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Good morning, and welcome to the Tesco first quarter trading statement call. [Operator Instructions] Just to remind you, the conference call is being recorded. I'll now hand over to Mr. Ken Murphy, CEO. Please go ahead.
Many thanks, Richard. Good morning, everyone, and thank you for joining us today. I'm delighted to also welcome to the call Imran Nawaz, who joined us as CFO last month. I'll let him say a few words to introduce himself in a moment. Hopefully, you've all had a chance to read the statement, so I won't go back over the numbers here. Instead, let me take a few moments to give you my reflections on the quarter. Overall, I'm pleased with our performance in the quarter. We have maintained top line momentum even as we lapped the stockpiling peak of last year. Online continues to perform well, with order numbers remaining high, similar to levels we were seeing in the second half of last year at around GBP 1.3 million a week. Basket sizes remain strong. Customer satisfaction has gone from strength to strength and we have gained online share. Across the group, there is an unusual shape of trade within the quarter, reflecting the changing behavior of customers in relation to differing restrictions in both the current and prior year. Just taking fresh foods in the U.K. as an example, in March, sales grew by 2% as last year customers were mainly shopping for COVID essentials. By May, we saw a decline of 4% as restrictions eased and more restaurants reopened. While we expect sales to remain well above pre-COVID-19 level through the remainder of the year, we expect to see this top line volatility continue. Through this, our focus will be on maintaining the strength of our customer relationships through value, loyalty and convenience. Whatever way the market turns and whatever way habits evolve, we will continue to serve customers however they want to shop with us. We are maintaining our commitment to value for customers and to making it more attractive to shop at Tesco. With Aldi Price Match, we are anchoring in low prices, and with Clubcard Prices now extended to Express stores, we are rewarding the customers who shop most often. I believe the combination of Aldi Price Match and Clubcard Prices is a powerful one. This is evident in our value perception, which stepped forward again on top of last year's strong improvement. In online, sales grew 82% on a 2-year basis. And our 1-year growth of 22% reflects that we have started to lap our huge surge in capacity from April last year. Tesco is becoming a more digital business one step at a time. Our West Bromwich urban fulfillment center is now operating at capacity. And last month, we opened our second UFC in Lakeside. The combination of strong online coverage, extensive reach through our store infrastructure and a flexible business model means we have the fundamentals in place that will, in time, provide the ultimate convenient offering to our customers. The network is complemented by our Booker wholesale capability which unlocks even more opportunity for us, and I'm pleased to see Booker recovering strongly as the eat-out market starts to open up. I'm confident that we'll continue to do well against the market by maintaining our relentless focus on customer satisfaction. Finally, I am proud of our ongoing efforts to drive sustainability in the business, including the launch of our ambitious new health commitments across the U.K., Central Europe and Booker. As part of our ongoing strategy to address the impact of plastic packaging, we have also started rolling out the U.K.'s biggest network of soft plastic recycling points and became the U.K.'s first retailer to scrap soft plastic rings and shrink wrap from our beers and ciders. In summary, I'm pleased with the strong start we've made to the year. As we look forward, we continue to expect a strong recovery in profitability for the year as a whole. It's still difficult to be precise given the great deal of uncertainty that exists more broadly, and so our best estimate remains for retail profit to recover to similar levels at '19 and '20. We will maintain our focus on value, loyalty and convenience for customers. And I continue to be excited about the many opportunities we have to create value for shareholders and all of our key stakeholders over the long term. I'd now like to welcome Imran Nawaz, our new group CFO, who joined us last month. He has already hit the ground running, getting to know the team and visiting stores. Before we get to Q&A, I know he wanted to say a few words to introduce himself.
Thank you, Ken. I'm really excited to be here. I've always been in the food and beverage industry, and I've admired Tesco from afar for quite some time. Clearly, this has been always, from a supplier perspective, first from Kraft, then Mondelez and most recently as CFO at Tate & Lyle. I've been really impressed by Tesco's strength in the market and our ability to execute and build on that strength. It's clear I've joined a winning company. I've had the pleasure of meeting some of you in my previous role, and I can't wait to see more of you very soon and, hopefully, face-to-face. Thank you for your time, and I'll hand back to Ken.
Thanks, Imran. Now just before we hand over to Q&A, while we're super happy to answer as many questions as you have, a number of people have asked us if we can limit questions to one per person in the first instance. That should mean everyone gets the chance to ask what's on their mind. And then, of course, if you have another question and haven't -- that hasn't already been asked, please feel free to join the queue again and to ask another question. Thank you very much. Cheers.
[Operator Instructions] And our first question comes from Andrew Gwynn from Exane BNP Paribas.
