Tesco PLC

Good morning everyone and welcome. Imran and I are delighted to present our interim results to you this morning. We've made a really good start to the year. Most importantly, we are winning with customers. Our continued investments in value and quality are being recognised, with increased satisfaction scores and growing market share. We know how challenging it is for many households across the country as they continue to grapple with the ongoing cost of living pressures. We have worked hard to make sure our offer is as competitive as possible in the first half and remain committed to doing everything we can to drive down food bills in the months ahead. Over the last three years, we have strengthened the foundations of the business. We have built out an unrivaled value proposition, laid the groundwork for our digital platform, made Tesco more accessible than ever before, and driven efficiencies in everything we do. I'm really proud of the further progress the team has made against our strategic priorities in the first half. And more broadly, I want to thank them for the brilliant contribution they're making every single day. As you will have seen from this morning's announcement, our relentless focus on customers has enabled us to deliver a really strong first half performance. Sales are up nearly 9% and profit and cash are ahead of expectations. Helped by a better than expected volume performance and strong progress on Save to Invest. A strong, sustainable financial performance allows us to carry on making the investments we need to stay competitive for our customers. So I'm delighted with where we are at this stage in the year. Customer satisfaction is absolutely critical to our success. It allows us to see how well customers are responding to our proposition and how they perceive us relative to our peers. Our brand net promoter score has increased once again, driven by improvements in our range and overall shopping experience. This is critical at a time where customers are choosing to shop across our different value tiers and ranges. Alongside customer satisfaction, one of our key goals is to grow or at least maintain our core UK market share. And I'm delighted that at the end of this half, we have seen the largest year-on-year market share growth of all the full-line grocers. Our growth has been driven by both stores and online, with total switching gains for six consecutive periods. This is, of course, despite others in the market continuing to open new space. which shows that customers are recognizing our investment in value, outstanding quality, and market-leading availability, and they're voting with their feet. Given the challenges many of our customers are facing, value remains paramount. We see it as our role to help customers spend less wherever we can. We do this via our powerful combination of Aldi price match, low everyday prices, and club card prices. This means customers can rely on getting the best prices in the market on their everyday essentials, in addition to outstanding offers on their favorite brands. To help customers find products and recipes that support them, to feed their families for a fantastic price, we recently launched our True Value campaign. This builds on the strength of Aldi Price Match to provide inspiration and new meal ideas using everyday products. We've also highlighted price cuts. where we have been able to reduce the price of hundreds of essential items from food lines such as pasta to baby products such as nappies. Additional expenses also occur while our customers are on the move. That's why over the summer we brought back our highly successful Kids Eat Free meals in our Tesco cafes. We wouldn't have been able to help customers spend less if it weren't for the strength and depth of our relationship that we have with our supplier partners. Throughout the first half, we have worked hard to ensure that we can pass savings on to customers as prices on many key commodities have started to fall. We have strengthened the capability in our sourcing team, leveraging data and insight to help us track ingredient and product costs, ensuring that we lead the way on price reductions wherever we can. We know that alongside value, quality is also critically important. We have made a concerted effort to put innovation back at the heart of our offer, and this is making a real difference to the products our customers experience. Throughout the half, we have further improved our range, launching over 300 new products and redeveloping and reformulating more than 1,100, from pasta to fresh fish, helping us offer even better quality at great prices. We're seeing growth at both ends of the basket, with particularly strong performance in the Dinner for Tonight mission, as customers look to save by choosing to eat in rather than eat out. We further strengthened the quality and presentation of the range to support this trend, which has contributed to 13 consecutive periods of net switching gains from premium retailers. The strength of our performance would not be possible without our brilliant colleagues and the work they do day in and day out for customers. As I mentioned in April, we were pleased to award a record pay increase for the second year running. Since April 2021, our total investment in colleague pay is now more than £1 billion. On top of this, we have also enhanced our wellbeing offer, giving UK colleagues access to virtual GP appointments seven days a week and expanding the services available on our Employee Assistance Programme. It's hugely important to us that our colleagues reflect the communities they serve and that everybody is made to feel welcome at Tesco. I'm therefore really proud that we've become the first major supermarket to offer the right to request flexible working hours for any colleague. We've also announced further improvements to our maternity, adoption and kinship leave policies. With the external pressures that we are facing, It's also incredibly important that we continue to support our suppliers, communities and planet as set out in our core purpose. We've continued to take extra steps to support British agriculture. Within the half, we have invested in developing a Future Farmers Programme and announced a further £10 million of financial backing to UK egg farmers. Being recognized as the leading retailer in the Advantage Supplier Survey for the eighth consecutive year is testament to the strength of relationships we have with not just the agricultural sector, but with all of our suppliers. Our scale also gives us a fantastic opportunity to make a big difference to the communities we serve. In the past six months, we have launched a 5 million stronger starts grant scheme, which aims to boost school funds for their extra food and new sports and play equipment to keep children active. Around 5,300 schools across the UK will benefit from the programme, and I'm excited to see what we can achieve. We are also making progress towards our commitment to be carbon neutral in our own operations by 2035 and our ambitious target of net zero emissions across our entire value chain by 2050. We have become one of the first companies globally to have validated science-based targets on all greenhouse gas emissions, including Scope 3. We will only achieve these long-term goals by making continued progress in the short term too. And during the half, we launched our 500th electric delivery van and announced the expansion of our low carbon fertiliser trials. So it's been a good first half for every stakeholder in Tesco. I'll now hand over to Imran, who is going to take you through our financial performance in more detail. Over to you, Imran.

