Interim Results

Tesco PLC 20 September 2005 TESCO PLC INTERIM RESULTS 2005/6 24 Weeks ended 13 August 2005 TESCO MAKES GOOD FIRST HALF PROGRESS - OIL PRICE A CONCERN Terry Leahy, Chief Executive, comments: 'By improving the shopping experience for customers in our businesses around the world, we have been able to deliver another good performance in a more challenging year. Looking forward, the accumulating effects of rising oil-related costs, both on consumer confidence and on our business, are a cause for concern, but we remain confident that we will make further progress in the second half.' GROUP HIGHLIGHTS •Sales up 14.1% to £18.8bn, up 12.4% at constant exchange rates •Pre-tax profit up 18.7% to £908m •Profit growth of 14.4% to £940m using pre-IFRS* underlying profit definition** (last year £822m) •Diluted earnings per share up 15.7% to 8.10p •Interim dividend per share up 10.5% to 2.53p •On track to create a further 7,500 new jobs in the UK and 9,500 worldwide in the second half UK •Sales up 11.1% to £14.6bn •Operating profit up 19.2% to £801m •Like-for-like sales up 8.2%, up 6.7% excluding petrol •Deflation of 2% (excluding petrol) as we cut prices again for customers •One million more customers join Clubcard in its 10th anniversary year •Second quarter like-for-like-sales up 7.6%, up 6.6% excluding petrol INTERNATIONAL •International now 54% of group selling space, making a significant contribution to group growth •Sales up 25.6% to £4.2bn, up 17.3% at constant exchange rates •Operating profit up 23.5% to £163m, up 16.0% at constant rates •Positive customer response to strategic investment in Central Europe NON-FOOD •UK Non-food sales up 13% to £2.8bn, including growth of 17% in Home Entertainment, 15% in Clothing and 33% in Seasonal •Extended Extra stores at Bar Hill and Slough feature wider non-food ranges RETAILING SERVICES •Tesco Personal Finance (TPF) customer accounts grow to over 5m. TPF delivers £50m profit - Tesco share is £25m. •Tesco.com sales up 31% to £401m and profit up 37% to £21m •Tesco Mobile customer numbers up to 750,000 * From the beginning of 2005/6 Tesco has adopted International Financial Reporting Standards (IFRS) accounting policies, having previously reported its financial results under UK GAAP. This change is a requirement for all listed groups in the European Union. ** Underlying pre-tax profit excluded net profit or loss on disposal of fixed assets, integration costs and goodwill amortisation. RESULTS Group. Group sales, including VAT, increased by 14.1% to £18.8bn (last year £16.5bn). At constant exchange rates, sales grew by 12.4%. Pre-tax profit increased by 18.7% to £908m (last year £765m). For comparison, using our pre-IFRS underlying profit definition, profit increased by 14.4% to £940m (last year £822m). IFRS. From the beginning of this financial year we have adopted International Financial Reporting Standards (IFRS) accounting policies. Prior-year (2004/5) comparatives have been restated, except for the adoption of IAS32 and IAS39, for which last year we used the exemption available within IFRS1. At our IFRS Seminar in February, we said that the overall impact of IFRS on profit after tax for the whole of 2004/5 would be between zero and a £30m reduction. When we issued restated 2004/5 accounts in May we indicated an overall impact of £19m. The impact of IFRS on the first half of this year, before IAS32 and IAS39, is £7m. IAS32 and IAS39 reduce post-tax profits by a further £26m in the first half. The following table shows key results as reported under IFRS and the equivalent performance using our previous accounting policies under UK GAAP. Further summary reconciliations can be found in Appendices A and B. Key IFRS profit measures and UK GAAP equivalent measures IFRS UK GAAP equivalent H1 05/06 H1 04/05 Growth H1 05/06 H1 04/05 Growth Group profit before tax (£m) 908 765 18.7% 960 804 19.4% Group underlying profit* (£m) n/a n/a n/a 940 822 14.4% UK operating profit (£m)** 801 672 19.2% 789 707 11.6% Europe operating profit (£m)** 83 66 25.8% 88 72 22.2% Asia operating profit (£m)** 80 66 21.2% 83 68 22.1% Joint Ventures & Associates*** 26 32 (18.7%) 67 60 11.7% Diluted EPS (p) 8.10 7.00 15.7% 8.51 7.22 17.9% * Underlying pre-tax profit excluded net profit or loss on disposal of fixed assets, integration costs and goodwill amortisation. ** Under UK GAAP, our operating profit measure excluded net profit or loss on disposal of fixed assets, integration costs and goodwill amortisation. *** Under IFRS Joint Ventures and Associates profit is reported net of interest and tax. Core UK Business. UK sales increased by 11.1% to £14.6bn (last year £13.1bn), with like-for-like growth of 8.2% (including volume of 8.7%) and 2.9% from net new stores. Deflation overall was 0.5%, despite the effect of rising oil prices on our petrol business. Deflation of 2% in our stores was driven by our investment in lower prices for customers. Second quarter like-for-like sales growth, excluding petrol, was 6.6%, similar to the first quarter. Helped by our efforts to keep fuel prices down, petrol continues to have a significant impact on sales growth, although its contribution to like-for-like sales during the second quarter against last year's exceptionally strong growth, was lower than in the first quarter. Including petrol, like-for-like sales grew by 7.6% in the second quarter. Total sales grew by 10.9% in the second quarter, including 3.3% from net new stores. We saw significant external cost increases in the first half, mainly from higher oil-related costs and above-inflation increases in business rates. Although we had budgeted for a large increase in oil-related costs, current oil prices suggest actual costs may be as much as £60m above budget for the full year, a level which will be hard to absorb fully through other cost savings. UK operating profit was 19.2% higher at £801m (last year £672m). The operating margin moved up to 6.0%. Operating profit increased by 11.6% to £789m using our pre-IFRS underlying profit definition (last year £707m). International. Total international sales grew by 25.6% to £4.2bn in the first half (last year £3.4bn) and by 17.3% at constant exchange rates. Like-for-like sales in International increased by 4.4%. International contributed £163m to operating profit, up 23.5% on last year, with operating margins unchanged, before a £1m integration charge on the Aram Mart acquisition in Korea. At constant exchange rates, international profit grew by 16.0%. Operating profit increased by 22.1% to £171m using our pre-IFRS underlying profit definition (last year £140m). In The Rest of Europe, sales rose by 25.5% to £2.3bn (last year £1.9bn). At constant rates, sales grew by 16.2%. Operating profit increased by 25.8% at actual rates to £83m (last year £66m) and by 19.0% at constant rates. In Asia, sales grew by 25.6% to £1.9bn (last year £1.5bn). At constant rates, sales grew by 18.7%. Operating profit increased by 21.2% to £80m at actual rates (last year £66m) and by 12.9% at constant rates. Joint Ventures and Associates. Our share of profit (net of tax and interest) for the first half was £26m compared to £32m last year. Under the pre-IFRS, UK GAAP measure, our share of Joint Venture and Associates profit rose £7m. Tesco Personal Finance (TPF) profit was £50m, of which our share was £25m, down 14.0% on last year, due to the change in provision policy for bad debts under IFRS and the competitive nature of the motor insurance market. On a pre-IFRS basis profit was unchanged on last year. Net finance costs were £82m (last year £71m), giving interest cover of 11.8 times (last year 11.3 times). Tax has been charged at an effective rate of 29.2% (last year 28.8%). Diluted earnings per share increased by 15.7% to 8.10p (last year -7.00p). Dividend. The Board has proposed an interim dividend of 2.53p per share (last year 2.29p). This represents an increase of 10.5%. The interim dividend will be paid on 9 December 2005 to shareholders on the Register of Members at the close of business on 30 September 2005. Shareholders will continue to have the right to receive the dividend in the form of fully paid ordinary shares instead of cash. The first day of dealing in the new shares will be 9 December 2005. Cash Flow and Balance Sheet. During the first half, the group benefited from a strong operational cash inflow of £1.4bn and the net proceeds of £346m from our property joint venture with Consensus. Net borrowings were at £4.3bn at the half year-end, representing gearing of 49%. The adoption of IAS32 and IAS39 had the effect of increasing net borrowings by almost £0.5bn. Before the effect of IAS32 and IAS39, net debt reduced by £33m in the first half. Group capital expenditure during the first half (excluding acquisitions) was £1.0bn (last year £0.9bn). We expect group capital expenditure to be around £2.5bn for the full year. UK capital expenditure was £0.6bn (last year £0.6bn), including £315m on new stores and £132m on extensions and refits. Total international capital expenditure was £352m (last year £245m) including £173m in Asia and £179m