J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our '22/'23 Interim Results Presentation. Thank you for joining us today. And I will start with a brief introduction to cover progress against the priorities set out as part of our 3-year plan. Kevin will then cover the first half financials, and then I'll go into more detail about our strategic highlights and performance delivery at what is the halfway point in our 3-year plan. Now you'll remember that these were the priorities we set out 2 years ago in November 2020. Our key value-creation pillars are Food First, Brands that Deliver and Save to Invest, underpinned by being connected to our customers and delivering our integrated Plan for Better. We laid out in April, the key focus areas, which would underpin our performance delivery over the course of this financial year. And we've been relentlessly focused on each of these and have been delivering consistently against them. As we navigate the second half of the year, it will be more of the same with all 6 imperatives remaining front of mind for me and all of our team. Now I'm encouraged by our progress so far this year, and we are delivering for all our stakeholders as a result. For our customers with the best value we've ever been, and we continue to make solid progress in the competitiveness of our offer. Of course, this is more important than ever during such a tough time for millions of households. We are committed to building the long-term loyalty and trust of our customers throughout this period. And importantly, we've strengthened our firepower to help battle inflation, funded by a cost-saving program that helps us invest more than our competitors. And for our colleagues, we continue to take a leadership position in our industry on colleague pay, and we've invested GBP 150 million this year to support colleagues and drive outstanding service. We were the first supermarket to offer a second pay rise in the year in September, and we've announced additional colleague discount and food support for our teams. For our suppliers, where we've continued to develop and further leverage the strong supplier relationships and the scale benefit from our volume share gains, of course, we've needed to be flexible, listening and supporting our suppliers given the challenging macroenvironment. And in turn, our suppliers have supported us, and I really want to thank them for their help and commitment, and this is reflected in the approved availability we're delivering for our customers. And for our shareholders, well, we're committed to improving returns by creating a simpler, more focused business. As you've seen, profits are significantly higher than before the pandemic. And we are delivering strong cash generation, driving down leverage and supporting dividend payments. This slide shows how we're delivering against our strategy for customers and colleagues. We are inflating behind the market month-after-month, and we are the only full choice supermarket to have grown volume market share versus pre-pandemic levels from the first half of '19/'20. And we've grown share again year-on-year. Now we're pleased to with the Argos performance, particularly in quarter 2 when we significantly outperformed the market as customers were looking for value and a brand they can trust. We continue to lead on supermarket customer satisfaction, and we're encouraged that our colleague engagement scores have improved again. This is a priority for us, which I regard as no small achievement in such difficult times. Having the most engaged colleagues is absolutely at our core in order to deliver leading customer service. And all this is made possible by the scale of our cost-savings program, creating the firepower to invest in price and colleagues ahead of our competitors. We are at the halfway point in our 3-year cost-saving program that will deliver GBP 1.3 billion by the end of next year, double the run rate of the prior 3 years. And it's important to stress that a lot of these savings are unique to us. Not least for example, the benefit of putting Argos stores inside Sainsbury's supermarkets. Stronger volume performance than competitors is also creating competitive advantage. So we are improving our competitive position and mitigating operating profit pressures, which is enabling us to deliver profits significantly ahead of pre-pandemic levels. I'll now hand over to Kevin to talk through our first half financials.

Good morning, everyone, and thank you, Simon. I will now cover the financial highlights for the 28 weeks to the 17th of September. I'm going to start by looking at sales on a year-on-year basis. Overall, grocery sales grew by 0.2% during the first half despite tough comparatives. We saw sales growth strengthening in the second quarter to 3.8%, as the lockdown comparatives eased, inflation was higher, and customers responded well to the strength of our offer. We also benefited from warm summer weather, which supported sales in both grocery and General Merchandise. General Merchandise sales declined overall across the first half, but we saw growth in the second quarter of 1.2% with Argos sales up 1.6%. Alongside the favorable weather, this was driven by the work we've been doing to improve availability and resulted in strong market share gains. Growth was strong, in particular, in consumer electronics and seasonal products. Clothing sales were down in the first half, reflecting the impact of customers returning to the High Street as COVID restrictions eased. In the second quarter, clothing sales were broadly flat. In total, H1 retail sales, excluding fuel, were down 1.3% year-on-year, including the impact of higher fuel sales, first half sales growth was 4.4%. I also wanted to share sales comparatives versus 3 years ago in order to provide a pre-COVID comparison. Grocery sales were up over 9% on a 3-year basis, driven by sustained higher volumes post-COVID as well as inflation. General Merchandise sales were down 5% versus 3 years ago with Argos sales down around 3% and Sainsbury's General Merchandise sales down nearly 15%. This partially reflects our shift in focus towards more profitable sales, including a reduction in promotional activity and a strategic decision to exit less profitable categories, such as entertainment in Sainsbury's. Clothing sales were 2.5% higher than 3 years ago. This was achieved despite a reduction in promotional activity. Full price clothing sales participation levels are significantly higher than '19/'20, 80% this year versus 64% in the first half of '19/'20. So total retail sales, excluding fuel, were up 5.9%, including fuel first half sales were up 9.2%. Retail operating profits in the first half were down 9% year-on-year. This reflects the investments we are making in value, the impact of reduced grocery and General Merchandise volumes post-pandemic and higher operating costs, partially offset by higher contribution from fuel. Financial Services made a profit of GBP 19 million in the first half, which is in line with the last year. Underlying profit before tax was down 8% year-on-year, which represents a 43% increase versus the first half of '19/'20. Finance costs were 9% lower year-on-year, driven by interest income from higher cash balances and lower interest rates on new leases. At a statutory pretax profit level, we reported a profit of GBP 376 million. Now this is down GBP 151 million against the prior year, which included GBP 181 million of exceptional income relating to the settlement of legal disputes. As you can see here, we delivered strong retail free cash flow in the half of GBP 759 million, up 37% year-on-year with a working capital inflow of GBP 360 million. This inflow reflects higher grocery sales in quarter 2 and a more typically strong seasonal working capital position seen at this point of the year. And as usual, we would expect this to unwind in the second half. We were in a net funds position of GBP 361 million at the end of the first half, and we are pleased with this strong delivery. This is the first time we've reported net funds. We are on track to deliver at least GBP 500 million free cash flow this year, in line with our 3-year target to March '25. The reduction in underlying earnings per share is consistent with the decline new PBT, and we will pay a dividend of 3.9p per share, up from 3.2p per share last year, in line with our practice of paying an interim dividend of 30% of the prior year's full dividend. Looking now at Financial Services where profit was flat year-on-year. Growth in revenues was firstly driven by a recovery in ATMs and Travel Money, although these areas of commission remain behind pre-pandemic levels. We also grew interest income as demand for credit increased. Although again, as you can see, our total credit card and loans book is over GBP 1 billion lower than pre-pandemic levels. This growth in income was offset by higher impairments and increased costs. Higher impairments were driven by 3 factors: growth in the loan book, additional provisioning made as a result of more cautious economic forecasts and the normalization of arrears levels post COVID. Overall, arrears levels remain low. Increased costs were driven by a recovery of volumes and some operating cost inflation. Going back now to the group P&L. In order to provide a clearer view of our underlying performance, as usual, we exclude P&L items, which by virtue of their size and/or their nature do not reflect the group's underlying performance and these are outlined on this slide. Restructuring costs of GBP 33 million related to the program announced in November 2020 for the structural integration of Sainsbury's and Argos. Our guidance for total restructuring charges for the 3 years to March 2024 is unchanged, and the still expect a cash outflow of around GBP 60 million this financial year in relation to this program. Offsetting this, we booked GBP 30 million of income relating to settlements for overcharges from payment card processing fees, much lower than the GBP 181 million recognized in the prior year and GBP 35 million of IAS 19 pension income. As already noted, the first half has been a period of strong underlying cash generation with retail free cash flow benefiting, as I mentioned, from a more typically seasonal working capital inflow and higher grocery sales in Q2. Free cash flow also includes the cash receipts of a GBP 50 million dividend from Sainsbury's Bank, which was announced at the prelim results in April and paid in the first quarter of this financial year. Now it's worth calling out the other line in the table, which in the prior year, primarily related to increased lease additions from the Highbury and Dragon transaction, where we served notice in the first half of last year to purchase 13 stores upon the expiry of the leases. We plan to pay for these stores in March 2023 from cash flow and a term loan. Excluding lease liabilities, we closed the half in a net funds position of GBP 361 million, representing a reduction in net debt of over GBP 500 million from the year-end and a reduction of around GBP 400 million from last year's first half. Net debt, including lease liabilities, reduced by nearly GBP 600 million from the year-end. These charts show the strength of our balance sheet position, which is important in the current environment. Our net debt to EBITDA leverage was at 2.9x at the first half, down from 3.1x at the year-end. As I've already mentioned, net debt is always lower at the half year. We would expect our net debt-to-EBITDA position to improve year-on-year to around 3x at March 2023. This would be at the top end of our target leverage range that we laid out as part of our capital allocation policy in April. Return on capital employed is down from year-end, reflecting the impact of lower underlying profits. We remain on track with our key metric to increase return on capital employed. So overall, we're pleased with our first half performance. The backdrop remains tough, but we're really well placed. Our volume market share outperformance has been supported by the strength of our financial position and the ongoing delivery of our cost savings program. Trading momentum has remained strong in the first few weeks of the second half with continued volume market share gains. We continue to generate strong retail free cash flow and expect to generate free cash flow of at least GBP 500 million for the full year. Looking ahead, we're well placed to deliver through Christmas and continue to expect underlying profit before tax of between GBP 630 million and GBP 690 million. Thank you very much for your time. I'll now hand you back to Simon to take you through our operational highlights and progress against our strategic priorities.

