David Tyler - Chairman Mike Coupe - Chief Executive Officer Ed Barker - Interim Chief Financial Officer

James Tracey - Redburn Partners Bruno Monteyne - Bernstein Stewart McGuire - Credit Suisse Edouard Aubin - Morgan Stanley Andrew Gwynn - Exane BNP Paribas Rob Joyce - Goldman Sachs & Co. Nick Coulter - Citi Clive Black - Shore Capital Niamh McSherry - Deutsche Bank Research

So good morning, everybody. Good morning.

Thank you for being here. This is the Interim Results Presentation for Sainsburys and you're all very welcome.

And actually, just to say, we anticipate talking for a little longer than normal this morning because we've got quite a lot to cover. So let me start by saying during the first half, our like-for-like transaction growth numbers were good, and we also saw growth in total number of items sold; and, as expected, underlying profit and EPS were a little lower than last year.

Ed is going to take you through the numbers shortly, but I'd like to note that in this challenging marketplace that's been around for a while, our profits have been considerably more resilient than any of our mainstream competitors over this period, and we continue to pay a dividend. As you know, one-half of our annual earnings equivalent on an annual basis.

So the strategy that we outlined to you two years ago now is showing results and delivering results. Now I'm just going to make three points before I hand over to Mike while I'm on my feet.

First of all to say, this has been a seminal half year for the business. It's one where we've created the business we want for the future with the acquisition of Argos which gives us the scale and strength in consumer products and services across the waterfront now.

We have strong positions now in food, in clothing, in general merchandise and in banking. And in all of them, we can see many opportunities ahead to enhance our customer proposition further and to cut our costs.

So we're in a strong position with a great platform for growth for the future, and indeed, we feel confident enough today to announce a new cost-reduction program which will begin in March 2018, which aims to take a further GBP500 million of annual costs out of our costs by the end of three years starting in that year, March 2018. So that's the first point.

The second point I wanted to stress was simply our balance sheet. Our balance sheet is stronger now than it's been for many, many years.

With the acquisition of Argos, we've added to our assets, and we've also added to our earnings capacity for the future. At the same time, despite that acquisition of Argos, we've reduced our net debt to GBP1.3 billion, significantly lower than at any time in our recent history.

And the third point I just wanted to make was to stress that in my view, and indeed in the view of the whole Board, we have the strongest management team in the sector led by Mike, the most experienced CEO in the groceries market; and by John, who's also here at the front today, who has had an excellent start running our clothing and merchandise business over the last couple of months or so. And we also announced, as you should be aware, two outstanding new hires recently; Kevin O'Byrne, who will join as our CFO in January, who will bring with him a massive financial and retail experience from Dixons Store Group, from Kingfisher and from Poundland; and also Simon Roberts, who previously headed up Boots in the UK and Ireland, and will also be joining us next year, and he'll be running Sainsbury's stores and distribution.

So in summary, what I would say is the business is now in a formidable place strategically, and it's got the best team in the sector to actually execute that plan. That's all I wanted to say.

I'm going to hand over now to Mike to initiate the detail. Mike?

Good morning. More enthusiasm.

It's not many times in your career you get bumped off LBC by Donald Trump, which is what happened to me first thing this morning. So I'm going to talk through by way of introduction where we were two years ago and what we've done in between times, and it's quite monumental that I can reflect on the fact that it's literally two years ago to the day that I got up and talked about our new trading strategy.

And underpinning our strategy was the reflection on the fact that our customers' shopping habits were changing, and changing very rapidly. So although our view of the world is that supermarkets in grocery will still be the place that people will choose to shop in the majority of cases, we also have to accept that the rise of technology, the growth of online and the growth of digitization, is very rapidly changing the way that our customers choose to shop.

And they want flexibility, they want convenience, they want speed, they want to be able to order online, they want to be able to order on their mobile phones, and they want to have the flexibility of where those products get delivered. And whatever we've seen in the last five years, we expect to accelerate over the next period of time, and we've set out to build a business that can deal with those changing consumer habits.

That strategy was based on five underlying principles, many of which were actually continuations of what we were already doing as a business. So whether it's selling great quality products at fair prices, and an increasingly broad range of quality products at fair prices, delivered by then 160,000 colleagues who are motivated to serve our customers and run brilliant shops underpinned by a core set of values, those elements of our strategy were very much around the DNA and the history of the organization.

What was different were two aspects. Firstly, the underlying principle of understanding our customers better than anyone else, and we can say that and we can do that because of our Nectar database.

That gives us a huge insight into our customers' shopping habits and behaviors, and allows us to join our proposition together in a unique way. And at the bottom of the slide, the underlying principle of being there for our customers in our words whenever and wherever they want.

And that's fueled a lot of the investments that we've made, whether it's in convenience stores or our online business, but of course, is a reflection of the ultimate acquisition of the Argos Home Retail Group business which gives us the ability to accelerate that move towards being an online retailer, or growing our online business. If we look at the business two years on, we've delivered our quality investment program.

We've now got through 2,100 products; another 900 to go in the balance of the year. We've done a huge amount of work on simplifying our price and promotions proposition, so we've more or less eliminated multi-buys in our business.

We've removed Brand Match from the mix. We've started running same-day deliveries in groceries online, so we have that in 30 stores.

We're trialing one-hour deliver in a couple of shops. We've opened around 130 convenience shops in the last couple of years, and we've maintained very high levels of service and availability in our shops.

So we do think we run the best shops in the industry and I think that's demonstrated - we see it in our internal measures, but also in the external measures. As David's already said, we're well on the way to delivering the GBP500 million of cost savings that we committed to, and we will have delivered another GBP65 million in the first half.

We've completed now the first stage of the migration of the Bank, which gives us tremendous platform for growth and diversification in that business. And, of course, we've acquired the Home Retail Group, and we've started to roll out the Argos stores in Sainsbury's supermarkets and we'll have 30 of those stores trading before Christmas.

So we've done a hell of a lot of stuff in the last couple of years. As we look forward, there are now four priorities that we will set for the business, and we'll talk in more detail, or I'll talk in more detail when I come back on these particular issues.

The first is to further enhance and differentiate our food proposition. In the end, at the heart of the Sainsbury's brand is selling high-quality food at fair prices, and that is a primary engine for growth in the business, or prime engine in the business; and we serve 26 million customers week in week out with high-quality food at fair prices.

Secondly, we have a tremendous opportunity to grow our general merchandise and clothing business and to deliver the GBP160 million of the synergies that we outlined in the case for the acquisition of Argos. We have a very large non-food business, clothing, general merchandise business, but it still only has a relatively small share of the market; 2.5% to 3% depending on how you measure it.

So we believe that there is a significant upside opportunity in that market. Thirdly, now we've undertaken the first stage of the re-platforming of the Bank, we do have an opportunity to diversify and grow our Bank into the future.

And fourthly, we've talked about committing to another GBP500 million of cost savings over the subsequent three years, and that we'll maintain and improve our balance sheet strength over the next period of time as well. So I'll hand over to Ed who is going to talk through the numbers, and then I'll come back and give you a little bit more detail on that.

Okay. Thank you, Mike.

Good morning, everybody. Before I get into the detail of the presentation, just want to talk through the HRG transaction effect.

We completed on September 2, so we've consolidated only three weeks of performance into these results. That's just GBP281 million of sales and a GBP1 million profit.

But we have, of course, consolidated the whole balance sheet. There are a number of quite complex moving parts that we'll cover as part of the presentation.

They are all summarized in your booklets. And we can, of course, cover more offline or with the IR team afterwards.

Clearly, the majority of what we're going to talk about this morning and in the presentation is the Sainsbury's business, and here, we've seen like-for-like transaction growth across all channels - that's supermarkets, convenience and groceries online - and total volume growth. It's been well documented that the market remains competitive and pricing pressures continue to affect margins, but within this, our market share has only declined 6 basis points.

Property profits for GBP113 million realized in the first half. That's mainly as a result of our Nine Elms development.

And we completed the pharmacy sale generating another GBP98 million profit. From a balance sheet prospective, net debt reduced significantly to GBP1.3 billion, mainly as a result of the transaction, but also improvements in retail working capital.

