David Tyler - Chairman Kevin O'Byrne - CFO Michael Coupe - CEO

Andrew Gwynn - Exane BNP Paribas Robert Joyce - Goldman Sachs Vincent Lee - Bernstein Kiranjot Grewal - Bank of America Merrill Lynch Dusan Milosavljevic - Berenberg Nick Coulter - Citigroup Daniel Ekstein - UBS

So good morning, everybody. Good morning.

Welcome to this presentation on the Sainsbury's interim results for the 28 weeks to the 22nd of September. Now everybody knows that we're operating in an intensely competitive environment in retail.

And this fact has been underlying this year by the unceasing flow that we've had of retail insolvencies and CVAs. Indeed, hardly a week seems to go by without another one emerging.

At Sainsbury's, we've recognized for some years that there an urgency to make fundamental changes to our business to get out ahead of the expected competitive challenges above all of those from the discount sector and from the digital environment. As a result, you'll see further progress in our announcement today in a number of important areas where we've made significant moves.

You'll see progress delivered by Argos, which we acquired, as you know, in 2016. You'll see progress at Nectar, which we acquired in 2017.

And of course, right now, we are progressing our planned merger with Asda, and we are in close contact at present with the CMA as part of its investigation. All of these initiatives and many others will underpin our ability to improve service and value for our consumers in the years ahead and, therefore, allow us to earn decent and good returns for our shareholders.

I believe that the first half of this financial year, indeed, is indicative of that. You'll see the underlying profit and underlying earnings are up and that our balance sheet has been further strengthened.

And so I'd just like to record my thanks and that of the board to Mike and I our very committed and capable management team. In a really challenging market, they are successfully delivering an unprecedented amount of change in our business.

And I believe that they positioned Sainsbury's today very well strategically and that they, the management team, have the clear capability to execute our ambitions and our plans highly effectively. So that's enough for me.

Before we turn to Mike, Kevin is going to take us through the financials. Kevin?

Thank you, David. Welcome, everyone.

In the period, the 28 weeks to the 22nd of September, we delivered underlying profits of 200 -- of £302 million, up £51 million year-on-year. The profit growth was predominately driven by synergies with a solid food performance and reduced interest costs.

General merchandise margins were down, largely reflecting a change in our mix. And our cost-saving plans were well on-track.

Bank profits were down in line with the guidance we have given for the full year. And we generated good underlying free cash flow, although this benefited from some phasing that will unwind in the second half.

We incurred a one-off cost of £170 million in the period. Key items included cost to restructure our store teams, new bank systems and the Asda transaction.

While the market backdrop is tough for food, general merchandise and clothing, and the key trading period is still ahead of us, we're on-track to deliver current market consensus. Sales in the half were up 3.5%, or 1.2% excluding the impact of fuel sales.

Retail operating profit was up £63 million or 23%. This included £58 million EBIT of synergies.

Interest costs were down £9 million year-on-year, reflecting the redemption of the Eddystone secured financing issued in 2006. You'll recall that we repaid £568 million in April '18.

And underlying profit before tax was up 20%, while profit after tax was down 13%, with the impact of the one-off items of £170 million offset by a tax credit in the period. Like-for-like sales grew 0.6%, and total ex-fuel sales grew 1.2%.

We had a modest pickup in the contribution from new space, which reduced the new space contribution from the Grocery business more than offset by a net increase in the number of Argos stores in store and the annualization of the majority of our Argos in Homebase closures. Grocery sales grew 1.2%, with a stronger performance in the second quarter when sales grew by 2%.

General Merchandise sales grew 1.5%, driven particularly by the growth in the electricals category. And sales in Clothing declined 1%, impacted by a change in timing of promotions in the half.

Convenience and online grocery channels continued to grow strongly, up over 4% and almost 7%, respectively, with weaker underlying sales from our supermarkets, in part reflecting the repurposing of space towards Argos stores and concessions and the resulting reduction in General Merchandise sales. In the half, we delivered $58 million of EBIT synergies.

This equates to £63 million of EBITDA synergies to take the cumulative total to £150 million. And since the end of the half, we've now achieved the targeted £160 million of EBITDA synergies about nine months ahead of the original schedule that we shared with you.

Key drivers have been the faster rollout of Argos stores in stores and Sainsbury's and very good progress on Goods Not For Resale savings. We continued to see some upside in synergies as we benefit from the joint commercial model in particular.

But as we have previously said, we don't plan to make any further separate disclosures of these as any ongoing savings will be treated as business as usual. And as time passes, it will become difficult to distinguish between synergies and other savings.

We achieved an important milestone with the bank in the first half, successfully completing the transfer of 1.1 million credit card customers to our new platform. In the half, bank income was broadly flat year-on-year and total profit down around 50%, in line with the guidance we gave in May.

Higher interest income from mortgage and credit card balances was offset by higher costs, driven by depreciation on the new bank platforms being brought into use, higher bank debt -- bad debt charge, predominantly driven by the first-time impact of IFRS 9 and higher interest costs mostly due to the costs of Tier 2 capital issued in November '17. We saw good growth in customer numbers at both the bank and Argos Financial Services.

And our NIM reduced to 4%, impacted by the growth of the lower interest, secure mortgage book and continued market pressure on unsecured lending margins. The underlying bad debt as a percent of lending was flat, with the year-on-year increase largely as a result of implementing IFRS 9.

The arrears performance in the book is stable. IFRS 9, as we've previously discussed, is the new accounting standard, which changes how the industry accounts for potential bad debt impairments.

And there's further detail on Page 47 of the accounts. As I said, we incurred material one-off costs in this period.

£65 million related to bank transition and Argos integration. Both were part of previously announced programs.

£14 million related to losses on the disposal of property assets. Restructuring costs are additional costs relating to the previously announced material changes to our store colleague structures.

