J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Thank you, Simon. I'm going to move to question 4, and we've got questions from 2 shareholders, from [ Judy Wainwright ] and [ Catherine Miller ]. [ Judy ] wants to know how we'll ensure that all the chicken we offer is from higher welfare breeds. And [ Catherine ] wants to know whether we intend to make the switch to all birds being higher welfare, in line with the Better Chicken Commitment. [ Catherine ] would also like to know whether we're going to follow Tesco in introducing a Room to Roam range to offer customers the option of higher welfare products. I'm going to try and address these 3 questions together. Thank you for your questions, [ Judy ] and [ Catherine ]. We are totally committed to offering our customers the best possible choice: quality and value without compromising high standards of animal welfare. It's what our customers expect from us, and it's why we're the U.K.'s biggest retailer of RSPCA Assured products and the world's biggest retailer of MSC-certified products. We share the commitment to improving animal welfare practices the Better Chicken Commitment is trying to achieve, but we believe a different approach is more effective. This is because the Better Chicken Commitment focuses on high-growth birds and stock density without taking a range of other factors into account, such as the standard of the housing facilities or grounds the animals are kept in or their access to feed and environmental enrichment. Our approach takes into account all of these factors. And the way we work with our farmers has been different because of this for many years. We've created a cycle of measuring, managing and continuously improving the health and welfare of our animals. And we believe the results speak for themselves. Our chickens have never been healthier. Let me move on to question 5 from [ Evonne Green ], who is concerned as to why we opened a till-free store at Holborn Circus as she feels this is discriminating for customers who do not use cards. Thank you for your question, [ Evonne ], and I'm going to ask Simon to answer.

Thank you, Martin, and thank you, [ Evonne ], for your question. And yes, the till-free store was a 3-month experiment rather than a new format for us. And we did have a help desk also available in the store during the trial where customers could pay by cash if they wanted to. During the trial, we learned a lot actually about what customers want and how we can best serve them. And we're using the learnings from this experiment to develop our SmartShop technology even further to help make shopping easier and more convenient for our customers, which is proving to be particularly valuable at the present time. Now SmartShop accounts for almost 1/4 of the sales in the supermarkets, with customers often preferring to use the technology to limit the amount of contact they have in stores and to reduce their time queuing. Martin, I'll hand back to you now.

Thank you, Simon. And [ Evonne ] also asked a second question, about how social distancing has impacted our profits to date. Thank you for your question, [ Evonne ]. And again, Simon, if you could please answer this?

Yes. Thank you, [ Evonne ], for your further question. Well, of course, safety is our highest priority and has been since the start of the pandemic. We've made changes to all aspects of our business to keep all our customers and colleagues safe, and they have added material costs. At the very beginning of the crisis, we made a decision to prioritize home delivery for elderly, disabled and vulnerable customers, and we did this because it was the right thing to do despite the fact that we knew it would cost more money. We initially restricted the number of products customers could buy in a single shop so that essential items were available to a larger number of customers. And we introduced priority shopping hours for NHS workers and elderly, disabled and vulnerable customers. And we closed our counters and cafés to focus our resource and our colleagues on supporting the stocking and selling of essential items. We reduced opening hours and temporarily closed some stores too, to safely and effectively serve our customers. Now we've installed over 40,000 Perspex screens in Sainsbury's and Argos stores to support hygiene and social distancing. And we are limiting the number of customers allowed into our shops at any one time to ensure customers can observe 2-meter social distancing. We are also operating one-way systems in smaller stores. And very recently, we provided over 85,000 t-shirts to our colleagues in stores to help remind customers to socially distance themselves from our colleagues. We have also focused on ensuring we can deliver products to customers safely. We temporarily suspended Argos two-man delivery, and we've adapted our grocery online processes to ensure contact-free deliveries. We've also invested in TV, radio and print advertising to further support in-store social distancing measures. And over recent months, we've supported our colleagues financially when they needed to stay at home, and we gave all our colleagues a thank you payment to 157,000 colleagues and frontline managers, equivalent to 10% of pay for the 4-week period from the 8th of March. So safety has been our first priority for our colleagues and our customers, and lots of activity there to keep everyone safe. But as I say, this has also added significant cost to our business. And overall, we told the market yesterday that we expect profits to be broadly flat year-on-year. I'll now hand back to you, Martin.

