Last checked at 10 May 2018 07:00
10 May 2018
Tesco PLC
Annual Report and Financial Statements and Notice of Annual General Meeting 2018
Further to the release of its preliminary results announcement on 11 April 2018, Tesco PLC (the "Company") announces that it has today published its Annual Report and Financial Statements 2018. In addition, the Company announces that its Notice of Annual General Meeting 2018 has been sent to shareholders. The 2018 Annual General Meeting will be held at ExCeL London, One Western Gateway, Royal Victoria Dock, London E16 1XL at 2.00 p.m. on Friday 15 June 2018.
The Company's Annual Report and Financial Statements 2018, Strategic Report 2018 and Notice of Annual General Meeting 2018 can be viewed on the Company's website at www.tescoplc.com.
In accordance with Listing Rule 9.6.1R, copies of the following documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM:
· Annual Report and Financial Statements 2018;
· Strategic Report 2018;
· Notice of Annual General Meeting 2018; and
· Proxy Form for the 2018 Annual General Meeting.
The Company's preliminary consolidated financial information and information on important events that have occurred during the year, and their impact on the financial statements were included in the Company's preliminary results announcement on 11 April 2018. That information, together with the information set out below, which is extracted from the Annual Report and Financial Statements 2018, constitute regulated information, which is to be communicated to the media in full unedited text through a Regulatory Information Service in accordance with the FCA's Disclosure Guidance and Transparency Rules ("DTR"), Rule 6.3.5R. This announcement is not a substitute for reading the full Annual Report and Financial Statements 2018. Page and note references in the text below refer to page numbers and note references in the Annual Report and Financial Statements 2018. To view the preliminary results announcement, visit the Company's website: www.tescoplc.com.
Enquiries: Robert Welch
Company Secretary
Tesco PLC
Tesco House
Shire Park
Kestrel Way
Welwyn Garden City
Hertfordshire
AL7 1GA
Tel: 07793 222569
LEI Number: 2138002P5RNKC5W2JZ46
Principal risks and uncertainties
We have an established risk management process to identify, assess and monitor the principal risks that we face as a business. We have performed a robust review of those risks that we believe could seriously affect the Group's performance, future prospects, reputation or its ability to deliver against its priorities. This review included an assessment of those risks that we believe would threaten the Group's business model, future performance, solvency or liquidity.
Following the review of the principal risks and our strategic drivers we have included two additional shorter-term risks. These relate to the ongoing uncertainty and approach to Brexit, and the timely synergy realisation and integration of Booker into the wider Group, set out on pages 24 and 25. Additionally, we have reframed our product safety and supply chain risks, currently reflected at the business unit level to form a new principal risk responsible sourcing and supply chain, set out on page 24. This risk relates to the social and environmental challenges facing our business, our customers and our communities. Our approach is outlined in our Little Helps Plan on pages 16 to 21.
The risk management process relies on our assessment of the risk likelihood and impact and on the development and monitoring of appropriate internal controls. Our process for identifying and managing risk is set out in more detail on page 43.
We maintain risk registers for the principal risks faced by the Group and this is an important component of our governance framework and how we manage our business. As part of our risk management process, risks are reviewed as a top down and bottom up activity at the Group and the business unit level. The content of the risk registers are considered and discussed through regular meetings with senior management and reviewed by the Executive Committee. Each principal risk is reviewed at least annually by the Board.
The table below sets out our principal risks, their link to our strategic drivers, their movement during the year and a summary of key controls as well as any mitigating factors. The Board considers these to be the most significant risks faced by the Group that may impact the achievement of our six strategic drivers as set out on pages 8 and 9. They do not comprise all of the risks associated with our business and are not set out in priority order. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business.
Principal risk | Risk movement | Key controls and mitigating factors |
Customer † | ||
Failure to have a coherent, connected and engaging customer journey and in-store experience will lead us to be less competitive and lose market share.
Strategic drivers: 1. A differentiated brand 2. Reduce operating costs by £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5% - 4.0% margin 6. Innovation
| Ongoing fragmentation of our customer engagement channels exposes us to an increased risk of diluting our customer experience and ability to differentiate our brand.