Yes, just a question on inflation really, I suppose the obvious one, but clearly we're seeing quite significant rises in some agricultural prices. So when would we expect to see that at the shelf edge? And how confident are you that the market is prepared, keen, happy to pass it through?
Thank you, Andrew. I'll give you my initial thoughts, and then I'll pass on to Imran as well. Look, we have seen definitely some commodity inflation starting to work its way through the supply chain. Interestingly enough, we've also seen a couple of elements of deflation. And while there's no doubt that it's a thing we have to manage, it's something that we've always had to manage. And so at this point, we don't anticipate it impacting pricing. We think we're working hard to mitigate any potential inflation that may come through. But it's clearly a watching brief, and it's something that we watch really closely, we keep an eye on and we respond to as and when we need to. Imran, what are your thoughts?
Yes. Look, when you see our first quarter, we actually had a bit of deflation in the first quarter and that goes to show you our strategy to provide value to our customers is central, and we will hold and stick with that. At the same time, we need to manage our P&L. And clearly, as Ken said, that is something we're going to watch like a hawk and manage by our costs, by our mitigating productivity initiatives and ensure we get through it. But ultimately, inflation or deflation is something that you deal with every day in this industry, and this is something we need to manage on a daily basis.
Our next question comes from Andrew Porteous from HSBC.
Welcome, Imran. I guess another one on inflation, to an extent. I mean you obviously talked about deflating relative to the market. It seems like your relative volume growth must be better than some of the data suggests. I'm just wondering, do you think you have any sort of relative advantages in dealing with any cost inflation that comes through? Does your absolute sales growth delivered over the past year, which is obviously well ahead of any competitors, does that give you a bit of an advantage when you're going into those negotiations?
Clearly, it helps, Andrew. Thank you for the question. I mean it's always good to grow and your suppliers appreciate it when you grow their volume, and that allows both you and them to work efficiencies into the model and then we work to pass through those savings to customers by the way of better pricing. So it's definitely helpful. Imran, have you any thoughts on it?
Yes. Look, I mean, clearly, as -- and when you look at the scale and size of Tesco, it's always something that is not unhelpful when thinking about the power of the group. And for sure, it's something we need to keep in mind and leverage.
Our next question comes from Fabienne Caron from Kepler Cheuvreux.
Can you comment over the quarter's performance of your large store versus the convenience store, please?
Thanks for the question, Fabienne. Yes, our large store performance was stronger than our convenience stores over the quarter. And we saw a modest growth, I would say, in our large stores and a kind of modest fall like-for-like in our convenience stores. I'll ask Imran to give you a little bit more precision around that.
Yes. I mean when you look overall for -- if I give you sort of the numbers on a 2-year like-for-like basis, our large stores after 2 years are still in growth of around 5%, convenience is flattish and then online is the 82% that you see, which gets you to the 9.3% overall.
Our next question comes from Sreedhar Mahamkali from UBS.
Welcome, Imran. Maybe I'll just pick up on the online bit and urban fulfillment centers. Ken, I think you -- back in April, you've talked about the first one hitting productivity metrics and stuff like that. Is there an update? Can you give us a sense of perhaps what those metrics are looking like now? And taking a slightly longer-term view, in a few years to 3 years perhaps, what does that UFC footprint look like, please? I think you previously, I think your predecessor at least talked about having 25 operational UFCs and things like that. Do you have a view on how that could look like?
No. Thank you. So if you remember, last October, we -- when it was about 2 months in, the West Bromwich UFC was doing about 200 orders a day. When we talked in April, it had risen to about 500 orders a day. And now it's up at about 650, which is close to its capacity. The UFC in Lakeside, which we just opened up in the last week or 2, has a target of 1,000 orders a day. So it's materially bigger than the West Bromwich site. And really, what we're trying to get to is what's the optimum configuration in terms of a UFC from a productivity and cost perspective. And also our busiest stores are picking 1,000 orders a day on average. And therefore, we want to make sure we can deal with our most productive stores. So pending the success of the Lakeside UFC, which we're feeling very confident about because we've learned a huge amount from West Bromwich, then the plan is to open -- we've already committed to open a third in Bradford later in the year. And then we hope to open another 3 before the end -- before the year is out. And really, if we get to a place that we think that the UFC, particularly in Lakeside, hits all of its metrics, then the plan would be to be putting down at least 10 a year thereafter. But that number is subject to change, because if we're getting to even higher productivity and cost-saving numbers, we may go for an accelerated program. The challenge is always with things like UFCs which are highly automated and which have suppliers that are global suppliers, and as you can imagine there's demand for these all over the world, is just making sure that there's availability from a supplier perspective. So that's -- they're the kind of the balls we have to juggle really in terms of just how many we'll be able to actually put into the network over the next 3 years.