And Mike will talk more about this in a few minutes. And finally, we incurred £17 million of costs relating to the Asda transition.

We guided in May to operating cost inflation of around 3% this year, with colleague wage increases being the main driver of this. Against this pressure, we continue to make very good progress with our cost-saving targets.

The biggest driver in the first half has been changes to our store operating costs. We continue to drive a lot of efficiency savings through technology investments.

Examples include significant improvements in online picking productivity, more efficient voice picking in depots and the use of new technology to reduce in-store refrigeration costs. We continue to be disciplined in how we allocate and invest our capital, and we are seeing our returns improve.

We look at our capital in three key categories: maintenance capital, capital we spend on repairing and upgrading our existing stores and IT systems; growth capital, capital we spend on new growth initiatives; and efficiency capital, capital we spend to deliver our cost-saving programs. The latter two categories, as you would expect, have higher paybacks.

In our half, our retail CapEx was down around 10% year-on-year. As you know, free cash flow is a key measure for group management.

As usual, we have a favorable working capital position in the first half, which is due to the timing of supplier payment runs. We delivered strong free cash flow during the period, although this was flattered by some phasing, such as the timing of the bank capital injections of £110 million, which will be made in the second half.

Net debt has improved by £530 million from the year-end to £834 million. The reduction was principally due to the strong free cash flow of £619 million as well as favorable £107 million movement on the fair value of foreign exchange hedging, a £250 million swing year-on-year.

For the full year, we continue to expect net debt, before any benefits of these fair value movements, to reduce by around £100 million versus March 2018 as the improvement in the first half partially unwinds due to the normally -- the normal seasonality associated with supplier payment runs and the phasing of the bank capital injections. Our key leverage metric is lease adjusted net debt to underlying EBITDAR.

And our medium-term target is 3x. For this, we include hybrid securities, which total around £495 million.

In the period, this metric reduced to 3.2x. As noted, this is flattered by some phasing.

The IAS 19 pension scheme calculation has moved into surplus at the end of the half, reflecting the impact of higher corporate bond yields on the discount rate. Overall, the group delivered a good performance in a challenging market, with a solid food -- performance from food impacted -- an impact from General Merchandise margin mix and a material contribution from additional synergies delivered well ahead of schedule.

Underlying free cash flow generation remains strong. In terms of outlook, while the market backdrop is tough in food, General Merchandise and Clothing, and the key trading periods are still ahead of us, we're on-track to deliver the current market consensus.

I'd now like to hand you over to Mike.

Thank you, Kevin. So just to pick up, I'm sure front and center part of your questions today will be the CMA process.

This lays out the timetable which the CMA themselves have published on their website. But it's important just at this point to perhaps reiterate the underlying case that we're putting to the CMA.

The first point to make, and it's self-evident in the case, our market is changing and changing very rapidly. And the competitive forces aren't abating.

And they're driven by a couple of things: firstly, the rise of discounters; and secondly, the change in shopping habits, driven by online and digital. So as a customer, you have more choice than you've ever had.

If you think about what the CMA are there to do, they're there to protect customers. And in the end, their test is whether or not there was any harm done to customers, and we're making a very strong case as to why we believe that not only will no harm be done, we'll actually improve prices and our overall proposition for our customers through the generation of significant synergies that can only be delivered by bringing the two organizations together.

We're now engaging in that process with the CMA. As you imagine, that involves a lot of detailed discussions, a lot of evidence, a lot of data.

And of course, the CMA are an evidence-based organization and a world-renowned evidence-based organization, so they will look at the facts and produce the preliminary findings towards the back end of January in line with the timetable that's outlined here today. I won't be able to go much further than that and despite whatever questions you'll ask me during the course of today.

I'm sure you'll ask a lot. But that, hopefully, gives you a flavor for where we are and, indeed, the direction of travel as we look forward and, indeed, the basis on which we're making the case.

Well, of course, as against that backdrop that we talked strategically about our plans now four years ago, and those market dynamics haven't changed. And if anything, the changes in the market are accelerating, not decelerating, and you can see that written large in some of the competitive dynamics in the market more widely, which David has already referred to.

We laid out our strategy four years ago. We're getting on and executing that, and there are four main headlines: the first is to make sure that we're differentiating our food offer, and I'll talk about that in some detail; grow our General Merchandise and Clothing business, we still believe that there are significant market opportunities in a relatively unconsolidated market; and adapt our business to our changing customer habits; to grow our bank, and again, we'll talk about that as we go through this presentation; but also to make sure that we deliver cost savings that enable us to invest in our underlying customer proposition, and we maintain and improve the strength of our balance sheet, which, again, hopefully, during the course of today, you'll see that we've managed to achieve.

Front and center of the changes in our business in the last period of time has been the change to our management structures. This has been probably one of the single biggest people changes this organization has ever made in its history.

We've been through a consultation process with 136,000 colleagues, both management and retail colleagues. And we've simplified our structure.

So the overall points of principle around making our business simpler to operate, streamlining our management structure, but also reinvesting labor hours into the frontline colleagues and to be able to pay our colleagues better and introducing a headline rate of pay of £9.20 an hour whilst also simplifying our colleague contracts. So not an insignificant undertaking, and we will be the first to recognize that, that has an impact on our business.

And perhaps the biggest impact happened during the sunniest part of the summer, and inevitably, that would have had a consequence in terms of our online operations. But we're in good shape now.

The changes took place finally on the 23rd of September, so our colleagues would have enjoyed their first paycheck at the new improved rate of pay, an average increase of 9%, over 30% over four years, on September 23. And we're getting on and running our business in the run up to Christmas.

And we can see that in the metrics. So despite some of the commentary you may have seen, actually, in the first half, in the 28 weeks that we're reporting, we actually won the Grocer magazine Service Awards 12 times out of those 28 weeks, so still the best in the industry.

