12 May 2017

 

Tesco PLC

 

Annual Report and Financial Statements and Notice of Annual General Meeting 2017

 

Further to the release of its preliminary results announcement on 12 April 2017, Tesco PLC (the "Company") announces that it has today published its Annual Report and Financial Statements 2017.  In addition, the Company announces that its Notice of Annual General Meeting 2017 has been sent to shareholders. The 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 16 June 2017.

 

The Company's Annual Report and Financial Statements 2017, Strategic Report 2017 and Notice of Annual General Meeting 2017 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 2017 ;

·     Strategic Report 2017 ;

·     Notice of Annual General Meeting 2017; and

·     Proxy Form for the 2017 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 12 April 2017 . That information, together with the information set out below, which is extracted from the Annual Report and Financial Statements 2017, 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 2017. Page and note references in the text below refer to page numbers and note references in the Annual Report and Financial Statements 2017. To view the preliminary results announcement, visit the Company's website: www.tescoplc.com .

 

Two videos to accompany this year's report, featuring John Allan, Chairman, and Dave Lewis, Group Chief Executive, are available to watch at www.tescoplc.com/ar2017 .  

 

Enquiries:                    Robert Welch

Company Secretary

Tesco PLC

Tesco House

Shire Park

Kestrel Way

Welwyn Garden City

Hertfordshire

AL7 1GA

 

Tel: 07793 222569

 

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 and systematic 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 those risks that we believe would threaten the Group's business model, future performance, solvency or liquidity.

 

The risk management process relies on our judgement of the risk likelihood and impact and on the development and monitoring of appropriate internal controls. We maintain a Group Risk Register of the principal risks faced by the Group and this is an important component of our governance framework and of how we manage our business.

 

Our risk management process is cascaded down the Group. The content of the Group Risk Register is considered and discussed through regular meetings with senior management and reviewed by the Executive Committee and the Board. Our process for identifying and managing risk is set out in more detail on page 56 of the Annual Report and Financial Statements 2017.

 

The table below sets out our principal risks, their link with our strategic drivers, their movement during the year and examples of relevant controls and 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 6 to 10. They do not comprise all 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. With respect to the particular risks related to Tesco Bank, in addition to the principal risk described, we also draw attention to the commentary on pages 3 and 30 addressing the incident of November 2016.

 

