Tesco PLC

Good morning everyone and welcome to our interim results presentation. I'm joined here in Welland by our CFO Imran Nawaz. This morning Imran and I will outline a strong first half performance in what is undoubtedly a very challenging market. We've continued to invest for customers and for colleagues at a time when it is most needed. The strategic priorities we first shared with you one year ago are serving us well and I will give you an update on our progress shortly. Over the past few years, we have maintained a relentless focus on value. We have further improved our competitiveness and in doing so have protected our strong positions in all of our markets. At the same time, we have significantly improved our ability to generate cash and return capital to our shareholders. The challenges around us will remain and I do not want anyone to underestimate the scale of the volatility and uncertainty in the market. However, As Tesco demonstrated throughout the pandemic, we have developed a level of responsiveness and resilience that sets us apart from many of our peers and gives me confidence that we can continue to create value for all of our stakeholders. The last six months have been very challenging, and so I'm particularly pleased that we have continued to make great progress. We know that customers are facing unprecedented pressures in the cost of living and it has therefore been critical that we've continued to support them with our relentless focus on value. Our investments in Aldi price match, low everyday prices and club card prices means that we are now as competitive as we have ever been. We have continued to reward loyalty too, with Clubcard growing both active users and sales penetration in every one of our markets. Customers are recognizing the value that Clubcard brings, and we are increasingly tailoring it to their specific needs. The progress we have made would not be possible without the hard work and resilience of the entire Tesco team. I want to say a huge thank you to all of our colleagues and our supplier partners for everything they're doing. I'm particularly pleased to announce this morning that we've made another investment in pay for our UK store colleagues, in addition to the significant investment we announced in April. Our colleagues are really important stakeholders in our business and are critical in helping us create value for every other stakeholder, and we will continue to do everything we can to support them. I believe the external challenges facing the industry are well understood, and I'm not planning to spend a huge amount of time reiterating them here. But it would be remiss of me not to acknowledge the extreme pressure many of our customers are under. In June, we said that we were starting to see some small changes in customer behaviour, but that it was difficult to separate them from the effects of post-pandemic normalisation. we can now see tangible changes in behaviour purely relating to increases in the cost of living. Whether it's switching to Tesco's own brand to take advantage of our great prices, or making more subtle changes such as switching from fresh to frozen, we can see customers prioritising value wherever they can. This can create challenges for us in terms of our mix, even before we overlay the impact of significant commodity and cost inflation. However, with our capability, reach and scale, I see it as our role to protect customers from as much inflation as possible. we will continue to inflate a little bit less and a little bit later than the rest of the market and take it on ourselves to navigate the other challenges we face as a business to the best of our ability. Regardless of the environment we find ourselves in, we focus on creating value through a combination of customer satisfaction, market share and strong cash generation. As I said in April, customer satisfaction is critical to our success. It is the best measure of whether the efforts we are taking are being recognised by customers and underpins our ability to grow over the medium term. I'm therefore really pleased that our ongoing customer focus continues to be recognized. Across the market, the pressures I have just outlined have led to a reduction in many of the usual customer metrics. However, against this backdrop, Tesco continues to be recommended by customers ahead of all the full line grocers. Our relative performance in our brand net promoter score has also continued to increase. and we are now ranked number one of the full line grocers on this measure. And as you can see, our relative performance gap has continued to widen. Our goal is to protect and ideally grow our core UK market share over the medium and long term. I'm pleased with our performance in the half, which builds on 23 periods of switching gains in the prior two years. versus this time last year, there is a small decline as we lap our period of greatest outperformance. But as you can see, when you look at it on a two or a three year view, we are the only one of the full line grocers to gain share. There is of course another dynamic in the market with the limited range discounters gaining share as a result of them adding millions of square feet of new space over this period. The fact that Tesco have gained despite this impact demonstrates the strength of our business and clearly in like for like terms, we have significantly outperformed. Our capital discipline remains strong and we will only invest where we