And our in-store availability, as measured by the Grocer magazine, is materially ahead of our next best competitor, some 2% ahead of our next best competitors. So despite all the challenges and changes in our organization, we continued to maintain store high standards which are ahead of the industry.

And of course, now we're through those changes. We've introduced new service standards in our organization.

We have a program called WOW service, which is front and center of our colleagues' minds as we go into the front -- run up to Christmas. And we've also introduced an app, which allows our customers to feedback in real time through what's known as Lettuce Know.

And so literally every store, on a day-to-day, week-to-week basis, understands their performance metrics in terms of their customer service and can act on that literally, as I say, on a week-to-week and day-to-day basis, so a big step-up in our performance there. In terms of the product changes, again, we recognize the need to both be more competitive but also to seek the ways to differentiate our product proposition.

And we've talked previously about our product quality framework, which allows us to put products in different parts of the spectrum. Basically, it's a grid which looks at functional performance and emotional attachment to certain products: in the bottom left-hand corner, commodities, things like toilet rolls; at the top right-hand corner, added value specialty products and things like freeform products.

And clearly, on that spectrum, we have the need to make sure that we satisfy our customers right across that spectrum. We use that as the framework for how we think about products, but it's also a changing framework.

The nature of our market is very dynamic. It wasn't that long ago that fillet steak was probably in the quality option box.

Actually is when we look at our competitive set and if we look at what the discounters are doing, a lot of the products that might have been considered as quality or specialty are actually moving into mainstream everyday items. And as I said, fillet steak would be an example of that.

So we have to constantly review our business and look at our ranges in that context, in that changing and dynamic marketplace. But an example of how we use the PQF.

We use the cheese category. First of all, we've seen a significant reduction in our cost of goods by looking at our value chains.

That's resulted in us being able to lower our prices and, therefore, seen a consequential volume growth. We've looked at the range hierarchy.

One of the successes of this quarter is the growth of Taste the Difference, and we've seen the sales grow by 3%, volume is up 4%. We know if we give our customers the right value options, they will tend to trade up, but equally, we need to get the rest of the hierarchy right.

We've rationalized the ranges, so reduction in the SKU count, making it simpler for customers to shop, improve layouts. And we've introduced new products, new concepts, new designs to make sure that customers can see where there are trade options and where we can add value and add range and add choice -- genuine choice for our customers.

Again, we are looking to differentiate our product ranges through what we call distinctive products, some of which are our own brands, some of which are owned brands and some of which are working with other branded third parties to introduce new and unique products. So example of that, big trend in the U.K.

is towards flexitarian eating -- I'm sure there's plenty of flexitarians in this room, eating more vegetables, less meat -- and looking at how we can combine those products together. That's helped us introduce a range called Love Meat & Veg!

And there are some examples of the products there. Again, vegetarianism is rising in the U.K.

Product you see on that side is a Shroom Dog, a mushroom-based hotdog; and again, big trend and opportunity for us to differentiate relative to our competition. And then Naturli, which, again, is a vegan-based spread, plant-based burger patty, which again adds differentiation and difference in our ranges.

Another example, Little Ones. Again, we tended -- or we do tend to under-trade in our baby product, our baby category.

We've introduced a new range of Little Ones products, which now account for 26% of the category's volume. So again, a great introduction, and again, that's driving differentiation and different something that you can't buy in our competitors.

Hyde & Wilde is an example of an owned brand, a product that we brought to the market in the craft beer sector. Again, that's a growing part of the market, and now it's our second fastest selling craft beer brand.

So again, an idea, an example of where we're bringing differentiation to our offer. Quinoa, and we are partnering with the only quinoa farmer in the U.K., again, a unique opportunity, something around the periphery of our overall offer but, nevertheless, something that makes a difference in terms of offering differentiation and choice.

And the last example is actually a brand that we brought to the market with Ribena, the manufacturer, which again is an exclusive brand to Sainsbury's in the spirit mixer category. So again, working with suppliers across the spectrum, not just own label, own brand, but also looking at how we can get exclusive brands into our business.

As we already know, this industry used to -- or you used to obsess about trading intensity. It's kind of dropped off the agenda, but one of the things that we'd like to highlight is how we are repurposing our space and making our space productivity higher.

And that's perhaps one of the untold stories in our overall strategy. So we talked four years ago about the need to repurpose about 1.5 million square feet of our space, and we've repurposed around 700,000 square feet of that space.

And typically, that means putting new offers in like Sushi Gourmet as an example or -- and perhaps more significantly, transferring Argos stores into Sainsbury's stores. And as a result of that, if you take a typical store, maybe 5,000 square feet of space goes to Argos, a slight reduction in food space and then a rebalancing of space between clothing and general merchandise, where we put -- tend to put more clothing in, which is more profitable, and take out the obvious big-ticket items like electricals, which are better served by the Argos business model.

But if you look at net across our business, it actually means, on a like-for-like basis, we've improved our sales intensity by 2% across the entire business. If you look more specifically about the stores where we've done that, so if you take Argos as an example, we've put roughly 250 Argos stores in Sainsbury's stores.

The increase in sales intensity has actually gone up even further. And indeed, if you look at the overall metrics, very significant increases in the sales intensity of general merchandise, for obvious reasons, but also an increase in the sales intensity of food.

And that's missing another part of the equation, which is in -- as the consequences of moving Argos stores into Sainsbury stores, we've also reduced significantly the amount of square footage in Argos. So again, that has an improvement or has an overall consequential impact in the trading intensity in our business.

And one of the reasons why the headline synergy number is being delivered is because of that trading intensity effect, where we're taking costs out of part of our business, investing in our core real estate, improving our sales intensity in our core real estate, and that's a formula that we can continue to drive as we look forward as shopping habits change and as there's a significant move towards online. And that's another reason why we're looking at other opportunities.