Thank you, Kevin. Let's now turn to Food First. The first of our strategic priorities. Now there's been a relentless focus across the business on keeping prices as low as we can at this difficult time for customers. And we believe we're in the best place we've been in a long while on value. We will have invested over GBP 500 million in prices over 2 years by end of this financial year. And we continue to anchor this value investment at the center of the plate in meat, fish and poultry and fruits and vegetables. This is really working for us. We have 3 core platforms of value, as you can see here. First is Sainsbury's Quality Aldi Price Match. Here, the focus is on fresh products that customers buy most often with 240 products in the Aldi Price Match campaign. Second is Price Lock, where we've added 20% more own brand lines to keep everyday prices low on the core staples. Prices are locked for 8 weeks and over 2,000 products in this campaign. And third is My Nectar Prices, which is becoming increasingly popular with customers seeking out Nectar points and offers to save money on everyday items. New offers are added every week as we react to market dynamics and customer needs. We've shown this chart before. It shows the strength of our value focus. We continue to consistently inflate less than competitors on the products that customers buy most often are shown here as well as on the overall basket. This focus is working. We're driving more volume and more customers into Sainsbury's, and we intend to keep building on this momentum throughout the rest of the year. Here, we can see our progress on value against our key competitors. We've continued to consistently improve our price position against all of them year-on-year. We've shown particular improvement against Aldi, improving our value index by 400 basis points year-on-year. As you can see on both these charts, it's all about how we help customers define value and then when they want to, to help them trade up. Sales of economy own label products were up 11%. We've been gaining spend in this category from nearly all competitors. But with the strength and breadth of our assortment, we are uniquely well placed to win at the other end of the basket as well. We are seeing great performance in our premium own label tier. Taste the Difference sales with sales up year-on-year and up 13% from '19/'20. And we expect to win more spend as customers trade down from restaurants and look for treats and meal deals for special nights in and celebrations with family and friends. Now to support that trade up, it's really important that customers recognize the high quality of Sainsbury's products. And you can see here that we are ahead of our competitors. And we're on track to launch 1,200 new products this year with over 600 delivered in the first half. We extended our Summer Editions ranges and sales grew over 30% compared to last year. And we're delighted with our delicious Autumn Edition range again this year, up from 47 products to 82 this year, and we continue to balance our assortment by category as we bring new lines into the ranges whilst at the same time, we constantly take action on the tail. So looking ahead, we're well set up for this Christmas as customers look for an extra special celebration. We will be launching 300 new Christmas products this year and nearly half of the Christmas innovation will be in Taste the Difference. So let's now take a quick look at some of our product innovation over this summer and autumn, including some of what's to come this Christmas. [Presentation]

