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Tesco PLC
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Hello, and welcome to the Tesco 1Q Results/Analyst Call. [Operator Instructions] And just as a reminder, this conference call is being recorded. Today, I am pleased to present Dave Lewis, Group CEO; and Alan Stewart, Group CFO. Please begin your meeting.
Thank you, Mirella. Good morning, everybody, and thank you for joining us. And as you've heard, as usual, I'm joined by our CFO, Alan Stewart.Hope that you've had a chance by now to review our press release. We try to keep it really simple and focused on the key drivers of our sales performance, given that it's a course of the trading update.With that in mind, I'm pleased to report that Q1 has been a good start for the year in a subdued market. I say subdued for several reasons. You'll be familiar already with some of the challenges in terms of the consumer sentiment but also because of the weather and other events like last year's Royal wedding. Now as the -- Tesco's CEO the last 5 years, I've tried very hard never to talk about the weather, but there just come a point where you need to say something and in Central Europe, in particular. It was 5 degrees cooler in April than May this year, which impacted total sales by around 2%.Now as you know in the U.K., the weather too has been a little variable this year versus last. But nevertheless, we outperformed the U.K. market in both sales and volume turns. Total sales were just over GBP 9 billion, including a 0.8% impact -- negative impact from the closure of Tesco Direct, where we took the strategic decision last year to remove unprofitable sales. This strong performance is a reflection of the underlying improvements we've made through our offer, including the broader rollout of our Exclusively at Tesco brand. These brands continue to be really popular with customers with sales up by more than 10%, and customer quality perceptions are twice that as our old Everyday Value ranges. From a seasonal perspective, we had a very good Easter. Easter eggs drove volume growth of 5% in impulse category, and Easter Sunday was the best trading day on record for our convenience business.In May, we launched our second 100 Years of Great Value event with some very strong promotion, the launch of Jack's products into the 850 Tesco stores for the first time as well as Clubcard prices.More than 1.5 million customers benefited from Clubcard price discounts in May, and engagement with our Clubcard App increased significantly, with average daily downloads up 350%. I'm also really pleased that we had some wider industry and customer recognition for the quality of our offer, too. Last week, we won the Fresh Produce Consortium awards for best of the best fresh produce business, and multiple fruit and veg retailer of the year for the first time on record. And on Tuesday night, we were delighted to be recognized at the Grocer Gold within the Grocer 33 awards for availability and service for the first time since 2010 and 2011, respectively. And I don't believe there's a time on record where we won both of them in the same year. I'm also particularly pleased that for the fifth year running customers voted us, Britain's Favourite Supermarket.Turning to Booker. It's been another good quarter with nontobacco sales at 4.2% on a same-day basis. Catering in particular performed very well and in a comparative market, Booker continues to maintain a leading price position. For our Joining Forces program, we've introduced 100 new and exclusive lines for Booker customers and improved the range and price in key fresh unpackaged products.We've also shared with some of Bookers' retail customers the benefits of our bigger group better-for-all initiative, with a target retail profit benefit of over GBP 6,000 per year. In Ireland, total sales were GBP 567 million, up 2.7%. Performance was particularly good in our core food categories, including produce, chilled food and grocery. Increased marketing support has also driven high customer awareness for our You Won't Pay More campaign with extremely competitive prices on 800 key own brand and branded launched products.In Central Europe, we had a good Easter with positive growth over the seasonal period in Czech and Slovak. Customers are responding well to our Star lines initiative with sales growth on the key 600 products that mattered most to our customers, outperforming the rest of the business by 5%. Overall, our sales growth was held back by Poland, which included store closures and 2 fewer trading days impacting performance in the region by 4%. In Asia, momentum has improved as our business moved back into growth, with sales up 2.6%. We continue to improve the offer for customers in Thailand and joined the important Songkran festival. We focused on great value offers to help customers celebrate. We hope to continue to see a positive sales contribution from B2B sales, which we now run with a centralized model. In Malaysia, we've seen strong growth, particularly in grocery and general merchandise. We've also launched a very competitive promotion on prawns, which is an important item for customers in Malaysia with sales up 87%. So across the group, it's been a good performance. Despite the subdued environment, we continue to do the right things for customers. And the bank sales were GBP 270 million, as we continue to focus on the products that matter most to Tesco customers. Our offer across the board is stronger than ever, and as a result, our core U.K. business is outperforming the market. Thank you for listening, and I'll hand you back to Mirella for your questions.