Principal risk	Risk movement	Key controls and mitigating factors
Customer
Failure to listen to our customers and to understand the changing marketplace leads to a loss of market share, as customer purchases are made with competitors. We are unable to build and sustain loyalty resulting in an adverse impact on our financial results.     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% Group margin 6. Innovation	We continue to focus on customer needs and placing our customer at the centre of our decision-making process.     No risk movement	Customer insight management is undertaken Group-wide to understand customer behaviours, expectations and experience. We monitor the effectiveness of these 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 strategically repositioned our business to focus on customers and are investing further in our customer proposition, reducing prices across our ranges and improving service with additional colleague hours. We have well established product development and quality management processes, which keep the needs of our customers central to our decision making. Ongoing monitoring allows us to react quickly and appropriately.
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% Group margin 6. Innovation	Achieving our transformation goals continues to demand further effort and investment as both internal and external expectations of transformation have increased.   Risk increasing	The Executive Committee have responsibility and oversight for all transformation activities. The multiple transformation programmes, including Finance, People, IT, UK, Central Europe and new Group structures have been designed to simplify our business and clarify accountability. Transformation programmes are supported by experienced resource from within the business and externally as required reporting directly to the Executive Committee.
Liquidity
Business performance does not 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% Group margin 5. Maximise value from property	We have imposed increased discipline and strategic planning across all of our Treasury activities.     No risk movement	We maintain an infrastructure of policies and reports to ensure discipline over, and oversight around, liquidity matters. There are specific treasury and debt-related policies in place and communicated across the Group. Reporting activity includes the provision of rolling liquidity reports, forecasts and cash flow, and treasury performance reporting of key metrics. These reports are regularly reviewed by the Board, Executive Committee and management. We are managing corporate debt through the implementation of a strategy to reduce our debt level. Updates on the funding strategy are regularly provided to the Pension Trustees, with whom there is regular communication and engagement. 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. The Audit Committee reviews and approves annually the going concern and viability statements and reports into the Board.
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 we engage in market scanning and competitor analysis to refine our customer proposition.
Brand, reputation and trust
Failure to manage our brand means we are unable to consolidate loyalty and rebuild trust, creating a perception among customers, colleagues, communities and suppliers that result in a loss of market share or unfavourable effects on our ability to do business.   Strategic drivers: 1. A differentiated brand	A broad range of factors impacted our brand, reputation and trust in the year and, on balance, the level of risk remains unchanged.     No risk movement	We have developed communication and engagement programmes to listen to our stakeholders and reflect their needs in our plans. The development of new corporate responsibility goals has also been aligned with customer priorities and our brand. We maximise the value and impact of our brand with the advice of specialist external agencies and in-house marketing expertise, including a Digital Marketing team. The Digital Marketing team manages activities and content relating to social media with country teams, to issue considered responses to legitimate customer feedback. Maintaining a differentiated brand is one of our strategic priorities and our Group processes, policies and our Code of Business Conduct, which is refreshed annually, set out how we can make the right decisions for our customers, colleagues, suppliers, communities and investors. There is a Board-level Corporate Responsibility Committee in place to oversee all corporate responsibility activities and initiatives.
Technology
A significant failure of IT infrastructure or key IT systems results in loss of information, inability to operate effectively, financial or regulatory penalties and negatively impacts our reputation. Failure to build in 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 continue.   Risk increasing	Our technology strategy is becoming fully aligned with the overall Group strategy, directed investment in technology resilience is being evaluated, and greater adoption of cloud computing technologies provides further resilience. We have governance processes in place around new system implementations, including change management controls. Closer alignment of business continuity and technology disaster recovery via the planned establishment of a business continuity forum.
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	In a climate where data risk is increasing globally and regulatory expectations are expanding, we hold personal data in a number of locations. The data security incident experienced at Tesco Bank highlights the rising profile for this risk globally.     Risk increasing	We have a multi-year data security governance and oversight plan in place, including a Privacy Executive Committee, Group Compliance Committee, Business Unit Compliance Committees and the Senior Data Usage Governance Committee to help ensure focus on relevant laws and regulations. These structures are supported by a Group-wide information security blueprint as well as relevant data security policies across our businesses. Our Cyber Security team investigates and mitigates the risks of cyber-attack. We have established a third party penetration testing plan to enable ongoing identification of assessment of vulnerabilities. A programme of compliance monitoring and review has been rolled out with training across our businesses - we have active monitoring processes to identify and deal with IT security incidents. We also draw attention to the commentary on pages 3 and 30 addressing the Tesco Bank incident of November 2016.
Political, regulatory and compliance
This has been renamed to include political risk reflecting the challenges faced in the various markets in which we operate. Failure to comply with requirements as the regulatory environment becomes more restrictive, due to changes in the global political landscape, results in fines, criminal penalties, consequential litigation and an adverse impact on our reputation; financial results or unfavourable effects on our ability to do business. Change in the global political environment means there is a push towards regulation of foreign investors and a favouring of local companies. These changes can have an adverse impact on the Group.   Strategic drivers: 1. A differentiated brand	A changing political environment has resulted in increased regulatory intervention in our markets around the world.   Risk increasing	Wherever we operate we aim to contribute to important discussions in public policy and engage with Government and regulatory bodies to represent the views of our customers, colleagues and communities; and to ensure that the impact of political and regulatory changes is incorporated into our strategic planning. Group and Country Compliance Committees monitor and guide legal and regulatory compliance with support from our Group Regulatory Ethics and Compliance team, and country developments are monitored by our local management teams. We also have comprehensive guidance across the Group to ensure compliance with the UK Bribery Act (and applicable local legislation). Our Group Code of Business Conduct has been recently updated and relaunched with appropriate training across the Group. This sets out clear behavioural guidance, consistent with our values and is supported by an externally managed whistleblowing service (Protector Line) to allow colleagues to report any instances of inappropriate behaviour. The tax environment in each location is evaluated as part of the regulatory landscape in each location of operations. The Group has tax policies and oversight for each country it operates in. The Tesco Bank Board oversees Tesco Bank's compliance with regulatory requirements.
Safety
Failure to meet safety standards in relation to workplace or product, resulting in death, injury or illness to customers, colleagues, or third parties.   Strategic drivers: 1. A differentiated brand	We continue to focus our efforts on controls to ensure workplace and product safety.   No risk movement	Our dedicated Quality Standards team undertakes horizon scanning to keep abreast of and inform new product safety legislation. Standards for health and safety are defined for all of our sites. Health and safety monitoring processes are in place and we have created a Group team whose primary objective is to ensure that safety standards are met. Global Product Safety Standards are communicated to our suppliers and tested through our audit programmes.
People
Failure to attract, motivate and retain the most talented colleagues and develop the required culture, leadership and behaviours to meet our purpose, resulting in an inability to achieve our business objectives.   Strategic drivers: 1. A differentiated brand 6. Innovation	Our people are our most valuable asset. We continue to advance diversity and inclusion and see a strong improvement in colleague engagement.   Risk decreasing	The Executive Committee meets regularly to review and monitor people policies and procedures and talent development. Objectives and remuneration arrangements for senior management are approved by this Committee. Objectives and remuneration arrangements form part of a coherent and consistent remuneration framework and have been redesigned to promote appropriate behaviours as well as the delivery of results. Talent planning, training and people development processes are embedded across the Group. We seek to understand and respond to colleagues' needs by listening to their feedback from open conversations, social media, colleague surveys and performance reviews. We have implemented ethical rules, guidelines, policies and procedures in line with our values. Training around our Code of Business Conduct has been recently updated and relaunched across the Group.
Tesco Bank
Tesco Bank is exposed to a number of risks, the most significant of which are credit risk, operational risk, liquidity and funding risk, market risk, and legal and regulatory compliance risk.   Strategic drivers: 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, its strategic priorities, long-term plan, capital planning, liquidity management and stress testing. 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 CFO/Audit Committee Chairman. A member of the Tesco PLC Board is also a member of the Bank's Board. In November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack. The Group's priority throughout was to ensure customers' accounts were protected and that it communicated with customers immediately and transparently, reassuring customers that there was no data loss or breach of systems. The Group has undertaken immediate remedial action and an independent review of the issue and continues to work closely with the authorities and regulators on this incident.

