Earnings Transcript for TSCO.L - Q4 Fiscal Year 2017

Executives: Alan Stewart - CFO and Executive Director Bernard Higgins - CEO and Director David Lewis - Group CEO and Director Jason Tarry - Chief Product Officer

Analysts: Andrew Gwynn - Exane BNP Paribas Bruno Monteyne - Sanford C. Bernstein & Company Clive Black - Shore Capital Group Daniel Ekstein - UBS Investment Bank David McCarthy - HSBC Edouard Jean Laurent Aubin - Morgan Stanley James Grzinic - Jefferies James Tracey - Redburn Michael Dennis - Cantor Fitzgerald Niamh McSherry - Deutsche Bank Robert Joyce - Goldman Sachs Sreedhar Mahamkali - Macquarie Research Stewart Paul McGuire - Crédit Suisse Xavier Le Mené - Bank of America Merrill Lynch Bruno Monteyne - Bernstein

David Lewis: Good morning, everybody. Nice to see you all. There's a bit of refurbishment going on in here since last time we were here. It's quite difficult to see faces, so apologies for that. It's great that you're here. You have, as always, I brought the majority of the Tesco executive to be here today. It's the one time I ask them to make sure they're available for your scrutiny, your questions and your probing. So please make use of that, if you haven't already. I'll introduce some of the new members actually in the middle of the presentation, not to embarrass them too much at the start. But I have 2 apologies, which is Tony Hoggett is on the advanced management program at Harvard, so he sends his apologies. And Matt Davies is celebrating Passover, so Matt is not with us this morning either, but both of them send their regards. So look, what Alan and I are going to do is take you through and try, in the interest of fashion, how it is we see the results that we've announced this morning and then give you a chance to ask us some questions. Okay? So without further ado, I'll start by talking a little bit about what we consider to be a year of strong performance. I'll bring you up to date with where we are on the six drivers that we shared in detail in October. Alan will then take you through the detailed results, and I'll come back and I'll talk about the four stakeholders that we think through in terms of how it is we're adding value for each of them as we turn our business around. So look, you've seen the numbers. It's a very full pack because you've got all the notes and all the risk approach to risk from orders as well. But look, in essence, you will have seen that sales growth is up 4.3%. Profit, operating profit before exceptional is up 30%. And the U.K. and Ireland is up 60%. So the operating margin improvement, which is around sort of 46, 48 bps in at the group level is around 64 bps within the U.K. and Ireland. And you see that we continued where we started in terms of strong cash generation year on year. In terms of the customer recommends, the Net Promoter Score continues to strengthen. Our colleague engagement, despite all of the changes that we're taking into the business, it continues to step up and is at really high level compared to any benchmarks in the U.K. And the Supplier Viewpoint that we've shared through these last 3 years continues under Jason's leadership to go from strength to strength. In the U.K., 1.6% volume growth, so we're into our full second year complete of volume growth; and actually second half year, stronger than the first half year. Transaction growth at 1.7%, and we have about 140,000 more customers year on year. Now when we talk about volume performance, you've seen this chart from me before. And you see what's happened going all the way back to 2011, 2012. And you see the performance over the last 2.5 years, so year on year, but year on two years, we continue to perform well. Now I know you have a question about the fourth quarter, so let me give you a context of that. If you look on the right hand side, what I've done here is I've taken the IRI data and I've looked at our performance versus the market. So what you see on the top is the full year. So what you can see is our outperformance on volume versus the marketplace total store is approaching 3%; and in fresh, it's actually approaching 4%. And across the board, that's where we were. In the fourth quarter, though, you see the total store volume ahead of the market. But it's fair to say, as you would know, market volumes, fourth quarter, based on macroeconomics, were more challenged than the previous three quarters. But we did well in food, did particularly well in fresh and in packaged. A couple of things that affected our fourth quarter growth. General merchandising, we talked about, end of Q3 into Q4, we changed our trading approach around boost. And I'll show you later, we made some other decisions that affected our volume in terms of what promotions we were prepared to chase and which promotions we weren't prepared to chase because of their impact on mix. But actually, our relative volume performance continues to be strong, particularly in the key areas for our business, which are food. Now International, more challenges in International. But when I say that, it's really crystallized around Poland. 18 months of strong performance in Poland. The last six months of last year, significantly more challenging from a competitive lens, and we felt that in the performance of Central Europe because of the size of Poland to that group. Matt and I, with the new management team, were there last week. Plans are afoot. I'm encouraged by what I'm seeing in the short term, but we have to go on and we have to deliver those plans. Overall, we still have volume growth in International. But the other thing that we did have with Poland, I should mention, is actually Thailand. Now some of you will know that the Thai market from other investments that you make, but the Thai market is depressed versus expectations. There's definitely been a reaction in terms of market momentum to the death of the King. Everybody, ourselves included, being hugely respectful of that. So our like-for-like is up in Thailand. Our market share is up in Thailand. But the market size in Thailand is not what anybody predicted it to be because of that sad fact. Sales growth, still 4% in Asia and slightly up in Europe. And you know that we simplified and completed the Kipa transaction. If I move then to the six drivers and if I were to summarize this in one slide, I'd say, look, we are differentiating the brand. It's a long journey. I'll introduce you to Alessandra later who will lead the charge on that for us going forward. But actually, there's some really strong progress through the course of this year. The YouGov survey that everybody uses, we kept that as a consistent theme, and I'll show you some of the performance there. So I'm happy with the way that the brand is developing. We set out last October that we would reduce the operating cost by 1.5 billion, right? Now we said that by '19, '20, so if you like, from October, that's three and half years to get us to that 1.5 billion. In the first six months of that period, we've delivered 226 million of those cost savings already. And that's part of a full year, i.e., including what we did before October, a total cost reduction last year of 455 million. So our cost reduction program actually in really good shape and actually accelerating versus where we were in October. We brought forward -- we're able to bring forward some of the plans that we had and I'll share those with you in a second. Cash, I've talked about. In terms of maxing the mix, you've seen where we are. We've taken the group margin from 1.8% to 2.3%. The improvement in the U.K. has been stronger than that group average, so really good progress there. And we've released about 0.5 billion from our property portfolio, again, consistent with how we talked about it in October. And I'll talk a little bit more about innovation in a second. So when we talk about being ahead of our own expectations, it's the expectations we set in these drivers, and let me share with you a bit more. So in terms of brand, you've seen this chart over the last two and a half years. We continue to improve, which is important, but also to narrow the gap to the three other big UK supermarkets. And what it is we need to do is obviously to get those lines to cross. But on that measure, you can see that we're still moving in a positive direction. The things that are driving that

David Lewis: So just an illustration of how we take the campaign on, make it more seasonally relevant, but the feedback that we're getting is fantastic. And just to carry that trend, you can see what's happened to the quality perception around food in Tesco as we feature and share the Food Love Stories. So really pleased with the way that, that campaign is differentiating the brand. So YouGov, if you're interested in these things, Campaign talked about it, is the Brand Story of the Year. And we are actually in a place where we're getting real memorability. And the important thing about ad memorability is it builds brands, but it also builds marketing efficiency. All right? So this is not something warm and cuddly. The more that we can make our advertising memorable and mean something, then the less quantum you have to invest to get the same marketing result. It's as simple as that. So that's where we were in terms of the brand. Operating cost of 1.5 billion. So since October, so if you've been tracking it, we talked about already changing the store operating model in 1,500 stores. We've already announced a simplification to the distribution network, taking out 2 distribution centers at Welham Green and Chesterfield. And we've streamlined already our European transport in part of the goods not for resale that we talked about before. So we gave you the buckets when we were together in October, and we took the opportunity of advancing the plans from 3 years into the last 6 months. And therefore, where we are, giving you the breakdown in the buckets, we've saved around 130 million in our store operating model cost, about 32 million against the targets we set in logistics and distribution, and 63 million in that bucket of goods not for resale. So 1.5 billion for basically a 3.5-year plan; first 6 months, 226 million delivered in this configuration is where we are. But as I say, total cost reduction for Tesco the last year 455 million. In terms of cash, we put out new terms. I think we're still the only retailer that publishes all of its terms for all of the categories and all of the partner sizes. Small surprise 99%, 99.4% of all small suppliers are on those terms, and we're fully compliant, 93% in terms of the larger ones. If you remember, we set the end of this year in order for everybody to change to move onto it of the larger ones. And we think we'll be done by August, Jason, so ahead of the plan, so that working really well. Stockholding has been a phenomenal performer. We talked about where we are in terms of cash. Working capital improvement efficiency really impressive. We've taken about 300, a bit more than 300 million of stock out of the business over the last 2 years, which is a little over 1/3. The interesting thing, as you'll see in a second, is we've done that and improved our service and improved our availability. So all that work that we've been putting into the operating model of the business is allowing us to lower costs, lower stock, but improve availability and improve service levels. And one measure of that is, again, we've improved the availability late at night, so this is sales-based availability, 6

