J Sainsbury plc ($SBRY)

Good afternoon, ladies and gentlemen. Welcome to the Sainsbury's plc investor presentation. review Investor Meet Company platform. [Operator Instructions] I would now like to hand you over to James Collins, Director of Investor Relations. James, good afternoon, sir.

Thank you very much for joining this afternoon. Thanks for the introduction. As I said, I'm James Collins, Director of Investor Relations. I have my colleague, Amy Morgan, Head of Investor Relations, alongside me. What we're going to do today is in hopefully relatively short measure. We're just going to do a little bit of an introduction in terms of just where Sainsbury's is strategically. Hopefully, as a business, we're quite well known to most of the audience. But just a few kind of topics in terms of where we sit strategically and what our priorities are. We'll also run through the results, the full year results that we covered that we published last week, which covered the year to March 2026. And we'll talk a little bit about how we're feeling about the current environment as well because obviously, we covered that in our outlook for the year ahead. So moving swiftly on. So first off, just this is the strategy that we laid out in February 2024. It was a period -- so in February 2024, that was just at the end of the first 3-year strategy under our current management, which was our Food First plan. And we're now 2 years into the second plan, which we call -- next Level Sainsbury's. There was a lot of consistency with the prior plan in terms of what we talked about here. So across the top here, that's the business' purpose, so making good food, joy for accessible and affordable for everyone every day. Looking then at the kind of priorities that we have as a business, the kind of key things on that strategy. Number one, we aim to be the first choice for food for customers in the U.K. So our objective was to attract many more people to come to Sainsbury's as the first place that they choose for food, but also to make sure that we're doing things the right way. So also play a really leading role in creating a sustainable food system in the U.K. That's not just an objective in terms of making sure that we're doing things in a way that customers would expect us to. There's also a real commercial imperative here because food security is more and more of a challenge in the U.K. and making sure that we have a really resilient and thriving food system supporting our supply chains is really important. So that was priority number one. Number two is building a world-leading loyalty platform. So Nectar is our loyalty scheme, and that has a really important role, firstly, in terms of how we engage consumers and how we reward loyalty and recognize and deliver personalized value to customers, but also as an additional revenue stream where we take the power of our first-party data, the knowledge that we have with customers, and we help our big FMCG clients to address those customers in a very targeted way. more Argos more often. Hopefully, again, you'll know the Argos business. It's the second biggest general merchandise retailer in the U.K., a big retailer of consumer electronics, homewares and domestic appliances, toys and seasonal items. And that business has been quite challenged in terms of the kind of sales and profit trend, but particularly the profit trend. And we're really focused on making it more relevant for more customers more often. So it's a very well-known brand. Lots of customers use it, but not frequently enough. And so we're working very hard on the digital proposition and the range in order to make it more relevant to more customers. We've had some real success with that in terms of customer numbers and volumes in this last year. And then last priority, S investor win, really important part. we do compete in a very tough and very competitive industry. It is important that we try and keep our cost base as tight as possible. And therefore, in this current 3-year strategy, we are targeting GBP 1 billion of cost savings, operating cost savings, that is. And we call it save an investor win because it's not just about taking costs out. It's about investing in infrastructure and technology in order to make sure that we're doing that in a structural way that permanently reduces cost. And as I say, technology and the right digital platforms are a really important part of that. So that's the intro. In terms of what that delivers in terms of the financial framework, this again is something that we set out in 2024. This leans into some of the objectives that we'll talk to later and some of our commitments. So our objective is that we turn food volume growth. So we aim to grow food volumes versus -- we aim to grow food volumes versus the rest of the market. If you link that to a reduction in our cost base and making sure that we are remaining competitive, both in terms of value, in terms of quality, in terms of customer service, we think we can get that balance to deliver profit leverage from sales growth. So ultimately, over time to grow profit higher than sales. The next kind of key priority from that is we take that robust profitability, that sort of good kind of steady growth in profit over the medium term and put that alongside very disciplined capital investment to deliver good, sustainable, strong cash flows and also aim to improve our return on capital. We then take those strong cash flows and we have a very focused capital allocation policy to deliver enhanced shareholder returns. So we're not going to give a great deal of detail in this presentation. But broadly, we aim to deliver at least GBP 500 million of free cash flow every year. Roughly GBP 300 million, a bit more than that goes on dividends, where we have a progressive dividend commitment. So the commitment that the dividend will at least be flat year-on-year and ideally rise year-on-year every year and then to return additional free cash flow to shareholders, which we've done over the last 2 years in terms of share buybacks and where we've promised another GBP 300 million share buyback this year. So over the last 2 years alone, we've returned GBP 1.3 billion of cash to shareholders. And we're talking with dividends and this year's buyback another GBP 600 million. So it's a really important part of our investment case. I'm just quickly going to cover the results that we published last week. So obviously, grocery is our biggest business by a very substantial amount, both in terms of sales, but particularly in terms of profit. And last year, our sales in grocery grew by 5.2%, slightly lower in general merchandise and clothing. That reflects the fact that we are deemphasizing general merchandise in a lot of our stores and putting more space into food and making our food proposition better. Clothing continues to grow very strongly. But overall, that balance, and you can see the relative scales of the business delivered growth of 5% for Sainsbury's. Within that, around about 3% volume growth -- sorry, 2% volume growth through the year and around about 3% inflation. Argos, you saw lower growth. So we had a strong first half, helped by good weather against poor weather in the prior year. But in the second half, with quite subdued consumer spending, it really impacted sales of big ticket items. And so we grew volumes throughout the year. However, that average selling price was reflected in the relatively low level of total sales growth. Alongside that, lower fuel sales, primarily fuel sales growth or decline year-on-year reflects the movement in fuel prices rather than much in volume, and it's not really meaningful for profit. So as a profit driver, the ex-fuel sales growth of 4% is the more important consideration in terms of driving profit. So then looking at operating profit this year. So actually, it was slightly down year-on-year, so down 1%. And you can see the split of operating profit there showing that Argos operating profit was actually flat year-on-year, but clearly at a very, very low level, a very low margin compared to Sainsbury's. And then so Sainsbury's, in terms of why the profit was down year-on-year, 2 things really. Number one, we had a very high level of operating cost inflation courtesy of 2 big things. Number one was the higher national insurance contributions that the government put through in the budget of last year. So that cost us GBP 140 million, just basically a cost of employing people, and we are a business with about 141,000 colleagues. So that was a big cost for us. And additionally, there was a new packaging tax called EPR, which again was another cost that we and the whole of the industry needed to pass through. Now that was largely passed through because together, those were more than GBP 200 million of costs, but not fully passed through in a year where you also saw quite an elevated level of competition with -- sorry, with trying to reestablish a pricing gap in the industry. So it did sharpen the amount of value investment that went in. So a small decline in operating profit for the year. Just worth touching on the guidance in the box on the right-hand side. So we have guided for the year ahead. We've guided quite a wide range of outcomes this year, and we've guided with, I think, quite a bit of protection on -- or cover on the downside. And this is because there are a lot of unknowns ahead of us from the conflict in the Middle East and the impact that, that will have on consumers in the U.K. economy. Therefore, our central case, our central