Annual Report 2015 and Notice of AGM 2015

RNS Number : 8023N

Tesco PLC

21 May 2015

 



21 May 2015

Tesco PLC

Annual Financial Report and Notice of Annual General Meeting 2015

Tesco PLC (the "Company") announces that its Notice of Annual General Meeting 2015 has been sent to shareholders. The Annual General Meeting will be held at The QEII Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00 a.m. on Friday 26 June 2015.

The Notice of Annual General Meeting 2015, together with the Company's Annual Report and Financial Statements 2015 and Strategic Report 2015, 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 2015;

·     Strategic Report 2015;

·     Notice of Annual General Meeting 2015; and

·     Proxy Forms for the 2015 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 22 April 2015. That information, together with the information set out below, which is extracted from the Annual Report and Financial Statements 2015, constitute regulated information, which is to be communicated to the media in full unedited text through a Regulatory Information Service in accordance with Disclosure and Transparency Rule ("DTR") 6.3.5R. This announcement is not a substitute for reading the full Annual Report and Financial Statements 2015. Page and note references in the text below refer to page numbers and note references in the Annual Report and Financial Statements 2015. To view the preliminary results announcement, visit the Company's website: www.tescoplc.com

Enquiries:                    Paul Moore

Company Secretary

Tesco PLC

Delamare Road

Cheshunt

Hertfordshire

EN8 9SL

Telephone: [phone]

Principal risks and uncertainties

We have an established risk management process to identify the principal risks that we face as a business. The risk management process relies on our judgement of the risk likelihood and impact and also developing and monitoring appropriate controls. We maintain a Group Key Risk Register of the principal risks faced by the Group and this is an important component of our governance framework and how we manage our business. Our risk management process is cascaded down the Group. The content of the Group Key Risk Register is considered and discussed through regular meetings with senior management and review by the Executive Committee and the Board. Our process for identifying and managing risk is set out in more detail on page 44 of the Annual Report and Financial Statements 2015.

The table below sets out our key risks, 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 our Group that may impact the achievement of our three strategic priorities as set out on page 3 of the Annual Report and Financial Statements 2015. 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.

In September 2014, we identified an overstatement of the expected financial results. This is now the subject of an investigation by the Serious Fraud Office and civil proceedings in the United States. Details can be found on page 33 and in Note 32 on page 136 of the Annual Report and Financial Statements 2015. There are significant uncertainties as to the outcome of the existing investigation and proceedings, as to whether further proceedings may be brought against the Group in connection with the overstatement of the expected financial results and as to whether any proceedings brought against the Group would be likely to have a significant effect on the results of its operations or its financial condition.