Alan Stewart: Good morning, everybody. So in terms of the results for the year, obviously, during the year, we had the impact of the change in the inflation rate with the sterling depreciating, and that has mixed our results. We began to see that in our half year results, but fully coming through in the second half of the year. Overall sales, up 1.1% at constant rates and 4.3% at the actual currency at the yearend. Operating profit, 1.28 billion, a 30% increase year-on-year and in actual rates, and 25% at constant rates. So a significant step-up in our operating performance, which I'll go into more detail. The exceptional items, the primary -- there will be more detail, but the primary element here is the 235 million charge which we took and announced a couple of weeks ago with the SFO and FCA settlements, which are now completed with the court order on Monday this week. So that's the key element of our exceptional profit. And then a significant increase in the group profit before tax and before exceptional items and net pension costs, up 72%. This is a key element our EPS. And again, I'll talk back to that later. In terms of the segmental performance. We've seen, as Dave said, a strong step-up in the U.K. business and some mixed performance in the International businesses. U.K. & ROI, I think the key element is, as Dave said, the increase in margin. Margin recovery is 68 basis points in the U.K., and we are at 1.84% margin in the U.K. & ROI segment as of the moment, with profit improvement from 500 million up to 800 million in the year. The International margin was down 42 basis points to 2.81%, as you can see still ahead of our overall group margin, but a bit of a drag in the current year. And the markets were, particularly in Poland, challenging. Profits in that segment were 320 million year-on-year, which was flat at the actual recorded currency. Bank margin, much lesser than into the bank because of the way the bank business runs, but down 145 basis points at 15.5%. The bank results, again, I'll talk on later. Overall group margin, up strongly to 2.3%, which is along the ambition towards the 3.5% to 4% margin by the '19 - '20 financial year. We'd spoken before about volume and how important volume to us is in the U.K. We've also told you on a number of occasions that the way that historically we'd measured volume wasn't really where we would start, but in order to create a clear trend, we continued with that. Well, today, we're shifting to what we believe is a clear indication of volume, which is the scanned singles going through the till. This is the way that the product people look at it, it's the way our colleagues look at it and it's the way our suppliers look at it. So it really aligns with the way we're looking at the business. And as you can see from this, the trend line is pretty much the same as you go across the different one, different elements. The green line is the previous measure. The major difference is down to mix. And going forward, if mix is an important part of what we're looking at in terms of that scanned singles transaction volume base, we will highlight it. But from now on, we're going back to that. Importantly, volume remains critical to our business recovery. But as Dave said, we will be choiceful and mindful about it as we look forward as well. Transaction growth, another key part of it. I mean, as Dave also said, 140,000 new customers. This is the number of customers going through the checkout. And we've seen strong transaction growth year-on-year, continued and pleasing trend in that line. Looking between the 2 elements of the U.K. & ROI segment. As you can see, the U.K. continued growth. We've spoken about Q4. We've spoken about some of the choices we make. And this is the first reported full year growth since 2009/'10 year, so a year which is important in terms of that turnaround of the overall business. The Ireland business, really pleased with the results. It's not what the chart shows, but we are really pleased with that because the volume growth in the Irish business is significantly above the market. And in Q4, there was a strong impact from the inflation -- the deflation we were putting into the market in order to maintain that competitive position. There's a small element in Q4 in Ireland relating to the industrial action which we've got there, and it's about 1%. But we are pleased with the Irish business performance, which is lagging slightly behind where we are in the U.K. So very encouraged by the way that market is developing as well. So as Dave said, we, again, as usual, we look at the, within the U.K., the like-for-like sales performance. And you can see that across all formats, we maintained the encouraging trend. I'm going to talk on the next slide about Extra, so I won't say anymore, but Superstores, Metros and Express continued to see good growth. Dave spoken about the Grocery Home Shopping and the growth in the online business. We're encouraged by that, basket size is up, loyalty is up and we're continuing to see a very strong customer loyalty through the saver delivery. General merchandise and clothing, as we saw at the half year, some impact from moving to the new website. F&F moved on to the same site as the general merchandise business. And again, some impact as we shift and look at improving the profitability within the general merchandise part of the business. But overall a year where across all of the formats and the way that we are engaging with customers continue to make good progress. The like-for-like, and this goes right back to the '14/'15 year, you can see that around June '14/'15, we were really at more than 7.5% negative growth in terms of that business. And since then, a strong and continuing improvement in that business. Remember that a lot of our general merchandise performance also comes through these large Extra stores, so there's an element in that as well. But encouraged by the continued performance, and again, you can see that in the store profitability which Dave referred to. In terms of profits, this is the key build within the U.K. & ROI segment, starting at the 503 million we delivered last year. You can see that we invested more than that in lower prices in the year, 300 million of that or so is the farm brands, which we launched early in the year. But across all of the categories, we continue to invest in price in order to maintain that competitive position. We get a volume and mix benefit, and you can see that. We made some other customer investment. This is some of the range reset and the resent Food Love Stories, in particular, we would highlight. And then underpinning all of the margin recovery, as we've set out over our ambition, is the net cost savings. This includes the store operating model, distribution savings and the marketing savings, which we've spoken about before. And then finally, the other category takes us to that 803 million of overall profit delivery, up very strongly year-on-year. The International like-for-like sales performance, and Dave's referenced the competitive position in Poland, and we saw that during the year. And in Asia, as we've seen the fourth quarter and the third quarter were impacted by the events, particularly in Thailand. But market share is strong in that market and a business which is very, very viewed very strongly from a customer perspective. Again, the chart of how we, the operating profit, as I said, flat from 320 million to 320 million. Some investment in lower prices more than offset by volume and mix benefits. Other customer investment is in availability, which was one of the key areas where within the European market we spent on availability and some increased marketing spend. And then we made some cost savings in that market. Store operating model is again an area of focus in a number of stores. We've closed unprofitable counters. And Dave referenced the distribution savings we made in Poland. Not only have we moved to different distributors, we've also closed and then moved to a new center in Poznan for distribution, with a significant saving in terms of our distribution costs. So overall, a business performance which is one which is mixed, but one where we have clear plans for the future. In terms of the bank, the bank performance is one which, again, we're pleased with. Different metrics, obviously, from a bank perspective. We've seen 3.5% growth in our active customer accounts. This is now very clearly the bank for Tesco customers, and then that's the purpose of Tesco Bank. And we're encouraged by the growth in current accounts. And we recently re-launched the offer having had a very, very strong reaction and positive reaction to the offer, which we launched pre Christmas. And we've recently re-launched that with the take up in line with our expectations. The other thing I would highlight about the bank results is that, of course, this is the year that the bank bore the full impacts of the change in the interchange fees. And on an underlying basis, the performance is strong at 29% up. Now clearly, banking markets changed, conditions changed, but it was a year where the bank delivered a good set of results. Strong lending growth, in line with the bank's aspirations, and it's being funded as the bank expect through customer deposits, so good growth in lending and in deposits, and underpinned by an ongoing cost saving program. The capital and lending ratios remained strong. Net interest margin, slightly down, in line with the desire to become more competitive. And the cost to income ratio at an underlying basis, 62% compared with 66%, if you take out the impact of the one off customer redresses, which now with the PPI claims with a finite endpoint, we can begin to see when that will end. And then the bad debt to asset ratio, slight shift, but one which is perfectly acceptable from the bank's perspective. So overall, a bank with strong capital ratios and a business performance with which we're pleased. Tesco Mobile continues to be a really outstanding part of our portfolio. From customer perspective, it is the it is again focused on Tesco customers, is the fifth largest mobile network in the U.K. and the largest virtual network, voted for the number of years as the best as a recommended provider. It's picked up the lowest customer complaints. In fact, in December, there was zero customer complaints for Tesco Mobile. And it's got a very high customer satisfaction. So a strong business, delivering continued growth in a market which is competitive, but where Tesco Mobile has a very strong and established position. I said I'd give you a little bit more color on the exceptional items, and this really breaks them out. Net impairment is a mix of a number of things. Obviously, we, having taken a significant impairment charge in the 2014 and 2015 financial year, we need to recalculate that every year across the whole of our business, and there will always be movements in this provision. Net in the year, when you take into account and release provisions, impairments, etcetera, a very small movement. But there's quite a lot of work goes into that from an accounting perspective. And I wouldn't be at all surprised if annually we have a movement in that net impairment. The restructuring and redundancy, we've spoken about the change in the distribution network. We've spoken about the changes in the store colleague structures, and we've also spoken about the cost-saving measures in the bank. And those