H1 20/21

Nov 5, 2020

Good morning, and thank you for listening into this presentation. I will cover the financial highlights for the twenty eight weeks to September before Simon covers our operational performance and the details of our updated strategy. Let me start with the key numbers. Retail sales excluding fuel were up just over 7% with strong grocery and general merchandise growth and some modest dilution from lower clothing sales. Fuel sales were down 45% in the period, so retail sales including fuel were down 1%. Retail operating profits increased 27%, reflecting very strong execution and efficiency across the business and a good level of operational gearing in both our grocery business and Argos. This was despite first half costs of protecting customers and colleagues from COVID exceeding the benefits of the business rates relief. Financial services made a loss of 55,000,000 in the half, in line with our expectations when we last spoke to you, largely reflecting an increase in provisions as guided in April as well as lower commission and trading revenue. Together, that drove a group operating profit increase of 9% and UPBT up 26%, benefiting from interest payments that were GBP 20,000,000 lower year on year. In the period, we recorded a statutory loss before tax of GBP 137,000,000 as we booked GBP $438,000,000 of predominantly noncash charges relating to restructuring and impairments. I'll cover these in detail later on. Free cash flow was very strong in the half as a result of strong grocery trading and working capital benefits due to the usual seasonal timing, which will reverse in the second half, but also the very good sell through of general merchandise stock. In the period, net debt reduced by $912,000,000, deferring last year's final dividend decision contributed about 160,000,000 to this reduction. We have today declared a special dividend of 7.3 p to be paid in lieu of final dividend for the year ended March 2020. And we've also declared an interim dividend for this year of 3.2 p in line with our policy of paying 30% of the prior full year dividend. This slide shows retail sales broken down by category and some of the change in trends we saw between quarter one and quarter two. We continue to deliver strong grocery growth in the second quarter after lockdown had ended, and this was against a tougher prior year comparison. Clothing sales were hardest hit in the first quarter and recovered more strongly than we expected in quarter two, helped by online sales up 75% in the half. Likewise, we saw some recovery in Sainsbury's general merchandise over the half, but the standout performer in quarter two was Argos, maintaining its quarter one growth rate despite a more normal weather backdrop. This slide shows grocery volume growth measured by Nielsen. We outperformed the majority of our grocery competitors over the half despite a tougher comparative in the second quarter. We were pleased with the strong execution across the business in stores and online, and we also achieved record customer satisfaction scores as Simon will cover later. The left hand chart here shows the strong performance versus the market across key categories for Argos, with the impact of COVID and the lockdown reflected in increased spending for the home, whether that be home office equipment or gaming. We were particularly pleased with our market share performance in categories such as furniture, reflecting strong availability and fast fulfillment. During the first quarter, with all the stand alone Argo stores closed, we pivoted to 100% online delivery and click and collect model. The right hand chart shows a strong market share performance for our Clothing business with a steady upward trajectory, again supported by online growth. This slide shows the movement in UPBT versus the first half last year. Higher retail profits more than offset the financial services drop, and interest costs were 20,000,000 lower year on year as we benefited from debt repayments and lower interest on lease liabilities. The table on the right shows the breakdown of retail COVID costs in the period with higher colleague costs, the largest part of these as we paid the wages of vulnerable colleagues who were unable to work, covered higher than normal absence levels, and paid frontline colleagues an extra bonus. Over the full year, we're expecting COVID costs to offset the business rates relief, although clearly there is some uncertainty around the impact that the progression of COVID and future lockdowns might have on these costs in the second half, particularly in the area of absence levels. The waterfall on this slide shows the main moving parts of the financial services underlying profit for the year. We saw lower ATM and travel money commission with reduced demand over lockdown and the fact that our travel money desks were almost entirely closed over what would normally be the peak holiday season. We also earned less income as customers repaid loans and borrowed less on their credit cards. But the biggest movement was the £43,000,000 increase in IFRS nine provisions for potential future bad debts. Against this backdrop, management took decisive actions in response to the situation, which I'll come to in a minute. The net result was a loss of CHF55 million in the period. We expect Financial Services to move back into profit for the second half of the year with a greater benefit from management actions and some recovery in ATM volumes. The bank management team are making good