about the prospect of 650 stores getting the ingredients of the new Tesco this year, and that our digital capabilities are arriving on our customers' hudls and smartphones. We are cash-focused, we are returns-focused, and we are customer-focused. Thanks for listening. Laurie and I will now be happy to take your questions. Do we need a microphone in this room? Yeah, could you bring the microphone down here? The gentleman in the second row. Thank you. Thanks. It is Dave McCarthy at HSBC. Three quick questions. On the pension, there is an GBP 800 million increase in the liability, 40% increase, 40 odd percent increase. Any intention to sort of address that? What are you going to do about it? Secondly, on the property, 12 months ago, you took a write-down on the U.K., and you talked about disposing of sites, et cetera. Have you got rid of any of them yet? Are we likely to see any more disposals? Because you continued to cut back, but you still retained a substantial pipeline. I think you only got rid of 20% of your property. I may be wrong on that, but correct me if I am. Then on total sales, just standing right back from this, you have reduced your opening program, but we are still getting 4% plus capacity increase each year. And that suggests, happy to go through the numbers if you want, Philip, but you're still- I've seen the math. Okay. So that suggests that the ongoing industry situation will be like-for-like declines for. On average, you're cutting back on your openings, so your new store opening contribution is going to come down to circa 1%. Looking forward, is the U.K. model going to be of ongoing total sales declines like we've seen in the second half? Because that's only going to get worse, at least in the short term. And then finally, when you talk about seamless multi-channel, an irritation has been that you can't use a voucher that you're given in store online and vice versa. A couple of years ago, I was told, oh, we're going to address that, but 2 years on, you still haven't got that problem solved. So is it not been solved because you can't solve it or because you're choosing not to solve it? Thank you. Well, Laurie, you're going to take the pension question, and then I'll take the other three. You're absolutely right, Dave. The liability has gone up by GBP 800 million in the year, but as you know, that's the IAS 19 valuation of liabilities. The discount rate actually dropped by 40 basis points year-on-year, and that drove that increase in liabilities. Just to give you some flavor behind that and some color, through a period of between June and September, the discount rate actually went up 50 basis points. That 50 basis points would have brought the liability down by GBP 1 billion after tax. It is very volatile. The outlook does look like that the discount rate will start to creep up next year, and therefore, you should see a reduction in the IAS 19 valuation of pension liabilities. Of course, the real liability is the one that's established through the triennial valuations, and the triennial valuations is actually for March 2014 and before, the three years before. We've just started that valuation process now. Yeah. So process that's undertaken by the trustees of the pension scheme. You might hear more about that at the half year. On property, I'm not sure about the 20%, but we can come back to you on that. We have identified a whole series of options on land and land that was acquired for extensions, and we've begun the process of disposal. We have disposed of land in the last year. That's going to increase. The rate of disposals will increase. It takes time to do this because, of course, they've got to extend planning permissions that are largely for Class 1 retail, and they might be being used for other things. Yes, property disposals in the U.K. have begun. On total sales, I think for me, it's important to just step back from what's happening right now in the markets, take the medium-term view. Many places in the U.K. haven't seen the new Tesco yet. When they get a new Tesco, we see a sales improvement, and we see an improvement in our margins and in our profit. We've got three years now to get it into every store in the U.K. Looking out further than that, though, the population of the U.K. is going to grow. It's forecast to grow by 8% over the next 15 years. That means people are going to need more food. We think more of that will be consumed in convenience, which is why we're working on our convenience, but we think more of it will be consumed online, which is why we're building the multi-channel business. That's why they are our two most important priorities. Real incomes show every prospect of growing after what's probably six years of decline for most families in the U.K. When that changes, I am not saying necessarily behaviors will change and they will leave retailers to go to another, but the retailer that is able to put together the best proposition is more likely to succeed, which is at the heart of our strategy. On your last question about the vouchers, it has been an absolutely most difficult thing to do. The problem will be gone this year. I do not want to go into the whys and wherefores. It is just not as easy as someone might have told you a few