[Operator Instructions] First question is from line of Andrew Gwynn from Exane BNP Paribas.
Two questions for me. So first question, market dynamics. You said you've outperformed the industry. What's your best guess on industry growth over the same sort of period? And then the second one, also you've highlighted a very good Easter. Outside of that, clearly, things are little bit more difficult. I'm just wondering if you can give a sense of -- is there -- are there any sort of glimpse that's positive to you, as we move away from those particularly difficult periods of comparisons? So maybe outside of the Royal wedding period or whatever.
So Andrew, in terms of the dynamics, I think what we've always done is talk about our performance versus the market. I think what you see in some of the external measures is a flat to negative -- slightly negative volume in total with some return of inflation, depending on different categories. Against that, we've outperformed the market in terms of -- 0.2% in terms of sales value and 1.2% -- 1.3% in terms of volume. So particularly pleased with the volume outperformance. When you talk about Easter, very, very happy with the performance in Easter. I suppose the critical thing is, those categories which are weather-dependent, be it closing these seasonal general merchandising, you've seen a lot more impact there from weather. And we've seen the changing weather this year versus last year. And into the second quarter last year, the weather was particularly good. And we'll have to wait and see what it is in the second quarter of this year. But in the core categories, in the core food offer, I'm very, very pleased with the performances of the U.K. business.
Okay. Appreciate it. Just on the -- obviously, on the market last year, if you think about sort of World Cup and whatnot, people buying lots of alcohol, particularly not that great for profit. So to what extent is there a slightly more balanced view when it comes to profitability perspective?
Well, I think -- it's obviously -- this is a trading call rather than a margin call. We were clear back in the results that we'll look for consensus for this year, and we were happy with where it stood when we were talking margins. I'm not. I won't change that view at this moment in time. But clearly, the mix will be different. There was a World Cup last year. There isn't the same activity this year. But those things come and go in food retail, so we just have to steer our course through that.
Next question is from Bruno Monteyne from Bernstein.
Dave and Alan. A follow up on Andrew's point and your answer where you say, the market is flat to small negative in volume but you're outperforming by 1.3%. So would it be right to say that you're having positive volume growth in your U.K. business, is my first question. The second one, if you look at the delta between your sales and your volume outperformance, is it largely because you're still cutting prices, or is it largely the mix shift towards the Exclusively at Tesco products that are driving the difference between the 2? And my last question is like, 0.4% is obviously not a very high or exciting like-for-like growth number. Is it strong enough, at this level, to continue sort of Tesco's recovery path?
Okay. Thank you, Bruno. Three questions. Is it positive like-for-like, as core U.K. volume? Yes, it is. It's investment in the mix, as we talked about at the results. So to your second question, it's much more about us investing in Exclusively at Tesco brands. I talked about a growth of 10% in those products. We've been extending distribution and increasing the number of lines and the depth of that and the breadth of that across the estate. So that's what's driving some of that and as I say, the reaction to those has been really very strong. And to your third question, is it strong enough? Yes, it is. As you know, I'm a very big believer that the important access in terms of volume is that the product's contract level and everything that we're doing at that point is working very well for us. We'll share a little bit more of that in the Capital Markets Day when we talk about, in fact, value opportunities.
Next question is from Dave McCarthy from HSBC.
A couple of questions both on the same subject really. Your Exclusively at Tesco range, as you say, is up by 10%, where it's gone into more stores. What's it like-for-like performance on the ranges that you originally introduced? The reason I ask that is when I walk around stores, I don't feel it's being sold to me. I think it just seems to be available. It's on the bottom. It's gone on to the bottom shelf in fixture. I'm not seeing any promotion behind that. So when we take in account of, you put it into new stores and you've got the extended ranges, what's the real underlying performance there? And then related to that, you've introduced Jack's products into a number of stores. But Jack's products don't have the Exclusively at Tesco sub-brand on them. Just wondered what the rationale was to doing that when you've already got a sub-brand that you're working on?