in Europe. Return on Capital Employed. In January 2004, we said our aspiration was to increase our post-tax return on capital employed (ROCE) of 10.2% in the 2002/3 financial year by up to 200 basis points over five years on then current plans. The progress the business has made since then, combined with the effects of our property funding initiatives, means that ROCE is well on track to meet our aspiration. The adoption of IFRS makes no significant difference to return on capital employed. Year-end Convergence. We announced in April that, due to the increasing contribution our international businesses make to Group results, we would align our international accounting period to the UK's February year-end this year. This will mean that our international business will report a 35-week second half this year, compared with the normal 6 months. The UK's accounting period will remain unchanged. STRATEGY We have continued to make good progress with all four parts of our strategy: - maintain a strong UK core business - become an international retailer - be as strong in non-food as food - develop retailing services We have done this by keeping our focus on trying to improve what we do for customers in all parts of our business. We aim to make their shopping experience as easy as possible; we constantly seek to reduce our prices to help them spend less; we offer the convenience of either large or small stores and we try to bring simplicity and value to sometimes complicated markets. Core UK Business. UK sales grew by 11.1% in the first half, including a like-for-like increase of 8.2%. This growth is broadly based - across the country, by store format and by product category. Growth in customer numbers is driving our sales. More customers are choosing to shop at Tesco today, with almost three million more weekly customer visits than there were a year ago. Our latest quarterly Clubcard mailing, which marked the tenth anniversary of the scheme, went to one million more people than last year, the biggest increase since 2001. Average spend per visit (excluding Express stores) is also up slightly despite deflation in our stores. We have continued to invest more in the things that matter for customers: • We have invested in lower prices for customers. Our sales deflation of nearly 2% (excluding petrol) confirms that many of our prices are lower than last year. • We have improved customer service by putting more staff into busy stores and, using new technology such as hand-held computers, enabling them to spend more time on the shop floor. • We have rolled out self-service checkouts to 130 stores and over 850,000 customers use them every week. Together with better staff scheduling, this has helped to reduce the time customers spend at the checkout and our most recent customer research shows that satisfaction with 'One in Front' is at its highest level for over two years. • We have improved on-shelf availability again. Our measure of this, which is based on our in-store picking of Tesco.com orders, shows that availability has improved consistently over the last six months. • At the same time, customers are recognising that our aisles are clearer as we introduce more shelf-ready packaging to speed replenishment, add parking bays in fixtures to keep refill cages out of the way and reduce the amount of off-shelf product displays. Tesco re-invests efficiency savings for customers. Our Step-Change programme, which brings together many initiatives to make what we do better, simpler and cheaper, is planned to deliver further savings this year of £330m, on top of almost £270m achieved last year. Examples include: • At over 1,000 of our stores, customers can now buy their lottery tickets at checkouts. Tesco is the first major retailer to provide this service, which is much more convenient for customers, simpler for staff and saves us money. • Nearly 6,000 products are now delivered to store in shelf-ready packaging. This makes stock replenishment easier, quicker and cheaper. To ensure that everyone feels welcome at Tesco, we have put a lot of effort into tailoring our offer for local customers. For example, our new Slough Extra features over 800 speciality Asian lines, from new vegetarian and Halal ready meals and extensive ranges of bulk-pack rice, to Bollywood DVD's. This is currently one of Tesco's highest turnover stores. We have also carried out extensive research to understand how best to help customers choose a balanced diet. This has led to the introduction of new nutritional 'signpost' labelling to our own brand products to provide simple, clear, front-of-pack information. 2,000 completed labels are planned by the year-end. We have made further progress with the development of our store formats. During the first half, we opened or extended another four Extra hypermarkets. A further 15 are planned to open by the year-end, bringing the total to 119 and we anticipate being able to open around 20 new Extras a year, mostly through extensions to existing superstores. Our recent Extra extensions - in Bar Hill, near Cambridge and Slough in Berkshire - opened in August, each trading from more than 100,000 square feet sales area, and featuring our widest non-food ranges yet. More customers have access to our Express convenience stores as we bring the Tesco offer and lower prices to many new neighbourhoods. The T & S to Express conversion programme is almost at an end with a further 18 stores completed during the first half. 27 brand new Express stores also opened in the first half, bringing the overall total to 589. A further 58 Expresses are planned in the second half. A total of 630,000 square feet of new sales area was opened during the first half in all formats, of which almost 130,000 square feet was in extensions to existing stores. A further 1.3m square feet is planned to open during the second half, including just over 550,000 square feet from extensions. International. We are pleased with the performance of our international businesses, which have had a strong first half. International is now making a significant contribution, not just to sales and profits but also to the group's growth rate. With good sales growth, growing local scale, increasing store maturity and the benefits of central distribution, returns from our international operations are also continuing to strengthen. These businesses are well-adapted to the needs of their local customers. They are run by strong local management teams benefiting from Tesco Group expertise in marketing, ranging and buying, store design and layout, format development, supply chain and systems. In almost all countries we are continuing to grow market share as we build our store networks and improve our like-for-like sales. At constant exchange rates, international sales increased by 17.3% in the first half. At actual rates, sales grew by 25.6% to £4.2bn (last year £3.4bn). Operating profit grew by 23.5% to £163m (last year £132m), with operating margins unchanged, before a £1m integration charge on the Aram Mart acquisition in Korea. At constant exchange rates, international profit grew by 16.0%. Operating profit increased by 22.1% to £171m using our pre-IFRS underlying profit definition (last year £140m). International like-for-like sales grew by 4.4% in the first half. This improvement was driven by significantly stronger growth in our Central European markets - with particularly pleasing performances in Poland and Slovakia - as well as Korea. Our existing stores in Malaysia and Turkey also traded very well. A total of 55 stores, with 1.1m square feet of selling area, were opened during the first half, including 14 hypermarkets. In addition, we acquired 12 stores in Korea from Aram Mart early in the first half, all of which have now been converted to Homeplus. We plan to open 164 new international stores in the remainder of the current year, adding 3.9m square feet of selling area. Our multi-format approach to our international development is gathering pace. With our large destination store networks now well-established and with first class supply chain infrastructure in place in many of our main markets, a growing part of our new space is coming through our smaller formats, such as compact hypermarkets, supermarkets and convenience stores. Large hypermarkets cannot reach all parts of the market: smaller formats serve the needs of customers in smaller catchment areas and they also cost less to build. For example, we are now trading Express stores in three countries, with 72 stores in Thailand alone, and supermarkets in several new countries, including Czech Republic, Malaysia and Thailand. At the end of the first half, our international operations were trading from 648 stores, including 286 hypermarkets, with a total of 28.9m square feet of selling space. It is now a year since we completed the acquisition of a 50% holding in Ting Hsin's Hymall business in China, extending our presence into Asia's largest market. We have established a strong local team to accelerate our expansion programme and manage the transfer of Tesco know-how and systems