Tesco PLC (LON:TSCO)

H2 12/13

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Apr 17, 2013

Well, good morning, and thank you for coming. I am going to hand over to Laurie in a moment, but before I do that, there are a few things I want to say. The past year hasn't been without some significant challenges. Some relate to longstanding issues which we have had to address in order to set a new base from which we can grow. Some relate to factors that are outside of our control, the impact of regulatory changes in Korea being the one I would highlight specifically. Severe conditions consumers face in the Eurozone haven't helped either. But set against this is the progress we have made in the U.K. Our plan to make a significant investment back into customers is on track. It started to make a real difference. We made great progress against our six-point plan. We improved our performance in absolute and in relative terms, and we are sustaining the margin at the new base that we set, 5.2%. We also announced our strategic review of Fresh & Easy back in December because we had established it wasn't going to deliver acceptable returns for shareholders in an appropriate timeframe. It could one day get to profit. It is just going to take too long. That review is now very well advanced, and that has led to today's confirmation that it will conclude, that review, with an exit from the United States. We have taken the associated write-down of the carrying value of the business as a result. I mentioned the external factors in Korea and Europe. Those combined consequences are a very painful drag on performance, I think particularly when it has been such a year of substantial change for the group. But I need to be clear about this. It would be wrong for me to say they are fully behind us, but I am confident that we are through the worst. We cannot be immune from external factors of this magnitude. But what we do is we face into them, we adapt our approach, and we ensure our business is as well-placed as possible as it can be to cope with any new ones that come our way. As ever, we are at our best when we focus on customers relentlessly. And I tell you now, this focus is absolutely driving what the company does. It is about ensuring we respond to the changing needs of customers. I have been in Tesco nearly 40 years. There has never been a period of such profound and rapid change as we are seeing. The digital age is transforming not just the way people shop, but the way that they live their lives. The opportunities are tremendously exciting. To make the lives of our customers easier, to enable them to shop in whatever way suits them best, to offer them new products, to offer them new services. But delivering on those opportunities requires a different kind of business, a different relationship with customers, and requires for us a new set of capabilities. Now, when we met here a year ago, I signaled the end of the space race and a change in focus towards more multi-channel and smaller formats. I am not sure everyone in the industry agreed with me, and maybe they still don't. But a year on, I am more certain than ever that this is the right thing to do. I believe that we are extremely well-placed, probably better than any other, to prosper in the new multi-channel world. Always been pioneers, always been innovators, and uniquely amongst our peers, we have a grocery home shopping business that's profitable. Thanks to Clubcard and Dunnhumby, we've got unique insights into how behaviors are changing, and our new conversation with customers is about listening to what they want, to how they're living their lives, and building the business accordingly. Stores are a very vital part of the multi-channel vision. We've got a superb portfolio of well-located stores in all of our markets, but many are in need of refreshing and of adaptation by using the space more effectively, particularly in our larger stores. I believe that even the largest of them have a great future, but at the same time, the end of the space race means that some of the major developments that we conceived in the mid-2000s are no longer appropriate for the Tesco of the future. The truth is, we can deploy capital better elsewhere. That's what has prompted the most in-depth review of property that I've known in my time at Tesco and the associated write-down you'll have seen in our statement this morning. Laurie will come back to this subject in more detail shortly. It's not just about dealing with the investments we've already made. Again, I feel the need to be very clear. The end of the space race underpins our capital discipline. Everything we're doing reflects my determination to deliver value for shareholders and to set a more appropriate balance between investing for the future and delivering sustainable returns to our shareholders. We are managing the business in order to generate positive free cash flow. We're going to allocate capital within a range of 4% down to 3.5% of sales, and we're going to maintain a strong investment-grade credit rating. For our investors, that means they can expect mid-single digit trading profit growth, ROCE within a range of 12%-15%. We're going to resume dividend growth broadly in line with underlying earnings, with a target cover of more than two times. These outcomes will be achieved through disciplined investment, focused on those existing markets where we see the best opportunity for significant growth and significant returns. Before I hand over to Laurie, we know there's a lot we need to do as we transform Tesco, and we know where we've needed to, we've taken very decisive action, so we can focus our energies on those markets where we believe we can be a leader in the multi-channel world. I'll talk more about the strategy a little bit later and about our approach to growth and returns. First, Laurie is going to review the past year. Thank you. Thank you, Phil. It's been a year in which we've taken decisive action to focus our efforts on those markets where we can have a leadership position. That's why we exited Japan, launched our strategic review of the U.S., while at the same time, taking a more measured approach to our growth in China. We also set an appropriate pace of migration for the bank, keeping it focused on the needs of our most loyal customers. Most importantly, we've begun the essential process of getting the U.K. business back on track, making sure we protect and build on one of the most important leadership positions we have. As you've seen, there are a number of one-off items included in the results we've announced this morning, mainly as a consequence of the strategic decisions we've taken. I'll take a few moments to talk through the impact of these on the headline numbers before moving on to a more detailed explanation of our performance. The most straightforward point to note is the treatment of Fresh & Easy as discontinued. That's not in our headline numbers now. The performance of our continuing operations is best described by a 13% reduction in trading profit, which, as you know, reflects the investment in the U.K., the impact of regulatory changes in Korea, and a disappointing result in Europe, all of which I'll return to shortly. The decline in underlying profit before tax is 14.5%, a slightly greater decline than that in trading profit, driven mainly by reduced JV income and increased net interest costs. There are three main one-off deductions. The GBP 804 million write-down of our U.K. property pipeline. A GBP 425 million goodwill impairment relating to the Czech Republic, Poland and Turkey. An increase of GBP 115 million in the bank's provision for PPI. These one-off charges are additional drivers behind the 51.5% decline in our reported statutory profit before tax. Now I'll go through our performance before these one-off items. Group sales for the year was GBP 72.4 billion, a 3.1% increase at constant exchange rates excluding petrol. The group trading profit fell by 13% to GBP 3.5 billion, with the U.K. down 8.3% to GBP 2.3 billion and international down 21.8% to GBP 1 billion, and the bank contributed GBP 191 million of trading profit. Our underlying profit before tax was down 14.5% also to GBP 3.5 billion, with underlying diluted earnings per share declining by 14%. The board has approved a maintained final dividend of 10.13 pence, demonstrating its confidence in the group's ability to return to profit growth. Net debt reduced by GBP 0.2 billion year-on-year, despite the trading profit impact and increased working capital, mainly due to the significant reduced capital expenditure and a small increase in property proceeds. The working capital increase was largely as a result of regulatory changes in a number of our markets and the shortening of order lead times for general merchandise, which reduced our creditor days. On return on capital employed on a continuing operations and pre-one off basis, it's 12.7%, and this is 200 basis points decline on returns calculated on a similar basis last year, and mainly reflecting the profit performance. In the U.K., it's a year since we unveiled our six-part plan to get the U.K. business back on top form. The U.K. is absolutely fundamental to the success of the group, which is why this is our number one priority for the year, and I'm pleased to say the plan is very much on track. We've made the investments as planned, and I'm pleased to report that it has led to a clear improvement in our performance, and total sales rose by 2.6%, excluding petrol, and like-for-like performance has improved during the course of the year, with particularly encouraging results at Christmas. As you know, the comparative base was much tougher for the last quarter of the year, following the unprecedented amount of couponing after our poor Christmas performance in 2011. But despite the comps, I'm pleased to say that we've made a reasonable start to the new financial year. When we laid out our plan last year, I described the impact of the investment in terms of rebasing of our trading margin to 5.2%, and the progress we've made in the U.K. has been achieved whilst delivering a margin absolutely in line with these expectations. I know that many of you are familiar with some of the changes we have made under the six-part plan in the U.K. The stores are already in much better shape, and you just have to visit any one of them to see plenty of evidence of the improvements we have made. You'll also have seen our update in this morning's release, so in the interest of time, I'm not planning to run through this in detail. As ever, the most important judge of progress is the customer. You may remember we introduced a new way of measuring customer perceptions back in July, our Customer Viewpoint. This measures real customer feedback in every one of our stores on a regular and frequent basis across 12 aspects of the shopping trip. I'm pleased to say that every one of these aspects has improved throughout the second half of the year, and this underpins our confidence that the underlying improvement we've seen in our trading performance is driven by these changes that we have made for customers. Whilst there are a number of drivers that could enable us to improve overall U.K. margins, we believe the new base of 5.2% is appropriate for the foreseeable future, and any outperformance here will be reinvested in driving additional improvements for our customer offer. Moving outside the U.K., our Asia performance was in line with expectations and was