Mike Coupe - CEO John Rogers - CFO

Bruno Monteyne - Bernstein Arnaud Joly - Societe Generale Rob Joyce - Goldman Sachs Aubin Edouard - Morgan Stanley James Grzinic - Jefferies Stewart McGuire - Credit Suisse John Kershaw - Exane James Anstead - Barclays Xavier Le Mene - Bank of America Shridhar Mahankali - Macquarie

Good morning everyone, welcome to the quarter one Sainsbury's conference call, it's Mike Coupe speaking and I am joined by John Rogers our CFO. John will begin by giving you a very brief summary and then we'll open up for questions.

John.

So good morning everyone. So draw your attention to the key figure of like-for-like retail sales down 2.1% in line with consensus.

The market continues to be impacted by strong levels of food price deflation and a trust pricing environment. We of course outlined in November some key actions that we were taking as part of our strategy going forward so for example a 150 million of price investment, the investment in quality of over 3000 skews and of course investment in our store service levels, I'm pleased to say actually last night that we won the Grocer's 33 Annual Award for service and availability, so a great positive external endorsement of our store standards.

So as a result of our strategy we're starting to see some encouraging early trends in our key trading and operation metrics. With that I'll hand over to Q&A.

Good morning John and Mike. You're talking about the volumes of 1 to 2% growth I think just in the press conversation you had with the overall life lag of minus 2.1, so you're really talking that you've seen the internal price deflation there of minus 3 to 4%, do I see that correctly?

The second question is on convenience, clearly a slowdown I think you got about 11% slowing down. Is it because of the availability of space that is just harder to find the sites that are giving you the high returns?

Are there any other explanations? And the third one is on given the growth you have in general merchandizing, clothing, what kind of margins tail would you expect this year from these kind of segments, the rapidly growing versus the rest of your food business?

Thank you.

In terms of the volume question, we think sort of volume growth of 1 to 2% across the entire business so the like for like level I'd say volumes are broadly flat. We've seen price deflation roughly between minus 2 and minus 2.5% for the quarter, that we talked about in Q4 and exit deflation of about minus 2.5% has come off slightly probably minus 2, minus 2.5% for this quarter, so hopefully that answers your first question on volume and deflation.

In relation to convenience I think it's just circumstance, I mean it is getting tougher to find the right size and I've said for some time that as competition in this marketplace hots up then returns will come under pressure on yield size. And we just simply won't play the game of expecting lower returns and so by definition that means it'll be tougher to find the size that we're looking for.

We still believe we're on track to open the 1 to 2 stores per week that we talked about at our prudence that we're comfortable with the [indiscernible], it just happens that at Q1 it was a relatively slow start to the year but we've got a very good pipeline say for example last we opened five new stores, convenience stores, this week we'll open two. So, you know we're pretty comfortable with the guidance that we gave at the prudence.

And I think the last question was on margin what the impact of closing grossly on margin. I wouldn’t want to say at this point, obviously it’s a trading statement so we won't comment on profit, profit measures but we can provide a bit more color on these things of course at our interim.

Yes, I would have thought the effect on sales mix would be pretty negligible even with reasonably substantial growth rate.

I have three questions, the first one on your price investment. Where will you cut prices in priority for this year?

And what is the volume trend on products whose prices are cut? Second question, you mentioned a 6% sales growth online for this quarter.

Can you remind us what was the trend in Q4 of last year? And the last question on the hard discounters; I would like to have your view on the slowdown of sales growth for hard discounters over the last few months.

In your view, it is mainly driven by, I would say, a less ambitious store opening program and you mention stronger difficulties to find good locations for convenience? Or is it linked to early signs of cannibalization or linked to the traditional players' reaction?

If you can give us your feeling on this slowdown of sales growth for hard discounters. Thanks.

Yes, on the second one broadly speaking it's a continuation of the trend that we saw in the first quarter I think actually the numbers of the volumes are up very-very slightly.