years ago. Take another question, though, thank you. Yes. So lady just behind you on your left. Thank you. Good morning, Philip. Bruno Monteyne from Sanford Bernstein. Three questions on the U.K. program. One is the big price investments on produce and meat, the cucumbers, the minced meat. Do you expect any negative consequences for the quality perception of your produce and your meat? How would you manage that? The second one is on the price investment of GBP 200 million. I think when I read the press release correctly this morning, it said, certainly, initial GBP 200 million price investments. Are you already planning to go beyond that? If so, this year or next year? And the third one is about the simplicity of pricing that you stressed that it is going to be simple price, low, stay down. Is there a conflict between at the same time than having the 60 million personalized voucher schemes? On the one hand, you have this super simple low prices on key products. On the other hand, you have all this complexity of personalized pricing. Is it the end of personalized vouchering and pricing, or can they live together? I do not think the price investment needs to have any impact on quality perception. The product quality is not changing. What is changing is the price. The milk is still the milk, and the chicken breasts are still the chicken breasts. They come from British farmed poultry, and they are produced in the same plants that they always were. On the GBP 200 million and beyond, an initial GBP 200 million is what was said, and what I said before was we are watching the reactions of competitors very carefully. We have set out our internal program. For commercial reasons, I am not going to share it, but we intend to be competitive, and we have the flexibility in our plans to allow us to be so. On simplicity of pricing, what is really important to customers is the stability of pricing. For too long we were allowing our pricing to be pulled around by the actions of competitors, so we've largely stopped that. We're going for a combination of good promotions, real promotions for customers, and everyday low pricing on the lines that matter most to them. We also believe, fundamentally, that the digital capabilities that we've built and Clubcard allow us to personalize. Customers like the little thank you that they get, that allows them to get a ham and cheese sandwich at GBP 0.50 off, because that's the sandwich they always buy, or broccoli, because they always buy broccoli. They feel it's a smart thing for Tesco to do for them. Personalization is not inconsistent with simpler pricing, or with stability. In fact, quite the opposite. It shows that Tesco knows their customers, and Tesco gives them deals on products that they buy every day. Thank you. Another question, please. Just behind, in front of Bruno, isn't it, yeah, and then behind and to his left. Morning, this is Sreedhar Mahankali from Macquarie. Three questions. Actually, staying with the price investment point, can you tell us what run rate you've got to so far with the price cuts you've talked about in the press release, the 24% reduction on average versus your GBP 200 million target, if possible? Secondly, in the U.K. and respacing, repurposing space, you've talked a lot about very successful repurposing of space across the markets, including the U.K., and yet it looks like you're only touching about 80,000 sq ft in the U.K. this year in terms of repurposing. Why is it not a lot more? Why is it not right to have a bit more disruption in the short term to actually get through the point and get it done with in a shorter time frame over 2 to 3 years, rather than 5 to 10 that you've talked about? The last one is Europe. How do you get to a cost of capital situation in Europe from where you are today? Having seen the presentation, I haven't really seen anywhere where you actually address that issue. It has been sub-cost capital for a while. How do we get there? Thank you. Can I just clarify Sridhar, the first question, the run rate, and then you said 24% Sorry, 24% reduction you've put through so far in lots of the categories you've talked about in the release, bread, eggs, and milk and so on. Is that getting you to the GBP 200 million already or? Well, that's for me to know. We haven't made all of the price reductions that we intend to make. We've been phasing it for very good reasons to do with the fundamental issue of price architecture. If you take a 250 gram pack of minced beef and you reduce the price, you have to look at what that does to all of the other products in the category, because it can look daft for customers if on a pence per unit basis, that discounted product, every other low price product, is so out of kilter. So it takes time. So we haven't done it all yet, and we have more to do. But we made a big and important start, and customers have responded very well to it initially. On the respace and repurpose, you said 80,000 sq ft. Actually, those stores together are 500,000 sq ft, a little bit over 500,000 sq ft. It can take up to 16 weeks to downsize them. An awful lot of engineering work to go in. And that's what we're going to be perfecting in 2014. Can we do it more quickly without disruption to customers