dominated by the Korean regulatory changes concerning trading hours. These changes held back our headline number, as we expected and have flagged during the year, and the impact on trading profit was broadly in line with our GBP 100 million guidance, with a ban on 24-hour trading and significant levels of Sunday store closures throughout the second half. This was compounded by considerable uncertainty for customers about exactly which stores would be closed and when. Following the passing of the legislation in January, the situation seems more certain, with more consistent store closures expected on alternate Sundays. As such, we expect the full year effect of the regulations, combined with the extension of 24-hour trading restrictions to between midnight and 10:00 A.M. to lead to an incremental impact of around GBP 40 million in 2013/14. In Thailand, like-for-like sales grew by 3.1%, and we continued to gain market share. We benefited from a strong opening program, including almost 300 Express stores, and we launched our first .com grocery operation in Bangkok in February. Completing my review of Asia, as we described last year, we've adopted a more cautious stance in China. We still see an excess amount of new space being opened in the market ahead of customer demand. We've moderated our pace of development accordingly, opening just 12 new stores this year and closing five underperforming stores. This is all part of our increased focus on our three strongest regions. We're working hard on the customer offer in China, introducing more localized store campaigns and a new communication strategy on prices and promotions. It's early days, but these changes have received a positive initial response from customers. Whilst our markets in Europe remain fundamentally attractive, our performance this year has been disappointing. Clearly, we face significant headwinds throughout the year as the macroeconomic uncertainties have continued to impact our business. You can see from this chart that every market has been seriously affected, with very real consequences for our customers. The severity of the impact can be seen in the fact that the combined economies of the markets are over 12% smaller than they were in 2008. This has had a particularly marked impact on general merchandise businesses across the region, holding back our overall like-for-like sales performance. Our performance in Hungary and Slovakia, where we enjoy two of the strongest positions, has proved more resilient to the economic headwinds. It's also worth noting that while our profits in Hungary continue to be held back by the crisis tax this year, this ended last month and should result in around GBP 30 million worth of improvement year on year. In both markets, we've seen particularly good growth in own label sales, with increasing participation driving improvements in our like-for-like sales. In some markets, such as the Czech Republic and Poland, we've seen increased competitor activity, with those retailers focused on discount proximity formats faring much better than those, like us, with a greater proportion of larger stores. Our own smaller format stores have performed better than the business as a whole, and our .com operation, now in 13 cities in these markets alone, have grown strongly since launch. In Turkey, we faced a particularly intense competition in a year in which we've retrenched in our strategy of pursuing large stores expansion to the east of our existing business. Like many other businesses in the country, we've faced intense cost price inflation, and the impact of this has been exacerbated by a number of one-off historic issues. The resulting losses have contributed to our shortfall versus expectations on Europe's performance. On goodwill, all of our businesses undertake a value in use test each year to justify the carrying value of goodwill. Those businesses acquired in Europe in the '90s and the early 2000s face a more difficult market today and different growth prospects as a result. This has led to the write-down of the value of acquired goodwill for HIT in Poland, Carrefour in the Czech Republic, and Kipa in Turkey. Our priority in all of these markets is to get the business focused on driving underlying performance, and it's for this reason that we'll only open 400,000 sq ft in the year ahead, a point I'll come back to shortly. We do still have a significant opportunity to realize substantial cost savings and increase our differentiation by applying our group skill and scale in the region. With new management in place, we'll also be redoubling our efforts in this area. In December, we announced a strategic review of Fresh & Easy, as it had become clear that the business wouldn't deliver an acceptable shareholder return in an appropriate timeframe. The review is now well advanced, including interest from a number of parties seeking to acquire Fresh & Easy as a trading business. As such, the board has confirmed that the outcome of the review will be an exit from the U.S., resulting in our announcement today that we are treating the business as a discontinued operation. Therefore, we have booked a loss after tax for discontinued operations of GBP 1.2 billion, including the impairment of fixed assets, onerous lease, and restructuring provisions, and the current year trading loss of GBP 169 million or GBP 200 million including property costs. Clearly, the process is still underway, and we will provide you further update when appropriate. Turning now to the bank. We are pleased to have completed the final stages of migration early in the financial year and to be able to get back to focusing on marketing our existing products. Our program of new products resumed in August with mortgages, and more recently with our ISA range. We have made progress through the year in banking products with good growth in customer accounts and balances. Our insurance business has been somewhat held back by a very challenging market with strong downward pressure on price, specifically in motor insurance. Throughout this year, we have focused on ensuring we offer the best products and prices to our most loyal customers. In recent years, the bank's profit has been impacted by a couple of non-trading factors. The first, fair value releases, and the second, runoff of our legacy insurance agreement with Direct Line. Before these, as we see here, the profits have grown well and are up 13% with a particularly pleasing performance in customer lending. In line with the rest of the industry in recent months, we have been proactively consulting with our customers on PPI. In light of this contact, it has become necessary to increase our provision for compensation by GBP 85 million in the second half in addition to the GBP 30 million provision in the first half, and this takes us to the GBP 115 million one-off charge you see in the accounts. Now on to property and the write-down we have announced this morning. Our property portfolio remains one of our greatest strengths and forms a fundamental part of our multi-channel offer. Over the last 15 years, by acquiring, developing, and trading high-quality stores, we have grown the value of our U.K. property to GBP 20 billion, and that is a premium to net book value of nearly 50%. We have also released GBP 9 billion of proceeds over the last seven years and more than GBP 2 billion of profit. We have used these proceeds to pay increased dividends and fund investment in higher growth opportunities overseas. Over these years, because of complex planning approvals and long lead times, we have needed to build up a substantial investment in land to deliver a steady stream of new space. Rather than building over 2.5 million square feet a year, our new space growth will now be closer to 1 million square feet, more focused on convenience for the future. In the context of our new approach, we have carried out a detailed review of our pipeline, assessing each site's potential to deliver good long-term returns. The consequence of this review is the write-down and impairment of a number of schemes, including a significant number of aborted schemes, leading to the GBP 804 million we have announced in the release this morning. Much of this write-down is concentrated in a small number of large schemes and particularly mixed-use schemes. This fundamental change in our approach to new space also has had implications for the sale and leaseback program. Historically, significant unrealized property profits have built up due to the pace of our expansion. Two years ago, we announced a planned reduction in the level of profits realized in order to ensure a match to the level of profit created in the new store development. As a result of our changed approach to new space, we will accelerate the reduction of the sale and leaseback deals such that they are unlikely to make a material contribution after the next few years. In summary, the U.K. firmly on track. Good growth in Asia, dominated by the impact of regulatory changes in Korea. European performance held back by severe economic challenges. Bank growing at an appropriate pace following completion of the migration. One-off charges as a consequence of our strategic decisions we have taken. It has been a year of decisive action, enabling us to tackle some of the long-standing issues. As a result, we are well-positioned for the future. I will now hand you back to Phil, who will update you on how our strategy is changing for the multichannel world. Thanks, Laurie. Okay. Thanks, Laurie. I am now going to tell you how we intend to take the business on from here, and how we ensure it prospers in that new era of retailing I described earlier, and in doing so, how we deliver sustainable balance of growth, of returns, and of cash. First, we needed a new conversation with customers, an open and transparent one. Whether we are talking about the launch of Price Promise or helping them understand how four of our products could be contaminated by equine DNA, we wanted them to know that Tesco is on their side, that we listen to them, and we build the business around them. We are already seeing real signs that those changes have made a big difference. For example, our interactions with our suppliers, they are more constructive, they are more direct. We are cutting out the middleman, and we are working directly with farmers and growers. It will mean a more secure supply chain, and it helps us work towards the new commitments that you may have heard I gave to farmers at the NFU conference a few weeks ago. We have also done an enormous amount to empower our colleagues to deliver the service that our customers are looking for, and the chart that Laurie showed with that improvement in measures is good. I see it firsthand when I go to stores. I see a twinkle in the eye of our colleagues. I see them looking up now, not looking down, trying to avoid us. 40% reduction in service-related complaints in January. 