J Sainsbury plc (SBRY.L) 2016-05-07 Earnings Call Transcript

Okay. Good morning, everybody. Thank you, everybody, for coming. As you know, this is our presentation of Sainsbury's interim results for the 28 weeks to September 26, 2015. Just a few words from me before I hand over, as normal, to John and to Mike. If we cast our mind back to this time last year, you'll remember that we set out then our new strategy, and Mike will update you shortly on this. But from my perspective, I think we can reflect on good progress over the last 12 months. We've worked extremely hard to improve our proposition to customers, enhancing our price competitiveness and the quality of our offer. We've delivered more cost savings to date than we had targeted. We've looked after our balance sheet effectively, in particular by cutting capital expenditure, and also by issuing new perpetual securities enhancing our financial flexibility. We're, therefore, perhaps a little bit ahead of where we expected to be one year into this strategy. But, of course, there remains a great deal to do, and I've every confidence that our highly experienced management team will continue to implement its plans, as it has done, with energy and with purpose. And just before I pass over now to John to go through the financials, let me just confirm that we are retaining our normal dividend policy for our interims. That is we'll pay out 30% of our total dividend from the previous year, and that means that we are declaring today an interim dividend of 4.0p. With that, John, over to you.

Thank you, David. Good morning, everyone. So just before I dive into the detailed numbers, I'm just going to take you through some of the financial highlights for the first half. As David has already mentioned, we've had a relatively resilient sales performance in the first half, certainly relative to our supermarket peers, albeit in what remains a challenging market; particularly, of course, given the growth of the discounters. Operational cost savings of GBP115 million in the first half, ahead of where we expected to be; and, therefore, we're going to be updating our guidance for the full year to deliver savings of GBP225 million compared to the GBP200 million that we spoke about at the prelims. The pension deficit, we've reduced that to GBP473 million, largely as a result of the GBP125 million that we've injected into the scheme this year. Of course, there's another GBP125 million to go in the next financial year. We've improved our liquidity and flexibility through the issue of the perpetual bond. Of course, we've announced the sale of our pharmacy business. We expect proceeds to be around GBP125 million of cash, subject to working capital movements; and we expect that to come in towards the end of this financial year. As David has already commented on, the balance sheet remains robust despite the decline in profitability. So those are the financial highlights for the first half. Now going into some of the details on the numbers. Obviously, the Group sales level, overall sales down 2%, GBP13.64 billion, delivering a retail operating profit of GBP332 million, down 14.4%. Taking account of the profit from the Bank, finance costs, share of profits from our joint venture, delivers an underlying profit before tax of GBP308 million, down just under 18%. Tax rate 25.3% in the first half; basic earnings per share 12p. And as David has already mentioned, 4p interim dividend. Items excluded from underlying results, GBP31 million - and, of course, I'll break that detail out for you a little bit later on - delivering a profit before tax of GBP339 million. Coming on now to some of the sales lines, retail sales lines. These numbers should be familiar to you from our Q2 trading statement. So like for like minus 1.6%, offset by the benefit of new space of 1.5%, delivering a small overall sales decline of 0.1%. And again, when you look at that broken down across different parts of the business, a very positive performance from convenience, online and our clothing operations, so good growth in those areas; and as you can see from the slide, the continued challenge principally driven by deflation, of course, in the supermarkets channel and in the food category. So guidance for the full year; this is new guidance, updated guidance for the second half. We expect the like for likes in the second half to be similar to the first half. So the 1.6% decline is your reference point there. In relation to the contribution from new space and the contribution from extensions, that guidance doesn't change from the prelims, and it's just repeated there for your benefit. Coming on now to profitability, clearly, profitability has been impacted by our price investment and deflation which has reduced overall margins. So if you look at the underlying EBITDAR margin, down 45 bps to 7.41%. And again, if you look at the underlying operating margin, again down the same 45 bps to 2.65%. So clearly, the price investment that we've made through this year and the deflation that's taken place in the market has caused those margins to come down. Probably it's just worth re-emphasizing the impact of the price investment that we've made. We talked about the price investment of GBP150 million in the second half of 2014/2015. We made that price investment broadly at that point in time through a number of different injections in price reduction. The impact that that has on profitability year on year is laid out in this chart. So the half 2, 2014/2015 we've already talked about had an impact year-on-year on profits of GBP40 million. In this half, the first half of 2015/2016, that investment that was made back in 2014/2015 has had a year-on-year impact of GBP80 million, and we're guiding to a year-on-year impact of GBP30 million in the second half because, of course, we saw some of the impact already in the second half of 2014/2015 that gets you to your GBP150 million in total. Of course, the overarching point here is we'll continue to remain competitive on price in this marketplace. Sainsbury's Bank. Good performance from Sainsbury's Bank at the headline level, overall income growing by 6%. Strong performance in our loan book; strong performance in our insurance book. So good uplift there. Overall profitability down slightly year-on-year. That just actually reflects the more balanced phasing of profit through the financial year. And you'll note here that we're not changing our guidance for the full year, which is we expect mid single-digit year-on-year growth in underlying operating profit for the Bank. So a good performance from the Bank. We see some of the ratios here improving significantly; so the bad debt asset ratio very low at 0.3%. That's a very good performance. And again, our Tier 1 capital ratio has improved over the half to 14%, so good uplift in the overall strength of the balance sheet of the Bank. Coming on now to the Bank transition. We now have a core banking platform. It's been built. It's currently in its testing phase. What we are announcing today though is a delay to the expected migration from the existing Lloyd's banking platform onto the new banking platform, because we really want to make sure that the transition for our customers is as smooth as it can possibly be. And hence, to get that right, we are delaying that migration by six to nine months. And we think that's the right thing to do from a customer perspective. The consequences of that though in terms of our transition costs, if you remember last time at the prelims, we guided to a range of transition cost of GBP340 million to GBP380 million. We now expect the transition cost to be at the top end of that range, so the GBP380 million. The business case remains very compelling for the Bank. We continue to be excited about the opportunity to grow this business on a stand-alone basis, but also with the synergies that that business has with our core food retailing operations. From a capital perspective, we looked at the funding of the Bank in the first half of the year and we looked at the options around funding in relation to equity funding or putting in some Tier 2 funding. Based on the analysis at that time, and we tested the market, we've decided that the right thing to do for the Bank was to put more equity in rather than to go down a Tier 2 funding route. And, therefore, as a consequence, we're updating our guidance today. We'd previously guided to putting GBP80 million of capital into the Bank this financial year. We're now updating that guidance and we're going to be putting in GBP160 million of capital into the Bank this year, principally because we think it's better to fund the Bank through the choice of the equity from the parent as opposed to going to the market for the Tier 2 funding. Operating cost savings, GBP25 million ahead of expectations. GBP115 million in the half; GBP225 million for the full year. Update a little bit of guidance on the cost inflation. So cost inflation at the lower end of our 2% to 3% range, albeit we do expect a half-on-half step-up of GBP13 million in relation to the 4% wage increase that we announced to our store colleagues to take effect from the end of August. So if you're looking at your models, expect, all else being equal, a GBP13 million step-up in labor costs in the second half of the year compared to the first; and