Good morning, everyone, and a very happy New Year to you all. Thank you for joining us this morning. I'm here in Welwyn with Imran, and in a moment, we'll be delighted to take your questions. Before we do that, I want to share a few highlights on the strong performance that we've announced in our trading update this morning. I want to start by saying a huge thank you to every one of our colleagues for the brilliant Christmas they helped us deliver, as they have done consistently throughout the challenging conditions of the last few years. Colleagues have once again gone above and beyond to make sure our customers could have a great Christmas. I'm really pleased with the strength of the performance we've seen in all our markets, especially given that we're trading over such a strong performance last year.
By delivering relentlessly on the strategic priorities that we set out 18 months ago, we have made sure that customers benefit from great value and quality in every part of their basket however they choose to shop with us. The U.K. has had an exceptional quarter three in Christmas, driven by our continued investment and innovation in the full breadth of our offer. Our large and convenient stores serve customers well throughout the entire period, with online proving to be very resilient and returning to growth over Christmas. We have seen customers continuing to trade down, but that has taken a number of different forms, and we are seeing growth at both ends of our offer, from the volume-driven success of our Price Lock campaign through to the growth of our Finest* range. For some customers, it's trading down from national brands to great value Tesco products.
For others, it's seeking out Tesco from one of the higher price premium-focused retailers or using our great range of ready meals to substitute for a takeaway or restaurant meal. Our value proposition of low everyday prices, combined with exceptional value offered by Clubcard Prices and Aldi Price Match, means that we are the most competitive we've been for many, many years. We've continued to make great progress on Clubcard across the group. Clubcard Prices has been a great success in the UK and is proving the same in Ireland and Central Europe following the more recent launches. Clubcard has helped millions of customers spend less, which now more than ever is really important. Across the period, we launched nearly 400 new products, including over 100 new Finest festive products, and we continued to build out and enhance our ready meal range.
We're really pleased that all these efforts have been recognized by customers with a significant increase in quality perception once again. All of this great work has culminated in us delivering a strong market share performance in the U.K. and Ireland. Booker has also continued to grow strongly despite a particularly tough catering backdrop, and our Central European business has delivered its highest growth in many years. As you will have seen, we are reconfirming our guidance from October for retail adjusted operating profit between GBP 2.4 billion and GBP 2.5 billion, retail free cash flow of at least GBP 1.8 billion, and bank adjusted operating profit of between GBP 120 million and GBP 160 million. We always expect customers to tighten their belts after Christmas, and that's certainly what we built into the plan for this year.
I am delighted that last week we announced a new Price Lock guaranteeing that customers won't pay more on over 1,000 lines all the way through to Easter. We have also further invested in our Dinner for Tonight range, offering customers amazing value alternatives to eating out or getting a takeaway. I'm confident that whatever customers are looking for in terms of value and quality, they will be able to find it at Tesco. Our performance continues to be strong, and we go into the new calendar year with good momentum. We have the right focus on value, quality, and range, along with the right strategy and team to deliver a strong performance whatever challenges we face. With that, let's go straight to questions and answers. Thank you.
If you wish to ask a question, please dial star one on your telephone keypad now to enter the queue. Once your name is announced, please go action. If you would like to cancel your place in the queue, you can do so by pressing star two. Once again, that is star one to ask a question. If you are asking a question, please remember to mute your online webcast to avoid any feedback. Our first question comes from Andrew Gwynn of BNP Paribas Exane. Please go ahead.
Good morning and Happy New Year. Yeah, two questions if I can. Firstly, and I appreciate you're not gonna give precise color on next financial year, but help us with some of the building blocks. I think market's still very rational, given the profit guidance essentially unchanged almost from the beginning of the year seems to be you're in very good control and maybe some of the cost pressure is slightly lower, albeit skewed towards SG&A, so wages and energy. Just help us out with some of those building blocks. Secondly, you touched on it there, but obviously an expectation that the consumer may tighten their belt after Christmas. Is that what you've seen in the data? Thank you very much.
Good morning, Andrew. Thank you for the question. Let's start with the second point. Maybe I'll hand over to Imran. I would say that customers tighten their belts every year in January, February. That's kind of a normal trading pattern. We plan for that. Largely the customer trading behaviors and patterns are playing out more or less the way we planned it. I would say to you that we've had a decent start to the year. That would be the first thing to say. I think the second question before I hand over to Imran is that largely you've answered your own question. I think, you know, we would be kind of looking at the same building blocks. Clearly, we can't give you visibility beyond that.