And from a return on investment point of view, I know these are not particularly capital-intensive, are you happy with what you're seeing? Is there much way to go from where you are now?
Yes. So I mean if we take an average cost of somewhere between GBP 5 million, GBP 5.5 million per UFC, we think that gives us an attractive payback based on the productivity metrics we've seen. And as you say, they're not -- therefore, they're not massively capital-intensive and they give us the double benefit of not only substantially reducing picking costs but also reducing the order time between capture -- order capture and order pick, which we also see as an important factor.
Our next question comes from Rob Joyce from Goldman Sachs.
Sorry. Apologies, I was on mute there. Welcome, Imran. Sorry about that. So just in terms of the guidance, I think a couple of your major U.K. competitors have guided that they're expecting their profits this year to be ahead of the pre-COVID level sort of 2 years ago while you're still talking to an unchanged profit level. Outside of Booker, are there any obvious differences -- reasons for the difference in your expectations there, do you think?
Well, again, I'll start the conversation, and then I'll ask Imran to comment. I think that a lot of it's got to do with your perspective on what the next 9 months hold. We are feeling really good about Tesco's position in the market. We think that Tesco is performing really strongly. All the customer metrics, brand health, market share and underlying performance indicators are positive for Tesco. So that's something we feel good about. Where we see a lot of uncertainty is just how big the eat-in market will be in 3 months, 6 months and 9 months and just how customers are going to respond to the final level of restrictions being lifted, whether or not they'll be able to travel, what the economic forecast looks like from a kind of a job perspective, what inflation will do, et cetera. So we see a lot of environmental volatility. And therefore, we felt that the right thing to do is maintain guidance at this point. Imran, what do you think?
Yes, I think that spot on. We've delivered a strong quarter. And in reality, that quarter was in line with our internal expectations. So the team has done what it said it would do, and that feels good. Now having said that, to Ken's point, there are 3 quarters still to go. And the guidance that what it's really about is the uncertainty in the market in the second half and COVID, reopening of the economy are critical to that. And frankly, none of that uncertainty has changed in the last 6 weeks since we last spoke to the market. So it just felt the right thing to keep guidance as to where it was for now.
Okay. So it's not reflecting anticipation -- I think you touched on inflation earlier, it's not reflecting difficulties passing through inflation to consumers or anything like that?
The guidance is -- correct. That's absolutely right. The guidance is purely a reflection of the market uncertainty for the second half.
Our next question comes from Clive Black from Shore Capital.
Welcome, Imran. Nice single question for me. I realize it's a trading statement, but could you make a comment, please, on maybe mix, the profile of COVID costs and working capital, given that they were so distortive this time last year, please?
Clive, I'll let Imran handle that one. Thank you.
So let me take them in order. In terms of COVID costs, the anticipation for the full year is unchanged. So I would still assume between GBP 200 million and GBP 220 million for the year. In terms of mix, what -- actually, mix has been quite positive for us in the first quarter. So what we saw obviously was a nice recovery on general merchandise, a nice recovery on clothing, fresh foods was broadly flat and packaged food was in slight decline, but that would not be a surprise for you when you consider the fact that we're lapping the big stockpiling from last year same time. When you then look at -- your last question was on working capital, look, I mean, obviously in the first quarter, working capital would be impacted by the nice rebound on the catering sales that we've seen, that would be a net positive. By and large, everything else is in a good place.
Congratulations for getting 3 questions into 1, Clive.
Our next question comes from James Grzinic from Jefferies.
My one question is around balance sheet. Can you perhaps say how you both feel about the 2.5x adjusted leverage ratio as a desired optimal capital structure for the group that you both have inherited?
Thank you. I'll start off and then obviously Imran will comment. As you say, it is the guidance we have out there at the moment in terms of our capital structure. And clearly, the debt ratio we ended the year in is not the one we anticipated at the start of the year. I think it's something that -- given that it is our stated guidance, we think it's appropriate for the moment. It's something that we continuously monitor. And clearly, we monitor in the context of not only our performance but market conditions and the volatility in that market, the level of uncertainty around inflation, interest rates, et cetera, because they all materially impact how we think about risk and how we think about the balance sheet, what the appropriate balance sheet to have from the perspective of Tesco. So we think it's the appropriate guidance for now. We will continue to keep an eye on it. Imran, what would you feel about it?