Thank you, Ken, and good morning, everyone. I will start by giving an overview of our results for the first half of the year, followed by some more detail on the performance across each of the business segments. Throughout my review, percentage growth rates will be expressed in constant currency, unless stated otherwise. We delivered a strong sales performance across the group, with retail sales growth of 8.2% and like-for-like growth of 7.8%. Although inflation continued to play a clear role across all of our markets, the impact eased across the half as global commodity prices started to fall. We've worked hard to pass the benefit onto customers through lower prices and volume trends have improved across the half. Retail adjusted operating profit grew by 13.5% year on year to 1.4 billion, driven by another strong safe to invest delivery. We delivered 290 million of savings in the first half and we have plans in place to deliver a similar amount in the second half. While not shown here, group statutory operating profit increased by 105.5% year-on-year. This is primarily due to last year's exceptionally large non-current asset impairment charge of 626 million. This was largely driven by the sharp increase in discount rates last year. Discount rates have been broadly stable since the year end, and there was no impairment charge or release in the first half of this year. We generated retail free cash flow of 1.4 billion, which was 85 million higher than last year, driven by stronger retail profits, partially upset by an increase in capex. Net debt was $9.9 billion at the end of the first half, which was $605 million lower than at year-end. This improvement in net debt was driven by a strong cash generation in the first half and a $250 million special dividend received from Tesco Bank. Combined, these more than offset over $1 billion of shareholder returns in the half, comprising the final dividend payment as well as the ongoing share buyback program. As a result, we have generated headline earnings per share of 12.26 pence or 16.8% ahead of last year. Total retail sales for the first half were £30 billion. Our UK and Ireland segment delivered 8.8% growth. Sales growth was stronger in the first quarter, with like-for-like sales of 8.8%, followed by 8% in the second quarter, as we saw the contribution from inflation fall and traded over exceptionally warm weather last year. In Central Europe, the trading environment continues to be challenging. Sales grew by 1.4%, which reflects the volume impact from sustained high levels of inflation, as well as the scaling back of government stimulus actions. Tesco Bank sales grew by 16.5%, primarily driven by higher interest income from credit cards as interest-bearing balances and yields increased. 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. we delivered like-for-like growth of 8.7% in the UK. Food sales were particularly strong, growing by 10.6%, reflecting a better-than-anticipated volume performance as we continued to inflate behind the market. Price inflation fell gradually across the half as our teams worked closely with suppliers to pass on lower-cost prices to customers as quickly as possible. Home and clothing sales, which account for around 7% of total UK sales, declined by 4.8%. This primarily reflects the impact of strategic ranging decisions, including exiting low returning categories such as large electricals and footwear. Excluding these impacts, sales were broadly flat. We outperformed the rest of the market in clothing across the half, and we further improved our value perception against our key competitors. Large store sales grew by 9.3%, driven by strong execution, market-leading availability, and an up-weighted trade plan over key events, including the King's coronation. Convenience store sales grew by 5.1%, and were most impacted by the poor weather over the summer. Our city and town centre express stores performed particularly well, growing by 7.5%. Our online sales grew by 10% year-on-year, and participation has now stabilised at around 13% of UK sales, which is 4 percentage points higher than pre-pandemic. We are really pleased with our market share performance, gaining 71 basis points in the half. Tesco Woosh continues to deliver incremental sales growth and is now in over 1,400 stores. In Ireland, total sales grew by 10% in the first half, with like-for-like sales up 6.9%. New Space therefore contributed 3.1% to growth, driven by the Joyce's stores we acquired last year, as well as a new Tesco Superstore which we opened in Adamstown. We launched a new price cuts campaign, highlighting reduced prices on over 700 food products and contributing to a steady decline in inflation across the half. Booker continues to deliver solid growth across both retail and catering divisions. Total Booker like-for-like sales grew by 7.5% in the first half of the year, and growth was even stronger excluding tobacco at 11.5%. Retail sales excluding tobacco grew by 14.2%, driven by the addition of 143 new retail partners, as well as our continued focus on price, choice and service. Catering sales grew by 9.1%, as we built on our already strong offer, including a further improvement in availability. In Central Europe, the impact of inflation continues to be felt to a greater extent, than in our other markets, putting downward pressure on volumes. Inflation is being felt most strongly in Hungary, where two-year retail inflation reached around 50%. Like-for-like sales increased by 0.9%, reflecting the scaling back of last year's government stimulus in Hungary, as well as a general volume contraction in the market. Food sales grew by 1.9% in the first half. Similar to our other markets, inflation