again, just the updated guidance just confirming around GBP225 million savings for the full year. And as always, these cost savings come from a number of different areas of our business. Organizational restructuring; so we've changed the way we structured our store support centers. We've also changed the way we've structured our retail business, all of which has delivered significant savings. So our retail colleagues have gone through a lot of change over the last 12 months and hence why we felt it was appropriate to reward those colleagues for all their hard work with the 4% increase in salary. Electricity usage; we continue to invest in energy saving initiatives. LED lighting is one great example, but we've actually reduced our overall electricity consumption 2.5% year on year, so very proud of the initiatives in that area. We've also done a lot of simplification of processes in our stores, simplification combined with automation. So whether it's inventory management or short-life code checking, all of which has delivered significant cost savings in the year, which is why we're able to up our target for the full year; but what we've really been pleased about is that - it says here no impact on sales or availability. If anything, the changes that we've made have improved our availability; they've improved our service levels within our stores. Coming on now to items excluded from underlying. Property profits GBP94 million. Most of that is the property profit from our mixed use development in Fulham. So we talked - we guided to GBP200 million of profits split over 2015/2016 and 2016/2017. You're seeing some of that come in the first half of this year. Most of that is the Fulham development. We've got the Sainsbury's Bank transition costs of GBP25 million. A small reversal of an impairment. You remember this time last year; we made the impairments in our store estate. We've seen a couple of reversals based on revised market expectations. And, of course, the usual other items outside of underlying, principally the pensions financing charge, the fair value adjustment on our property investments, among a few other bits and pieces, to deliver the GBP31 million I made mention of earlier on. Finance costs GBP62 million in the half versus GBP54 million the same time last year, driven by - so an increase of GBP8 million driven by two dynamics, one of which is a reduction in the capitalized interest and the trend, of course, that we've seen ongoing over the last couple of years as we start to slow down our real-estate rollout. And, of course, we've put in place the perpetual bonds for which there's a coupon of GBP4 million which also impacts on our half 1. From an accounting perspective, from a statutory perspective, just to be clear, we shouldn't account for - we account for those coupons as a dividend of equity. That's the way you do it on a statutory basis. But just to be clear in terms of the way that we report it to you, and from an underlying profit before tax perspective, we will assume that the coupon on the perpetual bond is just simply interest, just to be clear. Okay? So guidance for the full year, we expect our overall net finance costs to increase by around GBP10 million, maybe a little bit north of that year on year, as a result of the lower capitalized interest and the perpetual securities coupons. And then again, just a guidance on tax; it doesn't quite fit on this slide but it's the best place for it to go. Of course, the Chancellor announced reductions in the corporation tax in the budget and, therefore, as a consequence, we're expecting our tax rate for the full year to drop significantly to 22% as a result of the movement in the deferred tax balances, driven by that reduction in the corporation tax to 19%, and then subsequently 18%. So full-year tax rate expected to be 22% from the previous when we guided to 25% previously. So a reduction there in the tax. Cash flow and working capital. Cash from operations delivered GBP375 million, obviously, down from last year driven by reduced profitability in the business. But I am pleased to say that we've been able to deliver further benefit in our retail working capital in the first half of this year; not quite as large as the benefit that we were able to deliver last year, but we're doing a lot of work improving our working capital position, and we continued to deliver some benefit in the first half. I think an element of that will unwind as we go into the second half. I don't think it's all there permanently. But we're maintaining our guidance and expecting a small improvement in our retail working capital position for the full year. And then, of course, once you take account of all of the other cash reductions, interest, corporation tax, dividends, investments, etc., we come down to a net debt position of GBP1.86 billion. Now, of course, in the accounting here, we've treated the perpetual securities as equity, hence a reduction in the overall net debt position. But just very simply, as a footnote just to aid you here, we've also provided the net debt number assuming we treat the perpetual securities as debt. So you can see it either way in the numbers. We've broken that out for you. Retail CapEx again in line with the guidance of continuing to reduce our retail CapEx; GBP298 million in the first half of the year, very much in line with our guidance of expected core retail CapEx of GBP550 million for the full year. And, of course, that does exclude the CapEx in relation to Sainsbury's Bank. So no change in guidance; very much on track to deliver that number for the full financial year. Balance sheet. We have now got facilities available to us of GBP4.1 billion, of which GBP3 billion is currently drawn down if you include the perpetual securities as part of that facility. We've got significant funding capacity available to us. Of course, the perpetual securities were issued in July and we used some of those funds to help fund the pension scheme. And, of course, the perpetual bonds ranked below the pension scheme claim. So a particularly attractive way of funding the pension scheme. A few more details there around the interest on the coupon on both the bond and the convertible, but a blended rate of 4.69%. Just to remind you, we also restructured our revolving credit facility, GBP1.15 billion in May. And again, just as a reminder, we now have no financial covenants across any of our borrowings. So we have significant funding capacity and availability for whatever the market may throw at us, and we have no financial covenants across any of our borrowings. So a very flexible and liquid funding position. Overall market value of property has fallen slightly, 10.8% see press release, "GBP10.8 billion"). We've seen a slight increase in the yield, not by much, but a very small increase in the yield, which has caused the property valuation to dip slightly from the previous GBP11.1 billion to GBP10.8 billion. And again, we've talked about the pension deficit already. We've put in GBP125 million. We've put in a further GBP125 million in the next financial year, so GBP250 million in total. And in terms of guidance, net debt is expected to reduce significantly year on year due to the increase of the perpetual securities, partly offset, of course, by the pension contribution and, of course, the further injections into the Bank. But just to be clear, even if you treated the perpetual securities as debt, then again treating them as debt, we still expect to see a year-on-year reduction in our net debt position in line with the guidance that we gave at our prelims. And again, if you look at some of the key balance sheet metrics, here we've seen a small dip in our interest cover - or fixed-charge cover, driven by the reduced profitability. And again, if you look at the lease adjusted net debt over EBITDAR, if you take the perpetual bonds as debt, we're at 4.3 times; if you take them as equity we're at 4 times. But again, broadly in line with where we've been historically. So overall summary. Trading operations; I think we traded resiliently and robustly during the first half of the year. We are, of course, being impacted by food deflation and the pricing pressures in the market which is clearly pulling down our margins. But we have seen some strong growth in the areas of clothing, convenience and online. What's pleasing is the price investments that we're making are driving volume and transaction growth. So we've seen volume growth in the first half of about 1%. We've seen transaction growth of about 3%. So it was very encouraging early signs from that price investment. And, of course, we're ahead of where we expected to be in relation to our cost reductions. Key financial measures I won't reiterate because we've talked about those already. And again, you'll see some of the key summary points in relation to the balance sheet that we've already talked through: Retail working capital improving, and the pharmacy sale expected to deliver GBP125 million of cash towards the end of the financial year. So overall, as already has been commented, we've outlined our strategy. We're delivering against that strategy, and if anything, we think we're slightly ahead of the game but there's still a lot more to do. And with that, I'll hand over to Mike to take you through the business operations.