who you might be driving away during that period? And we don't feel it's an absolute pressing need to downsize all of them today. We feel it's an even more urgent need to refresh 110 Extras, which is what we're going to do, and 50 superstores, and to get the three-year program done. If I put too much effort into downsizing, I might not do another 30 Extras. I think they're the priority. We're going where the priorities lie. And in fact, Chris and I have many conversations with others about which store we should do. And they're quite emotional debates because we've all got the stores that we think have got the best opportunity. But in the end, we come down to their performance. And as we look at the investment appraisals, what will get us the best return, best improvement in the shortest period of time, of course. I don't think these do that when you look at it over a one, two, and three-year period. Also don't think you need to do them very quickly either. So maybe we'll go faster next year, but I think we need to be convinced that we can do it as best as we possibly can. We haven't even done two in the U.K. On Central Europe, it's a fair question. How do you get to the cost of capital? Well, you don't invest as much, and you get more out of the existing stores. The operational leverage that you get when you do that is significant. The Eurozone prospects look a little bit better for the next three years. But what we did was just a very prudent view of what our performance may be, which is why we took the impairment. The accounting standards are pretty strict. It's about the individual cash-generating unit. And so Ken and his team are managing them in a very disciplined way to get the best for customers and shareholders over the next three years. And if it goes better than that, it goes better than that. But our absolute focus is, let's generate cash, let's improve our returns, let's build a stronger multi-channel business in Europe. And that's what we'll be doing. I think when you do all of that, the cost of capital will get covered. Just very quickly following up on that. Margins have to be so substantially higher than what they're today for you to. So substantially higher than what they are today to get you to cost of capital. I'm just trying to understand how they go up. Yeah, that's fair. But you've seen how we've been prepared to do the opposite. We've been prepared to take margins down in Europe in order to improve our competitiveness. And the chart that we showed you about Poland was very hard-fought. And they're some of the most fiercely competitive markets, because there's many competitors and many stressed consumers. So it's never a straight line, this, as you know. But our plan is very clear, and our team is very focused. Can you pass the mic to the guy behind you? Bruno, John Kershaw. Yeah, thank you. Morning, guys. John Kershaw at Exane. Three from me. A nice sort of layout of your medium-term plan, but clearly, there has been a lot of negative press recently. The market share data has not been so strong. Perhaps can you talk about current trading trends and perhaps how you're managing morale in the business and driving that forward? Because obviously, people are concerned around that. Secondly, looking, you alluded to it in terms of the like-for-like drags from less couponing, refreshing the stores and the like. Can you try and give us an idea of what order of drag we're looking at on that? Is it a couple of percent? Are we looking sort of like a minus 3 like-for-like rather than turning up in subsequent months with a disappointing number? Finally, just stepping back on the sort of cash focus, can you give us an extent to what you think the free cash flow could cover the dividend in 2014-2015 before property disposals given the CapEx is obviously much lower now? Laurie will take the third question about free cash flow covering the dividend in 2014 and 2015. I'll go straight to the medium-term plan, market share, morale, and so on. We're all clear that our job is to lead Tesco during a period of transformation. We're not short of people telling us how to run our company. I think business leaders these days in Britain get a lot of it. When performance is not as good as people expect, the noise rises. But I'm pretty clear about what I've got to do, and we're getting on with doing it. I've got a great team who are absolutely determined to do it, and they lead the business, and they lead their teams. We think it's all about describing the vision and the strategy, about giving them the skills and the resources. I think the 650 stores that are going to be refreshed this year are going to feel it first and best. Clearly, you got everybody else to work with. But we want Tesco to succeed, and so do they. I've been greatly encouraged by the reaction that they have made to the current climate that we find ourselves in, the extraordinary climate that we found ourselves in over the last seven to 10 days. So I think the answer is, we've got to do what we got to do, get on with it. I think you can see that's precisely what we're doing. On the like-for-like drags of less couponing, are you going to have a go at that one? Thank you. Well, laid out in our presentations today are a