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					J Sainsbury plc Q1 Trading Statement
Conference Call Transcription
1 July 2004
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

CORPORATE PARTICIPANTS                                          PRESENTATION
Lynda Ashton
J Sainsbury PLC - Head of IR
Lord Levene                                                     Lynda Ashton
J Sainsbury PLC - Senior Independent Director
                                                                J Sainsbury PLC - Head of IR
Justin King
J Sainsbury PLC - CEO
                                                                 Good morning everyone. This is Lynda Ashton.
Roger Matthews
J Sainsbury PLC - CFO                                           I am sorry to have kept you waiting. We have
                                                                had an overwhelming response to this call.

CONFERENCE CALL PARTICIPANTS                                    On our call today I have Lord Levene, our
James Collins                                                   Senior Independent Director who will start the
ABN Amro                                                        call and update you on the Board changes.
                                                                Justin King will update you on our trading and
Ben Britz                                                       then we will take questions. I will now hand you
Morgan Stanley                                                  over to Peter Levene.
Paul Smiddy
Robert Baird
                                                                Lord Levene
Andrew Fowler
Merrill Lynch                                                   J Sainsbury PLC - Senior Independent
                                                                Director
John Kershaw
Merrill Lynch
Mike Dennis                                                      Hello ladies and gentlemen, good morning.
Chevereux                                                       Thank you for joining us this morning. You will
                                                                have seen the two statements which we have
Andrew Kasoulis                                                 put out. I will be taking any questions you may
Credit Suisse First Boston                                      have on the new Chairman and Justin King,
Juergen Elfers                                                  who is our CEO and Roger Matthews who is our
Commerzbank                                                     CFO, will be answering your questions on the
Kate Calvert                                                    trading update.
Morgan Stanley
                                                                As far as the Chairmanship is concerned, you
James Grzinic
                                                                will know that we have been for some time now
Dresdner Bank
                                                                looking for a new Chairman and we are
Nick Coulter                                                    extremely pleased that we have reached
Lehman Brothers                                                 agreement with Philip Hampton who I think will
Clark McPherson                                                 be known to many of you to take over that role.
Credit Suisse First Boston                                      We have unsurprisingly taken very careful
Nick Jones                                                      soundings as to the likely reaction to that
Goldman Sachs                                                   appointment and I am very pleased to say that
                                                                those soundings were all extremely positive.
Clive Black
Shore Capital                                                   With that, perhaps we could start to take your
Caroline Easpm                                                  questions and now Justin will say a few words
Execution                                                       first.
Jill Dodd
UBS Global Asset Management
                                                                Justin King
Tom Gadsby
Williams De Broe                                                J Sainsbury PLC - CEO

                                                                Good morning everyone. It is Justin King here.
                                                                The trading statement we've issued this
                                                                morning is for the 12 week period to June 19

                                              For enquiries please contact:
        Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                     Page 2 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

and as you will see from the announcement,                       And with that I think we go to questions.
our total sales growth was 1.9% for the quarter,
which is 1% on a like-for-like basis. That's the
total sales including petrol, which, as you would
expect has been helpful in the quarter. That
compares with a figure of 0.9% for the fourth
quarter.

We've also updated today on profit and
following on from the announcement we made
at the year-end of the prelims about margin
pressure, we've indicated that our continuing
investment in prices and our investment in
other issues such as availability and waste will
mean that we will significantly be below the
market consensus for this year.

Particularly on the issues of on shelf
availability, we will be maintaining our current
existing depot network and not pursuing
further closures to ensure on shelf availability
through the key trading period up to Christmas.

The current waste levels that we're carrying
are higher than were expected due to the need
to maintain on shelf availability for our
customers, which is somewhat better now than
it has been for some time, although as I have
been quoted many times as saying, significantly
below where it needs to be.

The further point that we've made around
margins is our investment in clearing non-food
stock, where we have a significant overstocked
position, and that investment has already
begun, will continue throughout the rest of the
year.

The net effect of these investments will be
weighted towards the first half.

As a consequence, I've begun a thorough
review of the business and we will report back
in full with presentation at the quarter two
trading statement on October 19. And while this
official review is taking place, we've undertaken
a significant rein back on all activity which is
not customer facing and as a part of that we've
slowed down and paused all major capital
investment that is not facing the customer.
That means that our previous guidance of
£700m on underlying Capex for this year has
now been adjusted to a figure that will be below
£500m.