are the key elements of that 199 million restructuring and redundancy charge. The bank, as I've mentioned, took a 45 million charge for PPI customer redress. That scheme is now one which is visible towards the end. There's a date in 2019 by when all claims have to be in. And as I say, we can now begin to see the end of that. Offsetting that, we had 57 million from an interchange settlement, which was pleasing to have resolved a long running dispute. We generated 165 million net from our property transactions. Dave mentioned 500. This is net of the -- we also buy back properties, so this is the net number. And then we've made the provision for the SFO and FCA. So that leaves the total to 263 million. And we continue to call out in the exceptionals issues which are significant and material to the results, but we also seek to run the business with as few exceptional items as possible. If we move now below the operating profit, to the finance income and costs, the first line here of interest received is as near as we can get to a cash element. We had more cash. We managed that cash as well as we could in the very low-interest environment across the course of the year, and we generated 48 million from it. IAS 32 and 39 movements are mark-to-mark movements, noncash generated by the market changes in respective risks across some of our hedging instruments. And that, year-on-year, gave us a 61 million credit compared with 19 million, but I would stress that they're noncash. And then interest payable went up year-on-year principally because it's part of our property buybacks, we do very often take debt on with that. And during the year, in February last year, we acquired a number of stores, 49 stores and two DCs, and that came with some debt. We repaid a lot of that, but that was a lot later in the year. So year-on-year, we carried more debt within our balance sheet. We do really continue to focus on the cost of whatever debt we're carrying and seeing how we can minimize that. And then finally, IAS 19 pension costs reduced year-on-year. And this is set, as you know, at the start of the year in relation to the pension deficit at the start of the year, so it's a very mechanical noncash element. And unwind came down because our pension deficit was down as at February last year. This February, with a higher pension deficit, we expect this charge noncash in the current year to be around 165 million. So overall, that gave us the net finance cost of 521 million compared with 629 million. Happy to go into more detail separately because I know that there's a big mixture here between cash and noncash, and cash is one of the things which we focus on strongly. The tax rate, tax rate is 25.4%, up significantly from last year. This is higher than the UK strategy rate. The banking supplementary tax surcharge of 8% ran through the whole of the year. And then we also continue to have some assets which don't qualify for tax relief. Looking forward to the year that we're just starting, we expect this to be around 25% in the full year as well. And we'll continue to update that as we go through the year. Earnings per share, I mentioned before the 842 million of profit before tax and exceptional items and finances cost, up 71%. The diluted earnings per share is at 7.9 pens, is up 40%, mainly because of the change in the tax between profit and tax, that's why the 71% doesn't come through. But it's a strong increase in terms of this important EPS measure. And again, going forward, we will come back and talk more about EPS because it's the way on which we will increasingly want to be judging our performance. Very happy to go into some of the movements between that as well. Principal movement between operating profit and PBT is the finance cost, which we've spoken about, and then the losses in our -- and cost of our JVs and associates, which were around 30 million. So -- but an important improvement in the -- in that EPS underlying measure. We've spoken a lot over the last two and a half years of the importance of getting our movement in net debt to a degree that we can manage, generate cash, then spend that cash and end the year with an improvement in our overall cash position. And this bridge really takes it through. These two lines are the cash from retail operations. 200 million is adding back the way that we account for the FCA and SFO settlement, so you could really add these together. There's a very small impact from Turkey. So around 1.9 billion of cash from our trading operations. And then 387 million of underlying working capital improvement in the year. We focus on working capital. Dave referenced the stock improvement, and that continues to be a focus in the underlying working capital. We did call out in the announcement that there was a fuel payment in that number. It is contained within that. It's somewhat north of 150 million. It will be a benefit for us for at least the next three years. It's linked to the timing of the calendar month payment of this fuel supply compared with our year-end when it pays. So it will be a timing benefit which will continue to feed through into working capital for three years, and then we'd expect it to reverse. So that gave us significant retail cash from operations. Interest and tax charges of 582 million in tax terms. CapEx, in terms of the normal business, CapEx 950 million. The CapEx through the account in the year was 1.2 billion, which was slightly less than we'd targeted at 1.25 billion and indicated, giving us free cash flow of 744 million. We then generated some cash from the disposals of the business, principally Harris and Hoole, Dobbies, the Giraffe business we sold in the year, and then right at the end of the year, we sold the Turkey business. And then through property disposals, Dave mentioned 500 million we generated from property disposals. Against that, in this chart, we offset the cost of properties we bought back. So net-net, we're still generating more than 130 million of cash from our property portfolio, having bought back those number of stores. And then finally, other movements take us to a total reduction in net debt of just under 1.4 billion in the year. Give you a little bit more shape behind our CapEx, as I said, we spent around 1.2 billion in the year on CapEx. In the U.K., by far, the majority of this is in our existing space. There's some element of new space and new business CapEx of the total of 731 million. Europe, all on our existing business, 141 million. And in Asia, about 40% of our CapEx is on new stores and business expansion, and that's 40% of the 262 million. So again, focusing our spend on CapEx where we can see returns, where we can be sure and clear that we will get the necessary returns and get them in a way that generates value for the business and our shareholders. We're pleased with the reduction in our indebtedness. And again, just really want to look at this in the 3 ways that I think about this because they are very different characteristics. Net debt, significant reduction over the last 2 years from 8.5 billion to 3.7 billion of net debt as of the end of this year. This is what's on our balance sheet. It's the bank and bond financings we have, and then we'll talk a little bit about that in the next slide. We then also have lease commitments. As we go through leases, as we buy back properties, obviously, these reduce. But equally, with a portfolio as big as ours, every year, we come to decisions we have to make about lease renewals. And if we renew a lease, then obviously we take on new lease commitments. So we see that coming through the numbers as well. But again, a significant reduction in our lease commitments over the last 2 years, from 9.4 billion to 7.4 billion. And then finally, the pension deficit, which I'll talk about again. The, as you know, the primary driver for the way that the IAS 19 measurement of the pension scheme, which is at 5.5 billion at the year-end, pretty much the same as it was at the half year, the primary driver is the drop in corporate yield. And despite that significant increase year-on-year, there's been no change in the underlying cash commitments which we are required to make to our pensioners and future pensioners. During the year, we've focused on derisking the investment side of that portfolio, and we've made good progress on that, and that has now come to an end in terms of the asset derisking strategy. We've had good performance from the scheme assets, which is why year-on-year, from the half year to now, we haven't seen significant change. And we continue to have the long-term deficit funding plan of 270 million, which we set up 2 years ago with the trustees and which was designed to work through changing market conditions, and importantly, through changes and triennial valuations. So that's just started. We are very closely involved with the trustees on that. And they have told us that they're wanting to get the pension triennial valuation resolved as soon as possible within the, of the March year-end. And equally importantly, they have confirmed that they are working within the framework that we set out 2 years ago. So we'll come back and update on that as we have more progress, but it's very much starting from the perspective that we set up a predictable cash flow to fund the deficit of 270 million per annum. And as I say, we'll come back to that. Dave mentioned the property portfolio in terms of how that has shifted. These are numbers as of the end of February, so the 1% in Dave's numbers isn't in here. That's the British Land transactions. But we are really pleased, both when you look at it on a space perspective and a value perspective in terms of how we've shifted that and are really shifting properties which we want to own back into the ownership of the business in order to be able to run those without being concerned about the rentals that might otherwise be a drag on the business. Liquidity is strong. We've got 3 billion of available cash. On top of that, we've got the cash which we've set aside and 760 million for the fulfillment of the Booker cash consideration. So the GBP 3 billion excludes that, just under 800 million. We've got 4.4 billion in facilities, which mature over the next 3 years, 4 years. And we repaid 1.9 billion in the year with a relatively low level of maturities this year and in each of the next 2 years. So from a profile perspective, we feel that we're well setup with a significant reduction in our overall indebtedness, strong cash position and facilities which back it. Our metrics have improved. The key metric of net debt to EBITDA has dropped from last year, 2.7 times to 1.6 times. Fixed charge cover has increased from 1.9 times to 2.2 times . And our total indebtedness ratio is slightly improved from 5.1 times to 5 times. If you hold the pension deficit flat year on year, then the indebtedness ratio has dropped from 5.1 times to 4.2 times, so strong underlying improvement if you hold the pension deficit. And I accept that the pension deficit measured is as it is, but that's very separate in terms of the way that we think about it. So an improvement in our debt metrics. So before I hand back to Dave. Group sales, up 4.3%. Property a profit recovery which continues, with profits up 30% in terms of our core operating profit metric. Our EPS is up 41%. Our cash generation is strong. We've repaid the 1.9 billion of maturities, and we have a strong liquidity position. Thanks very much.