It's a slightly better performance this quarter than last quarter but not by much.

As far as the price investments are concerned we talked in our prelim statement around the 6% volume increase on the lines where we made the price investments so roughly 1100 lines, we already talked about the fact that we're also seeing volume increases more generally across the business which we're pleased with and we won't talk specifically about our headline pricing strategy, however, we will talk about the fact that we would match our competitors' toe-to-toe. Of course, there is a basket of competitors to look at though, not everybody behaves in the same way but we will maintain our overall price position.

We are comfortable where we are. We certainly think our prices, we know our prices are sharper year-on-year and we will maintain that relative position going forward.

So we will look at what we'll do. There are certainly lots of ups and downs in the marketplace at the moment like there always are and we will continue to make sure that we do the right thing with our customers.

I mean as far as the hard discounters are concerned, I mean it's a matter of fact in terms of the reported data that we've seen a slowdown, and I suspect all of the underlying reasons placed at the question that you asked. So it was a combination of overtrading in existing stores.

Actually in terms of rate of store openings, I am not sure we're seeing a significant slowdown. So they still opened lots of stores.

There's also been a significant closing down in the relative price gap. So if you are looking at price differentials and maybe 20%, 25% a year ago, those differentials have come down we reckon, in our business by about 10% year-on-year on the products that we stocked which the discounts are stocked.

And I suspect there is a little bit more to go, so.

Yes, I think there's evidence of -- if you look at the trend that happened a couple of years ago of customers basically deciding to [indiscernible] their shop. So becoming more promiscuous, doing a shop of the discounters and then topping up at Sainsbury's or frankly any other supermarket, that behavior was principally driven we think by the pricing differential the discounters had about times.

So we talk about this time value arbitrage, it's a bit of a consulted description but the idea that it makes sense to customers to split their shop because of the relative pricing differential between the supermarket sector and the discounters. Now that pricing differential has reduced, I think customers are now just reconsidering that decision and perhaps to some customers at least, customers deciding that cash base is more convenient and easier if I get all my shop under one roof, that's clearly something that they can't do at discounters and therefore there may be some customers starting to revert back to previous behavior.

I think it's too early to call just yet but there is some evidence of that case. And I think what's been interesting overtime in our view that, that pricing differential versus the discounters will close further overtime.

So it is 10% to 15% today, we suspect that the supermarket sector will close that differential to may be 5% to 10% going forwards leading to perhaps a further continuation of the trends that we've seen, starting to see over the last few months or so with the discounter growth slowing down.

And if you [indiscernible] pick the numbers a little bit, we referred to on the press release John referred to it. We've seen a long-term decline in the size of the basket in larger supermarkets and actually we've seen that flatten out over the last quarter which you could argue is perhaps an early indication there will be only one quarter so it's never good to call a trend on the basis of one data point.

But nevertheless that's something that appears to be going on there. So the flattening out of the underlying decline in basket size which is a good indication as far as our supermarket business is concerned.

A couple from me. Just quickly on that volume number and the comment you just made there, Mike, on the basket.

In terms of -- how do we think about this longer term? If you're investing 2%, 2.5% in price, would we not expect to see some kind of volume response just on an elasticity basis?

I'm not sure how we should think about that. If you'd give us some color on that, it'd be great.

And a second one. It's just on the discounter comment you made there, John.

Why would the price gap close to 5% to 10% and have we seen any response from the discounters yet on the lines where you've closed that gap? Thanks very much.

If I pick up the discounter comment, I think what we will, look, there's a lot of uncertainty in this market and therefore trying to project anything going forward is needed to be covered by caveats. But I think what we will see over the next period of time is an investment in price in those products that the discount is served by the supermarket sector.

So if you look at for example some of Asda's recent announcements in relation to where they are targeting price investments, they tend to be targeted at those products that the discounters are selling and I think we will start to see, we will see that trend continue over the coming months. So we will see that what is today perhaps a 10% to 15% pricing differential come down to 5% to 10% overtime.