eased in the second quarter as we cut prices on thousands of products across the region. Non-food sales declined by 4.6%, reflecting an overall reduction in discretionary spend across the market. We launched a new basics kids and baby clothing range in response to customers' needs for great value on family essentials. Moving now to our profit performance. We delivered 1.4 billion of retail adjusted operating profit, which was 169 million ahead of last year, driven by a strong performance in the UK and Ireland segment due to our ongoing accelerated safe to invest delivery and another strong contribution from Booker. The retail operating margin in the UK and Ireland segment was 4.4%, which has now recovered to pre-pandemic levels and reflects the cumulative effect of our safe-to-invest delivery over the past 18 months. In Central Europe, retail adjusted operating profit of €46 million fell by €33 million year-on-year, which was entirely driven by the challenging trading conditions in Hungary. Slovakia and the Czech Republic continued to perform well. I will break the movements in each segment in more detail over the next few slides. In the UK and Ireland segment, adjusted operating profit grew by 202 million year on year. We delivered further savings through our Save to Invest program with key initiatives delivered in the half, including further reductions in energy consumption, simplifying the replenishment of our promotional stock and optimizing management structures in our large stores. Volumes were more resilient than we expected, supported by our ongoing customer investments. We were able to manage significant cost headwinds effectively, dealing with particularly high levels of inflation in both energy and colleague pay, whilst passing through thousands of price cuts and inflating behind the market. Booker delivered another very strong contribution, driven by the ongoing growth across both the retail and catering divisions. Turning to Central Europe now, where retail operating profits stepped back 33 million year-on-year, reflecting a range of external factors impacting our business in Hungary. The country faced significant currency devaluation year-on-year, which drove up the prices we pay our suppliers. In addition, the challenging trading environment in Hungary, combined with local regulatory actions, including price caps and mandatory promotions on everyday grocery items, impeded the industry's ability to recover these cost headwinds. Tesco Bank's performance was strong in the first half. Bank revenue increased by 16.5% year-on-year to €702 million, primarily driven by higher credit card balances and yields. We also delivered a strong performance in insurance, driven by competitive pricing and high renewal rates. The bank's adjusted operating profit of 65 million grew by 25% year-on-year, reflecting strong income growth in credit cards and a lower impairment charge due to the improved long-term macroeconomic forecasts compared to the equivalent time last year. Tesco Bank paid a one-off special dividend of 250 million to the group in the first half, which reflects the strength of the bank's balance sheet and capital ratios. The bank will continue to pay an annual dividend to the group of around 50% of earnings every year. This slide provides further detail on the components of our statutory profit performance, which increased by $677 million year-on-year. The primary driver of this increase is clearly the $626 million non-cash impairment charge that we took last year and was driven by significant increases in discount rates. Net finance costs reduced by 58 million, primarily due to fair value remeasurements related to mark-to-market movements on index-linked swaps. The group tax charge increased by 144 million to 288 million, driven by the increase in UK corporation tax rates from 19 to 25%, as well as the significant growth in operating profit I have just referred to. Moving now to our retail cash performance, which continues to be very strong. We delivered retail free cash flow of 1.4 billion in the first half, including a working capital inflow of 368 million, which was driven by the continued effect from rising cost prices, which increases our trade balances. Cash capex was 88 million higher than last year, reflecting incremental investment in our store refresh program, new store openings and an earlier spending profile year on year. We now anticipate Group CapEx to be around 1.3 billion for the full year, a little ahead of our current guidance range. We saw a 21 million reduction in interest paid, driven by higher levels of interest received on our short-term cash deposits. Given the strength of our cash generation in the first half, we now expect to generate retail free cash flow of between 1.8 and 2 billion for the full year, ahead of our long-term guidance range. This is of course excluding the 250 million special dividend received from Tesco Bank, which is not included in our headline retail free cash flow measure. Turning now to the balance sheet, which has further strengthened in the half. Overall net debt reduced by 0.6 billion as the retail free cash flow generation I have just described and the 250 million special dividend received from Tesco Bank more than offset the cash return to shareholders in the half. We paid a 509 million prior year final dividend and we bought back a further 503 million of our own shares. Our net debt to EBITDA ratio improved significantly and now sits at the bottom of our target range at 2.3 times, driven by the improvement in retail EBITDA as well as a reduction in net debt before lease liabilities. Lease liabilities reduced by 30 million since year end, as increases due to lease