Tesco 2007 Annual Report Download - page 8

6Tesco PLC Annual report and financial statements 2007 Find out more at www.tesco.com/corporate
Operating and financial review continued
Increased productivity and good expense controls have
enabled us to absorb significant external cost increases in
the year, arising mainly from higher oil-related costs and
increases in local business taxes. Start-up costs totalling £42m
for Tesco Direct and establishing our operations in the United
States were charged to the UK. Although the combined
start-up losses were a little below our previous guidance of
£50m, we expect these to increase during the current year,
particularly in the US, as we recruit store and depot staff
ahead of our planned launch later this year (see page 12).
Despite absorbing these additional costs, UK trading profit
rose 9.2%, with trading margins at 5.9%, similar to last year.
2006/7 Growth
UK sales (inc. VAT) £35,580m 9.0%
UK trading profit £1,914m 9.2%
Trading margin 5.9% –
Joint Ventures and Associates Our share of profit (net of tax
and interest) for the year was £106m compared to £82m last
year. Tesco Personal Finance (TPF) profit was £130m, of which
our share was £65m, down on last year after absorbing higher
provisions for bad and doubtful debts. Profits from property
joint ventures rose significantly, due to the sale of two stores
(in which we remain tenants) to third parties, realising £47m
of property profits from two of our joint venture companies
during the year.
In September, we sold our 38.5% equity stake in GroceryWorks,
an internet grocery retailing business in the United States (US),
to Safeway Inc., which resulted in a profit of £22m.
Exceptional items Pensions adjustment (Pensions A-Day):
In April 2006, a Finance Act revision was agreed. This change,
known as Pensions A-Day, enabled members of our UK defined
benefit scheme to gain additional pension flexibility, altering
our pension scheme assumptions and resulting in a reduction
of the future liability by £250 million pre-tax. Changes in
pension assumptions for the Republic of Ireland pension
scheme produced a smaller gain of £8m, bringing the total
exceptional gain to £258m, recognised in the Income
Statement. Gerrards Cross: we are facing continuing
uncertainty in respect of our Gerrards Cross site as a result
of the complex legal situation following the tunnel collapse.
No decision has yet been taken about the future for this site.
However, at year end we have written off the carrying value of
our existing asset there (an impairment charge of £35m). We
are not yet in a position to assess any recoveries or liabilities
in respect of ongoing claims.
Finance costs and tax Net finance costs were £126m
(last year £127m), giving interest cover of 21 times (last year
18 times). Total Group tax has been charged at an effective
rate of 29.1% (last year 29.0%).
Underlying diluted earnings per share increased by 11.6%
on a comparable basis, to 22.36p (last year – 20.04p).
Dividend The Board has proposed a final dividend of 6.83p
per share (last year 6.10p). This represents an increase of
12.0%. As announced with our Preliminary Results last year,
we have now built dividend cover to comfortable levels and this
increase in dividend is again in line with growth in underlying
diluted earnings per share, which includes net property profits.
We intend to continue to grow future dividends broadly in line
with underlying diluted earnings per share growth.
The final dividend will be paid on 6 July 2007 to shareholders
on the Register of Members as at the close of business on
27 April 2007 (the dividend record date). Shareholders now
have the opportunity to elect to reinvest their cash dividend
and purchase existing Tesco shares in the Company through a
Dividend Reinvestment Plan. This scheme replaced the scrip
dividend at the last Interim Results and was introduced to
reduce dilution of issued shares and improve earnings per share.
Cash flow and Balance Sheet Group capital expenditure
(excluding acquisitions) rose as planned, to £3.0bn during
the year (last year £2.8bn). UK capital expenditure was £1.9bn
(last year £1.8bn), including £687m on new stores and £295m
on extensions and refits. Total international capital expenditure
rose slightly to £1.1bn (last year £1.0bn); comprising £0.4bn
in Asia and £0.7bn in Europe.
The UK total includes £89m of capital invested in establishing
our operations in the United States. We expect US investment
to move to around the £250m level this year, in line with the
guidance we issued when we announced our entry to the
market last year. We expect Group capital expenditure this
year to be around £3.5bn.
Cash flow from operating activities, including an improvement
of £11m within working capital, totalled £3.5bn. Overall, the
Group had a net cash outflow of £265m during the year,
leaving net borrowings of £5.0bn at the year-end, £0.5bn
higher than last year. Gearing was 48%.
Return on capital employed In April last year, we renewed
our commitment to increasing our post-tax return on capital
employed (ROCE), having exceeded our 2004 aspiration two
years early. We set a new target to improve ROCE by a further
200 basis points. The strong performance of the business
delivered slightly higher ROCE in 2006/07 – at 12.6% (last
year 12.5%), (Including the one-off benefit from Pensions
A-Day, ROCE was 13.6%). This represents good progress
and was achieved despite carrying the extra start-up costs
and investment in the US and Tesco Direct as well as the
integration costs and capital employed in our International
acquisitions and increased stake in Hymall. This means that
ROCE is on track to meet our new target.