into the business. Hymall is trading from a portfolio of 33 hypermarkets, mainly located in East and North East China. The business made a small profit after tax and interest in the first half, of which our share was £1m, which is included within Associates and Joint Ventures. Elsewhere in Asia, sales increased by 18.7% at constant exchange rates and by 25.6% at actual rates to £1.9bn (last year £1.5bn). Profits grew by 21.2% to £80m at actual rates and by 12.9% at constant rates. • In Japan, C Two-Network completed the integration of the 25 Fre'c stores acquired last year and opened a further three new stores in the first half. The business now trades from 103 stores, with a further eight new stores planned in the second half. • In Korea, Homeplus has continued to make progress, delivering increased sales, including strong like-for-like growth, profits and returns. During the first half we opened two new hypermarkets, including our first compact hypermarket at Namdaegu, and completed the conversion of the 12 stores we acquired in March from Aram Mart. We are also now rolling out the Express convenience format. Our organic store development programme is accelerating as planned, with a further nine stores planned to open in the second half. • In Malaysia, we have seen very strong sales growth, both from new space and from our existing stores as we move towards establishing a substantial business. We have a strong pipeline of new space. We opened one new store in the first half, and in July our first supermarket at Selayang. We currently plan to open six further stores in the second half, including three new hypermarkets. • Competitive market conditions held back our progress in Taiwan. We opened one new hypermarket during the first half, with three further stores under development. • Our business in Thailand, where we are market leader, has delivered strong sales, profit and market share growth, despite a sluggish economy. The successful development of new formats continues and we now have 139 stores trading across five formats, including 72 Express stores, 12 Value stores and three new supermarkets. The newer formats are performing well, giving us many more opportunities to develop our national store network. In the Rest of Europe, sales increased by 16.2% at constant exchange rates and by 25.5% to £2.3bn at actual rates (last year £1.9bn). Profits grew by 25.8% at actual rates to £83m and by 19.0% at constant rates. In Central Europe, we have made strategic investments in lowering prices and improving product quality for customers, particularly in fresh categories, as part of our long term commitment to building our business. Customer response has been very positive and, combined with improved buying, our stronger sales growth has enabled us to deliver higher profit. • In the Czech Republic, we have invested in helping customers to spend less with our largest ever programme of price cuts. We have also accelerated our new store development, with two openings in the first half, including one compact hypermarket, and our new '1k' format (1,000 square metres). With a further eight openings planned this year, over two years we will have added 25% to our selling space in the Republic. • In Hungary, we have grown our business and our market share in a more difficult economic and retail environment. We have strengthened our market leading position by lowering prices, expanding our store network and developing our infrastructure. We opened two new stores in the first half, including our first 32,000 square feet compact hypermarket, adding 14% to our total space over the last twelve months. A further 16 new stores, representing a further 750,000 square feet of new space, are planned in the second half. We have just opened our 15th petrol filling station. • In Poland, the economic background is improving and signs of renewed consumer confidence, combined with an improving offer in our stores, including lower prices, have been reflected in strengthening like-for-like sales. We are growing market share, improving profits and returns and we remain well-placed to benefit from sustained economic upturn. The nine small stores we acquired from Julius Meinl recently will help us bring the Tesco offer to smaller communities. • Our business in the Republic of Ireland has had a good first half. Sales growth has benefited from strong like-for-like performance and an acceleration in the growth of our space. We opened three new stores with 75,000 square feet of new sales area during the first half, with a further three new stores planned in the second half. • In Slovakia, where we have a good market position, customers have responded to our lower prices, with like-for-like sales showing excellent growth as a result. Our new store programme is now supported by the growth of our compact hypermarket format. We now have six such stores, with five more planned this year. Our new 500,000 square feet fresh foods central distribution depot at Beckov is now fully operational and our feedback shows customers clearly appreciate the improved quality and availability it has helped us to deliver. • Kipa, our hypermarket business in Turkey, has delivered a very strong sales, margin and profit performance in the first half. We have introduced successfully some store layout changes such as power aisles in non-foods and more space for promotions. Our first new store, a 55,000 square feet hypermarket at Bodrum, opened in June. The introduction into Kipa of a new suite of IT systems called 'Tesco in a Box' to run many key functions in the business, including supply chain and replenishment has gone live as planned. Tesco in a Box was developed by a team from our UK, Korea and Turkey businesses. Non-Food. Our non-food offer has again made very good progress. UK consumers have been more cautious in their shopping behaviour this year but they remain willing to spend on good quality, competitively priced and well-presented merchandise. As a result, our sales growth, in the UK alone, was over 13% during the first half, with total non-food sales increasing to £2.8bn (last year £2.5bn). In most of the large non-food categories we have seen strong growth. For example, our home entertainment sales grew by 17%, consumer electronics by 20% and health and beauty by 11%. We saw good performances from many of our seasonal non-food ranges, which despite poor spring weather, were up 33%. Our Back to School offer, which this year includes complete school uniforms for less than £10, is selling particularly well. Tesco is still the fastest growing clothing retailer in the UK. In a slowing market, we have maintained excellent growth, with sales up 15% by value and 20% by volume during the first half. Retailing Services. Our efforts to bring simplicity and value to sometimes complicated markets are behind the success of our retailing services businesses. In Telecoms, we now have a very competitive offer in mobiles, domestic fixed line and internet access and a rapidly growing customer account base of over one million, with considerable scope for future growth. Mobile now has 750,000 customers and a recent independent research study by CFI* rated it number one in the industry for overall customer satisfaction, network quality, value for money and telephone customer service. The business, which is still in its start-up phase, broke-even in the first half. Tesco.com sales grew by 31% to £401m and profit increased by 37% to £21m. Weekly orders have increased to over 170,000 and service levels have continued to improve. Tesco Personal Finance (TPF) has delivered a good performance, with total profit in line with last year on a pre-IFRS basis. Net of interest, tax and the other reporting changes required by IFRS, profit reduced to £50m (last year £59m) of which our share is £25m. Market conditions in two of TPF's core markets - credit cards and motor insurance - have been challenging in the first half. In line with the rest of the banking industry, the business has increased its level of provisioning for bad and doubtful credit card debt and motor claims inflation has exceeded inflation in premiums, resulting in squeezed insurance margins. These factors have restricted TPF's performance in the first half and are likely to continue to do so for the rest of this year. * Claes Fornell International TPF is providing excellent returns in only its eighth year. £100m of surplus capital, representing over 20% of the original investment in the joint venture, was returned to Tesco and Royal Bank of Scotland through a cash dividend during the second half of last year, taking Tesco's net investment in the joint venture down to £180m. We now have 5.1m customer accounts, of which over 1.8m are credit cards and 1.4m are motor insurance policies. CORPORATE RESPONSIBILITY As a responsible company, Tesco works hard to bring real benefits to the communities we serve, the environment and the economy. Our commitment is embedded in the way we run our business and this is recognised in our inclusion in the FTSE4Good and Dow Jones Sustainability indices. Earlier this