progress with the transformation plan we set out last September and have been proactive in managing the additional challenges of COVID. You can see here the benefits of the work done on operating costs and also actions taken to quickly reduce funding costs. I talked earlier about the quality of our lending book, and I provided a couple of proof points here. Firstly, on the left hand side of the slide, we look at the proportion of lending in arrears at eighteen months. Our figures of 0.9% across loans and 2.1% in credit cards compares very favorably to typical industry levels in the 3% to 5% range, and this covers 83% of our loan book. Arrears and Argos Financial Services, which is 17% of our book, are higher at 7.4%. This is again below retail credit averages for a store card portfolio. And of course, this book earns higher margins, and we hold higher provisions here. Next, in the center of the slide, you can see the proportion of our customers who took payment holidays. At 6% of our book, it is significantly lower than market averages, which is well into the double digits. Of this 6%, eighty four % have now resumed payments, and 5% of the 6% are in arrears, which represents less than 05% of the total book. Finally, the table on the right shows provisions in terms of coverage ratios split between unsecured and secured lending. You can see that coverage for unsecured has increased materially from 5% to 6.6%, which is very much in line with industry averages, while the quality of our book in terms of arrears experience is better than average. The bank's balance sheet has strengthened in the period as we reduced our lending exposure. Despite booking a loss of 55,000,000 and increasing our bad debt provisions, we're in a stronger position today in terms of capital coverage and liquidity. Going back now to the group P and L. In order to provide a clear view of our underlying performance, items which, by virtue of their size and or their nature, which do not reflect the group's underlying performance, are excluded, and these are outlined on this slide. In the period, we incurred a total exceptional cost of GBP $438,000,000. And there are three numbers I'd like to draw out. Firstly, the GBP $259,000,000 of restructuring program costs. The two biggest drivers of this charge are the Argos store closure program that we announced today and the reorganization of our logistics network as we combine our Argos and Sainsbury's networks and reduce our number of depots and stock locations. The costs include asset impairments as well as closure provisions such as dilapidations. Secondly, COVID-nineteen and the accelerated structural change has led to a full impairment review of all the group's assets. Further impairment charges of GBP $214,000,000 have therefore been recognized across Retail and Financial Services non current assets. For Retail, this reflects changes in future channel mix and the impact on asset values. One example here is the value of some of our city center convenience stores, which we expect will be impacted by more customers working from home and shopping online in the longer term. A hundred and 5,000,000 of the impairment number relates to the write down of intangible assets in the bank. The third number I would call out is the ATM business rates refund following our successful appeal. As this is material and not relates to the half, we've taken the income below the line, although the original costs were taken above the line and charged to underlying profit before tax. Taken together, these one off charges resulted in a small net cash inflow in the first half. Over the full year, we expect total costs of around CHF $625,000,000, of which about CHF 100,000,000 will be cash. While over the next three years, we estimate the total cost of restructuring, including the CHF six twenty five million will be in the region of CHF 900,000,000 to CHF 1,000,000,000, with total cash costs of £300,000,000 Simon will cover this later on. We generated strong cash flow in the half. Most notable is the working capital swing in the period. You can see the typical seasonal benefit in H1 last year of about CHF250 million. On top of that, this year, we've had much stronger grocery sales and very strong sell through of general merchandise stock, which together more than offset CHF100 million drag from lower fuel sales. Some of that will normalize in H2, particularly as we rebuild general merchandise stock. Disposal proceeds reduced from last year when we were unwinding the Bridgeland joint venture. The result was free cash flow of GBP $943,000,000, an increase of GBP $245,000,000 or 35 percent year on year. Below free cash flow, the other line showing GBP 164,000,000 is largely the movement on our lease liabilities. Net debt movement year on year benefited from the fact that we did not pay a final dividend, and this will now move to the second half of the year with the payment of the special dividend alongside the interim, both of which we have announced this morning. Thinking more broadly about cash flow, we're now seeing the ongoing benefits of the structural changes we've made in the last few years. No bank capital injections, lower interest costs, which continue to reduce and lower cash pension contributions. These benefits underpin our expectations for strong annual free cash flow delivery going forward. Before closing, I just wanted to remind you of our target of £750,000,000 net debt reduction by the end of the next financial year. We are well set