J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Hello, and welcome to the Sainsbury's Analyst and Investor Call. On the call this morning is Simon Roberts, Chief Executive; and Blathnaid Bergin, Chief Financial Officer. I will now hand you over to Simon Roberts for opening remarks.

Well, thanks very much, and good morning, everyone. Really appreciate you joining the call with Blathnaid and I's short notice this morning. Thank you for your time. So I'm going to make just a few prepared comments first. And then, of course, Blathnaid and I will take all your questions. So let me just recap on clearly what we've announced this morning. We've announced an agreement for Swift to acquire Argos. And we've announced this because it will enable us at Sainsbury's to fully focus on the heart of Sainsbury's our core food business. Sainsbury's will be a simpler business with higher margins, higher earnings, higher growth and stronger free cash flow generation. The dedicated Argos management team of course, has already brought a sharper focus to the business and delivered tangible results with the Argos Transformation Plan with improvements to range and the digital proposition delivering volume growth, as you heard at our Q1 a few weeks ago. So we carefully considered what it will take to create the strongest possible future for Argos. The Swift team bring, as you've seen in our announcement this morning, the retail leadership, the operational expertise the technology capabilities and the long-term investment alongside a deep commitment and belief in the future potential for Argos, Argos' customers and colleagues. And having spent a lot of time with Richard Trevor and Matt in the recent months, they really understand and value the Argos brand. They share our values, and we believe they can build on and accelerate the Argos transformation. Argos will continue to trade through its established channels and both businesses will continue to work closely together through a series of long-term commercial agreements we put in place, including that Argos will continue to trade within Sainsbury's stores and income from an ongoing relationship with Argos with Nectar. So coming to the numbers, we expect cash proceeds of at least GBP 120 million. We expect to receive at least GBP 70 million of cash on completion, which we expect to be at the end of February next year, February '27. And the remaining GBP 50 million over the 3 years post completion. These cash receipts are expected to be offset by separation costs, and we expect to achieve full separation within 2 years of completion. In terms of profit, we estimate the impact on underlying operating profit post-separation to be broadly neutral and for this transaction to be accretive to underlying EPS. With income from commercial agreements and reduced lease costs outweighing the impact of dissynergies and the lost profit contribution from Argos. Now as you know, we've spent the last 6 years rebuilding the core strengths of our food business, delivering a return to growth, market share gains and sustained strong momentum. And this transaction we're announcing today will allow us to fully focus on the significant further growth opportunities we see ahead of us in delivering for all of our stakeholders. So I hope that summarizes the kind of key points of what we've announced this morning. So let's now get into your questions. Let me hand back to the moderator. Thank you.

[Operator Instructions]. Our first question comes from Fredrick Wild at Jefferies question.

Thank you so much for taking my questions and congratulations on the deal. So my first question is about the exit conditions. I mean are there any supply chain overlaps to unwind over the next few years? And ultimately, what are the exit conditions of the Argos concessions, if you said we want to repurpose some of the space there that other used over the longer term? And my second question is -- there's been a lot of, obviously, corporate focus on Argos and the change program there. So how does this deal impact how you think about CapEx in the future and how you think about your investment plans? And my third question, if I can get a third one in there, please, is about how it impacts your ownership of the Nectar data? And whether that will all stay with you whether, Argos will still be contributing to your sort of understanding of customers through Nectar?

Okay. Well, why don't I speak a bit to your first sort of question and a half, really in terms of the ongoing arrangements that we've put in place. And then Blathnaid I think can talk about what this means in terms of how we think about Sainsbury's and CapEx. And just more broadly, these long-term partnerships that we've put in place. Look, I think at the very heart of this transaction, one of the reasons we feel so confident this is the right thing to do is, clearly, this transaction has come at just the right time given the momentum we have in the Argos business for that now to be accelerated under new ownership. And in answer to your specific question we've agreed long-term commercial agreements in a whole number of areas, which will provide ongoing income clearly to Sainsbury's as a result of this transaction. So the Swift partners, the team of Richard, Matt and Trevor are fully committed to the Argos model as it is today of Argos store-in-stores, stand-alone stores and the distribution network. That means in hundreds of locations across the U.K. as we have today that Argos will operate inside Sainsbury's. And from Sainsbury's point of view and Sainsbury's shareholders point of view, we should be looking at this as a really good outcome because, of course, the store-in-stores use a very small footprint of space in our supermarkets. In the main, the Argos stores-in-stores are using stock from space-to-store the product. So we continue to take the advantages of the Argos store-in-store collection points in our stores. But clearly, going forward with rental income that reflects the value of being able to be in our stores. So we feel very positive about that. As we've always said, Nectar is just coming to the last part of your question, obviously, Nectar is part of Sainsbury's Nectar360, and we've agreed commercial agreements again. to make sure that the ongoing benefits happen for Argos customers. But clearly, as you'd expect, we've agreed appropriate commercial terms for the value of Nectar, and we expect to continue to see that benefiting both loyalty but also Nectar360 as well going forward. Blathnaid?