belief is that we will grow operating profit this year from that 1025 base. And actually, we expect to grow it from a slightly higher base, including financial services. So we -- our central case is towards the top end of that range, but we acknowledge that there's a lot that we don't know in terms of what happens with the conflict in the Middle East and the impact that might have on consumers and the U.K. economy. So that's reflected in that number. So just kind of standing back and this is a chart that we use a lot just kind of describing our priorities and the way that we think about the environment in which we're trading. And the first 3 blocks on, if you like, on the left-hand side of the chart are really the focus, the nuts and bolts of what it takes to be really good and compete, as I said earlier, in a very competitive industry. So strengthening our competitive position is obviously not only about value where we've really repositioned our price position over the last 3 years. and 2 years before that, but also making sure that we are delivering the best range and the best availability to customers where we are making investments in our stores to bring more fresh food range in and deliver the best of the Sainsbury's range to more customers in more locations. And alongside that, alongside value, the Sainsbury's brand is associated with quality. It's associated with interesting and innovative products in private label. And so premium private label through Taste the Difference is really, really important. And we've had some fantastic growth, good double-digit growth now for the last 3 years in that. And that basically is enhancing both the sales, but also to margin versus standard private label products. But then on the right-hand side, this is the balance where we do make choices to invest both capital and also revenue expenditure in making sure that we are basically building a really strong business for the future. So investing in loyalty and the capacity of our retail media business, where we monetize some of that customer data that we have in terms of helping FMCGs access those customers through retail media. That's an investment for us where we make really good returns. So that's really important. And then the last 2 blocks are where we are -- I talked earlier about investing in technology and in infrastructure in order to make sure that we save money, but we save it in a way that is -- that doesn't impact the customer experience. So in a business which is very heavily on labor costs in replenishment, in checkout, et cetera, more and more of that is being done through technology. And likewise, where we have very significant logistics and infrastructure costs in depots, we're introducing more automation. We're introducing a lot of machine learning and AI in terms of the way that our supply chains work and all of those are improving our cost base, reducing stock and working towards delivering that GBP 1 billion of cost savings that we've targeted over the 3 years. Just covering a few of those pieces that I talked about on the left-hand side of this -- of that chart. So value, super important. This shows our price position versus our key competitors. One of the key questions that the market had for us over the last year was Asda is or was very public around about a year ago about its intention to kind of really make some headway in terms of reasserting a strong price position versus the rest of the industry. As you can see on the right-hand side, actually, we maintained our pricing position versus Asda and versus Tesco, our 2 biggest competitors over the course of the year. And in doing that, we actually sharpened our pricing position versus Little and Aldi and Morrisons. And that partly reflects the fact that when we do make price investment, we're very, very focused. So we're focused on what we call center of the plate items, so meat, fish, produce, -- and what that does is we clearly invested some money there, but what it's delivering, as you can see in this chart here on the left-hand side is that we, in the last 5 years, have won significantly more primary customers in the market than anybody else. Our primary customer is a big basket customer who does the majority of their shopping with us or more shopping with us than they do with anybody else. And so our objective in this in sharpening our value position was through making sure that we're super sharp on the items that matter most to customers, they have the confidence to shop a fullrolly Shop with us. So that was value. But alongside this, I talked about Taste the Difference. So Taste the Difference has been the fast-growing premium label in the market this year and I think the year before. And that's from a position where it's already disproportionately high as a percentage of our sales. So it does reflect where the Sainsbury's brand sits in terms of sitting more in the South and Southeast, having a slightly higher average affluence of our customers. And right now, this is important because when consumers are worried about the cost of living, we are seeing quite a bit of benefit where people are trading out of eating out in restaurants and pubs and looking for premium food that they would eat at home instead because it's a cheaper option versus eating out where inflation has been much, much higher than is the case in retail. And you can see that, that's been really successful for us over the last 5 years where we've broadly doubled the size of Taste the Difference. And as well as we talked earlier on about taking costs out of the business, but we are super focused on making sure that we continue to deliver really good service. And so this metric shows that Sainsbury's customers consistently rank us above customers of other big businesses. And this is in all aspects of service. And so that's really important to us. And we've had really strong improvement on a lot of those key metrics over the last year, including value for money, which in a year where inflation was quite high, is a good metric. And I think reflects some of the longer-term progress we're making on value because it takes quite a while to feed through to customer perceptions. So that's super important. I talked about the primary customer stat earlier on. And I talked also about the fact that we are aiming to bring the Sainsbury's proposition and the best of the food offer to more people in more locations. So we're investing in releasing more space for food in our existing stores. And we've done significant work in 70 stores over the last 2 years. We're doing another 30 in the year ahead. And where we do that, where we add more food products and become a better food store, we are outperforming the rest of the estate, improving our trading intensity. And so this is a really core part of what we're doing. And in a very targeted way, we're also adding new stores. So in the last year, we've added 10 supermarkets, tend to be quite small supermarkets, and they're primarily where we're buying competitor sites where we bought some from the co-op but also converted some former home-based stores. And we'll be doing a similar level of new store growth in the year ahead. We are a big business, but we are second biggest supermarket in the U.K. and there are significant numbers of locations where the Sainsbury's brand doesn't exist. So we do have quite a few opportunities on a very selective basis. And the consequence of all of this, if you look at our market share, so really since we had a management change and the Food First strategy in 2020, we've made some good headway on market share, a bit of interruption through the kind of COVID years where we had a big ramp-up in 1 year and then flattening out. But you can see the progress that we've made in the last 3 years, in particular, where we are consistently growing volume ahead of our competitors. and that is reflecting broad gains from across the market. And as I said earlier, impacting or benefiting from getting a lot of those big basket customers, and that's really vital to the progress. And I think Amy is going to cover a couple of the other bits of the business shortly. But just looking at this last year, just an important bit of context here. So industry volumes in the industry, as you can see, is the purple line there in the market. They have slowed in the second half of last year. So they were -- they benefited at an industry level from better weather in the first half of last year with very good weather across pretty much all of the spring and summer. And then in the second half of the year, I think what you're seeing is a bit of that weather benefit starting to drop out, but also some impact from consistently high inflation. So typically, you'd expect industry growth -- volume growth to be around about 0% to 1% and inflation to be 1% to 2%. Inflation has been at elevated levels. And I think you're seeing customers slightly trade down and adjust their spending habits to try and dial some of that inflation out of their baskets. As you can see, we've actually consistently performed very well in terms of our volume and extended our outperformance through the second half of the year. I think that partially reflects the nature of our customers, plus also, I think some of the organic self-help where we are continuing to win share from competitors as more people trust us on the total value proposition over time. So that's a kind of cool run through Sainsbury's over the last year. I think Amy is now just going to give you a bit more detail on Nectar.