So moving on to our channels. As you can see from the chart, online orders continue to normalize post-pandemic, although the year-on-year decline is slowing. We did a better job than our competitors during the pandemic, making online delivery available to customers who really wanted and needed it. And so as customers have returned to stores, our online sales have declined a little more than the market. We are encouraged by how this is playing out. We're pleased to see a higher proportion of customers switching back into our own physical stores than is happening at our competitors, and this is reflected in our overall grocery market share gains. And we're happy with the balance back to physical stores, but we're also continuing to drive further online efficiencies, and we see further opportunities here in our in-store pick model. Drop densities and item pick rates are both significantly higher than pre-pandemic and item pick rates have improved 4% year-on-year. We're also pleased with the recovery of our Convenience channel. Convenience sales are now 7% higher than they were pre-pandemic, driven by growth in our less urban stores outside city centers, whilst our smaller city center Food on the Move stores have recovered rapidly and are close to delivering pre-pandemic sales levels. The chart on the right shows our overall channel performance and the switch back to our physical store estate. Our on-demand channel continues to grow, and we're now delivering around 118,000 orders per week from nearly 700 stores. And as customers choose to return to our stores, we're pressing ahead with our significant investment program to further improve the store shopping experience, as you can see here. In fact, we will touch to be 90% of our supermarkets this year alone. Prior to October, we finished relaying all our stores to meet the new high-fat sugar and salt regulations. We've taken advantage while making these changes to also upgrade our fresh and grocery offer in hundreds of stores, rolling out beauty aisles, investing in checkout technology and creating destination space for General Merchandise. So now that I've talked you through the what's the Food First, let's move on and update you on the proof points of what this is delivering. This slide shows our relative resilience as customers adapt to the cost of living challenges. We've seen less switching to Aldi and Lidl than any of the full choice supermarkets. And while customers are spending carefully, our customers are dropping fewer items out of their baskets and trading down less through product choices. This is driven by the strategic choices we have made, the demographics of our customer base, our range and our strong brand position, supported by the geographic mix of our stores. As you can see here, the trend in customer satisfaction is significantly impacted by inflation, dragging down value perception scores across all retailers. Nevertheless, customer satisfaction continues to be a key point of differentiation for us, and we are maintaining our lead versus all of our full choice competitors. And you can see this across the 4 key drivers on the right-hand side of this chart. We continue to lead on availability of items, speed of checkout, quality of products and colleague availability. And this is the final point on volume market share performance. We show at the left-hand chart at the start of this presentation, we are the only full choice supermarket to grow or maintain our volume share position from where we were pre-pandemic. And we also grew volume share ahead of the market in the second quarter. So moving on now to talk about Brands that Deliver. We're making good progress with the second pillar of our strategy, and I'm encouraged by the progress we've been making across the brands during the half. Leveraging the full potential in Nectar is all about continuing to acquire new digital Nectar users. Nectar continues to grow, and we've hit our target of reaching 10 million digital collectors. More SmartShop customers are benefiting from personalized Nectar prices, saving customers on average over GBP 100 a year. Our Nectar 360 is going from strength to strength, where we work with around 700 suppliers now every year. We previously said that we expected Nectar 360 to deliver incremental profits to the business of GBP 60 million to GBP 70 million by March 2026. We now expect this number to be at least GBP 90 million. In General Merchandise, our objectives were to reduce our cost to serve and improve profit delivery whilst delivering a better proposition for our customers. We're encouraged with the progress now being achieved as we further improve our focus and capabilities in General Merchandise. Argos profitability levels are significantly higher than pre-pandemic, largely driven by a reduction in operating cost to sales. Given the challenges last year, we put a major focus across the General Merchandise business on improving availability, and this is significantly better than last year. We are improving the assortment of ranges, customers are recognizing our strong value credentials, and we've grown our digital market share in Argos. To deliver full potential across Brands that Deliver, we need to build each of our brands so that they inspire and really connect with our customers. And this slide illustrates some of the things we're doing to develop and accelerate our brand proposition across General Merchandise. We continue to develop and grow our Tu clothing brand with our latest Tu & Me campaign really resonating well with customers. And in Argos, we're increasing our premium mix by securing desirable new brands such as Smeg, Neff and Mamas & Papas. We've seen good sales growth in Habitat as we build this brand. We're particularly pleased with the performance of the new Habitat kids range across bedding and furniture. And we're launching an exciting design collaboration with Sebastian Conran, son of Habitat's iconic founder, Sir Terence Conran, ahead of the brand's 60th birthday in 2024. We've seen a strong performance in Argos, particularly in the second quarter, where sales grew by 1.6% year-on-year despite pressures on consumer spending. The favorable summer weather also play to our advantage. We've been encouraged by overall market outperformance in Argos, growing share in all key categories as customers have turned to Argos for value. The chart on the left here shows the key categories that have driven this performance. Consumer electronics and technology sales were strong and the warm summer weather drove seasonal sales of gardening tools, barbecues and outdoor toys. Sales in bigger ticket items like furniture have been challenged as well as homewares as discretionary spending patterns have shifted post-pandemic. Now we remain cautious about spend heading into peak, given the pressures on consumers, but we're increasingly confident that if customers are spending that Argos is well placed to benefit. We're now going to play a short video to bring to life the changes we're making to the Argos distribution network. 2 years ago, we laid out our Argos transformation strategy with a key objective of giving customers faster access to a wider range of products. We're reducing our standalone store estate from 600 stores to around 160. Over 70% of Argos orders start online and 30% of fast-track delivery orders are delivered the same day. So it's important to have stock in the right place to get to customers quickly. Now a key part of achieving this transformation has been through replacing our distribution network of around 180 larger hub stores with 30 local fulfillment centers, which you can see in this video, taking stock out of the system, whilst moving it close to customers and creating real working capital benefits. We've now opened 11 local fulfillment centers. They are purpose built to deal with volume to stop broader ranges and enable smarter use of data and voice picking and allow optimized routing. In the areas where we've opened local fulfillment centers, we are seeing tangible benefits with better availability of items on the Argos website and thousands more product options available to customers more quickly. Overall, this half, Argos perceived availability scores have improved 6 percentage points. And as we make and embed these changes to improve our distribution network, Argos will become even more efficient and synonymous with rapid and convenient access to a wide range of products with great availability. Moving on to clothing. We are creating a stronger, more profitable Tu clothing business. Clothing sales in the half were 2.5% higher than pre-pandemic levels, with our full price participation remaining significantly higher than in the first half of '19/'20, driving a more profitable business. We delivered a record performance in women's dresses in the half with sales up 40%, and we saw a good performance in back-to-school clothing sales. Now to Financial Services. Here is a reminder of the objectives we laid out for the business in September 2019. We're making progress despite a difficult backdrop, and we were pleased that the bank paid its first dividend to the group of GBP 50 million in April this year. As we've said before, we are focused on developing and delivering Financial Services products for Sainsbury's and Argos customers. Our teams have joined up to deliver these plans and we're delivering this more efficiently with investment in digitization, in particular. So turning to our third key pillar, Save to Invest or put another way, reducing structural operating cost to fuel investment in the core business. Now we have doubled the run rate of cost savings and expect to deliver over GBP 1.3 billion of savings in the 3 years to March '24. 18 months in, we've delivered GBP 730 million of these savings. Now this is the first time we are talking to a cash target, which is partly to demonstrate the scale of the savings opportunities we have available relative to competitors, but also because much higher operating cost inflation than originally anticipated, means that we will not now meet our 200 basis point operating cost to sales reduction target by March '24. But let me be clear, we are ahead of the level of cash savings we committed to. And looking to how we can continue to generate savings. So far, our cost savings to date have been mainly driven functionally and focused on savings released from big structural operating model and proposition decisions. Now while these opportunities will continue to play an important role, we've recognized the need to think differently, and our focus is now shifting towards driving variable cost efficiency with a greater emphasis on driving productivity and pulling levers end-to-end across the whole business. Now this slide shows some examples of what we've already delivered to date on our key structural cost-saving programs. We've also made particular improvements in our utilities costs, reducing our electricity consumption by 23% over the last 3 years, driven by numerous schemes such as rolling out LED lighting to 100% of our stores and fitting aerofoil technology in our refrigeration. We also believe we're in a good place relative to the industry on our proportion of new to planet energy sourcing. We have committed to the long-term purchasing of renewable energy from new wind farms, which gives us good protection from variable cost inflation. And we're also confident that we're in a strong hedging position relative to others on utilities for the balance of this year and into next. In June last year, we launched our plan for better commitments, and we set out key targets within the 3 pillars of Better for You, Better for Planet and Better for Everyone. And we committed not only to setting bold targets, but also to being transparent in our reporting against them. Now in the half, we set out 5 human rights commitments and added improved animal health and welfare as a key pillar. We've been focused on working in collaboration with other retailers and the World Worldwide Fund to halve the environmental impact of the U.K. shopping basket by 2030. And you'll hear more on this next week when the World Worldwide Fund publish their Impact report. We're particularly pleased with the progress we're making in tackling food waste. We've remained best before date from our 100 more of our own brand products earlier this year, which is estimated to help customers save 11,000 tonnes of food per year. And in the year since we launched our partnership with Neighbourly, we've distributed over 6 million meals to those in need. So we're now at the halfway point of our 3-year plan, and here is a reminder of the 8 key metrics we set out for that plan. I'm pleased that we're making good progress across the majority of these metrics, and of course, we'll update more fully at our prelims in April. I'm excited about the momentum that as a team we're building in Sainsbury's. We have a very clear focus, and we're executing well against that. Putting more volume through our food business is the vital lifeblood that not only feeds the economics of the grocery business, but also supports all our portfolio brands. So before wrapping up, I want to return to some of the themes I started with. We're now at the halfway point of our plan, and we're delivering against that plan. We've got strong momentum, and we're proving to be more resilient than our competitors. We're saving more costs than our competitors, offsetting more of the operating cost inflation, and we're reinvesting more in our customer proposition and in looking after our colleagues. This is why we're winning volume share. For our shareholders, we're delivering strong cash flows supporting dividend payments. We're a more profitable business with a stronger balance sheet, and this means we're well placed to deliver in this environment and navigate the period ahead. Thank you for listening, and thank you for your time this morning.