Risk increasing | We now have a more consistent approach to building impactful customer propositions, offering high quality, competitive value, while improving the customer experience. Propositions are now developed across channels and geographies to ensure consistency in the engagement with customers. Group-wide customer insight management is undertaken to understand customer behaviour, expectations and experience, and leverage more consistently across the different parts of the business.
We monitor the effectiveness of our processes by regular tracking of our business, and those of our competitors, against measures that customers tell us are important to their shopping experience. We have well established product development and quality management processes, which keep the needs of our customers central to our decision making. |
Transformation† | ||
Failure to achieve our transformation objectives due to poor prioritisation, ineffective change management and a failure to understand and deliver the technology required, resulting in an inability to progress sufficiently quickly to maintain or increase operating margin and generate sufficient cash to meet business objectives.
Strategic drivers: 2. Reduce operating costs by £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5% - 4.0% margin 6. Innovation
| Achieving our transformation goals continues to demand further effort and investment, especially with regard to technology changes, as both internal and external expectations have increased.
Risk increasing
| We have multiple transformation programmes underway to simplify our business with clear market strategies and business plans in place. Our service model processes provide a framework for implementing change. We have appropriate executive level oversight for all the transformation activities.
Transformation programmes are supported by experienced resources from within the business and externally as required. |
Liquidity† | ||
Failure of our business performance to deliver cash as expected; access to funding markets or facilities is restricted; failures in operational liquidity and currency risk management; Tesco Bank cash call; or adverse changes to the pension deficit funding requirement, create calls on cash higher than anticipated, leading to impacts on financial performance, cash liquidity or the ability to continue to fund operations.
Strategic drivers: 2. Reduce operating costs by £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5% - 4.0% margin 5. Maximise value from property
| We have a disciplined and policy-based approach to treasury management. We have reduced our debt levels and have improving debt metrics. Liquidity levels and sources of cash are regularly reviewed and the Group maintains access to committed credit facilities.
Risk decreasing
| We maintain an infrastructure of systems, policies and reports to ensure discipline and oversight on liquidity matters, including specific treasury and debt-related issues. Our treasury policies are communicated across the Group and are regularly reviewed by the Board, Executive Committee and management.
The Group's funding strategy is approved annually by the Board and includes maintaining appropriate levels of working capital, undrawn committed facilities and access to the capital markets. The Audit Committee reviews and approves annually the viability and going concern statements and reports into the Board.
There is a long-term funding framework in place for the pension deficit and there is ongoing communication and engagement with the Pension Trustees.
While recognising that Tesco Bank is financially separate from Tesco PLC, there is ongoing monitoring of the activities of Tesco Bank that could give rise to risks to Tesco PLC.
|
Competition and markets† | ||
Failure to deliver an effective, coherent and consistent strategy to respond to our competitors and changes in macroeconomic conditions in the operating environment, resulting in a loss of market share and failure to improve profitability.
Strategic drivers: 1. A differentiated brand 2. Reduce operating costs by £1.5bn 6. Innovation
| We continue to face the ongoing challenge of a changing competitive landscape and price pressure across most of our markets.
No risk movement | Our Board actively develops and regularly challenges the strategic direction of our business and we actively seek to be competitive on price, range and service, as well as developing our online and multiple formats to allow us to compete in different markets.
Our Executive Committee and operational management regularly review markets, trading opportunities, competitor strategy and activity and, additionally, we engage in market scanning and competitor analysis to refine our customer proposition. |
Brand, reputation and trust† | ||
Failure to create brand reappraisal opportunities to improve quality, value and service perceptions thus failing to rebuild trust in our brand.
Strategic driver: 1. A differentiated brand
| A broad range of factors impact our brand, reputation and trust in the year and, on balance, the level of risk remains unchanged.