Beauty will be an example of that. So we have a trial now in seven stores of looking at beauty as a category and whether or not we can do a bigger and better job of serving customer missions.

It's a growing category. It's a profitable category.

And it's also a category where we think there's a competitive opportunity for us as we look forward. And again, it's an example, if we can get it right, where we can use our space differently to accommodate the changing nature of the way that people are shopping.

If we look at our channels, we continue to drive sales in the channel part of our business. So starting with our Convenience business, we think we run the best convenience stores in the market.

We would say that, wouldn't we? But that's evidenced by the fact that we have the highest sales densities in the industry.

That business is growing by 25% over the last three years, again, reflecting changing shopping habits but also reflecting the fact that we continue to invest selectively in quality real estate in that market. The underlying like-for-likes have also moved forward.

As I've said already, we have market-leading sales densities. But we're also, all the time, looking at how refine our ranges within those stores.

And the chart on the right is demonstrating how we're moving away from having the same range everywhere, which is basically the gray bar, to having more difference between the stores and, therefore, more range differences and much more local ranging on a side-by-side basis. So you can see how much that has changed over the last couple of years as we get better and better at fine-tuning the ranges on a local basis on a store-by-store basis.

And to illustrate it, if you take the store just across the way from here, the range would be markedly different to, say, a store on a housing estate in Hull. And that wouldn't necessarily have been the case a few years ago.

And we're also maintaining a strong position -- price position in our Convenience business, particularly relative to the two mainstream competitors, Tesco and the Co-op. I want to talk about digital more widely, although we've had a very successful period in our Groceries online business, growth of 7%.

We've appointed Clodagh Moriarty to the board -- where's Clodagh? -- to bring together all of our digital properties as we think increasingly as our digital offer as a channel in and of itself.

And as we look forward, we are starting to bring together our digital properties, to show up, in my words, in our digital real estate, to our customers on a common platform. And that's challenging across an organization like ours.

We have lots of legacy systems. But nevertheless, we are making strong investments in this area, both in terms of the underlying operation of our business.

So we've seen an improvement in pick rates as a result of our online picking systems. We've introduced same-day deliveries now across almost 60% of the U.K., but also using SmartShop, as an example, in our stores and being able to join that together with our Grocery Online business so that customers only have to sign on once wherever they are in the Sainsbury's real estate, not just in Sainsbury's but also within the bank and also, ultimately, within the Argos business as well.

So it's a very important part of our program as we look forward to adapt to the changing markets and think more holistically about how we bring our digital properties together and how we show up to our customers in that world in a single-minded way, a more joined-up way. We also acquired Nectar, I think, in February of this year, not February of last year.

It feels like a long time ago, but it was only about six or seven months ago. It is the U.K.'

s largest loyalty scheme. It's based on affiliate members as well, and we've been in a privileged position where we've signed up -- or we've resigned four of our major partners.

We've signed up three new partners. And as we look forward, we want to broaden the coalition to mean that customers can both earn and burn their net points across a wider range of product areas and categories.

And we have already 1.2 million users of the Nectar app. And again, we're undertaking a significant trial, looking at how we digitize the Nectar proposition as we look forward.

And so trials have been taking place on the Isle of Wight and in South Wales. And again, we're pleased with the results of that.

And as we look forward, we think there's a significant opportunity to join together the Nectar proposition as part of our overall digital real estate. And of course, Argos is a central part of that as well.

And again, we've invested a lot in improving the Argos shopping journey, making sure it's easier to check out, introducing things like virtual reality, so you can see how the television might look in your living room. And we're starting to trial things like voice ordering through Google Assistant.

So again, looking at how we can adapt technology but also join together our digital real estate as we look forward. Talking specifically about the nonfood category, so starting with General Merchandise.

A pretty good performance against a very challenging market backdrop, so we saw sales grow by 1.5% ahead of the market. Again, looking at how customers are changing their shopping habits, the Argos proposition is unique in its ability to deliver products to customers quickly.

And we've seen that in the growth of Fast Track Delivery and Fast Track Click & Collect sales, up 18% and 21%. We see the strong performance in Argos driven by electricals at least in part because of the timing of the World Cup this year.

And that has had an effect on the margin mix, which we believe will carry through into the second half. And of course, with the summer weather has a benefit in a sense, you sell a lot of fans and BBQs, but then you don't sell many lawn mowers, so there's a tradeoff, one way or another, in terms of the mix effect as a result of a sunny weather.

And what's pleasing is, if you look at the Argos stores in stores, these stores, which there are 10 have been opened for more than three years, actually have grown about 45% -- or have grown by 45% over the 3-year period that they've been opened; stores that have been opened for more than two years, by 35%; and stores that have been opened for more than 1 year, by 10%. And Argos stores in stores -- in Sainsbury's stores account for roughly 15% of our overall turnover in Argos.

And so you can see that over time, that will have a compounding effect because the main bulk of the conversion program was in the last year or so. So it gives us some comfort that we should see some growth -- future growth out of the Argos proposition as we look forward.

And again that, this chart illustrates the changing shape of the retail real estate as a result of the acquisition of Argos and putting stores in stores. So we actually now operate 122 less stores.

And if you -- and let's say roughly 12,000 square foot a store, that means there's roughly 1.5 million square feet of real estate that's come out of the market as a result of moving those stores into existing Sainsbury's stores. We've opened now 200 -- or at the end of the half, at least 251 Argos stores in Sainsbury's, roughly half as a result of relocations, roughly half in spaces where Argos already didn't exist.

We talked before about the fact that we've gone through a significant closure period within the Homebase business, so around about 85 less Argos is in Homebase, which means although we've got more stores, there's been quite a significant shift over the last couple of years in the shape of the real estate since our acquisition. So we have a total presence including Click & Collect points, now of 1,100 points of presence.

