Tesco PLC

Good morning everyone and welcome to our interim results presentation. I'm joined here in Welland by our CFO Imran to give you an update on our progress in the first half. I'm really pleased to be announcing another strong set of results. Customers have continued to recognise the strength of our offering across value, quality and service and are choosing to shop with us even more. This is driving volume growth across the group. In the first half, we have lowered prices on thousands of lines, launched or improved hundreds of products, and continued to invest in our stores and digital capabilities to serve customers wherever and however they choose to shop with us. The combination of great prices, high quality, and continued product innovation means we're as competitive as we have ever been. We have been the UK's cheapest full-line grocer for almost two years now, and we are seeing improving customer perception across a broad range of measures, as well as strong market share momentum in both the UK and the Republic of Ireland. We've also invested additional hours in our stores, the equivalent of more than 2,000 extra colleague roles year on year, helping deliver market-leading availability. I want to say a huge thank you to all my Tesco colleagues for serving our customers so well and for their contribution to our strong performance. Customer satisfaction is critical to our success. The latest data for the UK shows that customer perception of the Tesco brand has grown year on year, well ahead of the market average. What is really satisfying about these results is that we've seen progress across all six measured categories, including quality, value and satisfaction. As a result of that broad-based improvement, our Net Promoter Score has continued to trend upwards and is now approaching very high levels that we saw during the peak of the pandemic. Market share is another important measure of our progress. The UK grocery market remains extremely competitive and every day we need to be at the top of our game for customers. It is therefore pleasing that alongside market share gains in volume and value, we've seen continued switching gains now for nearly two years. In recent months, we have taken share from across the market, including the limited range discounters. The strength of our customer offer has translated into a strong financial performance for the first half. Imran will talk through the details shortly, but with group sales up 4% and our adjusted operating profit up 10%, we're very happy with the balance we've managed to strike between ongoing investment and delivery in the period. As a business, we are in great shape, with our performance during the first half building on a track record of delivery for all our stakeholders. but there's no room for complacency. We are laser focused on maintaining our competitiveness and delivering great value. Now I'm going to hand you over to Imran to take you through our financial performance.

Thank you, Ken, and good morning, everyone. I'm delighted with the strength of our performance in the half. As Ken highlighted, our customer satisfaction scores point to the progress we have made in developing our competitive advantage, and that has fed through into further market share gains, driven by very strong volume performances. This trading momentum, coupled with another strong contribution from our Save to Invest program, is reflected in our financial performance in the half, and we are well set up to continue to grow in the right way. As a reminder, we are currently in the process of selling our banking operations in credit cards, loans and savings to Barclays. We expect the transaction to complete before the end of the calendar year, so these activities remain classified as discontinued operations. The majority of my review this morning will be on a continuing operations basis. Our retail sales grew by 3.5% at constant exchange rates, which includes 2.9% growth in like-for-like sales, mainly driven by strong volume growth. Inflation rates trended back to more normalized levels across the half as global commodity price inflation continued to ease. Retail adjusted operating profit grew by 10% year on year. We delivered total safe to invest savings of 260 million in the half and are well on track to deliver our full year savings of 500 million. We generated 1.26 billion of retail free cash flow in the first half. And our net debt was 9.7 billion at the end of the first half, which is slightly down versus year end, as our strong cash generation offset over 1.1 billion of shareholder returns in the half, comprising both the final dividend payment and of course our ongoing share buyback program. Our headline earnings per share was strong at 14.45 pence, and we have proposed an interim dividend of 4.25 pence per ordinary share. which is in line with our policy of setting the interim dividend at 35% of the prior