Let me hand over to Imran and he'll give you his sense of it.
Morning, Andrew. How are you? So just a few thoughts. As you point out, you know, we're coming off a very strong performance this year, and as you also said, you know, guidance is pretty much largely unchanged throughout the entire year. This year we faced quite a lot of, you know, OpEx costs, if you think about the energy, if you think about payroll, if you think about the COVID unwind. As I would expect, as we've always been said, that next year we expect to see similar pressures continue. Without going into detail because I will absolutely give you guidance and an understanding of how we see next year when we meet in April.
I would say to you what gives me confidence is how well we've managed to do what we've been doing this year, the discipline on our Save to Invest program this year. We're in a good place also for next year. Clearly, you know, I feel we have sort of the right, you know, I would say the right offer, the right strategy, the right team to continue to do well. When we meet in April and talk, we'll absolutely give you a fuller picture of how we see the world evolve.
Okay. Thank you very much. Well done to you and the teams. Thanks.
Thanks, Andrew.
Our next question comes from Clive Black, Shore Capital Markets. Please go ahead.
Well, good morning, gentlemen. Thank you for the update. Yeah, well done on a very strong trading period. A couple of questions for me therefore. Ken, you talked about trading down in your commentary with quite a few moving parts there. I just wondered if you could maybe order the importance of those moving parts in terms of how you see it in the business. You mentioned switching out of restaurants into retail and so forth. Then just secondly, maybe a little bit of an anorak question, but I imagine volume across the whole business was hard to come by. I just wonder what that means for your working capital and how that feeds into your free cash flow given that supermarkets have tended to have negative working capital.
They would be helpful to have updates on. Thank you.
Great. Thanks very much, Clive. I'll answer the first part of that question and then, I'll ask Imran to comment on the working capital part. I think, what's been really important, from a trading down perspective is that, as you say, we are seeing it happen in multiple forms. What's been really pleasing is that, you know, as the only full line, grocer to grow market share from the pre-pandemic point to today, we feel particularly pleased about the versatility and the strength of our proposition. I see that playing out in a number of different ways.
The first of all is that we've provided that consistent value thread since before the pandemic started through the Aldi Price Match, through the low everyday prices which we've now locked, and of course, through Clubcard Prices, which has really driven penetration of Clubcard. That's had a fantastic impact on getting customers to trade with us and stick with us. Their behavior, as you say, has modified within that, and we have seen people trading down from national brand to own brand. We've seen them trade from, and this is in order of importance type. We've seen them trade from kind of small packs into bulk packs. We've seen them trade from fresh into frozen. I said we've seen them trade from eating out to eating in.
Now at the same time, we've seen Booker grow its catering sales really strongly throughout the period. So there's a slight kind of contradiction in that. Of course, when we dig under it, what we found is that Booker has done a brilliant job in providing a great value proposition and supporting the best value caterers in the market.
Consequently, those caterers are growing market share, and because of Booker's service and its price point, it's growing its share within those best caterers. We've seen quite a outstanding performance from Booker during the year. The great news from our perspective is we're winning at both ends, and we're really pleased with that performance.
Let me take maybe the second one on cash and working capital, Clive. Look, you remember when we spoke in October, we upgraded our guidance on cash flow for the year from GBP 1.4 billion-GBP 1.8 billion range to at least GBP 1.8 billion. That was on the strength of the first half performance and also the confidence that we saw going into the second half. What I'd be pleased to say to you is, you know, after having gone through the last 19 weeks, I'm even more confident on that cash flow number, which is good. I mean, as you say, it's at center to what we do, the cash flow delivery. There's a very high level of discipline in the business.
As it comes to specifically working capital, at the half, we had a significant info aided by the higher payables that you would get from the inflationary pressure. At the same time, you know, our aim is to continue to have every year working capital at a positive level, and we will do so this year as well.
That's very helpful. Can I just ask one supplementary on the working capital? Did you feel that you ended the year in a general merchandise apparel area in a relatively clean way?
Yes. Yes, we felt good when we looked. I mean, we walked the shops during Christmas, even now when we sort of did a review on inventories and how we landed, we exited very cleanly.