Hello, and welcome to the Sainsbury's 2022/'23 Interim Results Analyst Q&A Call. On the call this morning are Simon Roberts, Chief Executive Officer; and Kevin O'Byrne, Chief Financial Officer. [Operator Instructions] Our first question is from Andrew Gwynn from BNP Paribas Exane.

Yes, 2 questions if I can. So firstly, just talk about the control of the P&L. Clearly, a bucket load going on in terms of cost inflation, in terms of recycling the cost saving. But I suppose very simply, where did you land versus your expectations in the first half given all that noise? And then the second one, obviously, 2 key bits of guidance here. So the PBT guidance and then the cash flow guidance, what would cause you to deviate from those significantly? Is there something that you're watching from a consumer metric perspective? Is it simply just a relative performance versus your peer group?

Kevin, do you want to pick up on those couple of questions first, yes?

Yes. The first half was broadly as we expected, and we said that we'd have volume reducing post-COVID in both businesses, which we saw. We said we'd invest in food value, which we did. We had maybe a little bit more impact from product mix in Argos. There was more electrical in the mix than maybe we would have anticipated, but we had higher cost inflation, which we anticipated, and that was largely offset by our savings plans, which, of course, we anticipated. So there wasn't a huge sort of surprise, if you like. On the demand side, probably the demand side in Argos was stronger than we thought in the second quarter. But I'd say we had a bit of mix in there as well. So that was probably Simon might add something to that. On the PBT guidance, really, it's all around consumer demand. We've got absolute visibility of our costs. As you can imagine, we're fully hedged for the year. We've got -- so all that's in the bag. And the range will depend on the demand for -- in the final quarter, particularly around General Merchandise and what that's at. The other factor that's in there a little bit on our mind is impairments in the bank and just how will that work out? And clearly, a chunk of that is looking forward in the economic models and what IFRS requires us to do, which we'll get greater clarity on in the final quarter as well.

Yes. Thanks Kevin. I mean maybe just a couple of points on the demand side, Andrew. And I think, look, in the Argos business, I think clearly, the self-help actions that we're taking is like availability and range and Convenience are really working. Clearly, it was a strong summer from a weather point of view and undoubtedly that gave us some tailwinds, particularly in the Argos business, given obviously the strength of the seasonal business there. I also just pull out the momentum in food. We've seen our momentum volumes clearly in industry going backwards, but our relative volume performance against others in the second quarter, we're really encouraged by. And I think the combination of what we're doing both on value, but also on the breadth of the overall offering to really play to our advantage there.

Okay. I'll just come back on the cash flow. Obviously, the guidance is for north of GBP 500 million, because substantially ahead in the first half. So should we just sort of take in account you're saying at least GBP 500 million, and we'll see where we land -- or is this something we should be aware of in the second half on cash?

No, it's at least, Andrew. But bear in mind, the first half always is flattered by the working capital. And we had where the normal -- if you went back 3 years pre-COVID and you looked at our working capital at the half year for each of those 3 years in what were potentially normal years, you'd have seen GBP 250 million to GBP 300 million of cash flow coming in, in the first half because of just the timing of payment cycles and then coming out. So that's a factor in there. It clearly was exacerbated a little bit this year because you got more inflation in the number. And we would expect that to largely unwind.

Okay. Been a while since we had a normal year.

Our next question is from James Anstead from Barclays.

I've got 3 questions, if that's okay. Firstly, I appreciate it's really difficult to come with any representative way of judging cost savings at the moment, but you've given us this impressive doubling of the run rate in the next 3 years. I just wanted to be sure, because that seems to be judged off 2021 when obviously there were a lot of extra costs relating to the pandemic. Is that adjusted for? I just wonder whether the doubling of the cost savings is entirely kind of the best way of thinking about it? That's the first one. Secondly, you've also now said you'll have 160 Argos stores by March '24 rather than 100 because of better rent negotiations. Do you think it stops at 160? Or do you think you'll get to 100, but just more slowly, just interested where that goes? And then finally, perhaps for Kevin, it's obviously it's a very good problem to have GBP 300 million or so of net cash. And it doesn't sound likely you're planning in the very short term to start returning that surplus cash given the guidance on leverage at the end of the year. I just wondered if you could remind us other sources of use for that cash in the coming year or so. I know Highbury and Dragon might be part of that answer.

Why don't I take the cost and Argos question, and then I'm sure Kevin will speak on costs, may also want to comment on the specifics of the COVID costs as well. Yes, look, I mean just taking a step back on our cost action. You remember in November 2020, we said we'd reduced by 200 basis points on cost over 3 years. And what I would say, first of all, is that we're really encouraged with the progress as the team were making here. These are hard jobs taking structural costs out of the business like this. And as you can see, in a number of areas, we've really delivered against that plan. We're actually a bit ahead of where we thought we'd be at this point in time. If we think about the kiosk cost areas in areas like supply chain logistics, clearly, the Argos transformation, the work we've done on the proposition in food on cafes and counters and then really significant work in our channels on our still operating model. And so really what we're confirming today is this GBP 1.3 billion of cost out of the business to March '24 reflects the continued scale of that ambition. And whilst, as you say, there were some ups and ups and downs on the COVID costs on the way through the '21 period. When we look back at what the costs coming out of the business were to '19/'20 and we look at what we're doing now, we're more than doubling the rate of cost takeout. And just one other point, James, I would make here, which I think is an important one. We've really focused on functional cost savings and on proposition cost savings to this point. And very much now, we are going to continue to deliver down those paths for obvious reasons because they'll be essential. But we're also very much now looking at end-to-end cost-savings, productivity savings and also how we drive the operating leverage in the business. So it's a bold plan. We're maturing our cost-savings. We're confident about what we've got to and we can see a lot of opportunity in front of us. And look, I guess the key point on costs, we think we've more cost out in front of us to do relative to our competitors. In terms of the question on Argos, let's just take off a step back on Argos. We're pleased with the Argos performance in the half, particularly in the second quarter to -- Andrew's question or we had some weather help there, but the self-help in Argos that the team has led in availability, particularly and clearly in the cost out in Argos as we reshape the operating model. I think in terms of the number of stores here, we said at the beginning, 160. As you say, we've had some more favorable rent negotiations with landlords. Our objective was always to make sure we have the optimum number of access points for the Argos business, and this will mean at the end of the 3 years, we have around 1,100 points to access Argos, more than clearly we started with before, just under 800 stand-alone stores, 1,100 points to access Argos and we've managed to do that through some really strong and effective negotiations from our property team to get more stores in locations where we can serve customers at a lower cost and therefore, continue to improve the economics of the Argos business. Kevin, do you want to come to the third of James questions, if okay?

Yes, James. Yes, on net cash, yes, it's a great milestone. Actually we're very pleased that we've got net cash at the end of the half. We haven't had that before. And going forward, I expect net cash at the end of the year. But I'll remind you of the capital allocation policy that we laid out last year, first of all, invest to strengthen the business, which we're doing. And secondly, solid investment grade, really important and all the more important, I think, right now, given the world we're facing. So there's more to do on that. We should get to a 3x net debt to EBITDA by the year-end. We've set our target range is within 2.4 to 3x. So a little bit more to do on that, so we'll continue to do that. But we also very importantly said we -- in the meantime, we would still pay out a great proportion of profits to shareholders. And we'd go from what was roughly about 53% distribution, about 60% because of our confidence in the cash flow. And we know in the end, our cash flow is shareholders, so we want to give more of that in the meantime to shareholders. And then after that, we'll decide other things we want to invest in over and above that and then over return surplus cash to shareholders. That leads on to your second part, which is the Highbury and Dragon, which as you recall, we exercised the option in 2 different tranches to buy 21 stores back from this structure. And you'll recall, back in September, we were looking at would we say and leaseback 18 different stores to part fund that. In the end, the market wasn't good at the time. The transaction didn't go through, and we certainly never want to be or need to be because of the strength of the balance sheet and for seller at the moment. So clearly, we're not going to sell properties into this market. So we'll fund the 21 stores from some debt and some cash. So you'll see in the post-balance sheet events we put it, a bridging loan in place, we replaced that with a term loan. And the good news then is, net debt doesn't really change that much because we're replacing lease debt with bank debt. But it is positive from a cash flow point of view because the rent we would have paid will pay less cash and interest. So we're comfortable with that.