40% reduction. So, we changed the way we think through the organization and the way we act. What does that mean for the shape of the business and how we grow in future? I said in my opening remarks, we're in a period of profound change in the way people shop and the way that they live, and if you look at the steps we've taken in the U.K. business over the past year, we're demonstrating that doing the right thing for customers, by making what matters better, can win back their loyalty. It's about putting customers in control, and that's where multichannel comes in. It's about enabling the shopper to interact with Tesco in whatever way suits them best, using the power of multichannel to offer exciting new products and services, make life that little bit more enjoyable. Ultimately, it all comes down to the customer, and it's the customer that's guided my three-pronged plan for sustainable growth and returns, investing to make the U.K. business as good as it possibly can be, really asserting our position as a multichannel leader, and thirdly, pursuing disciplined growth internationally in those markets where we can make a difference and play a leading role. Now, I'm going to take each of these in turn. Firstly, continuing to strengthen the U.K. I'm pleased we've made good progress, but there's still a massive opportunity, and I'm very excited by our plans for that progress to continue. Laurie's already updated you on the progress of building a better Tesco, and over the past year, we've made significant progress. But there's much more to come in the year ahead. In the past month, we've rolled out Price Promise nationwide, following a successful trial in Northern Ireland. The vast majority of our customers are finding that it confirms that for them, Tesco is already the cheapest for their basket of goods. But for those who could have saved money elsewhere, they receive a coupon for the difference. It allows them to leave price at the door, removes the need to shop around, and it further builds trust in Tesco. As part of our work on quality and range, as well as completing the remainder of our core Tesco own label range, we plan to relaunch Tesco Finest, already one of the U.K.'s biggest food brands, later this year. We're going to continue to refresh more stores with an emphasis on Express, on superstores following the successful trial we did last year in three stores, and in Metro. You'll have seen some of those changes in stores like Regent Street, Tooley Street, and St. John's Wood. We're creating a more tailored offer, a more attractive environment, and it really does make a difference in these shops. The strength of the U.K. is going to be enhanced by the bank, as we see it becoming a more important part of the differentiation of our offer, with products being tailored to Clubcard customers. We're the only retailer with a full bank. We don't white label anything. Benny Higgins, who's here today, and is the CEO of Tesco Bank, runs the bank for Tesco customers and for Tesco shareholders and doesn't worry about anything other than that. The profitability, he knows, is very important. But we see the biggest benefit being the development of customer loyalty. This graph shows that customers with Tesco Bank products also tend to be extremely loyal Tesco shoppers. As we launch our current accounts in early 2014, that will help develop the loyalty even further. The second key point of our plan to drive sustainable growth is multi-channel leadership. I am really determined that Tesco will be the most accessible retailer across all formats and all channels, and it is going to be critical for our future success. I have already set out that tomorrow's Tesco is being built around customers' behaviors and expectations. It means innovating for customers and offering them what they want, where they want it, and how they want it. It is not some idle ambition either. Other retailers may talk about multi-channel leadership, but we have already demonstrated that we can innovate online and do so profitably with our online grocery offer. We have got the capability and the ambition to become the multi-channel retailer of choice in every market in which we operate. We are already online in eight of our international markets, using the platforms we developed and deployed so successfully in the U.K. to launch quickly and productively. Sometimes it takes a fresh pair of eyes to get the whole thing in perspective. Robin Terrell, who recently joined us as our Director of multi-channel, he is sat at the front, was at an exec a few weeks ago, and he said, "You are really hiding your lights under a bit of a bushel. What other business will have launched grocery online shopping in six countries in six months?" I do not really tend to stand back too often and think about it, but he is absolutely right. We have got the capabilities. We have got the skills. We have got everything, and now we are really pushing on very hard. We talk about grocery online as a uniquely profitable business, and I know some of our competitors find that hard to understand. It does receive a natural subsidy from the stores business. Dot-com pays its share of property costs, but of course, it benefits from leveraging the stores that it operates in. We do have to pay our people to pick our customers' shopping for them, but the model is highly efficient. It is not one person picking a full order. It is a team of colleagues, each picking up to six customers' orders at once, each picking in one part of a store using very sophisticated software we spent more than a decade developing and refining. Picking is even more efficient in our dot-com centers, which help to offset a higher property component. I know many of you saw this in Enfield when you joined us in November. We have subsequently opened another in Crawley, and we got another one coming at the end of the year. Our online business across the group broke through the GBP 3 billion sales mark in the last year and we are continuing to grow well in every market. But again, our existing stores are very much at the heart of the multi-channel plan. We need to refresh, we need to remodel, and in some cases, repurpose our existing space to ensure that our stores are the most relevant, the most compelling destinations for customers to visit. Food is at the heart of our business, and food first is the mantra we apply. Our thinking on ranging, even for the largest stores, starts with the idea, food first. Not just about fresh food and groceries, but ensuring we build our general merchandise offer around the categories which are most likely and closely related to the weekly food shop for our customers. It does, of course, mean starting by being the best food retailer in town. Around this strong food offer, we focus on our strengths in household and health and beauty. We then layer on strong ranges of those products which sit best alongside the family shop, homeware, stationery, toys, games, party. Products that in many ways are consumable and form a key part of household spend, where great value will be rewarded with improved loyalty. I think clothing is one of the best examples of this and one where we have made the most progress so far. It continues to be a strong performer for us. Much better ranges, improved quality, and in some of our most recent remodels, like this one in Cambridge, a much stronger store environment, all being rewarded with better trading results. Jill Easterbrook, who was the architect of this change two years ago, is now a member of the executive, and it is in no small part to her efforts that we have got where we have with F&F. I am delighted with its performance. A billion GBP of sales, 9% like for like, not bad. In some of our larger stores, and as a reminder, in the U.K., we have only 50 stores that are over 80,000 sq ft. Even having strengthened these core general merchandise categories, we can be left with excess space that provides the opportunity to create even more compelling destinations. This is one area where our investments in Harris + Hoole, in Euphorium, and in Giraffe come into their own. You can see a couple of images here of Harris + Hoole, a standalone top left on a high street in Southgate where I go and have my breakfast on a Sunday morning and very good it is, too. On the right, the first in a Tesco store at Tooley Street, doing very well indeed. Then bottom left-hand corner, you can see Euphorium in Kensington. It is now in about five stores. Bottom right, you can see Giraffe we recently purchased, will appear in Watford Extra in the summer. The first Giraffe in a Tesco store. Now, I am conscious that these examples are a bit U.K.-focused, but if you want an example of what we can achieve through repurposing the space, let us take a little trip to Karlovy Vary in the Czech Republic. A classic example of a store built as big as possible rather than appropriately sized for the market. Before we remodeled it, an 80,000 sq ft store, a 70,000 sq ft mall. We invested GBP 1.6 million, reduced the store by 30,000 sq ft, rented the space to Sports Direct and C&A, which believe it or not, are destination-driving brands in the Czech Republic. It sat a bit oddly when I wrote. Anyway, we have also been able to improve the layout of the store. We have tightened the range. It is better for customers. It is cheaper to operate. It has got low levels of waste, lower levels of lighting and energy, and so on. Since the change, footfall has increased by 25% because there is suddenly another reason for customers to come to the store, and the trading profit for the center has gone up by GBP 0.5 million already. That is pounds. It's one example, but the expected cash return from that investment is 30%. Technology will be a key enabler in helping us to be a multi-channel leader. The pace of change in this area is truly exhilarating. More and more people in every market are using tablets and smartphones, and mobile commerce is growing day by day. I see this as a massive opportunity. We've made great strides this year. Our grocery home shopping capability continues to grow and can be easily deployed internationally. Dunnhumby's insight is now back at the heart of the business, hardwired into the decisions we make each and every day. Our digital media businesses are about to merge with a great customer offer, and Michael Comish is here, who we were fortunate to acquire when we bought his company, Blinkbox, just under 2 years ago now, I think. We've added We7, a music streaming business, and Mobcast, an e-book service, all going to be rebranded in the next few months as Blinkbox and all available to Tesco customers. People like Michael are changing the way the company thinks about these challenges. You can make a lot out of the first curve, out of continuing to sell physical. You can make a lot if you get there with the second curve, the digital, and combine the two, which is just what we're doing. We've got an app development center in Shoreditch. It now produces for the entire group. Our technology team, now 5,000 engineers strong, produce bespoke, world-class software for the stores, for the internet, and for the bank. They can go across the world. We're in a very strong position. The third driver is the pursuit of disciplined international growth. The purpose of our international expansion is to exploit our skill and our scale in high growth economies, so we enhance returns relative to those available in the more mature markets. As such, we're allocating our capital to those markets where we see sustainable advantage driven by the skill and the scale and by potential market leadership, which underpins good returns. In all of them, we're going to aim to be the multi-channel leader, and you can see this in the good early progress we've made with online grocery operations in 8 of our markets. We're going to focus on our existing markets. We're going to think about their future potential in three groupings. First, Korea, Malaysia, and Thailand, three of our strongest international businesses in markets with significant