Okay, David. Two ways of answering the question. So look, judging like-for-like, as we go through, is obviously difficult as you're building out. If I look at the actual sales performance of the Exclusively at Tesco run, I'm really very happy, right? I'm really very happy. What we've done is, we've increased the number of SKUs. I think we're now running at about 430 different SKUs. And what we've been doing gradually through the course of the year is extending the breadth of that distribution to the estate, so I'm seeing that impact. If I look at things, the first ones we did, farm brands are now in their 3rd year, and they continue to be very strong in terms of like-for-like performance. To your point about selling them, look, based on the sales performance, I'm very happy. We did some communication, you remember, in October, November last year where we showed the price comparison of Exclusively at Tesco basket versus some of our competitors. That's a campaign that will return. I think when you see this year, we've obviously been doing other things as well as part of our centenary and putting value across the store, not just in the Exclusively at Tesco campaign. And that's where it comes to your Jack's question. We didn't sub-brand it Exclusively at Tesco. But clearly, it was something we put in as something exclusively, not available anywhere else as part of the centenary celebration. This was always part of our plan about how it is we would build a new brand under the Tesco business. And so that was part of that rollout. I was really quite pleased with the way that Jack's volume moved through the 800-plus extras during that month of May. But it was -- for a time period, it was to judge customers' reaction and all part of experimental process we talked about when we launched Jack's. So, so far, still very good, David. Thank you.
All right. Any idea -- can you give us any clue of what the participation is of Exclusively at Tesco?
Last time I looked, it was in about 84%, 85% of all basket.
Next question is from Clive Black from Shore Capital.
Couple of questions there, if I may. Could you give us more color around your experience in general merchandising, apart from your comment on buybacks? And secondly, can you just -- it's the first chance I think I've got to -- chance to talk to you since you acknowledged you want to sell the mortgage book in the bank. Can you just give us some color down the rationale of that, please?
Sure. Well, I'll start and then I'll pass to Alan, he can give you more on the bank in particular. But prior to your point, if it's raining in Liverpool, we've seen in general merchandising this year is a lot of the seasonal lines. Some of that, let's say, the easy one, garden furniture and things such as that, we've definitely seen a weather impact there this year. And we've also seen it in clothing. So our clothing performance for the last 5 years has been really very strong. And if I look at this period, our clothing outperformance, this is -- market is about 2.4%. And yet, we're talking about clothing volumes, which is down nearly 10%. So the 2 things I'd pull out in general merchandising more broadly would be the element of seasonal, that sort of barbecue, garden furniture-type category, and the impact it's having on seasonal clothing. I think when it comes to the mortgage book, there are 2 things that I would talk to, and then I'll pass it to Alan, he can give you more flavor, is -- obviously, we've been very clear about repositioning Tesco as a -- the bank as a bank for Tesco customers and thinking through what the right product and proposition is there. And then there are some particular things, I think, when we look at the mortgages and the mortgage market that come together to make the decisions. Alan, do you want to...?
Yes. Thanks, Dave. And building on Dave's point about the focus on Tesco customers. The mortgage business is originated through brokers, and therefore, it's disconnected to a certain degree from the customers and the retail customers. I think that's point one. Point 2 is that over the last 3 years or so the mortgage market in the U.K. has changed very significantly from the economics of it. And that's principally driven by the ring-fencing of a number of competitors in the U.K. market. And when we look at the economics of the business, frankly, the economics are a key part of the decision. Obviously, we need to look after the 23,000 customers who are there. And if the sale price concludes to a disposal of the book, we'll make sure we protect them. But it's really about the focus on Tesco customers and the economics of the mortgage business and the way it's delivered.
Thanks, Alan. But can you give any color to how the -- just the proportionality of the -- if we assume it's like GBP 180 million to GBP 200 million of profit from the bank, how material is that change? Is it a benefit? Is it a substantial one-off hit offset by cash inflows?
