Annual Report 2016 and Notice of AGM 2016

RNS Number : 1666Y

Tesco PLC

13 May 2016

 

13 May 2016

Tesco PLC

Annual Financial Report and Notice of Annual General Meeting 2016

Further to the release of its preliminary results announcement on 13 April 2016, Tesco PLC (the "Company") announces that it has today published its Annual Report and Financial Statements 2016.  In addition, the Company announces that its Notice of Annual General Meeting 2016 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 11.00 a.m. on Thursday 23 June 2016.

The Company's Annual Report and Financial Statements 2016, Strategic Report 2016 and Notice of Annual General Meeting 2016 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 2016;

·     Strategic Report 2016;

·     Notice of Annual General Meeting 2016; and

·     Proxy Form for the 2016 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 13 April 2016. That information, together with the information set out below, which is extracted from the Annual Report and Financial Statements 2016, 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 2016. Page and note references in the text below refer to page numbers and note references in the Annual Report and Financial Statements 2016. To view the preliminary results announcement, visit the Company's website: www.tescoplc.com

Enquiries:                    Paul Moore

Company Secretary

Tesco PLC

Tesco House

Shire Park

Kestrel Way

Welwyn Garden City

Hertfordshire

AL7 1GA

Tel: [phone]

Principal risks and uncertainties

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.

We maintain a Group Risk Register of the principal risks faced by the Group. Our risk management process is operated throughout the Group. All business units perform regular risk assessments that consider and assess the Group's principal risks, and specific local risks pertinent to the market in which they operate. This process ensures a consistent approach to the assessment of risk across the Group as well as informing the Group risks from a bottom-up perspective. 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.

As part of a wider and on-going process to enhance our risk management activities and capabilities, we have refreshed the process by which Tesco evaluates and reports principal risks and uncertainties. We show the alignment of our risks to our priorities by principal risk below. In some cases a change of emphasis in the risk reflects both the external and internal business environment, including wider economic factors facing our Group that have also been considered as part of this process.

This development of our risk process has resulted in the inclusion of Liquidity risk as a principal risk in this section. In our Annual Report 2015, this risk was included as part of a separate financial risks review now set out in Note 22 on page 124 of the Annual Report and Financial Statements 2016.

Our process for identifying and managing risk is set out in more detail on page 47 of the Annual Report and Financial Statements 2016. The table below sets out our principal risks, their movement during the year and examples of controls and mitigating factors. A significant process for the enhancement of our internal control environment is underway.

