Interim Results 2019/20
Kevin O’Byrne Chief Financial Officer
Financial overview • First period reporting on an inc. IFRS 16 basis - Material impacts on depreciation, finance costs and net debt • UPBT £238m (H1 2018/19 £279m) - Phasing of cost savings, weather, higher marketing costs - Delivering on our cost ambitions • Financial services profits up £4m. Modest underlying decline offset by change in transfer pricing • £229m charges excluded from underlying profit - Largely non-cash relating to property strategy programme • Strong retail free cash flow generation of £698m • New longer term asset-backed pension plan agreed • Interim dividend of 3.3p, +6% 3 Interim Results 2019/20 - November 2019
Group performance overview H1 H1 £m 2019/20 2018/19 Change Underlying results Group sales (inc VAT) 16,856 16,884 0.2% Retail operating profit 437 487 10% Financial Services operating profit 20 16 25% Underlying interest costs (219) (228) 4% Underlying profit before tax 238 279 15% Underlying basic EPS 7.9p 9.4p 16% Dividend per share 3.3p 3.1p 6% Statutory results (229) Items excluded from underlying results (172) 33% Profit for the financial period before tax 9 107 92% (2.2)p Basic EPS 5.1p n/a 4 Interim Results 2019/20 - November 2019
Retail sales Grocery General Clothing Merchandise 2019/20 FY Guidance (1.0) % (0.6) % Expect to open 2 new 3.3 % LFL sales growth 0.6 % Sainsbury's supermarkets and Q1 Q2 Q1 Total (0.5) % up to 15 convenience stores 0.4% sales growth Q2 Q2 (2.0) % Q1 New space Expect to open around 25 Argos (3.1) % stores in Sainsbury’s (of which (4.5) % 11 are relocations) resulting in around 305 Argos stores in supermarkets Supermarkets Convenience Groceries Expect to close 2 supermarkets, Online around 25 convenience stores and around 20 Argos stores in 9.8 % FY2019/20, as part of announced property closure programme of 10-15 5.0 % supermarkets, 30-40 (0.2) % 2.6 % (1.1) % 1.5 % convenience stores and 60-70 Argos stores Q2 Q1 Q2 Q1 Q2 Q1 5 Interim Results 2019/20 - November 2019
Sales performance versus market GROCERY: Volume growth ARGOS: Sales growth v BRC 1% Argos YoY Sainsbury’s Morrisons 0% Total Q2 grocers Tesco 19/20 -1% BRC YoY (excluding Argos) -2% H1 Q1 FY Asda 19/20 2019/20 2018/19 -3% CLOTHING: Value Growth (%YOY) -4% Sainsbury’s Total market 22 Aug 18 22 Sep 19 6 Interim Results 2019/20 - November 2019
Financial services Transfer pricing benefit, FY guidance unchanged H1 H1 Customer assets (£bn) £m 2019/20 2018/19 Change 7.4 Total income 227 226 0% 7.0 2.9 Underlying operating profit 20 16 25% 3.0 Personal loans Customer lending £7.4bn £6.2bn 19% Credit cards 1.9 Customer deposits £6.6bn £5.6bn 18% 1.7 Mortgages Storecards Active customers - Bank 2.10m 1.95m 8% 1.9 1.4 0.8 0.8 Active customers - Argos FS 2.20m 2.10m 5% FY 2018/19 HY 2019/20 Cost/income ratio 70% 71% 100 bps 2019/20 FY Guidance Net interest margin 3.5% 4.0% 50 bps Financial services underlying operating profit Bad debt as a percentage of lending 1.3% 1.6% 30 bps expected to be c.£45m, including a c.£10m CET 1 ratio 13.7% 12.7% 100 bps benefit as a result of a change in transfer pricing between Argos and Argos Financial Services Total capital ratio 16.7% 15.7% 100 bps Financial Services non-underlying costs are expected to be around £30m No further capital injections into the Bank are expected, following £35m in H1 2019/20 7 Interim Results 2019/20 - November 2019
Financial services Metrics inc. AFS H1 H1 £m 2019/20 2018/19 Change Total Financial Services UPBT 30 31 3% Cost/income ratio 67% 66% 100 bps ROCE 2 5.9% 6.3% 40 bps 8 Interim Results 2019/20 - November 2019
Items excluded from underlying results H1 H1 2019/20 FY Guidance £m 2019/20 2018/19 In 2019/20 cash outflows as a Property strategy programme (203) - result of items excluded from underlying results should not Retail restructuring programme (25) (69) exceed £100m Financial Services transition and other (15) (40) Property strategy programme one-off costs expected to be Argos integration costs - (25) £230m-£270m (of which £30m- Asda transaction costs - (17) £40m cash) Other 14 (21) Sainsbury’s Bank Financial Services non- Total (229) (172) underlying costs are expected to be around £30m 9 Interim Results 2019/20 - November 2019
Retail capital expenditure H1 H1 2019/20 FY Guidance £m 2019/20 2018/19 Retail capital expenditure to Core retail capital expenditure 248 243 be around £550m Argos integration capex - 31 Retail capital expenditure is expected to be around £550m- Retail capital expenditure 248 274 £600m per annum over the medium term Core retail capital expenditure Maintenance £248 m £243 m Growth 2019/20 2018/19 Efficiency 10 Interim Results 2019/20 - November 2019
