Tesco PLC (TSCO) Earnings Call Transcript & Summary

Good morning, everyone, and a very happy New Year to you all. Thank you for joining us this morning. I'm here in Welwyn with Imran, and in a moment, we'll be delighted to take your questions. Before we do that, I want to share a few highlights on the strong performance that we've announced in our trading update this morning. I want to start by saying a huge thank you to every one of our colleagues for the brilliant Christmas they helped us deliver, as they have done consistently throughout the challenging conditions of the last few years. Colleagues have once again gone above and beyond to make sure our customers could have a great Christmas. I'm really pleased with the strength of the performance we've seen in all our markets, especially given that we're trading over such a strong performance last year. By delivering relentlessly on the strategic priorities that we set out 18 months ago, we have made sure that customers benefit from great value and quality in every part of their basket however they choose to shop with us. The U.K. has had an exceptional quarter 3 in Christmas, driven by our continued investment and innovation in the full breadth of our offer. Our large and convenience stores serve customers well throughout the entire period with online proving to be very resilient and returning to growth over Christmas. We have seen customers continuing to trade down, but that has taken a number of different forms, and we are seeing growth at both ends of our offer, from the volume-driven success of our price lock campaign through to the growth of our finest range. For some customers, it's trading down from national brands to great value Tesco products. For others, it's seeking out Tesco from one of the higher-priced premium focused retailers or using our great range of ready meals to substitute for a takeaway or restaurant meal. Our value proposition of low everyday prices combined with exceptional value offered by Clubcard prices and Aldi Price Match means that we are the most competitive we've been for many, many years. We've continued to make great progress on Clubcard across the group. Clubcard prices has been a great success in the U.K. and is proving the same in Ireland and Central Europe following the more recent launches. Clubcard has helped millions of customers spend less, which now more than ever is really important. Across the period, we launched nearly 400 new products, including over 100 new finest festive products, and we continue to build out and enhance our ready meal range. We're really pleased that all these efforts have been recognized by customers with a significant increase in quality perception once again. All of this great work has culminated in us delivering a strong market share performance in the U.K. and Ireland. Booker has also continued to grow strongly despite a particularly tough catering backdrop, and our Central European business has delivered its highest growth in many years. As you will have seen, we are reconfirming our guidance from October for retail adjusted operating profit between GBP 2.4 billion and GBP 2.5 billion, retail free cash flow of at least GBP 1.8 billion and bank adjusted operating profit of between GBP 120 million and GBP 160 million. We always expect customers to tighten their belts after Christmas, and that's certainly what we've built into the plan for this year. I am delighted that last week we announced a new price lock, guaranteeing that customers won't pay more on over 1,000 lines all the way through to Easter. We have also further invested in our dinner for tonight range, offering customers amazing value alternatives to eating out or getting a takeaway. I'm confident that whatever customers are looking for in terms of value and quality, they will be able to find it at Tesco. Our performance continues to be strong, and we go into the new calendar year with good momentum. We have the right focus on value, quality and range, along with the right strategy and team, to deliver a strong performance, whatever challenges we face. And with that, let's go straight to questions and answers. Thank you.

[Operator Instructions] Our first question comes from Andrew Gwynn of BNB Paribas Exane.

Yes. 2 questions, if I can. So firstly, and I appreciate you're not going to give precise color on next financial year, but help us with some of the building blocks. I think market is still very rational. Given the profit guidance essentially unchanged almost from the beginning of the year, seems to be you're in very good control. Maybe some of the cost pressure is slightly lower, albeit skewed towards SG&A, so wages and energy. So just help us out with some of those building blocks? And then secondly, you touched on it there, but obviously, an expectation that the consumer may tighten their belt after Christmas. Is that what you've seen in the data?

Good morning, Andrew, and thank you for the question. I think that -- let's start with the second point, and maybe I'll hand over to Imran. I would say that customers tighten their belt every year in January, February. That's kind of a normal trading pattern. We planned for that. And largely, the customer trading behaviors and patterns are playing out more or less the way we planned it. So I would say to you that we've had a decent start to the year, and that would be the first thing to say. I think the second question, before I hand over to Imran, is that largely you've answered your own question, I think. We would be kind of looking at the same building blocks. Clearly, we can't give you visibility beyond that. But let me hand over to Imran and he'll give you his sense of it.

Good morning, Andrew. So just a few thoughts. As you point out, we're coming off a very strong performance this year. And as you also said, guidance is pretty much largely unchanged throughout the entire year. And this year, we faced quite a lot of OpEx costs. So if you think about the energy, if you think about payroll, if you think about the COVID unwind. And I would expect, as we've always been said, that next year we expect to see similar pressures continue, without going into detail, because I will absolutely give you guidance and an understanding of how we see next year when we meet in April. But I would say to you, what gives me confidence is how well we've managed to do what we've been doing this year, the discipline on our Safe to Invest program this year. We're in a good place also for next year. And clearly, I feel we have sort of the right -- I would say, the right offer, the right strategy, the right team to continue to do well. So when we meet in April and talk, we'll absolutely give you a fuller picture of how we see the world evolve.

Our next question comes from Clive Black of Shore Capital Market.

Thank you for the update. And yes, well done on a very strong trading period. A couple of questions for me, therefore. Ken, you talked about trading down in your commentary with quite a few moving parts there. I just wondered if you could maybe border the importance of those moving parts in terms of how you see it in the business. You mentioned switching out of restaurants into retail and so forth. And then just secondly, maybe a little bit of an anorak question, but I imagine volume across the whole business was hard to come by. I just wonder what that means for your working capital and how that feeds into your free cash flow given that supermarkets have tended to have negative working capital. They would be helpful to have updates on.