Our next question is from Rob Joyce at Goldman Sachs.

I've got 3. So in the outlook statement, you referenced being well placed into next year. Just looking at consensus, it looks to have around a sort of flat EBIT margin in the retail business next year versus maybe down 40, 50 this year. Just wondering if that seems consistent with your comments on being well placed and where you see costs? Second one was just a follow-on, really -- Kevin, thanks for the comments on Highbury and Dragon. Just to understand, for those of you still using old money, in terms of the impact on net debt, pre-leases, what do you think? I think the purchase price was just over GBP 1 billion from what I've seen from supermarket REITs. So if you could help us understand that? And maybe also just tell us what the expected rental savings would be. That would be really helpful. And then the third one was just you referenced volume quite a lot in the release. It does look from the external data, not specifically for you, but the market 3-year volumes took a bit of a downturn in September. Can you just help us understand how your 3-year volume momentum has been in September and into October?

Well, maybe, Kevin, if you maybe take the outlook and the net debt, and then I'll take the volume question.

Yes. And Rob, just starting with the Highbury and Dragon one, we'd envisage taking us -- you'll see we took a bridging loan of GBP 575 million. The transaction net is probably about GBP 700 million that we need. So we probably -- we'll put a loan of that size in place. Whether we need at all or we'll do something from cash, we'll play that. But let's say, it's GBP 575 million. So you'd add that to the pre-lease debt, and then we'll then eat into it over the next few years. So at the most GBP 575 million, probably a bit a bit less. The rent saving, have we done the 18 stores, depending on the agreement, GBP 45 million to GBP 50 million of rent? So the interest and that will clearly be materially lower. So that's good from that point of view. As far as being well placed into next year, look, I thought we might get a few questions on next year. And as you can imagine, there's a limit to what we can say. But we're very aware it's a tough backdrop. And it's clearly too soon to be very specific. We do our budgeting process after we get Christmas trading. So we'll come back and give you more detail as we enter the year. But there's some things we do now and some things we don't know, we know it's a rational market at the moment, and we can see people behaving in a rational way. We know we've got momentum from the plan and the actions that Simon laid out in the presentation. So we're in a good position with the underlying momentum in the business. We know we've got a mature Save to Invest program that's delivering and we can clear line of sight of future savings. And there's areas while inflation -- we also know there's going to be more inflation clearly next year, particularly in labor and utilities, but we have some visibility of that. So we're 75% hedged for our utilities for next year, and we clearly got some visibility and a view on labor. So we kind of know what we're dealing with to a large degree there, although still lots of other uncertainty. What we don't know, of course, is the level of demand, which is why we do our budgeting process after Christmas and closer to the financial year. And then that's the big sort of unknown. But overall, we think that's kind of everyone's facing that demand question. So we think we're relatively well placed without being in any way complacent because it's a pretty tricky environment out there. And we're making decisions literally day by day, as you can imagine.

Yes. And then as just come to volume specifically, Rob. So look, clearly, as you say, look, volumes in the market clearly are down. We know that. The key point that I really want to emphasize here is our relative volume to others. As you've seen through the half has been strong and also our relative volume to the full choice supermarkets compared to pandemic, as you've seen, we're the only one that's growing. So the context is really clear. We can see customers putting less in the basket. We can see some trade down happening. And as you described, as inflation has picked up into the autumn, those forces have accelerated. What I would say, and one of the things that clearly we're very focused on is the fact that we're seeing less switching to the discounters. We're seeing that continue as we come out of the half. Our basket sizes are holding up better relative to our competitors. And we're seeing a bit less trade down, too. And I think those 3 components and what clearly is a very challenging set of market dynamics at the moment, we're really focused on those because in the end, they are the tests to what extent our focus on value on our food offer is really working. Clearly, no complacency in that. It's going to be a competitive period after Christmas. I think we're going to see the market behave rationally, but clearly, as customers are absolutely seeking value, everyone is going to respond to that. And so our strategic focus on value on making sure customers trust the price on the shelf in the basket and that we not only help customers manage as they trade down, but also take opportunities to leverage our mix as well. And that's why one of the key points I wanted to just emphasize today, we're seeing that trade down. We're seeing customers shopping to own brands for sure, but we're also seeing customers trade up. And you saw the Taste the Difference performance up 14% on 3 years. And you can see what we're doing at the top end of the mix to really leverage that. If it's helpful, just a word on GM because I think, clearly, we've had a strong quarter 2 in the Argos business, some self-help has really driven that. The weather has been helpful. But for obvious reasons, we haven't seen yet the start of the real build towards Christmas. And I think there's one big area of uncertainty on our mind is just to what extent consumer spending will really pull back and we'll only really get a first deal of that over the next 3 or 4 weeks once we get towards the end of November.

Very helpful. Just to kind of help us understand the magnitude since the summer and the sort of volume fall off. Are we talking a percentage point or so? We think volumes are down minus 1 or now running at minus 2, whatever the number is on a 3-year basis. Can you give us any understanding of how much magnitude is trending?

I mean it's not a significant shift from. I mean, I think look, as the inflation cycle picks up, clearly, customers are responding. And we look very closely at the relationship between inflation up and the volume in the basket. And one of the things I would just draw attention to that I think we're seeing in our demographic and geographic mix is as inflation has gone up, we're seeing a bit less impact on the volume drop out than others. And I think that's a function of both the demographics of the Sainsbury's customer, but also the predominance of our geography base as well.

Our next question is from Clive Black at Shore Capital.

I would just mind asking a few questions about consumer behavior and sentiment. So it's a sort of single question with 3 parts. First of all, how do you see consumers viewing the differential in price between proprietary brands and private label? Is this something that you're talking about and noticing, and maybe your own thoughts about how that differential has changed in recent months, noting one or 2 major branded operators have actually expanded margins recently. And secondly then, some of your competitors have spoken around consumer behavior, things like end of month versus mid-month use of cash. I'd just be interested in the sort of anecdotal of how you're seeing shoppers actually operate in your stores? And then lastly, just a slightly broader piece. Have you seen the shoppers interest in ESG matters. You talked about in your presentation, Simon, adjust as times become more difficult.