see an attractive return. Cash is one of the standouts for me in this half, and we are once again in a really strong position, having generated £1.3 billion. Imran will share more details shortly, but for me, it demonstrates the inherent strength of our business and enables us to fulfil the commitments we have made as part of our capital allocation framework. Dividends are an important part of that, and we have declared an interim dividend of 3.85 pence in line with our policy. We have also returned 450 million pounds to shareholders through our ongoing buyback program in the first half, bringing the total to 750 million since we started in October 2021. It is inevitable and appropriate that I focus a lot on the UK in these updates, but we have also continued to make great progress across the wider group. Booker has had an outstanding performance, growing in both retail and catering. It has benefited from being in tune with its customers' needs as they emerged from the pandemic, and has continued to innovate its offer, such as through the formation of its food club, which now has over 40,000 independent restaurant members. Arlandt has also had a good half. Holding on to its strong market share, we have just started to convert the first stores we acquired from Joyce's, and if early signs are anything to go by, we're on to a resounding success. Finally, Central Europe has continued to do a great job championing value in a highly inflationary environment. We have seen a great response to Clubcard prices, supporting an increase in Clubcard penetration to over 70%. I mentioned before the extreme pressures that many of our customers are under. As you can see here, across every part of the group, we are working relentlessly to do what we can to help. We have rolled out the same core elements of our value proposition in the UK to our businesses in Ireland, Hungary, the Czech Republic and Slovakia. In Tesco Mobile and the bank too, we have stepped forward with new propositions to help customers save money across even more of their household expenses. The way that all our teams have worked together to bring club card prices to every part of our offer is a great example of how we can leverage the skill and scale of the group. Our unrivaled reach puts us in a unique position to make more products more affordable in more places than anyone else. It is this laser focus on value that has supported the strong performance in the first half that Imran will now take you through. Imran, over to you.

Thank you, Ken. Good morning, everyone, and thank you for joining us. I'll start with an overview of performance, followed by some further details on key trends and drivers. Throughout the review, percentage growth rates will be expressed in constant currency, unless stated otherwise. Group sales grew by 3.5%, a strong performance building on the momentum in the last few years. Group profit decreased by 9.8% to 1.3 billion. This reflects the impact of post-pandemic normalization and significant cost inflation, partially upset by very strong progress on safe to invest. Although not shown here, statutory group operating profit was down 43.6% year on year. That is due to a 626 million non-current asset impairment charge driven by higher discount rates. This non-cash movement does not reflect any change in the underlying strength of the business. I am particularly pleased with our very strong retail cash flow performance of 1.3 billion. The year on year movement reflects the impact of last year's exceptionally strong performance in both profit and working capital. Net debt at the end of the half was 10 billion, a reduction of 0.5 billion since the year end. This is primarily driven by the very strong cash generation and is after the outflow of 450 million relating to our share buyback. We generated headline earnings per share of 10.67 pence, The year-on-year change reflects our reduced operating profit, partially upset by a lower tax charge, lower net financing costs, and the benefit of our ongoing share buyback program. In line with our policy, we have proposed an interim dividend of 3.85 pence per ordinary share. As a reminder, our interim dividends are set at 35% of the prior year's full-year dividend. Total retail sales for the half were 27.6 billion. Our UK and Ireland segment delivered a 2.6% increase in sales, driven by further strong performance in Booker. Our Central Europe segment delivered both strong sales and profit growth, driven by resilient volumes in an inflationary environment. We saw year-on-year sales growth in Tesco Bank, as revenues recovered strongly due to higher retail spending, demand for travel money, and the annualized benefit of the acquisition of Tesco Underwriting in May last year. The bank generated 67 million of profit in the first half, which I will come back to later. Over the next few slides, I will cover the performance of each of our segments in more detail, starting with sales before moving on to profit. Let's start with the UK. We've seen very different drivers of performance across the half, so I'll briefly break it down by channel and then by category. In our large stores, our sales grew by 1.4% over the half. The first quarter reflects the lapping of very strong non-food demand in the prior year. Sales were much stronger in the second quarter, partially driven by warmer weather, the Platinum Jubilee celebrations and higher rates of inflation. As anticipated, we saw a decline in online