future potential. Second, our European businesses, Ireland, Czech, Poland, Hungary, and Slovakia. Our clear priority here, build stronger businesses for customers, improve returns. Third, China, India, and Turkey. Huge long-term potential. Our focus is, and it will remain, on establishing clear, profitable approaches to growth before committing significantly more capital in the future. We've got strong positions in Korea, in Malaysia, and Thailand, but that shouldn't be confused with any sense that these markets are mature. Clearly, we have an opportunity to build share. You can see from this chart that while we're number one in Malaysia and Thailand and number two in Korea, there's still plenty of opportunity, and they're all big markets with a combined modern grocery market share, GBP 75 billion today. But over the next 4 years alone, the size of the industry is expected to grow by almost GBP 20 billion. A real opportunity for Tesco to grow, even if we just retain our current shares. There are similarities for us with some more mature markets in Korea and Thailand. The majority of our hypermarket investment has been made, so convenience and online will be the key focus of our plans going forward. You may know that we already have over 1,100 Express stores in Thailand, and that Korea has our largest dot-com operation in Asia, and that we recently launched in Bangkok and KL. There are still opportunities for further hypermarket development in Malaysia, but the pace of this development is tightly regulated. Second group is Ireland, Czech Republic, Hungary, Poland, and Slovakia. Markets where we are well-established, but where our focus will be on holding our position and improving returns. Some of the CE markets, like Hungary and Slovakia, are faring better than others in terms of returns. Once again, our portfolio of hypers is largely complete, and future capital investment in new space will be limited. Our focus in these markets is about making the most of the assets and driving further benefits from our skill and our scale in areas such as joint buying and distribution. There is going to be some targeted investment in convenience and online, but the amount of new space will be significantly reduced, and our focus is on improving returns. Now, you would be right if you said, well, that focus on growing returns in Europe is not a new thing for you to say. But the thing that is changed is our capital discipline. We are tightly constraining any future investment in this group in order to provide unrelenting focus on these two objectives, holding our market share and improving returns. The final group is China, India, and Turkey. The opportunities in all of these markets are clear, but what connects them is that we are only going to pursue profitable growth, not growth at any cost. We do have a good model in these markets. They are different to the U.S. and Japan, but we will take a measured approach as we aim to establish a model that delivers growth and returns. As Laurie said, in China, for instance, we are focusing now on three regions, on developing a multi-channel offer, launching online food initially in Shanghai in the next few months. As you know, our model in India is to work with the Tata Group, and we are unable to commit our own capital under the current regulations. It is fine. The model works. We like the partner, and we are learning a lot about the market at very low cost to shareholders. I am saying this a lot, but to be clear, we will commit new capital to China and to Turkey, but only for those opportunities that pass our rigorous investment appraisal targets. We will be committing less capital in the coming years than we have in the past, at least until we can demonstrate a significant step forward in our objective of stronger returns. Underpinning all of these drivers of growth, U.K., multi-channel, and international, is the strength of the new management team we have created, some of whom are here today. A largely new executive committee drawing on the potential of the strongest leaders within the organization, complemented by some significant external hires. I'm confident the team we've got in place has the skill, the experience, the creativity, and the drive to deliver on the three priorities I've just set out, and to move quickly to seize the extraordinary opportunities which exist today. Laurie's now going to talk you through the framework within which we're running and guiding the business, and then I'll come and close, and we can take your questions. Laurie? Thank you, Phil. In 2012 and 2013, we've made fundamental changes to our business, both commercially and financially, to set a new base from which Tesco can grow in a more productive manner. We've also laid out our approach to growth and returns, which we are using to clarify our commitment to shareholders for the years ahead. We think this approach is realistic and appropriate given our multi-channel strategy. Importantly, we think it's a framework that allows us to do a better job for both customers and shareholders. Phil's taken you through this already, as you can see on the chart behind me, so I won't recap it point by point. Instead, I'll explain why these are the right guide rails for Tesco and how we've arrived at these particular financial disciplines. I'll start with growth, which has always been the central part of the investment case for Tesco. To be clear, it is still at the core of the investment case. But it's now a sustainable level of growth, a growth that enables us to deliver improving returns and a much stronger level of cash generation. In the past, we delivered a much higher rate of growth. Initially, this was driven by rapid and capital-intensive expansion overseas and in the U.K. We also benefited from disruption elsewhere in the U.K. In the recent past, however, it was sustained with too much short-term focus on the bottom line, leading to some of the issues we've worked hard to address this year. As such, the guidance we are sharing today is for mid-single digit trading profit growth. This reflects the balance I've talked about, and of course, takes into account the structurally changing retailing environment and the lower growth outlook for the economies and consumer spending around the world. The building blocks of this sustainable level of growth are as follows. First, we see the U.K. as a business that will focus on holding or growing its share through improving its existing assets. It will broaden its multi-channel reach, but new space growth will be about half the historic levels. So top line growth will be low to mid-single digit, and this will translate into a similar level of bottom line growth. While there are a number of factors which could contribute to a higher margin, it's our intention to reinvest any outperformance into improving our competitiveness. As we set out last year, we are comfortable to target the current level of U.K. trading margin going forward. In Europe, we see the difficult economic conditions persisting. In addition, we know we need to invest in our offer to do a better job competing with smaller format retailers and discounters. With capital strictly limited, which I will return to shortly, and therefore a much lower contribution from new space, we see Europe's profit growth at the lower end. Our biggest growth opportunity remains Asia, where the economies are healthier and consumer confidence is higher. Once we are clear of the annualized effect of DIDA in South Korea, all our Asian markets have the potential to grow profits at the higher end of the range. U.K., low to mid, Europe, lower end, and Asia, higher end, leading to a mid-single digit growth overall. We are determined to achieve this growth in a balanced way, and see the application of our financial disciplines as an important part of ensuring it is delivered in a way that supports strong, sustainable, and attractive returns going forward. Firstly, we will tighten control over CapEx. There will likely be a very small increase in 2013/2014 as we push on at a pace with our refresh plans in the U.K. Following this, we will move quickly into and then down through the range we have set at 4% down to 3.5% of sales. Importantly, this will enable us to move to a position where we can produce free cash flow without the historical requirements of property proceeds. This is clearly a significant change from our historic cash flow shape. For a number of years, we have relied on these proceeds to fund our investment as CapEx has exceeded available cash. We are getting close to a position where CapEx is broadly equivalent to the available cash and removing our reliance on these proceeds. From then on, available cash grows, exceeds CapEx, giving us a much greater flexibility from a cash point of view. Not only are we more disciplined about the amount of CapEx we will invest, but we are also more disciplined in terms of the way that we allocate it. At its simplest level, our planning process starts with all of our businesses set at the maintenance level of capital. We then review all of the opportunities presented to us by market, and only those that can produce a better incremental set of returns, which must be above our hurdle rates, gets allocated capital. In practice, protecting our strong position in the U.K. is still one of our highest priorities. The best returns are now from refreshing our existing stores and investing in the broader multi-channel opportunities of convenience and online. Evidenced by our property write-down today, we will not invest in those large store schemes where we see unacceptable returns. We will, of course, continue our process of making our existing large stores even more compelling destinations with the repurposing of space that Philip Dorgan described earlier. Second is Asia, where we still have very underdeveloped modern retail trade. We will continue to strengthen our positions in Thailand, Malaysia, and Korea. In China, we still see a huge opportunity, although our approach going forward is more measured and focused on standalone retail sites in the three regions where we have critical mass and good margins. We will build out the remaining 13 Lifespace malls, but are not committing capital to any new freehold investments beyond these. Finally, in Europe, our large store networks are largely complete, and we're effectively at a maintenance level of CapEx. Specific capital investment will be considered, but these will be about improving the assets we have and expanding in low capital formats such as the internet and convenience. Another way of looking this, which helps to explain why GBP 3 billion is an appropriate base, is to break it down by usage. First, we already have a significant amount of capital invested in the business around the world, largely in stores, which we depreciate over a long time. Buildings, for example, over 40 years. As such, around GBP 1.6 billion, similar to our level of depreciation, is required each year to maintain and refresh our stores. Importantly, we will increase investment in future capability to enable us to lead in the multi-channel area. So an important component of our capital spend is devoted to technology. This is not just pure digital assets, but the improvements in technology, which will enable us to create a seamless blend between our stores and online businesses. That represents GBP 500 million. That leaves us with approximately GBP 900 million going into growth opportunities in Asia and the