And we've concluded the Sainsbury's defined benefit pension scheme triennial valuation, and we'll see net cash recovery payments increase by around GBP6 million to GBP84 million a year. Finally, David has already mentioned the dividend.

The Board has approved an interim dividend of 3.6 pence per share. That's in line with our policy to pay 30% of the prior-year full-year dividend.

And we remain committed to paying an affordable dividend, with full-year dividend covered to be 2 times our underlying earnings. So coming on now to the Group performance, Group sales up 2.1%, mainly as a result of the inclusion of those Argos sales of GBP281 million; and if you take those out, broadly flat.

Given food price deflation and our continued investment in price this year, we've seen our retail operating profits decline by 7.2% to GBP308 million. The Bank has performed in line with the guidance we gave at prelims, and adds a profit of GBP29 million.

And after taking into account finance costs of GBP65 million, joint-venture profits of GBP5 million, this delivers an underlying profit before tax of GBP277 million. That's down 10.1%.

The tax rate is lower at the half year than it will be at year end at 21.3%, and the lower tax rate helps the EPS which is down 6.7% at 11.2 pence. I've already mentioned the dividend, but finally down at the bottom there, a very pleasing profit outside of our underlying results of GBP95 million.

We work very hard for the property profits as part of the mixed-use developments that we do, and the example this year being Nine Elms, and I'll take you through a little bit more detail of those one-off items on a later slide. But that means profit before tax is actually up 9.7% at GBP372 million.

Moving now to the Sainsbury's-only retail sales. Again, no new news really on this chart because we gave you all of this information at the Q2 trading statement.

But overall like-for-likes in the half down 1%, contribution from new space added 0.9%, delivering total sales decline of 0.1%. And as always, we've broken out that sales performance for you over on the right.

A good performance in our growth channels, but continued pressure on our supermarkets and our food business. Again, we've given you all the guidance for your models, and we highlight that over on the right-hand side of the slide; and here, contribution from new space to be 0.8%.

That reflects around 40 convenience stores and five supermarkets. That's two new supermarkets; one replacement, and we're converting two of our Netto stores.

However, we've also lost the pharmacy sale, so we sold the pharmacy right at the end of the first half. And the contribution from net new space, therefore, is expected to only be around 0.3% for the full year; and, therefore, a negative 0.3% in the second half.

Coming now to retail margins, and this is for the whole Group so it adds in that Argos sale of GBP281 million and the GBP1 million profit. So it's actually slightly dilutive in the first half.

At the EBITDAR level delivering 7.49%, down 9 basis points, and that reflects the ongoing food price deflation and the investments in price that we've made during the half. Underlying operating margin down 24% - sorry, 24 basis points, to 2.47%, reflecting in part the higher depreciation charge that we guided to at prelims.

And then guidance for the full year. So we remain and will remain competitive on price, and our full-year underlying profit expectation for the combined Group remains in line with current market consensus, which includes Argus, but we expect the Sainsbury's second-half underlying profit, i.e., that element excluding Argos, to be lower than the first half as a result of the continued price investment and a step-up in cost inflation in the second half.

Okay. So coming on now to the Home Retail Group acquisition.

We completed the acquisition on September 2 and the economics of the deal were uniquely well set for us, both in terms of the synergies that we can realize and our ability to finance the acquisition through the Argos loan book. Final consideration just under GBP1.1 billion, paid for in cash and shares; and the fair value of assets acquired was also just under GBP1.1 billion.

So goodwill of just GBP18 million overall. When you take into account some of those assets that we've acquired, such as the customer loan book of GBP615 million, which of course we could choose to run off into cash - we won't but we could - net cash, after the capital return of HRG shareholders of GBP322 million, and taking into account the GBP18 million of goodwill, we've effectively bought this business for GBP156 million.

When you then take into account the synergies that we're going to create over the next three years of GBP160 million, we think this is a really good deal. Full details of the opening balance sheet are included in your interim statement, which is also in your booklet.

So looking at the Argos acquisition impact on the Group. I'm just going to step you through how HRG previously used to analyze the Group, and then I'll take you through how Sainsbury's are now going to work with the Group.

So HRG previously analyzed the Group as Argos, HomeBase, Financial Services, central activities; and then there was some interest income as well. HomeBase has obviously now been sold and no longer part of the Group.

The transfer of the Financial Services business took place right at the end of the first half to Sainsbury's Bank. So all future results and guidance will be part of Sainsbury's Bank.

Any interest income will now form part of the Group's finance costs. So that leaves Argos, central activities, and of course let's not forget Habitat, which we're now going to call just Argos going forward.

And these will be combined into a Sainsbury's retailing segment. In line with our expectations, Argos should achieve an underlying profit in this full year in the range of GBP30 million to GBP50 million.

That's before the impact of synergies and any HomeBase transitional services agreement impact. We're giving this as a range due to the highly competitive market that we play in; and, of course, the key trading period is still in front of us.

Again, in line with the guidance that HRG management gave last October, in the first half, Argos made a loss of GBP26 million. Please note though that we didn't own the business at this time and, therefore, this element is not consolidated this year.

The loss in the first half has been driven by two key factors. Increased costs from annualizing fast track; fast track only launched this time last year so you've got the full-year effect coming through in H1.

There's also some higher depreciation from digital spend. And finally, there's a bonus cost in the current year and there was no bonus cost in the prior year.

Therefore, we're guiding to a second-half underlying profit contribution in the range of GBP55 million to GBP75 million which, of course, will be consolidated. Some Argos space guidance for you over on the right.

Around 45 Argos stores within Sainsbury's supermarkets by year end; 30 by Christmas, 45 by year end. And that includes the original 10.

round 35 Argos stores in HomeBase will close in the second half, with the remainder of those HomeBase stores closing in half 1 2017/2018. Seven Habitats that Mike's already alluded to, and four pop-up stores that we'll talk a little bit more about in the next section.

So on top of this base profit, we need to overlay synergies. We've already announced that these will be GBP160 million by the third full-year post-acquisition.

And to make it easier for you, because they span different financial years, we've now broken that out for you on the graph. And Mike will talk more about the synergies and where they're coming from later.

We continue to have high levels of confidence in these numbers. They're prudent, audited numbers, and they won't be impacted by FX rates.

And again, as we've already announced previously, in order to achieve the synergies, we'll need to invest GBP130 million of exceptional integration costs, and GBP140 million of integration CapEx over that same three-year time period. More complicated guidance for you over on the right which I'll just step through slowly.

So firstly, we expect synergies in the second half of up to GBP5 million. We've still got the HomeBase separation and restructuring ongoing, and there is some cost associated with that as well - these have all been previously highlighted.

Firstly, in relation to closing those remaining Argos stores in HomeBase; secondly, tracked costs at the end of the transitional services agreement. And together, we expect a cumulative profit impact of up to GBP5 million this year, GBP10 million next year, and GBP20 million in 2018/2019 from those.

There will also be a GBP10 million exceptional cost in relation to the HomeBase separation and restructuring. That's part of the previously-announced GBP75 million.

And then there will be some exceptional CapEx and costs; GBP50 million of exceptional integration costs in this year and GBP20 million of exceptional CapEx costs, in order to achieve those synergies. Again, more detail in your booklets.

And moving on now to the Sainsbury's Bank performance. Total income up 3.6% and underlying profit of GBP29 million.

That's down almost 15% but in line with our expectations. And we guided to this at prelims.

The lower profit is a result of reduced interchange fees and the investment that we're making in order to enter the mortgage market next year. All of the key metrics remain steady, and as I've already said, the Argos Financial Services loan book was transferred right at the end of the first half, and that took place and required GBP100 million capital injection into the Bank as part of that.

From a guidance perspective, underlying operating profit expected to be around 10% lower year on year, and that's due to that investment in the mortgage market and the reduced interchange fees. And a small second-half single-digit contribution from Argos Financial Services will be offset by the ongoing cost of the increased customer deposits that we raised in order to refinance that loan book.

Transferring the loan book to the Bank and funding it through the low interest rates that we pay to customers is a very effective way of funding, rather than the Group having to go out externally and maybe fund at 4%. Sainsbury's Bank transition costs to the new banking platform expected to be around GBP40 million in the full year, with CapEx in relation to that platform of GBP40 million as well.