Good morning. Just to point out we will try and get through by 11 o'clock, but if we don't finish by 11 o'clock, we will observe the minute silence at 11 o'clock. So if we could just bear that in mind. As has already been said, we laid out our plan this time last year; can't believe it's actually a year. And broadly speaking, we've delivered against that plan. We're slightly ahead of where we expected to be. And actually, we've got a more robust and resilient business at this point in time. So I'm going to talk a little bit about the consumer, where we think customers are; and then talk a little bit more about some of the things we've done to execute our plan over the last year. First thing to look at is household discretionary income. Our customers, customers in general, are around GBP20 per week better off than they were this time last year. So you'd think that that was good news in the round for the consumer sector, and particularly for grocery retailers. But we're not actually seeing that coming through in market growth. That money is being spent in other sectors. Travel would be a good example, but equally, directly affecting our market is eating out. Customers are tending to eat out more than they were previously. And we've seen the market bounce along between 0% and 1% in terms of growth over the last year. So that clearly has put a significant challenge into the marketplace. And we've seen the shape of the market year on year change reasonably significantly. We're actually seeing volume growth. We're seeing pretty robust volume growth, but that's against a backdrop where prices continue to deflate. And so we have taken a view over the half that, actually, we've seen deflation of around 2%. It's got slightly better during the course of the second quarter. But nevertheless, we'd expect that we would see deflation in our marketplace at least into the next financial year and beyond. There's no signs of it abating. And, of course, it disproportionately affects our business. It's not a big deal in the overall scheme of things, but nevertheless, the categories that we tend to overtrade in, meat, fish, poultry, fruit and veg, things like that, have tended to be where the deflation has hit. And if we look at the shape of the market, we talked about this last year, I think some of us would have seen us - some people would have seen us as being doom-mongers in our prediction for the market. But broadly speaking, they've played out. If anything, we're seeing discounter growth ahead of our expectations a little bit. And in the end, that continues to be the key dynamic in the marketplace and we would expect that to be the case for the future. But nevertheless, we need to keep investing in the things that make us different, and I'll talk about that in a minute, whilst also making sure that we make sure that we're price competitive as we look forward. So we outlined our strategy last year. Five elements: Knowing our customers better than anyone else; investing in great products and services at fair prices; making sure that we are there for our customers wherever, whenever they want; served by colleagues who make a difference; and our values that make us different. So those are the five key planks of our strategy. But the key driver of our differentiation is our quality and we continue to maintain a quality gap relative to our mainstream competitors for our customers; and we set out to invest in improving the quality of 3,000 products in our business over the year. And we continue to do that but, of course, quality means different things to different people. So I'll give you a few examples. For instance, our avocados, I think we talked a little bit about this during our quarter 2 trading statements, it's about making sure that we look at the end-to-end supply chain when we think about the quality of the products that we well, whether it's the base specification, the use of technology to make sure we get that right. Dry matter at 21%; the amount of squeezability 1lb to 4lbs. This is very important on that front to make sure we get the product right at the beginning; that we have the right packaging to get it through our supply chains; that that packaging is appealing, the labeling is appealing; that we talk to our customers about the attributes that they value and about the emotional side of the products that we sell. We make sure we can transport the products through our supply chains, and ultimately we get the right ranges in our stores. And if you take a category like avocados, we've already had a significant market share. We've actually seen that market share grow by about 1% from around 23% to 24% over the last period of time since we did this work. Another example, orange juice. Orange juice is all about the top notes, or juice is all about the top notes, making sure you get the essential oils right. And again, it's about going back to source, making sure the base ingredients are correct and bringing that through the supply chains in a way that works for our customers. Equally, if we look at our bread range, our customers would have said to us that there were some gaps, particularly at the high end, and so we've introduced new higher quality products and we've also reformulated some of our existing products. In fact, I was talking to somebody yesterday. Their favorite is a sesame seed and quinoa. They did actually phonetically spell quinoa for me just to make sure I pronounced it correctly during the course of the presentation today. The other thing about our in-store bakery products is we do bake them in our stores. So most of our large supermarkets have scratch bakeries. And it's important that we make sure that the freshness is there day in day out for our customers. So we have a process called wave banking which is making sure that we bake little and often in our shops. Big change in our value proposition. This is a journey we've been on over a number of years, but simplifying our pricing, reducing the amount of promotions that we run in our business. Our promotional content has dropped from around the mid 30s to now just over 30% over the last year, and we've reinvested that back into base pricing to make sure that we've got the right value proposition for our customers, as well as changing our Nectar scheme. So we're giving away the same number of points, we're just doing it in a more targeted fashion. We've simplified Brand Match to be more focused as far as our customers are concerned. And we're putting few price changes through our business, and we are seeing an improvement in our customers' pricing and promotional satisfaction. But as importantly, we're also seeing an improvement in our volume performance, and our business has been driven by volume growth, and by the number of transactions we're getting through our business week in week-out. And we've seen a significant closing of the gap. There's lots of ways that you can measure it, but relative for discounters, our prices are on average around 10% lower than they were relatively speaking this time last year. So there has been a big movement in terms of reducing the price gap relative to the discounters, but we also accept that it is the big show in town that we will have to continue to make correct targeted price investments in certain categories as we look forward. So that's something that's very much on our agenda as we think about what we need to do to build on the base pricing that we've put in place over the last period of time. And actually, simplifying pricing has had a significant impact on our supply chain. It's a positive impact. We've actually seen a significant lowering of our waste bill over the last year. That's I guess in some respects not unexpected, but actually, we've been really pleased with the progress we've made on lowering our waste costs, but actually also improving our in-store availability. And I'll come back to this later on. We think we run the best stores in the industry. We think our quality, our service, our availability are as good as anybody else; in fact better than anybody else. And we think that's measurable, and we've made another step on in the past year. Talk a little bit about non-food. Clothing continues to be a knockout performance, 10% growth on top of what was a pretty impressive performance the previous year. We've worked on launching the Tu website, so now we're online. Online now represents sales which were equivalent to our two best stores across the chain. So growing very rapidly; very early days. But nevertheless, we're very pleased with the launch of that. And we've launched the range of Admiral products in menswear, an area that we've traditionally underperformed in, so it's given us more creditability in that particular category. General merchandise has been slower than we've been used to, and that's largely a reflection of a couple of things. Firstly, the weather was particularly unseasonal, or unseasonable over the summer. So the seasonal categories were not particularly buoyant in the year, or in the first half. And secondly, particularly big ticket electricals have been under pressure. So actually, it's a pretty good performance in the context of what has been a difficult market. And we continue to invest space into the categories where we think there's a degree of robustness design relative to the online players. So for instance, home wares, house wares, kitchenware, are all markets where we think for the foreseeable future customers will be tending to come into large shops to buy their products. And also, it varies where we can differentiate relative to our competition. So design products in particular, and the idea of delivering the proposition of supermarket - sorry. It's high street style at supermarket prices sits at the heart of the idea that we're trying to deliver for our customers in non-food. The Bank, as John's already referred to, has had a pretty good half. Loan sales up 18%; insurance up 11%; travel money up 49%. Still got a relatively small share of the travel market, money market, something like 6% or 7%. So we continue to roll out travel money bureaus into our stores. We also want to make sure that our Bank is consistent with the Sainsbury's brand proposition and, therefore, we're seeking to always improve our service levels for our customers, and that's recognized by a number of independent surveys. And indeed, ATMs represent an opportunity for us and we've added more ATMs to the estate. And we dispense, would you believe, GBP1 in every GBP11 from the Link network, which represents about, I think, something like 70% of all the cash transactions in the UK? So a big player in the ATM market, and again, a sector that represents an opportunity for us in the future. And we're very excited about the Bank. Notwithstanding John's comments on the transition, we think there's a significant opportunity within the banking sector, the financial services sector as we look forward. Talk a little bit about space. This time last year, we talked about the fact that we thought we had roughly 1.5 million square feet too much, roughly 6% of our overall square footage. We're certainly not immune to some of the dynamics we see in the marketplace, but we would argue very strongly that given the shape of our estate, the relative geographic bias, and the relative size of our stores, we're not as exposed to some of the trends that we see in some of our competitors. So we think we're in reasonable shape, but nevertheless, we need to set about addressing some of the challenges of that excess space. And you can see by our performance over the last 10 years, that continual outperformance