to achieve this, and Simon will talk later about our confidence for strong ongoing free cash flow generation beyond that. So a really good first half for the business with excellent execution, strong and profitable digital sales growth and a particularly strong contribution from Argos. We recognized a high level of one off costs reflecting our accelerated ambition and change within our strategy. But these costs are largely noncash and will deliver significant longer term benefits. Our strong focus on cash discipline continued, and we have today declared a special dividend of 7.3p and an interim dividend for this year of 3.2p. Turning to the second half of the year, we've continued to trade well in both grocery and general merchandise. And while it's fair to assume that Christmas will be different this year, we are well set to deliver for customers in stores and online. At the same time, there will be some offsetting investment as we continue to improve the value for customers and we will continue to incur COVID costs with colleague absence levels, for example, having stepped up in the last few weeks. For the full year, our central assumption is that our current sales projections would result in full year group underlying profit before tax increasing by at least 5% year on year. Thank you very much for your time this morning. I'll now hand you over to Simon to take you through some of the operational highlights during the period and our updated strategy. Thank you, Kevin. Good morning, everyone, and thanks for joining us today. I'm going to shift gears now and spend the next thirty five minutes talking about what we see ahead for Sainsbury's. But first, I want to say I'm really proud of what our team have delivered over the last six months and what our industry continues to collectively achieve to feed the nation. The last few days have reminded us all of this again. Now as a business, we have cared and continue to care about what matters most for our customers, our colleagues and the communities we serve: safety, availability, helpful service and supporting the elderly, disabled and vulnerable. This has been a time of extraordinary delivery, learning and adaptation. And I've witnessed a pace of execution and customer focus, which we are determined to hold on to. And whilst this has been going on, I've also been taking a full look at the business and our strategy. Nothing has been off the table. We've had a thoroughly good look at everything. And as you'd expect, I've done a lot of listening to customers, suppliers, colleagues and investors. And my main objective today is to make sure that you are clear on our strategic priorities and on how we plan to accelerate delivery for customers and for investors. So I'm going to cover the following this morning. First of all, COVID impacts with a focus on the strategic changes it has accelerated. And then my reflections on our business and our position in what is a rapidly evolving market. I'll spend most of the time on our purpose and our priorities, specifically what our focus will be and the changes we'll make. And then finally, I'll summarize what our plan will be to deliver for customers and for shareholders. It has clearly been a unique first half. Our number one priority has been ensuring that customers and colleagues can shop and work safely. Our colleagues have risen to the challenge of COVID with a great energy, passion and a new determination. And we have responded to the unprecedented changes in customer behavior and the operational requirements that have followed. And of course, this is far from over as we are seeing again from this week. An example of this is how we've doubled our grocery online business, expanding our capacity from 350,000 orders per week to a record breaking 736,000 orders last week. But as we look forward, I think these are the key points. We have found a new pace and agility as an organization. And regardless of how long COVID is with us, we expect that a number of these changes are here to stay. And talking of changes that are here to stay, the rapid shift to digital. These charts do a good job, I think, of showing the huge step up in digital participation during the first half, with digital now accounting for nearly 40% of all our sales. Online grocery sales doubled in the half with sales participation increasing to 15% of sales. And this continues to rise. In fact, participation last week was over 18%. Now we've spent a lot of time and money in recent years investing in our technology and digital platforms, and this has meant we were able to deliver this growth efficiently and profitably. SmartShop continues to fundamentally change the way customers transact in our stores. And as you can see on the chart on the right, sales through SmartShop are now 31% of our sales and nearly 20% of our transactions in handset stores are going through SmartShop. You can see how dramatic the change has been in the past year. We will return to online profitability later, but as you can see here, we're fully embracing this rapid change in how customers want and need to shop. And at the same time, we're adapting our business at pace to address and mitigate the lower profitability of online. Now on this chart, we can see the digital shift is also happening across our non grocery brands, with Argos and 2L online also stepping up significantly over the period. 