 

Booker merger

In January 2017, the boards of Tesco PLC and Booker Group PLC, announced their agreement, subject to regulatory approval, shareholder approval and other conditions to a merger. As well as the risk of conditions to closing not being met, the ability to realise the expected strategic and financial objectives is subject to a successful and timely integration process.

 

Brexit

The result of the referendum on the United Kingdom's membership of the European Union leading to the departure of the UK from the EU (Brexit), could cause disruptions to and create uncertainty around our business, including affecting our relationships with our existing and future customers, suppliers and colleagues. These disruptions and uncertainties could have an adverse effect on our business, financial results and operations. As further details of the Brexit terms emerge, the management will continue to assess the potential risks and impacts of these on Tesco stakeholders.

 

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
	2017 £m	2016 £m	2017 £m	2016 £m
Sales to related parties	418	408	-	-
Purchases from related parties	416	496	16	14
Dividends received	17	32	11	9

 

 

Sales to related parties consists of services/management fees and loan interest.

 

Purchases from related parties include £286m (2016: £379m) 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
	201 7 £m	2016 £m	2017 £m	2016 £m
Amounts owed to related parties	17	13	-	1
Amounts owed by related parties	16	28	-	3
Loans to related parties (net of deferred profits)*	137	149	-	-
Loans from related parties (Note 21)	6	6	-	-

* Loans to related parties of £137m (2016: £149m) are presented net of deferred profits of £54m (2016: £57m) 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:

 

	2017 £m	2016 £m
Salaries and short-term benefits	13	20
Pensions and cash in lieu of pensions	2	3
Share-based payments	17	9
Joining costs and loss of office costs	1	5
	33	37
Attributable to:
The Board of Directors (including Non-executive Directors)	12	11
Executive Committee (members not on the Board of Directors)	21	26
	33	37

 

 

Of the key management personnel who had transactions with Tesco Bank during the financial year, the following are the balances at the 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 25 February 2017	6	1	4	-
At 27 February 2016	11	1	8	-

 

 

Statement of Directors' responsibilities

 

In compliance with DTR 4.1.12R, the Annual Report and Financial Statements 2017 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 2017 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 12 April 2017.

 

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 34 and 35 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.