full-year dividend. Moving now to a more detailed view of performance. Total retail sales for the half were 30.9 billion. Our UK and Ireland segment delivered total sales growth of 3.7%, with a particularly strong contribution from higher volumes. Inflation normalized to low single-digit levels as input cost inflation eased and we invested even further, cutting prices on thousands of products. In Central Europe, sales were up 0.9% year-on-year, driven primarily by stronger volumes as customers continued to respond really well to our targeted value investments. Disposable incomes have started to recover in the region, as the significant inflationary pressures customers have faced over the past two years are starting to ease. Tesco Bank revenue shown here relates to the retained insurance and money services business, which grew by 46.6% in the half. The revenue performance benefits from strong underlying progress in the insurance business, as well as two non-recurring benefits, which we set out in the release. 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. In the UK, we delivered like-for-like sales growth of 4%, With inflation now at more normalized levels, I'm pleased to say that growth was mostly volume-led, and as Ken already highlighted, we consistently grew ahead of the market. Our food sales grew by 4.9%, including a particularly strong volume performance in fresh food, driven by our ongoing investment in product quality and innovation. Finest sales continued to grow really strongly, with volumes up 14.9% year on year. Our home and clothing sales grew by 0.3%. We are well-progressed in our transition to our partnership with the entertainer. This will give customers an even better range of toys and improves our profitability in the category. This transition to a commission model, however, puts a small drag on the reported growth rates in the half. Excluding toys, home and clothing sales grew by 1.6%, primarily driven by strong clothing performance, where we continue to grow ahead of the broader store-based clothing market. Our large stores in particular are seeing the return on our investments in value, quality and service. These include an even stronger promotional offer over key seasonal events and the benefit of putting more colleagues on the shop floor, helping to deliver market-leading availability, as well as an improved customer satisfaction score. Convenience store sales, which include a higher proportion of food on the go, were impacted by poor weather in the half, as well as, of course, the ongoing decline in the tobacco market. Our online sales grew by 9.3%, driven by higher volumes. predominantly due to further progress in our well-established grocery home shopping business. We also continue to see a strong contribution from Tesco Whoosh, our rapid delivery service. Our overall online average orders per week were up 9.3% year-on-year to 1.3 million and a half, and we continue to improve the proportion of perfect orders, leading to further improvement in customer satisfaction scores. Excluding Woosh, our basket size increased by 4.4% year-on-year. In Ireland, like-for-like sales grew by 4.7% in the half, primarily driven by stronger food volumes. Total sales grew by 5.6% in constant rates, including a 0.9% contribution from new stores. Our food sales grew by 5.4%, including particularly strong fresh food performance. Home and clothing sales declined by 0.8% year on year, which includes a 1.4 percentage point drag from our new partnership with the entertainer. Excluding toys, our home and clothing like-for-like was up 0.6% year on year. Booker performed well in a challenging market. Total Booker like-for-like sales of minus 1.9% reflected the continuing decline in the tobacco market and the weakness in parts of the fast food market which is serviced by Best Foods Logistics, as we had highlighted in our Q1 update. Core retail sales, which excludes tobacco, increased by 0.6% year on year. Our retail symbol brands performed very strongly, with sales up 3.1%, supported by further improvements in availability, leading to even stronger customer satisfaction. Sales to independent retailers were softer, as some customers are switching into large store formats. Core catering sales increased by 1.7%, primarily driven by stronger volumes, as customers responded well to an extension of our everyday low-price campaign, with prices locked on over 700 products until January 2025. In Central Europe, like-for-like sales grew by 0.6%, driven by both strong volume and mixed growth, reflecting a gradual recovery in consumer sentiment in the region. Our food sales grew by 0.9%, including a very strong performance in fresh food as customers responded well to our value investments. Our non-food sales declined by 1.7%, impacted by unseasonal weather in the second quarter, which affected sales of seasonal ranges. Let's now move on to our retail profit