Capital injections I've touched on, but the Bank are expected to receive about GBP120 million this year, GBP100 million of which in relation to the loan book. Items outside of underlying, GBP95 million; and the split-out up on the chart, GBP113 million from profit on disposal of properties, again, mainly as a result of our Nine Elms development; GBP98 million from the profit on sale of the pharmacy business to Lloyds Pharmacy.

A number of other items on there, most of which you'll be aware of already. A small impairment charge of GBP30 million driven by movements in market values of land; and increased lease exit and break costs.

And then the other items, again down at the bottom, are broken out on another chart in the appendix. From a guidance perspective, we don't expect any further property profits in the second half.

The pharmacy transaction is now complete, so again, no further profit expected there. And then I've already given you the guidance for the Bank, Argos and HomeBase exceptionals on previous slides.

Financing costs. Net finance costs of GBP65 million, up 4.8%.

That's mainly as a result of the full-year effect of the hybrid securities. And as we've said previously, technically, from an accounting perspective, you would account for the coupons as dividends, but to be transparent we've treated these within our underlying finance costs.

And from a guidance perspective, net finance costs expected to be slightly lower year on year. This is as a result of the improved average net debt as a result of the acquisition and the refinancing of the loan book.

And then just at the bottom there an underlying tax rate of between 23% and 24% for the full year. That's slightly higher than the interim rate.

And that's purely to do with the timing of recognition of the changes of corporation tax rate on deferred tax balances. Cost savings, GBP65 million delivered in the first half and on track for the GBP120 million in the full year, and we remain on track for the GBP500 million target that we set out by the end of 2017/2018.

And hence, we would expect to deliver GBP155 million next years. As David has already mentioned, we're also setting ourselves a target of another three-year target starting form 2018/2019 for a further GBP500 million.

Cost inflation at the lower end of the 2% to 3% range that we guided to, but importantly with a step-up in half 2. And that's mainly as a result of the 4% pay rise that we awarded to colleagues from the end of August.

Cash flow, there's a lot on this slide. I've just tried to highlight some of the key elements: the strong cash generation, even after pension scheme exceptional payments of almost GBP200 million and the payment of our final dividend of GBP151 million.

The refinancing of the loan book has enabled us to repay the cash that we drew down on the RCF as part of the transaction. Net cash acquired of GBP322 million, and an improvement in retail working capital of GBP239 million, although there's some timing in there that will reverse before year end.

From a guidance perspective, we expect a small working capital improvement, and as I've already mentioned, full-year dividend will be covered 2 times by our underlying earnings. Core retail capital expenditure, GBP237 million in the first half.

That's one new supermarket, one replacement, and 16 convenience stores. And you'll see that we also acquired one freehold property in Chiswick, and we had [indiscernible] CapEx.

The premium still holds. And finally, we would expect now over the medium term that our core retail capital expenditure will be around GBP600 million, including that Argos business-as-usual CapEx.

Moving on to the balance sheet, we've seen a significant reduction in net debt and we've got stronger as a result of the retail working capital that I've talked to; and after, of course, the pension payments of almost GBP200 million and the dividend of GBP150 million. Remember there's timing in there from the working capital perspective and, therefore, we're guiding to net debt at year end of around GBP1.5 billion, but that's still down significantly year on year.

Facilities of GBP4 billion with only GBP2.8 billion drawn at the year end, so lots of capacity and flexibility to fund the business going forward. The value of our property has stepped down slightly, and that's due to the combination of reduced expected future rents and a very small yield shift, reducing the value down to GBP10.3 billion.

But remember, that's still significantly in excess of the net book value. Stable balance sheet metrics.

We've seen fixed charge cover come down slightly as a result of lower EBITDA. And lease-adjusted net debt to EBITDA is stable, even though we've included capitalized leases of Argos with almost no EBITDA contribution in the period that we've consolidated, so you would expect that to come down further by the year end.

And, of course, as we've said before, no financial covenants across any of our borrowings. Pensions.

We've concluded not one but two triennial pension valuations in the first half, so I'll just start with the Sainsbury's triennial; an actuarial deficit of GBP740 million. And since March, we've now made the two previously-announced GBP125 million exceptional payments into the scheme, so totaling GBP250 million.

And, of course, it's the actuarial deficit that drives the recovery payments, and we've agreed our recovery payments with the trustee, and had signed off from the pensions regulator as well that they'll increase by GBP6 million to GBP84 million. In relation to the HRG Argos triennial valuation, this was agreed as part of the transaction, a deficit of GBP315 million.

But again, since March 2015, HRG scheme has received two exceptional payments of GBP50 million. One was in relation to the HomeBase transaction, and one was in relation to the Sainsbury's transaction.

And again, we've agreed a recovery plan of GBP40 million per year. In terms of the accounting deficit, the IAS 19 deficit, these were struck at the September 24 2016 date, so a different date from the actuarial.

And like many others, we've seen a significant fall in discount rates since the year end. So the Sainsbury's deficit is just under GBP1.1 billion, and the Argos deficit GBP249 million, so a combined GBP1.3 billion deficit.

However, there's a lot of volatility, as you know, within the discount rates, and if you had struck these deficits at yesterday's date, the discount rate had actually recovered by 50 basis points from 2.2% to 2.7%. And therefore, that combined deficit of GBP1.3 billion would now be under GBP1 billion.

It just shows the volatility that we see in these numbers. Combined Group reporting, a little bit more color on how we intend to report the combined Group going forward.

Again, there's a more detailed appendix slide on this. But firstly, for Q3 and Q4, we're halfway through the year so we're not going to change anything; we're going to do it in the same that we did at Q2.

So you'll have separate Argos and Sainsbury's like-for-like performance. For prelims and then from 2017/2018 onwards, we'll report a single retail like for like and total sales number.

We'll no longer be splitting the performance between Sainsbury's and Argos. It's just not how we're going to run the business internally.

We'll absorb Argos into our current retailing segment but we'll continue to give you all of the additional disclosure that you get now around food, clothing, general merchandise, convenience, groceries online. And where we give future guidance, it will be on a Group basis.

So there will be no split out as we've done today in terms of Sainsbury's and Argos, other than we'll continue to report, of course, on the synergies and how we're doing against those. So finally, covered a lot in these slides.

It's all summarized, as I've said, in the appendix to your booklets. Any more detailed questions we can always take afterwards, and we've got the IR team on hand over the next few days as well.

So a quick summary of the guidance that I've already given you. So combined Group underlying profit in the full year in line with current market expectations, which includes Argos.

We expect Sainsbury's second-half underlying profit, excluding the impact of Argos, to be lower than that achieved in the first half; and that's as a result of continued price investment and the step-up in cost inflation we expect to see in the second half. The consolidation of Argos is expected to deliver an underlying profit contribution to the Group of GBP55 million to GBP75 million.

Synergies of up to GBP5 million, but offset by the HomeBase concession closure effect of up to GBP5 million. Year-end net debt of around GBP1.5 billion; and then the full-year dividend cover maintained at that two times.

All right. That's it for the numbers.

I'll hand back to Mike for the next section of the operational overview.

Thank you, Ed. We will be testing you all later.

So as I said earlier, we set out with our plan two years ago. We've been executing against that plan.

And broadly speaking, we're ahead of where we expected to be at this point in time, and we now have what we believe to be a very strong platform for future growth. And I'll outline the four priorities.

First of all, to continue to enhance and differentiate our food offer; secondly, to grow our clothing and general merchandise business and to deliver the synergies associated with the Argos transaction; thirdly, to diversify and grow the Bank which we think has a unique platform for growth; and fourthly, to continue to deliver the cost savings that we've outlined, the GBP500 million in the subsequent three years, and to strengthen our balance sheet. So we'll start off with our food.

We've said that we've enhanced the quality of 3,000 products. We've completed about 2,100 of those, and will complete that program by the balance of the year end.

We've made improvements in categories like Deliciously Freefrom, which is our allergen-free range where we over-trade compared with our competitors; our Taste the Difference ready meals. And I'll talk more about our On the Go range which is an opportunity roughly of GBP16 billion market where we've significantly improved the quality of the products.

And we're not sitting on our hands. We're planning to undertake another 125 range reviews over the next year, which means that we will one way or another touch around 60% of our food sales.