Principal risks	Key controls and mitigating factors
Customer (Risk Movement: no risk movement)
If we do not meet customer needs and compete on price, product range, quality and service in the competitive UK and overseas retail markets, then we lose our share of customer purchases By not considering the customer at the heart of our decision-making processes, we adversely impact our relationship with customers	·     We have strategically re-positioned our business to focus on the customer ·     We are investing further in our customer proposition, reducing prices across our ranges and improving service with additional colleague hours ·     Our performance is tracked within our business against measures that customers tell us are important to their shopping experience ·     Customer perceptions of Tesco and our competitors are regularly monitored to allow us to react quickly and appropriately
Financial strategy (Risk Movement: risk increasing)
There is a risk that the financial strategy is unclear or unsustainable Weak performance could put further pressure on free cash flow and impact our ability to improve our credit rating Our ability to operate successfully in international markets may be restricted if we cannot get the returns required in each market and this could adversely impact our profitability There is a risk that future legal and regulatory changes to the pension scheme could introduce more onerous requirements and increase our financial liability and that the deficit on the existing scheme could increase due to changes in assumptions on inflation, mortality and discount rates applied in determining liabilities of the scheme and the performance of its assets Investor support may be impacted if it takes longer than expected to demonstrate that our strategy is achieving the turnaround	·     Strategic matters are regularly reviewed by the Executive Committee and Board and we seek external advice as required ·     We have clear processes for the evaluation and identification of underperforming assets to ensure that appropriate action is taken ·     Our plans and budgets are developed and presented to our Executive Committee and Board for approval to ensure targets and objectives are clear and consistent ·     Our Group Property strategy ensures that there is a clear plan to address and control retail space, re-purpose space effectively where needed and ensure the right balance between freehold and leasehold space ·     We are consulting on the closure of our UK pension scheme to all future accrual which, if approved, would stop the future growth of liabilities and significantly reduce liability risk in the scheme ·     External expert advisors and the pension scheme Trustee are fully engaged to consider the funding position and fund performance of the pension scheme as well as the impact of legislative and regulatory changes ·     There has been a triennial revaluation of the pension scheme assets and liabilities in the year and a deficit funding plan has been agreed with the Trustee ·     We engage regularly with our investors to communicate details of our strategy and plans ·     Further detail on the management of financial risks is set out on page 25 and in Note 22 on page 120 of the Annual Report and Financial Statements 2015
Brand, reputation and trust (Risk Movement: risk increasing)
Our brand will suffer if we do not rebuild trust and transparency in our business If we cannot be firm in the face of ethical, legal, moral or operational challenges, our reputation may be damaged	·     Rebuilding trust and transparency in our brand is one of our three strategic priorities ·     Our Group processes and policies set out how we can make the right decisions for our customers, colleagues, suppliers, communities and investors ·     We have developed communication and engagement programmes to listen to our stakeholders and reflect their needs in our plans ·     We maximise the value and impact of our brand with the advice of specialist external agencies and in-house marketing expertise ·     We are developing new Corporate Responsibility goals that are aligned with customer priorities and our brand
Data security and privacy (Risk Movement: risk increasing)
Increasing risks of cyber-attack threaten the security of customer, colleague and supplier data We must ensure that we understand the types of data that we hold and secure it adequately to manage the risk of data breaches	·     We have active monitoring processes to identify and deal with IT security incidents ·     A new Cyber Security team has been established to investigate and mitigate the risks of cyber-attack ·     A Group-wide Information Security Blueprint has been rolled out across our businesses ·     There is a programme of compliance monitoring and review being rolled out with training across our businesses ·     A programme to review the use, storage and security of customer data is in progress
Transformation (Risk Movement: new)
If the scale of the change across our business disrupts our focus, there is a risk that we will not transform the business to where it needs to be There is a risk that we underestimate the wider impacts of the changes that we are making	·     There is Executive sponsorship of the Transformation programme with the creation of a Transformation Director role ·     New Group structures have been designed to simplify our business and clarify accountability ·     A new Programme Management Office has been established to manage the Transformation programme and will be supported by experienced resource from within the business and externally as required
Competition and markets (Risk Movement: risk increasing)
If we fail to address the differing challenges of the budget retailers, the premium retailers and online entrants, it may adversely impact our market share and profitability	·     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 units regularly review markets, trading opportunities and competitor strategy and activity
Performance (Risk Movement: no risk movement)
If our strategy is not effectively communicated or implemented, our business may underperform against plan and competitors The delivery of long term plans may be impacted if the business focuses on short term targets only	·     Our Board, Executive Committee and operational units meet regularly to review performance risks ·     All businesses have targets based on a new balanced scorecard of performance against KPIs and financial targets. Plans are monitored and reviewed regularly by the Executive Committee and the Board ·     An ongoing communication process informs our colleagues about the long term strategy and ensures that they understand their part in it ·     There are clear guidelines and policies set out to ensure that there is an appropriate focus on balance between short term and longer term delivery
Political and regulatory (Risk Movement: risk increasing)
