J Sainsbury plc

Good morning everyone and welcome to our 23-24 interim results presentation. Thank you for joining us today. Now I'm going to start with a brief introduction to cover progress against the priorities we set out three years ago in our Food First plan. Blannard is here with me and she will then cover the financials and then I'll go into more detail on some of the strategic highlights from the first half. Now, you will hopefully recognise our five priorities that we set out three years ago now, back in November 2020. Since then, we have talked to you many times about the key pillars of food first, brands that deliver, and save to invest, underpinned by being connected to our customers and delivering through our integrated plan for better. Now we've made strong progress, reigniting our passion for food, building resilience in our brands that deliver, and making bold choices to reduce our cost base. And this has provided us with the fuel to invest in our food offer, improving service, innovation, and particularly value. I'm pleased to say that our relentless focus driving these improvements has delivered, with food now firmly back at the heart of Sainsbury's. We're consistently delivering for customers on value, innovation and service, and they're noticing. Now, as a result, we've seen a significant shift in our market share momentum, and we've grown grocery volumes ahead of the market consistently since the start of the financial year. You can really see our progress here in the switching data which shows volume gains and losses between different retailers. We are now gaining volumes from all of our grocery competitors and we're the only full choice supermarket to be gaining volume from both Aldi and Lidl. Now of course a big driver of this is the meaningful improvement in our value proposition. We said at the start of this strategy that we weren't where we needed to be on price. Quite simply, customers wanted to shop at Sainsbury's but back then we were too expensive. Through the significant investment we have made in value, our price match to Aldi, the introduction of Nectar prices across the basket, and through continuously passing through less inflation than our key competitors, we are now at our most competitive on price. And customers are depending on us and now trusting us to deliver consistently great value. Now that consistency really shows through here. An update of a chart we have shown you previously, demonstrating our progress from November 2020 up to now. And the outcome, as you can see, is clear. We have improved our value position against all of our key competitors. The investments we have made across our food proposition are really being noticed by our customers. And as a result, they are rating us more highly. We have consistently outperformed on overall customer satisfaction. But what you can see here is the progress we've made in how we show up for our customers across the full spectrum of the metrics that are really important to them. Now, we're particularly encouraged by the progress we've made so far this year on improving our value perception, a measure which you will all know is notoriously slow to move. Now, alongside our progress in food, we've transformed Argos into a fundamentally more resilient, profitable business and a leading digital retailer. When we talked with you at our quarter one results in July, we flagged the tough comparatives that Argos faced this year after an exceptional summer last year. At the time, we were optimistic about the weather for summer 2023. But as you will know, unfortunately, the weather over the summer didn't go our way. And as a result, we saw significantly weaker sales across the higher margin seasonal categories. Just to give you some examples. In the second quarter, paddling pool sales were down 74% year on year. Barbecue sales were down 46% and garden furniture sales were down 42%. However, we continue to outperform strongly in the key electronics categories, with strong market share gains as customers have responded well to our improved availability and a greater range of more premium products. And just as an indication of the significant change in customer behaviour we saw this summer, gaming sales were up 20%. So while we took a hit on the top line and on gross margin mix, Argos continues to become a more efficient business, reducing the fixed cost base and therefore limiting the impact of revenue and mix shifts on the bottom line. Now, before I hand over to Blanid on the financials, I want to reflect on the eight key operational and financial metrics that we set out three years ago. I committed back in November 2020 that we would report on our progress every time we updated you. So as we look at the operational metrics, I'm really confident in the progress we have made and in the strength of our delivery. Our momentum is continuing to build. We've made record gains in grocery market share. Our customer satisfaction scores show that our customers are recognizing the improvements we've made. Significant progress too in our colleague engagement, and that's really helping to power our performance. And we're working hard on our plan for better objectives, making good progress in some key areas of our plan, but recognising too, there is still more work for us to do in others. Now on the financial metrics as we look ahead, we expect our strong momentum to continue. We've upgraded our profits guidance today, despite the headwinds caused by a tough summer in our general merchandise and clothing businesses, and with the reduction in financial services profits. Our group UPBT is significantly higher than it was at the outset of the strategy, despite significant investment in the customer offer. And we're on track to deliver the £1.3 billion of structural cost savings, the quantum associated with our original target of 200 basis points cost-to-sales reduction, and more than double the savings run rate of the prior three years. We've increased our guidance on the amount of retail free cash flow we will generate. And as a team, we remain very focused on driving further improvements in returns, both in terms of capital discipline and profit evolution. This will be one of the key focus areas we'll talk about more when we get together in February, as we look ahead towards the next phase of our strategy. So we've made a strong start to the year and we're encouraged by the continued momentum we're carrying into the second half. I want to recognise every one of my colleagues and all of our supplier partners. They are continuing to do a brilliant job, driving forward our progress and enabling our success. Huge thanks go to all our team for all they're doing every day to deliver for our customers. And with that, I'll now hand over to Blaned to cover the financials.