The risks identified 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 proposition
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.	We are addressing the challenge of changing customer wants and increased customer choice as a result of heightening competitive activity. The customer need is central to our decision-making. Risk decreasing	We have developed strategic plans to enhance our understanding of our customer needs. Customer insight supports development of customer focused strategies across each market and we have developed strategic customer profiles to understand specific market expectations. We have invested in the customer experience by increasing colleague hours on the shop floor and by providing further customer service training for colleagues across all stores. We continue to invest in availability and price as well as running our Feet on the Floor programme - whereby non-store colleagues spend a day on the shop floor to ensure customer focus is maintained.
Transformation of economic model
The transformation of our economic model does not allow us to respond to changes in the external economic environment, nor does it progress sufficiently quickly to maintain or increase operating margin, to generate sufficient cash to meet business objectives. This may result in an adverse impact on the business and shareholder confidence.	We are in the process of transforming our business and how we operate to drive improvement and better performance. No risk movement	Significant transformation programmes are being undertaken across the Group, including organisational design, data strategy, reset of supplier relationships, cost reduction and people & capability. There is Executive Committee and Board overview of key strategic initiatives to improve sales and margin, and to reduce cost. Periodic sales margin planning and forecasting activity are reviewed by Group and local finance functions.
Liquidity
Business performance does not deliver cash as expected; access to funding markets or facilities is restricted; failures in operational liquidity 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.	We have a strong focus on improved liquidity management and have taken a number of steps to address this. Risk decreasing	The funding plan and its key elements (e.g. debt issuance, cash resources, available credit facilities and cash flow forecasting) are subject to regular executive review, supported by rolling liquidity updates and key financial metrics. Treasury and debt-related policies covering UK and International markets are in place and periodic reviews of the Going Concern and Longer Term Viability Statement is undertaken by the Audit Committee and the Board. Following the significant reduction in future pension risk by closing the UK defined benefit scheme, we are implementing a derisking strategy to further reduce pension risk and better match our cash flows. Specific activities have been undertaken to reduce our debt-level with enhanced cost control measures in place. Further information on these risks can be found in Note 22 to the financial statements in the Annual Report and Financial Statements 2016. Whilst Tesco Bank is financially separate from Tesco PLC, there is a regular review of Tesco Bank's risk appetite by Tesco Bank Board and the Tesco PLC Board. This sets out Tesco Bank's key risks, their optimum ranges, alert limits, controls and tolerance limits and ensures ongoing awareness of any potential risk to Tesco PLC.
Competition and markets
We do not have an effective, coherent and consistent strategy to respond to our competitors and changing markets, resulting in a loss of market share and failure to improve profitability.	We face the ongoing challenge of a changing competitive landscape and price pressure across most of our markets. No risk movement	Executive oversight and ownership of business plans provide strategic direction for the Group with plans regularly reviewed and challenged. Dedicated Board strategy days are held to develop and challenge strategic direction. The use of market scanning and ongoing competitor analysis provides insight, an ability to anticipate market movements and develop an effective proposition. We remain closely aligned with local trade associations, governments and other policy makers across our markets. We have realigned our individual European businesses to sit within a simplified Central European structure under a single management team to provide greater clarity and a consistent strategic approach.
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.	We are working to ensure that we rebuild trust and transparency across our stakeholders through initiatives such as price transparency, Brand Guarantee and the launch of new fresh-food brands. This helps to ensure that our brand perception reflects the values that we demonstrate. Risk decreasing	Brand guidelines have been updated to provide Group-wide consistency over the use of the Tesco brand. Group commercial and corporate affairs policies and procedures have been updated. Communications, media relations and corporate responsibility plans are in place and include internal and external stakeholder engagement. There is a Group Corporate Responsibility Committee that oversees corporate responsibility activity. The Code of Business Conduct has been refreshed with specific guidance over brand, social media and communications, ethical trading and the establishment of a tone at the top with defined consequences in the event of non-compliance.
Technology
A significant failure of IT infrastructure or key IT system results in loss of information, inability to operate effectively and/or financial or other regulatory penalties.	Our IT landscape requires further investment in core infrastructure and data centres, as well as to support the store environment. Risk increasing	Controls include a technology strategy outlining a number of approved technology policies and procedures. The Technology leadership team provides central governance across major project approval, configuration changes, application updates and the development of new systems. We are increasing our investment in IT with a fully-funded development plan covering a range of back office and customer systems. Technology assessments are performed on an ongoing basis to identify further areas of need and opportunities for improvement.
Data security and data privacy
Failure to maintain control over customer, colleague, commercial and/or operational data leads to a loss of data, either through deliberate targeted action or inadvertent error. The misuse of personal data, for example without the customer's consent or retaining for longer than is necessary, may also result in reputational harm, regulatory investigations and potential fines.	We operate a large number of disparate IT systems, some of which are legacy systems and we hold significant amounts of sensitive data in a number of locations. Risk increasing	Our systems are secured with access controls, while regular vulnerability and penetration testing provides additional security. Compliance assessments are executed across UK and international business units against the information security policies. We are strengthening our data-related controls as part of a significant IT security improvement programme. The strengthening includes enhanced information security policies and governance, review of defence measures against attacks and continued migration away from unsupported systems. A Group-wide, comprehensive privacy compliance programme is being developed, which covers governance, risk assessment, policies and processes, training, incident management, monitoring and review. This is designed to drive the right behaviours and ensure obligations are met with regards to the handling of personal data.
Regulatory and compliance
Failure to comply with legal or regulatory requirements relating to our business activities, resulting 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.	Our regulatory and legal landscape continues to evolve in all of our locations, and across each of our businesses. There is a risk of breach of existing legal or regulatory requirements, and of not adapting our business as demands change. There are specific actions under way to address matters identified last year relating to commercial income and supplier relationships. No risk movement	The Group-wide Code of Business Conduct has been refreshed, with specific compliance programmes existing around key legislation (e.g. UK Bribery Act), built around a risk and compliance model. Colleagues in high-risk areas receive annual training and a communications programme supports ongoing awareness of Code and other regulatory risks. Leadership teams are trained on their regulatory duties and receive management data on compliance risks and breaches. Groceries Supply Code of Practice (GSCOP) compliance is addressed in a number of ways, including through a GSCOP audit and monitoring programme and the appointment of a Code Compliance Officer. Equivalent legislation will be issued in ROI in 2016 and steps are being taken to prepare for this. There is an externally managed whistleblowing service across the Group for colleagues and suppliers (except Thailand, where it is internally managed) and a supplier helpline for the anonymous reporting of inappropriate conduct. Tesco Bank's Board oversees Tesco Bank's compliance with regulatory requirements.
Safety
We do not meet safety standards in relation to workplace or product, resulting in death, injury or illness to customers, colleagues, or third parties.	We continue to focus our efforts on controls to ensure workplace and product safety. No risk movement	For workplace safety, controls include Group safety policies and procedures, Group safety standards and rapid escalated incident-reporting to the CEO. Implementation is driven by a dedicated Group Safety function, which provides advice to the Group on safety matters across geographies. A framework for standardised safety risk assessments has been developed. An extensive programme of technical product testing and reporting is in place with country teams responsible for the delivery and implementation of product safety policies and systems. We are proud to make the results of our provenance-testing publicly available. A supplier audit programme is in place to monitor product integrity and labour standards, which includes unannounced specification inspections of supplier facilities and products.
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.	Our people are our most valuable asset. We continue to manage and consider diversity and inclusion as well as colleague engagement. No risk movement	Standardised recruitment policies and processes have been established and a Board-sponsored people strategy is being implemented to attract and retain the best people. Diversity and inclusion are key elements of our people agenda. Remuneration policies and succession planning are subject to periodic benchmarking to ensure they remain appropriate for the Group. We provide ongoing opportunities for personal and professional development through our established leadership development and graduate programmes. 'Our Tesco' and 'What Matters To You?' initiatives allow us to connect, listen and respond to our colleagues. The consolidation of our UK offices into a single campus and the restructure of our Central European businesses has created an environment that fosters improved communication and collaboration between teams.
Tesco Bank
Continual and progressive changes in the regulatory environment in which the Bank operates could impact the level of capital and liquidity that is expected to be held. Regulatory uncertainty could also impact the future earnings profile of the Bank.	The Bank actively manages its response to proposed regulatory changes and has a track record of adapting activities in advance of the implementation of regulatory change. No risk movement	There is Bank Board reporting throughout the year in line with relevant regulatory requirements, 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. The Bank has formed good working relationships with the Prudential Regulation Authority and the Financial Conduct Authority and is also a member of the British Bankers Association. Through these relationships, the Bank is able to adopt a proactive approach to engaging in proposed regulatory change. The Bank monitors proposed regulatory guidance and changes during consultation and implementation phases. As a result, the Bank would expect to have sufficient time to respond and adapt its funding and business plans as appropriate. 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.