fundamental proposition change, which is less petrol promotions, less couponing. I don't think it's appropriate to give you a specific number on what the drag of those particular promotions are because that's a commercially sensitive piece of data as well. Yeah. I think that was buying me a bit of time. More in the first half than the second half. Because we were coming off in the last quarter of the last financial year. By the way, we're still going to do 5R40. We're running one right now at Easter because it's become a common tactic. It's just the weight of those is very significantly reduced by a huge order of magnitude. On the cash focus and we- We were talking through your question, John, so sorry. Could you repeat the cash flow and dividend question for me again? Yeah, it's just a simple one. You're obviously focusing much more on cash now. To what extent can we expect the dividend to be covered by free cash flow before disposals in 2014/2015? Well, materially. We are coming from a position of strength. CapEx is coming down again next year. The working capital improvements we feel are sustainable. There will be some property proceeds, so it will help out in terms of covering any draws on cash flow. But as I say, I think we can materially cover our dividend through our operating free cash flow. Thank you. Another question, please. So John, pass the mic to the guy to your immediate left, and then there is a gentleman here with his hand up in the third row, and then one in the fourth row. Thank you. Yeah, thank you. It is Frank Harding from Goldman Sachs. I have actually got five questions. You always do, Frank. But they are short. The first one was, whose customers are most attracted to the new Tesco concept that you've talked about? The second one was, what percentage of your CapEx over the next three years is going into the U.K. versus international? A split there would be helpful. The third one, given your focus on investing cash flows, could you explain within the investment line what the GBP 700 million outflow is that you seem to have taken after free cash flow? That was a GBP 700 million inflow last year. So it's quite a material swing. Could you just quantify the contribution from sale and lease back in FY 2015 and then run rate beyond? My final one was, beyond Turkey, would you consider international exits? Thank you. I'm going to take, whose customers are most attracted? Our customers are most attracted, and our customers who shop between us and others are most attracted. When I think about how we are going to improve our performance in a sustainable way, it's getting our loyal customers to become more loyal, to spend more of their disposable income with Tesco and to attract more customers who today aren't loyal, but shop across us, across the retailers, and then shop more with us. So these are two critical points, two critical measures. The other two are the proportion of customers that shop across the channels, in-store, online, mobile, and the proportion of customers who shop across the brands. Those four measures we have right in the forefront of our minds when we're looking at how the business performs. So that's that one. Well, we've said it, on capital expenditure and how much is spent in the U.K. and how much is spent outside. Our capital expenditure, for the next three years, we've said it no more than GBP 2.5 billion. I would say something in the region of 70% of it is spent on the U.K. or on technology, which can go to primarily the U.K., but we build things at Tesco to deploy in many, many places. It actually is one of the reasons why those vouchers that you get in store, you can't use online, because we're actually replatforming so that we've got one application for the whole of the group. If we just went straight at the U.K., we'd be diverting precious resource that meant you'd have to do it many, many times. I'll skip the outflow and Laurie will come back to that. On the sale and lease back contribution, the best I can say to you is we've shown you in the chart that it's trending down to zero, and that's where it's trending down to. Laurie has said today and before precisely why we think that's the right shape, and so we'll be staying with it. Beyond Turkey, my job is to do the best thing for shareholders, and so I don't rule anything out, but I also like the strong market positions we have in those other groups of markets. Number one in Thailand, number one in Malaysia in the hypermarket space, number two in Korea in hypermarkets. These good economies. Then market leading in Hungary. It's a small business. It's a strong business. Market leader in Slovakia, small business, strong. Poland, in the pack of three or four, way behind Biedronka. Our small store program showing encouraging signs. I think they are good businesses, but never rule anything out. Laurie? Are you on page 20 of the cash flow? Is that where your questions are coming from? Um- Page 20 of the press release, sorry. No, sorry, I have actually gone into the additional information pack. Okay which I think is page 4 or 5. The GBP 700 million within the retail business below the GBP 700 million of free cash flow, which reconciles to the presentation. So just covering off the sale and lease