No risk movement | We continue to develop communication and engagement programmes to listen to our customers and stakeholders and reflect their needs in our plans. This includes the supplier viewpoint programme and the integration of local community and local marketing programmes. We continue to maximise the value and impact of our brand with the advice of specialist external agencies and in-house marketing expertise. Maintaining a differentiated brand is one of our strategic priorities and our Group processes, policies and our Code of Business Conduct sets out how we can make the right decisions for our customers, colleagues, suppliers, communities and investors. Our Corporate Responsibility Committee is in place to oversee all corporate responsibility activities and initiatives ensuring alignment with customer priorities and our brand. Further details can be found on page 39. |
Technology | ||
Failure of our IT infrastructure or key IT systems result in loss of information, inability to operate effectively, financial or regulatory penalties and negatively impacts our reputation. Failure to build resilience capabilities at the time of investing in and implementing new technology.
Strategic drivers: 1. A differentiated brand 6. Innovation
| Our technology landscape continues to require further investment as external threats increase and the challenges around securing the right capability to deliver change continues.
Risk increasing
| We continue to assess our technology resilience capabilities and have identified opportunities to make significant enhancements. We are progressing greater adoption of cloud computing technologies to provide further resilience.
We have combined governance processes covering both technology disaster recovery and business continuity to ensure alignment.
Our technology security programme is designed to continuously strengthen our infrastructure and Information Technology General Controls. |
Data security and data privacy† | ||
Failure to comply with legal or regulatory requirements relating to data security or data privacy in the course of our business activities, results in reputational damage, fines or other adverse consequences, including criminal penalties and consequential litigation, adverse impact on our financial results or unfavourable effects on our ability to do business.
Strategic drivers: 1. A differentiated brand 6. Innovation
| We continue to enhance our data security to keep pace with increasing threats on a global scale. As a retail organisation we hold a large amount of data and are working to ensure we comply with the General Data Protection Regulations.
No risk movement | Our multi-year data security programme has been driving the enhancement of our security capabilities. We continue to work towards meeting regulatory requirements and regularly report the status of the security programme to governance and oversight committees.
We have established a team to detect, report and respond to security incidents in a timely fashion. We have a third-party supplier assurance programme focusing on data security and privacy risks.
We are making significant investment across the Group to ensure we comply with the requirements of the General Data Protection Regulation (GDPR) in Europe, and any other relevant legislation globally. We put our customers and our colleagues at the heart of all decisions we make in relation to the processing of personal data.
Our privacy compliance programme, driven by the Group Privacy Officer continues to drive compliance throughout our global business. |
Political, regulatory and compliance† | ||
Failure to comply with legal and other requirements as the regulatory environment becomes more restrictive, due to changes in the global political landscape, results in fines, criminal penalties for Tesco or colleagues, consequential litigation and an adverse impact on our reputation, financial results, and/or our ability to do business.
Long-term changes in the global political environment mean that in some markets there is a push towards greater regulation of foreign investors and a favouring of local companies.
Strategic driver: 1. A differentiated brand
| We continue to monitor and improve our controls to ensure we comply with legal and regulatory requirements across the Group. Given the ongoing uncertainty around Brexit, we have separated this out as an independent risk for the current year.
No risk movement | Wherever we operate, we aim to ensure that the impact of political and regulatory changes is incorporated in our strategic planning. We manage regulatory risks through the use of our risk management framework and we have implemented compliance programmes to manage our most important risks (e.g. bribery and competition law).
Our compliance programmes ensure that sustainable controls are implemented to mitigate the risk and we conduct assurance activities for each risk area.
Our Code of Business Conduct is supported by new starter and annual compliance training and other tools such as our whistleblowing hotline.
The engagement of leadership and senior management is critical in the successful management of this risk area and leaders provide clear tone from the top for colleagues. |
Healthy and safety | ||
Failure to meet safety standards in relation to workplace, resulting in death or injury to our colleagues or third parties.
Strategic driver: 1. A differentiated brand
| We continue to focus our efforts on controls which ensure colleague and customer safety.
No risk movement | We have a business-wide, risk-based safety framework which defines how we implement safety controls to ensure that colleagues, contractors and customers have a safe place to work and shop.