David Lewis: Okay. So last little bit from me. Consistent with what we've been doing for the last two years is to make sure that every bit of communication about the performance of the business, both inside and outside the business, is aligned. So 7

A - David Lewis: Was that a yawn or a -- Mr. McCarthy, first up. I didn't know if you were stretching or putting your arm up there.

David McCarthy: Hi, it's Dave McCarthy, HSBC. Wanted to ask you about how you're managing cost inflation. The -- historically, the industry has always done the cost-plus margin approach. But if you've got let's just say 5% cost inflation coming flow-through, including cost of goods sold, do you think you would pass on 5% or less than that?

David Lewis: So I'll give the general answer and, Jason, I'm going to ask you to add onto to that a little. So we start from a place which is -- first of all, we do reserve the right to challenge whether the 5% is justified, yes? It's actually quite important because, otherwise, I think you get some slippage, which is just opportunistic, and we don't think that's right. So there are -- some luxuries should be resisted. But then, it's a question of, if that's real, how do we together mitigate it? And so actually, that end-to-end review of how can we lower the way we work together in order to make sure that, that cost inflation is not passed on in its entirety in a way. And then there's a question which is, if it can't be completely mitigated, there's a question obviously for our supplier partners in terms of the price they choose to charge. And then we have to decide whether it is a -- something that we, after absorb and offset from our other cost-saving program, because actually we don't want to have that position in the marketplace. So everything is about reducing it. But Jason, do you want to be more specific than me?

Jason Tarry: I think you've done a very good summary, actually, Dave, and that's exactly the approach that we are taking. So anything unjustified gets pushed back. Anything else that where we see real cost price inflation, what can we do together, looking at it together, in order to be able to mitigate against that? And that might be looking at the range that we have together, looking at the processing costs, looking at the input costs and we do take positions and take a view on when we should buy and how long we should buy for. So there's a lot that we can do together, and we are, because we're very -- we don't think it's a good thing and we're trying to keep it under control as much as we possibly can.

David Lewis: So David, to your point, give you a data point to help you. So if you take -- I've seen two different market views about inflation in March and up to March, one at 2.3 and actually one at just over 3. I haven't had a chance to look at both of the bases of those, but let's say it's somewhere in that range. Against that, we're at 0.06. And if you look at -- we track the inflation in the basket, take out the promotions in the basket, take out the promotions in the basket, we think we're the lowest of the big 4 in a measurable way as a result of not wanting to pass on everything.

David McCarthy: So you believe you have got a competitive advantage in dealing with cost inflation and this period of inflation, you can use as a competitive weapon to improve your position.

David Lewis: I completely agree with what you just said. And it's completely consistent with what we've been saying. We've taken our prices down by 6%. The way we can enhance our competitiveness in the marketplace is not to let prices rise as much as everybody else does, and we think we're well placed to do that, okay? Go ahead, why don't you just pass it? We'll start at the front and work backwards this time, instead being the other way. Dan?

Daniel Ekstein: It's Dan Ekstein from UBS. I've got 2 questions. Firstly, on project reset. I think this time last year, you said you were down 18% in terms of SKU count. You said a further 7% today, I think. How much further is there to go there, I guess, both in sum and across the different categories within the business? And then secondly, on CapEx. CapEx guidance for this year is sort of 15% to 20% below where you said you thought it would be, and you called out cloud technology. I thought that was interesting. Is there an opportunity for the business to become sort of structurally less capital-intensive than in the past through application of that?

David Lewis: Okay. Jason, do you want to talk about range? And Alan, you can pick up on CapEx, is that okay? You're the experts.

Jason Tarry: Yes, so quite rightly, over the last 2 years sort of cumulative 24%. The good news is that share range perception has improved over that period of time. Now that is also linked to availability improvements and get what I want. But actually, the feedback is that our perception has, that it's easier to shop, the choice is clear to see. We think there's more to do. So it's a bit like you keep opening the curtains and seeing something new. So we still believe there's a bit more to go. I mean, the big step was in year one, where we were sort of 18%. You saw what we've done in the last year, and it'll be single-digit again, I think, in terms of the opportunity going forward. But still a bit more to do and even so retain our perception leadership.

David Lewis: Yes, that's right. It's like gardening, isn't it? You're constantly pruning and rotating and...

Alan Stewart: In terms of the CapEx, yes, we've guided and, in fact, continue to guide to an average of 1.4 billion of CapEx over the 3 years. And ,but in the year ahead, important that we've always said we will give more specific guidance in terms of the year we're just entering, and that's the GBP 1.25 billion. From a structural perspective, we definitely are wanting to shift to what historically would have been capitalized technology spend into expense technology spend, and that's consistent with the way the technology market is going. We are moving more to cloud-based services. I think from a business perspective, it gives us a greater flexibility as well because you're not carrying the drag of that inflation. You're able to respond more quickly in terms of where you want to spend money. I think we will always be a business in which there's quite a lot of CapEx development. Opening a store, keeping a store has got a lot of CapEx. But wherever possible, having less CapEx invested in the business is somewhere we would go. But structurally, CapEx ,depreciation this year is at 1.18 billion. So with 1.2 billion, we're pretty much aligned with depreciation and CapEx now. But that's really where it is. And all of our CapEx needs to hit the returns. Cash payback continues to be one of the key, if not the key, metric that we look at on CapEx.

David Lewis: Just pass it. We'll, shall we go by row just to keep the logistics easy? Go for it.