So quite a significant program. But if I take the On the Go range, which is a good illustration of the kind of work that we're doing, as I say, a GBP16 billion market.

We've introduced quality changes; so new, softer bread, on-trend ingredients, and improved taste and freshness. New forms of packaging, better labeling.

We've actually invested GBP8 million in the underlying pricing and also the quality of the range; and we've increased the number of meal occasions covered by the range. So whether that's breakfast or snacks, or indeed sushi products.

So it's a great example of the kind of work that we're doing. It's holistic, it's looking at all aspects of not just our supply chains but also the products that we're selling.

We've also made significant strides in the last couple of years on our value proposition, and we said two years ago we would simply our value proposition. And we've done that.

So we've seen our promotional participation reduced now to 24%. That's a massive step.

We've removed Brand Match. And we've all but eliminated multi-buys in our business.

And, of course, that has the impact of making it a lot easier to run our supply chains, and so we see that reflected in our store availability, but also in things like our waste costs. So a very significant program of change, and we're seeing that reflected in our customers' reactions.

So whether that's our transaction growth, whether it's underlying volume growth in the business, and indeed, the level of customer satisfaction that we measure in our overall offer. So a massive amount of change, a massive amount of work.

And we believe that we're as competitive as we've ever been. We've said before that we think our price position relative to our big three competitors has never been narrower; and indeed, our position relative to the discounters has never been as close.

And I give an illustration on the left-hand side of the Sainsbury's versus Aldi basket, GBP36 pays GBP36.85. And it's a typical basket.

It's a basket of goods that an average shopper would buy week in week out. And it's interesting to reflect that these prices are 13% cheaper than they were last year, or 21% cheaper than they were two years ago.

And that's a reflection of the fact that we've reinvested the money from multi-buys, from Brand Match, from reducing promotional participation, back into base underlying pricing. And on the right-hand side, a Which?

toiletry survey. Again, an independent survey which would show Sainsbury's as the cheapest amongst not just the big four grocers, but indeed other competitors as well, whether that's Boots, Waitrose, Superdrug or Ocado.

So we've done a lot of work on simplifying prices, we've done a lot of work on eliminating the complexity of our price and promotional offer, and we're seeing that reflected in the offer that we have for our customers and their behaviors. In terms of our service, we never lose sight of the fact that in the end, our executional standards sit at the heart of our business, and we continue to run what we believe to be the best shop in the industry, whether it's in terms of the service standards of the product availability, or indeed things like cleanliness and tidiness.

And we're very proud of the fact that we've won the Grocer Gold Award now for the fourth year running. I think we're ahead of the league table as well this year for availability and service.

And I think whatever metrics we look at, whatever metrics we see reported on, we consistently run outstanding shops, and we must never underestimate our standards of execution as being one of the drivers of our underlying performance. As Ed has already referred to, we've given a 4% pay increase to our colleagues this year.

That keeps us ahead of the National Living Wage. And again, we're very proud of the fact for the third consecutive time we've actually got Investors in People Gold accreditation, which again is a tremendous testament to the work that we do in the business.

So it's a reflection of the work that's done in our 160,000 colleagues within Sainsbury's, but of course, we welcome another 30,000 colleagues from Argos, so the total Group will have around 190,000 colleagues as we look forward. And again at the heart of the brand are our values.

If you take the Paralympics, we were again the sponsors of the British Paralympics team this year. But we also work that back into our Active Kids program.

This is a program where we allow schools to collect tokens, and that ultimately results in them being able to buy equipment for schools, whether it's sporting equipment or cooking equipment. And we actively engaged 2.5 million children in Paralympic sports as a result of the Active Kids program.

We're recognized for sustainable sourcing, so we have the highest possible score for the World Wildlife Fund's palm oil buyer scorecard. It's one of the key ingredients in a lot of the food and a lot of the products that we sell.

We've made a big commitment to cutting food waste. This is the single biggest issue on the minds of our customers when it comes to corporate and social responsibility.

So we've committed to investing GBP10 million in helping our customers reduce food waste, starting with a program in our Swadlincote store and in the Swadlincote district of GBP1 million, where we're learning what kind of interventions work, and therefore what kind of things can we roll out across the country more widely. One of the things that we've also encouraged is food donations, so we now have 1,100 charitable partners.

We have the highest proportion of food donations in the UK. And we've seen a reduction in our food waste of almost 10%.

So we've started reporting on our food waste in our business, and that's come down 10% year on year. And again, in terms of local charity campaigns, as well as supporting Comic Relief as a corporation, actually, every single one of our stores and most of our departments in our central organization also support a local charity.

We raise many, many millions of pounds as a result of that, and we have over 1,200 charities supported by our stores in their local communities. So if we look at our channels, we've said before and I'll say again, we believe that we have a structurally advantaged store effect.

So if we look at the market going forward, there is nothing that we said two years ago that would change our minds about the way that the market will develop over the next period of time. So the slide on the right-hand side is identical to what we put in the slide deck two years ago.

But the first point to make is that that means traditional supermarkets will remain the biggest channel in the industry, and as I say, we have an estate which broadly speaking is biased towards the South East of England, and is broadly speaking smaller than our - some of our major competitors. And we believe that gives us a structural advantage.

Nevertheless, we've continued to invest in other channels for growth, and I'll come on to that in a minute, but we've also got the opportunity of taking Argos stores and building concessions in our shops. And we've said that we'll get 30 Argos concessions in Sainsbury's stores by Christmas and, of course, there's an opportunity to roll that out further over the next period of time.

200 digital collection points. We need to make our traditional supermarkets more convenient for our customers.

And again, we're working on the layout of our stores to allow us to do that, as well as putting Click & Collect collection points in as well as putting the Argos concessions in. We actually have eight trial stores, building on the learning from last year, which are now trading and giving us again further learnings in terms of what we can do in the future to make our supermarkets more convenient for our customers.

Specifically on convenience we've seen 6% growth, so we now have not far off 800 stores trading. We've got 16 locals opened in the first half of the year.

The business is a GBP2.5 billion - well, not far off a GBP2.5 billion sales business. But we've also been very disciplined in our approach to capital allocation, so we'll only open sites where we make superior returns.

And hence, the number has come down over the last couple of years because those sites are more difficult to find as the market becomes more mature. An interesting development; we've actually moved into franchising for the first time, so we've entered into an arrangement with Euro Garages.

And we will have six - by the end of this week, we'll have six stores trading. We actually have got five stores trading today.

And that gives us access, if it works, to further opportunities in actually a low-risk way because these stores, because they're franchised, are capital-light. And, of course, it has the potential to build more points of distribution for us in the future in terms of the overall proposition and the way that we join that together.

Our groceries online business, so a GBP1.3 billion business. Again, great sales growth; 8% during the course of the year.

Order growth at 12% which is a reflection of us focusing on our customers. We said this two years ago.

This is about doing a great job for our customers. We're not just going to trade the business, [so trading] the business.

We're not just going to buy sales. And actually, in terms of our customer satisfaction measures, we've seen again progress over the last couple of years.

And we've also opened our dark store in Bromley-by-Bow in September. That means we now have more capacity in London, which again gives us the opportunity to serve that capacity and serve the market growth in London in the future.

Around 5% of our orders are now through the groceries online app which was launched during the course of the summer, and we're now in same-day delivery in 30 of our stores. And subject to that being successful, we'll continue to look to roll that out.

And we've got the Chop, Chop app working in a couple of shops in London, just to test the appetite of our customers for a quicker delivery turnaround, which is quite an interesting trial, and again may point towards some of the future activities that we'll be looking at. If we look at our clothing and general merchandise business, starting with the overview of the business overall; Sainsbury's general merchandise, Tu clothing, of course the Argos business and Habitat.

So by combining those businesses together, depending on how you measure it, we're either one of the largest non-food retailers in the UK, or the largest non-food retailer in the UK. But it gives us significant scale, and we must never lose sight of that, but as I've said already, still a relatively small share of a relatively unconsolidated market.

So we believe that there is significant growth opportunities across a number of the categories in the non-food general merchandise, clothing area. If we look specifically at Sainsbury's business, the general merchandise business grew by 5%, so a pretty creditable performance in a challenging market.

