Tesco : Preliminary Results 2018/19

10 Apr 2019

FULL-YEAR AHEAD OF EXPECTATIONS - SECOND HALF MARGIN OF 3.96% INC. BOOKER (3.79% EXC. BOOKER)

On a continuing operations basis	2018/19*	2017/18	Change at constant rates	Change at actual rates
Headline measures1:
Group sales2	£56.9bn	£51.0bn3		11.3%	11.5%
Group operating profit4	£2,206m	£1,646m3		33.5%	34.0%
Diluted EPS before exceptional and other items5	15.40p	11.90p			29.4%
Dividend per share	5.77p	3.00p			92.3%
Retail operating cash flow6	£2,502m	£2,773m			(9.8)%
Net debt6,7	£(2,863)m	£(2,625)m			up (9.1)%
Statutory measures:
Revenue	£63.9bn	£57.5bn		11.0%	11.2%
Operating profit	£2,153m	£1,839m		16.7%	17.1%
Profit before tax	£1,674m	£1,300m		28.3%	28.8%
Diluted EPS	13.55p	12.11p			11.9%

*Note: Booker consolidated from completion date of 5 March 2018 and therefore included in the 2018/19 figures for 51 weeks

Headlines

• Group sales² £56.9bn, +11.5%
  • UK & ROI LFL sales⁸ +2.9% incl. Tesco UK +1.7% and Booker +11.1%
  • Central Europe LFL sales⁸ (2.3)%: fewer trading days and less general merchandise
  • Asia LFL sales⁸ (6.2)%: improvement to (3.0)% in 4Q
• Group operating profit⁴ £2,206m, +34.0%
  • UK & ROI £1,537m, +45.1%; incl. £196m Booker (last year: £185m⁹) and £79m synergies
  • Central Europe £186m, +56.3%: significant cost reductions and improved profit mix
  • Asia £286m, (4.3)%: supplier negotiations concluded and significant restructuring complete
  • Bank £197m, +16.6%: strong banking performance and one-off contract renewal benefit¹⁰
• Group operating margin⁴ 3.45%; 2H operating margin⁴ 3.96% (3.79% excl. Booker)
• Retail operating cash flow⁶ £2.5bn: c.£(490)m working capital timing impact year-on-year
• Retail free cashflow of £906m: impacted y-o-y by working capital timing, higher tax and market purchases of shares
• Net debt^6,7 £(2.9)bn: increased by £(238)m after £(766)m Booker cash consideration
• Final dividend 4.10p, giving FY dividend of 5.77p - now expect to reach c.2.0x EPS cover¹¹ in 2019/20
• Statutory revenue +11.2% to £63.9bn; operating profit +17.1% to £2,153m; profit before tax +28.8% to £1,674m

Further progress against each of our six strategic drivers

• Brand health¹² continues to strengthen; quality perception +1.9 points and value perception +1.3 points¹³
• In-year cost savings £532m; savings of £1.4bn to date towards £1.5bn target
• Generated £2.5bn retail operatingcash⁶; £8.6bn retail operating cash¹⁴ generated over three years
• Improving the mix across geographies, channels and product; closure of Tesco Direct; less general merchandise in CE
• Released a further £285m value¹⁵ from property; three store buybacks in Cirencester, Stroud and Shepton Mallet
• Innovations including 10,000 own brand product relaunch; eight new 'Exclusively at Tesco' brands; launch of Jack's

Dave Lewis, Chief Executive:

'After four years we have met or are about to meet the vast majority of our turnaround goals. I'm very confident that we will complete the journey in 2019/20.

I'm delighted with the broad-based improvement across the business. We have restored our competitiveness for customers - including through the introduction of 'Exclusively at Tesco' - and rebuilt a sustainable base of profitability. The full year margin of 3.45% represents clear progress and the second half level of 3.79%, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago.

I'm pleased that we are able to accelerate the recovery in the dividend as a result of our continued capital discipline and strong improvement in cash profitability.'

Like-for-like sales performance⁸

	1Q 2018/19	2Q 2018/19	3Q 2018/19	4Q 2018/19		1H 2018/19	2H 2018/19		FY 2018/19
UK & ROI	3.5%	4.2%	1.9%	1.9%		3.8%	1.9%		2.9%
Tesco UK	2.1%	2.5%	0.7%	1.7%		2.3%	1.2%		1.7%
ROI	3.0%	3.1%	(0.2)%	(0.4)%		3.1%	(0.3)%		1.3%
Booker	14.3%	15.1%	11.0%	4.3%		14.7%	7.6%		11.1%
Central Europe	(1.0)%	(2.0)%	(3.0)%	(3.0)%		(1.5)%	(3.0)%		(2.3)%
Asia	(9.0)%	(4.8)%	(8.0)%	(3.0)%		(7.0)%	(5.4)%		(6.2)%
Group	1.8%	2.7%	0.5%	0.9%		2.2%	0.7%		1.4%

Headline Group results

A full Group income statement can be found on page 14.

