Interim Results. 3 October 2012

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Dennis Grant
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1 Interim Results 3 October 2012

2 Philip Clarke Group Chief Executive

3 Decisive actions taken Started journey to improve the shopping trip in the UK Reduced our level of new space growth in the UK, given more focus to driving the performance of existing stores Invested in extending reach, range and capability online Completed smooth credit card transition at Tesco Bank Agreed a deal with Aeon, confirming our exit from Japan 3

4 Challenges in the first half Continued uncertainty and real financial pressures in Europe Shopping hour regulations in Korea Fresh & Easy needs to do better 4

5 A different approach since January Less space growth, fewer new big stores, more smaller stores On space, others have followed our lead good for the industry Redirecting investment into existing stores More clicks than bricks in general merchandise; to win we must be multi-channel Good for Tesco, for customers, for shareholders 5

6 Building a Better Tesco UK 1. Service & Staff 2. Stores & Formats 3. Price & Value 4. Range & Quality 5. Brand & Marketing 6. Clicks & Bricks 6

7 Tesco is changing Running less hot Loving the stores we have Reducing new store growth Competing harder online 7

8 Service & Staff 8,000 more in store 8

9 Improving customer perceptions Fresh food looks well cared for Fresh food perceived as excellent 111 * Average Q1 Average Q2 Range as a reason for store choice 110 Average Q1 Staff visibility in store Average Q Average Q1 Average Q2 Average Q1 Average Q2 * Increase in proportion of customers rating Tesco 9

10 Stores & Formats 10

11 Stores & Formats space reallocation Before After Bakery Non-food Bakery Fresh Fruit & Veg Non-food Fresh Fruit & Veg 11

12 Stores & Formats Bishops Stortford Before After: Food first 12

13 Stores & Formats Express Opened our 1,500 th Express, Kew Road, Richmond After Before 13

14 Price & Value Price Loyalty Coupons Value for money Promotions 14

15 Price & Value Clubcard Bonus 15

16 Range & Quality Everyday Value 16

17 Range & Quality 17

18 Range & Quality Amersham meat refresh After Before 18

19 Brand & Marketing 19

20 Brand & Marketing relevant ranges 20

21 Brand & Marketing relevant ranges 21

22 Clicks & Bricks Fewer big stores Greater digital connection to customers Starts at home in the UK It is spreading around the world We are determined to be an internet winner 22

23 Delivery Saver Subscription service to save customers money on regular orders Over 70,000 customers already Basket sizes larger than average 23

24 Drive-through supermarketing 24

25 Tesco direct 25

26 Over 1,300 desks 26

27 Digital 27

28 Building a Better Tesco UK 1. Service & Staff 2. Stores & Formats 3. Price & Value 4. Range & Quality 5. Brand & Marketing 6. Clicks & Bricks 28

29 The UK team Chris Bush UK COO David Hobbs UK Operations Planning & Strategy Director Mike Iddon UK Finance Director Judith Nelson UK & ROI Personnel Director John Scouler UK Commercial Director Ken Towle Internet Retailing Director David Wood UK Marketing Director Andrew Yaxley UK Commercial Director Neela Mukherjee UK General Merchandise Director 29

30 International 30

31 Korea Opening hour restrictions on large retailers 24 hour trading prohibited Nearly all stores closed two Sundays per month Significant impact Homeplus still one of our most successful, highest-returning, businesses outside the UK 31

32 Thailand Strong performance - sales and profits up well 1,000 th Express to open soon Dotcom grocery in Bangkok later this year 32

33 China More cautious stance serving us well Will open around 16 hypermarkets this year a reduced plan Scaled back regional and central overhead Remains strategically important market 33

34 Europe Expect tough environment to continue for some time General merchandise and electrical sales particularly impacted Clothing sales have picked up combined teams across Europe Successful launches of grocery dotcom Focus on smaller stores and online business skill and scale 34

35 United States H1 performance not where we wanted it to be, despite offer improving Losses down slightly * Like-for-like improving into second quarter More existing stores crossing into store profitability Even firmer grip on new capital Photo with kitchen-to-go? * At constant exchange rates 35

36 Tesco Bank Modern bank 7 million customers Smooth transition for customers New products launching e.g. mortgages Getting back to growth Powerful driver of loyalty; great value, relevant products 36

37 Building a Better Tesco Made the right strategic calls on: the UK, space and capital Implementing change: Improving execution in UK Stabilising performance Reducing new space programme Putting more behind multi-channel Moving closer to a Tesco which delivers sustainable growth, improving returns, strong cash generation Much more to do; experienced, energised, focused team now in place Making progress towards becoming a leader in multi-channel retailing 37

38 Laurie McIlwee Chief Financial Officer

39 Financial performance Group headlines Segmental performance Balance sheet and cash flow position Property Capital Returns 39