Actually, our clothing business grew by 1% in the half, as would have been reflected in others' results, it has been a challenging market, and it’s fair to say. The weather was less than helpful during the early part of the summer, which is one of the main selling seasons.

But nevertheless, we saw our market share grow. And we are the sixth-largest clothing retailer by volume, which again if you consider that business to all intents and purposes didn't exist 10 years ago, that's a fantastic performance over that period of time.

And we've launched Tu Premium; we've launched the Admiral brand which is a menswear brand during the course of the half as well. And, again, they represent tremendous upside opportunities.

We're looking at putting Tu clothing - again, we said this in the business case, in the synergy case - through the Argos platform. Argos used to have a reasonably substantial clothing business.

And again, we believe that bringing those two businesses together and serving Tu clothing through the Argos platform gives us an opportunity for growth in the future. If we talk more specifically about the Argos business, we now have a new management team in place which some members of are in the room, led by John, who I'm sure you'll get the chance to speak to later on.

Made up roughly - I think it's five Sainsbury's people and seven Argos people, so a team that brings together the best of both businesses. So we've absolutely set out to build on the strengths of the teams within the organization because we think there are lots of great things that that business [indiscernible] over the last year, and that's proved to be the case.

So there's a high level of joining up going on within the organizations. And we're working well, albeit very early.

We're only, whatever it is, nine weeks into owning the business. We're working well together on how we combine the business and we're getting on with executing what we said we would do.

If we talk specifically about where Argos' strengths are, number 1 in toys, number 2 in electrical. So it has significant scale advantages over most, if not all players in the marketplace.

It is the second-most visited retail website in the UK, and that's a tremendous asset to build on with over 1 billion website visits per year. Around 50% of the volume is online.

70% - sorry; 75% is fulfilled through stores, which of course means that about 50% of the stuff that's bought online is actually click and collected. And, again, by opening up the channels of distribution, more shops, more sites, again, that gives us an opportunity to grow that business as we look forward.

We would claim to be the first UK multi-channel retailer that's achieved GBP1 billion worth of sales through mobile devices. Again, that would have been unthinkable five years ago and it reflects the changing shopping habits of our customers.

The Argos digital stores represent about 20% of the estate; and, of course, as we go through the rollout program, that will increase as a proportion of the stores. And then there's the partnership with eBay which was started roughly a year ago, and we've shipped our 10 millionth parcels, which again brings footfall into the Argos stores but also in the future has the potential to bring footfall into Sainsbury's stores as well.

So Sainsbury's has unique multi-channel capabilities, infrastructure, online, mobile, home delivery, Click & Collect. If we take the fast track proposition specifically, 20,000 products, same-day delivery, four-hour time slots, and seven days a week, GBP3.95, within four hours.

So I'd encourage all of you to go on your mobile phones after this presentation and order all of your Christmas gifts through Argos and get it delivered to your local store within four hours, and store collection within 60 seconds. So these are really significant sources of competitive advantage as we look forward, especially as we can bring it to more customers over the next few years.

It's facilitated by unique hub-and-spoke systems and real-time supply chain data at an individual-item level. So that single-item supply chain is something again which we think is unique and is a platform on which we can build.

And one of the hidden gems, which we haven't really talked about at all, is our two-man delivery service. So if you take categories like furniture, again a relatively unconsolidated market, and Argos is in a pretty strong position to be able to enhance its furniture offer over time and take advantage of that two-man delivery service.

So again, a platform on which we can build as we look forward. I'm going to show some Christmas ads, I hope.

[Advertisement] And John Rogers was the one in the green suit, for those of you who were watching carefully. So we said we'd deliver GBP160 million of synergies.

We have more confidence than ever that we will deliver those GBP160 million of synergies. We will put 250 Argos digital stores in Sainsbury's stores, so not quite about one-half of the estate; Sainsbury's has about 650 supermarkets.

But nevertheless, a significant physical presence over the next three years. There are significant cross-selling opportunities, as I've already said, across the portfolio; for instance, Tu clothing within the Argos business platform.

And we'll have an Argos point of presence in every single, or more or less every single Sainsbury store. So where we don't have an Argos digital store, we will have Click & Collect points across our estate.

We've got GBP70 million worth of central savings, cost synergies, removing duplication from central and support functions, and we're getting on with delivering that. But also, there are product purchasing benefits across the goods line; represents an opportunity.

And goods not for retail. Again, there are many things that we don't sell that we buy, and across the Group are things like electricity, fixturization and things that we can seek to reduce our costs.

And again, we've got good line of sight on delivering those synergies. And as I said, already other revenue synergies; for instance, putting Sainsbury's clothing through the Argos network.

In terms of the in-store stores, we'll have 28 open by Christmas. These are where we don't have an Argos presence in the catchment area so these are white spaces in terms of filling in the opportunity.

And, of course, they leverage Sainsbury's footfall, our space and our customer base. And we've annualized the first 10 trial stores, so they're performing well; very strong sales densities.

Like-for-like growth, it's early days in terms of the annualization but in the order of 20% to 30%, so strong like-for-like growth. A halo effect in terms of the supermarket.

So we talked about this in the synergy case that we see an uplift of 1% to 2% on supermarket sales. A very positive customer response; customers get this.

They absolutely get why this is going to work for them. And of course, the range of the products are actually complementary to Argos, strong in toys, strong in electrical, strong in white goods.

Sainsbury is strong in clothing, in house wares, in home textiles. And roughly 60% of the volume is online Click & Collect and around 40% is walk in.

So again, it shows that customers are choosing to shop online and Click & Collect which is consistent with what we modeled when we looked at the business. The other two stores that we'll open by Christmas are actually relocations, and this is, of course, part of the business case where we've made some assumptions, but now we're starting to validate those assumptions.

We've done one so far, which is Oldham where we've closed a store and relocated it in Sainsbury's. We get cost synergies.

Again, it's one of the drivers of the business case. We've reduced the occupancy costs, we've reduced some of the management costs; and, of course, we bring the Argos offer to Sainsbury's customers.

One of the assumptions we made was that we would retain some level of the sales, and it's very early days. We're literally talking about a couple of weeks.

But actually, if we look at Oldham post the relocation, we're actually taking more money in the catchment area overall than we were previously. So again, very early signs.

We have to caveat it very strongly. But so far so good, and that leads us again to have more confidence that we can absolutely deliver GBP160 million worth of synergies.

Talk a little bit more about the Bank. It's fair to say the last couple of years have been dominated by our re-platforming work.

We've now re-platformed our savings platform and we've re-platformed our ATMs. So that's a pretty significant for us step in the right direction over the last period of time.

So that's landed brilliantly well, and we expect to have the loans platform transitioned by the end of 2017. With the acquisition of the Argos Financial Services business, of course they have a card platform, and we're now looking at how we bring the two card platforms together.

And we think again that represents an opportunity for the future, and it wasn't - or we made no assumptions about synergies in the underlying business case for the acquisition of Argos. As Ed has already said, we've transferred the Financial Services loan book to the Bank, which is reflected in our balance sheet.

We now actually have 220 travel money bureaus working; around 1,700 ATMs. Around 9% of the cash withdrawn through the link network is actually drawn from the Sainsbury's ATMs.

And we have record credit card sales in the half. As we look forward, we do have an opportunity in our Bank.

So whilst in the short term we have to go through an investment phase in the mortgage business, it does give us an opportunity effectively for an annuity and endowment business as we look forward, and it gives us a diversification of our loan book. So we are launching our mortgages in the course of next year.

In home and car insurance, we're re-launching that in the early part of the New Year to give us a much broader coverage with a pool of insurers across both home and car. As I've already said, the addition of the Argos Financial Services gives us an opportunity to leverage that loan book over time.

We have 1.5 million or 1.6 million active cardholders purchasing Argos products. And, of course, we have the opportunity of putting Sainsbury's ATMs in Argos locations to extend the reach.

And again, in terms of the 1 plus one equals more than 2, we've talked about this before, if a Sainsbury's customer owns some kind of financial services product, they will spend more money in our supermarket chain, and that's particularly the case with the credit card. So we delivered GBP65 million of cost savings in the half.

We're well on the way to delivering the GBP500 million that we committed to over the three years of the plan. Some examples of where we do that.

Replenishment at the most efficient time of the day, so we've changed nightshift in many of our shops. A better use of our warehouse capacity across our network.