Each business is required to maintain a Safety Improvement Plan to document and track enhancements. Overall governance is provided by the Group Risk and Compliance Committee, with each business unit operating their own Health and Safety Committee.
Our annual colleague survey programme allows us to measure safety behaviour improvements Group-wide. The survey results alongside other inputs through the year, informs the delivery of safety initiatives and targeted communications. |
People | ||
Failure to attract and retain the required capability and continue to evolve our culture could impact delivery of our purpose and strategic drivers.
Strategic drivers: 1. A differentiated brand 6. Innovation
| We continue to operate in a fast changing and complex legislative environment. Market competitiveness and volatility affects our ability to attract and retain key specialist talent thereby increasing this risk.
Risk increasing
| We seek to understand and respond to colleagues' needs by listening to their feedback from open conversations, social media, colleague surveys and performance reviews.
Talent planning and people development processes are well established across the Group. Talent and succession planning is discussed annually by the Board and three times a year at the Executive Committee and Nominations and Governance Committee. The Remuneration Committee agrees objectives and remuneration arrangements for senior management, and the current remuneration policy is due for review at this year's Annual General Meeting.
There is a change programme in place, supported by Executive Committee and Audit Committee governance, to deliver technology and processes that are simple, helpful and trusted to all our markets. |
Responsible sourcing and supply chain | ||
Failure to meet product safety standards resulting in death, injury or illness to customers. Failure to ensure that products are sourced responsibly and sustainably across the supply chain (including fair pay for workers, adhering to human rights, clean and safe working environments and that all social and environmental standards are met), leading to breaches of regulations, illness, injury or death to workers and communities.
Strategic drivers: 1. A differentiated brand 6. Innovation
| New principal risk | We have product standards, policies and guidance covering both food and non-food, as well as goods and services not for resale, ensuring that products are safe, legal and of the required quality, and that the human rights of workers are respected and environmental impacts are managed responsibly. Refer to pages 16 to 21 for specific actions highlighted under our Little Helps Plan.
Supplier audit programmes are in place to monitor product safety, traceability and integrity, human rights and environmental standards, including unannounced specification inspections of suppliers and facilities.
We run colleague training programmes on food and product safety, responsible sourcing, hygiene controls and provide support for stores. We also provide targeted training for colleagues and suppliers dealing with specific challenges such as modern slavery. Our store audit programme seeks to ensure we comply with safety and legal requirements. |
Booker synergy realisation and integration | ||
Failure to successfully integrate Booker is dependent upon a number of factors, leading to a risk to our planned synergy commitments and value creation.
Strategic drivers: 1. A differentiated brand 2. Reduce operating costs by £1.5bn 3. Generate £9bn cash from operations 4. Maximise the mix to achieve a 3.5% - 4.0% margin 5. Maximise value from property 6. Innovation
| New principal risk | A detailed synergy realisation and integration plan is being implemented with period-end reporting and tracking of targeted benefits and key performance indicators.
For further information on the Tesco and Booker merger see page 7. |
Brexit† | ||
Failure to prepare for the UK's departure from the EU causes disruption to and creates uncertainty around our business including: our ability to recruit; as well as impacting our relationships with existing and future customers, suppliers and colleagues. These disruptions and uncertainties could have an adverse effect on our business, financial results and operations.
Strategic driver: 1. A differentiated brand
| New principal risk | The nature of the UK's future trading relationship with the EU is still to be determined. We continue to contribute to important public policy discussions and engage with government, regulatory bodies and industry.
As further details of the terms of our departure from the EU emerge, we will continue to assess and monitor the potential risks and impacts of these on Tesco customers, colleagues and shareholders and take appropriate measures. |
Tesco Bank | ||
Tesco Bank is exposed to a number of risks, the most significant of which are operational risk, regulatory risk, credit risk, capital risk, funding and liquidity risk, market risk and business risk.
Strategic driver: 1. A differentiated brand
| The Bank continues to actively manage the risks to which it is exposed.