Well, let's get right into the heart of how our customers are really behaving to your question. So look, I think on the first point, I mean, just to emphasize and we all get this done, it's really tough out there and customers -- and I said at the Q1 customers are watching every penny. And I think whatever we felt then double plus double what it's fitting like now, literally, every product selection at the shelf edge, customers are watching every panel that they spend. And I think that's playing out in the shift towards own brands. I think it's evident when you stand at the shelf for the own brand products and you look at branded products that broadly half the price. And customers are making choices based on that very clear value decision. We're seeing the shift to own brands and we're seeing customers on those everyday staple, they buy week out, cereals, canned and packaged products, household products, making those choices. And the thing that we're very focused on. We've got a very strong assortment in Sainsbury's. It's something we're very proud of. We think it's a point of difference. And at each of our product tiers, the teams have been doing a lot of great work to make sure our own brand product base is very strong, both at the main tier, but also as I described at the premium tiers as well. So look, I think we're going to see this trend continue. I think customers are going to buy into more own brand products as they see their relative quality and value, and it's something we think we're well set for. In terms of consumer behavior head towards Christmas, I mean, I think, look, it's very clear, as you say, customers are looking to spread the cost of Christmas out. They started to shop earlier and that was both a function of when they're getting paid. So month ends have become more important, and we've been gearing up to take advantage of that. We saw in the General Merchandise business, for example, early buying of things like Christmas gifts and Christmas decorations way earlier than normal as customers look to try and bring some of that spend forward. And you can see in the market data how month end particularly has become a real planning point for customers. We've seen that at the end of October. We'll see it at the end of November, I'm sure, and we'll see it as we go ahead. Specifically, just in terms of in the Argos business, one of the things about the range in Argos really is we have a whole bunch of products that help customers save energy. And so we've seen a huge increase in the amount of energy saving products, whether that be electric blankets, whether that be air fryers, whether that be air. And we've had very good availability to be able to really take the opportunity of giving customers access to those products. And look, we look, as I said earlier to James and Rob's question, it's really hard to call the GM demand for Christmas yet. I think we're not going to know that really until the end of November. But it's inevitable, isn't it, that the impact of just how tough it is going to play through. The question is to what degree we think the value in the cost brand particularly should be helpful to us and the momentum we've got on availability is clearly important, too. And then just on your point on ESG, Clive. Look, I think let's really talk about what customers are talking about. They're talking a lot about plastic. Plastic and the amount of plastic in food packaging went through a pandemic or everyone wanted to see products covered again for obvious reasons. And it's a big focus for us. We're very focused on how we take as much plastic out of our product base working very closely with a number of key supply chains and how we do that because these are big structural, as you know, changes that need to happen over a period of time. And then the other big area of focus for us is being food waste as well. And we've taken back dates off a further 100 of our products where there's no compromise on quality. And we're doing everything we can to bring down food waste and also help customers to bring down their own food waste to as they live to make the most of every penny on food that they spend.

And then just a follow-up to that, Simon. You say customers accounting every penny. Do you sense as a risk, if that's the right term, but coming into Christmas, we'll see people maybe really prioritize food and beverage as some related to experiences and which may lead to a very weak gifting or artifact demand?

Well, look, I think, as I said, I think it's early to see on the gift side, but I think it's inevitable people are going to prioritize their spend, and I think they're going to prioritize their spend actually on food and beverage at home. I think we've got a World Cup just before Christmas for the first time. And I think that's going to be a bigger home occasion. I think people are going to want to buy food and beverages to drink and enjoy a home with family and friends. We're gearing up for that. There's a lot of focus on the cost of living on watching every penny. But I think customers will look to want to treat themselves this Christmas, particularly in food. And that's why our focus as a business on Taste the Difference is going to be a really key part of our Christmas plan. Customers are going to want to enjoy themselves this Christmas, but in a way they can afford. And so we've got 300 new, as you've heard, Taste the Difference product, a big focus on innovation. So helping you to enjoy Christmas and the way you can afford it, same with the World Cup. We're seeing spend in restaurants really come off the last few weeks as customers spend more time and make their budget stretch further at home. And we're gearing up for all that. And look, on the GM side, I think it's inevitable spend on gifting will be less, but it will be on the kids and it will be on making sure that there's great value and experience in the gifts that people buy. And you'd expect me to say this. We think we've got a really strong range of products to do that. This time last year, availability was a big challenge in General Merchandise. Basically, we're in better shape. So as customers pull their spend earlier, we've got to be ready to make sure we can serve them and help them when they want to shop.

Well, I hope you're set up for Wales to be England in the World Cup and not be shocked when Iran beat England as well. All the best.

I couldn't possibly comment on those predictions, Clive.

Our next question is from William Woods at Bernstein.

2, please. The first one is just as part of the Food First strategy, you've obviously continued to kind of underinflate the market to improve relative price perception. Do you think that this continues to be necessary? And do you have kind of a relative pricing level in mind that you're looking to get to? And then the second one is just on kind of H2 margins, obviously, H2 should be seasonally stronger in terms of profitability. And would you expect the same year -- same this year even if demand is weaker and should we still see those kind of better margins?

Well, let me pick up your first question on Food First and where we are on value and Kevin can perhaps help us on the second half margins. Look, I mean, the fundamental principle of our Food First strategy was to improve the competitiveness of Sainsbury's. And clearly, as you can see in our results today, that's really working for us. It's working in improving our relative volume market share performance compared to others. And it's working in building the trust and loyalty of Sainsbury's customers in the value offer that we have and in the broader product offer that we have. So we're really clear, it's a key part of our strategy. And as you know, our cost program and the work we've been doing on our negotiations with suppliers are a key part of our self-help to underpin that. That being said, we think this market will continue to behave rationally. We want to make sure that we present our offer competitively within that context. And so we've said before and I'll say again, we would expect to inflate 1% to 2% behind the market, but we'll focus on our value investment into those parts of the shopping basket that really matter to customers. And we were clear upfront that center of the plate really matters, meat, fish and poultry, fruit and vegetables. And as we've deployed our value investment GBP 500 million over 2 years into these areas, it's really working for us. So it's giving customers confidence that if I can buy those items in my shopping basket at even better value than I thought than I'll shop the rest of the store. And that's shopping the rest of the store is really important because, of course, we've got this assortment in Sainsbury's that we're really proud of and customers really want to buy into. I've talked about own brands there. I talked about Taste the Difference. And so our focus on value is win the center of the plate, inflate behind the market in a market that we think is rational and use our cost-saving program to continue to be able to drive that strategy forward. Kevin?

William, on the H2 margins, we would anticipate year-on-year that we will have lower margins in the General Merchandise business largely. And that's a mixture of rate and demand. And obviously, they interact because if demand is lower than we expected, we'd expect people maybe would try and trade a bit harder and then we'd see rates. So it will be in the mix there, and we'll be able to tell you more about that after we've gone through it. But that's our working assumption year-on-year, which probably is a surprise.

Our next question is from Xavier Le Mene at Bank of America.

A question, if I may. Just on Price Match, actually, can you comment where you are with Price Match and showing some color about the performance you've got. So the percentage of your sales, is it increasing year-on-year on what is the plan going forward? The second one, just technical, but what the impact on fuel on your retail profit, actually.

Well, I'll let me pick up Price Match and Kevin might want to speak on field. Let's try to answer your questions for you as best as we can. So look on Price Match, it's a key part of our value platform, as you know. We're well -- this is a very mature program for us now. And as I said in the presentation this morning, it's really working for us. So 240 products in our Price Match. One of the elements that I would really draw attention to is the fact that our Price Match is very geared to fresh food. And when you look at what we're doing here, it's all about the efficient poultry. It's all about fruit and vegetables. It's all about dairy and the products that customers buy in high volumes regularly. And the key component of our Price Match focus is that when customers look at these products, shelf-edge or online, every time they shop, they get real confidence that our prices, parity, with Aldi and Lidl. And that's a really important point for us to make. And it's really working for us. So 240 products today, you'll see us as we head towards Christmas, make sure we maintain the strength of our competitive offer and the volumes in those categories where we have anchored the Price Match clearly have increased as we put more through Price Match. Kevin?