Andrew Gwynn: It's Andrew Gwynn from Exane. Just on the I forget the chart it was, obviously, the volume momentum in the U.K. business is a bit softer. Are you still of the view that now is the right time to recover the margin, the 3.5% to 4% margin? I suppose the sort of connected question to that is, what are the circumstances where you sort of take a step back and put the ambition maybe a little bit further out?

David Lewis: So look, it's very clear. We're very straight forward. Market momentum in terms of volume was more challenged in Q4 than the rest of the year. Our performance versus the market, we're still outperforming and that plays into the importance with which volume is a key part of our business model. I think so will does volume stay a focus? Absolutely, it does. I think the only nuance we would give you is not all volume is equal. We used to have a measure of volume that sought to aggregate large screen televisions with cans of baked beans. We think there's a more sophisticated way of doing that and we'll go to the scan singles way so that we actually drive volume in a way which does unlock the leverage that we're talking about. We think that's just the next level of finesse and specificity. But to your point about margins, the way that I look at it is, if we declare 1.28 billion of profit this year, and we think that we've got 1.5 billion of profit opportunity of which there's still 1.3 billion left to go, we can get to our margin aspirations through cost and keep Jason and the others focused on making sure we're competitive to drive the volume. So volume is an important part, but we think we've got enough opportunity in our cost base and the plans that we've got in that 1.5 billion to be able to continue to save, the 3.5% and 4% can be delivered from the business even when the market is a little bit more challenging, okay?

Andrew Gwynn: If volumes go negative, is there a point at some point where you can say that maybe we'll kick out that margin ambition a bit further?

David Lewis: Well, we'll continue so again, a bit like to David's question is how do we think about cost increases? If we think and the reason that we don't remember, we don't target our category guys on percentage margin. So if people believe that actually a lower price or lower percentage margin drives volume and the equation is better, they're perfectly at liberty to do that. So that'll be how Jason and the others have to think about how it is we play in the market, depending on how it unfolds through the inflationary cycle. I suppose the bit to take is there is a very open, very transparent conversation in decision now where the margin the percentage margin is not the key driver of the decisions that the buyers are making, right? Go for it.

Stewart Paul McGuire: Stewart McGuire from Credit Suisse. Two questions from me. On Extra stores, do you think that they need to be improving at a faster clip in order to actually get the volume recovery that you're hoping for, given that they're still quite flat with the exception of Q3? And then a question for Alan. On the pension, you've increased the discount rate by 40 basis points in the last six months, which I think should have about a 2 billion improvement in the deficit, but it only improved by about 350 million. Can you give us some color on that, please?

David Lewis: Okay, so large stores. Actually, I'm having started at 7.5 negative to get to flat and growing, we think is progress. We think we can enhance the offer in large store, so they will improve. I think if you take out general merchandising from large stores and you look at the food element of it, you see the growth that we're talking about. But that comes to also how it is we augment the mix, as to how we think about the partnerships and how it is we do. Without drawing attention to, we've put a couple of different trial propositions in the marketplace recently that will look at how it is we play large stores ever so slightly differently. So Duncan Hoy who works in for Matt in the U.K., runs the large stores. He's completely focused on how it is he builds that proposition to improve the performance. So -- but to be honest, the critical thing at the moment is that people don't appreciate -- there was a myth that these were a drag on our performance. They're not a drag on our performance, in the way that we see them in core food. Not at all. Not at all. Do you want to talk about pension?

Alan Stewart: Yes, so a couple of points on pension. And this is a market measure and so in that sense, it increases as the market increases and as yields in the market shift. So it's something which we just reflect the market measure. I've said a number of times, and I'll say it again, I think the IAS 19 measure is the least relevant measure of any of our pension, ways of looking at pensions. But it is there and, therefore, right that we talk about it. And the other -- that is very much outside our control, because it's market bonds. And then the other side of it, of course, is the asset performance. And the asset performance is one which is there for the long term and there for the long-term delivery of the pension, obligations which are there. They will move out of line at times and it's very much totally outside our control. We will continue to try to get the most accurate measure of what is the right discount to use for that liability, but it's something which may well move by the sort of quantum that you've seen this month, maybe -- this period, maybe even more really important for us is the predictability of those pension deficit payments.

Edouard Aubin: Alan -- sorry, Edouard Aubin, Morgan Stanley -- sorry, don't sit down. So you did not show us the table comparing and contrasting your cash flow generation in '17 versus '16, but I think very back of the envelope calculation, if you strip out exceptional items, cash and discontinued operations, I think your free cash was down around £300 million to £400 million. So could you just come back on the different moving parts? And you mentioned the cash bonus, for example, being one of them and petrol one, and so is that's -- if you could just elaborate on that.

Alan Stewart: Yes, so really, the exceptionals this year created -- it's an accounting noise, it's a technical noise because, in truth, the cash was generated in the business but the way it comes through the results is that left-hand column is reduced by it because we've taken the charge. So which is why I added those two together. The 2.3 billion of cash generation is -- includes the 387 million of working capital. And we are focused on that very strongly, and the cash generation is up 9% year-on-year. There will be some shifts. Sometimes, we're dealing with quite large outflows and payments. So this year, cash flow, in the year we've just entered, we will have the payment of the elements of remuneration to the SFO and FCA settlement, those will come through this year. But in a principle basis, we're looking to generate from the cash we make what we then spend in terms of the CapEx and the interest and tax, plus any other activities which we have, such as property buybacks. We want to end the year with a positive cash flow and continue to be able to reduce our debt. There'll come a point at which the 3.7 billion of net debt is one which we look and say, well, actually within our capital structure, that's the right level of debt. We're not there yet. But -- and as the business performance increases and as we've got meet our aspirations, that point is certainly one that we can begin to think about. So that's the way we think about it, generate cash year-on-year, I get what you're saying in terms of it. Last year, I did talk about -- you'll remember at the prelims last year, we spoke about that we've done very well in terms of the working capital generation because some of our activities had yielded results earlier than we planned. So in a sense, we captured it last year. That doesn't mean we're any less focused on capturing it in the year we've just closed and, indeed, in the year we've just started.

Edouard Aubin: And so for this year, I know you're constrained in terms of your guidance, but do you expect the free cash to be -- underlying free cash to be up or down versus '17?

Alan Stewart: Well, you're going to have to run it through your own model in terms of what it is. We're focused on generating the cash, we're focused on increasing the -- building the margin in line with the aspiration that we've set out. And we've been very clear in terms of where we think -- the CapEx this year is about 1.2 billion.

David Lewis: So that commitment to the 9 billion doesn't change, right?

Alan Stewart: Just to be clear, 1.25 billion for the year that we've just set out is what we said.

David Lewis: Go ahead.

Robert Joyce: Rob Joyce, Goldman Sachs. I'm sorry, Alan, still standing. I mean, I have some questions leading on from Edouard's is, on an average basis over those 9 billion three years of retail cash, what do you -- was does that free cash flow number average out on an annual basis? Running it through my model, I'm getting kind of 800 million a year type number, is that ballpark?

Alan Stewart: Look, it's a difficult question to answer, but your model, if you look at where you are and you look at how you face then, we're focused on doing what you do. You've got the redemption schedule of our bonds, you know what we're expecting to spend. I've said that the CapEx average will be 1.4, so providing nothing changes, I'd expect a bit of step-up in CapEx next year, the '18, '19 year. But any more than that, can't really help you, I'm afraid. But generating free cash, really important to the ability to run the business.

Robert Joyce: Could you give us any details on the sort of the working cap you expect over the next 3 years, average tax and then the sort of restructuring charges?

David Lewis: Just send the spreadsheet and we'll -- send it to Chris, he'll [ pin it in ] later.

Robert Joyce: Fair enough.

Sreedhar Mahamkali: Sreedhar Mahamkali from Macquarie. A couple of questions, please. Can you talk a little -- we talked about volume and you've given a couple of example how and why volume is very important. And clearly, volume isn't quite -- in that context, can you talk about relative volume versus absolute volume and the value growth, physical pound sterling value growth, and how that helps the margin equation? When you talked about cost, I get the point. Talk about P&L leverage in terms of relative volume and in terms of value, that's the first question. Second one is just in terms of rent savings, you talked about, I don't know, 152 million rent savings for the year. But I remember from the Investor Day, you talked about 176 million back then. Am I missing something here? Or is it now this year, is it getting to 176 million?