                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 3 of 14
QUESTION AND ANSWER                                 we've made, whilst there is an element of catch
                                                    up in them, are also part of a longer journey of
                                                    ensuring that notwithstanding the higher
                                                    quality of the products that we sell, that we still
James Collins                                       remain competitive on price.
ABN Amro
                                                    The other things I've touched on are all
                                                    customer facing and a recognition of the fact
 Good morning. It's James Collins from ABN.         that we're not doing a good enough job in our
The question I have is really around what's         stores. Again I talked about that around the
changed versus the last downgrade? I don't          time of the prelims and the number of the
think it's entirely clear from the statement. You   decisions that we've taken in recent weeks and
talk about the additional factors clearly of non-   days around ensuring that we protect
foods and also of investing in higher               availability through the rest of the year, both
availability. But perhaps if you could give us an   through the investment in waste but also in
indication of how much of what we're talking        maintaining the current depot network. The
about in the change of gross margin                 new depots will not ramp up further volume in
expectation is coming from pricing investment       the rest of the year. We will focus on ensuring
over and above what you'd already planned?          that the volume that they currently take
                                                    delivers much better than it currently is.
And a supplementary question to that is, is this
the consequence of industry push, or is it very     And as far as the comments on non-food are
much the pull that you're deciding to invest in     concerned, I think again I commented back in
pricing rather more significantly and rather        May that we had a significant overstock
quicker than previously had been planned?           position. We've started to trade our way
                                                    through that and we are going to continue to
Justin King                                         do that. We've got a significant position to deal
                                                    with.
J Sainsbury PLC - CEO

 James, hello it is Justin. Several questions
buried in there. I think the first thing I would    Ben Britz
say is to refer back to the claims on March 26      Morgan Stanley
and indeed the comments that we made at the
prelims in May about the toughness of fourth         Good morning. Just sort of a follow on
quarter trading which was reflected in the          question from that. One of them has already
second half numbers and specifically the            been answered. Can you please just try and
second half margin that we reported. And that       give us some indication of what you expect the
pressure has continued through the first            non-food stock sell down to be this year? I
quarter. We have taken some front foot pricing      mean I would hope that that is more one off in
investments and those are ahead of what was         nature than what you're doing on pricing and
planned. I think I have commented regularly on      perhaps you can give us some guidance on
the issue that we did stand away from the           that. That's my first question please.
pricing competitors in the market place for
some time whilst we focused on the
restructuring of the business. So there is a        Justin King
component of catch up in what we're doing.          J Sainsbury PLC - CEO
In terms of the comment about therefore
market pressures on pricing, we've previously        Well clearly, yes, it is more one off in nature. I
commented that Tesco did move earlier this          will be much more specific come the update in
year. But overall, I think I've consistently said   October about the total quantum. The reason
that pricing is part of this market and will        for that is that at the moment we're dealing
always be part of this market and we will have      with the stock that we have in store and in our
to play our part in that. So the pricing moves      depots. But obviously we have a forward
                                                    commitment position and the action that we
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

decide to take on the forward commitment                         I think there may well not have been in the
position will be directly linked to the decisions                presentation, but certainly I talked at length
we take as to how we're going to trade the non-                  about this in many of the briefings that I have
food ongoing. Because clearly I wouldn't want                    been involved in.
to get into heavy mark downs in that product
which is going to maintain part of our core
offer going forward. But if we want to land that                 Paul Smiddy
core offer, we may well have to take further                     Robert Baird
actions on commitments already made and that
is something we'll update in detail in October.                  But given it's having such material impact on
But to conclude where I started, as you said all                 profits for the current year, should it not have
of the issues around on food clearance are one                   been covered fully in the results presentation?
off in their nature.