Great. Thank you. So Freddie, we've guided GBP 800 million to GBP 850 million for CapEx this year. I'm not changing our guidance today, either on cash, on profit or on CapEx. We'll update our thoughts on that next year in the spring when we sort of give you a broader update on what next year might look like on that.

Our next question comes from Manjari Dhar at RBC.

I also just have three questions, if I may. My first was on the pension scheme. I just wondered if you could give us some color on, sort of, why you've chosen to retain the Argos pension scheme and what are the contractual commitments from Sainsbury's in terms of contribution funding going forward? And then secondly, I just wondered if you could give us some color on, sort of, how we should think about the time line of the separation costs as they come through? And then finally, I know that increasingly, Argos has been sort of separately managed from Sainsbury. I was just wondering, are there any remaining areas where there is still sort of integration in the wider business and that we have to think about in terms of separation?

Blathnaid, do you want to take 1 and 2, and I'll take 3?

Yes. Great. So look, on the pensions, we've transferred that scheme into Sainsbury's defined benefit scheme. It's -- there's a GBP 143 million surplus in that scheme. It's been in surplus for the last 5 years. We've not made any payments into the Argos scheme since 2024, and look, we're working through the strategy with the pension trustees as what the future for that scheme is, given it is in surplus and there is no cash payments going into that today. On the time and on the separation costs, I'd broadly split them 50-50 across the 2 years. That's the way I would think about it. We made a little bit of a tail into year 3, but I don't think it will be material overall.

Yes. Super clear. And then just on the sort of last point more broadly about separation. Look, I think, Manjari, to your question, you'll remember, we've talked about this on our previous calls. We learned a lot actually from the engagement we had last year. As you know, we've already started to make choices in terms of pulling apart, for example, some elements of the technology stack that we -- we've always believed that Argos will need separately from Sainsbury's. So we actually come to this transaction, having done a lot of the prework which I think is really important in terms of preparation. As Blathnaid just said, we're going to be really focused on achieving, for example, the full tech separation within the 2-year window. We've set 2 years for that. And we've got a very experienced team inside Sainsbury's who know what this looks like, know how to do it. And so of course, these are complex projects to achieve, but we're very confident we have the right focus and the right capabilities to achieve the 2-year separation. And of course, the job is to get that done, to get it done to plan. And then clearly, for Argos some new ownership to do what Argos needs to do, but I just want to come back to the big point of today, which is the opportunity this presents to simplify Sainsbury's and to have all of the team in Sainsbury's totally focused on the Grocery Business and the opportunity we think that presents. So getting the separation done efficiently, expediently, with the capabilities we have. And as we do that, getting clearer and clearer about how we're going to become even stronger in our focus on food.

Our next question comes from Rob Joyce at Exane BNP Paribas.

So thanks very much for taking the questions as well. So first one is just slightly elaborating what you said earlier, Simon. But just in terms of those commitments, and how easy it would be to exit those store-in-store locations for Swift? What are they looking at in terms of the signing up to leases on this, sort of, longer term? And how does it work if they want to exit those store-in-stores? And just linked to that would be, in terms of leases on the external Argos stores that Sainsbury's are still the head lease holder of, how many of those are there? And then the second one is just in terms of your ongoing, in terms of cost savings number, which has been quite a key component of sort of investing in the grocery business, does this change anything with regards to the amount of cost savings available in the business and what can be used to invest in grocery?

Really clear, Rob. Thank you. Well, why don't I take the first one, maybe Blathnaid on the external leases and then I'll come back on the cost at the end. Rob, I think it's probably just worth giving a little bit of context as to how these transactions come about, just to your question on the direction of travel on the store in stores and the commitment to that. One of the fundamental reasons why we're having this conversation this morning and able to share this transaction with the market today is that we've spent actually quite a bit of time over several months building up this deal, this transaction. And what's become very clear to me and to the Sainsbury's Board is the commitment that Matt, Trevor and Richard Swift partners have to the Argos model. And fundamental within that is the commitment to the store in store model. And of course, as we've come through all the discussions we've had and we've really got to know each other, what's become really clear is that this transaction fundamentally has a long-term commitment to store-in-stores. Actually, I was on a media call earlier with Richard, and he was talking about some opportunities in locations where Argos doesn't exist today, including making the point if we open new Sainsbury's wraps, wanting to be able to work with us on where else Argos might arrive. So the -- I guess the reason for sharing that with you is the direction of travel here isn't less store-in-stores. I think the new owners really see the value of that model. They really understand there and obviously the benefit of the footfall and customers that come with it. So we've clearly made a long-term commercial agreement with them, which has a clear income stream based on the number of stores inside Sainsbury's and it's a universal agreement that's a fixed cost for the number of stores are there. So what I'm saying is there's are a direction of travel here which says the store-in-store model becomes less important, if anything, there's a real determination to bring more range and more focused to help grow Argos. Blathnaid?