The cleanest, I think.
Okay
...for many years, actually, Clive. We're particularly pleased with how well we exited Christmas.
That's very good to hear. Thanks for answering the questions.
Thank you, Clive. Happy New Year.
Thank you. We move on to Izabel Dobreva of Morgan Stanley, please go ahead.
Hello, good morning, and happy New Year. Thank you for taking my questions. My first question is based on your negotiations with suppliers. How do you think about the pass-through of any future input cost inflation to customers? Are you seeing any signs that with the falling volumes and the strong growth in private label promotional activity starting to come back, so any change in the negotiating balance there? My second question is, how do you perceive the pricing environment currently in your UK business? Do you expect that the pace of price investment for the industry is going to step up over the next 12 months as the volumes potentially get softer? Any comment on the competitive environment will be very helpful.
Thank you. Look, the competitive environment is clearly intense and will remain so, but it has always been that way. I think that's not new news. I think that our relationship with suppliers is excellent, and that's borne out by the independent surveys where we score consistently in the top end of those surveys regularly. That's because we are very respectful and very objective at relationship with our suppliers. We also have a very strong sourcing organization, and they deconstruct all elements of a product and look at where inflation is coming through and how much inflation is coming through. We have that as effectively facts to argue the case for what is an acceptable pass-through cost versus what isn't. That's the way we operate.
Really it comes down to kind of the negotiation to see where we end. What we do work really hard on is trying to minimize the amount of cost that passes through to the consumer while making sure that we take the costs that are absolutely justifiable, so we don't risk putting our suppliers out of business or putting their business model under pressure unnecessarily. We have shown very proactive displays of support in key sectors like the milk sector, the pork sector, and most recently, the egg sector, where we know that those suppliers are in need of support, and we have reacted really quickly. That's our policy, and that policy will continue into the future.
In terms of the environment, I mean, look, as Ken said, it's a very competitive environment out there, and I would also add that so far, it's also a very rational environment and you know, you've seen that throughout the entire year. I would expect to continue to see that going forward as well. I mean, our job ultimately, as Ken said, is to avoid passing on cost increases to customers and fund as much as we can, whether it's Clubcard Prices, whether it's low everyday prices or whether it's Aldi Price Match. That has worked well for us and will continue to do so. I do expect as an overarching principle, a rational environment.
Thank you very much. I had, one very quick follow-up on the bank, actually. Given that the FCA yesterday warned that 200,000 U.K. households are falling behind on their mortgage payments, overall, 9% of households at risk. With that in mind, how would you describe your risk appetite in the bank and any early warning signs there?
Look, we don't, you know, have a mortgage book at the bank that was disposed of. What I would say to you is, you know, we are very tightly monitoring any credit risks at all times. I mean, we're able to confirm the guidance range that we put out there for the bank simply because of the great credit control management that we have in place. In fact, I would say to you, the quality of the book that we have has improved over the years.
Thank you very much.
Thank you.
Thank you. Up next, we have James Grzinic of Jefferies. Please go ahead.
Thank you. Good morning and Happy New Year, Ken, Imran. Couple quick questions. I guess the first one, given this changing mix dynamics, can you please remind us or help us understand what the extension of the changing mix is from a margin profile perspective, in terms of that own label business really accelerating beyond national brands? Secondly, can you perhaps tell us at what point you'll settle in terms of wages and what you're thinking in terms of your hourly rates for the year ahead?
Okay. Thank you very much for the questions, James. Let me take the second question first, 'cause that's a relatively short one. We've just started the negotiations with our unions, so we wouldn't comment on that until we're in a position to announce an agreed position with the union out of respect for the union. I think, you know, that's as much as I'd say on that. I think on the mix effect, I think what you're seeing is a lot of different moving parts. Very interestingly, before Christmas, we saw really strong sales in health and beauty, which is really good margin.
That was a combination of a great value proposition in our kind of health and beauty gifting, also a resurgence of cough, cold because, of course, it's the first Christmas post-pandemic, everybody was catching a cold. We had very strong availability relative to the market, we outperformed on that. That's kind of one example where you're, you know, where you're seeing some very margin positive sales mix effects. Clearly, you've got trade down to own brands, and frozen, more margin dilutive, you've got positive margin coming from premium mealtime and Dinner for Tonight offers and through our Finest* range, et cetera. You've got quite a mix of things playing out.