U.K., including around GBP 500 million of land, which, of course, we don't depreciate. So this new base of CapEx achieves the right balance of maintaining our leadership position in the U.K. and funding new digital investment at an appropriate level for our expansion in growth markets. Importantly, the allocation I've described will enable us to produce a steady improvement in return on capital employed from the current base within a range of 12%-15%. Even at the current base, we're already one of the highest returning retailers in the world. As you know, our weighted average cost of capital is around 7%, so we're already creating significant shareholder value. At the high end, these ROCE guide rails put us in a very elite club. Importantly, as most external analysis shows, there's a good correlation between returns and valuation multiple. In this way, our focus on improving return on capital is a key driver to improving total shareholder return. It is no accident that the majority of CapEx is going into those businesses that are already delivering our highest level of returns. As you can see here, our low returns in the U.K. have been held back in the short term by the investment we have made to build a better Tesco that's still the highest in the group. Next is Asia. The chart here includes Korea, Malaysia, and Thailand. Already high returning, and these businesses are already delivering returns approaching the U.K. levels now. It will come as no surprise to you that the European returns have not moved forward, given the external pressures. The priority here is to ensure the capital we have already invested in these markets moves to and exceeds the cost of capital. Finally, the immature businesses, China, Turkey, and India, and China represents most of this chart. As I've said, we're going to invest here, but only in the regions where we have scale and the opportunity to enhance returns. So more of our capital going into already high returning businesses and into driving forward returns in our immature businesses. All helpful to returns overall. The level of investment we chose to make in the past did leave us with a weakened set of debt metrics. Since becoming Finance Director, I've made this my priority to improve. Obviously, resetting the U.K. margin and the DIDA challenges in Korea, and a disappointing profit performance in Europe are still the improvements we've made to date. That said, it's a high priority for the group to maintain a strong investment-grade credit rating. Behind the framework we are laying out today, my target on net indebtedness remains unchanged, and it should be achieved within the next couple of years. Fixed charge cover is more stubborn, not because our net debt isn't coming down, but because our gross debt has long maturity periods. We do have GBP 2 billion of debt we can potentially retire over the next three years. Secondly, a lower level of sale and leasebacks will also help us slow down the rising rent bill. Both of these financial strategies will benefit the fixed charge cover. Our improved cash flow growth will help a key credit rating measure retain cash flow to adjusted net debt. This, of course, further underpins our commitment to maintain a strong investment-grade credit rating. Finally, dividends. They're an important discipline to us, and I know how important they are to investors. Against the backdrop of our reduced earnings this year, we've maintained the full-year dividend at 14.76 pence per share. This reflects our confidence in the business and the steps we've taken to resume growth in the future. Going forward, we believe it's right to make a renewed commitment to improving dividends in line with underlying earnings growth. Scaling back our sale and leaseback program will impact underlying earnings due to the falling property profits in the near term. Therefore, until property profits fall to an immaterial level, we are planning to increase dividends in line with underlying earnings growth, excluding the impact of property profits. This means that we'll be moving to a cover closer to two over the next few years, and given our greater focus on cash, this lower level of cover is more appropriate. We'll update you on the progress against this framework at our next and subsequent result meetings. I'd now like to hand back to Phil. Thank you. A year ago, I stood here, and I told you about the action we were taking to deal with the underperformance of the U.K. and the other challenges that we faced as a business. Although some of the challenges have been significant and new challenges have come along, we've addressed them head on, putting us in better shape for the future. Much of our success over the past three decades has been the result of very bold investments that have provided a very strong inheritance for my team, a very strong online base, Clubcard Dunnhumby. Market leadership in six of our international businesses. Fantastically strong portfolio of locations. The last set of investments made in the mid-2000s, before the world changed, U.S.A., Japan, more U.K. hypermarkets, the mixed-use schemes, they haven't done so well. Businesses which defer and pretend decisions that looked good before 2008, think they all look good today, they're in denial. We aren't in denial, and that's why Tesco is stronger today than it was two years ago. It's a more focused Tesco. It's a Tesco fit for the multi-channel future. Today's Tesco is once more led by customers, driven by a wonderful team, determined to strengthen at home and to build our international businesses carefully. You see, customers are changing, and we've changed, too. The successful retailer in the future needs to offer customers what they want, when, where, and how they want it. Isn't easy, but we have the advantage that when we're at our best, Tesco is built around the needs of customers. Thanks to our enormously powerful combination of geographies, of formats, of channels, and the quality of the team, I'm confident we're best placed to thrive in the new environment. To conclude, and before we take your questions, all of this is with the clearly stated objective that shareholders get improving returns and good dividend growth. Thank you for listening. I know it's been an hour, but I thought it was worthwhile spending that time. Laurie and I are now very pleased to take your questions. I think you have microphones in front of you, and if you can raise your hand and we'll Let's try Mr. Dorgan right at the beginning. At the front, rather. Thank you very much. I've actually got my mic to work, which is amazing. Thank you. Philip Dorgan of Panmure. Just got a couple of questions. First of all, you seem very pleased with your Q4 performance in the U.K. Doesn't look that good to me, given that it's got the softest of comps. Can you explain the factors behind your pleasure? Second question is, given that the European markets will get low growth, I can't quite understand why you're opening 300,000 sq ft in Poland this year, given the deterioration in returns. Finally, when will Tesco Direct make money? What will be the drivers? If you could just remind me how much it's losing now. Thank you. It just wouldn't be one of these meetings without you asking a question about Tesco Direct. No. The reason I'm pleased with Q4 is that we had a really good Christmas and did a great job for customers. Then in January and February, we didn't feel the need to blast coupons around to win back trade. So we're pleased with the way things went at Easter. The most important thing is the way customers are reacting. It's always going to take a bit of time, this. You could see from the graph that Laurie showed, like-for-like flight wasn't exactly going in the right way for quite a while, and now we've stabilized it, and we've got so much more that we know that we can do in 2013. It could have been very different. On the European markets, 300,000 sq ft in Poland, Laurie? Yes. An important context, I think. Two years ago, or 2011-12, we were opening 2.7 million sq ft in Europe. We dropped that to 1.4 million in the year just gone, and we're moving to 400,000 sq ft for the whole region in the coming year, including the Republic of Ireland and Turkey. So that's a fairly major cut into the new spaces going into the market. Your specific question about Poland, we opened, I think, about 190,000 sq ft in Poland in hypermarkets. It was three hypermarkets, which we were already committed to, so we had to open. They're actually trading pretty well, and they've been sized more appropriately than 120,000, 100,000 sq ft hypermarkets we've opened in the past. I thought that was 300 for the coming year. Well, look, the coming year is 400,000 for the whole region. But 300 is Poland. Just wanted to clarify. Yeah, most of it going into smaller formats. And Tesco Direct, well, it doesn't make any money. You know, we've never said how much. The reason it doesn't is it's not got to the scale, and the reason it hasn't got to the scale is our general merchandise offer hasn't been good enough in the U.K. And I'm disappointed with the general merchandise performance last year. But we have really gripped it now, and my sense is that it's about to improve. And I set out the GM strategy when I was talking about the hypermarket strategy for the U.K. So you can see where it's all heading. And I think people, customers in particular, will begin to respond very positively to GM in stores, and then that will help us to do a better job online. So I'm sorry, I'm not going to give you the losses. I never have. I disclose enough as it is already. Another question. Let's go with over here. Thank you. Yes. Hello. Jerome Samuel, HSBC. A question on the U.S. So you confirmed today the future exit. What kind of timeframe can we expect? More important, the cash impact of that exit you expect? Thank you. Laurie's leading the process and the negotiations for us. Laurie, do you want to just say a few words about that? Yeah. You'll appreciate there's a lot of commercial sensitivity around a process that I'm right in the middle of. Just 2 weeks ago, we received the first set of indicative offers from prospective buyers. It did generate a lot of interest. Encouragingly, there are a number of organizations that want to buy the business in its entirety or virtually in its entirety. So those are the ones that we are pursuing with earnest. It's hard to put a specific date on when the process will be complete, but it won't be within the next 3 months. So we should mentally target that as the first, if you like, deadline. Then importantly, the end of your question, the indicative offers that we have received will mean that we will be getting out of the U.S. without any further cash investment into the U.S. to exit. Of course, we do make a trading loss, so we will have to support the trading loss from now until we actually sell the business. Okay. Thank you. A follow-up on international. International, excluding the U.S., represent about 35% of your group profits now. Do you expect it to increase medium term, or given what you said, you think it is going to plateau at this level? I think we have been pretty clear in terms of our expectations in the financial guide rails to say that Europe is going to be at the low end of single digit growth and Asia is going to be at the higher end of single digit growth. Ex one time effects like the annualized effect of DIDA in Asia, but also the historic one-time issues I mentioned in my speech in Turkey