Interim Results 2015/2016

7 October 2015

\r\n\r\n\r\nNet debt (excludes Tesco Bank)\r\n£(8,588)m\r\n£(8,481)m\r\n\r\n\r\nDiscounted operating lease commitments\r\n£(9,091)m\r\n£(9,353)m\r\n\r\n\r\nPension deficit, IAS 19 basis (post-tax)\r\n£(4,201)m\r\n£(3,885)m\r\n\r\n\r\nTotal indebtedness (including lease commitments and pension deficit)\r\n£(21,880)m\r\n£(21,719)m\r\n\r\n\r\nPro-forma effect of Homeplus disposal¹\r\n£4,225m\r\n \r\n\r\n\r\nTotal indebtedness, adjusting for pro-forma effect of Homeplus disposal¹\r\n£(17,655)m\r\n \r\n\r\n\r\n\r\n

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1. The proposed sale of Homeplus was announced on 7 September 2015, after the half-year end, and was approved by shareholders on 30 September 2015. The pro-forma effect shown above is illustrative, to show the scale of the reduction in indebtedness that will occur following completion, as if the sale had occurred on 28 February 2015.
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Total indebtedness has remained at a similar level to the year end despite a reduction in discounted operating lease commitments, due to an increase in the IAS 19 defined pension deficit and a small increase in net debt.

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The increase of £(0.1)bn in net debt includes the consolidation of £(0.5)bn debt relating to our transaction with British Land in March, which allowed us to regain sole ownership of 21 superstores.  This transaction reduced lease commitments and reduced our exposure to inflation-indexed rent reviews in future.

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On an IAS 19 basis, the Group’s net pension deficit after tax increased from £(3.9)bn at the year end to £(4.2)bn, driven mainly by asset returns which have been impacted by volatile equity markets in recent months.  In accordance with the £270m annual deficit funding plan agreed with the Trustee, a cash contribution of £92m (£75m post-tax) was made into the scheme in the reporting period.  Following consultation with colleagues, we have confirmed that the UK defined benefit pension scheme will be closed and replaced from November 2015 with a defined contribution scheme.

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The completion of the sale of Homeplus, our business in Korea is expected to lead to a pro-forma reduction of £4.2bn in total indebtedness, comprising net cash proceeds of £3.4bn and c.£0.8bn associated reduction in capitalised lease and other commitments.  Further reductions in indebtedness will be driven by continuing to increase the level of cash generated from our retained assets.

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Summary retail cash flow¹:

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	TY	LY
Cash flow from operations excluding working capital	£1,199m	£1,255m
(Increase)/decrease in working capital
- cash impact from prior year exceptional items	£(401)m	-
- cash impact of new approach to supplier payments	£(231)m	-
- underlying decrease in working capital	£438m	£255m
Cash generated from operations	£1,005m	£1,510m
Interest paid	£(173)m	£(269)m
Corporation tax paid	£(53)m	£(244)m
Net cash generated from retail operating activities	£779m	£997m
Cash capital expenditure	£(498)m	£(1,131)m
Memo: Free cash flow	£281m	£(134)m
Other investing activities	£507m	£(1,341)m
Net cash (used in)/from financing activities and intra-Group funding and intercompany transactions	£(560)m	£1,415m
Net increase/(decrease) in cash and cash equivalents	£228m	£(60)m
Exclude cash movements in debt items	£448m	£(1,005)m
Fair value and other non-cash movements	£(783)m	£171m
Movement in net debt	£(107)m	£(894)m

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1. Includes both continuing and discontinued operations.
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Excluding working capital, cash flow from both continuing and discontinued retail operations was £1.2bn.  Reported working capital includes payments against exceptional restructuring and onerous lease provisions totalling £(0.4)bn and the remaining £(0.2)bn outflow relating to the new approach to cash payments to suppliers which we outlined in April.  Prior to these items, working capital improved by £0.4bn including a reduction in inventory levels and lower trade receivables.  Overall, we generated £1.0bn retail cash from operations within the half.

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Retail interest paid was £(96)m lower than last year principally due to a timing difference in the payment of instalments on a medium term note.  In addition, two other medium term notes with coupons of 5% and 5.125% matured in the prior year and were refinanced at lower rates.  Cash capital expenditure reduced to £498m, consistent with a full year spend of no more than £1bn.

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The cash flow in other retail investing activities principally relates to investments in and proceeds from short-term investments.  The prior year comparative also includes a total investment of £342m in the China and India joint ventures.