month, Tesco was honoured as 'Best in Class' for our approach to climate change by the Carbon Disclosure Project - a global survey of the responses of the world's largest companies to the issue of climate change. By sponsoring the Great Schools Run in June and July this year we helped give exercise for children a big boost. Over 1,200 schools took part, and completed a five week lesson plan on nutrition and exercise to help prepare them for a 2km run. Children are also at the heart of a new Tesco health initiative - Sports for Schools and Clubs - which launched on 12th September with the aim of inspiring more kids to get involved in sport. Our charity fundraising efforts have again delivered great results. Over 540,000 women took part in this year's Race for Life, including 22,000 Tesco staff. So far they have raised £23m for Cancer Research UK with significantly more still expected. This year we are also supporting 10km runs with 30,000 men and women hoping to raise a further £2.3m. Our Charity of the Year for 2005 is Age Concern and together we are hoping to raise £2m. The remarkable response of our customers and staff in times of adversity was demonstrated again during the London bombings in July. We supported the emergency services in a number of ways - for example, in our Russell Square store we set up a canteen for the emergency workers as they worked tirelessly to help those caught up in the crisis. Tesco immediately pledged £50,000 to the London Bombings Relief Charitable Fund and stores within the M25 held a collection for the appeal. We work closely with our suppliers, many of whom have grown alongside us. We are pleased that the Office of Fair Trading (OFT) has recently confirmed its earlier findings that consumers have benefited from competition in grocery retailing which has secured lower food prices and greater choice. We will continue to work with our suppliers to build on our positive relationships and keep the OFT informed of the work we are doing. The appointment of our Code Compliance Officer and ongoing confidential supplier survey illustrate how seriously we take our responsibilities in this area. CONTACTS Investor Relations: Steve Webb 01992 644800 Press: Jonathan Church 01992 644645 Angus Maitland - The Maitland Consultancy 020 7379 5151 This document is available via the internet at www.tesco.com/corporate A meeting for analysts will be held today at 9.00am and a press conference at 11.00am both at the Royal Bank of Scotland, 280 Bishopsgate, London EC2 4RB. APPENDIX A - Reconciliation of group profit A1 - Impact of initial transition to IFRS* on profit before tax and profit after tax Actual H1 Actual FY IFRS seminar 05/06 04/05 guidance for FY 04/05 £m £m £m Share-based payments (24) (52) (50) Pensions (17) (41) (40) Goodwill 31 61 60 JV's / Associates (14) (32) (30) Leasing (2) (4) immaterial Profit before tax (26) A (68) (50) to (70) Tax impact 19 49 40 to 50 Profit after tax (7) (19) 0 to (30) *excludes adoption of IAS32 and IAS39 A2 - Impact of adoption of IAS32 and IAS39 on H105/06 profit before tax £m Fair valuation of derivatives (1) Impact on Tesco Personal Finance (6) Korean share purchase agreement - change in net present value (5) - foreign exchange revaluation (14) (26) B A3 - Reconciliation of IFRS profit before tax to previously reported UK GAAP underlying profit Actual H1 05/06 £m H1 IFRS profit before tax 908 add back: Transition to IFRS (in line with guidance) 26 see A above add back: Adoption of IAS32 and IAS39 26 see B above Pro-forma UK GAAP profit before tax 960 add back: Integration costs 10 add back: goodwill amortisation 31 less: Property profit (61) Pro-forma UK GAAP underlying profit 940 APPENDIX B - Reconciliation of segmental operating profit B1 - Reconciliation of UK operating profit Actual H1 Actual H1 Growth 05/06 04/05 £m £m IFRS operating profit 801 672 19.2% add back: Share-based payments 21 20 add back: Pensions 24 25 less: Leasing (1) (1) less: Profit arising on property related items (65) (27) add back: Integration costs 9 18 Pro-forma UK GAAP underlying operating profit 789 707 11.6% B2 - Reconciliation of International operating profit Asia Actual H1 Actual H1 Growth 05/06 04/05 £m £m IFRS operating profit 80 66 21.2% add back: Share-based payments 1 1 add back: Loss arising on property related items 1 1 add back: Integration costs 1 - Pro-forma UK GAAP underlying operating profit 83 68 22.1% Europe Actual H1 Actual H1 Growth 05/06 04/05 £m £m IFRS operating profit 83 66 25.8% add back: Share-based payments 2 2 add back: Loss arising on property related items 3 4 Pro-forma UK GAAP underlying operating profit 88 72 22.2% Total international Actual H1 Actual H1 Growth 05/06 04/05 £m £m IFRS operating profit 163 132 23.5% add back: Share-based payments 3 3 add back: Loss arising on property related items 4 5 add back: Integration costs 1 - Pro-forma UK GAAP underlying operating profit 171 140 22.1% TESCO PLC GROUP INCOME STATEMENT UNAUDITED 24 weeks ended 13 August 2005 2005 2004* Increase Restated Note £m £m % Revenue (Sales excluding VAT) 2 17,237 15,143 13.8 Cost of sales (15,986) (14,044) ------ -------- -------- --- ------- Gross Profit 1,251 1,099 Administrative expenses (348) (317) Profit arising on property related 61 22 items ------ -------- -------- --- ------- Operating Profit 2 964 804 19.9 Share of post-tax profits of joint ventures and 26 32 associates Finance costs (132) (116) Finance income 50 45 ------ -------- -------- --- ------- Profit before tax 908 765 18.7 Taxation (265) (220) ------ -------- -------- --- ------- Profit for the period 643 545 18.0 ------ -------- -------- --- ------- Attributable to: Equity holders of the parent 4 641 543 Minority interests 2 2 ------ -------- -------- --- ------- 643 545 ------ -------- -------- --- ------- Earnings per share Basic 4 8.22p 7.07p 16.3 Diluted 4 8.10p 7.00p 15.7 All results relate to continuing operations * As restated for the adoption of International Financial Reporting Standards accounting policies TESCO PLC GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE UNAUDITED 24 weeks ended 13 August 2005 2005 2004* Restated Note £m £m Currency translation differences 5 7 Actuarial losses on defined benefit pension (141) (182) schemes Gains on cash flow hedges 34 - Tax on items taken directly to equity 77 59 ------- ---------- --------- Net expense recognised directly in equity (25) (116) ------- ---------- --------- Profit for the financial period 643 545 ------- ---------- --------- Total recognised income and expense for the 618 429 period ------- ---------- --------- Attributable to: Equity holders of the parent 7 616 427 Minority interests 2 2 ------- ---------- --------- 618 429 ------- ---------- --------- TESCO PLC GROUP BALANCE SHEET UNAUDITED 13 Aug 26 Feb 14 Aug 2005 2005* 2004* Restated Restated £m £m £m Non-current assets Goodwill and intangible assets 1,440 1,408 1,315 Property, plant and equipment 14,784 14,449 13,191 Investment property 629 637 563 Investments in joint ventures and associates 454 412 319 Other investments - 7 8 Deferred tax assets 14 14 12 ---------- -------- ---------- 17,321 16,927 15,408 Current assets Inventories 1,351 1,309 1,167 Trade and other receivables 843 769 648 Derivative financial instruments 24 - - Cash and cash equivalents 1,212 1,146 1,501 ---------- -------- ---------- 3,430 3,224 3,316 Current liabilities Trade and other payables (4,716) (4,957) (4,230) Financial liabilities - Borrowings (781) (482) (371) - Derivative financial instruments (3) - - Current tax liabilities (321) (221) (296) Provisions (4) (6) (4) ---------- -------- ---------- (5,825) (5,666) (4,901) ---------- -------- ---------- Net current liabilities (2,395) (2,442) (1,585) Non-current liabilities Financial liabilities - Borrowings (4,358) (4,567) (4,661) - Derivative financial instruments (413) - - Post-employment benefit obligations (894) (735) (875) Other non-current liabilities (27) (21) (31) Deferred tax liabilities (445) (499) (402) Provisions (7) (6) (9) ---------- -------- ---------- (6,144) (5,828) (5,978) ---------- -------- ---------- Net assets 8,782 8,657 7,845 ---------- -------- ---------- Equity Share capital 392 389 386 Share premium account 3,881 3,704 3,538 Other reserves 40 40 40 Retained earnings 4,413 4,473 3,835 ---------- -------- ---------- Equity attributable to equity holders of the parent 8,726 8,606 7,799 Minority interests 56 51 46 ---------- -------- ---------- Total equity 8,782 8,657 7,845 ---------- -------- ---------- TESCO PLC GROUP CASH FLOW STATEMENT UNAUDITED 24 weeks ended 13 August 2005 2005 2004* Restated Note £m £m Cash flows from operating activities Cash generated from operations 5 1,381 1,435 Interest paid (156) (150) Corporation tax paid (142) (215) ------- --------- --------- Net cash from operating activities 1,083 1,070 ------- --------- --------- Cash flows from investing activities Acquisition of subsidiary, net of cash acquired (48) (51) Purchase of property, plant and equipment (1,051) (858) Proceeds from sale of property, plant and 438 671 equipment Purchase of