and the crisis tax in Hungary. That is going to be the shape of those two regions. Okay. Thank you. Thank you, John. John Kershaw from Exane. Just a couple. On the returns side, first of all, thanks for the welcome candor on that. If it is going to be more capital discipline, less CapEx, are you not still in too many markets? Because you know well that you need to fight for leadership to drive those returns. Can we not expect perhaps market exits to come or give us some more color on that? Then in terms of the guide rails, 12%-15%, is that a case of down before up because of the tough macro and a bit more to go? Or is it a new realization of multi-channel returns will be lower in aggregate for the group? Then finally, given Doug has touched on Q4 trading, just more broadly, can you put some numbers to online profitability? Because it's clearly your future. You've given us what we sort of knew already. What we're looking for is numbers, as we're simple souls. Market exit. We're out of the markets I didn't think we'd be able to provide the right blend of growth and returns that I want to deliver for shareholders. I don't believe it will be necessary to exit any others. The European markets are perhaps the most challenging for reasons that it's the first time those consumers have actually felt recession since the end of communism, and rising unemployment and everything that you'll know about austerity. But two of them are market leaders with more than 25% share of the market. Two of them are second or third in the market, in markets that have really been hit very hard. One is Turkey, which we put into the third grouping. We're not putting a lot of capital behind Turkey until we find a model that we think can win. Again, in the sake of candor, we're disappointed with Europe. In part, the economies haven't helped. In part, we haven't helped ourselves and are receiving considerable attention at the moment for that reason. The fact that Czech, Poland, Slovakia, Hungary are contiguous, you've heard us talk often, I think, about getting some more synergies out of it. We're absolutely on that, as we speak. Laurie's going to take the guide rail question about ROCE, then I'll just finish on Q4 trading. The guide rails, John, the 12%-15%, as you implied, we're already above the bottom of it at 12.7%. It's our intention and our planning assumption that in balance with controlling capital and getting mid-single digit growth in earnings, that returns will gradually tick up over time. Not going back. No. Thanks, Laurie. In the Q4 trading question, we got to what is the grocery and shopping profitability, I think. It is profitable, but I'm not going to give the number today. We keep being asked this question, so at some point we're going to have to. But we'll do it at the right time and when we're ready for it. We need to think about the implications of that. The Central European businesses, which have only been running for seven months, are already breaking even at a cash level. Yeah. The U.K. does much better than that. Much better than that. Another question. We'll go right to the back, if we may. Thank you. Then I'll come back towards the front. Yeah, thanks. It's James Grzinic from Jefferies. I had two. The first one was just looking at page 63, you seem to assume that there will be a big bounce in operating cash flow already from this year. Can you help us? It looks about GBP 1 billion. What are the component parts of that? How much of that is working capital, non-repeats of exceptionals? How much is Fresh & Easy? Perhaps you can tell us how much of a negative Fresh & Easy was in the past year. In terms of space plans for the U.K., you're still going to put down 700,000 sq ft of Extra space, hypermarket space this year. Is that mostly reflective of contractual obligations? Should we expect that to go down drastically year up to next? Well, while we're trying to find page 63, Chris is about to do that. I'll have a go, James, in terms of the operating cash flow. He wrote the book. Thank you very much. I'll just do the 700,000 sq ft of Extras and what's going to happen in the future. So- I'm going to do the You can do it first then. Well, if you've got that answer, yeah. I was giving you some time. If you give me 30 seconds, that'd be very helpful. I'll give you that 2 hours. I'm listening. Still can't find 63. He still can't find 63. Anyway. You've put me off now. Go on. You go. Yeah. It will be hard for people to believe that Tesco has places in the U.K. where it doesn't have a presence, but it is true. Someone's going to snigger when I say Prestatyn. Our market share in Prestatyn was about 1% or 2% from the food superstore there with a clothing department 9 weeks ago. The stores that you're seeing us open in this year and in future years are going to be in places where we don't have a store or the store that we have isn't fit for the future. Let's just think about Sunderland. I know people don't want to think much about Sunderland, but some of us, unfortunately, have to. Sunderland has a Metro. When I was the RD in the north of England, we had a 10,000-square-foot Metro. It's what we have today. We're opening a center of town hypermarket. Gateshead, 35,000-square-foot store, opened 35 years ago. We're closing it. We're opening a new Extra 70,000 square feet, flat free car parking, and so on. The Extras are in places where we are not. Some of them are replacements, so upgrading an existing store that isn't competing, isn't competitive, all positioned nicely for the multi-channel opportunity. In future years, that's what you'll see us doing. But we won't be opening 2.5 million square feet then. They're not going to be 150,000 square feet. They're going to be more like about 70,000 to 80,000 square feet, and there'll be fewer of them. I think what we'll do in future communications, we'll lay out which the stores are, and then you'll all see the perfect sense of it and why. Laurie, have you got that page 63 yet? I have. Excellent. Sorry, James. We managed to confuse ourselves because we had a different numbering on the charts than the book that you've got. Of course, I know page 63. I think it's first important in context to explain the operating cash flow for the retail business this year so you can understand what grows next year. The trading performance of the group did go backwards, and that took about half a billion pounds, GBP 500 million, out of our cash flow year on year. Then working capital for the retail business, which I'll come back to, declined by about GBP 500 million. Then we paid about GBP 200 million into the pension fund. So that was a GBP 1.2 billion outflow for the retail business. Now, of course, our intention's to grow next year, so we don't have the drag of the retail business going backwards. We intend to improve our working capital going forward. We do not need to pay another payment into the pension. There is a related question, why did working capital go backwards in the year? Actually, our stock performance was fine, but our creditor performance did decline. There were two key impacts here. The first was to try and reduce stock, and as I say, we did not. We moved some of our general merchandise sourcing from long lead time Asia to shorter lead time in Europe. That did reduce the lead time. It also reduced the creditor days, but it did not reduce the stock. So we had a degradation in our creditor days for that. The second area is a little bit more sensitive because I do not want to refer to specific countries, but there is a country in Asia, and there are certain countries in Central Europe where the regulator is very focused upon organizations trying to extend their credit terms. In fact, the pressure to reduce it. We have complied with that. Importantly, and I know this is irritating for you, but the most important thing for me to do on working capital is to improve it all the way through the year, not when I report back to you. Actually, because that is the thing, obviously, that drives the overdraft at the bank, and that is the thing that drives the interest. Importantly, the working capital performance through the year was much better than in the prior year. In fact, our outflow on average was flat. We did not have an outflow on average. It was just a poorer performance at the end of the financial year than we were planning. So we should see an improvement in working capital. Indeed, it is a great focus for all of our businesses in the coming year, and we should see trading profit performance growth. That is the thing that starts to make the cash flow growth with the same level of CapEx. Thank you. Thanks for that. Just to clarify, once Fresh & Easy is deconsolidated out of the cash flow, how much of a drag are you taking out of the operating cash flow? Because I presume over the past year it would have been strongly negative, even if you reduced CapEx. For the U.S., yes. Yeah. It's a couple of hundred million. Pounds. GBP, yeah. Another question, please. We'll stay at the back row on the right-hand side here. Yes? Yes, you. There you go. Yes, fine. Sorry. Yes, hi. Sreedhar Mahamkali from Macquarie. Three questions then, please. Firstly, are you now comfortable that the U.K. recovery is fully on track and that you will actually be reporting positive like for likes through the year in the context of something like 1% like for like in consensus, driven by food, of course? That is the first question, please. Secondly, can you talk a little bit more about non-food, particularly profitability in the context of U.K. margin? How dilutive non-food is and what can you do there? In the context of non-food again, on slide 64, not sure what slide number that is in your pack. I do not know. On slide 64, where you talk about reshaping the space, there is no reference to electricals on that chart. How much space is there in electricals and is that all going to disappear? Finally, losses in Turkey. Four questions. I should have said three areas. Oh, sorry. Sorry. Right. Losses in Turkey, how much are they and what's your plan for next year? Thanks. Do you want to do that first? Yeah. Yeah. Turkey first I'll do, Sreedhar. The losses in Turkey, tens of millions. Disappointing because we were making a profit in the prior year. Mainly driven by the underlying performance of negative sales and a pressure on our gross food margin. I referenced a couple of one-time historic issues in my speech. They both impact both stock and margin, so ultimately margin. Because of the slowdown in the growth of the business, the aging of stock was making me uncomfortable, so we've actually taken a charge on the age of stock specific to Turkey. Secondly, we had a number of outstanding disputes with suppliers, which we'd taken in our favor as a credit on our balance sheet. Again, because of the slowdown of growth and retrenching, I wasn't 100% confident that we would get that money and be able to book it as cash. I've taken about GBP 20 million for those two charges. Thanks. I'm going to take the what about like for like for the year and what about our non-food profitability. Then I'm going to ask Chris Bush, who's here, the new MD of the U.K., many of you will know, just to talk about the ideas we've got for consumer electronics. Yeah, we're planning to have a positive like for like performance in the year. On non-food profitability, we've got a very profitable clothing business and some elements of our general merchandise are nicely profitable. But going back to Philip Dorgan's