So, as well as stores in stores and having physical real estate, we're also rolling out collection points within the remaining part of the Sainsbury's real estate against the objective of being there for our customers whenever and wherever they want. And we believe that's a very powerful proposition as we look forward.

And we don't mention Habitat much, but again, there's been a lot of reshaping of the Habitat business, again, closures in the Homebase real estate; and we've opened a number of new stores, some in Sainsbury's stores; but actually also, during the last period of time, a couple of stand-alone stores, one of which is in the Westfield center, in Shepherd's Bush, and one of which is in the center of Brighton. So we're just putting our toe in the water as to how we might develop that business into the future.

And on the right-hand side of the chart, it's self-evident in the case that customers are becoming more digitally savvy. They increasingly use their mobile phones to order products from us.

It is little short of remarkable. You can sit in this room, download the Argos app and order something and have it delivered within four hours at a -- to a convenient location for you, whether that's a store, your office or, indeed, your home or, indeed, somewhere else.

And you can see that in the shape of our business, with now 60% of our transactions enabled through some form of digital interaction with our business. And not only are improving the way we show up to our customers in our stores, the way that we interact digitally, we're also seeing improvements in our Net Promoter Scores as a result of a lot of operational changes within the Argos business.

So our online availability, our availability is up 5% year-on-year. We've reduced our out of stocks by 2%.

We have more digital stores, and so we are changing the shape of the existing real estate as well. And we've also introduced Pay@Browse.

So you no longer, in many stores, have to go to a checkout to pay, you can actually do that as you're buying your item in real time. Clothing has been a bit more challenging, it's fair to say, over the summer.

I think that's broadly reflected in the market more holistically. There aren't many clothing retailers at the moment punching the air.

But it's also as a result of us changing the phasing of some of our promotions. But nevertheless, we've seen growth in menswear, and we continue to have a lot of faith in our Clothing business.

It's been a big growth engine for us in the past, and we consider that's to be the case in the future and not least because we're now offering clothing online within Argos as well as within Tu online. And again, that business is growing like Topsy, albeit from a relatively low base.

And we're introducing a new petite range coming to our stores in the second half, for those of you who may well not be interested in that. I think that's for ladies in particular rather than men, but anyway.

And last but by no means least, the bank. We've seen a growth in Argos Financial Services, growth in penetration with now the bank use or the Argos Financial Service, a product used now in 19% of transactions, and that's, let's say, a 10% growth year-on-year.

The Argos Card app -- mobile app is now being used by 1 million customers. And 60% of app users have switched to paperless statements so, again, making that business more efficient and, again, showing the changing nature of the way that our customers shop with us.

40% of all payments are now made by the app, again, a reflection of that change in consumer behavior. We're pleased with the mortgage business.

Now our balance sheet is over £1 billion of mortgages. We've seen growth in Travel Money again, a business where we've got relatively low but, nevertheless, increasing market share.

And we've doubled the sales of car and home insurance. And again, there's a strong link between the bank and the Nectar scheme.

And again, as we look forward, our challenge is to make it more and more joined up across our digital real estate. So in summary, we think we've had a solid first half, and we continue to look to differentiate our Grocery business whilst making sure that we remain competitive.

And therefore, reducing our costs is an imperative part of our program as well. We've outperformed the General Merchandise from a market growth point of view, albeit that's partly driven by tech growth and, therefore, has had an effect on the margin mix.

We changed the promotional phasing within Clothing, and we believe it's a strong business with plenty of growth opportunities in the future. And we've grown the bank in terms of customer numbers.

And the profit for the bank is in line with guidance. So thank you very much.

And now we'll open up to questions.

I think you were first, so there you go.

I seem to be the only person who put my hand up, but I'm sure that's not the case.

No, if it's anything about the Brexit, we had already about three questions. So if you can stick with one, that will be fine.

It's not about Brexit, so we can move with that. No, it's Andrew Gwynn from Exane.

Got a couple of questions. So the first is just on the market conditions at the moment you'll see hinted in the outlook statement, and David covered it a little bit in his introduction.

But just elaborate a little bit on what you're seeing in the Grocery segment and also the General Merchandise segment. And the second one was like optimistic question.

But how confident are you you'll get the yes from the CMA given what you've got to so far?

Should I answer the first one -- sorry, the second one first and say I've said all I'm going to say on the CMA, which is all I said upfront. I mean, I don't think there's anything -- just to give you a bit of color there, there's nothing that's happened that would be a surprise.

They will do a wide-ranging investigation. That's what you'd expect them to do.

They will look at it in a detailed way. In the end, they're an evidence-based organization, and we've provided them with lots and lots of evidence, and we would sit with a central thesis of the case, which is by bringing the organizations together, we can uniquely deliver synergies which will be passed back to customers in the form of lower prices.

And if their test, which in this is to do no harm as far as customers are concerned, we think there's a compelling case for why not only will we do no harm, we'll actually benefit customers with lower prices, better service and better range, better quality. So on that part, I think we made the case, but we can go no further than that.

We're in the detailed part of the investigations, and we'll have to see what happens there in January when they produce the preliminary findings. As far as the market is concerned, I think we have to be sensible in terms of just recognizing the fact we're almost in an unprecedented times, consumer backdrop, political uncertainty, etcetera.

So whilst we have confidence in our -- the choices we're making and in our business, we have to color that with the background of just really moving into our busiest trading period in a period of unprecedented uncertainty. And inevitably, if there's uncertainty, that has the potential to knock onto the way that customers are thinking or feeling.

Not necessarily evidence at the moment but as we run into Christmas and get nearer to the end of March, who knows what may happen. And I think we just have to counsel caution at this point, which is why we're comfortable with consensus.

But we certainly wouldn't go any further than that at this stage. Rob?