sales as we lapped peak demand during last year's lockdown in the first quarter. our online business remains significantly larger than before the pandemic. And I'm really pleased that we've retained nearly 70% of the customers that we gained over the last two years. You'll see that we delivered a strong performance in our convenience stores throughout the half, driven by a sharp recovery in footfall in towns and cities as customers returned to their workplaces. Sales in our city center stores grew by 26%. Turning to performance by category, our food business delivered sales that were up 1.6% over the half, which is after the impact of normalizing from the very high demand in the first quarter last year. We saw strong growth across the second quarter as we traded over a more normal period with some benefit from the exceptionally warm weather. We saw an increase in inflation across the market in the half and started to see the impacts of changing customer behavior, such as switching from branded to own brand products and substituting to better value alternatives. We saw a significant decline in non-food sales in quarter one. That reflects a very strong performance last year when non-essential retailers were closed. Our year-on-year performance improved significantly in the second quarter and we outperformed the market, although we started to see a softening in demand in the more discretionary areas. I should remind you that our overall non-food participation is relatively small, representing around 8% of sales for the group. Our strong performance in Ireland is somewhat masked by the impact of lapping elevated sales throughout the pandemic, particularly in the first quarter. We saw like-for-like sales growth strengthened to 2.4% in the second quarter as the impact eased. Clothing sales were particularly strong as we lapped restrictions last year that prevented us from selling certain products. Our convenience stores have performed strongly and we continue to see strong growth in our online business as we expand our geographic coverage. We opened five new click and collect locations in the half, with the service now available in over 70% of our large stores. Online now represents 9% of our sales in Ireland. We completed our acquisition of 10 Joyce's supermarkets in June this year. In Booker, sales grew across both the retail and catering businesses, building on the strong momentum from last year. The retail business delivered overall growth of 2.2%. Excluding tobacco, sales were up 6.7%, driven by strong customer retention in addition to general inflation across the market. Tobacco sales were down 3.7% as demand fell across the market, driven by higher duty-free imports as customers resumed traveling abroad post the pandemic. In catering, we saw further strong sales growth driven by a sharp recovery as we traded over last year's restrictions when much of the hospitality sector was closed in the first quarter. We continued our strong momentum into the second quarter with sustained volume growth. Our catering performance includes strong growth in best foods logistics, which had sales growth of 34.6% in the first half. Moving now to Central Europe, like-for-like sales were up 10.4% with growth across all three countries. Inflation has been more significant in our Central European markets due to macroeconomic factors, including retail tax changes. Volumes have remained resilient, partially due to government support for customers such as price caps on essential food products. Market share improved across the half on a year-on-year basis, driven by switching gains. Customers have responded really well to the full rollout of Club Card prices and our low price guarantee, which further strengthens our value proposition. We saw a strong performance in general merchandise as we were able to offer our full range following non-food sales restrictions last year. Let's now move on to profit. As you can see, retail operating profit decreased by 138 million year-on-year, which reflects the net reduction in the UK and ROI segment, partially offset by profit growth in Central Europe. I'll break the movement down in more detail on the next few slides. In the UK and ROI, the profit decline of 11.5% was driven by a number of factors, most notably the year-on-year normalisation in volumes post the pandemic. Mix was a little bit negative year on year due to the effects of customers switching to own brand products to offset cost of living pressures. Significant operating cost inflation, including our largest ever single year investment in colleague pay and higher energy costs were partially mitigated by our accelerated safe to invest program. Turning to Central Europe, profit was up 19.1%, which reflects the resilient volume performance in the region and well-managed inflation in both input and operating costs. Food sales grew strongly and we saw a strong performance in convenience as customers returned to city center stores. The strong profit performance is after an additional 14 million charge due to an increase in the Hungarian retail sales tax. In Tesco Bank, we have seen revenue growth driven by an increase in new credit card customers, a recovery in our travel money service, and higher levels of retail spending. The bank's profit declined year on year, predominantly driven by a higher impairment charge due to upfront charges on new business and worsening macroeconomic indicators. This was partially upset by the profitable growth