I think where you should take a lot of confidence from, was related to one of the earlier questions, which our guidance hasn't changed right through the year, which means that we've really got great control over our margin, and we're able to manage it and hold our value position at the same time. We do that through great negotiation, great operating efficiency, and real focus.
That's very helpful. Can I just perhaps ask as a follow-up, many moving parts, would it be fair to assume that net-net, that changing consumer behavior is not helpful from a margin mix perspective, though? Clearly having a lot of success on the operations and the cost side of things to, well, offset that.
I mean, I think what I would say is that, we've just put in an outstanding Christmas. I think, we have performed pretty consistently, not only through the cost of living crisis of the last nine months, but through the last three years through the pandemic, and then pivoting into this crisis. What you're seeing here is a real strength in the Tesco business model across not only the UK, but also Booker wholesaling business and through the other markets in Ireland and Central Europe, which suggests that we have the weapons to basically adapt our business model and manage our mix and our margin to produce very good returns for our shareholders.
Yeah. If I can build on that, I mean, that's kind of almost our job, if you wish, to kind of balance out these competing forces, right? When you look, for example, you know, anticipating that there would be people moving from out of home into in-home food consumptions as they replace restaurants with let's eat at home, you know, the fact that we expanded our Finest* range, you know, by 20% and saw growth at 8%, you know, that's actually a really good margin business. You know, when we are gaining from our premium retailers, you know, we've upped our quality. Again, that will be helpful because, A, it's new business coming to us, but also very helpful. The last point I'd say to you is you're right. In some cases, you have margin dilutive own label brands.
That is true. At the same time, if you focus on how do you maximize the mix between sell more volume, gain more customers, and have the right portfolio, that's the balancing act we need to do. What I feel very happy about is the business, the team has done that brilliantly this year, and we'll have to continue to do that next year again, because as you say, it doesn't get easier.
Great. Yeah. Thank you very much, and well done.
Thank you.
Thank you. We're now moving on to Sreedhar Mahamkali of UBS. Please go ahead.
Yeah. Hi, good morning, both. I've got one question and two hopefully short follow-ups then please. The first one, just in terms of the trading quickly and questions, would you say it was entirely in line with your expectations or perhaps a little ahead on? A couple of follow-ups then, just in terms of Andrew's question going back on consumer. Ken, I think you pointed to decent stuff to the year, but still remaining cautious. Have you seen any change in the sort of run rates, just after Christmas already? Is that what your sort of tighten the belt comment relates to? The last one was a follow-up to Clive's question earlier on, free cash. I mean, I know you talked to GBP 1.8 billion.
I think you said even more confident or a little more confident in your sort of earlier comment. Is there any flex you can give us there? Is an expectation closer to GBP 2 billion an unrealistic one? Any color there you can add. Thank you.
Look, when we spoke, maybe I'll take the first one and the cash one, 'cause they're sort of linked. You know, when we gave guidance for the year, which is only a few months ago back in October, you know, we were confident in what we were giving. The underpin, if you remember what we said, was we would expect a strong Christmas performance, right? Because we felt people would celebrate. That has played out pretty much in line of our expectations. The reality is we always set ourselves stretching targets, and I'm pleased to say that we hit them. Maybe I'll be honest, maybe slightly even ahead of my own expectations I'll be honest, because, you know, Christmas was very strong, slightly stronger than even I thought. That's a good thing.
Therefore, you know, just to answer the question, maybe behind the question also, I feel good about being able to confirm the guidance range that we've laid out and maybe even more confident than I was back then. On the cash flow side.
I mean, look, it was a significant upgrade, right? If you think about the range we had, the low end of GBP 1.4-GBP 1.8, now at least GBP 1.8. The idea is to let the profit fall through and make sure we continue on the discipline. I recognize cash flow is critical. As you know, we have our buyback program, our progressive dividend. We're well on track to finish the GBP 750 million program by April. It underpins what we do, and we're doing it well. Clearly, where exactly we will land, both on profit, Sreedhar, and on cash flow, I'll obviously tell you in April. I'd say to you, we're feeling good about the full year outcome.
Sorry, just one quick follow-up. You mentioned the buyback there. If you do end up with a number considerably better than expected in terms of free cash flow, and you've got good line of sight into next year's free cash flow, would you rethink the sort of GBP 750 million runway, or is that sort of how you want to position it as a more consistent?
