About this content About Jessica Davies Jessica has spent 15 years covering private and public markets, business, law and investment in the transition to cleaner energy. She spent several years as an editor at Dow Jones, covering private equity and private markets, where she led the team that broke the news of alleged misuse of funds at Abraaj Group. During her time at the company, she sat on the Women @ Dow Jones committee. She also spent four years as an editor and journalist at Centaur Media PLC cove ...

Tesco PLC (OTCPK:TSCDF) Q2 2024 Earnings Conference Call October 4, 2023 4:00 AM ET Company Participants Ken Murphy - Group Chief Executive Imran Nawaz - Chief Financial Officer Conference Call Participants Andrew Gwynn - BNP Paribas Exane Clive Black - Shore Capital James Grzinic - Jefferies Izabel Dobreva - Morgan Stanley James Anstead - Barclays Sreedhar Mahamkali - UBS Nick Coulter - Citi Paul Rossington - HSBC Ken Murphy [Commercials] Good morning, everyone, and welcome. Imran and I are delighted to pr ...

Financial Data and Key Metrics Changes - Retail sales grew by 5.1%, with a strong performance across all regions, particularly in the second half due to general market inflation [23] - Retail profit decreased by 6.3% to GBP2.5 billion, impacted by post-pandemic volume normalization and elevated cost inflation [23][24] - Free cash flow generated was GBP2.1 billion, reflecting strong profit delivery and high working capital inflow [25] - Net debt remained stable at GBP10.5 billion, with a net debt to EBITDA ratio of 2.6 times [26][52] - Headline earnings per share was GBP0.2185, flat compared to the previous year [27] Business Line Data and Key Metrics Changes - UK and Ireland segment delivered a 4.7% increase in sales, with food sales growing by 4.6% [28] - Central Europe segment saw both sales and profit growth, driven by strong cost management [29] - Tesco Bank experienced revenue growth driven by increased credit card spending, although profitability declined year-on-year due to a significant provision release in the prior year [45] Market Data and Key Metrics Changes - The UK market share was maintained, with Tesco being the only full-line grocer to have grown share over the last three years [7] - Online sales participation stabilized at around 13% of total sales, with strong market share at approximately 35% [34][74] - In Ireland, like-for-like sales growth was 3.3% for the full year, including 6.6% growth in the second half [35] Company Strategy and Development Direction - The company is focused on driving top-line growth, profit, and cash while maintaining strong capital discipline [4][7] - Tesco has repositioned its value proposition, matching prices with discounters and improving customer perception of value [58][59] - The company aims to achieve net zero emissions across its entire value chain by 2050, with significant progress in reducing food waste [17][18] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging operating environment due to rising household costs and inflation, but emphasized the resilience and agility developed [3][8] - The outlook for the next year includes expectations for broadly flat retail adjusted operating profit and continued strong cash flow delivery [53][80] - Management expressed confidence in the ongoing share buyback program, committing to purchase another GBP750 million worth of shares over the next 12 months [54] Other Important Information - The company has made record investments in base pay for hourly paid store colleagues, with all UK-based store colleagues now earning over GBP11 an hour [11] - Tesco has contributed over 50 million meals through food donation programs, reflecting its commitment to community support [14] - The company has achieved a significant reduction in energy consumption, cutting usage by approximately 20% over the last four years [101] Q&A Session Summary Question: Pricing and Competitive Environment - Management noted that the market is rational, with cost increases being passed through into pricing while maintaining competitiveness [83][84] Question: Operating Profit and Margins - Expectations for some margin dilution due to inflationary pressures were communicated, with a focus on maintaining value for consumers [85] Question: Fulfilment Fee Context - The fulfilment fee is intended to address increased online business costs, with suppliers contributing to these costs [88][89] Question: Media Income Potential - Media income is seen as a growing opportunity, with potential to be meaningful over the next three to four years [90][92] Question: Working Capital Direction - Future working capital inflows are expected to normalize, with a range of GBP0 to GBP100 million anticipated [98] Question: Energy Headwinds - Energy costs are expected to remain a headwind, but management is confident in their hedging strategies [100][103] Question: Free Cash Generation Allocation - Management is focused on improving profitability across store space and selectively closing underperforming stores [107]

Preliminary Results 2022/23 | --- | --- | --- | --- | --- | |----------------------------------------------------------|-----------------------------|------------|-------------------------------------------------|---------------------------| | INVESTING FOR CUSTOMERS \nPerformance highlights 1,2 : | AND DELIVERING \nFY 22/23 | \nFY 21/22 | A STRONG PERFORMANCE. \nChange at actual rates | Change at constant rates | | Group sales (exc. VAT, exc. fuel) 3 | £57,656m | £54,768m | 5.3% | 5.3% | | Adjusted operati ...