back question that was before. So we've come down to GBP 568 million worth of proceeds from GBP 1 billion and GBP 351 million. It's in the retail cash flow page on page 6. You said it was page- Sorry. Group cash flow in the retail vertical, page 5. Oh, okay. You've split out Retail Tesco Bank and Tesco Group. All right. On the left-hand column, there is a negative 494 and a negative 207, and last year that was a positive 721. The 494 is basically an increase in our short-term investments in preparation for the retirement of debt, which has happened this year. The 207 proceeds from other investments would be just general short-term investments that we take that are not quite cash but are very liquid and convertible to cash quickly. Again, that would have been an increase ready to retire debt in the coming year. Thank you. Thanks. Over here. Sorry, Phil, could I come back just on your loyalty point? Sorry, you were talking about increasing loyalty. Yeah and if we look at the switching data, it's clear why you're saying that. I just wanted to understand, was there an easier source of re-winning loyalty? Is it easier to win loyalty back to the people that are going to Big Four competitors or to discounters or towards online? I'm just interested to understand how you think about that. I think none of it's easy. I wouldn't say easy. I would say that the focus should be on our loyal customers, those who've become less loyal, and those who look like they could become loyal. And what's happened in the U.K. over many years is people have shopped across more fascias, and that's affected loyalty. And our whole job is to increase loyalty. And that's why we have the programs that we have. Sorry. Yes. Hello. So François Halconruy from Morgan Stanley. I just had two questions. The first one regarding Europe. I was expecting a bit more color on the impairment. Could you provide perhaps a breakdown on what was exactly the nature of this impairment, and what impact did it have on depreciation there? And importantly, going forward, what kind of tailwind should we expect in terms of decreased depreciation? Can you just speak up a bit? I heard the first part of your question. Color on impairment impact. Yes. Going forward, what type of tailwind should we expect in terms of decreased depreciation in the region there? A second question on the U.K. and the drags you are seeing there in terms of top line. You are talking about further drags from the general merchandise transformation you are having currently. Could you provide a bit more color on how this has developed in Q4, and going forward, when do you expect this drag to fade down? Okay. Thank you, François. Laurie, you can take the- Color on the impairment. We do not break down the impairment by country within the segment. That is total for the region. It did impact every single country within the region. In the main, it was a value in use calculation. There were some stores that we took an alternative use value methodology, less cost to sell. In terms of depreciation, it will reduce our depreciation charge by broadly GBP 30 million to GBP 40 million in the coming year. Of course, those impairment tests are done every single year, unless there is some trigger event at some point in the year, and that would produce an out of cycle impairment process. We have been pretty prudent, François, in terms of what we think our business will recover by in Central Europe, and in Turkey. Of course, our Irish business is still under quite a lot of pressure in terms of consumer sentiment. Thanks, Laurie. On the top line drags, I mentioned in my presentation an example of Chesterfield, which is typical of the sorts of changes that we will be making as part of the refresh program and the GN change, 200 stores this year, 200 stores next year. Electrical space falls by 20%. It has been the category that has gone fastest online. We have too much space and therefore we reduce it. That is going to have a drag on sales as we do it over a couple of years. Our entertainment space reduced. Then general merchandise space reduced more generally. These are the sorts of top line drags. I think the biggest of all is, as Laurie said, the fundamental shift in where we invest margins in promotions above the line, 5-off-40s and the like, which do buy you trade in the short run, and we have been on this drug for Chris Bush is nodding vigorously. We have been buying trade, and the industry has been buying trade for a long time. We think that that has got to stop. It will have a drag on sales for us whilst we make the change. But we are pleased with Clubcard Fuel Save and initial customer reaction. We are pleased with the reaction to our refresh program. We are pleased with initial reactions on pricing. Got more to do. The gentleman behind you, please, and then the gentleman in front of you, Clive Black. Thanks. Rickon Thackwrat from Spirit of Santo. Just one technical question. Can you just explain the difference between why there is a large difference between the cash tax charge over your cash flow and the EPS tax charge in your earnings statement? The second question, just again, on the components of why you are saying the U.K. like-for-likes will be weak near term. Excluding