Now our personal view is I don’t think that will be a net-net price investment by the supermarket sector. We think that the vast majority of that margin investment will be recovered in those products that the discounters don’t sell and to be fair we are seeing already some evidence of that in the market today.

So when our competitors talk about price investments there's often also price increases in other products across the portfolio where margin is being recovered. We are seeing reasonably positive margins for example on fuel today.

So, so far in this market what we are seeing is a targeted investment versus the discounters, an element of what we might describe as rationality across the rest of the portfolio. That reduced price differential versus the discount I think will contribute to the continued slowdown of the discounters but you know they could respond so we are actually very vary in fact that it remained a very, very tough market but we would characterize the market today as being quite rational and it's entirely sensible for the supermarket as a whole to be investing in its price position both as a discounters, we would argue that actually in terms of pricing environment today, the pricing positions between the respected supermarkets is certainly for the last couple of months has been relatively stable that could change overnight of course and we're very mindful of that, but at the moment it seems to be the most price investment seems to be targeted at the discounters.

And on volume, I mean we're seeing in the market more generally, some levels of volume growth and we're seeing that now for the last six months and that's against the backdrop for the last or broadly speaking five years where our volumes have either been flat or declining despite the fact that's actually growing population. So, I think there is some signs to your point of volume elasticity in the marketplace but of course to some extent that's offset by sort of eating out versus eating in trend which we see when customers have a little bit more money in their pocket.

So, there is an ongoing trend to show some signs of life in terms of volume and we will say at some point the deflationary cycle, annualize and I suspect we'll see positive inflation certainly by this time next year.

I guess my question, Mike, just very quickly, do you think volume is a response to the fact that you are just charging people less and does that mean it potentially goes away when inflation comes back? Because I guess the reason you haven't seen volumes for the last five years is because the industry has been passing through a lot of inflations to people, would be one of the reasons that you could conclude from that.

Is there any thoughts on that and how we think about that?

Yes, I would argue that if you went back five to six years ago, the response of customers entirely rational that they had their incomes squeezed and they started to in effect waste less, they used their inventory in their cupboards, they shop more frequently and when they shop tended to buy less and consequently waste less, it's quite unusual if you look at the industry over decades of broadly speaking volumes grow in line with population growth and what we're seeing is a return to that strength. So, it's really difficult to unpick the elasticity as you put it, there is no doubt if you look at our business where we've made price investments, we've seen a more buoyance volume response, a higher volume response in where we haven't made price investments but nevertheless across our entire business, we've seen volume growth.

I suspected, it's very difficult to unpick because of the other variable is customer disposal income and we are seeing a rise in that and if that trend continues I'll suspect the volume trend will continue as well.

Just two quick ones for me. You mention in the release that reduced promotional participation helped you reduce waste.

Was this reduction in waste above your budget and how material could it be to your margin this year? And we had adverse weather this year in the U.K.

during your Q1 so to what extent did that impacts your non-food sales this quarter?

So on the margin question obviously, very few questions but obviously not going to a respond to our relative positioning vis-a-vis waste and budget other than to say that we've absolutely seen the correlation between our reduced promotional participation, which is now around 30% from highs of perhaps close to 40% that we've seen over time a significant reduction in our promotional participation as a result of the pricing changes that we've made, it's a very positive sign, we've worked very closely with our suppliers to get that position and that's -- we think that is at the moment industry leading in terms of that relative movement that we're very pleased with that performance that has very much resulted in reduced waste in our stores, again as result of us moving out the supply chain.

Was this a positive surprise or was it expected, the waste reduction?

I think we've just said at this point Edouard that we're pleased with the performance and we're pleased with the result that we've seen in terms of that reduction in waste.