The deliveries, the way that we organize our deliveries, the way we pack our deliveries again is an area that we've made progress on. How we organize our logistics management.

And, of course, we have many third-party contracts which again we're constantly reviewing and looking at how we can make better over time. And as we've already said, we've committed to a further GBP500 million in 2018, 2019 and beyond, roughly phased across the three years.

As we've said, our balance sheet strength remains a priority. Our balance sheet is stronger than it's been for a long while, and you've seen that reflected in the numbers that Ed talked about before.

But if we look specifically at Argos as we look forward, now we've acquired the business we can look at the average lease length, and again in terms of delivering synergies, the average lease length is around 3.3 years, which means the program that we're talking about is more than deliverable without any onerous costs coming in our direction. Unless we forget, we have maintained our dividend and we pay 2 times cover, and that means that we'll pay a dividend of 3.6p this year.

So bringing that all together, we think we're in a fantastic position. We think there are significant opportunities if we look at the Group overall.

So 90,000 products, 26 million customers walking through Sainsbury stores each week, a fantastic amount of customer knowledge which we can use to sell the goods and services that we now provide. We have fantastic delivery networks, whether it's in our groceries business or whether it's through the Argos network.

We now employ 195,000 motivated colleagues who are focusing on delivering customer service. We have a portfolio of stores which broadly speaking are the right size in the right locations, biased towards the south east of England and on the smaller side of supermarkets.

And overall, we'll end up with around, or we have around 2,000 points of distribution where we can bring that brand presence to bear. And as I say, I think we are uniquely positioned as we look forward in terms of our opportunities for growth.

I'm just going to talk through Nine Elms. I'm going to show you a video as well but let me just talk through what we've done with Nine Elms.

So if you get a chance, if you haven't already been there, it's not that far from here. It's only about a 15 minute cab ride and it shows you we're bringing all of the elements that I talked about together, and it's a really live showcase of how our proposition works in a physical sense on the ground.

So within the food offer, again, we've worked hard in making it more convenient for our customers. We've brought things like on the go together, we've introduced a sushi bar.

If you look at the run of counters, again we've stepped that on. We've introduced things like patisserie or a broader patisserie range.

So we've worked really hard on the food footprint to get that in a great place as far as our customers are concerned. We've reworked the non-food space, the physical presence of our non-food, our clothing and general merchandise.

And again, although we're not pretending to be a department store, it certainly looks and feels more like the high street than ever. We've put a Habitat concession in.

Again, that's an interesting opportunity. It's something that again we've not built into our synergy case.

But as I've already said, we'll have seven Habitat stores running in Sainsbury's stores by the end of our financial year. We've put an Argos concession in.

We have the Lloyds Pharmacy in the store; so again, where we've transferred our pharmacy business to Lloyds. And we even have a Starbucks downstairs.

So as I say, if you don't - if you haven't done it already, I would encourage you to actually go and have a look because, of course, it brings all of the elements to the brand together. So I'm going to show you a video and then I'll just wrap up.

[Advertisement]

So in summary, we set out a plan two years ago. We're ahead of that plan.

Secondly, the market will remain competitive. There's absolutely no doubt about that, but it's of course been competitive for many years.

HRG and the acquisition of Argos and Habitat gives us the ability to accelerate that strategy. We have a differentiated position in food.

Our customers tell us that all the time. And we believe we have a strong platform for growth.

So with that, I'll sit down and take questions. Thank you.

Good morning, Mike and Ed, James Tracey from Redburn. First question from me is on Argos.

And can you comment on what you expect the impact from the devaluation of the pound to be on profits for next year when the hedges roll off, preliminary views, if you can? Second question is on the customer service and availability.

As you say, Sainsbury's is probably doing better than ever in terms of customer service and store standards, yet when you look at the like-for-like sales growth data, you can see that relative to Tesco and Morrisons it's slipping a bit, and worse than it has been for the past few years. So what's your view on like for likes going forward?

Do you expect to return to positive like for likes and also better like for likes than your competition? Thank you.

[Indiscernible] and confident about or market position. In terms of predicting the future, I think it's quite an unpredictable world that we're living in at the moment, so not least some of the things that have happened in the last 24 hours.

So I'm not going to make myself a hostage to fortune in terms of predicting what happens next. What I would say is I think as I said in the presentation, we have a unique platform to build this business over the next three to five years.

Great. Thanks, James.

Hedging, 80% to 90% hedged a year out. So at the time of Brexit that would have been the hedging position in terms of the timing.

From a value perspective about $1.2 billion from an Argos perspective; obviously some in the Sainsbury's non-food as well as part of that. I think the effect of what's actually going to happen still remains unclear.

We're obviously seven or eight months away from that unwind. It's an industry-wide issue.

It's not just an Argos issue. People seem to think that this is just an Argos issue.

It's going to affect everybody within the industry. And we're going to work with our suppliers to mitigate as much as we can for our customers as part of that.

And the same is true across - and I suspect this question will be asked at least 17 times during the course of this conversation. The same is true across our food business.

In the end, we'll set out to mitigate with our suppliers any cost price pressures. We'll look to our own business in terms of self-help.

And we'll do whatever we can to limit any impact as far as our customers are concerned. I think the other point I'd make about Argos is we are going to deliver GBP160 million of synergies in a market which is relatively unconsolidated and in a business that has very strong positions in many of the categories which are subject to the kind of forces that you're talking about.

And these are not forces which are unique to Argos. These are forces which are across the entire industry, and the - if you take the synergies as an example, these types of benefits are just not available to our competitive set.

So I go back to what we said all the way along, which is these are relatively unconsolidated markets. We are now one of the largest non-food retailers, clothing and general merchandise retailers in the UK.

And therefore, our ability to mitigate cost, combined with the synergies, put us in our view in a pretty unique position to deal with whatever happens over the next period of time. But to Ed's point is uncertain in the end I think for any of us to predict what's going to happen next is going to be really, really difficult.

Thanks, Mike. Thanks, Ed.

Welcome.

Good morning. Bruno Monteyne from Bernstein.

Pre the Argos acquisition you guided a medium-term margin development of going back to 3%/3.5%, and this financial year was going to be a low point and then going back up. Are you still down on the old retail business this first half, further going down in the second half?

Are you pushing forward medium-term guidance of this being the low-point year and then back up?

Yes. Again to the point I made earlier, there are some unpredictable forces in the marketplace but we won't shy away from what we said previously which is, in the end, we believe 3% to 3.5% is a reasonable place to get to over the next, let's say, three to five years.

If you look at the unwind on this half compared with the first half of next year, there are some things that start to come through like synergy benefits and the cost-saving initiatives that we've talked about. So perhaps, Ed, if you'd just reflect a little bit more on that.

Yes. So you've seen that with GBP120 million of cost savings this year, that steps back up to GBP160 million.

So I think you need to take that into account. And obviously, the synergy profile is not much of that synergy comes through this year.

A lot of it steps back up next year in terms of that. So I think you need to weigh up everything in terms of where we're going to flatten out as part of that, and I think we stand by what we said previously that over the longer-term, medium to longer-term, 3% to 3.5% we think is a reasonable return of where we will get to from a margin perspective.

What we don't want to do is set a time limit to that. We want to do what's right by the customer as well with our differentiated offer.

Good morning. Stewart McGuire from Credit Suisse.

A couple of questions from me. Just clarification that's gross not net cost savings you're talking about.

And if it is gross, can you give us an idea what you expect cost deflation might be? Second question on Argos relocations.

Can you give us an idea of the number of stores that might be close to existing supermarkets to give us an idea of total number of stores that might end up being relocated? And on Page 42, you mentioned the size of the Argos store.

Does size of the Argos store matter? Can you just move that into a Sainsbury's?

Does it really matter how big the Sainsbury's concession is? Thank you.

So I'll do the last two and then I'll ask Ed to comment on the cost savings. I think we've probably already covered the point.

We haven't broken out the relocations versus white spaces, and we won't. Clearly, it impacts on individuals so we have to quite careful about what we say, but we have given you a headline number of the GBP250 million.

In terms of size, yes, it does matter. In terms of the offer, basically it matters about how much of the Argos offer you can get that can be instantly picked up.