intangible assets (23) (43) Net decrease in loans to joint ventures 7 - Equity investments made (2) (28) Dividends received 23 45 Interest received 40 39 ------- --------- --------- Net cash used in investing activities (616) (225) ------- --------- --------- Cash flows from financing activities Proceeds from issue of ordinary share capital 41 28 Net decrease in borrowings (149) (173) New finance leases 3 167 Repayments of obligations under finance leases (9) (51) Dividends paid (271) (322) Own shares purchased (20) (96) ------- --------- --------- Net cash used in financing activities (405) (447) ------- --------- --------- Net increase in cash and cash equivalents 62 398 ------- --------- --------- Cash and cash equivalents at beginning of period 1,146 1,100 Effect of foreign exchange rate changes 4 3 ------- --------- --------- Cash and cash equivalents at end of period 1,212 1,501 ------- --------- --------- Reconciliation of net cash flow to movement in £m £m net debt Net increase in cash and cash equivalents 62 398 Cash outflow from decrease in debt and 155 57 lease financing Amortisation of 4% unsecured deep discount loan stock, (8) (8) RPI and LPI bonds Foreign exchange differences and other non-cash changes (176) 145 ------- --------- --------- Decrease in net debt in the period before the impact of IAS 32 and IAS 39 33 592 IAS 32 and IAS 39 adjustments to net debt (449) - ------- --------- --------- (Increase)/decrease in net debt in period (416) 592 ------- --------- --------- Opening net debt at beginning of period (3,903) (4,123) Closing net debt at end of period 6 (4,319) (3,531) ------- --------- --------- The Interim Report for the 24 weeks ended 13 August 2005 was approved by the Directors on 19 September 2005. NOTE 1 Accounting policies Basis of preparation Tesco PLC ('the Group') has previously prepared its financial statements under UK Generally Accepted Accounting Principles ('UK GAAP'). Following a directive issued by the European Parliament in July 2002, the Group is required to prepare its 2005/06 consolidated financial statements in accordance with International Financial Reporting Standards ('IFRS'). Accordingly, this interim financial report has been prepared using accounting policies consistent with those which management expects to apply in the Group's first IFRS Annual Report and Accounts for the year ending 25 February 2006. In particular, the Directors have assumed that the European Commission will endorse the amendment to IAS 19 'Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures' issued by the IASB in December 2004, which allows actuarial gains and losses to be recognised in full through equity. The accounting policies followed in this interim financial report are the same as those published by the Group on 25 May 2005 within the 2004/05 IFRS restatement, which is available on the Group's website, www.tesco.com, with the exception of the adoption of IAS 32 'Financial Instruments: Presentation and Disclosure', and IAS 39 'Financial Instruments: Recognition and Measurement' which apply to the Group from 27 February 2005. The Group has taken the exemption within IFRS 1 'First Time Adoption of IFRS' to apply IAS 32 and IAS 39 prospectively only and not to retrospectively restate prior period comparatives upon adoption. The Group's accounting policy for financial derivatives under IAS 32 and IAS 39 is included below and detailed disclosure of the nature and effect of the adoption of IAS 32 and IAS 39 is included within note 9. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are provided in note 8. IFRS currently in issue are subject to ongoing review and endorsement by the European Commission, or possible amendment by the IASB, and are therefore subject to possible change. Further standards or interpretations may also be issued that could be applicable for the full year consolidated financial statements. These potential changes could result in the need to change the basis of accounting or presentation of certain financial information from that presented in this document. These interim statements, for the 24 weeks ended 13 August 2005, do not constitute statutory accounts as defined in section 240 of the Companies Act 1985. Comparative annual figures for the period ending 26 February 2005 set out within this report have been extracted from the 'Restatement of financial information for 2004/05 under IFRS', as published by the Group on 25 May 2005. Statutory consolidated financial statements for the Group for the year ended 26 February 2005, prepared in accordance with UK GAAP, on which the auditors gave an unqualified opinion and did not include a statement under section 237(2) or (3) of the Companies Act 1985, have been filed with the Registrar of Companies. Financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. The Group does not hold or issue derivative financial instruments for trading purposes, however if derivatives do not qualify for hedge accounting they are accounted for as such. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The fair value of derivative financial instruments is determined by reference to market values for similar financial instruments, or by discounted cash flows or using option valuation models. Where derivatives do not qualify for hedge accounting, any gains or losses on remeasurement are immediately recognised in the Income Statement. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge relationship and the item being hedged. To qualify for hedge accounting, the hedge relationship must be documented and tested for effectiveness. In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective. Fair value hedging Derivative financial instruments are classified as fair value hedges when they hedge the Group's exposure to changes in the fair value of a recognised asset or liability. Any gain or loss from remeasuring the hedging instrument is recognised immediately in the Income Statement. Any change in the fair value of the hedged item, attributable to the hedged risk, is adjusted against the carrying value of the hedged item and recognised immediately in the Income Statement. Derivative financial instruments qualifying for fair value hedge accounting are principally interest rate swaps. Cash flow hedging Derivative financial instruments are classified as cash flow hedges when they hedge the Group's exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecasted transaction. The effective element of any gain or loss from remeasuring the derivative instrument is recognised directly in equity. The associated cumulative gain or loss is removed from equity and recognised in the Income Statement in the same period or periods during which the hedged transaction affects the Income Statement. Any element of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the Income Statement. Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and currency options. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Income Statement. Net investment hedging Derivative financial instruments are classified as net investment hedges when they hedge the Group's net investment in an overseas operation. The effective element of any gain or loss from remeasuring the derivative is recognised directly in equity. Any ineffective element is recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign operation is disposed of. Derivative instruments qualifying for net investment hedging are principally forward foreign exchange transactions. NOTE 2 Segmental analysis Management view the Group's operations of retailing and associated activities as being carried out within three geographical areas - the UK, the Rest of Europe and Asia. The Group's geographical segments are determined by the location of the Group's assets and operations. These geographical areas are the basis on which the Group reports its primary segment information. 24 weeks ended 2005 2005 2005 2004 2004 2004* 13 August 2005 Sales Revenue Operating Sales Revenue Operating including excluding profit including excluding profit VAT VAT VAT VAT Restated £m £m £m £m £m £m UK 14,570 13,394 801 13,113 12,079 672 Rest of Europe 2,325 2,040 83 1,852 1,629 66 Asia 1,922 1,803 80 1,530 1,435 66 -------- -------- -------- -------- -------- -------- 18,817 17,237 964 16,495 15,143 804 -------- -------- -------- -------- Share of post-tax profit from joint ventures and associates 26 32 Net finance costs (82) (71) -------- -------- Profit before tax 908 765 Taxation (265) (220) -------- -------- Profit for the period 643 545 -------- -------- NOTE 3 Dividends 2005 2004 2005 2004 Pence/share Pence/share £m £m Amounts recognised as distributions to equity holders in the period: Final dividend for the year 5.27 4.77 410 365 ----------- ----------- --------- ------- Proposed interim dividend for the half year 2.53 2.29 198 177 ----------- ----------- --------- ------- The proposed interim dividend was approved by the Board on 19 September 2005 but was not included as a liability as at 13 August 2005, in accordance with IAS 10 'Events after the Balance Sheet date'. NOTE 4 Earnings per share and diluted earnings per share Earnings per share is calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period adjusted for the effects of dilutive options. 