                                                                 Justin King
Paul Smiddy                                                      J Sainsbury PLC - CEO
Robert Baird
                                                                  Well I think I can only communicate to the
                                                                 market when we're ready to communicate to
Good morning. I have got two questions.                          the market both what the position is and the
Firstly, for how long have you been overstocked                  implications of it and that's exactly what we're
on non-foods?                                                    doing today. Remember today's trading
                                                                 statement is 10 days in advance of when it was
Justin King                                                      originally planned, which was on the morning of
                                                                 the AGM. And the reason for that is having
J Sainsbury PLC - CEO                                            established what the position is we've
                                                                 communicated it to the market.
 It is Justin again. The non-food position has
been building as you would expect. One of the
challenges that we have, I think again I                         Paul Smiddy
commented in the Analyst session earlier on in                   Robert Baird
May, is that we're running a non-food business
off food systems. The consequence of that is                      But it sounds like you've published very
that we did not have good forward visibility of                  recently an annual report with a stock valuation
commitment over some of our in stock position.                   that is over-inflated on the basis of the strategy
Whether that be in store and in supply chain. So                 that was already in place?
one of the things I've been working on in my
three months in the business is getting a proper
understanding of the total non-food position,                    Justin King
including commitment, on a product line by                       J Sainsbury PLC - CEO
product line basis.
                                                                  Well I think what our stock position was at the
Paul Smiddy                                                      year-end is clear. It is in the annual report. We
Robert Baird                                                     reported on that on May 19. We have now taken
                                                                 decisions to clear some of that stock.
                                                                 Specifically the stock that is in stores and
 I don't recall any comment in the May 19                        warehouses and we're taking action to clear it.
results presentation suggesting that you were
overstocked on non-food.

                                                                 Andrew Fowler
Justin King
                                                                 Merrill Lynch
J Sainsbury PLC - CEO


                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 5 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

 Yes hello, good morning. Two if I might. Again,                  Thank     you     Justin.     Clearly    today's
just on the non-food. I'm struggling to                          announcement is not about dividends. There
understand what this stock is. Well first of all                 therefore is no new news on dividends at all
I'm struggling to understand how you didn't                      and clearly the comments that I made at the
know, as Chief Executive, what your forward                      prelims on May 19 still apply. No change to that
commitments were. But is this stock that was                     regard. But I think what I would add is it is
the wrong stock and you want to maintain your                    important that this dividend decision is taken in
presence in non-food? Is it simply stock that                    the context of Justin's comprehensive review
wasn't selling, or you're actually going to                      of the business, which has been laid out in
withdraw from the large areas of non-food?                       today's announcement, and clearly that should
That's the first issue.                                          set the framework for any future financial
                                                                 strategy including future dividend policy. That's
The second one is just the obvious question on                   the position as we see it today.
the dividend. Bearing in mind that I'm hearing I
think that one of your broking advisers is
talking about a cut dividend this year, would the
Board be happy to pay an uncovered dividend?                     John Kershaw
                                                                 Merrill Lynch
Justin King
                                                                  Morning guys. Could you perhaps expand a
J Sainsbury PLC - CEO                                            little bit to help us on the split between the
                                                                 investment in the various areas because clearly
 I'll get Roger to cover the issue of dividend in a              you are talking at the moment of this being a
moment. Just to come back to the stock. As far                   predominantly H1 investment now? If they are
as commitment is concerned, I mean the                           mainly one offs then you can understand the
further comment I'd make is commitment, as                       recovery thereafter. If there is significant
you I'm sure would understand, is a complex                      ongoing price investment then clearly it is
issue. Commitment can literally be stock that is                 difficult to understand how we are not going to
already on the water. It can be commitment of                    have yet another downgrade relating to H2
manufacturing capacity. It can be commitment                     coming say in October.
to raw material, for example, in things like
fabrics, which is unfinished. So I think the point
I was making about the systems, our systems                      Roger Matthews
are not well equipped to give us true visibility of              J Sainsbury PLC - CFO
complete commitment.
                                                                  John, perhaps I could pick that one up. It is
As far as the mark down decisions are                            Roger again. I think broadly we would see the
concerned, I think I have said in my earlier                     movement in numbers today being split fairly
answer, the decisions that we've taken already                   evenly between the two issues that Justin has
relate to that stock that we've already got.                     referred to. Firstly, in respect to the margin
Further decisions which I'll communicate in                      investment and margin pressures, and
October will be specifically linked to any                       secondly, the additional costs involved in
decisions that we take about which parts of our                  improving product availability.
non-food business we wish to stay in and which
we wish to come out of. Clearly, any further                     So I think very broadly, the movement we're
activity will be focused on that non-food which                  notifying the market today of is split pretty
we believe should not be part of the proposition                 evenly between those two factors.
going forward.