90% of sales in Argos are currently online as we have seen dramatic changes in how customers are shopping Argos. We've helped customers shop the way they have wanted and needed to, and most importantly, them to feel safe throughout the first half. And this performance has continued over recent weeks. Now on this chart, we show the customer satisfaction measures compared to our key competitors, both in stores and online. Online customer satisfaction was flat across the first half despite doubling order volume. And more recently, it is now ahead of last year. And in our internal measures of customer satisfaction, availability now is also up year on year through the second quarter after a tough Q1. In other areas of our customer satisfaction, speed of service is up 13% year on year and the friendliness and knowledge of our colleagues is up 7% year on year. Now we're moving on to talk about our business and to reflect on where our business is at, starting with what we are seeing through COVID in a broader market context. Now I know that nothing on this slide will be a surprise to you, but the pace of change and activity is clearly speeding up. The five major factors that we expect and that have informed our plan are shown here. First, we expect the intensity of competition to continue, and if anything, increase, especially in driving value. The accelerated shift online I've just spoken about will not reverse. Amazon will remain a strong, direct and growing competitor as will the discounters, who we expect to continue to expand capacity with continued focus on value. And all of this will be tough for us all, but especially for smaller players. And the foodservice sector has clearly been dealt a firm blow by COVID. So as a result, how will we compete more effectively? I think there are three important takeaways here. In this environment, we must prepare for continued disruptive moves, and we expect the landscape to further change. We must be ready and fit to participate. Scale has always been a key competitive advantage in grocery, but even more so through periods of turbulence. Our relative scale gives us the ability to absorb change and out invest smaller competitors. And these challenging dynamics together will put continued pressure on industry margins, but they cannot be an excuse. And I believe we can deliver better relative performance. Again, no surprises here when we think about the key consumer trends and priorities. In this environment, people are shopping differently with the resurgence of the big weekly trolley shop and an enforced shift away from eating out. With these changes, we see the following trends accelerating. Value because it's important, combined with ongoing increasing pressure on household spending. As highlighted already, a permanent shift to digital with sustained online and mobile growth plus predominantly contactless payment. Convenience. Customers want to have it now. They want ultra convenience. Combined with a growing desire and trend to source locally with renewed focus on provenance. And underpinned by health and sustainability with heightened public awareness and government initiatives to drive behavior change. We, I believe, are well positioned to adapt to these shifts in customer shopping behavior. But stepping back, the right hand chart shows the customer priorities day in, out remain the enduring ones we all know so well, convenience, price, value and quality. So turning to the platform this business has today. It's clear to me we have great assets and great people. We're a heritage trusted brand loved by millions of customers. With scale number two position in food, operating in highly attractive locations with particular strength in the South and inconvenience. We have strong positive operating cash flows. We serve an attractive customer base with a bias to a more affluent socio demographic than our key competitors. We've invested in digital innovation, and Nectar is now a firm basis with which to create customer stickiness and build proprietary data sets. This is a compelling foundation to build on, and it gives the team and I real confidence that from it, we can deliver improved performance. Now despite the positive performance of the past six months, Sainsbury's has not been winning in recent years, and we've not been delivering to our full potential. And as you would expect since becoming CEO in June, I spent a lot of time listening closely to our key stakeholders. I've also taken an unvarnished look at the facts and economics of our different parts of the business. Let me draw out some of the key insights. We have lost ground in food. Customers tell us we need to offer more consistently good value on everyday items and regain our historic strength in food quality and innovation. Our colleagues say that they've never felt more engaged, as you can see on the middle chart. They want to bottle the new ways of working and up the pace of the business permanently. They also say we've added complexity to our business and that this has brought cost and slowed us down. We have spread our resources too thin. Suppliers say we're good to work with, and they see the potential in our customer base. They also say we need to move faster, working more in partnership to innovate at pace and drive growth. And finally, our financial and shareholder returns have not been where they need to be. Our shareholders are asking for clearer focus, a strong balance sheet and improved returns. There is clearly a strong desire from our suppliers, our colleagues and our customers to see Sainsbury's winning in the marketplace. And given the strength