2005 2004 Profit Weighted Earnings Profit* Weighted Earnings average per Restated average per number share number share* of shares of shares Restated £m Million Pence £m Million Pence Basic 641 7,798 8.22 543 7,679 7.07 Potentially dilutive share options - 110 (0.12) - 78 (0.07) --------- --------- --------- --------- --------- ---------- Diluted 641 7,908 8.10 543 7,757 7.00 --------- --------- --------- --------- --------- ---------- NOTE 5 Reconciliation of operating profit to cash generated from operations 24 weeks 24 weeks to 13 Aug to 14 Aug 2005 2004* Restated £m £m Operating profit 964 804 Depreciation and amortisation 366 347 ---------- --------- Profit arising on property related items (61) (22) ---------- --------- Share-based payments 10 22 (Increase)/decrease in inventories (42) 42 (Increase)/decrease in trade and other receivables (36) 5 Increase in trade payables 56 33 Increase in other payables 124 204 Decrease in working capital (a) 102 284 ---------- --------- Cash generated from operations (b) 1,381 1,435 ---------- --------- (a) The decrease in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than period end exchange rates. (b) The subsidiaries acquired during the period have not had a significant impact on Group operating cash flows. NOTE 6 Analysis of changes in net debt At 26 Feb Opening Cash Other Exchange At 13 2005* adjustment flow non-cash movements Aug Restated for IAS 32 changes 2005 and 39 £m £m £m £m £m £m Cash and cash equivalents 1,146 - 62 - 4 1,212 Derivative financial instruments - 6 - 18 - 24 included in -------- --------- ------- -------- --------- -------- debtors Bank and other borrowings (471) (63) (60) - (174) (768) Finance leases (11) - 5 (7) - (13) Derivative financial - (9) - 6 - (3) instruments -------- --------- ------- -------- --------- -------- Debt due within (482) (72) (55) (1) (174) (784) one year -------- --------- ------- -------- --------- -------- Bank and other borrowings (4,486) 25 209 (26) (7) (4,285) -------- --------- ------- -------- --------- -------- Finance leases (81) - 1 7 - (73) Derivative financial - (448) - 25 10 (413) instruments -------- --------- ------- -------- --------- -------- Debt due after (4,567) (423) 210 6 3 (4,771) one year -------- --------- ------- -------- --------- -------- (3,903) (489) 217 23 (167) (4,319) -------- --------- ------- -------- --------- -------- NOTE 7 Reconciliation of movements in equity 2005 2004* Restated £m £m Equity attributable to equity holders of the parent: 8,606 - At 26 February 2005 Transition adjustments on adoption of IAS 32 and IAS 39 (343) - ---------- ---------- At 27 February 2005 8,263 7,693 Total recognised income and expense for the period 616 427 Share-based payments 10 (28) New share capital subscribed less expenses 41 20 Reduction in own shares held 67 10 Dividends to equity holders of the parent company (410) (365) Payment of dividends by shares in lieu of cash 139 42 ---------- ---------- At 13 August 2005 8,726 7,799 Minority interests 56 46 ---------- ---------- Total equity 8,782 7,845 ---------- ---------- NOTE 8 Explanation of transition to IFRS The reconciliations of equity as at 29 February 2004 (date of transition to IFRS) and as at 26 February 2005 (date of last UK GAAP financial statements) and the reconciliation of profit for the period to 26 February 2005, as required by IFRS 1, including details of significant accounting policies, were published on the Group's website, www.tesco.com, on 25 May 2005. The reconciliation of profit for the 24 weeks ended 14 August 2004 and the reconciliation of equity as at 14 August 2004 have been included below to enable a comparison of the 2004/05 published interim figures. RECONCILIATION OF PROFIT For the 24 weeks ended 14 August 2004 Reported Share- Business Leasing under UK based combinations GAAP* payments IFRS 2 IFRS 3 IAS 17 £m £m £m £m Revenue 15,143 - - - Cost of sales (14,023) - - 1 --------- -------- --------- ------- Gross profit 1,120 - - 1 Administrative expenses (316) (23) 25 - Profit/(loss) arising on property related items 26 - - (4) --------- -------- --------- ------- Operating profit 830 (23) 25 (3) Share of post-tax profits from joint ventures and associates 59 - 1 - Finance costs (129) - - (2) Finance income 44 - - - --------- -------- --------- ------- Profit before tax 804 (23) 26 (5) Taxation (242) 6 - 2 --------- -------- --------- ------- Profit for the period 562 (17) 26 (3) ========= ======== ========= ======= Reconciliation to underlying profit (non-GAAP measure) Profit before tax 804 (23) 26 (5) Profit/(loss) arising on property related items (26) - - 4 Integration costs 18 - - - Goodwill amortisation 26 - (26) - Underlying profit 822 (23) - (1) Employee Presentation Deferred Total IFRS Restated benefits of JVs and under associates tax adjustments IFRS IAS 19 IAS 28/31 IAS 12 £m £m £m £m £m Revenue - - - - 15,143 Cost of sales (22) - - (21) (14,044) -------- -------- -------- -------- -------- Gross profit (22) - - (21) 1,099 Administrative expenses (3) - - (1) (317) Profit/(loss) arising on property related items - - - (4) 22 -------- -------- -------- -------- -------- Operating profit (25) - - (26) 804 Share of post-tax profits from joint ventures and associates - (28) - (27) 32 Finance costs - 15 - 13 (116) Finance income 2 (1) - 1 45 -------- -------- -------- -------- -------- Profit before tax (23) (14) - (39) 765 Taxation 7 14 (7) 22 (220) -------- -------- -------- -------- -------- Profit for the period (16) - (7) (17) 545 ======== ======== ======== ======== ======== Reconciliation to underlying profit (non-GAAP measure) Profit before tax (23) (14) - (39) 765 Profit/(loss) arising on property related items - - - 4 (22) Integration costs - - - - 18 Goodwill amortisation - - - (26) - Underlying profit (23) (14) - (61) 761 * The above UK GAAP numbers have been adjusted into IFRS format in accordance with IAS 1. RECONCILIATION OF EQUITY - As at 14 August 2004 Reported Business Employee Dividends Investment Intangible under UK combinations benefits property assets GAAP* IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38 £m £m £m £m £m £m Non-current assets Goodwill and intangible assets 1,015 25 - - - 275 Property, plant and equipment 14,110 - - - (563) (275) Investment property - - - - 563 - Investments in joint ventures and associates 318 1 - - - - Other investments 8 - - - - - Deferred tax - - - - - - assets ------ -------- ------- ------- ------- ------- 15,451 26 - - - - Current assets Inventories 1,167 - - - - - Trade and other receivables 673 - (22) - - - Investments 895 - - - - - Cash and cash equivalents 606 - - - - - ------ -------- ------- ------- ------- ------- 3,341 - (22) - - - Current liabilities Trade and other payables (4,413) - 12 177 - - Financial liabilities - Borrowings (366) - - - - - Current tax payable (296) - - - - - Provisions - - - - - - ------ -------- ------- ------- ------- ------- (5,075) - 12 177 - - Net current liabilities (1,734) - (10) 177 - - Non-current liabilities Financial liabilities - Borrowings (4,594) - - - - - Post-employment benefit obligations - - (875) - - - Other non-current liabilities (31) - - - - - Deferred tax liabilities (610) - 260 - - - Provisions (15) - - - - - ------ -------- ------- ------- ------- ------- (5,250) - (615) - - - ------ -------- ------- ------- ------- ------- Net assets 8,467 26 (625) 177 - - ====== ======== ======= ======= ======= ======= Equity Share capital 386 - - - - - Share premium account 3,538 - - - - - Other reserves 40 - - - - - Retained earnings 4,457 26 (625) 177 - - ------ -------- ------- ------- ------- ------- Equity attributable to equity holders of the parent 8,421 26 (625) 177 - - Minority interests 46 - - - - ------ -------- ------- ------- ------- ------- Total equity 8,467 26 (625) 177 - - ====== ======== ======= ======= ======= ======= Leasing Share Impairment Deferred Other Restated based of fixed tax under payments assets IFRS IAS 17 IFRS 2 IAS 36 IAS 12 £m £m £m £m £m £m Non-current assets Goodwill and intangible assets - - - - - 1,315 Property, plant and equipment 63 - (144) - - 13,191 Investment property - - - - - 563 Investments in joint ventures and associates - - - - - 319 Other investments - - - - - 8 Deferred tax assets - - - - 12 12 ------ ------- ------- ------ ------ ------- 63 - (144) - 12 15,408 Current assets Inventories - - - - - 1,167 Trade and other receivables (3) - - - - 648 Investments - - - - (895) - Cash and cash equivalents - - - - 895 1,501 ------ ------- ------- ------ ------ ------- (3) - - - - 3,316 Current liabilities Trade and other payables - (6) - - - (4,230) Financial liabilities - Borrowings (5) - - - - (371) Current tax payable - - - - - (296) Provisions - - - - (4) (4) ------ ------- ------- ------ ------ ------- (5) (6) - - (4) (4,901) Net current liabilities (8) (6) - - (4) (1,585) Non-current liabilities Financial liabilities - Borrowings (67) - - - - (4,661) Post-employment