petrol and general merchandise, are those the two major components of that? Also, are you sort of saying that you are moving more to sort of an everyday low price kind of dynamic rather than more promotional based in the way you are operating? Thanks. The difference between the cash tax and the EPS tax or the P&L tax is the P&L tax has been impacted by a non-cash movement of the change in the corporation tax in the U.K., which is now to be 20% on our deferred liabilities. That does not come through the cash flow until those deferred liabilities are met. Also, in the cash tax line, the cash tax is up year-on-year, and the P&L tax is down year-on-year. The cash tax does pick up the tax on sale on leasebacks. That is the reason why actually the cash tax is slightly higher, because the tax on the sale and leasebacks in Korea was higher than the tax on the sale and leasebacks in the prior year. On U.K. like-for-like weaker, are we moving to a more EDLP model, which was your question. On the lines that matter most to customers on those products, which I showed some examples of, we are moving to an EDLP model. Because I think for too long, we have allowed ourselves to create too much room between us and others. It is required a wholesale change in the way we do pricing because of the architecture point. If you sell four pints of milk for a quid, then how much you sell two pints of milk for? We have to move them all. That requires us to really think very hard about it, that is why we are doing it in phases. We were trialing some of this last year in some parts of our business. But customers want a blend of stable pricing on everyday items, they still want attractive promotions. So you have to do both. I have never met an EDLP player that has stayed EDLP. I was wandering around a discount chain in a market in Europe only two weeks ago, I went, "So many promotions." It was extraordinary because there comes a moment, some of my colleagues on the front row here are nodding. There comes a moment when they cannot get growth. So we are not going EDLP. But on the things that matter to customers, we are going to be the right price. I do not think we have any choice. That has required us to make all manner of changes. You mentioned PFS and GM, though, that- I just wanted to exclude, are those the drivers of what you think the weak like-for-like performance in the near term? Are those the key components or are those- Well, we exclude PFS from the like-for-like because, the volatility of pricing. We are seeing an 8% volume increase in petrol in fuel sales in Wales, which is the lead market for our Clubcard Fuel Save. But the pricing has come down because market pricing has come down, so we will always exclude that. GM will have a bit of a drag, but the bigger drag is this move in deflation into EDLP and less of these above-the-line 5-off-40s. Because that drives in, it is a big investment, that makes customers switch. We are trying to change that value equation. Clive? Yeah, thank you. You said you are very pleased with Fuel Save's start and also the reaction to price cuts. I know the current trading data is all distorted by Easter, but it looks like recent trade has actually been very weak. I just wondered if you started the year where you thought you would, and what is actually not working if Fuel Save and price cuts are? Coming back to Dave's earlier question, are you actually creating a basis for us to expect no like-for-like growth in the next three years, given that you are going to have a falling contribution from maturing new space, you are going to have greater attrition from competitors' new space, you are going to have this ongoing program of disruption to your stores, and from the sound of it, you are saying you are going to invest more than GBP 200 million in price, so there could be internal deflation on core food lines. Should we actually be expecting Tesco to have flat to negative like-for-like sales in the U.K. in the next three years? What does that really mean, therefore, for your financial outcome in terms of managing negative operational gearing? Well, your second question was, are we trading as we expected? We are within a smidgen of that which we expected. Because we have been making this switch from above the line to below the line, real value for customers. I have to tell you, it is damn uncomfortable to do. But we just feel now is the time we must, because the ingredients of the modern Tesco, the new Tesco, are ready to roll. But if your pricing is not right and you are just screaming above the line, that is not sustainable in the long run. So I think we shift uncomfortably in our seat, even though we are not far off. We are not far off. Fuel Save is very interesting, though. We launched it in Norwich. Four or five shops. They have consistently done much better than the total company. They continue to do so. Now, we then moved it to Wales, and we were watching Wales, and we were watching Norwich, and we thought, "This is it. This is something that will reward our most loyal customers." So we went from Wales to national. But we are only seven weeks into national. What we know from another big retailer in the world who has used this mechanic is it takes quite a while because