has meant that our sales densities have also been more robust than our competitive set. So three main dynamics for us to look at. The first is: How do we make our food shops easier to get round, easier to get in and out of through the combination of layouts, range, and indeed the use of technology? Secondly, we have fantastic clothing and general merchandise business. How do we get that to be more accessible to our customers in more stores? And as of today, around 100 of our stores actually carry the full range of general merchandise and clothing, and that clearly offers an opportunity. And thirdly, to develop strategic partnerships, whether it's through concessions or indeed through things like click and collect. So how do we utilize our space and make our superstores a more attractive place to shop in the future. And we have a number of trials underway. We have six stores now with various variations on the theme. By no means right; you wouldn't expect them to be right. But clearly, we're learning as we're going along. We'll undertake further trials during the course of next year with a view to honing down the format that we want to work with in the future, with the objective of making it, as I say, simpler for our customers, more focused on our points of difference like counters, bringing a fresh bakery to the front of our stores. So that again is very much at the heart of our proposition and something that our customers will shop in a convenient way. Trialing technology, particularly things like SmartShop and different kinds of checkout formations. Rolling out clothing and non-food more generally. And lastly, working with concession partners, as I've already said. Jessops, Timpson's, Argos all represent opportunities for us in the future, and we'll continue to explore those types of partnerships as we roll forward. Convenience still is a growth area, growth opportunity for us. Our convenience sales are up 11%; not quite as strong as they have been previously, but nevertheless, a pretty robust performance. And convenience in particular is subject to more deflation than perhaps our mainstream supermarkets, simply because they're more focused on fresh foods. You can see around you, around the stores in this geography that the proposition is much more fresh food focused and, therefore, has been more prone to some of the deflation we've seen in the marketplace. But we've continued to open at a reasonable rate. We've said one to two a week. We've opened 37 stores in the first half. So that kind of rate, development rate of growth has continued. We can certainly see our way to around 1,000 stores. We're currently at around 750 stores, as we speak. And we're doing trials with different types of format; whether that's smaller stores, the micro convenience store that you see over the road, which you can visit directly after this if you haven't already been there; and equally, structuring the format the other way, looking at larger format convenience stores and lower cost convenience stores so that over time, we can open up more opportunities to roll out further above and beyond the around about 1,000 sites that we can see our way to over the next period of time. This time last year, we talked about making sure that our online business was about serving our customers, not just about chasing volume for the sake of chasing volume. We've been very much adapting that or adhering to that strategy over the last period of time. Actually, we've seen a pretty impressive performance with orders growing by about 14%, although overall sales have grown by 7%. And that's mainly because the cost to order has fallen in the marketplace over the last period of time, not least because of the introduction of delivery paths, which has the effect of depressing the overall basket size. But, nevertheless, a pretty robust performance. And actually, last week, we had our record week on grocery online deliveries, 250,000-odd orders. We have click and collect now in 84 locations. We'll get to 100 by Christmas. And we'd anticipate during the course of 2016, probably towards the back end, that we'll open our first fulfillment center, and that's largely because we start to cap out in terms of capacity during the course of the next year in London particularly. So that fulfillment center is there to serve the needs of our customers in London. We've rolled out Brand Match online, and we've also introduced a bagless delivery option. Interestingly, around 50% of our orders are bagless which, of course, means that 50% of our customers are opting for the deliveries to be bagged, and they are now paying a carrier bag charge on the back of that. I'm not going to talk a lot about Netto this morning. We've had a few questions. Nevertheless, we've opened nine stores. They're trading well. We'll open another six before the end of the financial year. And we're learning lots. And at this stage, that's what we want to do. We want to make sure that we get the learning so that we can review the business with our partners thoroughly during the early part of next calendar year. And we'll update more fully when we get to the premiums in May. But so far so good. And certainly, if you look at the fresh food performance, the offer is proving to be very robust, and we're very pleased with the results, as I say, so far. One of the things that we want to emphasize is we continue to run what we believe to be the best shop in the industry. So whether that's our customer service, whether it's our ongoing availability, whether it's the cleanliness and the tidiness of our shops, our customers really appreciate this. And we've just picked out one stat, which happens to be the Grocer 33. We've won, I think it's seven out of the last nine, and we've won that particular accolade for the last three years running. And if anything, we've seen our service levels improve over the last year. So not just our customer service, but as I've said already, as a result of the change in our pricing and promotion strategy, we are seeing demands being more smooth and, therefore, the availability in our shops being significantly better. And I think any external measure would suggest that we are running the best shops in the industry. Certainly, our internal measures would say that. And that's one of the reasons why our customers come and choose to shop at Sainsbury's week in week out. And John's already referred to the 4% pay increase. We're now at GBP7.36 an hour. We think it's right. It's certainly something that we've been planning over a number of years and we'll continue to invest in our colleagues. It's important that we invest in our colleagues. In the end, they're the people that face into our customers. We want to maintain our retention levels and we also want to maintain our service levels for our customers. So we can see how we've managed to do that over the last period of time. And we've also applied it to all of our colleagues. So the Chancellor has chosen an artificial break at the age of 25. We think it's appropriate to pay all of our colleagues the same rate of pay, and we'll continue with that policy into the future. We talk about knowing our customers better than anyone else. We already think that we have a lot of customer knowledge and that we use that customer knowledge in a variety of ways. But actually, the next stage of the program is to have what we would call a single view of our customers where we bring together all of our data sources, not just our Nectar database. And that will enable us to anticipate and fulfill our customers' needs on a more personalized basis. So that particular program, the first stage of it gets implemented in the early part of next year. We think that will step us on again in the way that we personalize our interactions with our customers. We also have a program called Trolley Talk where real customers give us real time feedback. That means that we can constantly iterate our business on a store-by-store basis to do a better and better job for our customers. And we've also opened our digital lab in the last period of time. Downstairs, you'll be able to see it, where we're now much, much more fleet of foot in our digital technology and the ability to land things in the digital world more quickly. And that's manifested itself in a lot of development, for instance, of our online proposition. And the final part to talk about is our values making us different. And at the end of the day, Sainsbury's is a business with a heart. It's a business that sets out to do the right thing. And we've got a myriad of initiatives in this space. So as an example, we are talking today about Waste Less, Save More. This is a program that is aimed at attacking the waste challenge that we have as an industry, but on a holistic basis. There are many, many individual initiatives. We're offering GBP10 million over the next five years, starting with GBP1 million working with a single town. We've actually had close to 200 applications and we'll be choosing a town to work with over the next period of time, looking at how we can use all of our expertise and experience to work with that town to lower food waste, both for customers within our shops and, of course, increase and improve recycling content. We've removed a lot of sugar from products. So we've talked about orange juice where we've reduced the sugar content by about 10%. Similarly, on yogurts, we've reduced the sugar content by 37 tonnes. Dairy's a big issue. We've had a big challenge over the summer on the price that's paid for milk. We pay on the basis of the cost of production, which means that our dairy farmers, the 300 people that supply us, are to some extent insulated from what happens within the marketplace, and we think that's right in terms of building long-term relationships with those farmers. And that's just one example of how we work with our farmers to make sure that we do the right thing, not just for them but also for our customers. Every single store, every single department in our store support center supports a local charity. And again, we make significant donations on a local level. And indeed, the proceeds from the carrier bag packs are being given back to our stores to be able to donate to local charities on an individual basis, which again we think is a good use of the market. And we continue to work on our diversity, our gender and ethnic diversity. And as another example, we've been involved in the Business in the Community race to work survey in the last period of time so that we can work out better ways of encouraging ethnic diversity in our organization. So in summary, the market remains challenging, and we expect that challenge to continue for the foreseeable future. It doesn't feel like any of the pressure is going to be relieved that we've seen over the last year as we look forward. However, we're actually ahead of where we expected to be, and we continued to seek to differentiate our offer on the basis of quality, service, availability, underpinned by the values of the organization. We've invested GBP150 million in price over the last year, and you've seen how the price gap relative to the discounters has come down. But we think there's more to be done. We're not going to do it in a blanket fashion. We want to be targeted; we want to be targeted; we want to be thoughtful about the categories and the products where we invest that money. So far so good. We've made good progress against our strategy, and we certainly have a more robust and resilient business than we would have had this time last year. So that's it from me. We will now take questions. Thank you.

