Tesco 2009 Annual Report Download - page 37

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    2009
1.9
2.3
2.5
2.8
3 .1
    2009
2,334
2,672
3,263
3,751
4,332
Tesco PLC Annual Report and Financial Statements 2009
35
REPORT OF THE DIRECTORS
Underlying profit before tax (£bn) Number of stores
To find out more go to
www.tesco.com/annualreport09
We are now reducing UK capital spend on large mixed-use development schemes and we have purchased fewer existing trading stores from
competitors, allowing UK capital expenditure to revert to the levels of four years ago. Importantly this is being achieved whilst continuing to meet
our objective of adding some 6 to 7% to our UK selling space annually. In some of our markets, such as the US, we are taking a more cautious
approach to expansion during the downturn and we are also seeing substantial falls in store site and build costs. Taken together, these changes
mean that we are able to plan for Group capital expenditure to reduce substantially this year to around £3.5bn, whilst still delivering strong organic
growth in Group selling space of around 9% in the current year.
Cash flow from operating activities totalled £5.0bn (last year £4.1bn), including an improvement of £582m within working capital, driven in
part by good control of stock. Net debt rose to £9.6bn at the year-end (last year £6.2bn). £1.9bn of this increase is attributable to the impact
of acquiring TPF and Homever, and a further £1.0bn to the effect of unfavourable currency movements.
We are targeting a reduction in net debt in the current year, driven by lower capital expenditure, property divestments, lower stock levels and other
improvements in working capital.
Property In April 2006, we announced plans to release cash from property through a sequence of joint ventures and other sale and leaseback
transactions, in the UK and internationally and return significant value to shareholders, both through enhanced dividends (through the growth in
underlying earnings per share, which includes property profits) and share buy-backs. We have managed the pace of this programme in light of the
current financial and property market conditions, and as a result we have divested the property at attractive yields.
The transactions completed so far – with pension funds, property companies and other investors – have delivered aggregate proceeds of £2.2bn.
Whilst yields have increased modestly in recent months, we expect to be able to complete further transactions on attractive terms in the months ahead
and we are currently in discussion with potential counterparties. Proceeds for the remainder of this year will principally be used to pay down debt.
The net book value of our fixed tangible assets is £24.7bn, most of it in our freehold store portfolio – even after recent property divestments linked
to our £5bn programme. We estimate the current market value of these assets to be £30.4bn, representing a 23% premium to book value.
Pensions Our award-winning defined-benefit pension scheme is an important part of our competitive benefits package, which helps Tesco
recruit and retain the best people. The trustees manage and fund our scheme on an actuarial valuation basis and, at our triennial valuation dated
31 March 2008, the scheme had a small deficit of £275m.
Following the valuation, member and company contributions have increased and, to further improve the security of the scheme for members,
the trustees will be granted contingent property assets worth £500m.
As at February 2009, under the IAS 19 methodology of pension liability valuation, the scheme had a deficit on a post-tax basis of £1.1bn (last year
£0.6bn). This change has been driven mainly by falls in capital markets and other asset classes, although the deficit is similar to the level reported
at our Interim results.
Return on capital employed In January 2004, we said that we had an aspiration to increase our post-tax return on capital employed (ROCE)
of 10.2% in the 2002/3 financial year by 200 basis points over five years on then current plans. In April 2006, we renewed our commitment to
increasing our post-tax return on capital employed (ROCE) by a further 200 basis points, having exceeded our 2004 aspiration early.
ROCE rose slightly to 13.0% in the year before the effect of the two major acquisitions – TPF and Homever – which were completed in the
second half. This represents a good performance and we remain on track to deliver our targeted ROCE improvement in the years ahead as these
investments mature.