Yes. Thanks, James. So our Nectar business has 2 elements. It has our customer-facing loyalty scheme and our Nectar 360 Retail Media business. Our customers really love Nectar. They're engaging more and more, and they're getting more value than ever. And so through our Nectar Prices, which is on more than 10,000 products, they're saving almost 20% on a typical big weekly trolley shop. And then they're increasingly benefiting from your Nectar Prices, which is our personalized value offer, which is selected for them on a weekly basis. And the strength of this great value that customers can access through Nectar has driven a further step-up in participation now at more than 85% and digital engagement with the Nectar app has reached record highs in the year. So this is great for customers, but it's also key to our ability to power Nectar 360. And we believe we're really setting the standard, not only in the U.K. but globally when it comes to retail media. We're already a key strategic partner for more than 900 brands and client agencies, and we're increasingly becoming a first choice partner as brands want to work with fewer, higher-quality networks. Really key to this has been the launch of Nectar 360 [indiscernible], which we launched in the autumn of last year, and it's the U.K.'s most advanced unified retail media platform. We designed it in-house, and it's delivering great returns for clients already. The key kind of differential with this is that it really gives the clients that we're working with great visibility of the returns on their marketing investment. So it makes it much easier for brands to run sophisticated campaigns with real-time feedback on how those campaigns are performing. Alongside this, our connected digital screen network now consists of almost 3,000 screens across our supermarkets and convenience stores, and we have plans to install a further 3,000 screens during the next year. And we continue to bring more value to Nectar customers with more opportunities to -- for customers to earn and spend books across a bigger network of great brands in our coalition. Turning next to Argos. We remain focused on strengthening the Argos business. We're very much investing in the product offer and the digital proposition to make it a business that customers visit more frequently and when they are visiting us buying more. As Jason has kind of already mentioned, it was another tough year for general merchandise retailers with subdued spend and intense competition, but we've made some good progress with higher customer numbers and higher items per basket. And as a result, we grew volume in the year, but this was offset by a lower average selling price, which just reflects weak markets in bigger ticket items and intense competition putting pressure on prices. Looking ahead, you can see some examples here on the slide of some of the different areas of focus. So expanding our range through supply direct fulfillment and the launch of the marketplace later in the year, further strengthening of digital and a greater usage of the Argos app, which encourages further frequency of visits and added value services such as Argos Pay our flexible credit solution and then also driving further cost reduction through the business. And we've actually established a dedicated Argos management team to help accelerate the pace of change. So moving forward these actions and driving further cost reduction, which will support the investments that we're making in Argos-speific infrastructure and technology platforms. And then finally, just to touch briefly on our cost savings program, which, again, James has mentioned to you briefly, but we really see this as a key competitive advantage -- we set out our target to save GBP 1 billion in costs 2 years ago, building on the significant savings that we've made in the prior 3 years and very much supporting our investments in technology and infrastructure to improve productivity and make meaningful structural reductions to our cost base. In a year when we were faced with significant cost pressures, we relied on well-developed programs to deliver savings rather than just find new ways to cut costs. And it really showed through in the consistency of our execution and the customer experience over the year. And if you think back to the slide that we showed on customer satisfaction, you can see that there. So we've delivered another GBP 330 million of savings last year, and we're well on track to deliver our GBP 1 billion target. And I'll just hand to James for some conclusion remarks.