Financial Data and Key Metrics Changes - Group sales increased by 3.5%, while group profit decreased by 9.8% to GBP1.3 billion, reflecting post-pandemic normalization and significant cost inflation [18][19] - Statutory group operating profit was down 43.6% year-on-year due to a GBP626 million noncurrent asset impairment charge [19] - Retail cash flow performance was strong at GBP1.3 billion, demonstrating the inherent strength of the business [11][19] - Net debt at the end of the half was GBP10 billion, a reduction of GBP0.5 billion since the year-end [20][43] - Headline earnings per share were 10.67p, reflecting reduced operating profit but partially offset by lower tax charges and financing costs [20] Business Line Data and Key Metrics Changes - U.K. and Ireland segment sales increased by 2.6%, driven by strong performance in Booker [21] - Tesco Bank generated GBP67 million in profit, recovering strongly due to higher retail spending and demand for Travel Money [22] - Convenience stores saw a sales growth of 26% in city center locations, reflecting a recovery in footfall [25] - Food business sales were up 1.6%, while nonfood sales saw a significant decline in the first quarter but improved in the second quarter [26][27] Market Data and Key Metrics Changes - Central Europe experienced a 10.4% increase in like-for-like sales, with strong performance across all three countries [32] - Clubcard penetration increased to over 70% in Central Europe, supporting strong sales growth [14] - The market share improved year-on-year, driven by switching gains and the rollout of Clubcard prices [33] Company Strategy and Development Direction - The company focuses on four strategic priorities: Magnetic Value for Customers, I Love My Tesco Clubcard, Easily the Most Convenient, and Save to Invest [50][69] - Investments in Aldi Price Match and Low Everyday Prices have enhanced competitiveness in a challenging inflationary environment [52][54] - The Save to Invest program aims to save around GBP1 billion over three years to offset cost inflation [67][68] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the extreme pressure customers face due to cost of living increases and emphasized the importance of maintaining value [6][7] - The company expects to maintain profit guidance within the previous range, albeit towards the lower end, due to uncertainties in consumer behavior [46][70] - Confidence in generating strong cash flows and creating value for shareholders remains high despite market challenges [70] Other Important Information - An interim dividend of 3.85p was declared, in line with the company's policy [12][48] - The company has returned GBP450 million to shareholders through a buyback program, totaling GBP750 million since October 2021 [12][48] - The company has made significant investments in colleague pay to support its workforce [5] Q&A Session Summary Question: Why is GBP2.4 billion to GBP2.5 billion the right answer for profit guidance? - Management indicated that this range represents a balance between competitiveness, investment in colleagues, and shareholder returns [74] Question: Can you isolate the volume impact from COVID reversal for the full year? - Management noted that the COVID unwind was around half of what was gained, and they managed inflation well [80] Question: What concerns you most about FY '24? - Management expressed concern about energy inflation, which is outside their control, but emphasized their ability to manage what is within their control [91] Question: Can you elaborate on energy hedging for February '23? - Management confirmed they are fully hedged for the current year and have structured processes for rolling coverage [94] Question: What are the key drivers of margin hit for the second half? - Management identified payroll increases and energy costs as significant drivers, with the Save to Invest program gaining momentum [98]

Financial Data and Key Metrics Changes - Group sales grew by 3% year-on-year and by 10.2% over two years, with strong performance across all regions [17] - Group profit increased by 58.9% to £2.8 billion, reflecting strong sales performance and a reduction in COVID-19 costs [18] - Retail free cash flow was £2.3 billion, up £0.9 billion from last year, driven by higher operating profits and the elimination of UK pension contributions [19] - Net debt decreased to £10.5 billion, £1.4 billion lower than last year, primarily due to strong free cash flow generation [20] - Proposed final dividend of 7.70 pence per share, leading to a full-year dividend of 10.9 pence, an increase of 19.1% [20] Business Line Data and Key Metrics Changes - Total retail sales for the year were £53.8 billion, with profit of £2.6 billion, showing strong recovery in both UK and Ireland segments [21] - UK sales grew with like-for-like growth of 0.4%, while Ireland saw a decline due to strong comparatives from the previous year [22] - Booker reported a 15.3% increase in one-year like-for-like sales, driven by a recovery in catering sales [22] - Central Europe experienced a 2.9% increase in like-for-like sales, with growth across all channels and categories [31] Market Data and Key Metrics Changes - Market share in the UK improved consistently, gaining market share every month, with a notable outperformance in volume terms [11][12] - Ireland's market share improved by 11 basis points, while Central Europe also saw market share growth [13] - Online sales in the UK remained significantly larger than pre-pandemic levels, with a two-year like-for-like increase of 66% [25] Company Strategy and Development Direction - The company focuses on maintaining competitive pricing through initiatives like Aldi Price Match and Clubcard prices [51][53] - Strategic priorities include enhancing customer value, expanding digital engagement through Clubcard, and improving convenience in shopping [50][66][70] - The company aims to offset cost inflation and create additional headroom for investment in competitiveness and growth [80][81] Management's Comments on Operating Environment and Future Outlook - The management acknowledges the challenging operating environment due to inflation and cost of living concerns, with a focus on maintaining customer value [83][86] - Profit guidance for the next year is set between £2.4 billion and £2.6 billion, reflecting uncertainties in the market [88] - The company remains committed to sustainable cash generation and shareholder returns through a share buyback program [90] Other Important Information - The company has made significant contributions to humanitarian efforts in response to the war in Ukraine, raising nearly £4 million for the Red Cross [6] - The company has launched ambitious climate commitments, including a target for net zero operations by 2035 [62] Q&A Session Summary Question: Market outlook and inflation impact - Management stated that they start the year in a strong position with the best price indices in years and are committed to maintaining leadership in pricing [98] Question: Price increases and market leadership - Management noted that price inflation is occurring where necessary, with a mixed market on who leads price increases, but Tesco aims to hold back inflation [107] Question: Changes in customer behavior - Management indicated that they are observing changes in customer behavior due to disposable income pressures, but these are expected rather than confirmed [112] Question: Profit guidance details - Management provided insights into uncertainties affecting profit guidance, including COVID normalization and inflation levels [115]

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