We need a microphone. I think, we lost the lights between the sides. Let’s keep it there.

Good morning, Bruno.

I don't want to get too far ahead of ourselves. We're very encouraged by the cash generation capability of this business. And clearly, given that we've significantly reduced the CapEx requirements, then the business would have been, of course, throwing off more cash. But it still remains a challenging market. Mike talked about we're a much more resilient and robust business than we were this time 12 months ago. But there's still uncertainty out there so I wouldn't be promising anything at this stage. But if you look at the math of our corporate plan going forwards, and if you look at the impact of that cash flow coming off the business and the other capital requirements, we have said that we do expect our net debt position to come down over time, and we would maintain that guidance today. To the extent of which it comes down and the speed to which it comes down at this stage I think would be dangerous to comment on.

Yes. I would characterize it as a journey that we're on. I'm not sure anybody could give you a definitive answer to the question. You can look at other markets and you could speculate that a price gap of 5% to 10% is the kind of space that you need to get into. But we also think it's very much product and category specific. So I don't think it's something which is a blanket price across the board because there are many categories where our basic lines are actually cheaper than the discount equivalent. So there are many categories where we think we're already ahead of the game, but equally, we'd accept there are some categories where we might need some more targeted investment over time. But if you look at the kind of area where you start to see a slowdown in discounter growth, but also perhaps a limit on that capacity to invest, which is probably at least as important over the medium to long term, you would need to be in a space somewhere around 5% to 10%.

I suppose just following on from that, that's probably at least 100 basis points off the margin absent for the cost savings if you assume, let's say, 20% overlap of the range. You've got your cost-saving program, but how do you retain those great availability levels? How close to the bone are you? Because, yes, your store standards are great, but you can't just keep cutting costs willy-nilly.

And that's the challenge. I wouldn't shy away from the underlying premise of the question. However, we have to continue to move forward on all fronts. So we have to be able to do all of the things above, and one of those things is to make sure that we have an efficiency program which maintains and improves our overall store standards. We've done a truly remarkable job over the last year. We're very pleased with the progress we've made. And there are any number of productivity initiatives which are about taking labor out of our stores more generally and still being able to maintain the right level of service and the right level of product availability. Just a simple example would be things like date embedded barcodes which would give us a significant cost saving if we were to roll that program out and also actually improvements in availability and customer service. So there are significant numbers of initiatives that we would aim to land over the next period of time that would, if anything, at least maintain, if not in some cases enhance our overall store standards. But that's the balancing act. In the end, this is all about taking ourselves on a sensible structured journey, which I think you could see that we've done over many, many years, and will continue to do so. So I don't think we could definitively answer the question, and I suspect over time we probably will never get to the complete answer. But it's about balancing our store standards, our availability, our quality and our underlying pricing. But the most important thing for us is to start at that end of the spectrum, start with standards, availability and quality.

And I think it's worth also highlighting that there have been other win-wins; so for example, in reducing our promotional participation in our stores which we've taken down from the mid 30s, where most of the industry, by the way, still is today, down to just above 30%. There's a clear benefit of that from a customer perspective in offering customers regular low prices, and we've seen that in our price perception data improving over the last year or so. But from an operational perspective, it's greatly simplified our business, and that simplification has allowed us to take cost out. So we've identified a number of win-wins across the business where we've not only been able to take cost out, but also been able to improve the service standards in our stores. And we continue to look for those opportunities going forward.

Shall I do the first one and John can do the second one? Given the more challenging of the two. No. You're right. In the end, there is - if you'd have looked at the dynamic last year that we described, you would argue, I would argue that the discounters have done a little bit better than we were expecting. And in the end, we have to make sure that we maintain and improve our quality and service gap relative to the discounters whilst continuing to go on the journey of reducing the price difference, particularly on specific products in specific categories, and to do that in a way which is manageable within the overall P&L that we run. Of that there is no doubt. They're laying down a lot of space. A lot of their space is new. So they're going through the maturity curve. And they accelerated their programs a few years ago so they are benefiting from that. But in the end, we need to make sure that we make progress on all fronts. You can't get away from that. And that's the challenge for us as a business. We would argue very strongly, and you can see this in the most recent data, broadly speaking, we're maintaining our market share. Actually, over the last year, we've lost about - I think it's 0.17, but that's been flatter in the most recent numbers, if not slightly ahead. So we would argue that we're doing a better job than some of the others. But equally, we need to continue to do a great job for our customers.