Thank you very much. Thank you, Simon. I'm moving to question 7, from [ Michael Lindgren ]. He asked us to justify why shares were awarded to Executive Directors, given we've canceled a shareholder dividend. Thank you for your question, Michael. Let me, first of all, clarify, if I may, that we have not canceled the dividend. We have deferred any dividend payment decisions until later in the financial year. This is the right thing to do given the current uncertainty. As announced at our prelim results, Sainsbury's Executive Directors did not receive a cash bonus for 2019-2020. The Remuneration Committee sets executive pay, which reflects the roles and responsibilities concerned. Our CEO and CFO remuneration is around 13% lower than the previous year. The deferred share award was awarded based on pre-agreed performance measures for the previous year, i.e., '19-'20, during which the business progressed against a number of targets. The deferred share award is deferred into shares, which are released after 2 years, and the Remuneration Committee has determined that awards under the deferred share award should be granted at 44% of the maximum. Question 8, [ Shane Liddon ] has asked if we plan to change how shareholders will receive dividends in the future if we plan to end payment via check, and if so, the date this will change. Thank you for your question, Shane. The principal changes to the company's Articles of Association are summarized in Pages 12 and 13 of the 2020 Notice of Meeting. Generally, the amendments proposed are to reflect recent developments in market practice and to bring clarity to the language in the existing articles. Resolution 21 would give us further flexibility to change how shareholders receive their dividends in the future, including the ability to end payments by check and warrants. The amendments are in line with market practice and reflect that increasingly checks and warrants are no longer our primary methods of paying dividends. If we make the decisions to end payments by check in the future, shareholders would be given sufficient notice, i.e., a period of several months to ensure that other payment methods are successfully implemented before the transition. And I'll move swiftly on to question 9, also from Shane, who's asked a number of questions around which lenders we have creditor agreements with, which landlords we have property leasing agreements with, about the annual rents of our 33 Holborn offices and which financial service providers we've entered into for interest rate swap. Shane, thank you for your question. But we are bound by confidentiality agreements between our lenders, landlords and financial service providers. So we're not able to answer this question as we do not disclose the rental agreements on any of our properties. And question 10 from [ Trevor Bowden ], who's asked whether Mike is going to apologize for the share price performance under his leadership. Trevor would also like to know what measures Simon is going to put in place to make Sainsbury's great again. Thank you for your question, Trevor. In common with other U.K. grocery businesses, total shareholder return for Sainsbury's has trended below that of the FTSE 100 index in recent years. However, if you look at our track record over the last 7 years, our TSR has been above that of Tesco's. We are deferring any dividend payment decisions until later in the financial year when there will be improved visibility on the potential impact of COVID-19, and of course, dividends impact on TSR. Simon and our Operating Board are committed to constantly ensuring that we're delivering the best, both for customers and shareholders. It's very early days for Simon as the CEO. We set out a clear plan at the Capital Markets Day last September. But