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Capital expenditure and space:

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	Group		UK & ROI	International	Tesco Bank
	TY	LY	YOY Change		TY	LY	TY	LY	TY	LY
Capital expenditure (£bn)	0.4	0.9	(0.6)		0.3	0.7	0.1	0.2	0.0	0.0
Gross space added (mn sq ft)1	0.3	0.8	(0.5)		0.0	0.3	0.2	0.4	n/a	n/a
Net space added (mn sq ft)1	(1.0)	0.5	(1.5)		(0.9)	0.2	(0.1)	0.3	n/a	n/a

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1. Excluding franchise stores and ‘gross space added’ excludes repurposing/extensions.
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Capital expenditure fell by 61% to £0.4bn as we reduced gross space additions by 0.5m sq ft year-on-year.  The majority of our significantly reduced opening programme was focused on Thailand where we opened 0.2 million square feet, including four hypermarkets.

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Overall, net space in the Group fell by (1.0)m square feet as we closed unprofitable space, primarily in the UK.  Further detail on Group space can be found in Appendix 6 starting on page 36 of this statement. 

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TESCO BANK

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	TY	LY	YOY Change
Revenue	£478m	£482m	(0.8)%
Operating profit before exceptional items	£86m	£99m	(13.1)%
Lending to customers	£8,297m	£7,528m	10.2%
Customer deposits	£6,581m	£6,632m	(0.8)%
Net interest margin	4.2%	4.4%	(0.2)%
Risk asset ratio	19.1%	17.1%	2.0%

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Operating profit before exceptional items at Tesco Bank decreased by (13.1)% to £86m mainly due to an initial reduction in interchange income following MasterCard’s agreement with the Competition and Markets Authority for a phased introduction of new, lower fee levels.  This agreement is ahead of the introduction of European Commission caps which will lead to a further reduction from December.

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We have made further progress in our efforts to differentiate Tesco Bank’s offer for customers.  In July, we became the first UK bank to show foregone interest on our customers’ monthly statements.  This allows customers to see if they could have earned more interest by transferring deposits from their current account to an Instant Access Savings account.

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In addition, we introduced a 95% loan-to-value mortgage and smaller loan sizes in the half and these contributed to an overall increase of 10.2% in customer lending.  The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective.

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Our strong portfolio of insurance products was recognised in August when we became the first bank to have a Defaqto 5* rating across all categories.  In a very competitive market, the insurance business was able to broadly maintain the number of in-force policies.  The profitability of both Home and Motor products has benefited from further enhancements to our underwriting approach.

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An income statement for Tesco Bank can be found in Appendix 7 on page 39 of this statement.  Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 16 of this statement.  Tesco Bank’s Interim results are also published today and are available at www.corporate.tescobank.com.

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Contacts

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Investor Relations:	Chris Griffith	01992 644 800
Media:	Tom Hoskin Stockwell	01992 644 645 0207 240 2486

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This document is available at www.tescoplc.com/interims2015.

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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/interims2015.  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 plc website.

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An interview with Dave Lewis, Chief Executive, and Alan Stewart, Chief Financial Officer, discussing the Interim Results is available now to download in video, audio and transcript form at www.tescoplc.com/interims2015.

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ADDITIONAL DISCLOSURES

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Risks and Uncertainties

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As with any business, risk assessment and the implementation of mitigating actions and controls are critical to successfully achieving the Group's strategy. The Tesco Board has overall responsibility for risk management and internal controls within the context of achieving the Group's objectives. The principal risks and uncertainties faced by the Group remain those set out in our 2015 Annual Report and Financial Statements.  The Group also faces risks and uncertainties as a result of the SFO and other investigations, and the litigation risk associated with the matters under investigation as described in Note 16 of this release (Contingent Liabilities) and in our 2015 Annual Report and Financial Statements.

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Statement of Directors' Responsibilities

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The Directors confirm that to the best of their knowledge this interim consolidated financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

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The Directors of Tesco PLC are listed in the Tesco PLC 2015 Annual Report and Financial Statements.  A list of current directors is maintained on the Tesco PLC website at: www.tescoplc.com.

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By order of the Board

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Directors
John Allan* - Chairman
Dave Lewis - Chief Executive
Alan Stewart - Chief Financial Officer
Mark Armour*
Richard Cousins* - Senior Non-executive Director
Byron Grote*
Mikael Ohlsson*
Deanna Oppenheimer*
*Non-executive Directors

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Company Secretary
Paul Moore

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6 October 2015

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