in travel money and the ATM business. This year's operating profit includes an 18 million contribution from Tesco underwriting, being fully consolidated following the completion of the acquisition in May last year. The bank's balance sheet remains strong. This slide gives you more detail on the components of our statutory profit performance, which decreased by 68.1%, primarily as a result of the non-cash impairment of non-current assets that I mentioned previously. Net finance costs before fair value remeasurements were £88 million lower than last year. This was driven by net pension finance income this year as a result of our overall group pension surplus compared to a charge last year. Net finance costs include a fair value remeasurement charge of 75 million, primarily relating to the mark-to-market movement on inflation-linked swaps, which was a significant change through the prior year due to an increase in discount rates. Our tax charge was 148 million, down from 313 million in the prior year. This reflects lower operating profit and a one-off charge in the prior year that related to a revaluation of our deferred tax liability. Moving now to cash. We've generated 1.3 billion of retail free cash on top of an exceptionally strong performance last year. Retail cash from operations was strong at 2 billion. Our total working capital inflow was also strong at 390 million, driven mainly by higher trade balances due to cost price inflation and higher sales at the end of the half. Both of these amounts were lower year on year due to reduction in food volumes and the effects of the sharp recovery in fuel volumes last year. Capital expenditure in the half was 507 million and we have provided the usual breakdown both by region and type in the appendices. Our capex remains on track to be in line with full year guidance. We paid 294 million of interest costs, of which 188 million related to finance charges on lease liabilities and 106 million to interest paid on bank debt. Interest costs reduced year on year as a result of property buybacks lowering our lease liabilities. Our cash tax paid was 45 million, which is broadly in line with last year. This is after the continued benefit from the one-off pension contribution in 2021, following the disposal of our Asia business. It also reflects the super deduction allowance on certain capital investments, which was introduced in March 2021. Finally, there was a 51 million movement in relation to the purchase of shares to satisfy share schemes. Turning to the balance sheet, net debt at the end of the half was 10 billion, half a billion lower than the year end, primarily driven by a reduction in underlying net debt before lease liabilities due to our strong cash generation. This position at the end of the half is net of the 450 million worth of shares that we have bought back through the first half. Lease liabilities increased marginally to 8 billion, largely due to the recognition of new leases related to the leaseback of the 17 stores that we sold in Central Europe that I mentioned earlier. The IAS 19 pension deficit was broadly in line with the year end. As a reminder, only pension schemes which are in a net deficit position are included in our total indebtedness. At a total level, we continue to carry a post-tax pension surplus of 1.1 billion. I'm really pleased to confirm that we have agreed the actuarial pension valuation as at 31st of March 2022 with the trustees at a surplus of 0.9 billion. We have also been able to agree with the trustees that we don't need to make any pension deficit contributions ahead of the next tri-annual valuation in 2025. Furthermore, the expense payments to the scheme by Tesco will reduce by 8 million per year to 17 million. Our net debt ratio was 2.5 times within our published guidance range and stable since year end. And our fixed charge cover was 3.5 times also in line with the prior year end. Before I finish, I wanted to talk briefly about the update in guidance that we've published today. As you will have seen in the statement, despite ongoing challenges in the market, I'm pleased that we are able to maintain our profit guidance within our previous range, albeit towards the lower end. We therefore expect full year retail adjusted operating profits of between 2.4 and 2.5 billion. Significant uncertainties in the external environment do still exist, most notably how consumer behavior continues to evolve. Our strong and ongoing focus on cash and a more positive expectation on working capital means that we have upgraded our expectation for full year retail free cash flow to be at least 1.8 billion. we continue to expect bank-adjusted operating profits of around 120 to 160 million. To summarize, as you have seen today, we have reported a solid performance despite the tough backdrop. We have confidence in our capital allocation and multi-year performance frameworks continuing to guide our actions so that we can create sustainable long-term value for every Tesco stakeholder. In line with our dividend policy of 35% of prior year earnings, I'm pleased that we have been able to announce an interim dividend of 3.85 pence. As part of our ongoing capital return program, we repurchased 450 million worth of Tesco shares in the first half, which takes us to a total of 750 million since we started the program last year. we are on track to buy back a total of 1.05 billion by April 2023. Thank you very much for your time and I now hand back to Ken.