question about Direct and about general merchandise in general, in the stores and online, we're heavily dependent for the sales line on consumer electronics, which just don't generate much of a profit, so they're dilutive. So GM can become non-dilutive. It is dilutive now, and that's the plan that we have set out for the next year with some seriousness, I hasten to add. Customers and you will see changes in our stores, in many of our stores, and in our online offering during the course of the year. We feel once and for all, we've gripped it. So, Chris, do you want to just say a little bit about what you're planning to do with electrical space in stores? Here's Chris. There you go. It doesn't quite reach. Can you hear me? Can you hear me without a microphone, is that okay? I think we're taking a good hard look at what we're doing with general merchandising in all of our stores. In small stores, those super stores that you would be familiar with, what's clear to us is that customers want a consumable range of general merchandise and a range of products that they would expect to buy on a distressed purchase. At the moment, the range in some of those stores, that's helpful, includes things like televisions and customers tell us in those stores that they don't actually want to buy a television. So we're revamping the range, and you'll see that as we go through this year, a much more appropriate range of general merchandising in stores between 10,000 sq ft and 50,000 sq ft. In the bigger or destinational stores, we need to be clear on where we want to compete and where we want to win, and I think we are. We're getting our act together on developing a very compelling offer in those areas. On electrical, that will mean that in some categories in electrical, you'll see us turn down our efforts, and in some categories in electrical, we'll turn up our efforts. Digitalization is with us today and it's going to be with us tomorrow. You won't see a Tesco store over 50,000 sq ft that won't be selling digital applications because that would be clearly wrong for what we stand for. So it is a bit of reshaping. It's work in progress. You'll see some change this year. You'll see more change next year. But we're confident and clear it's the right thing for the future. Thanks, Chris. So we'll come back to the front now. I know you've been very patient, Andrew, so over to you. Andrew Kasoulis from Credit Suisse. One question. Your debt and financial charge targets, can you clarify whether or not you need to achieve those before you potentially make a share buyback, please? Laurie? Well, our focus over the next two years is strengthening the balance sheet. Read into that we want to be a strong investment credit rating. At the moment, with Standard & Poor's and Fitch, we are on negative outlook, but we are an A-rated company. With Moody's, we are top of the B rating, BBB+, on a stable outlook. We are not comfortable with that position. We would like that to be a lot stronger. Now, actually, the financial metrics for the majority of the credit rating agencies were actually in not an unreasonable position. Of course, about 30% of their view comes from intangibles, strength of market share, strength of business, strength of margin growth. A lot of the natural consequences of our strategy, to some, put a negative spin on that. We have got to make sure that not only the financial measures get stronger, but actually the underlying of the performance of the business comes through. Once we have done that, then yes, in two years' time, that is roughly the timeframe, we have got flexibility to discuss what we want to do with excess cash. I would like to wait till then to have that conversation. I think we are doing a good job on dividends, to be honest. As you saw, our cover is going to drop from 2.7 times cover to closer to two over a very short period of time. That gives you confidence that our cash flow growth is coming through in terms of our own internal plans. Another question? Hi, Mark Ziffer at Redburn. Just one question for you, Phil. Can you give us some idea of your vision for why people should shop at Tesco versus competitors? Specifically, I'm thinking, how much do you think you should and you can improve in all the key areas of service, and you showed some progress on internal surveys there, and value, and quality, and how high do you think you can aim, you should be aiming? What's your vision as what's going to make Tesco great again for customers? Simple one question. Yeah. My answer is that I want us to become the benchmark again. There was a time when we were, and now I don't really think that we are. That requires better quality, it requires better service, it requires better promotions, better stores. It's just building a better Tesco. We intend to be the benchmark. The benchmark for the best value for money retailer, that alchemy between the price you pay and the quality you receive. But with quality as absolutely the underpin. Absolutely. We made so much progress here in a year. Well, I thank the team who are here, because they're the people who've really made it happen for us. As we bring new people into the organization, we're doing a lot of that. As we allow younger people to come through, we're doing a lot of that. They're coming with a completely different set of expectations about what they want to do. We've relaunched our fresh meat and poultry and seafood range in the U.K. twice in 25 weeks. Twice. We hadn't actually done it for 4 years. Chris is in the merchandising center every week here in the U.K., looking at the way products are merchandised, the way the ranges are put together. We're going back to what we used to do. We're going back with a new team. We're going to be the benchmark. That's what will get us back to leading. Laurie's just scribbled here, "Don't forget to mention." Bringing in the Tolleys, who are the people who run Harris + Hoole for us. Getting Michael Holmes to get a hold of Giraffe for us and bring in Russell and his team. These are all changing the way the organization is behaving and thinking. We've tried to do bakery well for years. Euphorium shows us the way. We tried to do digital video with a product called Tesco Connect. It was the first thing I canned very quietly. 3 years of development, never really got to market. But we were very fortunate to get Michael Comish and his team, and they've built us a really great offer. We could have done it without that. So that's what helps you be the benchmark. You change the organization because the people, you allow them to come through. We will be the benchmark again. We've only just begun. Let's go right to the very back, and then we'll come down to Dave McCarthy after the guy at the back. All the way from Merseyside. Two questions, please. Firstly, can you give us an indication what the sales uplifts have been on the stores you have refreshed this year, and what that contribution may have been to the U.K. like-for-like sales? Secondly, can you give us a feel for your expectations from the bank over the medium term, and whether there are any particular levers or thresholds that may lead the bank's profitability to grow? Okay. Thank you. Benny Higgins is here, who is the CEO of Tesco Bank, so I will let him say a little bit about the bank in a moment. We refreshed 300 stores in the U.K. in the last year. We experimented a lot with the new Express treatment in London, which Andrew, he actually is also here, is now leading because Andrew has got the job of helping us do the right thing for London customers, got all formats. In terms of contribution to the overall like for like, I do not have it at hand. We can get it. We are getting a couple of percent uplift overall out of Expresses, are not we? Yeah. Superstore is tolerably better than that. The new one is even better than that. That is why we are putting a bit more into refresh. I do not think customers are getting the opportunity to see the best of Tesco in all locations, and that is our idea. It is going to take us a few years, and some of the stuff that Chris and Andrew and others are doing is staggeringly good. One of the big things will now be to make sure we get that to more stores, the range, the new space allocations and so on. On the bank, have we got a microphone for, it is coming around for Benny. What do you reckon, Benny? Benny now is a member of the Tesco executive team. He used to just be up in Edinburgh, but now we make him come down to Cheshunt and do some work from time to time. Benny. Thanks for that, Philip. That was my appraisal. I feel very optimistic, Clive, about the future for the bank. Why do I say that? Four years ago, we got full control of the business. We had 200 people, and we were renting accommodation from RBS. We had no systems. We were basically leaning on RBS for both our banking and our insurance. Today, we have four major centers, two in Edinburgh, one in Glasgow, one in Newcastle. We have 4,000 people. We are in control of our own destiny. One of the first things we did when we took control of those service centers was to remove incentives and targets for people dealing with customers on the phone. I spent all morning in Newcastle yesterday, and it's transformed the atmosphere. People in that business, our people, are focused on looking after customers. The best way, I think, to calibrate how well a business is doing and what the wellbeing of it is to say, ask yourself, what are the customers doing? If you look at the last 12 months, our customer accounts have risen to 6.6 million. If you look at our principal main accounts, it rose by 15% and annualized 20% in the second half. If you look at how much savings Tesco customers place with us and trust us, that rose by 12% last year. If you look at the lending products, credit cards and loans in particular, you see a 16% increase in Tesco customers borrowing from us. I think we've got very strong people in the business. I've learned a lot by being part of Tesco about what it means to start with the customer and work through to what you need to do to run the business. That's how we're running the business. I think what Philip alluded to earlier is the most powerful thing for me. We're not just another part of a profit pool. We are an essential part of making Tesco a better business with broader and deeper relationships, so I'm very optimistic. Thank you. Near term, we've taken a bit of a hit from insurance. That's been very difficult for us. Benny's now focused much more on our customers rather than just going out and buying customers who aren't ours. PPI has taken the industry hard, and we've had to take a charge this year. We hope that's the last one, but you never know. I'm getting phone calls every day, and Anna, my assistant, who's here, keeps ringing up, telling them not to ring me and ask me if I want to go and do some ambulance chasing, but they keep on coming at me. I'm particularly excited by the personal current account launch in 2014 because when we got into banking all those years ago, customers said, "We'd like you to be a bank because we think you'd be a very good bank." But when we say to customers, "You know we're a bank?" They say, "We have no current accounts, so you're not really a bank yet." You can see how we're thinking about it in the future. David. Yes, thanks, Philip. Just wanted to drill a bit deeper on the property write-downs. You've got 800 million of write-downs on 100 properties you've owned for 5-10 years. How many of those