As far as the dividend, I'll hand over to Roger.
                                                                 Mike Dennis
Roger Matthews                                                   Cheuvreux
J Sainsbury PLC - CFO


                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 6 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

 Yes, Mike here. I'm just looking at your review                 you won't be keeping that are currently on the
and the context of which you're going to review                  table as being introduced back end of the year
the whole business. Could you talk about on                      and will you be giving us an idea of whether you
what basis you're doing the range review? I.e.                   plan to unlock any cash from your property
from the point of view are you doing it from a                   division?
funding position, are you doing from the
customer perspective, are you doing it on a
basis of reviewing whether you think you can                     Roger Matthews
have this type of category range in a Sainsbury                  J Sainsbury PLC - CFO
Superstore, i.e. cutting the categories by about
10%-30% in terms of SKUs?                                         Can I just take the first part of that one in
                                                                 relation to dividends which Andrew I mean that
Justin King                                                      was clearly what I was trying to say. That it
                                                                 would be natural to spell out what our future
J Sainsbury PLC - CEO                                            dividend policy will be in the context of that
                                                                 very comprehensive review that Justin has
 Hi Mike, Justin. I mean evidently it is from a                  undertaken. So clearly, that should form part of
customer perspective and our range will need                     the announcement we make on October 19.
to be right for our customers and therefore it
will be different from the way that Asda and                     In terms of the property, just in terms of the
others range.                                                    second part of the equation, then clearly we will
                                                                 look at all aspects of the property portfolio and
The reality of our situation is at the moment                    see what opportunities exist in terms of
that we carry significantly more range on a                      opportunities to churn or whatever. It will be a
store size to store size basis than our                          comprehensive part of the review.
competition and yet in all of our customer
metrics we are not given credit for that in
measures of choice for example, measures of                      Justin King
interest and innovation. So the objective will be                J Sainsbury PLC - CEO
undoubtedly to reduce range because it creates
some particular challenges with the supply                       Just to come back Andrew to the question
chain because if one can buy in significantly                    about clarity on non-food. Yes I would expect to
higher range, which I have said we have, with                    be able to give clarity on non-food at that time.
the fact that we have lower sales per foot,
which we have as well, that means that our
average sales per line are significantly reduced
and that's part of the challenge the supply                      Juergen Elfers
chain is struggling with. So we will be reducing                 Commerzbank
range, but I would imagine that even in the
medium to long-term, as choice is such an
important part of our customers' reason to                        Yes I have a question on the potential split
come into Sainsbury's, I would imagine that we                   between inflation and volume for your 1% like-
would continue to carry a different and larger                   for-like increase for the quarter?
range. But we will seek to get much more credit
with our customers for that.                                     Secondly, as the objective is to reduce range,
                                                                 does that mean that we would have to expect
                                                                 an ongoing investment in the reduction of
Andrew Kasoulis                                                  ranges both for food and non-food?
Credit Suisse First Boston
                                                                 Roger Matthews
 Yes hi guys. Within the review that you have                    J Sainsbury PLC - CFO
coming in October, will you, from what you've
just been saying, actually be spelling out your
dividend policy going forward? Will you be                        I will take the first part of that one in relation
telling us which elements of the non-food that                   to inflation. The inflation for quarter one

                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 7 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

including petrol was 0.5%, forming part of the                   way behind the competition but we have, and if
1% like-for-like growth, including petrol.                       I were to put it in out of stock numbers, and I'm
                                                                 not going to give you a specific out of stock
                                                                 number. But we've halved the number of out of
Justin King                                                      stocks that we were experiencing in rough
J Sainsbury PLC - CEO                                            numbers over the last three months. But you
                                                                 can see that there is a weight price associated
 It is Justin and just to add to Roger's point of                with that and that's because a good proportion
course you will all be aware of the significant                  of our out of stocks - a substantial amount of
level of inflation in petrol, which obviously is                 our out of stocks - were in the fresh food area.
included in that number and we've had good
volume and value growth in petrol. It's one area
where we're well equipped to deliver excellent                   James Grzinic
value for money and we have been in the last
quarter.                                                         Dresdner Bank