performance. We delivered 1.56 billion of retail adjusted operating profit, which is 138 million ahead of last year, primarily driven by the strength of our trading performance. Our retail operating margin was 4.5%, up 30 basis points year-on-year. Within this, the UK and Ireland adjusted operating profit grew by 135 million year-on-year to 1.5 billion. Strong retail volume growth and the ongoing delivery of our Safe2Invest program helped to power our investments in the customer offer and in our colleagues, while still driving strong earnings growth. Our UK and Ireland operating margin was 4.7%, a 29 basis points increase year on year. The Central Europe adjusted operating profit was 49 million, an increase of 8.7% year-on-year at constant exchange rates, primarily driven by stronger volumes, improving mix, and a further contribution from Safe2Invest. This slide provides further detail of the components of our statutory profit performance, which increased by 135 million, or 15.2% year-on-year, driven by adjusted operating profit growth. There was an adjusting charge of 37 million to operating profit in the half from the continuation of non-cash charges related to the 2018 acquisition of Booker. Our net finance costs were lower due to higher interest on cash, short-term deposits and money market funds, as well as favourable non-cash mark-to-market movements on certain hedging instruments. The group tax charge increased by 96 million to 370 million. This increase was primarily driven by higher profits and a higher statutory tax rate versus last year. Let's now move on to our retail free cash flow. We delivered another strong performance, generating 1.26 billion, reflecting the strong operating profit performance in the half. The year-on-year reduction of 107 million primarily reflects lower working capital benefits and higher tax paid. Our total working capital inflow was 169 million, reflecting trade seasonality and volume growth, leading to higher trade balances. The higher working capital benefit last year reflects a higher level of cost inflation, which has now normalized. Cash CapEx was in line with the prior year and we continue to invest in high returning projects, including Safe2Invest and our digital platforms. Cash tax paid was 138 million higher year on year, mainly due to no longer benefiting from tax relief relating to the 2.5 billion one-off pension contribution we had made in 2021, now fully utilized, as well as the impact, of course, of the higher retail adjusted operating profit year on year. Let's now turn to Tesco Bank. The sale of our existing banking operations to Barclays is progressing well and is on track to complete before the end of this calendar year. Continuing operations revenue grew by 46.6%, driven by growth in home and motor insurance volumes, as well as strong renewal rates and a one-off benefit from the signing of a new five-year pet insurance agreement. Adjusted operating profit from continuing operations in the first half was 94 million. The performance in the half includes two non-recurring benefits, which total 42 million. The first is related to the new pet insurance contract, and the second relates to net investment income, which will cease following completion of the proposed sale to Barclays. The remainder of the profit growth was driven by higher insurance income year on year, as I described earlier. On an ongoing basis, we expect an adjusted operating profit contribution from the retained insurance and money services business of between 80 and 100 million per year. In the current year, the non-recurring benefits that I described mean that we now expect the contribution from the retained business of around 120 million. Let's now turn to the balance sheet, which further strengthened in the half. Net debt was 9.7 billion, a reduction of 88 million versus year end. This was predominantly driven by strong retail free cash flow generation of 1.26 billion, which more than offset the cash outflows relating to our ongoing share buyback program of 575 million and the payment of last year's final dividend, which was also 575 million. Our net debt to EBITDA ratio was 2.1 times at the end of the first half, slightly below year end. The total indebtedness ratio, not shown on the slide, was 2.2 times compared to 2.4 times at year-end. Our fixed charge cover was 3.9 times at the end of the first half, which is an improvement since year-end, primarily due to the increase in retail EBITDA. Turning now to our outlook for the current year. We expect to deliver retail adjusted operating profit of around 2.9 billion, in addition to 120 million from the retained Tesco Bank business. We expect to generate retail free cash flow within our guidance range of 1.4 to 1.8 billion. And we are on track to complete our 1 billion share buyback by April 2025. Thank you. And now I'd like to hand you back to Ken to take you through our strategic progress.