In each country in which we operate, we may be impacted by legal and regulatory changes, increased scrutiny from competition authorities and political changes that affect the retail market The regulatory landscape is becoming more restrictive in many markets and may impact our trading	·     We engage with government and regulatory bodies to represent the views of our customers, colleagues and communities and to manage the impact of political and regulatory changes ·     We aim to contribute to important discussions in public policy wherever we operate ·     Country developments are monitored by our local management teams ·     Group and country Compliance Committees monitor and guide legal and regulatory compliance with support from our Group Regulatory Ethics and Compliance team ·     The Tesco Bank Executive and Treating Customers Fairly Board oversee Tesco Bank's compliance with regulatory requirements
Product (Risk Movement: no risk movement)
Our business may suffer if we fail to work with our suppliers to ensure that our products are designed and delivered to meet a high standard and to ensure we can trace their provenance If we do not build mutual and trusting relationships with our suppliers, this could impact our range and price proposition If we do not manage our supply chain, we may risk not being able to ensure the quality and security of product supply for customers	·     Group and country Compliance Committees have been re-structured to simplify the identification and monitoring of the risks associated with products, suppliers and operations ·     We publish results of internal testing (e.g. provenance tests of content in our food) and we have in place ethical trading teams working with suppliers ·     Appropriate controls are in place around: product development; supplier management, including the introduction of a new Supplier Feedback forum and an independent Protector Line and Helpline; distribution standards; third party contract management; and compliance with regulatory standards ·     Clear procedures are operated globally to ensure product integrity and comprehensive supplier audit programmes are in place to monitor product integrity and labour standards ·     A comprehensive compliance programme is in place to promote, monitor and review compliance with the Groceries Supply Code of Practice in the UK. Appropriate programmes are in place in other markets ·     Sustainability considerations are integrated into our long-term decision making to ensure that the development of our products is aligned with our goal of reducing our impact on the environment. We look, in particular, at sustainable sourcing, improved security of supply and mitigating the impact of climate change
Technology (Risk Movement: no risk movement)
Any significant failure in the IT processes of our retail operations in stores, online or in our supply chain could impact our ability to trade If we do not invest enough or efficiently or invest in the wrong areas, we may not be able to deliver our customer proposition which could impact our competitiveness As we develop new technologies, we must maintain the controls over existing platforms or it may impact systems availability and security	·     Our IT strategy is reviewed and approved by the Executive Committee ·     We have governance processes in place around new system implementations and change management of existing IT, adherence to which is closely monitored ·     There is a clear programme of investment to maintain the integrity and efficiency of our IT infrastructure and its security ·     Business continuity plans are in place for key business processes
People (Risk Movement: risk increasing)
Failure to attract, retain, develop and motivate the best people with the right capabilities across all levels, geographies and through the business transformation process could limit our ability to succeed There is a risk that our leaders may not play their critical role in shaping the organisation that we want to be and that they do not inspire great performance from our teams	·     The Executive Committee meets regularly to review and monitor people policies and procedures and talent development ·     We seek to understand and respond to employees' needs by listening to their feedback from open conversations, social media, colleague surveys and performance reviews ·     Talent planning, training and people development processes are embedded across our Group ·     Objectives and remuneration arrangements for senior management are approved by the Executive Committee and have been re-designed to reward behaviours as well as delivery of results
Safety, fraud, control and compliance (Risk Movement: risk increasing)
If we do not implement safety standards effectively, we may endanger our customers or colleagues Given the existing size, geographical scope and complexity of our Group, the potential for fraud and dishonest activity by our suppliers, customers and employees increases There is a risk that if the compliance monitoring to our Group standards and policies is not sufficient, we could fail to identify weaknesses or breaches	·     Standards for Health and Safety are defined for all of our sites, monitoring processes are in place and we have created a Group team whose primary objective is to ensure that safety standards are met ·     Product safety standards are communicated to our suppliers and tested through audit programmes ·     Procedures and controls are set out across the business to reduce fraud and compliance risks, including our Group Accounting Policy, key financial controls self-assessment programme, IT access controls and appropriate segregation of duties. Group Loss Prevention and Security monitors fraud, bribery and other compliance risks ·     Compliance Committees monitor compliance with relevant laws and regulations ·     Our Group Code of Conduct has been recently refreshed and re-launched with appropriate training across the Group. This sets out clear behavioural guidance, consistent with our Values ·     We have comprehensive guidance across the Group to ensure compliance with the UK Bribery Act (and applicable local legislation) and use an externally managed Whistleblowing service (Protector Line) to allow colleagues to report any instances of inappropriate behaviour ·     A Fraud Blueprint setting out risks, controls and operational strategies informs a preventative approach
Tesco Bank (Risk Movement: no risk movement)
The continually changing regulatory environment could impact the levels of capital and liquidity the Bank expects to hold, could impact the earnings profile as a result of interchange fee caps, and may affect the governance of the Bank as the new regulatory Senior Managers Regime is finalised	·     The Bank has a defined 'Risk Appetite', approved and regularly reviewed by both the Bank's Board and the Tesco PLC Board, which sets out the key risks, their optimum ranges, alert limits and the controls required to manage them within their approved tolerance limits ·     The Bank has formed good working relationships with the Prudential Regulation Authority and Financial Conduct Authority ·     There is a comprehensive structure of governance and oversight in place, including through the Bank's Governance and Conduct Committees, to help ensure the Bank's compliance with applicable laws and regulations ·     The Group is actively engaged in developing and implementing plans to respond to interchange fee developments to manage the impact on our profitability