40 Group performance 12/13 vs. 11/12 Group sales * 36bn 1.4% Group trading profit 1.6bn (10.5)% Underlying profit before tax 1.8bn (8.5)% Group profit before tax 1.7bn (11.6)% Underlying diluted EPS 17.08p (7.9)% ** Interim dividend 4.63p 0% Net debt 7.2bn (0.4)bn * Group sales (inc. VAT) exclude the accounting impact of IFRIC13 ** Underlying diluted EPS reduction calculated on a constant tax rate basis; (6.7)% at actual tax rates 40

41 UK In line with our plans and projections, despite tough trading conditions Improved sales performance in H1 Q1 (1.4)% like-for-like, Q2 0.2% like-for-like * Strong volume improvement Strengthened grocery like-for-like, turnaround in fresh Clothing marked improvement Hardlines remained negative * Including VAT, excluding petrol 41

42 UK Sales growth driven by strong new store performance Trading profit and margin performance reflects planned investment Sales growth (exc. petrol) UK 2.7% LFL (exc. petrol) (0.6)% Similar margin expected in H2 Trading profit Trading profit growth 1,115m (12.4)% Trading margin 5.15% Trading profit change (86)bp 42

43 Asia Change in regulatory environment in South Korea Anticipate full year profit impact of c. 100 million Asia profits up, excluding regulatory impact in Korea Strong performance in Thailand Asia Actual FX Constant FX Sales growth 5.4% 6.0% LFL (1.4)% Trading profit 281m 287m Trading profit growth (3.8)% (1.7)% Trading margin 5.10% 5.18% Trading profit change (49)bp (41)bp 43

44 China Adjusting approach and having more capital discipline More focused expansion Concentrating on leasehold standalone stores Closing small number of underperforming stores Restructuring regional support costs 44

45 Europe Further deterioration in economic environment Discretionary spending hit hardest Gained or held market share in the majority of countries 20% lower capital expenditure Hungary crisis tax sunset clause should provide relief from early 2013 Sales growth (inc. petrol) Actual FX Europe Constant FX (6.8)% 4.4% LFL (exc. petrol) (0.2)% Trading profit 171m 187m Trading profit growth (27.8)% (21.1)% Trading margin 3.75% 3.66% Trading profit change (106)bp (115)bp 45

46 United States Small reduction in losses at constant rates Strengthening like-for-like sales performance Continuing to focus on store-level profitability Overhead cost reduction US Actual FX Constant FX Sales growth 20.1% 16.4% LFL 5.2% Trading loss (74)m (72)m Change YoY (1.4)% 1.4% Trading margin (20.50)% (20.57)% 46

47 US Improving store profitability H2 11/12 Store profitability grouped by weekly contribution cohorts stores No. of stores <(30) (30)-(25) (25)-(20) (20)-(15) (15)-(10) (10)-(5) (5) * Trading profit before depreciation and central & campus overheads EBITDA ($k/wk) * 47

48 US Improving store profitability H1 12/13 Store profitability grouped by weekly contribution cohorts stores No. of stores <(30) (30)-(25) (25)-(20) (20)-(15) (15)-(10) (10)-(5) (5) * Trading profit before depreciation and central & campus overheads EBITDA ($k/wk) * 48

49 US 49

50 Tesco Bank Successful migration completed Tesco Bank profit Trading profit increased by 114% to 94 million Increased PPI provision by 30 million Net provision now 78 million 30m 5m 30m Baseline profit flat Bad debt to asset ratio improved Released 10 million provision 89m 89m 94m Strong capital and funding position Launched mortgages H1 11/12 Baseline Profit H1 12/13 Baseline Profit PPI provision increase Fair value release One-off credit H1 12/13 Trading Profit 50

51 Balance sheet and cash flow Group capital expenditure in the first half was 1.6 billion Expect full year capital expenditure to be c. 3.2 billion Net cash flow from retail operating activities was 1.3 billion 0.6 billion lower than last year Reduction in operating profit One-off pension contribution Working capital outflow Net debt improved year-on-year by 0.4 billion Net finance costs rose by 75 million Non-cash IAS 32 and 39 movement Bond issue ahead of maturities 51

52 Capital, property & returns Successful property transactions in Asia Profits were 324 million Listing of our Thai property fund generated proceeds of 379 million Sale and leaseback in Korea generated over 300 million proceeds 52

53 Pension IAS 19 pension deficit has increased to 1.8 billion (post-tax) Triennial actuarial valuation completed One-off cash contribution of 180 million in H1 53

54 Key financial metrics Committed to deliver improvements on these measures Current environment makes speed of delivery more challenging Remain determined to improve returns 54

55 Summary We have faced a challenging first half Started our planned investment in UK Tough external environment We are more competitive and executing better Building a Better Tesco is starting to deliver 55

56 Philip Clarke Group Chief Executive

57 Tesco Team looking forward, not back Innovating, not standing still Focusing on customers Delivering more for shareholders 57

58 Q & A

59 Interim Results 3 October 2012

Preliminary Results 18 A i pr l 2012 il 2012

Preliminary Results 18 A i pr l 2012 il 2012 Preliminary Results 18 April 2012 Philip Clarke Group Chief Executive The first year Decisive i action taken Got Fresh & Easy moving towards break-even Announced our decision to exit Japan Slowed down