Rob Joyce from Goldman Sachs. Three from me.

First one, I guess just to slightly elaborate on that second -- your answer there, Mike, is there anything specific in the second half that means, given the strong results in the first half, given the additional benefits to come from Argos, that you didn't want to push that -- the guidance up versus consensus? Second one, just wonder if you could comment on -- I think M&S noted yesterday a bit of a change in shopping behavior.

They said they were seeing a move away from that frequent little-and-often kind of shopping. Not sure if that's something you're seeing in your business.

And thirdly, a couple of specific ones. Just in terms of the Asda exceptionals you pulled out there in the first half, can you say what Asda costs are embedded in the underlying number from last year?

I think you have to absorb them last year. And secondly just on that, another one, anything you can say on the EBIT benefit from fully consolidating Nectar in the half?

I can take the last two.

Well, okay. Kevin, take the last two.

I'm not sure where to start with. Just on Nectar, there is some benefit from Nectar, but clearly, the strategic rationale for buying Nectar was to get the database that Mike talked about to operate Nectar right across all our brands, the bank and Argos and Sainsbury's, and create sort of unique currency for first customers of Sainsbury's.

The way we're running Nectar is very different than Aimia ran Nectar. And you'd probably understand the key assumption in any key contribution from Nectar is the assumption on how many points customers actually use or don't use.

We've taken more prudent view on the points assumption there than Aimia would've taken, and hence, the contribution isn't as much as you might think. But there has been some contribution, as you can imagine, from Nectar in the numbers.

We're not breaking it out. On the Asda cost, there was Asda cost last year.

They weren't material because, as you can imagine, they're back-end loaded, and the heavy lifting that you're seeing now, there's lots of lawyers, work accountancy, getting ready for prospectus, there's economists, etcetera. So there's a lot of heavy lifting going on there, so there were some costs last year.

Again, we haven't broken them out but not as materially as you're seeing in the first half of this year.

And yes, I'm not sure I can give a lot more color than I've already given. We're about to enter our eighth busiest trading weeks of the year, so to call anything this early in the year is always dangerous.

We always have this conversation at this time of year. You just don't know what you don't know.

But I think we are in potentially unique times, so I think we have to counsel caution just in looking at the outlook in the balance of the financial year. Remembering our financial year ends in the early part of March, so we'll have to see how that plays out over time.

But given that we've got our busiest trading period, given we've got a backdrop of uncertainty, that would always color our thinking in terms of the way that we're looking forward.

Anything on that shopping behavior is changing?

Sorry, on the shopping behavior, no, certainly, all the evidence we would have, and believe me, we've got evidence coming out of our ears for obvious reasons, would overwhelmingly demonstrate the customers are shopping more frequently. They have more choice, and they exercise that choice.

So I don't have any basis on which I could make that judgment other than being able to demonstrate beyond reasonable doubt that the customers are shopping around more than ever. And when they shop around, they tend to buy less.

I don't know if there's something unique to the M&S business that would bump that trend. But whatever days we look at would overwhelmingly support that sort of not just choice but exercising that choice.

Greg [ph] from Shore Capital. Can you just talk a bit about deflation and inflation?

M&S, just they were talking about deflation in their business. Just trying to understand underlying volumes given your negative like-for-like in your supermarket estate.

I'll let Kevin answer that.

We have -- we don't publish a number. We've inflated less than most of our competitors in the half, and we've seen one of the most encouraging volume performances that we have for a number of years.

Volumes are down slightly, but material improvement year-on-year.

Down slightly 1%? Or...

We don't disclose the number. But when I say slightly, it will be certainly less than 1%.

It's Vincent Lee from Bernstein here. Two questions from me, please.

So back in Q1, you said that you made £150 million of price investments. Are you seeing any volume traction in Q2 as a result of those investments?

And on the same points, how much did you invest in prices in Q2? Did you feel the need to invest to compete against Tesco's new ranges?

My second question is, going into Q3 and Christmas trading, can you talk maybe a little bit about your expectations for closing -- for Clothing and GM? You touched a bit on it earlier, but maybe you could give a little bit more color on the kind of margin pressure you're expecting.

Yes. I mean, I think we've probably had to go answering the first part of the question.

It's always difficult to relate exactly which bit drives what, but you'd have to make some kind of assumption that the changes we've made in our proposition have had a material impact in improving our volumes. We've already talked about the fact that the volume trend has got better, albeit it's still slightly negative.

Again, Kevin's talked about price position. If you try and unwrap it, we're effectively inflating our business less fast than the market and our competitors.

Now you can draw your own conclusions from that. But we don't talk specifically about price investment in this statement, but we would always seek to keep ourselves competitive.

On GM and Clothing?

I mean, we -- I think Mike said it already in the sort of outlook, we're cautious in the outlook. If you think of the GM market in particular, it looks like it can be very competitive.

There's lots of people under pressure there. And our experience in the first half was we outperformed the market.

We delivered stronger sales. Our margin pressure largely came from mix -- very largely came from mix as we mix more into electricals.

But we would be -- our working assumption would be it's going to be reasonably competitive, and there could be some margin pressure going into the second half. On Clothing, probably one point worth making, we talked about the phasing of clothing promotions in the first half.

We're not actually -- we're sort of removing some promotions as well, so that's not going to go into the second half, so we wouldn't expect any upside in the second half from moving a promotion into the second half. We're sort of taking a promotion out of the program.

So underlying, we'd see a sort of a continued position in the clothing market, and I suspect weather will have quite a lot to do with what the actual number turns out to be.

I mean, just maybe just to put a little bit of color on it, I mean, again, if you look at the market dynamics, David referred to it upfront. Now we're in a period of quite significant restructuring in the retail industry generally and particularly in the clothing and general merchandise industry.