renewals and rent reviews were more than offset by the reducing nature of the overall liability. Our fixed charge cover also improved from 3.5 times to 3.6 times by the end of the half due to our increase in retail EBITDA. Although we continue to see some uncertainty in the outlook for the second half, the strength of our performance in the first half means we are making some increases to our current financial year guidance. We now expect to deliver retail adjusted operating profit between 2.6 billion and 2.7 billion. We also expect retail free cash flow of between 1.8 billion and 2 billion, which is ahead of our medium term target range of 1.4 billion to 1.8 billion. We continue to expect bank adjusted operating profits of between 130 million and 160 million. As I mentioned earlier, we have made good progress on our share buyback program across the half. and we are on track to complete our commitment to buy a total of 750 million worth of shares by April 2024. To summarize, we have delivered a strong start to the year across sales, profit and cash. We've set our interim dividend at 3.85 pence per share in line with our interim dividend policy and we have continued to make good progress on our ongoing capital return program. we have now purchased around £1.6 billion worth of shares since launching the programme in October 2021. I will now hand back to Ken.

Thank you Imran. During the half, we have made further progress against our strategic priorities. And while I'm not planning to take you through every point of detail, I will touch on some of the key highlights, starting with magnetic value. Our unrivaled value combination of Aldi price match, low everyday prices and club card prices has been instrumental in supporting our customers during these challenging times. During the half, we have continued to increase our distribution of Aldi price match products, further removing the need for customers to shop elsewhere in their search for value. In addition, we have continued to lock the price of over 1,000 products with our low everyday prices, providing customers with the certainty that they are seeking on everyday essentials. We have seen promotional participation increasing across the industry, and while we are keen to ensure that our base prices stay as low as possible, we have also ensured that Club Card prices continue to offer the best deals in the market. We now have around 8,000 products on Club Card prices at any one time, offering customers the chance to save hundreds of pounds a year on their favourite products. On top of this powerful combination, we recently launched a price cuts campaign to highlight that not only are we holding back inflation, but that we are actually reducing the price of many items. Throughout the half, we have lowered the price of around 2,500 products by an average of around 12%. All of these efforts have enabled us to become the most competitive we have ever been. During the half, we've consistently been the cheapest of the full-line grocers and our price differential to the discounters has also reached an all-time low. This is an important achievement for us and one we do not take for granted. We will continue to do everything we can to pass savings on to customers wherever we can and are looking forward to helping customers have a fantastic Christmas by shopping at Tesco. We have also made further progress on quality. Throughout the half, we have seen particularly strong performance in our finest range with volume growth supported by over 150 new products. Health is also an important driver of quality and therefore of magnetic value. We have launched some great products in this area in recent months, such as our finest signature vegetable dishes, which help customers replace or reduce meat consumption with healthier meat-free alternatives. I'm really pleased that we've continued to make progress towards our target of 65% healthy sales by 2025. Over the last few years, we've been working hard to build out a unique and powerful digital platform, powered by the scale and reach of Clubcard. We have driven up Clubcard penetration in every part of the group and increased the number of customers using an app to interact with us from less than 2 million to now over 16 million. During the half, we have seen digital engagement increase with 7.5 million customers using their digital Clubcard at the till and a 20% increase in the number of customers engaging with Clubcard via the web, app or phone wallet. The app isn't just for online use. Customers can now use it to create shopping lists, check stock levels in store, and also for whoosh deliveries. Strategically, more customers interacting with Tesco more frequently for more shopping missions creates stronger relationships, drives loyalty, and creates further opportunity for growth. Personalizing our offering is increasingly important to our proposition. We can use Clubcard powered by Dunhumby to understand our customers better than anyone in order to support them in their shopping journey, whether in store or online. This half, we have issued 86 million personalized coupons to nearly 6 million customers and have seen a four times greater return on these compared to their non-personalized equivalents. Personalisation and digitisation is not only about the app, but also in-store and online. We have increased the number of digital screens in our stores, adding over 750 in the half and delivering nearly 120 different campaigns. And we now have more than 300 suppliers using our online sponsored search functionality with 77 million daily impressions on our website. All made possible through Dunhambie's data science capabilities. Moving to easy the most convenient. Our