So one of the things that we'll be learning through the next 30, or through the 10 that we've already opened and the subsequent ones we'll open before Christmas, is what's the optimum size, and also what's the optimum location. And we've got some variables that we understand, but it's fair to say that if you've got a 900 square foot concession, you are clearly not going to be able to get as much of the product actually in that location.

Of course, it doesn't get away from the fact that with the fast track offer you do have, we do have available for us, the 20,000 products within four hours wherever we trade.

Can I have a quick follow-up on that? So the space front of store versus warehouse, does that make a difference then; the amount of space you allocate within a supermarket versus the storage space in the back where you get the product?

Yes. So the most important factor, if you think about the percentage of sales for Argos in a given location, that's determined by the size of the warehouse at the back of the Argos concession, if that makes sense.

We've opened stores which range from 900 square feet up to 5,000 square feet, and I'm sure you can ask John at the end of the presentation or at the end of the conversation about what percentage of Argos sales get into that kind of space. But I also emphasize the point that the four-hour delivery service gives you access to a significant percentage of the Argos turnover within four hours.

And remember the slide that we put up that 60% of those store pickups are already generated online, which enables 60% of those sales anyway to be there ready and waiting for you. It's only the 40% of sales that are walk in that you would expect those products to be there.

And Argos in store in Sainsbury's will probably hold 2,000 or 3,000 of the products rather than our hub-and-spoke model, and the hub's obviously holding the full 20,000. [Indiscernible] clarify, if you look at something like Nine Elms would hold about 6,000 SKUs, which is about 3,000 or 4,000 square foot unit.

If you looked at something like Crayford, that would hold about almost 15,000 SKUs, so slightly larger footprint, but can hold 15,000. So 15,000 of the 20,000 available through fast track.

And as Mike says we're trialing different formats, different SKU counts, to find the optimum size and position in the store.

Yes. I'll reemphasize that the headline.

There's nothing that we've seen so far that would give us any - would undermine any of our confidence in delivering the synergies, and all the things so far would give us encouragement on the plans to roll out what we said we would rollout. So we're pretty sure that we can get to the GBP160 million.

In terms of your cost savings one, which was the first one?

I'd totally forgotten about that.

The GBP500 million is the bottom line number. That's what we'll drop through the bottom line number, so it's a net number.

If we have to spend money to get there, then so be it, but that will be the bottom-line effect.

Edouard Aubin from Morgan Stanley. Just one question from me on the impact of cost inflation on your full retail margin.

So you reported a roughly 20 basis point decline in your full return margin in H1, and I think you're guiding for roughly 40 basis points implicitly in H2. So I think I remember in May you told us that you expected cost inflation to be the lower range of the 2% to 3% kind of guidance, and even potentially below 2%.

So what has changed versus what you were expecting then in terms of the cost inflation?

Maybe, Ed…

So the key movement is the 4% pay raise for colleagues that we announced that takes effect from August as part of that. We stepped up where we thought that that would be.

And therefore, I think where you see your cost inflation, it was probably a little bit lower than the 2% in the first half and it's going to be a little bit higher than the 2% in the second half because of that.

Andrew Gwynn from Exane. I'll go for two and I'll swear actually and go for a gross margin question which I know you don't like talking about.

But on the food business, as you stand at the moment, are things better or worse from a gross margin point of view? If you think about that in-tray on your desk, Mike, is it getting smaller in terms of issue?

No, we don't comment on gross margin.

But in terms of the [sector's] issues, in terms of price investment, and obviously with a wave of cost pressure that could come through in the food business, how would you characterize the UK food retail market now? That's the first question, and you can swear and talk about gross margin if you want.

On the second bit, which is just on Argos, we talk about synergies, but you haven't talked about the use of synergies. It was always the question that was deferred through the process for Argos, but how much of the GBP160 million would you expect to reinvest, and how much would you deliver to the bottom line?

Yes. In terms of the characterization of the market, I was asked the question about 17 times on the call this morning.

It's very uncertain. There are clearly FX pressures coming through, but equally, our job is to be agents of our customers to push back on our suppliers to work out if there are things that we can do to source alternatives; to look at our own business in terms of how we reduce our costs to make sure that we do everything we possibly can to limit any impact on our customers.

Of course, the events of last night also may have some bearing on what happens next, so there are so many uncertainties it's really difficult to predict. If you look at some obvious impacts, if you take the price of petrol, it has gone up by 5p a liter.

We still remain extremely competitive on fuel, but it was GBP1.10 on June 22 and it's now about GBP1.15 on average a liter. So there are some cost price pressures coming through, but it's really difficult to predict how it will play out over the next period of time.

And Ed's already made the point. There are many contracts that we strike on an annualized basis where in effect the cost price is hedged.

And so, again, it's not until you come to renegotiate those contracts that you are actually dealing with whatever's happening in the here and now. And that will be related to commodity prices.

It will also be related to currency. As far as the synergies are concerned, in effect, the GBP160 million is what we would anticipate dropping through to the bottom line at a net level.

We made a commitment that we'd expect it would add double-digit earnings accretion, and we stick by that inherent position.

Can I just follow up very quickly, if you don't mind? Just again coming back to gross margin outlook, and you mentioned obviously your guidance - not guidance, but your - word to use - so the 3% to 3.5% margin, getting back to that from where you are at the moment, how much is going to be driven by cost savings and how much do you think can be driven by a recovery in your gross margin?

I don't think we would break it up in that way. I guess if you look at the building blocks, we've talked about a GBP500 million cost saving.

We've also talked about GBP160 million worth of synergies. You can make some assumptions about what you think would happen in the base two business.

But also, of course, we've got some opportunities in the Bank. And as we look forward, although we will go through a period of investment in product as opposed to an investment in systems, you do start to build an annuity income, endowment income, from things like mortgages over time.

And so without going all the way of committing to what that might look like, there is potential upside in the Bank; and, of course, the Argos Financial Services book has the potential to add to that. So those elements come together over a three to five-year period.

Thanks very much. Rob Joyce, Goldman Sachs.

A couple of ones from me. Firstly, just on the core business and the guidance there, can you just confirm I think Edouard's math there that you are guiding to a 40 basis points decline in the second half and the core business margins?

And when we look forward, we accept the step-up in savings you're making there. Is there any reason to think that those cost pressures disappear in outer years from there?

Sorry. Which cost pressures?

The cost pressures which are driving the margin decline in the second half.

All right. Yes.

Maybe, Ed, you can talk….

So I think without going through all of the detail, we've given you all of the building blocks that you need to be able to get to the second half. We've confirmed that consensus we're happy with.

You've got the H1 number. You've got the Argos contribution.

You've got finance cost guidance there. And that should enable you through your models to be able to work out what that element of decline will be in the second half.

Again, we'll make the point that next year there's GBP155 million worth of savings built in plus the first stage of the synergy program that we're talking about for Argos [landing] as well. So there are some things on the upside which I think you should be able to unpick over the next period of time to work out how that will play out.

Okay. But just to confirm.

There's no unique cost savings in the second - cost pressures in the second half that will disappear?

I'm now trying to think out loud. Not that I can think of right here, right now.

Thanks a lot. And the second one's just on Argos.

The gross margin there - you're not giving the guidance any more, but if we look at it despite the fragmented nature of the industry, gross margin is down give or take 500 basis points last five years to 10 years, is there any reason that pressure abates from here if we exclude the impact of FX?

Well, I think there are a couple of points you can make. First of all, it's a larger business.

So if you take our toy business, we're combining two businesses together, and we have a very strong position in the marketplace as we do in things like big-ticket electricals. Part of the opportunity for the combined group is in Sainsbury's products being sold through the Argos platform, which generally speaking are own-label products that have higher margins and so, therefore, you can imagine over time as we work through the categories that there's an opportunity to enhance the mix.

And I've already talked about two main deliveries. A category like furniture is very high-margin category.

You look at the results of some of the competitors in that area. And again we think there is an opportunity of bringing Sainsbury's and Argos' magic to that particular category and to potentially grow our share.

So we can see ways of enhancing margin, mainly through mix because of that uniqueness offering in the two product brands put together.

Thanks very much.

Hi, it’s Nick Coulter from Citi. A couple from me, please.