Thank you, Amy. So the -- the outcomes, again, that we talked about when we stood up in February 2024, we're kind of super keen. I've highlighted already the kind of main areas of the strategy. I've highlighted the financial formula. But ultimately, a business like ours, we talk a lot about making balanced decisions. And this, if you like, is the sort of balanced scorecard where this is something that we focus on every single time that we report, and we focus on it internally, and we measure ourselves all the time consistently to say where are we on this journey. So these are the things that we've consistently said this is how we're measuring ourselves. So number one, growing food ahead of the market. We've been doing that really consistently. We're very happy with where we are. Customer satisfaction, actually, you saw the charts earlier on, they look very good. But we know there are areas we could do better. When we get down to some of the granular detail, we know that there are things we could do better. Colleague engagement, very, very high scores. We obviously measure this a lot. There is a huge amount of change we put through our business, but we do really, really work hard to invest in our colleagues. We have led the market in terms of pay. And we additionally really make sure that we engage colleagues in the change that we make and try and deliver kind of higher added value in roles in the business. So that's reflected in good colleague engagement. plan for better. So this is some of our commitments around carbon reduction, around plastic reduction. Again, we've made really good progress, but there are areas where we know we could do better. And a lot of what we achieve here depends on achieving things at an industry level, but it's something that we work hard on from a campaigning point of view and working with the industry and our suppliers. Delivering profit leverage from sales growth. So obviously, earlier on, I talked about the fact that our profit -- operating profit this year has stepped down a bit. So our sales growth was higher than profit growth. So not a good year for that in that year. In the prior year, we delivered very significant profit growth. So that's one where we're not quite where we would have intended, but the industry circumstances have been quite unusual over the last 12 months. And then GBP 1 billion cost savings, we're well on track to deliver those on the 3 years, and we are well on track to deliver more than GBP 1.6 billion of retail free cash flow. That's super important in terms of delivering that good consistent dividend and being able to buy back shares. And then lastly, high return on capital employed. Again, it took -- broadly, it's gone sideways this last year, having made a big step forward in the prior year. But we are confident that still the prospects of improving our returns are very good. So thank you for listening to that. I will now take some questions.