On the subject of ongoing mark downs and                          Yes good morning. The first one is I am a little
range reduction, if there are any one time                       bit confused on the three areas of the gross
issues to deal with, we will deal with that in                   margin pressure. Can I get specifically an idea
October. Just to make a more general point                       of the magnitude of the non-food clearance
about general merchandise is that the ability to                 cost on non-food?
mark down ongoing is something that needs to
be built into any general merchandise business.
A good solid clear as you go policy should be                    Roger Matthews
built into the bought margin that you have in                    J Sainsbury PLC - CFO
the product and one of the reasons that we
have a stock position at the moment is that we                    Just really repeating James what Justin said
have not had the right approach in the past to                   earlier, no specific further guidance at this
clear as you go.                                                 stage in terms of the split. I did say that if you
                                                                 take the two key elements of the profit
                                                                 reduction today, then it's broadly split between
Kate Calvert                                                     price investment and additional costs to
                                                                 improve availability.
Morgan Stanley
                                                                 Specifically, in relation to the non-foods, Justin
Yes hi, I was wondering if you could give some                   said it was part of the comprehensive review
detail on what your availability was running at                  that he will be doing going forward and more
before you took over Justin and where you've                     detail to follow in October.
got to with availability at the moment?

Justin King                                                      Nick Coulter
J Sainsbury PLC - CEO                                            Lehman Brothers

Hi. Well we don't comment on specific                             Morning. Please could you give an idea of the
numbers. The main reason for that is that                        health of the underlying food business
people measure availability in very different                    excluding petrol and non-food, which I guess
ways and it becomes an exercise in apple and                     are about 20% of your sales? What's going on
pears.                                                           the rest of the business, the core area?

I think what I can say is that our on shelf
availability was clearly - you could see that, I                 Roger Matthews
could see that, our customers could see that -                   J Sainsbury PLC - CFO
someway behind the competition. It is still some

                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 8 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

 I think the only thing I can really add to the
trading statement, because we don't break                         This is Peter Levene. The whole issue as you
down specific sales figures, is that the non-food                know of the package which is in the
business performance is in line with where it                    remuneration report this year became a subject
has been in the last two quarters. I put that in                 of negotiation between the Board and Sir Peter.
the context the fact that we have made a                         We were unable to reach agreement on that
pricing investment and so we have seen a                         and it has therefore now been decided by both
volume response to that pricing investment.                      sides to refer the matter to our legal advisers
But again, one would not expect to see a major                   to try to resolve. So the answer is we don't
response to a pricing investment in the sales                    know and the matter is under discussion.
line in short order. It takes the sales lines quite
some time to respond because obviously
customers have to get used to the changes that
you've made. And to the extent that you're                       Andrew Fowler
winning back customers, you have to get those                    Merrill Lynch
customers back into the store to experience it.
                                                                  Sorry Roger to push you again. Can I just
                                                                 clarify that the margin investment you talk
Ben Britz                                                        about being split 50:50 includes non-food
                                                                 clearance costs?
Morgan Stanley

 Sorry, I just still am a little unclear on Roger's              Roger Matthews
last comment. With the price investment that                     J Sainsbury PLC - CFO
you talk about in the key elements of the profit
reduction, does that include the non-food                         No, sorry Andrew I'll just stop you there. No, I
clearance cost?                                                  actually put the non-food additional cost of
                                                                 clearance non-food in with my additional costs
Roger Matthews                                                   category.
J Sainsbury PLC - CFO
                                                                 Andrew Fowler
 Yes, I mean I was really Ben just referring to                  Merrill Lynch
the two key elements. One being the price
investment and the second one in relation to                      Right.
additional costs, which would include the non-
food element. And I'm saying between those
two key elements, it's broadly split, evenly split
between the two.                                                 Clark McPherson
                                                                 Credit Suisse First Boston

Paul Smiddy                                                       Hello it's actually Clark McPherson from Credit
Robert Baird                                                     Suisse First Boston. Just a question regarding
                                                                 this morning's announcements and have you
                                                                 been in contact with the rating agencies
Sorry, just so we can clarify what the level of                  regarding this news, or do you plan some time
exceptionals will be this year, can you give us                  in the next couple of days to discuss this with
an idea of what the maximum compensation to                      the rating agencies?
Sir Peter would be?

                                                                 Roger Matthews
Lord Levene
                                                                 J Sainsbury PLC - CFO
J Sainsbury PLC - Senior Independent
Director

                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                      Page 9 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

 Well we have not been in touch with the credit                  downstream to get better utilization out of that
rating agencies. Clearly we've moved fairly                      asset. Because obviously the asset has been
rapidly to make this announcement this                           created, we've invested in it.
morning in the context of our review of the
numbers. But clearly we would be expecting to                    So hopefully that adds a bit of color to the
have those                                                       question?