Pensions Agreed long term sustainable and flexible funding plan Annual cash contribution reduces by c.£50m Outcome • 2018 triennial valuation deficit down to £538m, from £1,055m in 2015 124 • Greater asset-backed security for the Scheme • Immediate cash payments reduced 98 • Reduced risk of over funding and trapped cash 76 69 48 2019/20 2020/21 2021/22 2022/23 Annual cash commitment under old plan 11 Interim Results 2019/20 - November 2019
Retail free cash flow H1 H1 2018/19 2019/20 FY Guidance £m – Restated for IFRS 16 2019/20 Restated 1,034 Adjusted operating cash flow before changes in working capital 1,029 Capital injections into the Bank are 289 expected to be £35m Decrease in working capital 296 (282) Pension contribution, net interest paid , corporation tax paid (279) Proceeds from disposal of property are expected to be in line with 2018/19 1,041 Net cash generated from operating activities 1,046 (248) Cash capital expenditure before strategic capex (243) Expect underlying retail depreciation and amortisation of around £1.2bn, including 54 Proceeds from disposal of property, plant and equipment 34 c.£500m right of use asset depreciation (232) Repayments of lease obligations and right-of-use assets direct costs (231) Net debt before fair value movements on (35) Bank capital injections - derivatives to reduce by at least £300m Dividends and distributions received from JVs, net of capital injections 118 11 Net finance costs of around £405m, Retail free cash flow 698 617 including £320m lease interest in 2019/20, Dividends paid on ordinary shares (174) (156) following the introduction of IFRS 16 Argos integration capital expenditure - (31) Repayment of borrowings, other non-cash and net interest movements 44 - Movement in net debt 568 430 Opening net debt including perpetual securities as debt (7,346) (7,575) Closing net debt including perpetual securities as debt (6,778) (7,145) Of which: Lease Liabilities (5,770) (5,873) Net Debt excluding Lease Liabilities (1,008) (1,272) 12 Interim Results 2019/20 - November 2019
Balance sheet targets • Net debt reduction of at least £750m H1 FY Net debt exc. Lease liabilities (£m) £m over the next three years 2019/20 2018/19 Net Debt • Medium leverage reduction targets (6,778) (7,346) 2,125 Of which lease liabilities (5,770) (5,824) - Net debt/EBITDAR less than 3x Net Debt exc. leases (1,008) (1,522) • Dividend policy changed to 1.9x (603) underlying eps cover versus 2.0x 1,522 3 Target - Adjusting for the impact of IFRS 16 (750) c.800 FY FY FY 15/16 18/19 21/22 13 Interim Results 2019/20 - November 2019
Summary and Outlook • Grocery sales improving relative to the market • General Merchandise and Clothing outperforming a difficult market • H1 profits down - Phasing of cost savings, weather, higher marketing costs • H2 profits will benefit from - Annualisation of colleague wage increases - Normalisation of weather comparatives and marketing costs • Material impact of property strategy programme exceptionals (largely non-cash) • Strong free cash flow generation • On track to deliver non-lease net debt reduction of at least £750m over the next three years 14 Interim Results 2019/20 - November 2019
Mike Coupe Chief Executive Officer
Key industry challenges Low to no Growth of the Digitisation market growth discounters £ 16 Interim Results 2019/20 - November 2019
We will help our customers live well for less Confident in the core Integrated customer offer One multi brand, multi channel business Sustainable cost reduction, covering cost inflation and funding investment in our competitive offer Strong cash generation supporting investment, dividend and allowing deleverage Financial flexibility and resilience 17 Interim Results 2019/20 - November 2019
Our strategy Purpose To help our customers live well for less Priorities 1 2 3 4 5 6 Be Offer Make Drive Grow Provide a competitive distinctive shopping efficiency connected seamless on price products convenient, to invest in services customer and new supported by the customer experience categories great service offer Colleague engagement; Customer satisfaction; Volume share; Metrics Profitability; Free cash flow; ROCE 18 Interim Results 2019/20 - November 2019
1 Be competitive on price 19 Interim Results 2019/20 - November 2019
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