A reduction in waste but also improvements in availability which is the other part of the equation and it sounds a bit like you're making excuses when you start talking about the weather, but we already had the warmest week of the year, this time last year. So, there were certainly some seasonal weather effects in the quarter and perhaps the other two headwinds, slight headwinds where the timing of Easter particularly around the timing of Mother's day and also this time last year and for those that remember it, there was a very brief World Cup campaign and that had some influence on the backend of the course when it came to big ticket electricals and things like that, so there is a few underlying factors in the numbers, which have probably on balance are helpful, but as I say, blaming the weather is the last refuge of scoundrels so we won't to do that this time.

I just had a quick one really. Can you perhaps put into context that promotional reduction for the rest of the grocers, that 40% to 30% you've traveled?

Where is it for the industry as a whole? And perhaps another quick one, on Nectar, can you perhaps talk through -- what seems to be quite a smooth transition into halving those Nectar points?

Is it fair to assume that it's been smooth? Thank you

Yes, we're just trying to find some statistics, I suspect if you looked at the headline promotional participation for the industry, it's probably flat year-on-year if not slightly increasing, I'm just looking at the graph.

You can look at the Kantar, the Kantar data is there in terms of spend on deal. You can see, definitely see a reduction in our promotional participation over the last couple of periods, for the rest of the sector just eye balling the data.

It does look as though it is relatively flat for most of the supermarket peers. There are some ups and downs within that but you will see that yourself, you can get that from the Kantar data.

Though we say our particular move, as we say from a longer term trend of around just below the 40% participation level to just north of the 30% participation level is being a very positive sign.

And yes, you are right in your observation. We've made a very smooth transition, we've made sure that we gave our customers plenty of notice of the change.

And actually we're giving away as many Nectar points but in different ways, so we're true to what we said we would do, so our customers are still seeing Nectar points coming through and similar quantities that they were before but in different ways, so for instance we ran a large scale fuel promotion using Nectar points in the early parts of the quarter. But we've seen no change in customer behavior.

Thank you.

I was wondering if you could give us a little bit of color on your promotion -- or your price investment activities between formats. So, for instance, the same item that's in a Sainsbury's local versus a supermarket, what kind of investment are you putting into that particular item and are we seeing any relative difference in that investment?

I think the pricing differential between our convenience format and our supermarket format is always factored around 4% to 5% differential and in fact that differential has maintained itself over the last three to six months, so whilst we'd be making the price investments that we made in our supermarket sector, we made the corresponding price investments in our convenience to state, such as differential between the two has broadly remained the same.

Obviously a lot of them have been asked already, so just encouraging to hear that you're seeing some sort of stabilization in basket in the core stores. But what's happened to overall volume trends?

Because clearly, with the shift away from the core store, that has been quite negative, so if you can talk to the shape of volume trends or traffic trends, obviously the blend of the two, that would be helpful. And then more broadly, just in terms of customer trust and managing price architectures.

I understand it makes economic sense to be sharp on the products that the discounters sell and less so on the ones that they don't, but obviously, there's quite a lot of lines of substitution in product and in the end, they sell the volume lines. So can you really, effectively do a net no-investment and close the price gap to the discounters by 5 to 10 percentage points?

I suppose that's a bigger picture question. Is that really feasible, or will it require more margin investment?

If John comments on the volume point, I'll come back on the margin investment point.

Yes, just to pick up on the volume pieces, as I have already said that the items per basket historically have been going backwards, reflecting the trends that we've talked about many times over the last 18 months or so. In the quarter we did see those items per basket stabilize so broadly flat in the quarter.

As Mike highlighted on our previous [wires] call actually that it's one quarter so we wouldn’t want to call any turn in the market just yet. It's a very volatile market, there's lot of uncertainty in this market going forward but it may be the early sign of a change in trends.

In terms of your specific question on volume trends -- volume trends again are moving in the right direction, so continue to be negative in the supermarket state as they have been for some time vis-a-vis all the calls we've had over the last 18 months or so. But they are in line with the stabilization in the basket size, those volume trends are moving in the right direction again, so perhaps early signs of a change in shape of the market but too early to tell at this stage.