Nick Jones
Goldman Sachs                                                    Clive Black
                                                                 Shore Capital
 Hi, it'sNick Jones here. You mentioned
operational processes and systems and the
supply chain in the note here. Can you give us                   Morning gentlemen, it's Clive Black actually.
some sense as to whether you're just facing                      First of all on pricing, on what basis are you
some more extensive teething problems with                       actually cutting pricing in terms of how you're
the whole process and supply chain system that                   measuring by how much you need to cut prices
you've been spending the last two or three                       and would you describe the competitive
years investing very heavily in? Or to what                      environment since you've come into the job
extent is this just back to the drawing board                    Justin?
and we're in for a comprehensive overhaul?
                                                                 Secondly, following on from Paul Smiddy's
                                                                 question, is there any change in your likely
Justin King                                                      expectations of cash exceptionals this year
J Sainsbury PLC - CEO                                            following these changes?

                                                                 About price, what do you think Sainsbury
 Well the very reason that we have                               stands for on non-price matters excluding what
communicated today is that we will have a                        you said about range?
review in October is so that I can answer that
question very specifically then. But let me try
and add something to it now.                                     Justin King
                                                                 J Sainsbury PLC - CEO
I think if you were to look at our depots for
instance. We've pushed the capacity up to a
point where they are really struggling to deliver                 Right, well I'll take the first one and I'll hand
excellent service. One of the reasons why that                   the middle one to Roger. I mean basically the
is, is that we have not made the necessary                       pricing is I suppose twofold. One is reference to
changes upstream in terms of suppliers.                          the competitive position and many of the
Whether that be the timing of deliveries, the                    moves that we've made, and I've said this
format of those deliveries. Do they come in with                 several times on price, we're addressing the
scanable barcodes for example? Nor have we                       fact that having stood away from the market
made the necessary changes downstream in                         for a long while we had a lot of prices that were
terms of when we can make deliveries to                          out of line with where they needed to be. So
stores. So for example, putting night shifts on                  just competitive reference is an important part
stores so that we can take through the night                     of it.
deliveries. Both of those have a significant
impact on the capacity of those depots and                       But the second part, and this is the more
therefore one of the things that we were                         complicated one and the one that takes time to
looking at in the comprehensive review is not                    learn about, is making sure you're investing in
necessarily the depots in isolation, but the                     those categories and on those products that
things that we can do both upstream and                          our customers most value. And we've started


                                               For enquiries please contact:
         Lynda Ashton, Head of Investor Relations, Tel +44 (0) 20 7695 7162, Email lynda.ashton@sainsburys.co.uk

                                                     Page 10 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

that process with some of the investments                         Andrew Kasoulis
we've made and we'll continue to make it.
                                                                  Credit Suisse First Boston
But that is a learning process. This is not a
business that has been investing in price in a                     Yes hi again guys. I realize you probably won't
proactive way for a very long time and we will                    tell us how much you've already invested in
need to work out what pricing investments are                     price, but can you give us an idea of how much
geared for us and as I'm sure you'll appreciate,                  you think you've closed the price gap versus
that gearing isn't always on the individual                       Tesco and how much more you think you've got
projects because as I've said many times,                         to do?
customers experience value at the basket level.
And it is the impact on the basket that is                        And also just a follow up on the dividend. Will
important rather than necessarily the response                    you be prepared to risk the credit status,
of an individual line. That's a complex issue and                 perhaps even go into junct credit status to
one that we will work with over time.                             maintain the dividend or to have a progressive
                                                                  dividend policy going forward?
I've lost the second half of the question.
                                                                  Justin King
Roger Matthews                                                    J Sainsbury PLC - CEO
J Sainsbury PLC - CFO
                                                                   Andrew, you're right, I'm not going to give you
 Why don't I pick up the exceptionals part Clive                  a number on price. I think there are plenty of
and no, there isn't any change to our guidance                    surveys published in the public domain that
on exceptional costs, whether they be cash or                     picked up the fact that that moves are
otherwise from today's announcement. But                          significant. I have said many times, price is
clearly, I wouldn't like to pre-empt anything                     something that will be ongoing. This is not
that might come out of the comprehensive                          something that is a one time deal.
review over the coming months.
                                                                  There was an earlier question about the market
So purely in the context of today's                               environment. Pricing has always been part of
announcement, no changes, but clearly not in a                    food grocery. It continues to be. We do have
position to look into the crystal ball and pre-                   the dynamic of margin on Safeway at the
empt what might come out of the                                   moment, but obviously what margins are doing
comprehensive review over the coming months.                      is simply moving Safeway through the Morrison
                                                                  price style. So you asked if we're going to step
                                                                  up the competitive environment. I don't think it
Justin King                                                       is a seachange in the general competition on
J Sainsbury PLC - CEO                                             price that we have always and will always
                                                                  experience. Roger.
 Just to come back on the second half, which
was, was that what we stand for? As I've said,                    Roger Matthews
price is necessary but it is not sufficient. It's not
the reason for us to have a point of difference.                  J Sainsbury PLC - CFO
Our point of difference will be driven by the
quality of the products that we sell, the                          Yes, I will follow up the point on the dividend
environment that we sell it in, the service that                  Andrew. I mean clearly, as I said in the prelims,
we deliver, the fact that we have best quality                    there is quite a number of factors we could take
food, the fact that we have new and innovative                    into account in deciding our future dividend
food. This business is a food business first and                  policy and not surprisingly, one of them would
foremost and that's the main reason that most                     be the balance sheet and our credit rating. I
of our customers choose to shop with us.                          think I've always been consistent in saying that
                                                                  we are keen to maintain a solid investment
                                                                  grade credit rating. But clearly, that would be
                                                                  one of many metrics that we would take into