of our competitive position in core grocery, I'm convinced that we can. Being a better Sainsbury's starts here with a new, clear, galvanizing purpose. Why do we exist? Why do a 78,000 people get up every morning and come to work and do what they do? Driven by our passion for food, together, we will serve and help every customer. This belief and this conviction has to be throughout our business with all our colleagues. We will put food back at the heart of this company. At the core of our purpose, all of us could eat a little better no matter how much time or money we have. Tastier, healthier, more sustainable food, cooked and made at home, enjoyed together. Together, we will serve and help every customer, helping everyone to eat better. So now I will move on to talk about our priorities and the three priorities which will drive our resource prioritization and deliver value over the next three years. There's a lot to be done to deliver the improved performance we all want to see. This is about focus, acceleration and delivery. Our three value creation priorities are food first, brands that deliver, and save to invest. So what will be different as we look forward? I and we will put food first. However hard we pursue the multi brand platform, it can't succeed without a vibrant food business at the core. We will focus the role of our other brands more tightly in supporting food, ensuring they each deliver in their own right. We will step change our ambition on cost, going beyond cost savings to commit to structurally lowering our cost to serve by at least two percentage points to sales. We'll be open to and pursue partnerships where they accelerate our priorities. We've built a robust plan to increase earnings and continue to generate strong, dependable cash flows. We'll continue to do this. And underpinning all of this will be a clear set of metrics against which we will measure ourselves directly linked to incentives. We will simplify how we work, cut complexity, and accelerate our delivery, which I will measure through these key metrics. We'll have seven metrics, three operational and four financial. This is critical internally to focus minds and externally to bring consistent, clear measurement of our progress and delivery against the commitments I am making today. By consistently reporting against these, you'll also judge our progress, I know, as we move forward. So on to our first priority, to win in food, to put food first. To inflect the trajectory of the business overall, we have to change the trajectory in food. So what does this mean to me to put food at the heart of Sainsbury's? It means better value, getting credit for value and range, especially at the center of the plate. It means reigniting innovation and inspiration, improving the speed and success rate on new products. It means growing online, extending points of distribution to expand our reach and accelerating convenience store opening. It means being committed to sustainability through net zero, being fully integrated into our customer and commercial plans. It means we'll tailor proposition by store and by channel, meeting the needs of local customers and being more relevant. Using data and advanced analytics gives us ways to do this, which we didn't have before. It means leveraging and adapting our supermarkets and their role as productive omnichannel locations. And it means our store colleagues, of course, being the vital frontline ambassadors of our plan and our brand. And we will continue to deliver and offer helpful, great service where it really matters to our customers. Now it's critical, of course, that we deliver this making full use of the technology and data enablers which we've invested in. At one level, the what we need to do is not all new, but the how we will do it will be very different. Seamlessly omnichannel across stores and online, innovation fully connected to customer preferences, tailored price and ranging decisions driven by data in a way that was impossible five years ago. As a result, I'm confident in our ability to inflect our performance in the core of our business in food. We will address our value position. You saw the start of this focus at last year's Capital Markets Day. We're committed to being better value for money with more consistent prices across the year. We will be competitive in key categories and everyday products that matter most to our customers. And this investment is already in progress. In the last month, we have invested in over 300 fresh food lines, and it's already having an impact. Customer satisfaction measures on value are the strongest we've seen in recent years. And where we've invested, we're seeing an 11% increase in volume in meat, fish and poultry lines. Improving real and perceived value for money is a vital first step. And I'll talk in a few minutes about the cost program that is so key to underpinning the sustained investment in value we will make. In innovation, we have lost our lead in recent years. Customers have high expectations of the Sainsbury's brand in range and in quality. And you can see here they still rank us highly on quality. However, they tell us we can do better on innovation. As I've already said, our suppliers challenge us here too. We will innovate more, faster and with a higher success rate. We're making this a priority. We will innovate faster in our own brands as well as being a home for branded innovation. We will speed up our processes to reduce the time it takes to bring products