Alan Stewart: One was the target, one was what we've delivered.

Sreedhar Mahamkali: Okay. And this year, what kind of number should we be thinking about?

Alan Stewart: Well, look, the -- what we've done in terms of the British Land transaction is sub 20 million in terms of the improvement in rent. And -- but for most of last year, we actually had it for most of the year because we bought the majority at the start of the year, so there's very little annualization impact in terms of what we've done. But we will continue to look at it. And finally, just to -- I will come back to -- the one other thing which we shouldn't ignore in terms of that free cash generation or the cash generation is the property side of it. Because as you've seen, we generated significant value from our property. Some of that, we chose to invest back in the property buybacks. But that's a key part of our cash generation, to generate value as well and in terms of debt reduction.

Sreedhar Mahamkali: Just the last one and then probably we'll come back to the floor.

David Lewis: [indiscernible]

Sreedhar Mahamkali: Well, with Alan. Going back to Edouard point, can you quantify the cash bonus? Is that possible or is that...

David Lewis: In terms of the -- what Dave referenced to...

Sreedhar Mahamkali: Exactly, versus stock.

David Lewis: Yes, I think it was about 77 million.

Alan Stewart: Delta.

David Lewis: About. Is that right, [ Kate ]? Where's Kate? Right at the back. It's a bit more, isn't it?

Unidentified Company Representative: That, yes, last year, it was, it's more than that.

Alan Stewart: It's more than that. But going forward, it'll be about that.

David Lewis: Yes, so we should give the number. But because we're talking about a turnaround bonus work for last year, which was higher than the ongoing level, a number I had in my mind is around 130 million, 135 million, I think, right? Was that twist of equity cash, indeed, okay, going forward. So should we go back to...

Alan Stewart: Sorry, I'm looking into the year ahead in... yes, you asked about [indiscernible].

David Lewis: And what we can do on rent is we'll take what is delivered in this year, we add them together and you'll be quite happy against the [170 million ] I think. The, so back to relative volume, and I'm going to look at Jason and probably Matt because they can help me with some examples. So the way that we look at it is this, we're pretty, people have modeled this, right? We're pretty confident to the extent of our ability that our absolute size allows for an advantage in buying relative to others, right, particularly in food, okay? Now we have a view as to what that advantage is. We've never said it, it's competitively sensitive and you wouldn't expect me to reveal that. It is fair to say that by, where we were 3 years ago, we'd lost that advantage and position in the way that we were dealing with our suppliers. And we've, under Jason's leadership, got that back in the way that we've changed the engagement throughout. So I do believe that we have a relative benefit in volume that comes in a lower-cost price that gives us greater optionality in terms of how we price in the marketplace. In terms of cash, the thing that's really interesting in terms of how this works, and the example I'm going use, I'm going to look at Jason and Matt because they can give you more flavor if you need, is I've seen it work out in agriculture very starkly, right, which is, we had a situation before which is if you were our farmer, we had agreed with you what the specification was. And during that point in time, we gave you a volume demand, which had some tolerances in it, of a certain specification that you were invited to hit. So we might take 60% of your crop because it fell within that specification at the time when we were demanding the volume. As a farmer, your problem is, what do I do with the rest of the volume that came at that time, right? Or indeed, those that are outside of the specifications that you've agreed with Tesco. What we've done over this period is work with them to say actually how do we increase, with our select partners, how do we increase the volume we take? So increasing the crop utilizations the way we talk about it, but also through our proposition in terms of perfectly imperfect than others take a greater range of specification. And the things that have really struck me is when there are crop flushes. So we did, I think we said 9 last year, we've done 3 or 4 already this year, so cauliflowers and carrots are the last couple. There've been some on English strawberries just recently an opportunity where a farmer will come and say actually, sun's earlier, crops earlier, there's more volume. For the farmer, that's a nightmare, because the opportunity is, either I give you the 60% you wanted and the rest is wasted, terrible. So profitability but also environmentally wasted. Or they discount to the marketplace in order to sell that volume. So what we've been doing is saying actually we'll take the volume. So it's, we get the benefit of a lower actual price because we take a greater volume. The farmer gets certainty because he sells all the crop. And we then open our stores to give the customer a better deal in terms of strawberries or cauliflower or carrots. And so that's when we see absolutes. So with the last crop flushes we see, I get a piece of paper that says, benefit for the farmer, benefit for Tesco in terms of pounds, right, and also what the benefit is for the customer. So that's where we start to see the relative volume opportunity that we are for our suppliers translating to real money in terms of a benefit that we can enhance the margin with, right? I'm looking at the experts in the room in terms of Matt and Jason to either correct me or build on me if I've got it wrong.

Jason Tarry: No, you've been listening very well, Dave.

David Lewis: Fair enough.

Clive Black: Clive Black from Shore Capital. You can rest, dear Alan, as I don't have a spreadsheet. Following on from Dave McCarthy's question. Dave, in terms of inflation, managing inflation, it's interesting you said you're inflating more than the big 4, but you didn't mention the discounters. And I just wondered in that respect how you expect customers or shoppers in the U.K. to phase into inflation? And in that respect, what do you see in your range, from a proposition perspective, more private label, fewer international brands, more British brands?

David Lewis: Yes. So I think what I said was that we were inflating less than the big 4. Not just correct, so it is less than the big 4. But Clive, you're spot on. We can see what's happening in terms of customer buying behavior against the discount offer as people feel the pinch in terms of inflation. The opportunity for us is what do we do about that, all right? We did it with farm brands and that's using a known exclusively owned brand to access the price point in order to offer customers and we've been very successful with that. And we've got some thoughts and ideas about what it is we need to do to be competitive because whilst we make the reference here, just to be really clear, we see all of that as the competitive set. And so we, like I suspected, just need to think about how it is we at the end of last year, we could see switching in favor of Tesco from all of our competitive set. In the first part of this year, we've seen that be different across the marketplace against some of the discount offers. So we need to sit down and we need to be clear about how to respond. But that I'm not going to tell you exactly what I'm going to do about it, so I'll stop just there. Go for it.

James Tracey: James Tracey from Redburn, two questions for me. The first question is on the U.K. profit bridge. It looks like most of the cost savings were reinvested back into price. So the improvement in margin can be put down to improving volumes and mix. So given that's the case and volumes have slowed a bit, is it fair to assume that you need to have positive volume growth to get to the long term target or are there other levers you can pull? And then the second question is on the Tesco Bank, lending growth was 17% over the full year. Have you seen a slowdown in the exit rate of lending growth? And I'm basically asking are you becoming a bit more cautious when it comes to lending money, given that the bad debt ratio starting to tick up and the economy seems to be getting a bit more difficult?

Alan Stewart: All right. I'm going to ask Benny to answer the second question if that's okay, because Benny is I know he's here. But let me answer the first one in terms of the it's interesting. Most people, James, talk about it and say the only way that we're achieving it is through cost savings, whereas, you've gone the other way. I think that there is definitely some and some, and that's something which we definitely have to look at. So we've spoken about the volume, we've spoken about the importance of it and we've also spoken about within max the mix, how increasingly we will be selective and choice full as to how we improve the overall business performance by looking at those different channels and categories. So I expect to see there will be elements of both as we go through. But the core underpin, and this is really important, the way we look at it, the core underpin to everything we're doing is those cost savings. And we've made the 226 million towards the 1.5 billion and we'll continue to look at those and to try to achieve them as quickly as we can and as effectively as we can.

David Lewis: Benny?