And just to build on what Mike's just said, you've highlighted the dynamic that's happening in the market which is customers are choosing to split their shop; in essence, both shop at the supermarket and shop at the discounter. Now you're right to say that the supermarket sector overall has made some inroads into reducing the pricing differential, but depending on the way that you measure that pricing differential, today it's of the order of 15% to 20%. And in my view, that differential is still too high to be able to convince customers to switch their behavior from splitting their shop to doing their shop under one fascia. And this is where we come to the prevailing view, this hypothesis that remains to be tested, although it has been tested in perhaps other markets. There's an argument that says that once you get the differential down to more broadly that 5% to 10% level, albeit it might category-specific then the differential at that point is not large enough to convince shoppers that it's worth their while to split their shop. I don't think you need to address it in its entirety, though I'd say while significant progress has been made, it's still too large to convince the vast majority of shoppers to not split their shop, and so we're still seeing that dynamic today.

Yes. And I think that more have done it as a consequence of the impact of new space, and we can't ignore that dynamic on the overall numbers, but I think we would still maintain the view that you need to get to a point where you remove price as a point of competitive advantage. Now we believe from a discounter-facing perspective, and I've said it may vary by category, that needs to be in that 5% to 10% level. At the same time it's obviously facing into the pricing challenge. As a business, we need to make sure that we're focusing on all the other good things that make us a very differentiated offer; the quality, the service levels that where we're making great progress on. So we've already gone on this journey of reducing the differential on price. You're absolutely right. It hasn't had a massive impact today on the market dynamic. But there is an argument that you will get to a tipping point once that differential is reduced to the right level across the right categories. And that's what we're making reference to today vis-a-vis pricing.

Just one other reflection, David. We are trialing different formats because the other big dynamic is that customers perceive discount stores to be more convenient. Clearly, we've got a convenience business which is growing pretty well and has grown over the last few years. That plays very much into the dynamic. And our challenge is to make our superstores more convenient in its broader sense, whether that's for convenient food shopping, which is why we're working on the layouts that we're working on, as well as putting more things into the formats that allow more reasons for customers to come and shop with us. Now that's not a quick fix. If we work out a formula in the next year, that will be going some; and, clearly, it would take us some time to roll out those ideas. But that's the other big dynamic in the marketplace. Customers just see smaller shops, of which discounters are part, as more convenient places to shop.

And just in relation to your question on online profitability, you're right, All else being equal, we are seeing pressure on profitability driven by the lower delivery charges, driven by the lower basket size. But, of course, in reality nothing is - all else being equal, we are continuing to make significant inroads into the costs of our online operations. And actually, overall, when you look at the profitability of our online business year on year, we've actually improved the profitability as a function of taking costs out from those processes. The other point that we always make around online as a channel is that it's not really sensible to split it out in that sense because it is part of our overall customer offer. We've said this many times that our customers demand that offer from us. And we also see that when customers switch from shopping with us in store to shopping with us online that we end up capturing an overall greater percentage of their spend. So there's a loyalty dynamic as well. So looking at channel by channel in isolation is helpful from a management accounting perspective, but you do need to step back and look at the overall business.

I'll have a go at the first and third and John can comment on the second. Yes. I think it is the next stage of the online journey. We talk about serving our customers whenever and wherever they want. And you can see, in most online markets now there's a step towards even faster deliveries. And you can see that in Amazon Prime, as an example; the Argos announcement the other week in terms of four-hour delivery slots. And clearly, Amazon have raised the stakes within the food market by putting in effectively a one-hour delivery time, albeit you have to pay quite a lot of money for it and you can only order 50 products. But I suspect that won't stay that way for very long. So it's inevitable that it'll move in that direction. Whether or not there's a customer demand for it we'll so over time. Because I think, particularly in food, it might be less attractive because in the end, it has to be a more planned occasion than perhaps one-hour or four-hour or same-day deliveries in non-food. But we'll see over time, but I suspect it's inevitable that it will move in that direction. As far as the industry-wide norms, if you go back and look at history over 25 years, broadly speaking, the volumes in the market grow in line with population, and the population of the UK is growing by about 0.75%. And broadly speaking, inflation sits around the 2% to 3% level, albeit it swings around all over the place. We've never seen a period of extended deflation in my 30 years in the industry, so we're in very unchartered territory at the moment. But if you are looking at the historical norms, those are the kind of places you'd expect the market to get to over the next period of time. But that's by no means certain. That's a reference back to the last 25 years, and as we look forward, who knows? There's certainly no sign that the deflationary pressures are abating as we look towards the end of our financial year and into next financial year. Whether or not as we see inflation coming through we might see a reduction in volume I genuinely don't know. But we would expect if you took a medium to long-term view, that that 0.75% volume overlaid by 2% to 3% inflation ought to be a place that we return to at some point in the future.

And, James, just a breakdown; help you a little bit in terms of the volume growth by food and non-food, just to be clear, I think you said volume growth 3%. What we said was transaction growth of 3%; volume growth of 1%. And actually, we've seen volume growth of 1% across our food category, and broadly speaking, deflation in the half of about 2%, minus the deflation of 2%. When you look at the non-food side, again, we've seen volume growth of around 1%, but we've actually seen some inflation on the non-food side around 2%. And that, of course, is very much mix driven. So that gives you, if you like, your two components, your two channels that combine for the overall business.

Okay. So the question was more about mix. So alongside unit volume, are you including the impact of mix? So are you trading up/trading down within the deflation number or within the volume number?

So mix in that context would be - it's all wrapped up in the deflation number.

If you look at the shape of the business, our business, we tend to overtrade in fresh food categories, and that's tended to be where the deflation is the highest. And also, interestingly, the other way round where the volume growth tends to be the greatest as well. So there is a dynamic going on in our business which is changing the shape of our business a bit. It does make some - or it does have some impact on the headline numbers but not a huge amount. The mix is relatively unimportant in the overall scheme of things.

James Tracey of Redburn. Three questions from me; first one from John. The depreciation and amortization charge, why did it fall GBP10 million year on year? Second question is on the price investments. Do you think that GBP30 million of net price investment in the second half is sufficient given that the discounter gains are accelerating and you need to do more on the price gap? And just on that second question, does that -? Are you expecting Asda or anybody else in the market to cut prices significantly? Is that baked into that GBP30 million guidance? And the final question is: Do you feel that at a competitive disadvantage in online because your business utilizes a store pick model versus a central distribution model, which some people say is more efficient? Thank you.

Well, if we take them in reverse order, and John can come back and think about the amortization and depreciation question as we go through. Actually, the stats are remarkably close when we've looked at it in terms of the pick efficiencies. It's quite surprising. And as John has already said, we continue to invest money in making sure that our pick and van utilization efficiencies continue to improve. So we would argue, actually, we run a pretty efficient online business relative to specialist picking operations.