[Operator Instructions] First question, James, I think we should discuss is how long will we continue benchmarking Aldi Price Match? Does there come a time when you feel confident in a pricing proposition, which doesn't reference a competitor?

That's a really good question. And I think it plays to something really important, which is that there is always a very significant lag between the change that you might make in your price reality versus competitors versus how quickly that flows through to price perception. And so with Aldi Price Match, we stood up in 2020, and we admitted that we were not where we needed to be on price, that we were too expensive, and we saw it reflected in the way that customers shop. So basically, customers too frequently were just coming into the shop, just buying a few things that they really want to get at Sainsbury's or just buying a few things because we were convenient on the way home from their office or a school or whichever. But what they weren't doing was having the confidence to shop the whole basket. And so Aldi Price Match was really important for us to be able to say to customers who frankly had observed over a long period that we were not in the right place price-wise. Once we've invested in those kind of really core items to say, listen, you can trust us now on the things you buy day in, day out. So across milk, bananas, breads, chicken breast, mint beef, whichever it is, those kind of core items that make up the kind of the large part of basket over time. And in doing that, giving that assurance, people over time, I think, have trusted us more across the whole basket. And so I think it was really important at the time -- but even then, we introduced that and we kind of really made significant headway in our price position from 2020, 2021 onwards. It wasn't really until '23, '24 that we started to see perceptions on value start to improve or really significantly improve. And so we are still seeing that benefit coming through. So it takes a long time to change people's perceptions. I think it's a great ambition that over time, people will trust us without needing to benchmark and talk about Aldi in our stores. But I think it won't be happening in the very short term because, as I say, there's still that lag. We still know that perception hasn't caught up with the reality of us being significantly more competitive these days.

And I think sticking with pricing and margin, to what extent can we expect to recapture margin in FY '27? Or is the current margin structurally lower due to competitive intensity?

That's also a good question. So I think probably what the question reflects is the fact that our operating margins in the kind of core retail business stepped back last year. And ultimately, our intention is to deliver operating leverage, so for margins to be at least flat every year and possibly rise a small amount. And within our current range of the guidance that we've provided for the year ahead, our belief is that we will grow retail operating profit. That's our central case. Clearly, as I said earlier, there are a lot of unknowns that we don't know how the world is going to shape up and what that means for the U.K. consumer in particular. So that's where we are slightly nervous of being more confident in terms of kind of tighter range of outcomes this year. But as far as we're concerned, the industry, I think, has shown a very good -- the grocery industry has shown a good few years now of behaving very rationally. We've had a lot of operating costs and a lot of cost of goods sold pressure through those that the industry has passed on very consistently. So if the industry continues to behave that way, that should mean we get back to an environment where we should be able to grow operating margins. So I think as long as we're not in a very, very tough situation with the U.K. consumer and a much, much tougher economy, then you should get back to that situation where as long as we're delivering on all of the elements that we talked about, so growing food volumes versus the rest of the industry, saving costs at a higher rate than the rest of the industry, that should give us capacity to get back to margin improvement.

Thank you, James. And another kind of question on the topic of value at this time, asking around whether we are seeing customers mixing value and premium within the same shop and how that is influencing our product strategy?