Great. So I'm going to stand back from the leases, Rob, and just spend a few minutes on it because it is -- you just need to spend a few months to get your head around it. So the first one is Argos is the headline landlord on a number of leases that go back many, many years. That is about 250 million. That comes off the group consolidated balance sheet and transfers into the Argos legal and it was already in the Argos legal entity, but moves out of our balance sheet as part of the transaction. That's your reduction in your net debt, the 250 million. The second bucket are the properties that Argos operates out of today where Sainsbury's has taken on those lease obligations. They split into two. There'll be some store-in-stores, but they're predominantly local fulfillment centers, those leases, we would expect to unwind over the next 3.5 or 4 years, the majority of those as those leases come up for renewal, the Argos team will take them on and negotiate with the landlords and they'll come off our balance sheet, but they will pay us for those leases in the meantime. So they will bear the cost of them. It's just -- it makes more sense for us to kind of continue to operate those as kind of the landlord pass-through on that. The third bucket is the store-in-stores. Now we are the headline landlord on that. So we can either be the freeholder or the leaseholder. We have put the store-in-store rent agreement in place. That's in place for a few years. It's a fixed rental amount for the first few years. There's some flex for Swift, if they want to add to that estate if they want to take away from that estate and reshape. But very limited, though what we'd expect them to do on that. So there's the three buckets on it. So I think your headlines is reduction in net debt of 250 million, leases that are transferring to Argos, the other leases are a pass-through that will unwind over the next 3 to 4 years and then the cease rental agreement that we talked about on that. I hope that kind of helps bring it together.

Thanks, Blathnaid. And then roughly, last question -- I think just -- sorry, Rob, do you want to?

No, I'll say thank you guys. Clear on that one.

Just going to come to your cost saving points. So look, as you say, I mean, one of the benefits of the last number of years is there have been opportunities to take cost savings in Argos and to reinvest those in the grocery model. And I think back to the early phase of the food first was very much our focus. I think where we are now, as you know, we have a very clear cost focus in the whole business. We remain on track for GBP 1 billion cost savings by the end of these 3 years. And clearly, as we've come through the last period of time, I said at the beginning of next level Sainsbury's, but Argos and Sainsbury are two separate businesses. And so very much as we've come into this strategy cycle, we've been focused on clearly the cost saving and efficiency effort in Sainsbury's, which is continuing to deliver a very focused as we look ahead and dissimilar in parallel track in Argos. So we don't see this transaction today as presenting any changes in the direction of travel or in the value we see in delivering efficiency in both businesses. And clearly, in Sainsbury's as we look ahead, we're -- in our last year, our next level plan will be talking to you at the beginning of the next financial year, about the next period of time. And we're very focused as a team, as I say, on the big opportunities for Sainsbury's today is about actually doubling down on that now with the focus and simplicity this will bring to the business, and we'll be able to drive our performance even more as we look ahead.

Our next question comes from Izabel Dobreva at Morgan Stanley.

I had a couple of questions. The first one is, could you please explain the structure of the commercial arrangements. So should we think of this as an annuity-like fee stream that you will essentially be receiving every year on a stable recurring basis? Or is it structured more as a share of the profit of Argos. So how should we think about the volatility coming from that profit contribution? That was my first question. Then my second question is just around the buy back. So I understand that there will be separation costs, which are going to offset cash proceeds. But at the same time, you are reducing your leverage profile. So how should we think about the scope for capital returns as a result of this transaction? And then finally, could you give us a sense of -- sorry, to interrupt you. I just had one final question of could you help us understand the synergies point that you mentioned? What exactly are dissynergies and how have you gone about sizing them so that we can understand what is the level of risk that they may be higher or lower than you anticipate?

Great. So why don't I take those and Simon will help me and support. So I'll start with the buyback. That's an easy one. Look, we have a very clear capital allocation policy this transaction is kind of cash neutral to us. It will -- it will be cash accretive over time. We're not going to talk about that today. But our capital allocation policy remains exactly as it is today. These are arm's length kind of commercial arrangements. They will be kind of ongoing arrangements is what we'd expect them to see and they do offset the dissynergy. So when you bring any two -- take any two businesses apart, we've taken cost savings with synergies over the years, we'd expect some dissynergy. So to give some examples of that, you'd have some shared teams and group functions, and you have to stand up your own teams on those and expertise. And that's kind of a big dissynergy in some of the tech, you have shared your tech stack as well. Lion's share of our separation costs are in separating out that tech, so we'll have to run our own tech stack rather than sharing the costs as well. But the commercial arrangements broadly offset dissynergies over time. So, net-net it plays a draw as a way to think about it. The other one to sort of bring you down a little bit further into the P&L with the 250 million leases transfer across. There will be sort of a reduction in our lease interest payments as well. So you'll see that dropping through, and that's where we get our single-digit EPS accretion from on the transaction. Hopefully, that's answered your questions. If not, let me know.

Yes, Blathnaid, thank you. Maybe just one thing to add. I think Blathnaid has covered it all, but just to be clear to you quite bit, there's no volatility in the long-term agreements that we've agreed. They're not linked to changes in performance we've agreed on all sorts of issues, whether it be rental for store in store, collection points, Nectar360 the whole basis of this is a long-term agreement and it's not subject to any volatility that kind of plays into that.

I just had a small follow-up. So should we understand that the synergies will come on top of the separation costs?