to market. Customers tell us we can do more for them in areas like taste the difference, organic and healthier products in particular. And as an example of how we're moving faster, we've just reset our fresh food department in every supermarket for the first time in ten years. We've done this with a full space rebalance, launching over 200 new lines. Customer reactions and volumes have been ahead of expectation, and it's great to hear customers on panels talking positively about buying and enjoying our new fresh food products. Now customers also tell us, of course, that they care more and more about the impact of their shopping on the environment. And we have a strong track record here, having led the industry across many initiatives over decades. We published our net zero targets earlier this year, and we're reporting progress against these for the first time today. And this slide lists the four priorities we'll be very focused on over the next three years: reducing our carbon footprint, helping customers make healthier and more sustainable choices and reducing food waste and packaging. The next stage will be to fully embed these in the operations of the business. Now we've been at the forefront of the shift to digital, investing ahead of competitors both in proposition and in our operations. And despite the challenges, it's been a clear imperative to be where our customers want to shop, and this has served us really well. In my mind, there is no doubt whatsoever that the accelerated shift to shopping for food online is here to stay. We we've responded with focus and speed to double our online capacity. We've added just 15 new stores to fulfill orders moving to two fifty nine stores. As a result, we've strong operational gearing and very low capital investment required to scale to the volume we now have. And importantly, more than half the increase in grocery online sales is coming from customers who are new to Sainsbury's, as you can see on the right hand chart. Just to be clear, this has been profitable growth for us. We have increased sales and are seeing better online margins even before you consider the additional leverage on some of the store based fixed assets and costs. Now there are four key drivers of online profitability. Drop density, which has improved, and we've seen orders per van increase by 35%. Our average basket size has increased by 17%. And stem mileage has been reduced. Our item pick rate, which you can see from the right hand chart, dipped at the start of the crisis, but is rapidly recovering despite the ongoing social distancing limitations. We are now back at almost pre COVID levels. And through Click and Collect, we are now at 100,000 orders a week. That's 8x greater than pre COVID levels, with sales participation of Click and Collect at 20%. We've also increased efficiency at the doorstep and maximized capacity through dynamic slot pricing and extending delivery windows. Put simply, we are driving shorter distances with fuller vans. And we can make ourselves more efficient by continuing to improve our grocery online operating model and experimenting with new ways to operate this channel well and cost effectively as it continues to scale. Now on to our convenience estate. As I said earlier, customers are shopping more locally. We have a strong convenience estate, and customers have really appreciated the opportunity over the last six months to shop Sainsbury's closer to home. Sales are up 15% in stores close to where people live. We are stepping up our ambition on new store openings, doubling the rate of growth, but importantly, focusing on sites close to where customers live. And building on the success of the new neighborhood store format, we will open around 18 of these stores in the next three years. And we will expand our convenience network to a further 110 locations in Anchor towns in attractive underserved catchments or where we are subscale today. So to move on to the second and third priorities of our plan. These both support our ability to deliver in food. Our second priority relates to our nonfood brands. We've spent significant time looking at how shoppers interact with these parts of our portfolio. And crucially, we have looked at how they are positioned competitively. As a result, we will make material changes in how we run these brands. As you know, Sainsbury's has assembled a number of brand assets as part of a multichannel, multi brand group strategy. Bringing these together has delivered value in some areas, especially where they share overhead and store costs. But an unintended consequence has been to introduce complexity into our business and distract us from our core in food. Our brands do, of course, share customers, and this is a strength and an opportunity. But they also have their own shoppers, especially Argos. Going forward, we'll manage these brands with three very clear objectives, delivering for their customers, making a return in their own right, and supporting our food business. They must deliver profitable growth, and we will invest in them in proportion to their potential to do so. This means different things for our different brands, and I'll now take you through the headlines for each. Let me talk first about Argos. Now it's no surprise that Argos has performed well during COVID, as Kevin shared earlier, and it continues to do so. We're starting a bold transformation of the Argos model aimed at making it more competitive and more profitable, and COVID has reinforced our