52 weeks ended 23 February 2019 On a continuing operations basis	2018/19	2017/18 (restated)3	Year-on-year change (Constant exchange rates)	Year-on-year change (Actual exchange rates)
Group sales (exc. VAT, exc. fuel)2	£56,883m		£50,993m		11.3%		11.5%
Fuel	£7,028m		£6,500m		8.1%		8.1%
Revenue (exc. VAT, inc. fuel)	£63,911m		£57,493m		11.0%		11.2%
Group operating profit4	£2,206m		£1,646m		33.5%		34.0%
- UK & ROI	£1,537m		£1,059m		45.0%		45.1%
- Central Europe	£186m		£119m		56.3%		56.3%
- Asia	£286m		£299m		(6.7)%		(4.3)%
- Tesco Bank	£197m		£169m		16.6%		16.6%
Include exceptional items and amortisation of acquired intangibles	£(53)m		£193m
Group statutory operating profit	£2,153m		£1,839m		16.7%		17.1%
Group profit before tax before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments	£1,958m		£1,284m				52.5%
Group statutory profit before tax	£1,674m		£1,300m				28.8%
Diluted EPS before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments	15.40p		11.90p				29.4%
Statutory diluted EPS	13.55p		12.11p
Statutory basic EPS	13.65p		12.15p
Dividend per share	5.77p		3.00p				92.3%
Capex 16	£1.1bn		£1.1bn
Net debt 6,7	£(2.9)bn		£(2.6)bn
Cash generated from retail operations 6	£2.5bn		£2.8bn

Notes

Creating value for our key stakeholders

We have continued to make strong progress this year, guided by the six strategic drivers that we set out in October 2016, as we create long-term and sustainable value for our key stakeholders.

Customers

• 149,000 more customers are shopping at Tesco¹
• continued improvement in Brand perception measures of quality (+1.9 points) and value (+1.3 points)²
• introduced eight new 'Exclusively at Tesco' brands; relaunch of 10,000 own brand products
• launched 'Jack's' - a new brand and store format - as part of celebrating 100 years of great value at Tesco
• refreshed Clubcard app in August with Faster Vouchers functionality; users up 34% year-on-year
• offering Booker 'bulk buys' in 70 Tesco stores; wider roll-out to continue next year
• unlocking benefits of 'Joining Forces' for Booker customers, with greater choice, lower prices and better quality
• continued to work in partnership with Cancer Research UK, Diabetes UK and the British Heart Foundation to promote healthy living and support prevention and cure for the nation's biggest health challenges
• committed to making customers' shopping more sustainable through long-term partnership with WWF

Colleagues

• maintained colleague engagement: 83% recommend Tesco as a great place to work
• implemented the third stage of a 10.5% increase for hourly paid store colleagues in November 2018
• launched new Colleague Clubcard Plus, providing easier access to Tesco benefits in one place
• conducted the UK's largest ever workplace health survey, with over 8,000 colleagues taking part
• further simplified our operations, making changes to stores and offices to enable investment in serving customers
• new partnership with The Prince's Trust, helping 10,000 young people to develop skills and employability
• offered 1,193 new UK apprenticeships in areas such as HGV driving and food technology

Supplier partners

• retailer with most improved supplier relationships for third successive year in June 2018 GCA survey
• Supplier Viewpoint Group measure reached a high of 77.5%, up 260bps year-on-year
• ranked first for the third successive year in the independently-run Advantage supplier survey
• enabled suppliers to access higher level of combined UK sales growth through our merger with Booker
• worked alongside 358 of our existing suppliers to create new 'Jack's' brand with 1,800 products
• working in partnership with Carrefour to identify opportunities in own-label, branded products and goods not for resale

Shareholders

• delivered Group operating margin of 3.45%; 2H operating margin 3.96% (3.79% excl. Booker)
• generated £2.5bn retail operating cash flow; £8.6bn retail operating cash generated over three years
• retail free cashflow of £906m; impacted y-o-y by working capital timing, higher tax and market purchases of shares
• announced final dividend of 4.10p per share taking full-year dividend to 5.77p per share; now expect to reach c.2.0x EPS cover³ in 2019/20
• strategic repositioning of the Group: delivering faster growth through Booker; benefiting from long-term, strategic alliance with Carrefour; more sustainable general merchandise business, including closure of Tesco Direct in July
• delivered Booker synergies ahead of plan; well on track to meet target of c.£200m p.a. by end of third year

Looking ahead

We are confident that we will meet the remaining goals in our turnaround plan in 2019/20 and deliver a level of profitability (pre-IFRS 16 and excluding Booker) within the 3.5%-4.0% margin range.

Whilst the market remains uncertain, our performance to date is strong, leaving us well-positioned to invest in our competitiveness as we continue to celebrate 100 years of great value for customers. We remain comfortable with consensus profit expectations for 2019/20.

We are continuing to focus on customer satisfaction, cash profitability, free cash flow and earnings growth and are using these measures to inform our decisions as we look to create sustainable value for shareholders.

As a result of the progress we are making strengthening the balance sheet and delivering free cash flow we now expect to reach a dividend cover level of around two times earnings³ in the 2019/20 financial year. We will maintain our focus on balance sheet strength, targeting a leverage range of 3 times to 2.5 times total indebtedness to EBITDAR³.

Forthcoming events

As we move beyond our medium-term ambitions, we plan to host a capital markets day on 18 June 2019 to share some of the 'untapped value opportunities' available for Tesco. We will also hold an ESG-focused event on 26 June 2019. Both events will be held at our Welwyn Garden City campus, with invitations being issued shortly.

We will be issuing full 2018/19 financial statements on an IFRS 16 basis on 29 April 2019, as described on page 13 below.

Contacts

Investor Relations:	Chris Griffith	01707 912 900
Media:	Christine Heffernan	01707 918 701
	Philip Gawith, Teneo	0207 420 3143

This document is available at www.tescoplc.com/prelims2019.

A meeting for investors and analysts will be held today at 9.00am at London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Access will be by invitation only. For those unable to attend, there will be a live webcast available on our website at www.tescoplc.com/prelims2019. This will include all Q&A and will also be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

Disclaimer

This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as 'aim', 'plan', 'intend', 'should', 'anticipate', 'well-placed', 'believe', 'estimate', 'expect', 'target', 'consider' and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Tesco as of the date of the statement. All written or oral forward-looking statements attributable to Tesco are qualified by this caution. Tesco does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.