Just yes, on fuels, Xavier, it's category is performing well for us. We're pleased with the performance. We're gaining share against the supermarkets and against the majors and we're growing volume. So that's really good. And we think of it as one category among a range of categories. And it's interesting as the industry has moved away from incentivizing fuel, you see fuel promotions in fuel than you would have seen in the past to incentivizing fuel largely, which again isn't a surprise, I guess, given the pressure on people's wallet as we said. And if we put it in the scale of things, it's similar to sort of frozen food in our business as far as sort of category contribution. It's performing well, and it's helping us balance the better value that we're giving customers across the range.

And just say, just last point, just to help on your question on Price Match. As I said, over 90% of the volume of Price Match is in fresh category just to really emphasize the point about where all the investment is going.

Our next question is from Sreedhar Mahamkali from UBS.

A couple of questions. First one, I think, Simon, you said you've got a good picture of costs. You said 75% hedged on energy, good view on wages, et cetera. And you've also talked about significant ambition in cost-savings. As you look forward into next year, do you see these cost headwinds that you clearly have a pretty good idea of, will they be playing a draw versus they stepped up cost-savings, do you think? Or is that not quite how we should think about? That's the first one. Secondly, going back to GM, you've talked about a very different profitability profile at Argos and GM. A couple of short questions there. Can you talk to any contribution to profit in GM in the first half? Did you grow profit from GM in the first half? And for the full year and into next year, how strongly is GM profit contribution tied to sales versus self-help? I know sales is always important, but I'm just trying to distinguish how the model worked historically versus how it's working now the point you made about leverage being a very different dynamic now, especially at Argos.

Well, let me start by just trying to give you a greater sense on the cost and then Kevin, let's talk about the GM margin. So I mean just take half a step back here. As Kevin said, I think, look, it's too early to talk about next year. And I think as you'd expect me to say, we need to wait for the outturn of this year because a lot could happen between now and the beginning of next year. But that being said, I just wouldn't want to emphasize, we believe we're in a strong position for really 3 reasons. The first is we have a mature cost-saving program now. As you know, we started this over 2 years ago now. And we've been very focused as a team on structural cost out of our operations and on opportunities that we think we have in front of us that others either don't have or have already exercised again. So first point to make is that we think we've got a lot to go out here. Second point to make is that we've got clear visibility as you've indicated, clearly, in utilities and energy costs, but also in labor costs as well. As Kevin said earlier, we're fully hedged in energy this year. We're 75% hedged next year with clear line of sight clearly as to where that hedging is and what we're also seeing in terms of our plans on labor costs as well. So I think that visibility is enabling us to plan for what we need to have in place next year. And look, clearly, operating cost inflation is bigger, much bigger next year than we've seen before in those areas, but we can see the direction of travel and we can see the cost plans we need to have in place to make sure we're on the front foot here. And I think the other point to make is that our momentum in cost-saving, we think is strong, and we're clear about how we're going to continue to accelerate it. And then just moving on to the Argos point before handing to Kevin. Look, I think the Argos cost program, cost transformation program, and I would broaden it to customer transformation program, we're really encouraged by. You can see the performance in terms of our relative market share improving. We're taking cost out of the Argos business, but we're also growing market share as we do it. And as you know, as we've effectively deployed heart and lung transplant on the Argos distribution and fulfillment model, we've been able to improve our customer metrics. And therefore, that operating leverage in the Argos business is here to stay because we've structurally taken so much cost out of the business. Kevin, in terms of our GM margins anything you want to add.

Sreedhar, I'll just draw your attention to Slide 34 in the package, which just shows what we've done with the cost base and the operating profit. We're pleased with the performance in the first half of Argos from a profit point of view. It's growing versus '19/'20. It's down versus last year, as you'd expect with volumes down. And of course, costs out are critical. And another little anecdote for you. We start in both the business we have about 725 stores. Today, we have about 725 stores with 415 of some -- 414 of them are in our own stores, so effectively rent and rates free. So you can see massive focus on costs. We've also had a big, big focus on margin discipline we've talked about before, which is very important. But of course, sales clearly are critical in any retail business, an element of fixed cost that we will always have. So we need to hit the sales. It's a combination of all those things, but real cost discipline, real margin discipline and then driving sensible sales behind that.

Our next question is from James Grzinic from Jefferies.

I had a couple of questions. The first one is on -- just really on costs. On hedging, on utilities, can you perhaps help us because, of course, you might have visibility, but the level may not be good depending on where spot will be next year. So can you help us understand at what levels you're hedged for most of next year? Secondly, still on costs. We've seen one of your peers introducing GBP 11 level, core starting wages. You're talking you're well covered on next year on labor. Can you perhaps help us understand, I think you're 125 were you thinking going to be setting for next year on wage. And I guess, thirdly, where do you think the mix of margin will develop next year given what you said on fuel, are you saying in terms of consumer behavior? And perhaps to summarize it, I guess, if you give us a sense of where you think OpEx inflation will be for your cost structure next year. Growth of this cost saves, of course.

Let's try and navigate through all of those questions. So I mean, look, I think we've given you as much as we can give you on hedging. But Kevin, let me just check with you on that. I'll then cover wages and let's come back to the next question.

We're inevitably going to disappoint you with our answers here, as you can imagine.

I expected that.

But look, on hedging, we've hedged, we believe, relatively well. Clearly, we're not going to give the rates because that would be competitively sensitive. Utility will cost more next year than this year because clearly, you just need to look at the price curves. But the important thing is we have visibility. We kind of know what we're dealing with, and therefore, we can take actions to set it. One thing I would say, coming into next year, we have about 1/3 of our electricity will be long-term contracts for wind and solar, mostly when vast majority wind. So that does help us. And these are contracts that we've signed some of them a number of years ago, some of them more recently. So that gives us an underlying chunk of our electricity and we're a big electricity user, as you'd imagine. So that's helpful. That's probably all I was going to say.

Sorry, Kevin. Can I just ask you a follow-up on that point? So if you can help us further. If we think about your total energy cost, how much electricity is, is it 50-50?

No. electricity will be more than gas, but we'll have a 1/3 of that. As I say, we get from the electricity from new plants.

Let's talk on wages then, James. So look, I mean I think just take off a step back and then look ahead. Look, clearly, as you know, we've taken a leadership position in the industry on colleague pay. We feel very strongly about our teams have done and continue to do a brilliant job serving customers, and you can see that playing out in our continued strength of service performance. Now look, I think it's no accident, right? We want to really focus on supporting our teams, particularly at the moment when the cost of living challenges are really impacting everyone. And so that's why we made a second pay increase this year. We were the first to do it. You'll remember at the beginning of this calendar year, we were the first to announce our move to our new rates in March and then we've gone again in September. To your question, looking ahead, look, I think this is clearly an industry-wide an issue. Everyone is looking at how they're going to be handling pay rates going forward, as I've just indicated. It's one of the things we've been thinking about and planning for, for a long period of time. When we think about our labor costs, we talked earlier in the year, around GBP 4 billion of our cost are in labor. And so it's one of the first things we clearly look at in our planning of cost. I'm not going to share with you now our plans on colleague pay into next year. But I would say with clear visibility of our plan. We've been planning for it. And when I talk about our cost-saving program, I would just come back to kind of 3 components of that structural cost out. We're ahead of where we expected to be at this point in time. And so as we play forward, those benefits are now in our cost stack. Secondly, we're very focused as a team on productivity in our operations. And clearly, lots is happening about how customers are shopping differently. For example, more customers are self-checking out or digitally checking out. That's helping us to relook at our productivity in our operations. We're seeing less customers shopping online than we saw certainly at the highest of pandemic and even at the start of this year. So as more customers come back into store that helps the economics of our operations. You can see in our presentation today, we've actually won or attracted back more of our customers into store than our competitors. Our fulfillment costs come down as we do that. So the reason I draw attention to that is, there's clearly a lot of inflation in wages, but there's also a lot of operational self-help and customer behavior change that's in our planning for how we think about that. And then look specifically on next year, and apologies for the repeat on this. I think that the kind of position that we see here is it's just too early to call the components of next year's outlook yet. We'll learn a lot over the next few months. But I would just come back to, again, the 3 fundamentals, which is we've got a lot of good momentum in the business. And we're really focused as a team on our performance and on our delivery of profit performance, particularly, you can see that in the rate of our profit accretion since '19/'20 in the first half. We've got a real focus on our cost-saving and transformation programs. They're on track, and in some areas, they're ahead. And we've got clear line of sight of what we're doing on the next phase of those programs. So the outlook has got a lot of challenges in the macro, but we think we're well placed to navigate those.