Financial risks review

The main financial risks faced by the Group relate to the availability of funds to meet business needs, fluctuations in interest and foreign exchange rates and credit risks relating to the risk of default by parties to financial transactions. Further explanation of these risks is set out in Note 22 on page 120 of the Annual Report and Financial Statements 2015. An overview of the management of these risks is set out below. Details of the main financial risks relating to Tesco Bank and the management of those risks can be found in Note 22 on page 123 of the Annual Report and Financial Statements 2015.

Financial risks	Key controls and mitigating factors
Funding and liquidity risk
The risk of being unable to continue to fund our operations on an ongoing basis	·     The Group finances its operations by a combination of retained profits, disposals of assets, debt capital market issues, commercial paper, bank borrowings and leases ·     New funding of £2.3 billion was raised during the year, including £2.1 billion from long term debt and £0.2 billion from property disposals. At the year end, net debt was £8.5 billion (2014: £6.6 billion) ·     The policy is to smooth the debt maturity profile, to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities and to maintain access to capital markets so that maturing debt may be refinanced as it falls due ·     Tesco has put in place £5 billion of committed facilities consisting of a revolving credit facility and bilateral lines as alternate sources of liquidity ·     At the year end, the Group had a long-term credit rating of BBB- (negative) from Fitch, Ba1 (stable) from Moody's and BB+ (stable) from Standard & Poor's
Interest rate risk
The risk to our profit and loss account resulting from rising interest rates	·     Forward rate agreements, interest rate swaps, caps and floors may be used to achieve the desired mix of fixed and floating rate debt ·     Our policy is to fix interest rates for the year on a minimum of 40% of actual and projected debt interest costs of the Group excluding Tesco Bank. At the year end, the percentage of interest-bearing debt at fixed rates was 79% (2014: 84%). The remaining balance of our debt is in floating rate form. The average rate of interest paid on an historic cost basis this year, excluding joint ventures and associates, was 4.09% (2014: 4.5%)
Foreign exchange risk
The risk that exchange rate volatility may have an adverse impact on our balance sheet or profit and loss account	·     Transactional currency exposures that could significantly impact the Group Income Statement are managed, typically using forward purchases or sales of foreign currencies and purchased currency options. At the year end, forward foreign currency transactions, designated as cash flow hedges, equivalent to £2.2 billion were outstanding (2014: £2.9 billion) as detailed in Note 21 on page 116 of the Annual Report and Financial Statements 2015. We translate overseas profits at average foreign exchange rates ·     We only hedge a proportion of the investment in our international subsidiaries as well as ensuring that each subsidiary is appropriately hedged in respect of its non-functional currency assets. During the year, currency movements increased the net value, after the effects of hedging, of the Group's overseas assets by £5 million (last year decrease of £1,102 million)
Counterparty risk
The risk of loss arising from default by parties to financial transactions	·     The Group holds positions with an approved list of highly rated counterparties ·     Tesco monitors the exposure, credit rating, outlook and credit default swap levels of these counterparties on a regular basis
Insurance risk
The risk of being inadequately protected from liabilities arising from unforeseen events	·     We purchased assets, earnings and combined liability protection from the open insurance market for higher value losses only ·     The risk not transferred to the insurance market is retained within the business with some cover being provided by our captive insurance companies, ELH Insurance Limited in Guernsey and Valiant Insurance Company Limited in the Republic of Ireland. ELH Insurance Limited covers Assets, Earnings and Combined Liability, while Valiant Insurance Company Limited covers Combined Liability only

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:

Trading transactions

	Sales to related parties		Purchases from related parties		Amounts owed  by related parties		Amounts owed to related parties
	2015 £m	2014 £m	2015 £m	2014 £m	2015 £m	2014 £m	2015 £m	2014 £m
Joint ventures	430	366	549	533	17	19	22	6
Associates	-	7	14	18	26	-	1	17

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

Purchases from related parties include £430m (2014: £412m) of rentals payable to the Group's joint ventures (including those joint ventures formed as part of the sale and leaseback programme).

Non-trading transactions

	Sale and leaseback of assets		Loans to related parties		Loans from  related parties		Injection of equity funding
	2015 £m	2014 £m	2015 £m	2014 £m	2015 £m	2014 £m	2015 £m	2014 £m
Joint ventures	-	-	207	218	16	16	14	3
Associates	-	46	-	37	-	-	10	7

Transactions between the Group and the Group's pension plans are disclosed in Note 26 to the Annual Report and Financial Statements 2015.

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 accounts for those partnerships have been consolidated into these accounts pursuant to Regulation 7 of the Regulations.

In the prior year, the Group completed one sale and leaseback transaction involving property assets in Thailand. On 24 January 2014, one trading mall was sold to the Tesco Lotus Growth Fund, an associated entity of the Group, for a consideration of £46m. There were no sale and leaseback transactions in the current year.

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:

	2015 £m	2014 £m
Salaries and short-term benefits	14	16
Pensions	3	3
Share-based payments	4	2
Joining costs and loss of office costs	8	1
	29	22

Of the total remuneration to key management personnel, £16m (2014: £16m) relates to Executive Committee members who are not on the PLC Board.

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 and personal loan balances		Current and saving deposit accounts
	Number of key management personnel	£m	Number of key management personnel	£m
At 28 February 2015	19	1	16	1
At 22 February 2014	12	-	4	-

Statement of Directors' responsibilities

In compliance with DTR 4.1.12R, the Annual Report and Financial Statements 2015 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 2015 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 22 April 2015.

The Directors are required by the Companies Act 2006 to prepare financial statements for each financial year which 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 UK Generally Accepted Accounting Practice (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 European Union 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; 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 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 UK 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 strategy.

Each of the Directors, whose names and functions are set out on pages 28 and 29 of the Annual Report and Financial Statements 2015 confirm that, to the best of their knowledge:

·     the Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; 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, together with a description of the principal risks and uncertainties that it faces.

 

END

 

 

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