Bernard Higgins: Yes, sure. On lending, our appetite, we've had a very conservative risk appetite on lending, both unsecured and secured lending. And so we're able, actually, to continue to grow the lending and the number of customers we serve without in any way breaching that. Risk remains really very prudent. So we wouldn't see a slowdown for us even if there's a market slowdown.

David Lewis: Okay. Do you want to -- I'm going to keep moving back, I'll come back to you at the -- can you do me a favor and pass back? Sorry, Bruno, it's not a trend -- remind me, and you get the last word.

Niamh McSherry: Niamh McSherry, Deutsche Bank. I have three questions. And actually, I did look at the chart and see it a little bit differently to James. My question was on the volume and mix benefit of about 500 million in that chart, it looks pretty good, for 0.9% like-for-like in the UK & ROI. And so is that the type of the volume and mix benefit that you might be looking for going forward? Or was this year exceptional? So that was the first question.

David Lewis: Okay.

Niamh McSherry: And the second one was actually about expensing IT spend versus capitalizing it. Is there any -- give us an indication of the magnitude, in millions of pounds, of that kind of shift in approach? And then the third one is on your max versus the mix chart, can't help noticing that online as a channel is still all red. And you've made a lot of changes in the last 18 months. Are there more changes that you can make to move some of those boxes out of red?

David Lewis: Why don't I take one and three, and you take two, how's that? So you're right about the volume and the mix against the like-for-like. The way that we see it now, but the market may change given Clive's question is, we set ourselves a point, which is how do we rebuild the volume in total and now more selectively and more appropriate by product category, because that's where the real leverage is, so we need to get more deliberate and choiceful about how we do that. And I'm pleased with the progress that we're making there. But the way that the plan works, the way that we had set the work was, actually, we were 8% -- 7%, 8% more expensive than where we wanted to be for customers. So every bit we saved and every volume that we grew went into funding that 6% price reduction that you've seen over those two years, all right? And the idea was that as we then carried on making those savings and keeping that volume that actually more of that saving could go to being able to recover the margin because our price position was again competitive. Now everything is dynamic in retail in that sense, so we were really happy with where we got to. And in our plans, that's exactly how it plays out. And we have the wherewithal to be able to change that cost saving into more competitiveness to get the volume and the mix right against the 3.5% and 4%. Now if the markets move, we'll have to adjust, then we'll have to think about how it is we drive volume differently in order to get that element and the contribution from that or, indeed, how we save more money in terms of costs in order to be able to give us the optionality. But that's how we think about it. But it's fair to say that the market is moving, particularly this in the last couple of months and we'll need to think about whether we have to adjust it. But based on last year, we were happy with the balance that we got. What was the third one, so I can do them both at the same time?

Niamh McSherry: The third one was online.

David Lewis: Mix? Online. So look, online, remember red is less profitable than the average, not loss making. I suppose, the way that I would look at it is very happy with what we've done on Grocery Home Shopping. Really very happy with what we've done on Grocery Home Shopping. The particular challenge in online for us is still in general merchandise. And so we've made some changes. [indiscernible] and other things we've made some changes. We've also made some changes in terms of the impact of indiscriminate promotional activities, so boost in that sense, and whether that -- what the impact of that is. So do we lose less than we did a year ago? Yes, we do. Do we get to a place where we would want it to be? No, it's not. So there's quite a big program of work going on to address it. But within it, I'm really quite comfortable with where we are on food, more challenged in the general merchandising space.

Alan Stewart: In respect of the technology and the spend, we originally expected CapEx to be 1.25 billion, it came in at 1.2 billion. So it's tens of millions, but much more conceptually is, within the technology area, we're trying to expense rather than to capitalize because of the flexibility it gives us. But over time, they clearly are elements of CapEx, which -- and technology CapEx, which you are required to capitalize. So it will be some and some. But in the year, it was probably tens rather than anything more.

Niamh McSherry: Tens, but probably going up?

Alan Stewart: Directionally going up. Always consistent within everything we've said in terms of our ambition as well. So we give the best possible view as well.

David Lewis: Do me a favor and pass it back that way. Sorry, I'll come...

James Grzinic: Thanks, morning it's James Grzinic from Jefferies. I had a couple. I guess firstly for Alan given that Dave is distracted, but cash exceptionals, the year ahead, are they going up or down relative to the year just past?

Alan Stewart: Let me talk about rather the year past had some definitely. The cash exceptionals this year, we know that we've got the 235 million, which will come in the current year. The others will flow through to a certain degree, and some of them are bank. We called out the two bank exceptionals, that was in aggregate about 80 million of the exceptionals. So by far, the majority of those are either bank related and therefore, if you like, separated from the retail cash flow. But I can clearly see the 235 million coming through. Little of the other restructuring will be carried over into the year that we've just entered. There'll be some, but a lot of it has been spent in the year.

James Grzinic: And for Dave, the first question is, have you recovered any of the scale advantage on sourcing at all since you've been at Tesco? And is the 3.5% to 4% ambition underpinned by going back to the historic advantage Tesco had from a sourcing perspective? And lastly, it's very evident that consumers are changing, switching over the past 3 or 4 months. Are you seeing a change in behavior in your stores as well?

David Lewis: Okay. So look, and again, I'll look to Jason just -- I think we -- what we've done, if you remember, is we went through a difficult process of streamlining the number of supply partners in terms of setting up how we want. So actually, for those supply partners who are now able to rely on the growth opportunity of Tesco, we think we're restoring some of that benefit in terms of supply cost. We think that there's more that can be done there, but it's much more in terms of how it is we run the business together. So the examples we shared with you all the way through last year about how it is we took stockholding points out between ourselves and our fresh food supply partners so that, actually, we could flow straight from Spain into store, take out two days, take out stock, benefit to everybody, those are the things that we think we now need to focus on in order to rebuild an advantage which is unique and exclusive to ourselves. And by taking more of the crop into the Tesco offer, we do reduce that opportunity for the market to benefit from the marginal volume that Tesco doesn't take. So -- but that's a very deliberate and very important program of work we've got. But it's not just -- the reason I say that, it's not just about a scale-buying advantage. It has to be an advantage, which is from how we run the business together so that you've got that meat example, where, it's interesting, our supply partners are saying my business is now more profitable because of the way Tesco runs its relationship with me. That's as important to me as rebuilding our profitability in meat as well. So there's a lot of programs there. And that's what Jason and the team are focused on. In terms of changing behavior, we've definitely seen some, we've seen some basket composition changes. I think what we've seen as well as the things that are evident is, as there's been cost inflation, we've seen different activities. So we've seen an increase in promotional activity across the piece and that normally comes in the form of a supplier saying, we need this cost increase, but here's an increase in the promotional investment to try and you get really big sort of swings in terms of promotional activity after that sort of cost increase. We've not done that, we haven't done that. We've said actually we don't want because, to be honest, all you're doing is increasing the cost increase to pay for the promotional activity. We want to be lower for more consistence, so we don't want that base inflation. And we've seen, therefore, activity around promotions, which is driving some behavior and we can see that in our bond guarantee response as people get the equalization from us. And that's the bit that we're watching. So that's the bit that we're watching because history suggests that that's a 3 months phenomena and then the supplier partner pulls the promotional investment and the price has to settle. And we've committed ourselves to try and be long term. If it doesn't, if it carries on, then we'll have to think about whether we change, but that's where we are. That's the dynamic.

James Grzinic: And are customers starting to trade down within your offer? Are you [busying] up on that?

David Lewis: The last data I've seen, I can't say to you that there's been a trade-down. But what I can tell you is the increase in own label participation has increased, but that's under 3 tiers. So it's not a trade-down I think in the way that your question means, but there is a movement in the mix towards own label as we improve that offer. Jason, yes?

Jason Tarry: Yes, I mean, with Easter moving, obviously most of the...

David Lewis: Yes, big difference. Yes.

Jason Tarry: [indiscernible] customers are more able to do their Easter shopping [indiscernible]. So you, this actually moved that materially [indiscernible] very interesting mix, really quite interesting.