Yes. Look, I mean, I understand the importance of the question and coming in now 6 weeks in, it is certainly one of my top priorities, to review and test every element of the existing framework and see whether any changes are appropriate. I mean what's very clear to me is, as a company, our commitment to focus on cash is paramount and returning excess cash to our shareholders is also something that I believe makes a lot of sense and is the right thing to do. We'll give you an update on October once we've done the work.
Our next question comes from James Anstead from Barclays.
Ken, Imran, just a question, a bit left field. There's a lot of focus at the moment on these immediacy grocers that are popping up, particularly in London, and getting very nice valuations put on them. Clearly, it's very early days and I appreciate that there's an awful lot of other factors affecting the sales of your, let's say, your London convenience estate. But are you seeing any signs yet that they're having any impact on your sales?
No signs yet, James. And you're right, that it's really, really difficult to tell given the amount of volatility in urban express formats due to COVID. So you're right that it's not an easy task. It is something, though, it's an area where we've got a lot of curiosity about. And as you know, we launched our own trial in Wolverhampton with Whoosh which is software we developed internally. As well as that, we obviously operate as well in a number of our one-stop stores with Deliveroo. So it's something that we're curious about. We're always interested in how we can solve customer problems, and if a new customer need arises, we're very keen to figure out the right solution. And we're also agnostic about how we get there in terms of whether we do it ourselves or we do it with a partner. I think what's really important for us, though, is we maintain a customer relationship and that the quality of the service to the customer is what you'd expect through Tesco. So look, it's something I'll keep a close watching brief over, but we're not seeing a material impact yet.
Our next question comes from Maria-Laura Adurno from Morgan Stanley.
So going back to some of the comments that were made earlier, in this context where you have still deflation from a grocery price standpoint and at the same time input costs that are actually rising, where do you stand in terms of cost savings measures? Is this something that you're working thoroughly? And if so, any examples you can provide?
Thanks very much. So look, the short answer to that question is cost savings are very, very much a part of the ongoing way we run the business. So it's something that we look at religiously. It's something that we feel is never finished. So we don't necessarily talk in terms of one big cost-saving program, but more in kind of a continuous savings challenge. Our ambition is to offset any inflationary cost as a minimum from our cost-saving initiatives. So that's really it, Maria-Laura.
Our next question comes from Nick Coulter from Citi.
Can I just ask a quick question on Clubcard Prices in the Express format and whether you've seen any early signs increased Clubcard sign-up? I guess it's a slightly different audience, but I'd be interested to know if you're kind of pulling people into the digital ecosystem or what your expectations are.
Short answer is yes. It is very early days, so I don't want to give you any numbers because we're in the foothills of this. But we've seen very positive signs since we launched the program. Customers love us. And we are seeing an increase in digital sign-ups from our Express customers since we launched the program.
Our next question comes from Xavier Le Mené from Bank of America.
So one question. We start to hear a lot about availability issues due to shortage of HGV drivers. So question is, do you see a risk here in terms of availability? But also do you see a risk in terms of cost increase going forward? And I'm not just talking about the driver, but labor costs overall.
So we're really happy with the availability we've been able to maintain since these issues started. So we work hand in glove with our suppliers to maintain availability. And we're also working exceptionally hard in terms of our driver numbers and making sure that we can keep that availability very high. Imran, do you want to comment at all on the wage inflation risks, et cetera?
So clearly, whenever you have a supply/demand issue, you have the clear risk of inflationary pressure coming on you. It's something we need to manage. And I'll just reiterate what Ken said earlier about the way to think about productivity at Tesco, the goal is to more to -- at a minimum, offset inflation. And if you have inflationary pressures coming through from freight industry, it's something we need to manage by a mix via price and via cost management.
[Operator Instructions] And we have a follow-up question from Andrew Porteous from HSBC.
I guess one for Imran, really. I mean obviously, you talked about your admiration for the Tesco brand from outside. But obviously you made the leap joining Tesco. I just wondered what you saw as the big opportunities in joining Tesco at this point and what investors and the market can expect from you in the future.
Yes. I mean it's a good question. I mean clearly, having been on the supplier side, I've seen the journey that Tesco has gone through. And when I look at the scale, the company today, the focus it has, the market share position it has online and in-store, it just gives you a lot of runway for driving growth, and at the same time for creating value, making the right choices on investments, looking at the opportunities ahead, it just feels like a place to be. And I have to say, having visited a lot of stores, having visited distribution centers, the UFCs, spending a lot of time with our colleagues in stores talking about customers, this is an organization that we were focused on customers and being efficient and there's a real sort of, let's say, passion to win. And that's really, to me, the ingredients you need to create value. So it made a lot of sense when the opportunity came along to take it.