And as sort of part of the value simplicity philosophy that we've talked about a lot is to make sure that we maintain what customers would view as the right hierarchies, so that we make sure that we have the right good, better, best pricing architecture and we're very conscious of that. But we are also learning as we're going along, so we're experimenting all the time with the balance between promotions, pricing, architecture within individual cash groups and they do respond in slightly different ways but our underlying sort of headlined analysis, in answer to this, sort of the balancing of margins question is that, that ultimately the market will behave rationally and that would mean investing in the prices which directly impact from the discounters and to a large extent that is what we're seeing in the marketplace, that's what we've seen in the last year.

Although we didn’t do it specifically, the 1,200 products, 1,100 products that we invested in price broadly speaking overlapped quite heavily with the products that was stocked by the discounters. And we would expect overtime that there will be a rebalancing.

Now how that happens and when it happens, time will tell. But that’s what we believe to be a sensible and rational response to competitive environment.

And indeed if you look at what happened in other countries that's tended to be where the markets got to. So I suspect that will happen overtime but we think it will happen.

Okay. Now, it's very clear.

And just one follow-up. I think I remember asking you that or you saying that you had to tread very carefully in detoxing from promotions.

A drop from 40% to 30% is an absolute gallop. So have you surprised yourselves or did you misspeak or I mishear you before because I find it extraordinary to have such a degree of reduction in a relatively smooth transition versus the market.

Well just to be clear John, I mean I talk about that drop from 40 to 30, I am talking about from the high to the low and that’s over a period of a year or so. I am not talking about in the last quarter.

We have been talking about this trend now for some time.

[multiple speakers] three or four-year trend you were referring to

Absolutely I mean I think when we first spoke about it before we talked about three or four years ago, so the very first word that we did on value simplicity was in a very limited number of categories. And as we've learned we've got more confident.

And we've, now got something like 80% of our volume now working within the value simplicity rules that we've established. Every category is unique, so the reality is that you learn as you go along.

But you can surmise from what we said and the degree of change in our business over the last year that we have more confidence in that underlying strategy rather than less confidence. So we certainly hope being I mean aggressive is probably strong a word of putting but we are certainly being rolling out reasonably quickly across the business.

And actually just sort of one bit of color, the categories where we have been using value simplicity for the longest are actually the best performing categories within our business. So that's one of things that gives us confidence, it's not just a short-term trend, it's actually a long-term trend.

And it makes a huge difference to the operational metrics of the business which we've also talked about our service, our availability and indeed our underlying ways have all improved pretty significantly.

I only really had one question and John, pretty much, asked it. But just to follow up on one point.

Roughly what proportion of your grocery volume would you say can be bought effectively, substitutable from a discounter, what proportion is unique to you, or the larger retailers, and what proportion can be substituted quite easily?

Well, we recon it's roughly 20-80. So in terms of SKUs that we carry, not necessary the volumes but the SKUs that we carry it's roughly 20% 80%.

Of course it's difficult to match the products but you can have a very long argument to that exactly which part of our range we should match the discounters, whether it should be our basics range or our standard own label. But nevertheless, on a sort of product-for-product basis as far as you can go we reckon it's about 20% of the overall mix.

Okay. But presumably much higher from a volume perspective.

Yes, not much higher but a bit higher.

Yes, okay. That's very helpful.

Thank you.

Yes, good morning. Two questions if I may, actually -- Xavier Le Mene from Bank of America.

The first one you mentioned a pretty quiet market I would say. You have been actually losing a bit of market share in the recent period.

So can you give us a bit of color of who you're losing to, and who potentially you're winning to, market share? And the second one just also like to comment on competition within the big four which is pretty quiet as you said, but can change in one night, what are your expectations there or in other words are you pretty in line with what you're expecting or were you expecting a tougher competition actually in Q1?