clearly, the priority now has to be to ensure that the business navigates the disruption caused by COVID-19 and on protecting the safety of our colleagues and customers. I'm sure there are things that we'll be doing differently as we come out of this crisis, and our focus is ensuring we emerge a stronger business, able to serve our customer needs in a much changed world. Moving on to question 11. The question is from [ Jaketa Heuster ], who's asking her question on behalf of ShareAction and supported by Nest Pensions. [ Jaketa ] would like to thank Sainsbury's for working so hard during the ongoing crisis. She also believes that Sainsbury's recent announcement to set up long-term targets to increase the proportion of sales from healthy products and provide bi-annual progress report shows elite, real leadership and a true commitment towards improving healthier diets and tackling childhood obesity. [ Jaketa ] would like to know, will Sainsbury's also commit to publishing a health and nutrition strategy, setting out the work plan underpinning it. Thank you for your question, [ Jaketa ], and thank you for your kind words and the recognition of the work we're doing to help our customers eat well. We have committed to investing GBP 1 billion over 20 years towards becoming a net 0 business across our own operations by 2020, aligned to the highest ambitions of the Paris Climate Change Agreement and a decade ahead of the U.K.'s government's own target. We'll be regularly reporting progress against our new, bold commitment to develop and deliver healthy and sustainable diets for all by 2020 by measuring our progress, and the Board will be incentivized to meet these KPIs for net zero. Sainsbury's will develop and deliver healthy and sustainable diets for all, and we have a strong track record of delivering this for our customers. We were the first to introduce front-of-pack traffic-light labeling in 2005. And in 2016, the first supermarket to stop food multibuys. In 2015, we introduced calorie labeling in cafés, and we offer the equivalent of 2 portions of vegetables in more than half of the children's menu options. In 2019, Sainsbury's was the first U.K. supermarket to trial selling meat alternative products in meat aisles, nudging customers to a healthier and more sustainable lifestyle. We will drive sales of both healthy and healthier products, nudging customers towards the Eatwell Guide. Regarding our health strategy, we're currently revising our plans, having recently announced our commitment to be net zero by 2040. We continue to challenge ourselves to go further wherever we can, and we'll be setting ambitious outcomes as part of our new strategy. We've already written to ShareAction to let them know we'll be happy to outline our broad intents and the evidence supporting that approach once the scoping phase is complete. As part of this commitment, we have shared our ambition to develop and deliver sustainable diets for all. We plan to measure progress towards this by reporting annually against a single, more focused KPI. This will aim to increase the percentage volume sales which are healthy and healthier relative to our total sales year-on-year, and further details on this will be shared once our definitions work is complete internally. Baseline figures will be published before the end of 2020. Question 12. [ Susan Blackwell ] has asked for an update on Sainsbury's position regarding the living wage, particularly in regard to Argos colleagues and any third-party contracted colleagues. Additionally, Susan would like to know if we'd be willing to meet virtually with ShareAction and the Living Wage Foundation to explore how the company could work towards becoming an accredited Living Wage employer. Thank you for your question, Susan. Simon?