Do we have a lower -? Well, our average - I won't tell you what our average delivery cost is, but I guess in the end, our drop densities are pretty high. We tend to be more biased towards London, which inevitably means your drop densities are higher. I don't have the stats off the top of my head, I have to say. We'd probably have to go and have a look at it. But probably on balance, you're right. But the most important factor is that the pick efficiencies that some people would claim for a specialist warehouse are nowhere near as differentiated, as cheap relative to store picking, as perhaps some people would make out, which is quite a significant consideration. Of course, the other thing about picking in stores is it's a hedge against the overall dynamics of the business; and it does mean that we run better shops as a result because you're getting a lot of volume coming through that you're then subsequently using within your online operation.

The thing is there's a strong commercial point. I'd actually argue that our in-store pick operation is a commercial advantage because the dynamic of the market is very much towards click and collect. We're seeing that increasing behavior from customers, particularly if you take, for example, our clothing online business. A very high percentage of those orders, 80% are click and collect. It's the preferred choice for customers. And obviously, an in-store pick model plays itself very well into a model where customers like to click and collect. So I think for us, I actually see it as potentially a commercial advantage above and beyond those operators that have decided to have dedicated picking centers.

Yes. It will turn out to be quite ironic if you get specialist online retailers having to deliver to a click and collect point. That has a certain sense of irony around it. You'd have to ask Asda or indeed anybody else in the marketplace what they're going to be doing on price. I haven't got a clue. It's fair to say you saw a big step down in pricing last year. You saw the gap close quite significantly. And broadly speaking, the gap between the big four players has narrowed to probably the narrowest it's been in my time in this industry. But coming back to the central point that we've made already and you're alluding to, we think there is more work to be done. It needs to be targeted for, and we need to understand the cause and effect as we go through the next stage of our overall pricing strategy. So we're not going to see blanket wholesale GBP150 million investments like we made last year. But equally, we would expect in some categories, on some products, we need to invest more money over time. And we need to think quite thoughtfully about how we recover that elsewhere in our P&L. But there's no doubt, the point we've already made, that there will need to be movement towards closing the gap down relative to the discounters over the next period of time.

Just your first point on depreciation. The reason it's GBP10 million lower half on half is because, of course, we're benefiting from the impairment, the lower depreciation as a result of the impairment charge that we took a year or so ago now. We saw a GBP10 million benefit in the second half of last financial year. We're seeing a GBP10 million or so benefit in the first half of this financial year. We won't see that benefit repeat itself in the second half of this financial year.

I think it's under continual review. Clearly, we're pleased with the performance to date, and hence why we've announced the uptick to this year's numbers of GBP225 million of savings. We've got very good line of sight of savings now into the next financial year, and we've even got pretty good line of sight into the third year as well. So as time moves forward, we've got more and more certainty on that GBP500 million number, pretty good certainty already. And we continue to review it. So we're not today upgrading that number, but it is under constant review.

Well, at the moment, in order to be absolutely clear, just what we're saying is we expect to deliver GBP500 million over three years; and this financial year, we expect to deliver GBP225 million. So by definition of the math, the rate decelerates over years 2 and 3, and that's no different to what we announced at the very beginning, which was GBP200 million and then effectively GBP150 million/GBP150 million over the following two years. So you would expect the rate to decelerate. But it is something that we're constantly looking at. We've become increasingly confident about our ability to deliver those savings over time. So it's something that we're looking at all the time, and if we need to update in due course, we will do so.

James Grzinic, Jefferies. I have two. The first one is can you perhaps give us more detail on how we lower the promotional participation? Is it about fewer vouchers? Is it about less in-store activity? Is there a skew between non-label and branded? And are you getting supplies to translate reduced investment into promotional support into low weighted in terms? It would be very interesting to hear about that. And secondly, can you perhaps illustrate how your regional performance has changed through time?

Your regional performance has changed through time.

All right. Do you want to think about the second question? On promotional participation, we started out around three years ago on a value simplicity program. That started with the basic premise that we needed to simplify the way that we presented value to our customers; less promotions, less heavyweight promotions. They were just cynical about top price and buy-one-get-one-frees, and we were seeing some categories where the promotional participation was over 90%, in which case customers were just ignoring the non-promoted price and only ever buying on deal. We thought that was wrong and needed to be addressed. And to some extent, that was a manifestation of suppliers' behavior, and particularly keeping promotional monies on their side of the table. So we started experimenting with laying out proper category pricing hierarchies, so making sure that the Basics line was here, the standard own label was here, the brand was here, and if there was a premium brand it was a little bit more premium; our Taste the Difference ranges were here. So we've got some fairly clear rules, but equally as we go through each category we discover different things, and the rules don't necessarily apply to all categories. The underlying premise of your question, yes, we've also been very successful in taking in effect monies from promotional funding and putting it into underlying base prices. So our suppliers largely have come on the journey with us; some more positively than others, because in the end they have to trust us that we're not going to go back and ask for more promotional monies once we've got the base monies into - or the other promotional monies into base price. But that's something that we've been working on and working on pretty successfully over the last three or four years. And it's certainly taken Paul and I in my previous role going around literally talking to the senior management in Europe of a lot of these companies to persuade them that it's the right thing to do. We're about 90% through now, actually, so we've made a lot of progress. And it's not without risks; it's quite a significant change. The encouraging thing is that we are seeing baseline volumes grow; we're seeing transactions growing. And perhaps as importantly, the categories where we did it first, which tended to be the non-food categories, are the ones that have grown the fastest in our business overall on a sustained basis. So there's some - and I always say that customers' behave collectively utterly rationally. They behave completely irrationally individually, but collectively, they behave utterly rationally. And we're seeing that in our underlying price and promotional strategy.

And, James, just in reply to your question on regionality, we actually look at regionality quite closely, both across our supermarket business and our convenience business. And whilst you may see month-by-month fluctuations in performance across the different regions, in principle, we find those are much more driven by the timing of new space and the maturation of sales across our estate. When you look over the year more broadly, we don't see, or we haven't yet seen any big regional differences. And that's something - I know the question often get asked and we continue to look at it, and the answer so far has always been the same; there not a massive variation either across our convenience business or our supermarket business region by region.

Halfway through the year, still got Christmas to trade. We'll comment more on our bonus payments when we come to our prelims in May.

Andrew Porteous, HSBC. You've signaled a step-up in cost inflation in the second half driven by staff costs. I was just thinking. That will obviously take some time to annualize in the first half next year, presumably. And then looking forward, you've given a 2% to 3% cost inflation range for a few years now. Should we expect to see a structural step-up in that range as you seek to maintain things like differentials and staff churn, et cetera?

I don't know. I think it will be too dangerous to comment at this point much beyond the end of this financial year, but I don't see any reason why that 2%/3% range should change. You're absolutely right. We'll see a GBP13 million additional half-on-half charge as a result of the step-up in our salary costs of 4%, so we'll see that come through in the second half of this financial year. And clearly, you'll then annualize it in the first half of next financial year, so you'll need to put that into the model to reflect that increase. But actually, if anything, taking outside of that particular increase, the cost inflation in the first half has been perhaps slightly below the 2%. So when you add that and it’s - So actually, if anything, cost inflation has probably been a little bit below the 2% if you weren't to adjust for the increase in the salary costs. If you put that increase in, it gets you to just over the 2%. So I don't see any reason at this stage why that should particularly change going forwards, but clearly, we'll provide you with more detailed guidance when we come to our prelims in May.