James, just maybe just to give you a little bit more help on the last question. It's roughly 80/20 electricity/gas, but to some to be a little bit academic because we're both -- we're hedged on both and obviously, they're very linked the price of gas feeds into electricity.

Our next question is from Nick Coulter at Citi.

Apologies, I have 3, maybe I could go one by one, easy process. Firstly, on energy, would you be able to share the broad rate of inflation that you've seen on utilities or energy in the first half just to kind of give us some anchor to the debate? And then I guess, a quick supplementary on that, on the nature of those long-term contracts, are they fixed or are they index linked? How do they work, please?

On that, Nick, I mean, no, we won't share, unfortunately. We just think it's giving too much information to start breaking down our cost base and -- that we've incurred on utilities. And those contracts tend to be between 10 and 15 years and largely fixed.

Okay. And then secondly, on -- I know the demand environment is bad, but how do you plan your Argos inventory for peak, please? Obviously, you were talking to high single digit sales declines for the year at the start of the year. There's clearly inflation in the mix. There's better availability, easier supply chain. So how should we think about how you're approaching peak from an inventory perspective? And it would be great to get your thoughts on the dollar impacts coming down the track in general merch as well.

Maybe I'll just pick up on inventory, and Kevin, I'm sure we'll want to add to this. And I think that we think we're in good shape, Nick. I think obviously, a lot of interest in the market on the relativity of stock positions in General Merchandise retailers globally over the last period of time. And I would say that one of the things that we've been very focused on as a team is the rigorous management of our stock, making sure we've got real line of sight as to where it is, what's onshore, what's off dock, how we're prioritizing fast-moving product within our range. And one of the features of our improvement in availability has been our improved processes and how we've been managing this across our logistics and supply chain and commercial teams. And so I think no complacency in anything I said there. Clearly, we're pleased with our market share growth in General Merchandise, you can see through the first half, how that's built, that's built off the back of both weakness in last year's numbers, some improved weather, but importantly, structural improvements in how we're managing availability. And of course, it's one of the key points of focus for us to make sure that we're stocking effectively to our forward plan. And so as we look at how we're trading, the momentum we started the second half, we think we're in solid shape there.

Are you kind of risk -- on a risk offer, you kind of being conservative and willing to miss sales, or how are you approaching peak? How do you think the industry is set up just clearly Walmart and Target weren't set up appropriately?

Well, we think we're well set up for peak. I've never over complacent about that. These are typical times, as you say, but we're in a strong place. We've got stock where we need it, and we gear up for actually some of the unique characteristics of the pre-Christmas build. We've spoken about the World Cup coming just before Christmas. Obviously, a Black Friday, where customers are going to want to really buy into products this year and really get value. And so all of our plans have taken into account the best view we can see. For obvious reasons as you'd expect me to say what the top of customer demand is and what the bottom of that, we'll find that overcoming weeks, but we're well prepared for it.

Just to build on the dollar. The -- clearly, we don't know if we've got it right, and we'll tell you after Christmas, but we're also mindful that there's some -- there's good stock and bad stock. And there's some stuff if we're buying it now, and we've bought it on all dollar rates to come on to your next question, if we had to winters and sell it later, that will be fine as the clearly the presenters, you wouldn't want love of it around. So we play all that, as you can imagine. Just on the dollar hedge, no impact on the dollar -- no impact for this year, as you can imagine, because we have bought forward. For next year, more than half of the dollars we need for next year, we think we bought and I can't tell you what the rate is, but you can imagine it's comfortably above what's in the marketplace right now. But another point, it's probably worth making because I think people assume that if the dollar goes down, that affects Argos profitability, it may affect harvest profitably, but not in the way I think people think because clearly, it will affect the cost of the product and therefore, it will affect the cost that we're selling in that. But like everyone in the market, we'd have to adjust the pricing versus the dollar. And if we're hedged a little bit better than others, then we can be more competitive for longer, so that's good. But where it will affect, of course, is demand. So as dollar weakens and prices go up, will affect demand. The good news is that freight is going down. So that's helpful in the marketplace, and we're seeing where we have freight inflation, we'll have deflation in freight. So that's helpful. So in the mix, I think the real question will be what will it do to demand?

Yes. No, I think that's fair. Again, just a quick one on Nectar 360, which looks like a real bright spot, and it sounds very encouraging. Are you able to share a profit figure for the half, please or some sense of how you're going through that curve to the raise target?

Yes. And I mean, as you know, I'm going to say we don't split out Nectar profitability specifically on its own. But to your first point, we're really encouraged with the progress on Nectar and Nectar 360. As you've seen in the half, we've gone through our GBP 10 million first target for Digital Nectar collectors. And actually, the platform of Nectar 360, we're really encouraged with how that's building. I think from a macro perspective, as we see the cost of advertising in the market really picked up, I think, more and more is the opportunities to use Nectar 360 is a way of directly reaching on the personalized way customers. And so you've seen that we've upgraded our expectations in terms of profitability over the next period of time. And that's just a function of the fact we're now working with over 700 suppliers momentum really picking up. Our team have done a fantastic job in this area to really build out our capability.

Our final question is from Victoria Petrova at Credit Suisse.

My first question is, if we look at your cost-savings versus extra costs, is it sort of fair to assume that you are saving around GBP 250 million per annum now this year and next year, probably and are running at around sort of GBP 260 million to GBP 275 million, maybe GBP 280 million extra costs with a similar split to your competitor when we look at labor versus energy? Is it fair to assume any comment would be extremely helpful? And my second question is, do you expect underlying profit before tax to be up or down next year?

It's clear. It's Victoria. Look, I hope we've given you as much clarity on the shape of our cost program. And I guess just maybe before passing to Kevin, on the relative scale of our cost-saving program compared to other listed retailers that have similarly put their cost-saving target out. You can see the scale of what we're doing over 3 years at GBP 1.3 billion compared to what we were doing before more than twice the rate. And you know that inflation is clearly higher in the business than we had before. But it's the fact we have the cost-saving opportunities in front of us still to go at that we don't think that others have in the same way that we think is a very important underpin of the size of this cost ambition. I'm not sure we can do a lot more to break out in any more detail. But Kevin...

It's clearly more material. I think, Victoria, picked up your question. It's more than GBP 400 million in the year.

That was our final question, so I will now hand back over to you, Simon, for closing remarks.

All right. Well, thank you very much, everyone, this morning for joining us. And I hope the presentation is useful. It's been great to hear your questions this morning. Thank you for all your interest, and we look forward to catching up with you over the next few weeks. Thanks look again for your time. See you soon.