Yeah, I mean.
maneuver there?
You know, when we talked about the buyback, we always talked about it's a multi-year program, i.e., you know, we commence it, you know, and we will have done GBP 1 billion almost by the time we get to April. Sorry, actually ahead of GBP 1 billion since starting this. This is something that's important to us, and we want to make sure it's sustainable and continues. The scale and the amount will always depend on, you know, the conditions. We're feeling good about where we are, and we'll have the conversation with the board that will ultimately be part of the key part of that decision process.
Thank you.
Thank you. A brief reminder that is options today. We're now moving to Xavier Lemoine of Bank of America. Please go ahead.
Yes. Good morning, Ken, Imran, and Natalie here. 2 follow-up question, actually, if I may. The first one, can you potentially help us to understand a bit more the performance you had in the recent months? Would be good potentially to have some indication on the inflation you were facing, as well as the mix effect and the volume effect for the U.K. more specifically. That would be quite helpful. Back to Andrew's question, actually, I understand that you're not going to comment, you know, fiscal year 2024. Can you potentially help us with the changes you're expecting on your, you said, covering cost unwind. Would be good potentially to have a number there. Are you expecting also any positive coming in from business rates more specifically?
Great. Thank you for the questions. Specifically on inflation value volume, as you will have seen from Kantar, inflation in the industry is running in Q3, somewhere between 11%-14%. We've been consistently inflating a little bit behind that, as per our policy of a little bit less a little bit later. That kind of would be as much as I'd say on inflation. If you look at our volume performance, versus pre-pandemic levels, because there's an awful lot of noise and distortion on volume through the pandemic, we grew volumes in food over the Christmas period. We're really pleased with that performance. Booker grew its catering volume.
We were winning at both end of the market, both in that kind of food for consumption at home and the eat out markets we won. We're really pleased with that performance. We have seen a bit of a falloff in GM sales volume year-on-year, but that is partially cost of living driven, but also partially driven by the fact that we have been repurposing space in our stores over the last nine months, devoting more space to clothing and a little bit less to GM. Consequentially, you've seen strong growth in clothing in the Christmas period. Maybe I'll take the business rate question. I mean look, we welcome the government's business rate reform that they announced in autumn. I think the net benefit to Tesco is it's in the tens of millions.
There's gonna be a bit of an increase for Booker. Look, it's all helpful. It's against the backdrop of around GBP 700 million of business rate taxes, as you can imagine. It's helpful and I'm happy that we are getting it, but it's in the tens of millions. As it comes to next year, look, I, you know, The moving pieces that you know well, Xavier, you know, between our Save to Invest program, very happy with the half a billion or so that we will hit this year and planning to. You know, we're in a good preparation phase to make sure we deliver on next year's half a billion as well. That's cumulative GBP 1 billion. You know, payroll negotiations still to come.
you know, obviously, there's the energy headwind, but, you know, again, we have a strong hedging program in place. How that then plays out, we will give you absolute clarity in terms of how we see the world, at least when we meet in April. I wouldn't wanna comment beyond that.
I understand. Thank you.
Thanks, Xavier.
Thanks. It's dial one for your questions today. We now take Nick Coulter of Citi. Please go ahead.
Hi. Good morning. Just one for me, please, if I may. Would you be able to share any insights from your teams on the outlet for COGS inflation and whether there are any signs that is beginning to roll over or at least not going much higher? Any thoughts appreciated. Thank you.
Hi, Nick. Thanks very much for the question. We'll start to lap the COGS inflation in Q1 of our new financial year, so kind of March, April onwards. We are hopeful, though we can never be sure that we'll start to see inflation moderate in the second half of the year. All things being equal, that should happen, but clearly there's a lot of variables out there. That's broadly what we foresee.
Great. Super helpful. Thank you.
Thanks, Nick.
Thank you. As there are no further questions, I'd like to hand back over to Ken for additional or closing remarks.
Thanks very much, Saskia. Thank you all for joining us this morning, taking the time and for all the great questions. As you can see, it's been a great Christmas for Tesco. A really strong, consistent performance from a really great team. I'd just like to say a huge thank you to them, once more and to you, for supporting us. We look forward to seeing you all in April. Thank you.