Yes, I mean we've lost a tiny bit of market share I mean it's only, it's pretty marginal, actually it's a slightly improving trend quarter-on-quarter. I don’t think we would historically comment on the relative position of our competitors, you can read it in the Kantar data and you can draw your own conclusions.

So I would just suggest that there is a continuation of the trends that we've seen historically. So you can pick through the data.

I mean I think to Mike's point on the Kantar data, the Kantar data shows its flat year-on-year in terms on market share. So I am not quite sure where you get your market share reduction from.

In relation to comments on competition, as Mike says we're not going to go into details I think what we would say and we have said this, is that when we set that our strategy back in November we had a clear view as to how the market was going to evolve and indeed we outlined some of that when we talk you through the relative market share movements across the different channels. What we've seen over the last few months or so is basically the market evolving pretty much as we expected it to.

So in line with our plans and indeed in terms of our strategic execution we would say that we're slightly ahead of the curve compared to where we thought we would be. So the market if anything has perhaps been a little bit more benign than we would have expected, I hate using that word in the context of the food retailing sector because it's anything but benign but it's probably been a little bit better than we would have expected and our progress against our strategic plan has been a little bit better than we expected.

But I would just highlight that this is a very-very tough competitive market. As you highlighted it changes overnight there continues to be lots of uncertainty, it is entirely possible that there could be more price investments to come, the point that we would make is we're actually ready for that our price position has never been better we will compete toe to toe in this market, we set the business up, we've conserved cash in a way that allows us to do that so we're confident we can compete in this market whatever the market should choose to throw at us.

But as we sit here today we're slightly ahead of the curve against our strategic plans and the market probably if anything is a little bit better than perhaps we might have expected.

Couple of questions, one was actually follow up from James' question earlier on, don't know if you answered but I might have missed it. What is the industry level of participation at this time in terms of promotional participation, you mentioned low 30s for you just about 30 I think you said, where is the industry now John?

I'm actually eyeballing the Kantar data and I don't have the actual average number but it looks like it's about 35-36 or something of that level if you looked across the board but if you like I'll get Duncan to do the math and actually work out the average and we get that to you.

Second one is again, and apology if I missed it, did you mention a particular deflation number or range for deflation the quarter was in the like for like, sorry if I missed it but…

Yes, I said that early on in the call, it's between 2 and 2.5% for this quarter so we said for the Q4 that we were exiting at about deflation levels of minus 2.5%. We've seen across the quarter deflation land up between minus 2 and minus 2.5.

And the categories driving this, John, key categories revenues and to what extent is driven by fresh and perishables and…

Hugely weighted towards fresh and produce we've seen big deflation across there and of course that's part of the market that we typically over index in, so we've seen a lot of in the chilled and the produce segments in meat, fish and poultry we've seen significant deflation across those areas.

The fresher the product, the higher the deflation basically.

What sort of deflation are we talking, 10-15-20% deflation in some of these areas or…

I wouldn’t get that high, I'd sort of give you a bit of a broad range 5-10% deflation and some of our fresh categories.

And this is one where you have reasonable amount of visibility, how quickly can this sort itself out, don't you have any views here.

It's largely driven by northern hemisphere harvest so well there are three factors, the exchange rates which your guess is as good as mine. There's the effect of Russia closing its borders to western imports so that's brought product back into Western Europe that would have been going east and thirdly the most significant factor will be the effect of northern hemisphere harvest and until we know what they look like which we won't really know until the backend of the summer it will be really difficult to call.

We said on balance we think that it will annualize towards the backend of this calendar year and into next year and so if you were trying to make a, a sort of intelligent guess you'd be saying that perhaps we'll go through zero at some point in the early part of next calendar year but it will be that. It wouldn't be based on any kind of hard facts as we sit here today.

I think we've run out of questions so thank you very much to everybody and we'll see you actually backend of the summer I think. So look forward to our course two trading segment in September.