Thank you Imran. Now to our strategic priorities. As a reminder, there are four priorities that help us stay competitive, accelerate our growth, and ensure that we can sustainably generate strong levels of retail free cash flow. I hope you are starting to get familiar with them, but as a reminder, they are magnetic value for customers, I love my Tesco club card, easily the most convenient, and safe to invest. I'm going to give you a relatively brief update on each of the drivers this morning. Magnetic value and safe to invest have been particularly critical given the inflationary environment, but all four have kept us moving forward with our long-term plans. Great prices are an essential component of magnetic value, and as I've just said, they are particularly important in the current environment. Clearly the entire market has had to cope with significant inflationary pressures and inevitably this has led to price increases for customers. At Tesco, we have continued to do everything we can to hold back inflation wherever possible. Where it has been passed on, we are ensuring that it is a little bit less and a little bit later than the rest of the market. you can see that this has allowed us to maintain a strong price position with our price index showing that we have consistently been cheaper than the market for the last 56 weeks. Importantly, we're also at the most competitive we have ever been versus the limited range discounters. Customers are recognizing our ongoing commitment to value with our perception score relative to the market continuing to strengthen. Aldi Price Match has been the cornerstone of our value proposition, helping to remove price as a reason for customers to shop elsewhere. It remains a key component alongside low everyday prices and club car prices. As customers have sought out the great value that it offers, we have made it even easier to access by increasing the distribution with a wider range of products in more stores across the estate. As a result, in addition to featuring in virtually all large baskets, Aldi PriceMatch now features in over 80% of our top-up shops. Club card prices have now been rolled out across the entire group and offer customers great deals on a wide range of products, ensuring they can save across food, clothing, Tesco Bank and Tesco Mobile. Finally, low everyday prices. You will have seen today that we have launched a significant new price lock commitment, freezing low prices on over 1,000 products until 2023. Our low everyday prices campaign covers products and brands that customers buy in, week in, week out. It covers everything from cupboard staples and tea time favourites through to household and health and beauty products. As we head into the winter months, and great value becomes even more important for our customers, we hope that this new price lock commitment will provide even more confidence that there is no need for them to shop elsewhere. When customers' budgets are under pressure, they need to have confidence that the food that they are buying is of great quality. Along with our progress on value, our quality perception has gone from strength to strength, increasing 208 basis points year on year and ahead of the market. We have strengthened our premium offering with our finest range increasing by more than 13% year on year. Our finest performance has remained strong and continues to be a focus for us as customers look to do more of their entertaining and socializing at home. Finest is just one element of the improvements we've made to our dining-in offer, and we're pleased to increase our market share in the important Dinner for Tonight segment by 83 basis points year-on-year. The two other components of magnetic value are health and sustainability. Earlier in the half, we launched our Better Baskets campaign, making it easier for customers to make healthier and more sustainable choices without compromising on price every time they shop with us. On climate change, we have been continuing to develop the strategy behind our ambitious value chain targets and making further progress in electrifying our transport. We have introduced HGV trailers with refrigeration units powered by solar panels, each saving around 2,000 litres of diesel per year. We also became the first retailer to launch a zero-emission electric lorry, servicing over 400 stores in Greater London. Each lorry is expected to replace around 30,000 diesel-fuelled road miles every year. We continue to work closely with our suppliers, with a particular focus on British agriculture. We are helping support British farmers with the many challenges they are facing. For example, giving extra funding to pig farmers and increasing the price we pay dairy farmers for fresh milk. We are also working hard to reduce food and packaging waste. We accelerated our target to halve food waste by five years, bringing it forward to 2025. On plastic, we have now removed multi-pack wrap from all of our own brand canned fizzy drinks, saving 12 million pieces of plastic a year. Moving now to the second of our strategic priorities, I love my Tesco Club Card. We've made great progress throughout the half on Club Card. with club card prices fully rolled out across all markets and businesses and club card satisfaction up five points year on year. Club card penetration has also increased significantly and is proving an invaluable tool for customers as they navigate the pressures they are facing. Club cards are now used on 75% of sales across all stores in the UK. The number of active Clubcard households is now at over 20 million, an increase of just over 3 million versus last year. Alongside this, our Clubcard app is gaining even greater traction, now with 10 million users in the UK, 1 million in Central Europe, and over 300,000 in Ireland. and we're rewarding customers even further. We have launched in-app personalization to 