Look, the -- if there was anything to say, we would say it if we get to that point. But it's not something which I'm focused and concerned about at all. The mortgage business, given what I just said, hasn't been delivering very good economics in terms of the profitability. One of the reasons why people like mortgage businesses is they're long-lasting. They tend to be historically, raised to be sticky, but even the mortgage market is changing. As you know, people are remortgaging and often changing after 3 years. So it's a business, which -- where the economics are really, shall we say, questionable.
Next question is from Rob Joyce from Goldman Sachs.
Three from me. Just obviously, you alluded to some price investments relative to the market with those volume numbers. Can you give us some numbers around how you see your relative pricing, how that's evolved in the last quarter, particularly versus the Big Four? Second one would be just can you remind us when we should annualize the major investments in Exclusively at Tesco, when that'll be in the base for the like-for-like numbers? And then thirdly, just looking at Central Europe, I mean given the slightly material negative like-for-like, should we be thinking about negative leverage to the profit line there, at this stage of the year?
Okay. Well, let me try and help you. In terms of price investments, yes, you're absolutely right. We have been investing in prices. We said we were going to. We said that we saw an opportunity for us to invest more when we gave the results. I think we don't give any indication in terms of, sort of, price indices. But if I were to give you one set of facts, I updated for this meeting where our Exclusively at Tesco basket was versus the German retailers. So the basket that I shared with you in October 2018, if I look at the prices that were in week commencing the 10th of June, our cost in Tesco was GBP 32.40 and it was 78p cheaper than Aldi and GBP 1.48 cheaper than it was in Lidl. So we continue to make price investments. We're trying to do it strategically and in a targeted way. To your second question, Exclusively at Tesco, I think you're talking about October. Really, we got -- so the material improvements, it's only really in October, November that you started to see it. So that's when you should probably look to be thinking about annualization. And in Central Europe, I'm not worried about the leverage point. Part of this is stores, part of this is indeed weather. But actually, again, back to the point, core categories, core volumes, core contracts, absolutely comfortable that we're following the strategy that we set out, and it's worked for us over the last 2 years. So no, I'm not concerned about the leverage impact that you alluded to.
Dave, and then just very quickly on the pricing, that's was very helpful, versus discounted. Any sense of how you're moving the price gap versus the rest of the Big Four?
Yes. Quite a lot since, but not that I'm going to quote. Look, I think the thing is the -- if I look at the level of inflation that's in the marketplace, and most of that obviously is driven normally by the Big Four, if you look at the level which is Tesco, it's significantly less than the market.
[Operator Instructions] And the next question is from Dusan Milosavljevic from Berenberg.
Just 3 quick question from me. First one is on the online business in the U.K. I think it was growing at around kind of 2% to 3% over Christmas. And in previous years, it's been down a lot, those kind of levels. So now it picked up a little bit. So I just wanted to ask you, what do you think was -- is driving that? And it is a question or decision of kind of a market acceleration? And the other point, the second question is just on Thailand. Obviously, we've had a couple of markets have been -- you were rationalizing on profitability within the country. And now it seems like the trends are improving. Again, can we expect -- where are we in that annualization of those range rationalizations which you were doing? And kind of what can we expect on that from -- going forward? Just a little bit color on that.
Did you say you had 3, Dusan or...
I had to hold in for the third one, but yes, I can...
Okay. No problem. I was just taking notes that's all. In terms of online, growth in the first quarter was 7%. So it was a tick up versus what you've seen before. I think couple of things there. Actually, changing the proposition in Click & Collect has helped put Click & Collect up 10% in that period. So we've been working very hard in getting the commercials right in grocery and shopping. I'm very happy with the performances there, and the proposition is competitive in the marketplace. But the things that are significant are -- that were coming off a base, which is 2% or 3%, as you say, the change in Click & Collect. Some of the changes we put into the operation have actually improved delivery and service and availability. So all of that is coming through. The customer feedback on Grocery Home Shopping versus the competitive offer is really very positive, and we're seeing it in the growth. In terms of Thailand, I think, what you should see is the material step-change that went as part of renegotiating terms, and that it is now pretty much behind us. Myself and the exec, we're in Thailand, just over a week ago, reviewing the business there. I think we're back now into more business as usual. For the sort of things you've seen from within the U.K. in terms of range rationalization, still more that we can do, and we'll carry on with that, in fact, much more now to business as usual. And I'm really, sort of, quite happy and excited by some of the growth opportunities that now start to present to us themselves sort of in Thailand as we've reset the business. So that's what I would say on Thailand. So what's your third question?