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                                                       Page 11 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

account following the review and be part of the                   mechanical handling and so on. That's not that
announcement in October.                                          unusual with major capital investments, but we
                                                                  are working our way through those teething
                                                                  problems at the same time as trying to look at
                                                                  decisions that we can make up and downstream
Caroline Eason                                                    as I've indicated.
Execution

 Good morning. Can I just go back to your
comments Justin on the supply chain? I've
made a mistake and was led to believe that
following three years of investment there
would be a sort of state of the art depot                         James Grzinic
system. Could you just give us a bit more color
on your comments about the improvement you                        Dresdner Bank
need to make to the up and downstream to
make it more efficient?                                            Yes good morning again. Can you just give me
                                                                  a little bit of a feel for the magnitude change in
                                                                  the gross margin? We were talking in the
Justin King                                                       second half about a gross margin decline of 150
J Sainsbury PLC - CEO                                             basis points worse in Q4. Can you give us an
                                                                  idea of the trend since then and also what sort
 Yes Caroline, well I suppose the point I would                   of support you have had from suppliers on your
make about state of the art is that it is only                    pricing initiatives as well please?
worth measuring whether it is the state of the
art if it delivers this outstanding availability and              Roger Matthews
affordable costs and it does neither of those at
the moment.                                                       J Sainsbury PLC - CFO

The point about up and downstream is that                          James, I really don't think there is any more
supply chains aren't just about physical boxes.                   specific guidance we can give you on the gross
They are about the whole way that you run                         margin. We've repeated some of the comments
product through the whole system. So we have                      that we made both on March 26 in the pre-close
made the investment in the physical boxes, but                    update and on May 19 at the prelims. We saw
a number of the connected decisions that could                    quite a significant margin investment in the
deliver significant benefit out of those depots                   second half of last year and our operating
have not been made and we will need to look at                    margins came down from 4% to 3.5% and we
those. I did mention night shifts for example                     were very open in terms of continuing margin
and clearly night shifts is not an easy short-                    pressures going forward into the first half of
term decision because that involves people in                     this year. As Justin said, we need to be
stores. It involves re-rotoring and obviously if                  proactive on our own price investments during
you're going to have people on nights, you're                     the first quarter. I can't take it any further than
going to have to recruit some new people. But                     that.
if in putting on night shifts we can improve the
through the day throughput in the depots to
make greater use of the assets, then that's an                    Justin King
intelligent decision to make. So that's what I                    J Sainsbury PLC - CEO
was pointing towards in talking about up and
downstream.                                                        On the supplier point, as I said before, I see no
                                                                  reluctance generally from suppliers. They really
Within the depots themselves there are still lots                 want Sainsbury's to be successful and they
of room for improvement. Somebody asked a                         want to play their part in that. So I see no
question earlier about teething problems and                      reluctance generally. Suppliers play a part and I
we have had many teething problems with                           guess as a supplementary answer to the earlier
software and also with physical kit - conveyors,