Thank you, Martin. And thank you, Susan, for your question. As we've already said today, our colleagues do a fantastic job, and paying them fairly is, of course, incredibly important to us. We pay above the national living wage. And over the last 6 years, Sainsbury's has increased pay for store colleagues by 31%. Last month, we have also announced the opportunity for Argos colleagues working in shops within Sainsbury's supermarkets to voluntarily move on to Sainsbury's terms and conditions, including pay, effective from September 2020. And of course, to the request, we're happy to meet with ShareAction on this issue further. Thank you, Martin, and back to you.

Thank you. And can I just make a correction? I did in the previous answer talk about net zero by 2020. I think that's a little bit ambitious. 2040. Apologies for that error. So let's move on to question 13, Mrs. [ Berman ] would like to know if Simon regularly visits stores and whether he has direct responsibility for the ordering and stocking of product lines in stores. She's noticed that some of her preferred products in our Barters Walk, Pinner branch are no longer on offer. She's also commented that availability of colleagues in her local store has worsened. Thank you for your feedback, Mrs. [ Berman ]. As I've outlined, Simon is now our Chief Executive Officer. In his previous role as Sainsbury's Retail and Operations Director, Simon spent a huge amount of time visiting stores across the country. As CEO, Simon is very focused on listening to customers to ensure we serve them brilliantly, and he will continue to spend lots of time in stores, although obviously, given current restrictions, he isn't able to spend as much time in stores as he'd like to at the moment. Paul Mills-Hicks is our Commercial Director and responsible for our product ranges. We tailor the products we have on offer in each of our stores to suite the customers that shop there. And we regularly review and change our offer to make sure we get this right. In response to your second question, we obviously had to cope with a significant amount of colleagues self-isolating, either with coronavirus or with symptoms. We're now in a position that with robust social distancing measures and in line with government guidance, most of our colleagues are now coming back to work. Despite colleague absence over the past few months, availability of colleagues has increased by 7% in our recent customer satisfaction scores. Question 14, from Mrs. [ Feng ], would like to know why Hubbard's is a better product brand name than Sainsbury's? Thank you for your question, Mrs. [ Feng ]. Last year, we made a number of changes to our value proposition, including relaunching and improving our entry price point offer replacing our Sainsbury's basics range. We have 13 brands in the range, including Hubbard's, and we work closely with our customers to get the offer right. Some of the brands have links to our heritage, for example, the Stamford Street frozen range, which is named after the location of the Sainsbury's former store support center, while J James & Family meat, fish and poultry products refer to the founder, John James Sainsbury. Other ranges are more category focused such as the House 247 household range and the Just Snax bagged snacks. Question 15, [ Harold Jones ] would like to know if it's possible to have suggestion boxes in stores so that, for example, if a product you want is not in stock, you can make it known. Thank you for your suggestion, Harold. We value honest feedback, and we know it's vital to listen closely to our customers to understand how they want to shop with us and how we can improve our services. If a customer has a complaint about the service -- a product they receive, we would like to know. The quickest way is to give Sainsbury's careline a call and a member of team will be able to help. Thank you. Question 16 is from [ Sharon Green ], and she's asked, if any colleague visited Israel and made contact with NGOs like Kav LaOved to make sure that poor working conditions do not happen at the farms which supplies Sainsbury's. Sharon also said that in response to her question at last year's AGM, Mike Coupe said that Sainsbury's would take some of the auditing process in-house since several failings in the SMETA auditing process have been identified. She'd like to know how this is progressing. Thank you, Sharon. We're aware of the Human Rights Watch and other NGO reports about Israel. And I know you've been in touch with our sustainability teams on this for more in-depth discussion. That's why we have a specialist program in Israel. And following the review, we now source avocados and grapefruits directly from suppliers in-country, which means we can work more closely with them. We've started discussions with Kav LaOved to understand how they can promote their work amongst our supply base and work with them to better engage with our suppliers. Following the recent visit from our technical manager, we plan to make unannounced visits to farms in the region once travel restrictions are lifted. Question 17, from [ Greg Butera ]. Greg is an appointed representative of ShareAction, and he's asked for an overview of Sainsbury's approach to contracts for its colleagues. In particular, does the company provide all colleagues with a minimum of 16 contracted hours? If not, would the Board consider committing to do so? Simon, could you please answer this question?

Yes. Thank you, Martin, and thank you for the question, Greg. And to confirm, we don't offer 0 hours contracts, and all of our colleagues are on contracts with a guaranteed minimum number of hours. On average, most of our colleagues are on contracts with a minimum of around 20 hours per week, and we always state the minimum hours required clearly when advertising for roles. It's important for us to offer roles to colleagues on a range of hours, as roles vary widely across our business. It's also important to remember that we have lots of colleagues who enjoy the flexibility of doing a smaller number of contracted hours, for example, students who work 1 day a weekend. Thank you for question. I'll hand back to you now, Martin.