Yes. We are seeing that. And I think it's a great proof point of the fact that we are helping customers across the whole basket. And so I think it's very important. We don't just have customers who are interested in the premium products. We don't just have customers who interested in those products where we are delivering the kind of the strongest assurance on kind of everyday staples. The reality is that most customers do both, trade up for special occasions and people are really super focused on not spending too much on everyday items. So I think we put a stat in this presentation that -- or in the presentation we did last week that said more than 70% of customers during the year actually had an Aldi Price Match and Taste the Difference products in the same basket. So we're really succeeding with that, and that's really important for us because even on the kind of premium taste of Difference products, we think they're great value. The great value versus some of our high street competitors and they're certainly great value versus people eating out for the kind of same restaurant quality food.

Great. A question here about the long-term farming agreements that we have talked about. What does the kind of pricing and cost flexibility in those agreements look like?

Well, so the really important -- well, there are lots of important aspects of these agreements. And we talked last year about -- sorry, last week about the fact that we are putting in multiyear agreements with a lot of our supply chain across some key products and food types across dairy, across poultry, across beef and some key fruit and veg supply chains as well. So firstly, in putting in those long-term agreements, we are giving the capacity for those producers to become as efficient as possible. It means that they can basically use that confidence that they know that they will have our contracts over the longer term to go out and invest in better technology in better infrastructure, in better milking capacity, whichever it is, basically becoming more efficient. And at the same time, we know that actually people -- a lot of the producers are also investing in better welfare standards because we can give them assurance that we will pay for that and that they can know that they will have us buying that product over the longer term. So that's why it's really important. In terms of flexibility within cost, a lot of the time, we're actually taking out the flexibility on cost, and we're saying to these producers, listen, we think it's only fair that if you are going to invest and commit to us long term, that we commit to a kind of cost of production model. And this works really well for both of us because rather than a conflictual arrangement where a supplier comes and says, well, listen, cost of fertilizer, the cost of feed, the cost of energy is going up, I need a higher price. And we are stuck on the idea that we have a very kind of limited cost price. We basically say, well, listen, we'll have complete transparency where those higher costs exist, we will pay a cost price that reflects that. And it gives a resilience and a confidence and a quality through our food supply chains that we think is really important. So inevitably, there will always be a degree of flexibility in most contracts, but those cost of production models are really core part of a lot of those long-term agreements.

The question here is just around our financial policies. And if you could just outline a few of the different pieces. So in particular, our leverage targets, investment hurdle rates, our policies on dividends and buybacks and then any short-term refinancing needs that we have.

I didn't write down the -- so in terms of leverage targets, we are super clear that our capital allocation framework starts with a leverage target of 2.4 to 3x net debt to EBITDA. And why -- how do we define that range? We define that range because that gives us the greatest flexibility in terms of financing. So that gives us an investment-grade credit rating. So that's really vital that 2.4 to 3x. And that dictates -- right now, we're at 2.6x and that will dictate the amount of cash that we're able to return to shareholders. So that's leverage targets. In terms of investment hurdle rates, so you will have seen our return on capital is relatively low. So I think 8.9% this year. Our intention is that, that will get up into double digits over time. And so when we're looking at hurdle rates for projects, clearly, it will differ depending on the type of projects that we're investing in. But typically, we would expect double-digit returns and particularly when we're looking at some of those longer-term projects building new stores, for example, we'll typically be expecting returns in the teens. So that's hurdle rate. Dividends and buybacks, I think I said earlier, so we've got a progressive dividend policy. So we have a payout ratio at the moment, which is quite high, around about 60% of earnings, but we intend to grow our dividends, our dividend per share every year. And then from a buyback point of view, broadly, unless there is an additional use over and above our capital -- our kind of normal capital envelope, unless there is kind of an extraordinary opportunity with very high returns, we will return our additional free cash flow to shareholders in the form of a buyback. As I said, the core level of buyback in the last 2 years has been GBP 200 million. We've enhanced that last year with additional returns from the sale of the bank, and we're enhancing it this year with another GBP 100 million of bank proceeds. But that core GBP 200 million has been supported now for the last 3 years, so GBP 200 million, GBP 250 million and then it will be GBP 300 million this year. Amish computer died. So I think I'll be asking myself the question.

I think you'll still be able to hear me, hopefully, but no longer be able to see me, apologies. So the next question we had, James, was around Taste the Difference. And if there is a new sales target now we've exceeded GBP 2 billion target.

Yes. So yes, so in short, we're already talking within the business about a GBP 3 billion target. So again, we won't stretch the brand further than is right for the business and for the mix within our stores. But I think we've proved to ourselves, particularly over the last 2, 3 years, -- but when we do innovate, and we have the most fantastic innovation team here internally. So when we introduce new and interesting products, we do have customers who are inclined to trade up and trade into those products. So we've already introduced a tier slightly above Taste the Difference called Taste the Difference Discovery, where we're leaning into some of the products which, again, you typically wouldn't have found outside of a restaurant or wouldn't have found outside of specialty butcher. And we're delivering those at much, much better value than you would find in a specialty shop. So I think we will keep pushing ourselves in terms of innovation and in terms of what we're prepared to offer customers, and we are pretty confident that we can keep on growing that brand.