Good morning everyone and thank you Simon. I will now cover the financial highlights for the 28 weeks to 16th September. Covering sales first, grocery sales increased 10.1% in the half with volume growth in both Q1 and Q2 despite tough comparatives. This was against last year's very warm summer weather and strong events performance. Growth eased a little in the second half as inflation slowed. General merchandise sales grew 1.1%, or 2.5%, excluding the closure of Argus in the Republic of Ireland. Sales of outdoor and seasonal products were down more than 30% in the second quarter, reflective of a very poor summer weather. This was offset by market share gains and strong sales growth in electricals, with Argus Q2 sales down just 0.1%. Weather also impacted clothing sales, where we took a disciplined promotional stance. This had a significant impact on seasonal impulse purchases in a highly promotional market. In total, H1 retail sales, excluding fuel, were up 7.7% year on year, or 8.4% on a like-for-like basis. including the impact of lower fuel sales primarily reflecting lower prices, first half sales growth was 2.6%. Turning to the key profit numbers, retail operating profit was up just under 2% with strong profit growth in grocery, partially offset by the mixed impact on general merchandise gross margins as a result of lower seasonal sales. Financial services profits fell, primarily due to lower net interest income. After slightly higher underlying net interest costs, underlying profit before tax was flat year on year. At a statutory pre-tax level, we reported a profit of £275 million. This is down £101 million against the prior year. Within this, restructuring costs were broadly unchanged year on year, and I'll cover the key movements behind this shortly. Looking at the balance sheet, net debt, including leases, reduced by over 700 million from the year end. In addition to our strong cash flow, this reflects a net benefit of 372 million from the completion of the Highbury and Dragon property transaction. As a reminder, we bought 21 of our best supermarkets back from a property investment pool, which we part-owned. This transaction completed earlier in the year, removing lease liabilities of just over £1bn. The net cash cost of the transaction was £670 million. We funded this with cash and a term loan and this is reflected in the movement of ex-lease debt position from net funds of £144 million to net debt of £231 million. Net debt to EBITDA reduced to 2.6 times reflecting three things. the impact of Highbury and Dragon transaction on net debt, continued strong cash generation and is normally the case, a strong seasonal working capital benefit which we would expect to partially unwind in the second half. You can see our return on capital employed improved to 7.9% from 7.7% at H1 last year, primarily driven by our continued focus on debt reduction. We generated £520 million of retail-free cash flow in the half, a strong performance, but this is down versus last year's exceptional level. We benefited from three things. First, strong working capital inflow, driven by the seasonal timing benefit mentioned earlier. Secondly, grocery inflation, and finally, strong stock control. The reduction in underlying earnings per share after flat pre-tax profits is driven by the increase in the rate of corporation tax. We will pay a dividend of 3.9p per share in line with last year and with our practice of paying 30% of prior year's full dividend. Turning to financial services, underlying profit was down 6 million year on year. Revenue growth was strong, driven by lending growth and travel money commissions. You can see net interest income reduced as the impact of significantly higher base rates on funding costs was not fully passed on to consumers. This reflects both the market dynamics together with the nature of the products we have. Specifically, buy now, pay later at Argus, a really important part of the Argus proposition. We also continue to see a high proportion of both credit card and Argus card customers continuing to clear balances rather than incurring interest costs. Ultimately, it's a high quality credit book with the low bad debt ratios being an indicator of this. However, this provides a margin squeeze in the current circumstances. We completed the sale of the mortgage book during the period, reducing net lending by £449 million. The impact on total consumer lending was partially offset by growth in unsecured lending. We are focused on optimising the lending portfolio and on cost reduction, but we now expect financial services profits to be lower than last year's levels. Returning to the Group P&L. In order to provide a clearer view, we exclude P&L items which do not reflect the Group's underlying performance. These are outlined on this slide. Restructuring costs of £32 million relate to the programme announced in November 2020. Our guidance for the total restructuring charges for this programme is unchanged. To date, the costs of the programme have been £778 million, with cash costs of £243 million. We expect a related cash outflow of around £20 million in the second half, which would mean total cash costs of a little more than £260 million through to the end of this financial year. The remainder of the one-off costs are primarily non-cash, including a loss on the disposal of the mortgage book, a year-on-year change in the movement of energy derivatives positions and non-cash movements relating to the Highbury and Dragon property transaction. Now on to debt and cash. This table shows the key elements of the cash flow and movements in net debt this year and last. There are three main drivers of the differences in retail free cash flow, specifically the lower working capital inflow, higher capexes guided and last year's dividend of 50 million from Sainsbury's Bank that we don't expect to repeat. We have broken out the elements of the Highbury and Dragon transaction for you here. We continue to expect full year capex of between 750 million and 800 million, and we now expect free cash flow of at least 600 million this year, higher than our original guidance of at least 500 million. Just a quick reminder of our capital allocation framework. As outlined before, the cornerstone is targeting a solid investment grade balance sheet through leverage comfortably within the range of 2.4 to 3 times. We then commit to paying a strong dividend to shareholders through a payout ratio of around 60% of underlying earnings. We then look to invest in high returning opportunities that generate future value. And finally, we are committed to return any surplus cash to shareholders As we've said before, we will talk about this once we are comfortably within our target leverage range and we will provide an update in February. We are pleased with the performance delivered in the first half, with strong grocery volume growth, good cost discipline, strong cash generation and resilient profits despite seasonal headwinds and cost pressures. So while financial services is a headwind for us this year, we're confident of delivering underlying profit before tax of between £670 million and £700 million, the top end of our guidance range. Cash generation continues to be strong, and we now expect to generate retail-free cash flow of at least £600 million for the full year. Thank you for your time, and I'll now hand back to Simon to cover the strategic highlights in more detail.

Thank you, Blanid. I'm now going to review in some more detail the progress we've made during the first half of this financial year. But first, I'm going to share with you a brief film, which really does set out our bold ambition in food, to deliver good food for all of us.