David Lewis: Yes. Okay, I missed down here, my apologies. Please.

Michael Dennis: Mike Dennis from Lazarus. I fail to see where the operational leverage is in the second half of Tesco U.K., and I was wondering if you could help me. You state in your slides that rents have gone down. You've increased subletting. You've got more ATM income. You've got less CapEx going into the U.K. You've got lower amortization. I can't quite see in the second half where any of the operational leverage, given you've talked about higher volumes, is. So going forward into 2017, without any volume growth out there in the market, that's the whole market, I'm failing to see where the operational leverage is on the business. That's the first question. The second question is, given that and what you gave on the Capital Markets Day, is it a fact that the cost-to-sales ratio in the U.K. is just significantly too high, like a 31% cost to sales and what you really need to do is go back to looking at the stores and FTEs again and saying I've got to take this whole business down a whole level in order to make it operationally viable in a market where Aldi operates on a vastly lower level of operational costs? I was just wondering on those 2 questions if you had any thoughts.

David Lewis: There are 2 bits of it. The way that we look at the leverage in the U.K. in the second half, the bit that you didn't talk about, is what we've been doing in terms of enhancing the offer. So actually, the gains that we've made, we've invested 300 million inside the U.K. in terms of farm brands, we saved 455 million in costs in total and you've seen the profit enhancement. So we can see the leverage in how it is we run the business. If you go to your second question, I don't disagree with your cost to save idea, that's where the 1.5 billion thought came from in terms of benchmarking the marketplace. And you've seen we announced after October changes to the store operating model, we've given you what the detail of that is. We've just announced a change and a further rollout of that to more stores in the U.K., so that plays into this year. And we've now started to do the same thing in our Express offer. So we're quite confident about the things that we have and either lower our cost or improve our relative leverage in the U.K.

Michael Dennis: But it isn't because the 31% stayed the same. The annualized 500 million is really a cover for the increase in the underlying costs.

David Lewis: Do you want to.

Michael Dennis: I don't see where the I'm just trying to work out exactly where the progress is.

Alan Stewart: The progress is clearly, Mike, from 500 million of profitability to 803 million of profitability, that's the progress. So we can talk about different elements of it, but fundamentally what we're doing is we are reducing the cost of our business by making it simpler. And there will be some elements where costs go up, there'll be some where costs go down. But we're overall aimed at reducing the cost of our business. We recognize that some of our competitive position needs to become better, and that will reduce the overall margin that we make from what we sell. But we recognize that by becoming more competitive, we sell more, so we get some of the uptick. And but that's where we are. We've increased it by 60% year on year. We've rebuilt from a base of zero. And we're confident about the year ahead.

Michael Dennis: Yes, but if I'm wrong, then in the cash flow, the retail cash flow, wouldn't go from 1.3 billion down to 500 million ex the bank. So the cash flow turnaround is massive in the U.K. retail business according to your figures. Just so if you're right, the cash flow should be going up or sideways or.

Alan Stewart: Sorry, I'm not I'm genuinely not getting what you're saying because we've set out, we've shown.

Michael Dennis: One of them isn't right, either you're not making the cash from the retail operations in the way or the one off costs going through your business, the cost benefits are the cost benefits to the retail operating profit and the operating leverage is quite small, which would mean that in going forward, if retail sales don't pick up, then you don't have much operating leverage going forward, therefore, retail margins should go down.

Alan Stewart: Yes, but we're and we'll come back and talk about it next.

David Lewis: I'm getting the five minute so can I just check how many more questions there are in the room. I know Bruno's got 1. How many more burning questions because we're is that okay? Might what I suggest we do is we follow you in detail with Chris to try and triangulate the questions you've got. So should we is that it, are we now just Bruno? Perfect. Oh, two more. So yes, please, and then pass the microphone down here, Steve, yes?

Xavier Le Mené: Xavier Le Mené from Bank of America Merrill Lynch. One question about the international actually because we focused mainly on the U.K. So can you elaborate a bit more, it seems like U.K. being the focus, I think that international is less important to you? And then if you were to potentially look at the different countries, so can we get a bit of insight of where you think you're fully committed and where you're less committed?

David Lewis: Okay. So after the business review, we have a retail operation, which is U.K. and Ireland, Central Europe, Asia, right, we're committed to all. All right? We changed the management team so that he's responsible now completely for Central Europe, Tony for Asia; and Matt for the U.K. and Ireland, all right? We've got a plan as a business that creates value in all three of those businesses, right, going forward. First time we've had that in Tesco for quite a long while, right? The levers we need to pull, different in different places. If I talk about Central Europe, what we've got is we've got three markets in terms of Hungary, Czech and Slovak, which are growing, growing share, doing really very nicely. And we've had a competitive reaction in Poland because we had 18 months where we did really well and now we've seen the market reaction and we need to think about how best we do that. That's what Matt's on going to do. The fact that I was there this week -- last week thinking through those plans tell us we're going to respond in Poland and we have a plan that we have to deliver. In Asia, we see lots of growth opportunity and that's where Tony is. Thailand's our second largest business and indeed, our most accretive to margin. So there's a return to be had there, we're growing share there. The market is a little bit softer than we thought because of what's happened there, it's definitely a one-off. And we've made really quite a big turnaround in terms of the financial performance of the Malaysian business. So actually, there isn't any more focus here than there. I'm really quite happy with the portfolio we've got, with the management we've applied and the plans that we've got. We just got to get on and deliver them, all right? Absolutely no issue in terms of something becoming less in focus as a result of what we just talked about in the U.K. Okay? Bruno, last but not least.

Bruno Monteyne: Bruno Monteyne from Bernstein. Two for me. Could you comment a bit about how the market is changing? I mean, for at least three or four years, there was always somebody losing very, very badly in the market, one or two. Now all the big four are growing at least one, even though only 1 just -- fairly close at that, so -- and the discounters are still growing. So what's changing in the way customers are shopping and the way that retailers are competing that suddenly means everybody is doing relatively well? And the second one, you still have your margin target of 3.5% to 4% out there, [indiscernible] that's two years away from now, should we expect relatively equal pacing between today and then getting there?

David Lewis: So I think we're all still seeing a change in the dynamic of the marketplace. I think there are still sources of volume that are out there in terms of sources of business for both the big four and, indeed, at the discounters. But it's dynamic, right? And I'm a bit where Jason is, I'm going to wait until Easter's gone and have a look at the whole basket because at the minute, we're reading periods which are not like-for-like. And so what we should do is take a look post Easter and actually then have enough to say, has there been a shift that requires a change in approach from us? But at the minute, if I look at our business in terms of customers, if I look at the penetration, if I look at the frequency, and if I look at the basket, the dynamics have not changed massively from where we've been. I think the challenge for all is in the penetration as choice gets fuller, but we'll see, and that's why we need to build a more differentiated brand, i.e. reason why they're in Tesco and not somewhere else. But I think to your question, I think we should probably follow that up, probably in four, six, eight weeks' time because I think we'd be able to give you a better answer I think to your question. And do you want to?

Alan Stewart: Yes. Look, we've set out ambition. As you say, there's less time remaining between now and then than when we announced it six months ago, and we're aiming to improve our business year-on-year. And how that falls exactly, we can't give color to it, but it will be very surprising if where from 2.3% to 3.5% or 4% all happen in the final year. It will be really surprising.

David Lewis: I think, look, to Alan's point, I think what we can and what we should say is are we confident about the 3.5% or 4% even with the challenging environment? Yes, we are. Yes, we are. First step, another good step in the right direction, ahead of where we said we would be and, therefore, all of the things being equal, we should be more confident about getting there than less. And we are. We're not in the game of sort of giving detail month-by-month, year-by-year, quarter-by-quarter progression because I want to have the flexibility to deal with the market that you just talked about. But point-to-point, are we clear that by '19, '20 we get ourselves to that place? Yes, We're clear. And we're confident about this year. Right. Ladies and gents, thank you very much indeed. My parting thought for you is this