confidence in making this change. Let me share a few facts about how Argos shoppers are changing their behavior. Digital penetration has been growing rapidly. Even before COVID, sixty percent of sales were online, and today, it's at 90%. Of these, more than half are click and collect. Our store in store locations continue to perform strongly. And finally, we know we must continue to improve both value and availability to enable Argos to remain competitive. These are the facts that underpin our plan for Argos, starting with a full transformation of its channel and fulfillment infrastructure. So over the next three years, we will close around four twenty stand alone Argos stores. We'll open around 150 more Argos stores in Sainsbury's, and we'll open another around 100 collection points so customers will be able to click and collect at every Sainsbury's supermarket. Now there is a strong customer and cost sharing logic to these moves. They will future proof the Argos model and boost our ability to invest in the proposition and improve profitable returns. Around 12,000 of our colleagues work today in our stand alone stores, and we'll be working really hard to redeploy colleagues where we can. We do expect around 3,005 roles to be lost as a result of these changes. To support this shift, we will build around 30 new local fulfillment centers. These will give shoppers quicker access to a wider range and will improve availability. They will help us to take stock out of our system overall with real working capital benefits. Also, will continue to improve our price position and reduce the number of promotional events that we run. And we've already been reducing operating costs by stopping the catalogue production, and there is more to do here beyond. Overall, these changes will reduce cost to serve at Argos by around £105,000,000 in the next three years. And at the end of the three years, we expect to have around 1,000 locations in Argos to keep improving the convenience and speed, which is so critical to the Argos proposition. Now home and furniture is a key area where we can differentiate and grow, and the Habitat brand is an asset here. It's a really strong brand, and we're going to maximize its potential for the first time by making it our main home and furnishing brand. We will launch new product ranges from January 2021. And by the end of the year, Habitat branded products will make up almost 80% of home products on our shelves. And we'll fully integrate Habitat operations into our Argus and Sainsbury's operations. Moving on to Nectar. Well, this is an exciting business, which fundamentally unlocks our ability to connect with customers and drive that insight into our business decision making. Nektar will support Food First. It will be fully integrated into the food journey and deliver personalized value and content. The relaunched app is already on its way to having 10,000,000 users. It's already a very profitable media business, and we will continue to grow this further. It can also increasingly support and link our portfolio brands as well as driving increased value from scale coalition partners. And for example, Nektar rolled out in August in September, and the uptake is already well ahead of plan. We see Nektar playing a pivotal role to support our overall strategy as well as being a driver of profit growth in its own right. And so turbo boosting nectar will be a key priority for us, and Mark and his team are fully focused on this. Now our customers want and expect financial services products across food, clothing and general merchandise, and we are committed to providing these. We laid out a clear strategy and an ambitious plan for the bank last September when you were with us at our Capital Markets Day. I'm confident in the delivery of this plan being led by Jim and Mike despite the challenges of COVID. I said earlier that all of our brands, including the bank, must deliver for customers and shareholders in their own right. And the plan for the bank is entirely consistent with this. It aims to double profit and returns over five years and take no more capital injections from the group. So I now want to move on to the third of our priorities, safe to invest. We're very clear that the plans we've outlined for our grocery business are ambitious and we need to deliver a structural reduction in our operating cost base. We have not been good enough at this in the past. This must become a nonnegotiable and one of the key metrics we report against. It requires a transformation in the way we approach costs and becoming a much simpler business. Operating cost reduction is an imperative, of course, to create fuel to invest and return greater value to shareholders. We also have a renewed commitment and believe that we can work more effectively with suppliers to make sure we are giving customers the best value possible. Now the change in our cost ambition should be clear here. We have a good track record of delivering cost saving initiatives, but we have allowed our overall cost structure to rise. We now need to fully focus on simplifying our business to structurally reduce our cost by at least 2% to sales. And doing this will create £600,000,000 of additional capacity to invest and deliver in food as we have outlined. Savings will need to be higher than this to offset areas of unavoidable cost inflation, and we will move further and faster than we committed last September. It is critical that we do this with real focus, both to create the firepower