2 million Clubcard holders, giving them coupons tailored to the areas that matter most to them. I wanted to take a few moments to remind you how the progress we are making in Clubcard fits in our wider digital platform strategy. The points I've just outlined are all about putting the foundations in place, creating a strong proposition through Clubcard prices and enabled us to significantly increase penetration at the same time as migrating customers onto our digital offering. We've also been developing our capability in parallel. This includes enhancing our ability to personalize, strengthening our digital customer experience, and reinvigorating our data science business, Dunnhumby. Although it is early days, we have already started to benefit from the application of this capability. As I've already mentioned, we have applied many of the initiatives that we have launched in the UK across the group. We are building the strong base Dunhumbie has already established with suppliers through Dunhumbie Shop and we have launched a new service, Tesco Media and Insights, which is starting to work with a range of consumer goods brands to monetize some of the new opportunities we have created. While the bringing together of these tools and capabilities is still relatively new, I see it as one of the most important long-term opportunities for us to focus on. Our third priority is easily the most convenient, serving our customers wherever, whenever, and however they want. It's about keeping our existing estate relevant for customers while seeking out capital-like growth in convenience and online. I mentioned back in April that we were expecting further normalisation in the online market in the current year, and this is what we have seen. Orders, while still strong at over 1.1 million per week, are down around 10% year on year. Happily, where we are seeing customers return to shopping in store, a large proportion of these are doing so with us. Our online business still remains significantly ahead of pre-pandemic levels, and we've seen a robust performance in market share, holding broadly flat year-on-year. Our online proposition is supported by the combination of Urban Fulfillment Centres, Click and Collect sites, and Whoosh, our super-fast home delivery service. We opened our fifth Urban Fulfillment Centre in Rotherglen in May and plan to open two more later this year. As we continue to test and learn, we've made improvements to our processes, software and hardware, leading to a much faster ramp up to capacity in Rutherglen compared with our earlier urban fulfilment centres. We have continued our roll out of click and collect locations, with circa 70% of all UK households now within a 25 minute drive of a site. We've worked hard to improve the customer experience, launching curbside pickup in 180 locations. We have more than doubled the number of stores where Tesco Woosh is available to 442 and expect to reach a total of more than 800 by the end of the financial year. Our convenience business has continued to perform strongly coming out of the pandemic. We have continued with our opening program in the UK with 17 new express tours in the last six months and more planned for the remainder of the year. We have also opened a small number of stores in Ireland and Central Europe. We're continuing to expand the Booker network with a net increase of 195 new retail openings, as well as increasing the number of catering customers. Our final strategic priority is safe to invest. Last year, we set ourselves the goal of being able to save around 1 billion of costs over three years to help offset the impact of cost inflation on our business each year. We've made really good progress. To give some examples, we have simplified our stock and replenishment routines in store, ensuring that colleagues' time is used as efficiently as possible. Our reduced stock control routines have saved nearly 47,000 hours a week as a result. We also move more replenishment from nights to days, enabling more colleagues to be available on the shop floor to help customers at peak times. We have reviewed many of our supplier contracts for goods and services not for resale, re-tendering some to achieve better prices, and consolidating others to reduce levels of duplication. We said in April that given the significant cost pressures we are facing, we would look to accelerate the program. I'm pleased to say that we are well ahead of our original three-year plan and on track to deliver savings of around 500 million this year. Based on our progress so far and the momentum we've established, we are now seeking to deliver the original target of around 1 billion of savings by the end of February 2024, a year earlier than initially planned. In summary, we are pleased to have delivered a strong performance in a challenging market and to have done so at the same time as investing for our customers and colleagues at a time when they need us most. Our strategic priorities are serving us well. They will continue to guide our progress for the long term as we double down and relentlessly focus on value, competitiveness and operational execution. I am pleased that we are on track to deliver the profit we have outlined in our guidance this morning. It is a challenging environment and we all face significant uncertainties in the months ahead. But we are confident in our ability to continue generating strong cash flows and creating value for shareholders. Thank you for your time so far. Imran and I are now really happy to take your questions. As ever, we'd like to give everyone a fair chance to get their questions in. So if you could limit your initial questions to one or maximum two, then we'd really appreciate it. Then, of course, if you have any follow-up questions thereafter, we'd be more than happy to take them. So with that, I'll pass back to the operator and we'll take your questions.