And it's inevitable, when you have retailers in some form of distress, and almost every retailer that we look at ad gets reported has some challenge, the people will promote in order to drive sales and to sell the stock that they've got. So again, one of the reasons why we would counsel a little bit of caution as we run up to Christmas, it is the sheer backdrop of what's going on in the sector, you have to say that, that, one way or another, would potentially have an impact on the way that people choose to trade the Christmas trading period.

The more desperate you are, the more you tend to mark down and promote businesses in order to sell the stock. We can't see.

Yes, wait, there in the middle. I'm sorry.

Should I go?

Did you raise your hand?

Yes.

I didn't see your hand, sorry. We'll go there, there and there.

Kiranjot Grewal from BAML. I've got two questions.

Firstly, where do you see a price cut versus the discounters at the moment? And the second one, could you give us a bit of color on maybe customer capture and all range performance in the context of your higher-end competitors struggling, are you seeing any movement from, say, the M&Ss and the Waitroses down to yourselves?

Yes, I mean, again, it's sometimes difficult to disaggregate, but assuming that we've done a good job of selling Taste the Difference, it is probably some read-through in terms of our performance relative to our mainstream competitors. And it's probably had an impact on our -- or has had an impact on our Convenience business, where, again, by refining ranges, by being more specific in the way that we target ranges, and that would not in the least be as a result of things like Taste the Difference.

We're being more competitive not just on price but also on range. But to actually try and unpick it in the overall scheme of running a business is always going to be challenging.

We don't specifically refer to a price cut versus the discounters other than acknowledging that there is one and also acknowledging that one of the ways of closing down that price gap and a unique way of closing that price gap is by the Asda potential merger going through, where it would create a one-off -- or rather a significant cost benefit, not least in the cost of goods, which would be passed back to the customers in the form of lower prices, and that has a huge benefit to customers.

I suppose you didn't give the gap. Can you tell us the direction of it?

Has it shrunk?

Yes, it has definitely come down, for sure. And again, there's always a -- that is not just around individual product pricing, it's also about looking at range hierarchies and how we use range hierarchies different.

And we've opened -- we've introduced some new products, opening-price-point products, which, again, in and of themselves, are more competitive relative to the discounters, not dissimilar to what a numbers of our other competitors have been doing as well. So the absolute pricing gap has come down over the last three or four years.

But also the range structures and hierarchies are leading to lower price points in our organization.

It's Dusan from Berenberg. Three questions from me.

The first one, can you provide some statistics to show that the growth that you are generating in your banking business is coming through the mortgages and insurance in the new aspects of your business as opposed to the kind of all the Argos business and unsecured financing because there had been some concern about that from investors in respect to the current environment in the U.K.? The second one is on -- you mentioned in the release that the labor changes you have made have impacted your performance over the summer, so if you can maybe elaborate on that.

And the third question is just in terms of the commentary you've made on Argos, where store in store is now 15% of Argos total performance. How was the phasing of that growth?

You mentioned that it -- a lot of them came within the last year.

Well, I'll ask Kevin to respond to the bank. Maybe if I could just take the other two points.

On the phasing, to be quite honest, I'd have to break out the exact profile of the store-in-store investments, but it's fair to say that in the last 12 -- the 12 months from last November to now would be at the time that we have made the most store-in-store investments. So we could probably -- I don't think it would be a problem to break out the exact profile of the stores.

And broadly speaking, the number of stores would be a proxy for the level of penetration over that time, that wouldn't be far out. Now we've been through a huge amount of people change in our organizational.

It's inevitable, if you are consulting with 136,000 people, and you're doing that 3x over a relatively short period of time, you introduce a level of uncertainty for those colleagues, and we would recognize that. And no matter how well you manage that, people, generally speaking, don't like change, don't like uncertainty, and we've respected that and done our best to make sure we've managed our colleagues through that period of change.

It happens. You -- normally, you choose to do these things at quieter times of the year, and generally speaking, the summer holidays are the quieter times of our year.

It happens to coincide with six weeks of the best weather the U.K. has seen for a decade.

And so we saw a very significant uplift in demand, not least in some particular fresh food categories. And that undoubtedly, at the time we were at sort of peak change, had an impact on our operational performance, which I think is being reflected by some people in this room and certainly reflected in my inbox.

And if you take a proxy for our service deliveries being the number of emails I get about it, then we're basically back to where we would've been in sort of April, May time of this calendar year. So we're confident we got things back under control.

We've -- we invested out back into our frontline colleagues, changed our management structures, and that's bedding down. And indeed, as I've said, we also introduced new colleague rate of pay from September, so getting a 9% pay rights for a lot of our colleagues would be, relatively speaking, quite motivational.

So all of that's now gone through our business. The bank?

Now the bank -- yes, we've taken actions that you'd expect in the current climate, where if you look at the period we're talking about, we reduced around secured lending in that period. We actually increased our Argos Financial Services lending because that has actually got -- it's a very high-margin lending.

As you can imagine, when you look at the rates and under a stress test, that's actually a good place. And of course, it supports our customers to buy products in the business.

And we've increased in the bank the majority, putting out all the increases in the mortgage book net increase. And that's obviously secured lending, 56% loan to value, very -- it's a very good loan book.

It's Nick Coulter from Citi. Firstly, just to follow up on the bank, when do you expect to get a return on the capital injection of £110 million, which I think is going in the second half?

And where do you see the ROCE, whichever return measure that you use on the bank? And I've got two more.

Well, at the moment, the return on equity in the bank is below -- you can work it out itself. We've put about £750 million of capital into the bank, and clearly, the maths, you can see we're not getting return on this.

We're very clear in the steps we're taking to get a return. We're focusing on secured lending to remove some volatility, and that -- and help returns.

We're focused on Argos Financial Services, which is a high-returning business. We're focused on our commission business, and you've seen some very good growth in Travel Money and in our insurance business.