Say it again. Sorry.

Should we expect you at the higher end of it then? Would you -?

No. I wouldn't even say that. I think let's just see where we get to. There's a number of inflationary pressures coming through. We comment a lot about business rates. Clearly, salary is one of those. But equally, there are also deflationary pressures as well. For example, if you look at utility charges coming through, because we hedge our utility charges a year or so forward, we're not yet seeing the benefit of lower utility costs particularly coming through. We will see some of those benefits next year. So we'll give you more detailed guidance at the time, but there's always going to be some pluses and some negatives. I don't see any reason at this stage to be changing that 2%/3% range, but we'll provide you with the detail at the time.

Rob Joyce, Goldman Sachs. So on price, just to be clear, so you said you were looking to halve the gap or change the gap by the same magnitude again with the discounters. Does that mean we should look at another GBP150 million of price investment next year? And secondly -

Carry on.

Yes. I don't think we quite put it the way that you put it. We recognize there is a price gap that still needs to be closed. As we've done over many, many years, we iterate these things. We use our data to learn where it works, where it doesn't work. If you look at other countries, the observation then the price gap needs to be around 5% to 10% in order to, today's point, stem the flow to the discounters from mainstream supermarkets. So that's the order of magnitude if you look at other countries. Now we don't know whether the UK is like that or not, but we recognize there are particular categories and particular products within categories where we have to make price investments. And we'll do that in a thoughtful and measured way, and we'll do it in a way which we think is affordable as well. So in the mix, we'll see how it plays out over time. We've yet to embark on that sort of stage of the journey, but we'll do it in a way which is understanding, experimenting, and ultimately implementing how we address that gap over time. So it would be wrong to infer that there's a GBP150 million dump coming out. And equally, there's some mix benefit. We shouldn't lose sight of the fact that we have a portfolio of 100% of the products that we sell, only about 20% of our volume directly faces into the discounters. So there are some mix elements that we can bring into play over time as well. And inflation, to some extent, your guess is as good as mine. The big dynamics of commodity price falls, exchange rate falls combined with the Chinese and the Russians closing their borders to exports are the big drivers. And the extent to which those revert over the next period of time, I'd probably be sitting in an island somewhere in the Caribbean if I could work it out. So there's still - it's still yet to work its way through the system. The one thing I think we're pretty confident is we're not going to see much of a change to the dynamics we've described through the back end of this financial year and into next financial year.

No. It's more to do with - this year. On balance, you'd always expect there to be some pressure on harvests. This year looks like it's been another good year. And again, on balance, you might have expected exchange rate movements, and again, the movements have tended to be favorable for imports. On balance, you might have expected the Russians or the Chinese to have opened their borders and, therefore, products to flow out of Western Europe. And again, that hasn't happened. So all of those things you could have speculated about three/six/nine months ago, but as of yet, none of them have happened and those deflationary pressures remain. And we compete very hard, as do our competitors, and generally speaking, customers benefit from that.

I think we are through. I'm just conscious of time. No other questions in the room?

Well, thank you very much for being here this morning, and thank you very much for listening. And I would encourage everybody to respect the one minute's silence when we actually get there. Thank you.

Bruno from Bernstein.

You're generating a lot of free cash flow in the food retail business; very high levels, even excluding the working capital improvements. You're not going to keep investing in the Bank forever. What should shareholders expect you to do with the excess cash generation a year or two years out as you've gone through the Bank investments? Where is it going to go?

I'll let John answer that one.

Thank you.

John Kershaw from Exane BNP Paribas. I suppose coming to the flipside of Bruno's question is the price gap to the discounters. I think yours is 20% or so. You may see it slightly differently. But how much closer do you think you need to get? And more importantly, what do customers tell you need to do as an industry of supermarkets and you specifically to get closer?

Dave McCarthy from HSBC. Just sticking with the discounters first of all, you've narrowed the gap. The consumer is better off. And yet the discounter growth is accelerating, which can't be explained, I don't think, by just opening new stores. We know from looking at Nielsen stats that something like 45% of consumers are going into a superstore each quarter and then doing their shopping in a discounter as well. So is there something else that you're missing at an industry level - I don't just mean Sainsbury's - on what's really going on here? Because price gaps and all that stuff means that the discounter growth should be slowing unless there is a variable we've not looked at. And then secondly on the Internet, you've increased your sales and increased at a faster rate your order numbers, so your average order size is coming down. The average charge per order that you make is coming down, which is via your path. So is your profitability or loss per order getting worse? Just taking that without talking about loyalty amongst customers, and so on, but just on a straight Internet basis.

I get that, but there's - what we're talking about here is that the numbers who are choosing to cross shop is actually increasing, even though the price gap has narrowed. So I take your point entirely that as it narrows you're not necessarily going to win people back, but as it's narrowed, more have done it. So I'm trying to work out what the dynamic is.

James Collins of Stifel. So just following on online first, do you think that same day will become commonplace? Do you think that's an irresistible force given that Tesco are trialing it now alongside the Amazon threat? Second question on a slightly different subject. You talk about volume growth of 3%. Does that include a mix benefit? So when you break down inflation and volume, do you include mix within that 3% volume? And if so, how much of the 3% is mix and how much is unit volume? And then a wider question, industry-wise, clearly, the chart you showed shows significant volume growth and significant deflation. Once deflation, if you like, normalizes and we get back to flat or inflation, do you think the volume growth will continue? Or do you think that that's just a straight trade and the industry continues to produce no growth?

Okay.

Okay. Thank you.

And do you have a lower delivery cost as well because you're closer to the customer?

Thanks a lot.

Nick Coulter from Citi. One for John, please. And apologies; I may have missed this at the start of your presentation. But on cost savings, you're well ahead of the run rate for the three-year target of GBP500 million. At what point have you said that you'll review that, or do you anticipate reviewing that target? Or should we expect that the cost saves start to taper down? Thank you.

So we shouldn't necessarily expect that run rate of GBP200 million plus to decelerate?

Thank you.

Sorry. How our -?

Oh. Regional performance.

I'm just wondering whether the south is particularly accelerating against the rest of the country being left behind.

Thank you, John. Since I have you, can I ask a follow-up quickly? Has the bonus accrual gone up year on year in half 1? I presume so.

Great. Thank you.

Should we expect you trade ups within it then?

Thanks a lot.

It's probably quite linked. Just on deflation and the outlook. You previously mentioned you saw inflation coming back towards the end of this financial year. What's changed on that one? Thanks.

Okay. I guess my question is: I think from what - correct me if I'm wrong, but you previously mentioned you thought that inflation would start to come back over that same time period. Is there anything in the market itself that's directing that change in opinion?

Thanks a lot.