Thank you, Simon. Thank you. Question 18 is from [ Philip Clark ], who's asked a number of different questions. And before we start to answer them, I'd like to thank [ Philip ] for his kind comments regarding how well Sainsbury's colleagues have responded to customers' panic buying. First of all, I just want to say how much I agree that the efforts of our colleagues were heroic. Your reflections on how well we adapted to government social distancing guidelines are also appreciated. And of course, we're very pleased to hear that our colleagues in our open in-store have to adapt to a new way of shopping. He also asked us to pass our thanks to Mike Coupe for improving the results of the business, especially cash flow and reducing debt. And we will, of course, do that. [ Philip ], you've also asked whether we're prepared for a second wave of panic buying as being reportedly happening in Australia. I think we've shown that the strength of our supply chains has enabled us to meet needs of customers at this extraordinary times. We have worked collaboratively with our suppliers throughout. And thanks to the phenomenal efforts of our colleagues, we have managed to keep the shelves as well stocked as possible. We've learned a lot over the past 4 months. And whilst we sincerely hope there will not be a second wave of panic buying, we are confident we'll be able to support our customers. Then [ Philip ] asked a number of questions on finance. And as you may have heard me at the beginning, I'm not sure whether you joined, but Kevin O'Byrne is unable to join us today as he had a close family bereavement last night. So I'm going to try and answer your questions. Firstly, you said you were concerned about the magnitude of items excluded from underlying results. You said that in 2018, these reduced pretax profits from GBP 601 million to GBP 202 million; and this year, from GBP 586 million to GBP 255 million. In particular, you asked about the GBP 296 million relating to the property strategy, requesting additional details surrounding the charge and commenting on the disclosures related to the announcements made during our Capital Markets Day in September. I think the best way to answer this is to say that the entire transcript from the day we held in September is available on our corporate website. And of course, the details are also included in our annual report. In respect to the information you asked, the annual report also has details of this charge in Note 17 for the accounts on Page 142. You've also asked about the allocation of the charge between supermarkets, convenience and Argos. And this depends on a multiple number of factors, including the carrying amount of the capitalized assets. We have not disclosed the cost split between this -- these, because in accordance with our decision, our retail businesses are now one aggregated segment, as we outlined in Note 4 on Page 116 of the financial statements. I hope this will help you to see that we're -- these -- we're doing this because we think they're the right thing for us to do despite the cost that you see in the profit and loss account in these years, which lead us to your next question, which says you challenge us that we described these as noncash. And you say, all that means is noncash in this period. There would have been cash in a prior or even future accounting period. And you said that it's vital to learn lessons to avoid a repeat of closures. You've also asked what we've learned about how and where our customers wants to shop with us. I think what you say is technically correct, [ Philip ], but the noncash element of the cost is of interest to investors to know the level of incremental cash spend required to deliver the property strategy program, and the statement is simply intended to help clarify this. I think we've made it very clear that we have to make sure that we adapt to how customers shop with us. And when that happens, sadly, we may have to close down some stores where we're not serving the customers in the way that we used to in the past. In regards to your point about Argos and whether there will be more closures, we now have 300 Argos stores inside our supermarkets, and we'll continue to adapt to meet the needs of our customers as their needs change as a result of the current crisis. We're opening our Argos stand-alone stores in phases. We opened 145 on the 15th of June, and the second phase will begin in mid-July. We're going to be led by our customers. And our phased approach will focus on opening the stores where the customers are most in need of physical presence. Finally, we note your comments regarding reporting on safety measures. Page 43 of our annual report gives more detail on our approach to managing health and safety. We can assure you that the safety of our customers and colleagues is our highest priority. Question 19. [ Steve McCulloch ] has asked us what we're doing to ensure all chicken meat we sell is from higher welfare breeds and whether Sainsbury's will sign up to the Better Chicken Commitment, Thank you for getting in touch and for your questions, [ Steven ]. We've already answered this question earlier, and I hope you're happy with that answer. And question 20 is from [ Annie O'Gara ], has asked, if and when Israel annexes 1/3 of the Palestinian West Bank, will Sainsbury's cease its trade with Israel? Annie, thank you. I know you've also been in touch with our sustainability teams on this for more in-depth discussion. I won't repeat what I've already said about sourcing from Israel. But over the years, we have consolidated our sourcing from Israel and are now working more directly with suppliers in the country. We are a global business sourcing from over 70 countries. We are nonpolitical and source products according to the ability of the producer to meet our quality, safety and ethical standards, and we label our products clearly and accurately for customers. We have finished our pre-submitted questions and answers. And as I said at the beginning, we have tried to answer 47 questions within the 20 questions that we've answered. I understand that we're now over time, over the 12:00 deadline, and some shareholders have now disconnected. And we now only have 5 left on the telephone line. So I think it would be appropriate now to close the meeting. And I just want to say thank you to you, operator, and to the Equiniti team, our registrars, for all their help. Thank you to our members of Company Secretariat and our communications teams for their hard work in preparing for this meeting. And finally, a big thank you to my fellow Directors and members of our Operating Board for all their hard work and contribution with our great focus on customers, colleagues and shareholders. Thank you very much indeed for joining us today and for your continued support for the company. I wish you a safe and healthy rest of the year.

This concludes today's meeting. Thank you for your participation. You may now disconnect.