if I could just help you understand, you going into the petrol station and they say to you, "Do you want to use your Fuel Save discount? It is 9p." Most people say yes the first time around. The second time around, they say, "Well, how much could I save? 20p?" What they do is they drain their tanks, and at the end of the month, when the Fuel Save is about to flip out, they then fill it up. And what we are seeing is that phenomenon in our 480 petrol stations. That is why we are pleased. On the no like-for-like growth in the next few years, no, I do not think we are preparing anybody for no like-for-like growth or negative like-for-like growth in the next few years, all other things being equal. We are watching very carefully the actions of our competitors, and they are far from clear. But thanks to Price Promise, we can actually see where the real pricing is affecting our real customers. Because what we do is we, immediately at the checkout, when my wife does her shopping, we tell her whether it was more expensive or less. And if it was more expensive at Tesco against Asda, Sainsbury's, or Morrisons, we give her a voucher. Mrs. Last's getting a bit fed up she is not getting any money vouchers down there. And we are watching that like hawks. And that is one of the best ways for us to know, because we can then look at which products are causing that. She saved GBP 18 because she bought some face wipes on deal at Tesco, not on deal somewhere else. So it is a combination, really, of Fuel Save rewarding loyalty, Price Promise giving reassurance to our most loyal customers, and then milk getting cheaper, bread getting cheaper, chicken getting cheaper, minced beef getting cheaper, and all the other products that have got cheaper. Cucumbers. That is an amazing thing. Cucumbers are GBP 0.79. The discounters were GBP 0.49. We went to GBP 0.49. The discounters went to GBP 0.45. We did not go to GBP 0.45. The difference is tiny, but the difference was huge. So reassuring, and we walk around a lot of shops, and we hear a lot from our colleagues about how the noise has reduced from customers, and the conversation starts to change. But it is not a quick fix, and that is why I said we sort of shift uncomfortably in our seat today. But we know it is the right thing. We know it is the right thing. I think we have got time for one or two more questions, and just thank you. The lady is coming down to the gentleman on the third row. Anybody else want to ask a question? Thank you. This is going to be the last question then. Okay. Xavier from Bank of America Merrill Lynch. Two questions, actually. The first one, just looking at your margin in the U.K. in the second half, so down by almost 30 basis points. Can you tell us what was due to the price cut that you potentially did in the second half, and what was due to the leverage effect you had with negative like-for-like? Then talking about your comment about H1 and H2, you said potentially more impact from the new initiatives, in the first half, which potentially may have a higher impact on your like-for-like. So can we expect your margin to be more under pressure in H1 versus H2 for this year? And the third one actually, not two. Just on the dividend, you said the dividend will grow in line with EPS going forward. In the case of your EPS would be down this year, would you be ready to cut the dividend? Thank you. Well, the dividend's a matter for the board, but we've consistently held our dividend as earnings have reduced. That seems to be our common practice. But at the moment that we recommend the dividend to the board, the day after, we'll let you know. I know how important dividend is. I know. Margin U.K. second half, negative leverage, and a determination in the last quarter to really start to invest more in the offer for customers. But there is a negative leverage effect because when your like-for-like's down, your fixed costs don't come down that fast. Labor's rather fixed at certain points in the year. So, of course, that's the reason why. But a little bit of priming the offer ahead of the big changes that we made on the 25th of February. And then half one, half two. We have a plan for the first half of the year, and that plan, we think we'll see like-for-likes challenged in the first half. But we have a plan for the margin for the first half as well, and we'll see where that gets us to at the half year. I'm not being flippant with that answer. It's just, I think it's commercially sensitive, so I won't share it. Thank you, everybody, for listening. And just before we finish, Laurie, I think you wanted to say something. Yes, I did. This is going to be my last presentation to you in terms of the Tesco results. So I had two words to say. Which is thank you. I've learnt a tremendous amount working with you over the last five years as CFO. It's been an invaluable set of experiences, particularly in the teeth of a recession, 2009 through to 2014. I'm, of course, staying around for a number of months to help the team with transition, so I'll probably see all of you. But just, again, a reiteration of a thank you. I very much enjoyed working with you.

Data Source: Quartr Last updated: Apr 16, 2014

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