benefit obligations - - - - - (875) Other non-current liabilities - - - - - (31) Deferred tax liabilities 3 27 16 (86) (12) (402) Provisions 2 - - - 4 (9) ------ ------- ------- ------ ------ ------- (62) 27 16 (86) (8) (5,978) ------ ------- ------- ------ ------ ------- Net assets (7) 21 (128) (86) - 7,845 ====== ======= ======= ====== ====== ======= Equity Share capital - - - - - 386 Share premium account - - - - - 3,538 Other reserves - - - - - 40 Retained earnings (7) 21 (128) (86) - 3,835 ------ ------- ------- ------ ------ ------- Equity attributable to equity holders of the parent (7) 21 (128) (86) - 7,799 Minority interests - - - - - 46 ------ ------- ------- ------ ------ ------- Total equity (7) 21 (128) (86) - 7,845 ====== ======= ======= ====== ====== ======= * The above UK GAAP numbers have been adjusted into IFRS format (in accordance with IAS 1) and includes restatement for UITF 17 (revised) Notes to the reconciliation of equity/profit at 14 August 2004 and details of significant changes in accounting policies The following describes the most significant adjustments arising from the transition to IFRS. Share-based payments (IFRS 2) Share option schemes The main impact of IFRS 2 for the Group is the expensing of employees' and directors' share options. The expense is calculated with reference to the fair value of the award on the date of grant and is recognised over the vesting period of the scheme, adjusted to reflect actual and expected levels of vesting. We have used the Black-Scholes model to calculate the fair value of options on their grant date. In the 24 weeks to 14 August 2004, application of IFRS 2 results in a pre-tax charge to the Income Statement of £22m; however, the pre-tax effect is partially offset by a deferred tax credit of £6m. Deferred tax is calculated on the basis of the difference between market price at the Balance Sheet date and the option exercise price. As a result the tax effect will not correlate to the charge. The excess of the deferred tax over the cumulative Income Statement charge at the tax rate is recognised in equity (in the 24 weeks to 14 August 2004 this amounted to a credit of £5m to retained earnings). Share bonus schemes Under UK GAAP we expensed share bonus schemes by applying the rules of UITF 17 which based the charge on the intrinsic value of the award. The IFRS 2 charge is based on the fair value. This results in an additional charge of £1m to the Income Statement for the 24 week period to 14 August 2004. Goodwill (IFRS 3) Under IFRS 3, goodwill is no longer amortised on a straight-line basis but instead is subject to annual impairment testing. In terms of adjustments to the Income Statement in the 24 week period to 14 August 2004, the non-amortisation of goodwill results in an increase in half-year pre-tax profit of £26m. There are no associated tax impacts. Recognition of dividends (IAS 10) Under IFRS, dividends declared after the Balance Sheet date will not be recognised as a liability as at that Balance Sheet date. The interim dividend of £177m declared in September 2004 but paid in November 2004 has been reversed in the Balance Sheet as at 14 August 2004 and charged to equity in the Balance Sheet as at 26 February 2005. Leasing (IAS 17) UK GAAP and IFRS accounting for leases is broadly similar except that IAS 17 requires the Group to consider property leases in their component parts (i.e. land and building elements separately). Following a detailed review of our property lease portfolio, a small number of 'building' leases have been reclassified as finance leases and brought on Balance Sheet as at 29 February 2004, based on the criteria of IAS 17. As at 14 August 2004, this led to a relatively small increase in fixed assets of £63m, and a similar increase in finance lease creditors, resulting in a decrease in net assets of £7m. The main impact on the Income Statement is that some UK GAAP operating lease expenses will be replaced with depreciation and financing charges for the building elements of the reclassified leases. Over the life of the lease, the total Income Statement charge will remain the same, but the timing of expenses will change, with more of the total expense recognised earlier in the lease term. The net pre-tax impact on the Income Statement is approximately £1m for the 24 weeks ended 14 August 2004. In the 24 weeks to 14 August 2004 there is a one-off Income Statement adjustment of £4m, relating to the deferral of some profit from the sale and leaseback deal completed in April 2004, which instead will be recognised over the 25 year lease term. Employee benefits (IAS 19) For UK GAAP reporting, we applied the measurement and recognition policies of SSAP 24 for pensions and other post-employment benefits, whilst providing detailed disclosures for the alternative measurement principles of FRS 17 'Retirement Benefits'. IAS 19 takes a similar approach to accounting for defined benefit schemes as FRS 17. On transition, the deficit disclosed under FRS 17 has been recognised in the Balance Sheet. At the opening Balance Sheet, this resulted in a pre-tax reduction in net assets of £676m which represented the sum of the deficit plus the reversal of a SSAP 24 debtor in the UK GAAP Balance Sheet as at 28 February 2004. An associated deferred tax asset of £199m was recognised in respect of the pension deficit. Therefore the total adjustment to net assets as at February 2004 was £477m. We have applied the amendment to IAS 19 which allows actuarial gains and losses to be recognised immediately in the Statement of Recognised Income and Expense i.e. the actuarial gains and losses will be taken directly to equity. The incremental pre-tax Income Statement charge for the 24 weeks to 14 August 2004 from the adoption of IAS 19 is an additional charge of £23m. This is split between the current service cost (increases operating costs by £25m) and the return on plan assets (increases finance income by £2m). The related tax effect of this is a £7m credit to the Income Statement. The actuarial loss on the scheme for the same period, recognised through reserves, is £182m, with an offsetting tax adjustment of £54m. Joint ventures (IAS 31) and associates (IAS 28) The Group has chosen the equity method of accounting for joint ventures (JVs) and associates, which is largely consistent with how they were accounted for in the UK GAAP accounts. The adoption of IFRS leads to a change in the presentation of the Group's share of the results of our JVs and associates. Under UK GAAP, we included our share of JV and associate operating profit before interest and tax and showed our share of their interest and tax in the respective Group lines on the Profit and Loss account. Under IFRS, JV and associate profit is shown as a net figure i.e. post interest and tax. This will have the effect of reducing profit before tax for the 24 weeks ended 14 August 2004, by £14m, but will reduce the tax charge by the same amount. Overall, there is no impact on the Group profit after tax as this is purely a presentational change. Impairment of assets (IAS 36) Under IAS 36, individual assets should be reviewed for impairment when there are any indicators of impairment. Where individual assets do not generate cash flows independently from one another, the impairment review should be carried out at the 'Cash-Generating Unit' level, which represents the lowest level at which cash flows are independently generated. The IASB has determined that for retailers this is at the individual store level. Following impairment reviews as at 29 February 2004, we identified a small number of stores which in total required a provision for impairment of £142m. This has the effect of reducing the total fixed asset balance by approximately 1% as at 29 February 2004. A similar review was performed for 2004/05 but no further stores required an impairment provision. However, due to movements in foreign exchange rates, the overall provision set against fixed assets had increased by £2m at 14 August 2004 - this consolidation adjustment has been taken through equity, with no impact on the 2004/05 half-year Income Statement. IAS 36 has the additional effect of reducing the deferred tax liability by £15m as at 29 February 2004 and £16m as at 14 August 2004 (the movement year-on-year relates to foreign exchange differences which have been taken to equity). The deferred tax adjustments arise because the impairment reviews have reduced the net book values of certain assets qualifying for capital allowances, with no corresponding change in the tax base. Intangible assets (IAS 38) Under UK GAAP, we included licences and capitalised development costs within tangible fixed assets on the Balance Sheet. Under IAS 38, 'Intangible Assets', such items should be disclosed separately on the face of the Balance Sheet. As a result, there is a reclassification of £275m in the Balance Sheet as at 14 August 2004, between Property, plant and equipment and Intangible assets. There is no impact on the Income Statement from this reclassification. Investment properties (IAS 40) Under UK