And then a question about Smart Charge, James. So we talked to growth of 136% in Smart this year. Can you give any more context on the drivers of that growth?

Yes. It's pretty extraordinary growth because we didn't add much by way of new Smart Charge facilities this year. So that was only a very small part of the growth. So we got more than 100% of the sales growth was actually like-for-like sales growth. So i.e., more people charging through our current facilities. And that's just a maturity aspect. So it's not just more people having electric cars, and that will clearly be part of the growth. It's also people getting used to Sainsbury's getting used to the fact that we only have hyperfast charging. So it's a very high-quality charge, very good value charge and clearly very convenient for lots of customers who aren't necessarily able to charge at home. that they can do a really super fast charge whilst they're doing their shopping or take advantage of the location that we're in and also take advantage of Nectar. So we're really making some headway. The other thing we've done, which I think has really helped build the sales and also the profit of Smart Charge is that we're now more linked into some of the networks. So clearly, depending on what type of charging model you have, what kind of car you have and perhaps for big company car users and company van users, we're linking into a lot of those networks, and that's driving a lot of repeat spend. And remember, we -- the vast majority of our big superstores are in very, very good locations, quite often near busy road networks. So they are great locations, not only for people doing their grocery shopping, but also taking advantage of that passing traffic.

Thank you, James. A question now on Argos. So do we still see Argos as a core long-term growth driver for the group? Or is the focus now more on stabilizing performance and extracting cash flow?

Yes, we've been pretty clear in the last couple of years that our intention right now is basically to strengthen the Argos business. So rather than immediately improving profitability or immediately improving the sales trajectory, it's really about strengthening the business, so strengthening the digital proposition in the way that we show up on websites, the way that we show up on the app, where we've made a significant amount of development in the app. So I think -- so number one, in that kind of the way that we show up to customers, but also range. We have a curated range. We're not Amazon with millions of products potentially. but we are basically a more targeted, focused, easier shop with fantastic fulfillment where we can deliver a lot of products same day. We have a huge free click and collect network, but making sure that we have the right range behind that is a big development. So short term, we're not overinvesting because we don't want it to be a business that detracts from the very strong cash flow of the business. And we are clearly at least looking to kind of deliver stable profits while we're doing that. But I think we've delivered stable profits last year. We've talked about our simple case this year being stable profits. I think we would hope to start to see some progress beyond perhaps this year.

Great. Thank you, James. Question here around shrink. So I've seen in the headlines that shrink is increasing at a significant rate. Is that something that we would recognize?

Yes. So just to be clear, so when we talk about shrink as bit of a retail term, we're talking about stock loss and the vast majority of that comes -- some of it comes through wastage where products -- fresh products go off over time, but the vast majority is through theft. It is a huge challenge for the industry. You would have seen as amount of coverage in the press in weeks, months in the last couple of years, both in terms of organized crime, but also customers or frankly, not customers, people either come through violence or through wantingly ignoring self checkouts, et cetera, choosing not to pay for their items. So yes, it is a challenge. It is something which we are addressing in a strong way as we can. And a lot of how we're making significant progress is through technology. So on our self-scan checkouts, we've improved -- number one, we've improved the recognition of camera technology where cameras can recognize what customers are doing in terms of what they're scanning and what they're putting in their basket and perhaps assist those customers if that doesn't quite match what's actually going through the till. So that's produced some very, very good results, and we're using AI technology to kind of marry what's happening at the TL versus what the camera sees. And at the same time, we're the first U.K. supermarket to introduce facial recognition. And this is where we are just extending trials of a system where we have a register, which is managed by a third party of of individuals who have a history of violence or theft in our retail stores, and we recognize them or the cameras recognize them as they walk into the store, and we encourage them or we ask them not to enter the store. And I think one of the kind of key challenges with shrink is avoiding moments of conflict. This is a potential moment of conflicts, but the simple fact that we are addressing those customers, telling them that they do have a record, and we obviously have all the legal aspects in terms of kind of giving that assurance, it's been very successful in terms of those individuals turning around, not entering our store and more importantly, not trying again to enter our stores. So it's having a huge impact. And this is as much about colleague safety as it is about shrinkage because unfortunately, crime and retail violence is a huge impact for us and for the whole of the retail industry. And in doing this, we are effectively introducing a system where if part of the challenge at the moment is that individuals don't see much risk of prosecution or kind of adverse outcomes from shop lifting, then I think that, that is slightly different where we're starting to show them evidence that they are being recognized. They're encouraged not to come to our stores, and we think probably over time, it will extend to more retailers.