have got planning permission? What are you going to do with them? Are you prepared to sell them to your competition? What does this mean for your capitalized interest as well? Because you've clearly capitalized GBP 800 million for a number of years. You're going to be stopping doing that. So presumably, your capitalized interest is going to come right back this year, which will impact your profits. Yeah. Do you want to do the capitalized interest bit? Because I like talking about the stores bit. Yeah. Okay. The specific write-down of the WIP within the GBP 804,000 Million GBP 804 million is GBP 570 million specific to the WIP. It's that area that, as you say, will mean that our P&L charge for interest will go up because a proportion of it will be capitalized. You could roughly take 5% of GBP 570 million, so it's a GBP 25 million hit to the interest line. The cash flow line doesn't change at all. Thank you. Some have planning permission, many don't. Some of the mixed-use schemes, which are the What we did is we stood back and said, "Look, we've got a great pipeline of properties we've built up for the future. Which ones are fit for the future?" That was the starting point. Which are in places we want to be, and which are in places we don't think we need to be in? Which are going to get us a return? That was the starting point. It wasn't how much is in there, it was what is it, and do you want it? We are going to open a store in Kirkby, because we haven't got one. It's not going to be 110,000 sq ft with 1 million sq ft of retail. It's going to be about 70,000 sq ft, with some associated big boxes next to it, and that's it. We're in for more there, so we're writing down the sort of the alternative use value of the other land that we've got around it, therefore, you get a charge. We've ended up with a great group of stores we're confident we can build out and a group we don't think that we can. We've been slowly but surely removing our interest from those in the last few months, and that's culminated in this charge today, and you'll see more of that in the future. Some of them might be taken by competitors, because they're going to be in places that we are, we don't think we need to be, or we don't think they're going to get a return. We've taken them down to the alternative use value, and we think it's the right thing to do. Because we don't want to be opening just for the sake of it. We want to be opening in the right places with the right stores. Just going back on that, so you're going to take them down to alternative use value? Yeah. You might sell them to the competition. Are you prepared to sell them to a property developer, and then they sell them, and they make the profit? Having looked at each of the schemes, the chances of that are extremely remote. However, if it comes to that's what we will do. Okay. The other bit I was surprised- The alternative use value in that case will be, we think we're going to sell it to a developer because we think he's going to sell it on. Not it's just going to go and be fallow land for 15 years. Okay. The other bit I was surprised on is two aspects. One, that you've got properties with planning permission that you've not been developing and you've just been sitting on, because there's been commitments from Tesco in the past to the competition authorities that was not the case. Secondly, the extent of the write-down shows that you've been paying for properties that don't have planning permission, and you've been paying a premium over alternative use for it. So it just seems the worst of both worlds in two cases. Well, on the first point, we've been sitting on properties with planning permission. You actually can't sit on it for very long because you lose the planning permission, as you probably know. So there aren't very many of those. But there were local authorities who were minded to give permission. But we've subsequently decided we don't want to be there. Because you know the way planning works. You have to have a recommendation by the local planners to the planning authority. So, we had very clear desires by planning officers that we would build out a store for them, and we now concluded that we won't. So it wasn't that we gaily went about buying land where we didn't think there was an opportunity. We only made investments where we thought that there would be, and where we had pretty good indications that that would be the case. Which is why they might end up going off to somebody else, although I think, as I said, unlikely, having looked at the individual schemes. What was the second part of your question for the write-down? The second was that you seem to have a very large write-down for properties that you have bought without planning permission because historically you would buy a piece of land for, say, GBP 1 million subject to it gaining planning permission, and then you would pay the GBP 20 million. Yeah. It is the same answer really, David, because we only buy when we know we have the option that it can be turned into a planning permission. Many of these were bought 2005, 2000, 2007, 2008, before the world changed, before the internet. And planning officers, they have also changed their views in that time. So we are confident that we exercised the right level of control but for a different era and a different world and you know, I hope, that I am sincere when I say what we are going to do, we are going to build out the right stores in the right place. And that has meant that we have decided that some of them that we could do, we are not going to do. Thank you. Jaime. Jaime? Jaime Vazquez. Yeah. Thank you. Jaime Vazquez from JP Morgan. You have repeatedly alluded to the world has changed, and that affects the format you choose for future expansion. That change in the world should also have an impact in the shopping malls that you have outside the U.K. First of all, the question is: What is the value of that mall? You have very kindly valued the U.K. property at GBP 20 billion. What's the value of your international malls? Secondly, is it not time to start monetizing that value actively considering the change of the world? Secondly, can you please quantify the Chinese losses or at least whether they went up last year and what the outlook for this year would be? Thank you. The Chinese losses came down last year as a consequence of the focus that we put on not building out in places where you just don't get growth and immediate profits. So they came down. Still loss-making, but they came down. On the malls, we don't give a value to them, and we're not going to be monetizing them either. The thing about Asia in particular, but also about Europe, is our customers want to go to a shopping mall, and if it's anchored by a hypermarket, it's another reason for going to the mall and to the hypermarket. So we always refresh. Take Karlovy Vary, that one example of Surin in Thailand, Yeongdeungpo in Korea. What we do is we're always refreshing the offer, and it's that which creates the impetus, and it makes it to continue to be an attractive destination. We see the two as having very symbiotic relationship, and absolutely, we need to keep on managing them actively, which is what we're doing. Okay. Yes. Hi, Edo Aubin from Morgan Stanley. Just to follow up on the real estate question and the hypermarket. You have talked about the opportunity to downsize some of your hypermarkets in the U.K. and abroad. Could you just quantify a little bit what is the opportunity over the next 2-3 years? I think you are going to have something like 17 million sq ft of hypermarket selling space in the U.K. by Feb 2014. Could you just give us a sense of what could be the magnitude? Yeah. Thank you. By the way, I have only got time for one more question after this because we have got to go off, so I am sorry about that. Those of you who wanted to ask questions and couldn't. In the U.K., hypermarkets for us start at 60,000 sq ft of selling and go up to, in the case of Harwich, about 130,000 sq ft. It is our biggest store. But only 50 of the hypermarkets are over 80,000 sq ft. So the opportunity is the 50 over 80,000 sq ft, and some of them we do not need to downsize at all because they are in amazing locations, normally in major cities, and they are just doing very well. So we will tinker at the edges of those. You will see a few a year, not a huge number, but in 10 years' time when we look back, I think most of them will have had some space change, the 50. And these have changed outside the U.K.? All right. Hardly any in Asia. Largely in Central Europe. It is largely those 8s and 10s and 15s, so 80,000 sq ft, 100,000 sq ft, 150,000 sq ft that we opened a decade ago. So the Karlovy Vary example, over the next few years, 20 of those, I think, are within our sights. They pay back very quickly, and they make the shop better for customers because the worst thing is going to in a store which is shorter customers and big on space, and it is a bit soulless. We have got a chance for one last question, and we will go over here. Barclays. Just two questions. Firstly, on ROCE. I think since 2006, you have always given us a very specific target for ROCE, and now it is widened to quite a wide range of 12%-15%, even though you have actually eliminated a couple of the hard-to-predict elements like Fresh & Easy, for example. So why is it that you are still giving us really quite a wide range of outcomes there? Secondly, on Central Europe, you have had a 40% cut on this year. If you look at the, I forget which chart it is, but you have talked about pretty low single-digit growth for Central European or European profits going forward. Is there any kind of improvement we should expect before you get onto that low kind of growth number going forward, or have profits in Europe really been fundamentally rebased down quite severely? I will take the second question first, and then Laurie take the first on ROCE. You should expect progress in Central Europe in 2013, 2014. I said part of the problem was the consumer, part of the problem was us. Some of it was one-time issues. So we expect progress in Central Europe in 2013, 2014. I think the critical point, James, is that the range that we have given you of 12-15, both are very good ROCEs. We need to have that firmly in our head. We have said clearly, and I have replied to one of the questions today, that our objective and the way that we are planning is for our ROCE to improve gradually through those guide rails. So that is the guidance that we are giving you. Also at 15%, if that is where we eventually get to in the future, that is a very, very good return on capital employed. I think actually there is only one other retailer that I can think of that has got a return anywhere close to that. With regards to the second bit of your question, the specificity of 14.6 and a date, that was set in a different era. That was set in an era before the reset of the U.K. margin. It was set before the impact on our opening hours in South Korea, and it was certainly set ahead of the multi-channel strategy that we're pursuing in both Clicks and Bricks. We don't think that's an appropriate message to give you going forward and the guide rail and the framework of 15%-12% is a much better way of telling you how we're going to drive total shareholder value in the future. Well, thank you all for coming along and listening, and see you soon.

Data Source: Quartr Last updated: Apr 17, 2013

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