Thank you, Imran. As you've seen, we've had a really good first half and I'm proud of what we've achieved. It's also important for us to take a step back and reflect on our performance over a longer period and how we intend to sustain our momentum. Our strategic priorities are hopefully familiar to you. They outline how we tried to differentiate our offer from what remains a very competitive landscape. Our performance during the first half is evidence of the momentum we've built by closely anchoring to these priorities. We first set out our multi-year performance framework three years ago, and it's as relevant now as it was then. The framework was devised to create sustainable long-term value for every Tesco stakeholder. By focusing on customer satisfaction, it aims to drive top-line growth, grow absolute profits while maintaining sector-leading margins, and in doing so, generate strong cash flow. We couldn't have anticipated the many challenges we have faced, such as the cost of living crisis and the war in Ukraine. But despite those challenges, the framework has proven to be the right one, allowing us to deliver for our stakeholders while also investing in the future growth of the business. As we touched on earlier, our customer satisfaction scores and market share have significantly stepped forward as customers respond to our investments in value, quality and service. Progress is rarely straight line, but we've taken a full percentage point of market share in the UK since the first half of 2021. We've also grown our absolute profits by leveraging the strength of our brand and network across all channels. We continue to take a disciplined approach to capital investments, prioritising projects which drive efficiency, growth and digital capabilities. Through building our digital platform, powered by the scale and reach of Clubcard, we have unlocked new revenue streams. In retail media, we are building out the breadth of what we can offer our advertising partners, spanning multiple channels. As a result, we are seeing growth in active advertisers, campaigns per advertiser, and spend per campaign. We're still at an early phase in unlocking all we think we can achieve from retail media, but we're really pleased with our progress. Our Save to Invest program has also been an important part of our performance, helping fund some of our strategic investments and offsetting cost inflation. By the end of this financial year, we expect to have unlocked a total of 1.7 billion pounds of savings across the last three years. And finally, our cash generation has been really encouraging. While this year we will face into a more normalised working capital inflow and an increase in tax paid, we expect to be within our medium term guidance range of £1.4 to £1.8 billion. I mentioned earlier our priorities and leading on value will remain number one. Although inflation has come down, we are acutely aware of the continued challenges that many customers are facing. And that is why we are working incredibly hard to keep value front and centre in our offering, ensuring that customers are spending less wherever they can. Our powerful combination of Aldi price match, low everyday prices and club card prices means that customers are getting fantastic quality at great prices. This has made us the UK's cheapest full-line grocer since November 2022. Our approach to offering compelling value runs across the group. This half has seen us cut prices on at least 1,500 products in each of our markets in Central Europe, offer a price lock on over 700 products within Booker Catering, And in Tesco Mobile, we've extended our offer of no EU roaming fees till 2026. When it comes to value, we know that quality is as important as price. We're investing right across our range, making sure customers can enjoy some really fantastic products regardless of budget. These investments are working and we have seen a step change in quality perception across the last 12 months, strongly outperforming the market. During the half, we developed over 860 new or improved products. Exciting launches across our dinner for tonight offer include brands such as Root & Soul and Pinch. In the Republic of Ireland, food sales are up over 5% thanks to our investment in quality, which were also recognised with eight gold medals at the 2024 Mond Selection Awards. One of the highlights of our investment into quality is once again Tesco Finest, which has seen further significant growth with volumes in the UK up nearly 15%. During the half, we launched more than 180 new or improved finest products, including our sourdough range and the relaunch of our hugely popular dine-in offer, which has since seen 18% volume growth. We've been innovating across our wine range as well. Our new finest Floreal white wine, for example, tastes fantastic. And with the grape grown amongst wild flora, it fosters greater biodiversity. As a result of our continued innovation, we saw over 20 million customers buying a Finest product in the half, an increase of 5% year-on-year, and saw switching gains from all our competitors into Finest. Our commitment to quality has been recognised externally too, with Finest being awarded Own Label Range of the Year at the Grosser Gold Awards. We continue to evolve our digital capabilities with the depth and breadth of Clubcard data, allowing us to offer a more personalised and relevant shopping experience for customers. We are seeing very high levels of engagement with over 23 million Clubcard households in the UK and over 16 million app users across the group. The opportunity to offer our customers a personalised experience