Could I ask firstly on transactions, volumes and basket size, and whether the elimination of multi-buys has meant that you're perhaps not building your customers' baskets in some of the more discretionary categories, and whether you think that the elimination has reached its final point or there's more to go for in terms of your promotional shape? And then secondly just on Argos, for the first half I think you called out three cost pressures that led to the increased loss.

Can I just get clarity that it's those three cost pressures that led to the increased loss and there's nothing else in the mix? Thank you.

I'll ask Ed to pick that apart. First of all, you're right.

Strong transaction growth. Actually, that's a leading indicator of the success of a retail business.

In effect, it makes choice more democratic, for want of a better term, so people will buy what they want to buy when they want to buy it. That's reflected in volume growth as well overall for the business.

But you're right. It takes a while in some categories for customers to change their behavior, and generally speaking, the more “impulsive” the category is, the longer it takes the customers to change their behavior.

So in some categories, you see almost an instant response to removing promotions or taking out multi-buys; in other categories it takes a longer time. But of course, we've been doing this now for three years so we've worked out way through quite a lot of that change, and we've done it in a very thoughtful and targeted and data-driven way.

And so we've gone a long way down that spectrum. And I'll make the other point which is it does allow us to run a simpler business that works better for our customers.

And we think that's a strong platform for the future.

When will that annualize out, because obviously, that is a volume drag or basket-size drag for you?

Well the final stage of multi-buys is during the early part of this financial year, so we're talking about April, May. That's when we made the big move, and then I think we finally got to the endpoint in August.

So there's still an annualization effect, but if you take it on a sort of category-by-category basis they broadly speaking behave in the same kind of way. The only question is where's the point of the trough and how long does it take to then get back into underlying growth?

But are you seeing a more marked impact in some of the discretionary categories where you're not encouraging people to build baskets? Do you think that behavior will change over the course of time?

We have confidence in the way that we've done it. And we've seen this time and time again when we've done it that there's an initial reaction from customers.

And of course to your point, if you're not encouraging multi-buys you might see a volume reduction in the short-term, but over time customers get used to and then feel good about actually I'm not loading my cupboards with a load of stuff that I'm never going to eat. And ultimately, they see that as a good outcome, which is why we're really pleased to see our customer satisfaction rising.

And as I say over the next period of time, the last big move we made, which was effectively eliminating multi-buys from about April to August, will annualize to your point.

Thank you.

In relation to the three, those are the key three. So the fast track annualization it launched last year.

Digital spend that's been going on over the last three years, therefore increased depreciation; and a bonus cost that wasn't there last year that is there this year. Of course, there's general inflationary pressures within the business, and that would include the national minimum wage, but they've been offset by cost savings that were also taking place within that business.

So those are the three key callouts.

So you wouldn't call out gross margin within that mix then?

Not overall, no.

So in terms of what Argos discloses, 100 basis points of gross margin pressure in Q1, then that would have reversed effectively in Q2, or it's not something you'd want to call out?

We've also seen the increased sales that have come through, so from a cash perspective probably broadly offsetting.

Thank you.

It’s Clive Black here. In terms of inflation that may be coming down the line, does it worry you, or what's your view on how the consumer may behave if inflation, if CPI goes much higher than wages?

And in that respect, what are the lessons that you've learnt from prior years in terms of food in particular that would prevent people from going back to discounters? And in that respect, where do you see your private label offer relative to brands in terms of consumer behavior?

Yes. The first point I'd make is the point I've already made, which is our job is to mitigate any cost price pressures through our supply chain either with our suppliers or looking at our own business as to how we can do things differently.

If you start with the premise that there is some food price inflation, which I'm not necessarily agreeing with, but let's assume that we look at history and say what happens next, generally speaking, if customers start seeing their income being squeezed they start cutting back on the more discretionary things in their lives, holidays, eating out would be a good example. And you could argue that's one of the things that's weighed against the grocery sector as we've seen the opposite effect in the last couple of years.

And remember that household incomes are still growing so there is still money out there to be spent. And in those scenarios and in the scenario where that happens, customers see their income squeezed, they start eating in rather than eating out.

And if you look at previous cycles, that's usually helpful to grocery retailers. So the last time we saw this was 2008 where we saw a very significant inflationary spike.

And I think at that point in time you'd have said that the grocery retailers are doing pretty well as we saw that change in behavior. What's different, as you've highlighted, is that the discounters in 2008 probably were 4% of the market.

Now that they're 10% of the market then that clearly is a different dynamic. But nevertheless, the headline I suspect would still be the case.

On balance, it's probably neutral, if not slightly helpful. Of course, there's then a subsequent phase which we saw through 2010 and beyond where incomes were squeezed to the point where people start dialing out volume and start dialing down in terms of where they choose to shop.

At that point in the cycle, I think we saw two years where incomes dropped by 7%, so even the most extreme predictions at this moment in time wouldn't lead you to that point of view as we stand here today. But who knows?

We live in turbulent times.

So just in that respect then on the first question, given a lot of international proprietary brand manufacturers in particular have got dollar and euro-denominated earnings, do you see them trying to, as we've seen with some high-profile movements recently, put through price rises that leads you to strategically change your emphasis on private label to stop people going into discounters?

How should I answer that question? We won't talk specifically about individually branding manufacturers, and we would point out to any large branding manufacturer if they allow their cost prices and by proxy their retail prices to get too far out of line with where the own label market is, whether it's in our business or in the market more generally, they will suffer volume losses and therefore will suffer a consequence from that.

So we would point out that loud and clearly. Our job across our entire portfolio, whether it's brand or own label, is to do everything that we can to mitigate those costs.

Of course, in Sainsbury's particular position, we have a very strong British sourcing policy, and in many categories, if not all categories, we've gone as far as we could probably go in terms of British sourcing of a lot of the products that we sell. So in some senses, we have mitigated the impact on own label, but of course, as a proportion of our business, own label is higher than most of our competitors as well, or most of our direct competitors.

But I would highlight the very point that you've made. The manufacturing companies, if they allow that gap to get too wide, generally speaking they'll suffer as a result.

And so if you look at the relative profitability of some of the large GPGs compared with people like us, there are clearly questions that we would be asking.

Sorry. Just to finish, given you've got the same price basket as Aldi apparently now, is your…

A lot of products in that basket.

Is your expectation of the discounters' market share growth, I think which was a company estimate on your slides, overstating things on their behalf?

Sorry. Say again.

If you…

Is you expectation that discounters' market share gains in future, which I think was a company estimate in your slides, over-egging their potential growth?

Well, we said that we think they'll get to the 15% level in the marketplace. And as we stand today, that's largely going to be driven by new space growth.

So you can read the numbers that we read in terms of their current performance and you've seen their sales growth slow down significantly. And as far as we could tell, the majority if not all of their sales growth is now coming through new space.

And, of course, new space programs have very long lives to them, as we know ourselves, and so you can model it in the same way that we would model it. If you look at three years or five years, if you continue at compounding rates that we're talking about, you would get to those kinds of numbers.

So I think the $1 million question is what happens next, whether or not the pressures in the marketplace reduce the capital investment. And we are seeing, in effect, a return to, for want of a better word, a more normalized state than we've seen perhaps in the last three to five years.

Hi. Niamh McSherry, Deutsche Bank.

I just had a question about the grocery business deflation outlook. Given that you talk about continued price investment, can you just confirm whether you're talking about a similar level of deflation as you saw in H1 because you plan to invest more in the market, or perhaps maybe a little less in line with the market, but continued investment?

Well, in half 1, it was minus 1%. Again, if you look at the two-year picture, prices are of the order of 4% lower, so everything that we sell compared with a couple of years ago.

But it's really difficult to predict. So I'll go back to what I said earlier.

It's very difficult with all the moving parts that we're talking about. And, again, the events of the last 24 hours is part of the overall mix to predict exactly what's going to happen in terms of inflation or deflation as we look forward.

There's clearly a currency element. There's a commodity element.

And, of course, there's a competitive element as well. So all of those things, I wouldn't want to make myself a hostage to fortune on predicting what's going to happen next.

Okay.

No more hands? Well, thank you very much, everybody.

I'm sure we'll get a chance to talk to you, and I look forward to welcoming some, if not all of you to Nine Elms at some point. Thank you.