And we're being more cautious on our unsecured lending. We clearly have a very high-quality book, as evidenced by some of the things we've said before.

But we're even being more cautious in the current climate and we're nailing down costs as we try and scale up. The issue now, we have to grow the bank because we've made a big investment at the infrastructure.

Now is not the time to stop that investment. Now is the time to invest carefully.

And all of the capital we're talking about allocating the bank is to support that growth.

No, I get that -- I guess Asda will help as well...

Yes.

If that comes true. But just in terms of timeframe, how long do you think it takes then to cross your WACC?

Because it's probably moved to the different directions of what you've seen.

We clearly have set an internal targeting and projection of that, but we're not willing to share them at the moment. And I think some of it will do.

Look, the environment will drive some of the timing on that if we could predict that more carefully. But as you say, I think we're making all the right moves.

Right now, we're being very disciplined about our capital. As the management team across the business, we're very aware that we need to and want to get a return from the bank.

And I think as we combine our assets with Nectar, with Argos, etcetera, we have all the tools to do that. There's a few years of probably heavy lifting, and then Asda will help as well.

But as you say, it's £750 million to date, hundreds more to go in, and an EBIT that's projected to be £30 million, you can see well...

Yes, absolutely, we're not sitting here satisfied with the bank right now, either in the bank or in Sainsbury's. So we're all very aware that we need to get a return as we're very pleased with some of the investments and the assets we have, but it's -- we've said I think a number of times, it cost more than we expected, and it took longer, although I would point to the fact we've put 1.1 million customers onto our platform and the credit cards this year.

We've had a successful new loan book transfer, etcetera. And you've -- we've seen, if you look across the market, some of these things, if they fail, they're even more expensive.

We haven't failed. We've got the platform.

Then on the Argos synergies, you've been clear that you expect more. Should we think of those as part of the kind of the ongoing £500 million pot?

Or are they in addition to that £500 million?

I mean, what we've always said publicly is we committed to the £160 million. We're delighted we achieved them well ahead of plan, and we would stop measuring them.

That's a very practical thing, this having a couple of people spending all their time working out what's the synergy, what's the cost saving and allocate it. We have to do that as part of the transaction.

It has to be audited. That's not a very good use of time.

Secondly, we did say that beyond the £160 million, we reserve the right. We'd probably invest in the underlying offer.

And you can see some real progress in the business -- in the Argos business, where we've talked about some of the margin pressure, etcetera. So investing to the new ranges, etcetera, would probably make sense from a shareholder and, clearly, from a customer point of view.

It's a wonderful business because you tend to think of things in compartments. We've kind of managing in the around.

Sometimes, you win over here and lose over there and vice versa. And all the time, you're looking at those trade-offs that you're making on a week-to-week, day-to-day basis.

And it is undoubtedly the case that there are more upsides within Argos, but equally, we're in a competitive market, where we will need to make other investment choices as we look forward. And that's right across the business.

No, absolutely. I'm just trying to understand if it's part of the £500 million or in addition to the £500 million for you to then have choices to what you do.

Yes. No, no, look, the £500 million is a separate tranche of work.

We've got very clear programs on our cost transformation, and we continue to work hard at that.

Then lastly, just on Clothing, are you moving to a more full-price model? And if so, what happens to cash gross profit in the quarter?

Sorry, say it again?

On Clothing, are you moving to a more full-price model and away from heavy discounts? And if so what did you see with cash gross profit in the quarter?

Well, we wouldn't break out the cash gross profit separately. But as a direction of travel for our business, not least from a customer point of view, we'd always look towards a business that has more stable, more consistent pricing and wasn't disingenuous in the way that it represents itself to its customers.

That's a direction of travel for the business, and clearly, as part of that, we'd be looking at how we would adapt our Clothing business to that kind of strategy.

But your cash gross profit was better than your like-for-like or your growth in that cash flow?

I can't comment on cash gross profit.

Dan Ekstein from UBS. I've got a question on the digital slide and the digital strategy more broadly.

You talked about a Groceries Online strategy and an Argos digital strategy. At the moment, it's two quite separate components.

Does it always need to be that way? You've got 250 Argos in Sainsbury's at the moment, mostly your online groceries picked from store.

It's clearly not as easy as it might be on paper, but the Holy Grail in terms of unit economics is putting general merchandise onto an online grocery truck. And it feels like if anyone is in a position to do it, it could be you guys.

I mean, how far are we from seeing that? Or is it something that you don't think that's going to be possible?

I think in the way you've framed the question, a number of years away from that kind of approach simply because the economics, broadly speaking, there's a cutoff point where the economics of the Argos business model work, price points in effect; and below that, the Groceries Online-type model works. So there's always that trade-off to be made.

But the idea of sort of full-scale integration is many, many years away. The way I would think about it is how we start by integrating the front-end piece, so things like single sign-on, making sure that you only have to enter your credit card details, your name and address, once across the entire ecosystem.

In the summer, for the first time, if you search for a fan on Groceries Online and it wasn't available within the Grocery business, we took you to the Argos website, where you could buy a fan and then brought you back to the Sainsbury’s Grocery Online offer. That kind of search mechanism is, again, the kind of thing that you can see happening relatively quickly because it's largely technology-based, not logistically-based.

So these are the kind of things where we're working on and increasingly in the mobile and digital space. And again, Nectar points across all of our real estate, wherever you are, both in terms of earning and burning, that, again, will come through the business in the next six months or so.

So it's a step-by-step journey, but probably the last thing on that journey would be to think about how you integrate the deliveries from stores to customers, although there are things that we are doing in terms of delivering two stores using our grocery network for Argos products as an example. So again, that's a benefit that sits behind the scenes in the way that we're running the business differently.

Are we done?

We're done.

Well, thank you very much. And I will see you all again sometime in May.

Thank you.