through Clubcard remains hugely exciting. We have made good progress in the half, and an example of this is Clubcard Challenges, which we launched to just under 5 million customers, rewarding them with personalized offers and promotions in a fun, gamified way. By combining Clubcard insights and leveraging Dunhumbie's expertise in data, we are creating a market-leading digital capability that benefits our customers and supplier partners. Our media and insights platform continues to grow and build partnerships with new consumer brands coming on board and agency agreements signed with WPP and Publicis. During the half, 91 brands participating in our Summer of Sport event. In June, we introduced Tesco Marketplace, providing customers access to an even greater range on tesco.com. with products from trusted brand partners. Over the last few months, we've been ramping up the number of products available on the platform, which is now at over 150,000. The market for retail media is growing at pace, and we're pleased with how customers and suppliers have responded. The combination of our physical and online footprint is unrivaled. I touched earlier on our progress across the last 12 months. But what is really shining through for me is the connectivity of the campaigns across our channels, whether that be a screen in store, a banner on Woosh, or something much bolder, as you can see here on our Wembley store. Our ability to reach customers at every stage of their shopping journey means that as we work with more advertisers and launch more campaigns, the depth of media spend is increasing. Being easily the most convenient means serving customers wherever, whenever, and however they want to be served. Given the scale and quality of our network, we believe we can do that better than anyone. And so it remains crucial that we continue to invest in our stores and infrastructure in a disciplined and returns-focused way. During the half, we opened 44 stores across the group and refreshed another 182. In Ireland, we're continuing our fresh first rollout with a further 11 stores converted during the half, helping to support a strong performance in fresh food. We're on track to open a new, chilled distribution centre in Aylesford in the summer of 2025, making use of robotic automation to enhance efficiency for our warehouse colleagues and improve customer satisfaction. In Bucher, we've signed 397 net new retail partners for our Symbol brands, with Premier winning Symbol Franchise Retailer of the Year at the Grosser Gold Awards. Tesco wouldn't be Tesco without our amazing colleagues, and it's vital for me that we deliver for them and all our stakeholders. This calendar year, we made our largest ever increase in colleague pay, while also enhancing our parental leave policies and our wellbeing offering. Almost 15,000 colleagues have signed up to our virtual GP service in its first year. receiving free, quick access to GP appointments seven days a week for them and their families. All this progress has culminated in standout colleague satisfaction results and us winning Retail Employer of the Year at the Grocer Gold Awards, an accolade we're really proud of. Turning to our communities, our Stronger Stars programme continues to go from strength to strength and is now supporting over 8,000 projects across the UK through grants focused on providing food and support to young people. Together, these projects have been awarded more than £9 million of funding to date. We are continuing our vital work on food donations, having now supplied over 220 million meals in the UK, working alongside our partners. We also introduced new initiatives over the summer to support children facing hunger, including additional donations to Fair Share and the Trussell Trust, rolling out food donation bags across all large stores, and once again running our popular Kids Eat Free offer across our 317 in-store cafes. A few weeks ago, we announced that we would be supporting over 1,000 unemployed people by hosting free career clinics across the UK in November, specifically targeting areas that face higher deprivation and economic challenges. Our suppliers play a vital role in our business. We continue to work with them on a wide range of initiatives, and we're delighted to have recently been ranked first in the Advantage Supplier Survey for the ninth year running. We signed up a further 16 innovative new brands as part of our 2024 accelerator scheme. Each brand will be provided with a year-long programme of mentoring, learning and development experience to help them flourish and grow. At the same time, we've been working really hard to reduce our environmental impact and put sustainability at the heart of our operations. We signed an agreement to source renewable energy from a new wind farm in Scotland. And in partnership with one of the UK's largest dairy farms, we launched an innovative trial of methane reducing feed supplement for dairy cows. Our work to reduce our environmental footprint can never be truly complete, but I am pleased with our progress so far. In summary, we've delivered a strong performance during the first half on all fronts. The strength of our customer offer has delivered volume growth and market share gains, which has led to profit growth and a strong cash performance. We will continue to invest in value, quality and service while unlocking longer-term growth opportunities. And through this, we are delivering for all stakeholders, ensuring we serve customers, communities, and the planet a little better every day. Thank you very much for your time, and we'd now be happy to take any questions.