Great. Thanks very much, Clive. I'll answer the first part of that question, and then I'll ask Imran to comment on the working capital part. I think what's been really important from a trading down perspective is that, as you say, we are seeing it happen in multiple forms. And what's been really pleasing is that, as the only full-line grocer to grow market share from the pre-pandemic point to today, we feel particularly pleased about the versatility and the strength of our proposition. And I see that playing out in a number of different ways. The first of all is that we provided that consistent value thread since before the pandemic started through the Aldi Price Match to the low everyday prices, which we've now locked, and of course, through Clubcard prices, which has really driven penetration of Clubcard. And that's had a fantastic impact on getting customers to trade with us and stick with us. Now their behavior, as you say, has modified within that, and we have seen people trading down from national brand to own brand. We've seen them trade from -- and this is in order of importance. We've seen them trade from kind of small packs into bulk packs. We've seen them trade from fresh into frozen. And I've said we've seen them trade from eating out to eating in. Now at the same time, we've seen Booker grow its catering sales really strongly throughout the period. So there's a slight kind of contradiction in that. And of course, when we dig under it, what we found is that Booker has done a brilliant job in providing a great value proposition and supporting the best value caterers in the market. Consequently, those caterers are growing market share, and because of Booker service and its price point, it's growing its share within those best caterers. So we've seen quite an outstanding performance from Booker during the year. So the great news from our perspective is we're winning at both ends, and we're really pleased with that performance.

Let me take maybe the second one on cash and working capital, Clive. So look, you remember when we spoke in October, we upgraded our guidance on cash flow for the year from GBP 1.4 billion to GBP 1.8 billion range to at least GBP 1.8 billion. That was on the strength of the first half performance and also the confidence that we saw going into the second half. What I'd be pleased to say to you is, after having gone through the last 19 weeks, I'm even more confident on that cash flow number, which is good. I mean, as you say, it's at center to what we do with the cash flow delivery. And so there's a very high level of discipline in the business. As it comes to specifically working capital at the half, we had a significant inflow aided by the higher payables that you would get from the inflationary pressure. But at the same time, our aim is to continue to have every year, working capital at a positive level, and we will do so this year as well.

That's very helpful. Can I just ask one supplementary on the working capital. Did you feel that you ended the year in the general merchandise apparel area in a relatively clean way?

Yes.

Yes, we felt good when we looked -- I mean, we walked the shops during Christmas. But even now when we sort of did a review on inventories and how we landed, we exited very cleanly.

The cleanest, I think, for many years actually, Clive. So we're particularly pleased with how well we exited Christmas.

And we move on to Izabel Dobreva of Morgan Stanley.

My first question is based on your negotiations with suppliers. How do you think about the pass-through of any future input cost inflation to customers? So are you seeing any signs that with the falling volumes and the strong growth in private label, promotional activity is starting to come back? So any change in the negotiating balance there? And then my second question is, how do you perceive the pricing environment currently in your U.K. business? Do you expect that the pace of price investment for the industry is going to step up over the next 12 months as the volumes potentially get softer? Any comment on the competitive environment would be very helpful.

Thank you. So look, the competitive environment is clearly intense and will remain so, but it has always been that way. So I think that's not new news. I think that the relationship -- our relationship with suppliers is excellent. And that's borne out by the independent surveys where we score consistently in the top end of those surveys regularly. And that's because we have very respectful and very objective relationship with our suppliers. We also have a very strong sourcing organization, and they deconstruct all elements of a product and look at where inflation is coming through and how much inflation is coming through. And then we have that as effectively facts to argue the case for what is an acceptable pass-through cost versus what isn't. And that's the way we operate. And then really it comes down to kind of the negotiation to see where we end. But what we do work really hard on is trying to minimize the amount of cost that passes through to the consumer, while making sure that we take the costs that are absolutely justifiable, so we don't risk putting our suppliers out of business or putting their business model under pressure unnecessarily. And we have shown very proactive displays of support in key sectors like the milk sector, the pork sector, and most recently, the egg sector, where we know that those suppliers are in need of support, and we have reacted really quickly. That's our policy and that policy will continue into the future.

And then in terms of the environment, I mean, look, as Ken said, it's a very competitive environment out there. And I would also add that so far, it's also a very rational environment. And you've seen that throughout the entire year. I would expect to continue to see that going forward as well. I mean, our job, ultimately, as Ken said, is to avoid passing on cost increases to customers and fund as much as we can, whether it's Clubcard prices, whether it's low everyday prices, or whether it's Aldi Price Match. And that has worked well for us, and we'll continue to do so. But I do expect, as an overarching principle, a rational environment.

I had one very quick follow-up on the bank actually given that the FDA yesterday warned that 200,000 U.K. households are falling behind on their mortgage payments. So overall, 9% of households at risk. So with that in mind, how would you describe your risk appetite in the bank? And any early warning signs there?

Look, we don't have a mortgage book at the bank that was disposed of. And what I would say to you is we are very tightly monitoring any credit risks at all times. And at the same -- I mean we are able to confirm the guidance range that we put out there for the bank simply because of the great credit control management that we have in place. And in fact, I would say to you, the quality of the book that we have has improved over the years.

Up next, we have James Grzinic of Jefferies.