The third question was just on actually the regional and the kind of range performance in Central and Eastern Europe. Has there been a drag from the rationalization of general merchandise ranges there? Because that's something you were flagging, I think, in previous periods. And the other things that -- yes, I mean the other thing is I guess, you were flagging Czech Republic and Slovakia was good performance. And then I guess that at least with Hungary where -- is there anything to flag about Hungary? Why is the like-for-likes [indiscernible]?
No, nothing particular to flag in terms of Hungary. I think to be honest, we're in the place we've been before, which is there are 3 markets where our performance is being good versus the market and the momentum carries on. I'd just take that one or 2 highlights in one or 2 categories, that's all. I think yes, there is drag across the whole format in general merchandising, the results of our decisions on mix. But by far and away, the most notable thing in Central Europe is that we continue the transition that we have in Poland. So that couple of trading days, and then you got the issue of weather and general merchandising that I referred to earlier.
Next question is from Xavier Le Mené from Bank of America Merrill Lynch.
Dave, Alan, two quick ones, if I may. The first one, can you give us some indication about Q inflation -- actually, in Q1? That will be quite helpful. And second one, back to Andrew's question about the market dynamics. How do you see the political uncertainty right now? What are your expectations going forward in the U.K.?
How long have we got? Look, the -- in terms of -- we -- as you know, we don't want to get into specific volume and inflation numbers anymore. But the -- look, I think market -- if I use an external number for you, I think, the Kantar industry data on food inflation to -- or the end of May was something like 1.2%. And I think if you use the same basis, the inflation for Tesco during that period was 0.3%, right? So they're externally quoted numbers. But I wouldn't be, if I looked at the relativity, they wouldn't be a mile away from what I see in terms of my internal numbers. And look, I think your question was about politics going forward. Look, we continue to stay focused on what we're doing. We did do some stockpiling for Brexit at the end of March. We're now selling that stock through. We're pretty much through all the stock that we built for that. We'll stay abreast of things as we get to October. I think the thing that everybody in the industry knows is the ability for the industry to absorb. Stock building in October will be very different from what it was in March given seasonality and Christmas upcoming. So look, we'll continue to stay abreast of it. We'll see what the [ machinations ] come, but I'm definitely not a political predictor of things. We'll just stay focused on what's best to run the business whatever the prevailing outcome is. I sounded more like a politician than I realize. I'm sorry. I'm trying to avoid the question.
Next question is from Sreedhar Mahamkali from Macquarie.
A couple of questions, please. Firstly, going back to your matrix, the context of maxing the mix. Your change in Click & Collect today was the proposition change -- basket change. Is it the signal that online in general is actually now more profitable, or it's just the Click & Collect part of it that you're more comfortable with? How should we see your online track sheet? That'll be helpful to understand. And I guess, part b there, if you've got an idea, what percentage online home delivered versus Click & Collect. Will be very helpful to understand. And second question, sort of to Asian like-for-like. As that continues to build through Q1, potentially accelerating through the rest of the year, how should we think about the shape of Asia this year?