Our next question comes from Fabienne Caron from Kepler Cheuvreux.
Yes. Just a quick follow-up. Sorry, on the urban fulfillment center, you quote CapEx of GBP 5 million to GBP 5.5 million. I wanted to make sure what is in it. Is it land, building and automation? And are you still using the Dematic shuttle system? Or are you working with other automation?
It is all of the automation costs, refit costs of the building, but the building itself is already owned effectively. We -- it fits inside our large extras, effectively. And yes, we are currently still working with Dematic.
Our next question comes from Sreedhar Mahamkali from UBS.
Just a quick follow-up, please, on Aldi Price Match. Sorry, actually not on Aldi Price Match, I do understand Aldi Price Match in particular, how you target versus Aldi and Lidl. But can you perhaps elaborate a little bit on how you deal with other disruptively priced nonfood operators who are also now quite substantial players in grocery, please?
Well, in the same way as we think about Aldi and Lidl, really, our plan is to make sure that no customer feels like that value is a reason why they wouldn't shop at Tesco. And so it's the same logic in many ways. And we try and supplement that with great range and great quality and a great experience. But clearly, you have to be competitive on value. So from a philosophical perspective, there is no difference really. Our sense of it is that if you can compete effectively with the person perceived to be the price leader in the market, which is Aldi, then that effectively sweeps up the rest of the competitor set in that hard discounter sector. And then you use the other aspects of your proposition to win.
Got it. I was more thinking in terms of the choice of assortment. Clearly, the other nonfood operators who are like players that we all know very well, they tend to be much more branded as opposed to private label. So clearly, Clubcard Prices is what I was trying to explore.
You're absolutely right. You're absolutely right. And we operate a third value tier in addition to Clubcard Prices and Aldi Price Match called Low Everyday Prices, which is really designed to compete against those other discounters on branded lines.
Next question comes from Alyssa Gammoudy from ING.
I had a question about online demand. I see that it remains high. But I was wondering if now that the U.K. is opening up, if the online shopping behavior is changing already in terms of basket size and value, et cetera. If you can give some color there.
Again, I'll kick off and then I'll ask Imran to jump in. So the really pleasing thing is that in terms of the volume of orders that we are processing, at about 1.3 million a week, is more or less in line with what we've been doing throughout last year during the pandemic from when we increased the capacity to the end of the year. And therefore, it's been incredibly resilient even with the easing of the restrictions. What we're probably seeing is the people that have become most comfortable with the online experience are shopping a little bit more often with us. And we've seen some customers drop off because they're now shopping more locally or they're physically shopping either in Tesco or in another store. So you're seeing a bit of a mixed behavior. Not a substantial decline in basket. The baskets are holding very well. So it's a pleasing trend. Imran, any thoughts on that question?
Yes. I think as you point out, over a 2-year period, the fact that we grew around 80% tells you that we're holding on to the gains in a nice, solid way. What I personally also like was that the participation of click and collect has stayed constant at around 20% of the total online business, which is obviously pleasing to see. Overall, still to be on growth year-on-year by 22% or so is a good result. And I mean clearly, as we head into the summer and get into the second half, we need to see how that evolves. But overall, a good start.
Next question comes from Xavier Le Mené from Bank of America.
So just you gave already a bit of comments about your U.K. performance about food, nonfood and online. But more specifically, can you give us a bit more color about your food sales in-store maybe on a 2-year stack, if you don't want to comment Q1, but just to see how you're doing with the stores on the 2-year stack.
Sure. Imran, would you like to respond to that one?
So the question goes on mix essentially. I mean so when I look at food overall in the quarter, year-on-year, it's slightly down. Within that, fresh is relatively flat and packaged is down a few percentage points more. The way I think about that is that tells us, as you lap the stockpiling from last year, that was very heavily focused on the packaged part of our portfolio, so there's a logical decline. I mean more interestingly, when I look at it over 2 years, what I see is packaged food is still up around 11%, fresh is up 7%, and overall food is up 9%, which is quite a resilient performance overall.
Thank you. And as there appear to be no further questions, I return the conference to speakers for closing remarks.
Wonderful. Thank you very much, Richard. Thanks very much for all your great questions. I really appreciate the time you take to talk to us. As you've seen, it's been a really strong first quarter performance. But I'm most proud of the way we continue to strengthen our relationship with customers. Clearly, the outlook remains uncertain, but I feel really confident that Tesco is really well positioned to deal with whatever comes our way. And we really look forward to seeing you all in October, if not before. Thanks again for your time, and have a great weekend. Cheers now.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.