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
	2016 £m	2015 £m	2016 £m	2015 £m
Sales to related parties	408	430	-	-
Purchases from related parties	496	549	14	14
Injection of equity funding	-	14	-	10
Dividends received	32	79	9	9

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

Purchases from related parties include £379m (2015: £430m) 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 26.

Balances

	Joint ventures		Associates
	2016 £m	2015 £m	2016 £m	2015 £m
Amounts owed to related parties	13	22	1	1
Amounts owed by related parties	28	17	3	26
Loans to related parties (net of deferred profits)*	149	207	-	-
Loans from related parties	6	16	-	-

* Loans to related parties of £149m (2015: £207m) are presented net of deferred profits of £57m (2015: £67m) 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:

	2016 £m	2015 £m
Salaries and short-term benefits	20	14
Pensions and cash in lieu of pensions	3	3
Share-based payments	9	4
Joining costs and loss of office costs	5	8
	37	29

Of the total remuneration to key management personnel, £26m (2015: £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 27 February 2016	11	1	8	-
At 28 February 2015	19	1	16	1

Statement of Directors' responsibilities

In compliance with DTR 4.1.12R, the Annual Report and Financial Statements 2016 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 2016 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 13 April 2016.

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 32 and 33 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 the Annual Report and Financial Statements 2016 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.

 

END

 

 

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