performance in online is a particular highlight. Our online proposition has continued to strengthen post the pandemic. And while orders are stabilizing at around 1.1 million per week, our market share remains very strong at around 36%. and during the half has grown by 71 basis points. This has been driven by further improvements in our already market leading service, with online availability now running at over 97% and the number of perfect orders up by 12 percentage points year on year. All of which has helped lead to gains from our online competitors. We also continue to increase our capacity and efficiency with a further three urban fulfillment centers, two in the first half and one in the last month. Combined, these will allow us fulfill an extra 1 million orders per year. We've also continued to expand our WUSH rapid delivery proposition. During the half, we added more than 400 new stores, taking us to a total of 1,414 and are now reaching around 60% of the population. We have also added a larger basket functionality, which now operates in over 900 of these stores, helping customers to get everything they need whenever they want. Woosh has been a great addition to our offering and has been made possible by leveraging our extensive Tesco Express network, requiring very little capital investment. We were really pleased to see Woosh recognized as e-commerce initiative of the year at the recent Grocer Gold Awards. A testament to the operational efficiency, reach and innovation behind the proposition. Moving now to our store estate. We have also invested in and continue to develop our large store offering. With 115 stores updated through our Refresh program, Highlights include an improved bakery offering, in addition to a rebalancing of our non-food space, frequently adding in more space for our F&F clothing ranges. We have also added a further 402 retail partner in-store offerings, including brands such as Yo Sushi, Costa Express and Greggs, helping to broaden our customer offering and make our stores an even more convenient and compelling place to shop. Our market-leading availability in large stores has also gone from strength to strength as we continue to refine and simplify our end-to-end operations across the estate. we've continued to grow our convenience network also. We opened 16 new Tesco Express stores in the UK, in addition to refining our range to include cheaper alternatives on around 50 key lines, including many own brand products that were on average over 40% cheaper than the products they replaced. One Stop has performed well with 11 new owned stores and 16 new franchise stores. We have continued to broaden out our one-stop product range and saw record fresh sales participation this half. Our convenience network in the UK is further enhanced by our Booker offering, which added 143 net new Booker retail partners to its existing network of over 7,000 this half. Our addition last year of the Jaxx product range has been a particular highlight, with 20% sales growth year on year and over 40,000 retail customers now stocking it. As Imran mentioned earlier, Booker has delivered an exceptionally strong performance this half, driving growth and creating new opportunities. I've touched on the growth in Booker's retail business already, so I'll focus now on catering side of the business, where we have supported customers by adapting our ranges to offer great menu choices at fantastic prices. We further strengthened this by locking the price on 650 essential products over the peak summer trading period, and we're extending this to over 700 products for Christmas. Our Booker food clubs have also gone from strength to strength, with over 50,000 customers now signed up to receive discounted prices on 95 of our most popular products across drinks, snacks, and essential food products. We have also used this capacity created by Best Food Logistics to create a new Chef Central offering for multi-site customers, typically hospitality chains with between 25 and 100 sites. Chef Central offers customers a defined product range, allowing them to offer standardized menus across their business, managing costs and placing orders centrally. Save to Invest has been key to our strategic and financial progress this half. We are constantly looking for opportunities to drive a simpler and more efficient operating model so that we can reinvest into the business to best support our customers and other stakeholders. We have made strong progress across all areas such as goods and services not for resale, property, operations and central overheads. Examples include streamlining of our express checkout experience with increased self-service and upgrading checkout systems and simplifying our replenishment routines in large stores to deliver both availability and efficiency gains. During the half, we have delivered circa 290 million pounds of savings, meaning we are on track to deliver at least 1.1 billion cumulative savings between February 2022 and February 2024. In summary, our performance this half has been driven by our relentless focus on great value and quality for customers. We are committed to doing everything we can to drive down food bills and make sure that customers can have a fantastic and affordable Christmas by shopping with Tesco. We are confident that we have the right strategy to keep winning and are pleased with the progress we have made. Our financial performance in the first half has allowed us to upgrade our expectations for the full year. and means that we are in a strong position to continue to deliver for all of our stakeholders. Thank you for your time so far and we're really happy now to take whatever questions you may have.