to invest in our food business as well as delivering better returns overall. And underpinning our ambition in cost, we will transform our ways of working to reduce complexity. I and many of the team have overseen major cost reduction programs before. And let me tell you, I am under no illusion about what is involved. There will be tough decisions, and we will need to work differently. We know where the cost needs to come out. We've spoken about some of these areas before. For example, our logistics and supply chain reinvention targeting around £150,000,000 in savings. I've touched on a couple of other areas today already, namely our plans to reduce the Arbour stand alone store estate, which will deliver around £105,000,000 of savings over three years. There is more work to do in our store operating model, and COVID has both increased the need for this and shown us how to work differently. For example, counter closures will drive down hours, shrink and waste, worth around £60,000,000 in savings. I now want to spend a couple of minutes on technology and how it supports our performance and efficiency. Phil and his team are at the forefront of leading our focus here. This has been a key area of investment for Sainsbury's and will continue to be so. Although as you would have gathered from my previous comments, the prioritization of that investment will shift to make sure it supports food and our cost reduction programs. As I mentioned earlier, we need to pursue our strategy fully leveraging the power of technology and data. Technology is fundamental to the channel shifts we're seeing to unlock efficiencies, process change and make better and faster decisions in all parts of the business. Let me give you just a couple of tangible examples of how this is working already. In delivering our customer experience, we know that if we switch 1% of customer transactions to self checkouts in SmartShop, this saves 5,000,000 a year. And we know that once customers use SmartShop, they don't revert back. In driving structural agility and efficiency, new supply chain systems will enable an end to end process simplification and improvement in what we can deliver. Technology is also a critical enabler of our plans for Nektar, which in turn supports the journey we are on towards being a fully customer and data driven organization. Therefore, technology and data will remain a key focus for investment, and we'll be making sure that we deliver a tangible return on each element of investment that we drive in technology. So turning to our team. We have the right leadership team to deliver this plan. I've made some key changes to the structure of our team to deliver the change necessary. On my first day in June, I wanted to be really clear that customers will be at the heart of this business and our decision making. That's the reason I promoted Mark Given to the board as chief marketing officer to bring the voice of the customer into the heart of the business. I'm now changing the structure of our commercial leadership to bring the additional focus we need on food to lead and deliver the plans I've shared today. We will have separate commercial directors for food and general merchandise and clothing as we move forward. Rhianne Bartlett leads our fresh food business today, and she will step up to lead the food division going forward. And Mike Luck will lead the general merchandise and clothing division. I'm really pleased with them both and know they will do a fantastic job. Since June, we've also brought our channels together across retail and digital under Cloda Moriarty, reflecting how customers shop and the need for us to shop consistently for them. I would like to thank Paul Mills Hicks for his outstanding contribution to Sainsbury's. He'll be working alongside me well into 2021 in an advisory capacity. Now we touched on what will be different earlier, but I want to be really clear on what will be different in the plans we have laid out today. Together with my leadership team, we are bringing a clear sense of acceleration, focus and delivery. We can and will do better for our customers and our shareholders. And in the end, it is about value creation delivery, of course. We will deliver an inflection in our underlying profit momentum, driven by a stronger food performance, improved performance from our portfolio brands and the structural transformation of our cost base to drive at least 200 basis points of reduction. There will be one off costs of around £900,000,000 to £1,000,000,000 over the next three years, but these are largely noncash impairments with cash costs of around £300,000,000 We are maintaining the same tight discipline on cash and capital expenditure as you've seen in recent years. The increase in capital expenditure over the next three years will go to high returning investments in the transformation of the Argos network and our supply chain and logistics infrastructure. These will reduce cost to serve and unlock working capital benefits. We expect to continue generating an average of £500,000,000 a year of free cash flow in the three years to March 2025, which will allow payment of a consistent dividend whilst continuing to strengthen the balance sheet. And so to close, I believe this is the right plan for what this business needs to do next. We've made some bold choices, and we've set clear priorities. I'm energized, passionate, and determined about what I think we can deliver. I wanna thank you for your time, and thank you for listening.