No risk movement | The Bank has a defined risk appetite, which is approved and reviewed regularly by both the Bank's Board and the Tesco PLC Board. The risk appetite defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business and its strategic priorities, long-term plan, capital planning and liquidity management. Adherence to risk appetite is monitored through a series of ratios and limits.
The Bank operates a risk management framework that is underpinned by governance, policies, processes and controls, reporting, assurance and stress testing.
There is Bank Board risk reporting throughout the year, with updates to the Tesco PLC Audit Committee by the Bank's Chief Financial Officer, Chief Risk Officer and Audit Committee Chairman. A member of the Tesco PLC Board is also a member of the Bank's Board. |
† Indicates that the principal risk has been included as part of the longer term viability scenarios.
Related Party Transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below:
Transactions
| Joint ventures | Associates | ||
| 2018 £m | 2017 £m | 2018 £m | 2017 £m |
Sales to related parties | 474 | 418 | - | - |
Purchases from related parties | 396 | 416 | 18 | 16 |
Dividends received | 15 | 17 | 11 | 11 |
Injection of equity funding | 21 | - | - | - |
Sales to related parties consists of services/management fees and loan interest.
Purchases from related parties include £275m (2017: £286m) of rentals payable to the Group's joint ventures (including those joint ventures formed as part of the sale and leaseback programme).
Transactions between the Group and the Group's pension plans are disclosed in Note 27.
Balances
| Joint ventures | Associates | ||
| 2018 £m | 2017 £m | 2018 £m | 2017 £m |
Amounts owed to related parties | 20 | 17 | - | - |
Amounts owed by related parties | 27 | 16 | - | - |
Loans to related parties (net of deferred profits)* | 138 | 137 | - | - |
Loans from related parties (Note 21) | 6 | 6 | - | - |
* Loans to related parties of £138m (2017: £137m) are presented net of deferred profits of £54m (2017: £54m) historically arising from the sale of property assets to joint ventures.
A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships (Accounts) Regulations 2008 (Regulations) apply. The financial statements for those partnerships have been consolidated into these financial accounts pursuant to Regulation 7 of the Regulations.
Transactions with key management personnel
Members of the Board of Directors and Executive Committee of Tesco PLC are deemed to be key management personnel.
Key management personnel compensation for the financial year was as follows:
| 2018 £m | 2017 £m |
Salaries and short-term benefits | 17 | 13 |
Pensions and cash in lieu of pensions | 2 | 2 |
Share-based payments | 19 | 17 |
Joining costs and loss of office costs | 4 | 1 |
| 42 | 33 |
Attributable to: |
|
|
The Board of Directors (including Non-executive Directors) | 12 | 12 |
Executive Committee (members not on the Board of Directors) | 30 | 21 |
| 42 | 33 |
Of the key management personnel who had transactions with Tesco Bank during the financial year, the following are the balances at the financial year end:
| Credit card, mortgage and personal loan balances | Current and saving deposit accounts | ||
| Number of key management personnel | £m | Number of key management personnel | £m |
At 24 February 2018 | 7 | 1 | 5 | - |
At 25 February 2017 | 6 | 1 | 4 | - |
Statement of Directors' responsibilities
In compliance with DTR 4.1.12R, the Annual Report and Financial Statements 2018 contains a Directors' responsibility statement. This is reproduced below, in line with DTR 6.3.5R. The statement relates to and is extracted from the Annual Report and Financial Statements 2018 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 11 April 2018.
The Directors are required by the Companies Act 2006 to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Group and the Company as at the end of the financial year, and of the profit or loss of the Group for the financial year. Under that law, the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and have elected to prepare the Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 101 'Reduced Disclosure Framework' (UK Accounting Standards and applicable law).
In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and prudent;
· state whether IFRSs as adopted by the EU and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and Parent Company financial statements respectively;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
· prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company, and which enable them to ensure that the financial statements and the Directors' remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They also have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and the Company, and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's and the Company's performance, business model and priorities. Each of the Directors, whose names and functions are set out on pages 28 and 29 confirm that, to the best of their knowledge:
· the financial statements, which have been prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and
· the Strategic report contained within this document includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that the Group faces.