Thank you, James. A question here around any plans that we have to grow our vegetarian and vegan range of food, especially in Taste the Difference. And is this an opportunity that we've not fully taken up?

Yes. So well, so number one, in terms of the parts of the food market that are growing right now, it's really interesting. And I think partially reflective of an increasing focus on health, increasing visibility and knowledge of what types of products are good for you and you should be eating. And to a very small degree, possibly as a consequence of GLP-1s, all of these things are feeding into the fact that fresh foods are growing much, much faster than packaged goods. So packaged goods, clearly, a large part of those aren't necessarily the healthiest products. and people are avoiding processed foods to a greater degree these days. So fresh foods are performing better. Protein is a real focus. So that's feeding through to dairy to meat, fish and poultry. And additionally, fiber is becoming a real focus. Vegetarian food, I think I would put this in the same bracket as I would attempt to help customers with more options on fiber, more options on protein. Clearly, all of the constituent parts that anybody with a vegetarian diet or a high-protein diet or somebody looking to enhance of fiber, all those things are available in stores, where I think we have a real role is making that easy for customers. Now I think vegetarian has been a focus for a number of years. And so I think probably our range there is good. I'm interested in the comments about Taste the Difference and vegetarian. -- we'll feed that back to the development team. But I think you will see a lot more development around those areas where, as I said, we are helping customers with those protein choices, with health choices and with fiber choices and making that more visible in terms of what we're doing with our products.

Yes. And I think one thing to build on that actually is that where previously there may have been a trend of vegetarians wanting to eat kind of nonmeat alternatives, so sort of meat products. Actually, people are really looking to scratch cook and they want to be inspired about recipes they can make from scratch where they swap in various pulses or vegetable options instead of meats. And so we've been encouraging that through healthy choices challenge that we run through our Nectar app, which is really driving greater purchases of fruit and vegetables as well.

Yes. And it's worth saying some of those, again, where the industry, particularly with vegetarian and vegan food, tried to help customers with easier choices. And for example, some of those meat products, they weren't necessarily the healthiest. So I think that that's -- we're in a bit of a hinterland right now where we're trying to solve both solutions, so making it easy for customers. but avoiding some of those kind of high -- quite often, a lot of those products were high salt or have a high degree of processing in them. And so again, it's trying to help products without some of those adverse consequences.

I think, James, we've got time for one final question quickly. So just very quickly, the portion of grocery sales that are going through online and what does the trend look like in that space?

Yes, good question. So it's around about 14% of our grocery sales are online. And that is -- post COVID, that number has been gradually increasing. So pre-COVID, that number was about 6% or 7%. during COVID, when clearly a lot of customers couldn't or didn't want to shop in stores, that rose to 21%. It then trailed back to 12% post-COVID, and now we're seeing it growing fast. So last year versus our grocery growth of 5%, online sales grew about 13% -- now about half of that growth is not what we call core conventional groceries online. So the kind of big basket shops that you see delivered in Sainsbury's fans. Instead, it reflects what is the fastest-growing part of the market, which is what we call food on demand. So this is rapid delivery through somebody like Uber Eats or Deliveroo. So we fulfill a lot of those sales through our convenience stores and our supermarkets. It's premium price. The delivery is taken care of through one of those third parties through Uber Eats or Deliveroo or -- just Eat. And it's a kind of fast-growing part of the business for us. And ultimately, what we aim to do is match customers' requirements, however they want to shop with us. And right now, that food on-demand business, we think that we have the biggest food on-demand business in the U.K. So it was a bit more than GBP 700 million of our sales over the last year.

Great. I think that's all of our questions for today.

Perfect. James, if I may just jump back in there. Thanks very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But James, perhaps before really now just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

That's great. And thanks again very much for your time. So I'd just close very quickly to say really our investment case, the investment proposition that we have investors is about good consistent delivery of those strong cash flows and the way that those can flow through to cash returns to shareholders. I think over the course of this year, right now, we're in a position where there are, as I said earlier, a lot of unknowns ahead of us. Over the course of this year, we will be updating the market, hopefully being able to give a little bit more certainty as the situation in the Middle East and what that means for the economy. And hopefully, we'll be able to give a little bit more progression in terms of the messaging that we're giving over time. So happy to update at any time. And again, thank you for your attention today.

Perfect, James. That's great. Thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Sainsbury's plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.