GAAP, we included all owned property assets within tangible fixed assets on the Balance Sheet. Under IAS 40, 'Investment Properties', we are required to split out any property which earns rental income or is held for capital appreciation. As a result, there is a reclassification of £563m in the Balance Sheet as at 14 August 2004 between Property, plant and equipment and Investment property. There is no impact on the Income Statement from this reclassification. Deferred and current taxes (IAS 12) Under UK GAAP, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the Balance Sheet date and which could give rise to an obligation to pay more or less taxation in the future. Deferred tax under IAS 12 is recognised in respect of all temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying value for financial reporting purposes. The change to a Balance Sheet liability method of providing for deferred tax leads to a number of adjustments, as follows: Feb 2004 H1 04/05 H1 04/05 Aug 2004 Net assets Income Equity Net assets statement £m £m £m £m Impact of IAS 12 (79) (7) - (86) Tax effect of accounting changes 232 15 59 306 --------- --------- --------- --------- Net impact on tax balance/profit after tax 153 8 59 220 JV and associate presentation change (IAS 28/31) 14 --------- Total impact on tax 22 The significant components of the Balance Sheet adjustments are the recognition of deferred tax assets on the pension scheme deficit and share-based payments, less deferred tax provisions for potential future gains arising from rolled-over gains and for the potential future tax liabilities arising from fair value adjustments recorded for business combinations. Neither of these provisions were previously recognised under FRS 19. Other adjustments Other adjustments arise from the reclassification of money market deposits from current asset investments to cash and cash equivalents (as a result of the definition within IAS 7 'Cash Flow Statements') and other minor presentation differences. NOTE 9 RECONCILIATION OF EQUITY The following reconciliation describes the effect of the adoption of IAS 32 and IAS 39 as at 27 February 2005. The Group adopted IAS 32 'Financial Instruments: Presentation and Disclosure' and IAS 39 'Financial Instruments: Recognition and Measurement' from 27 February 2005. The Group has taken the exemption available under IFRS 1 'First Time Adoption of IFRS' not to restate comparatives for IAS 32 and IAS 39. The analysis below details the transitional adjustments arising from the adoption of IAS 32 and IAS 39 as at 27 February 2005: Reported Financial Financial Restated under IFRS Instruments: Instruments: for (excluding Presentation Recognition IAS 32 IAS 32 and 39) And and and Disclosure Measurement IAS 39 IAS 32 IAS 39 £m £m £m £m Non-current assets Goodwill and intangible assets 1,408 - - 1,408 Property, plant and equipment 14,449 - - 14,449 Investment property 637 - - 637 Investments in joint ventures and associates 412 - (10) 402 Other investments 7 - (7) - Deferred tax assets 14 - - 14 ----------- ----------- ---------- --------- 16,927 - (17) 16,910 Current assets Inventories 1,309 - - 1,309 Trade and other receivables 769 - - 769 Derivative financial instruments - - 6 6 Cash and cash equivalents 1,146 - - 1,146 ----------- ----------- ---------- --------- 3,224 - 6 3,230 Current liabilities Trade and other payables (4,957) - 163 (4,794) Financial liabilities - Borrowings (482) - (63) (545) - Derivative financial instruments - - (9) (9) Current tax liabilities (221) - - (221) Provisions (6) - - (6) ----------- ----------- ---------- --------- (5,666) - 91 (5,575) Net current liabilities (2,442) - 97 (2,345) Non-current liabilities Financial liabilities - Borrowings (4,567) - 25 (4,542) - Derivative financial instruments - (228) (220) (448) Post-employment benefit obligations (735) - - (735) Other non-current liabilities (21) - - (21) Deferred tax liabilities (499) - - (499) Provisions (6) - - (6) ----------- ----------- ---------- --------- (5,828) (228) (195) (6,251) ----------- ----------- ---------- --------- Net assets 8,657 (228) (115) 8,314 =========== =========== ========== ========= Equity Share capital 389 - - 389 Share premium account 3,704 - - 3,704 Other reserves 40 - - 40 Retained earnings 4,473 (228) (115) 4,130 ----------- ----------- ---------- --------- Equity attributable to equity holders of the parent 8,606 (228) (115) 8,263 Minority interests 51 - - 51 ----------- ----------- ---------- --------- Total equity 8,657 (228) (115) 8,314 =========== =========== ========== ========= Notes to the adjustment of equity at 27 February 2005 for IAS 32 and IAS 39. 1. The Group has entered into an agreement with Samsung Corporation to purchase the remaining shares of Samsung Tesco still held by Samsung. These shares will be purchased in three tranches in 2007, 2011 and 2012. The purchase will reflect the market value of these shares at the date of acquisition. Under IAS32, the net present value of the future payments are shown as a financial liability, the forecast value of which was £228m at February 2005. 2. In 2003, the Group monetised profitable interest rate swaps. The amount realised was held in deferred income and amortised through the interest line in the Income Statement. On transition to IFRS, the remaining credit balance held in deferred income, £163m, is transferred to retained earnings. Under IFRS 1, there is a corresponding credit of £163m to the value of financial liabilities, which is subsequently amortised through the interest line in the Income Statement. The net effect is a transfer of £163m from deferred income to financial liabilities, with no impact on the Income Statement and net assets. 3. Other adjustments are due to the marking-to-market of financial instruments. INDEPENDENT REVIEW REPORT TO TESCO PLC Introduction We have been instructed by the Company to review the financial information for the 24 weeks ended 13 August 2005, which comprises the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement and the Group Statement of Recognised Income and Expense and the related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the Directors. The Directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority. As disclosed on page 4 of the Report and Accounts for the 52 weeks ended 26 February 2005, the next annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards. This interim financial information has been prepared in accordance with the basis set out in the IFRS restatement document, which was issued on 25 May 2005 and is available on www.tesco.com/corporate. The accounting policies are consistent with those that the Directors intend to use in the next annual financial statements. As explained in the 'Accounting policies and basis of preparation' note there is, however, a possibility that the Directors may determine that some changes are necessary when preparing the full annual financial statements for the first time in accordance with International Financial Reporting Standards. The IFRS standards and IFRIC interpretations that will be applicable and adopted for use in the European Union at 25 February 2006 are not known with certainty at the time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the 24 weeks ended 13 August 2005. PricewaterhouseCoopers LLP Chartered Accountants London 19 September 2005 INVESTOR INFORMATION REGISTRAR AND SHAREHOLDING ENQUIRIES Administrative enquiries about the holding of Tesco PLC shares (Other than ADRs) and enquiries in relation to the scrip dividend scheme should be directed to: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA Telephone 0870 600 3970 SHARE DEALING SERVICES Shareview dealing is a telephone and internet service arranged through Lloyds TSB Registrars and provides a simple and convenient way of selling Tesco PLC shares. For telephone sales call 0870 850 0852 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing A postal dealing service for buying and selling Tesco PLC shares is also available and a form can be obtained by calling 0870 242 4244. TESCO ONLINE SERVICE Tesco financial information, including the Interim Report and the Annual Report and Financial Statements 2005, is available on the internet at www.tesco.com INVESTOR RELATIONS Investor Relations department Tesco PLC, Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL Telephone 01992 646484 www.tesco.com/corporate e-mail investor.relations@uk.tesco.com SECRETARY AND REGISTERED OFFICE Lucy Neville-Rolfe Tesco PLC, Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL Telephone 01992 632222 FINANCIAL CALENDAR 2005 Interim dividend: Ex-dividend date 28 September Last date for receipt or revocation of scrip dividend mandates 11 November Interim dividend pay date 9 December 2006 Financial year-end 25 February Preliminary results announcement 25 April Final dividend:ex-dividend date 3 May Annual Report posted 26 May AGM 7 July Final dividend pay date 14 July This information is provided by RNS The company news service from the London Stock Exchange

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