Okay. Thank you, Sreedhar. Look, in terms of the matrix, definitely versus where we started sharing that maximized matrix with you, the profitability of our online business has definitely improved. Very happy with the contribution it's now starting to make, and therefore, much more, sort of, investable as we go forward. It's very important that we keep our commercial sense as we grow the online business. Click & Collect is a relatively small part of the total grocery shopping. So whilst it grew by 10% as part of the 7% growth we talked about, still, the vast majority, a very significant majority is Grocery Home Shopping delivered. But the fact that the economics are improving, gives the optionality about how we can invest in that going forward. So again, so far so good. In terms of Asia, the thing you've always got to be careful within Asia is the timing of particular religious events. So we talked about Songkran in Q1. So actually, in the middle of that, you've got some -- but actually, the more fundamental thing is that if -- I think on -- it's in the notes of the release. At current prices, the growth in Asia was a little bit more than 7%. We see a good performance in Asia going forward. But it's not really about like-for-like through the quarter and on because actually the seasonal events are more significant in that, and particularly in the Thai market. But I suppose, Sreedhar, what I'm saying is that we're really very happy with how the turnaround in Asia has progressed. We're back to a -- on a constant basis, 2.6% growth; on a current basis, 7% sales growth. And we look forward to maintaining our momentum in Asia as part of the transformation.
If I could just add, Sreedhar, in terms of -- whilst this is an earnings call, and therefore it's -- isn't an earnings call, it's about the sales. Remember, the shape of the full year last year is -- it's the full year element throughout the first half, second half as regards to the Asian segment. So we definitely had some shift from first half into second half. It's much more of our full year profitability last year. And then how that played out this year is likely to be more balanced. But so -- hats off to the second half last year and albeit too soon. It's just what I'm saying.
Good point. Sreedhar, is that helpful?
Yes. Very helpful.
And next question is from Nick Coulter from Citi.
Just one for me, please. Can I ask you specifically about your comfort with the market consensus, given the shares are going a little bit weaker this morning? So notwithstanding any IFRS 16 impact, are you comfortable -- how comfortable are you with the market's expectations on both profit and also cash flow, please?
So Nick, look, as Alan just said, it's not -- obviously, not an earnings call. We talked about -- in the results, we were very clear that time that we were happy with consensus, and we remain exactly in that position.
So you're traveling on a trajectory that gives you significant comfort to hit the market's expectations?
Nick, very happy with what we said when we gave the results in April to the same question. So we were happy with consensus at that point. Nothing has changed.
If I could make a [indiscernible] sooner we can get, given that we're reporting on IFRS 16, the sooner we can get IFRS 16 numbers into the market, then [indiscernible] people will be if there's confusion at the moment, I think.
Very good.
Next question is from Andrew Porteous from HSBC.
A few on Booker, if I could just, please. You delivered some growth there against tough comps. I just wanted to sort of dig down a bit and see where that growth's coming from. And can you talk about whether you're still adding or recruiting symbol groups on an underlying basis once we account those one-off contracts? And could you also give us an idea of the mix between retail growth and catering growth within those overall Booker numbers? And then a last one, quickly, was on Booker within Tescos. You opened a few of them now, and it seems to have gone a little bit quiet. Could you sort of update us on the progress there and how well they're resonating with customers?
Okay. Yes, I can. Look, the good growth does continue, and as you say, comes on from very significant and tough comps. But the things we pulled out was actually strong growth in catering. And we talked about the 100 new and exclusive lines that we'd introduce. There is some growth in the retail business, but the one that we would point to is in catering. Importantly, I think -- and again, I called it out in the script is, the retail customers are now starting to see the benefits of the bigger group. So that's enhancing the retail offer, particularly for our symbol customers. And look, in terms of Booker into Tesco, we're in -- we've got ranges in 70 of our large stores. It's still working on the absolute right mix, but happy with the performance. And when we talk about untapped value opportunities at the Capital Markets Day next Tuesday, I've invited Charles to share with you what some of those opportunities are. But obviously, at the minute, Booker, so far, still very good.
[Operator Instructions] And no further questions registered at this time, so I'll hand the call back to speakers for any closing comments. Please go ahead.
Okay. Thank you, Mirella, and thank you, everybody, for joining us today this morning. As I said earlier, I'm really very happy with the start of the business across the group. We continue to focus on the most important things, which is giving Tesco value and service for our customers. And we continue to outperform the U.K. market as we do so. I look forward to seeing some or most of you at the Capital Markets day next week. But have a very good day. Thanks for joining us.
And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.