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                                                      Page 12 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

question about prioritizing price investment,                    in those depots is that we do want to create
one of the things that we will be able to do is to               within them the ability, in the short-term, to do
prioritize those investments where suppliers                     a little more manual handling so that we can
want to play their part and come early to the                    ensure that the deliveries arrive in store in a
table. And that is indeed what we have been                      form that is much more friendly for the stores
able to do.                                                      to operate. So that does mean we need to put
                                                                 some small consolidation areas into the depots
                                                                 and that has an impact on capacity. It also
                                                                 means they will be in fact slightly less technical
Jill Dodds                                                       and slightly more manual, but that will give us a
UBS Global Asset Management                                      payback in stores because the deliveries will
                                                                 arrive at the store in a form that is much easier
 Yes hi, Jill Dodd, UBS Global Asset                             for them to handle.
Management. A question for Justin. There has
been a criticism of the depot system that it is
just too automated for the style of the
business. Do you accept this? If this is the case,
maybe it needs more structural change than                       Roger Matthews
was expected?                                                    J Sainsbury PLC - CFO

Justin King                                                       But I think also to put that comment into
J Sainsbury PLC - CEO                                            context, clearly it could be seen relation to our
                                                                 comment this morning on capital expenditure
                                                                 where we've been confident to say that we will
Yes Jill I mean I think too automated is not an                  see the estimated Capex this year coming down
absolute metric. I mean they are very                            from £700m to £500m before any store
automated of that there is no doubt. Although I                  acquisitions. So I think that again would
don't know whether you or -- I know many                         reinforce the point that we don't foresee at this
people have visited them. There are still several                stage any major structural change to any parts
elements of them that are still very manual.                     of the infrastructure.
One of the consequences of automation is that
it requires the things that join up to it to work
well and I'm going to give you a specific                        Tom Gadsby
example. If you're going to run an automated                     Williams De Broe
system then you need standardized barcodes
on your products coming in from the supply
base. And we have, at the moment, significant                     Morning. Your predecessor made great play of
issues with certain suppliers where our systems                  the space benefits you were to get from the
struggle to read their barcodes. We either need                  supply chain and the fact that you can convert
to change the nature of our barcode readers so                   a lot of space in store to things like health and
they can cope, or we need to persuade those                      beauty and off license. Is a lot of that going to
suppliers to put barcodes on their products, on                  have to be reversed?
the cases of their products, that our systems
can cope with.                                                   Justin King
So I don't automation is in and of itself an                     J Sainsbury PLC - CEO
absolute problem. But if you do have a highly
automated system then you're very dependent                       Well I think a direct answer to the question is
on the input to it being right. I mean barcodes is               again a matter for October. But what I would
a simple example, but it is one that we're                       say is this. We talked earlier about the
grappling with at the moment.                                    challenges of some of our stock issues. We
                                                                 have converted many stores and that's given us
To the capacity point, one of the reasons that                   great extra footprint. We have 157 stores that
we do not want to chase the capacity further up                  are now 40,000 square feet plus. Clearly from

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                                                     Page 13 of 14
J Sainsbury plc Q1 Trading Statement
Conference Call Transcription

the comments that I've already made about                        phone. We won't be able to hear it on the voice
non-food we don't believe we're trading that                     box. She would just like you to call her if you
extra space as successfully as we can and                        have any further questions that weren't
should. Non-food, as a product group, does                       answered on the session.
place a particular pressure on back of house.
So the reason for sorting out the supply chain                   Thanks again.
and specifically the supply chain on non-food, is
so that the back of house can function better.
But the specifics around that I would get
through in October.

I think we're going to take one more question if
we have one.




Nick Coulter
Lehman Brothers

 Hello again. Just following up on the Capex
comment. Could you expand on the exception
i.e. that you still have plans for surplus Shaws
cash? I.e. what do you intend to do with that?
What's still out there?

Roger Matthews
J Sainsbury PLC - CFO

 Well no new news on that today. I mean you're
quite right, we still retain funds from the sale of
Shaws post the capital return and post the
acquisition of the stores from Morrisons and
our plans are unchanged. We will look at any
store acquisition opportunities in the market
and repeat our desire to expand where feasible
within the convenience market. So no change
to our plans there.

Justin King
J Sainsbury PLC - CEO

 Okay I think we're going to draw to a close at
the moment. Thank you very much for coming
on line. I know there were a lot of you and many
of you may well have not had the opportunity
to ask questions. Hopefully we've covered most
of the ground, but we will hopefully have the
opportunity to speak to you in the coming
weeks. I'm going to hand you back to Lynda
now I think. Lynda is the other end of the

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                                                     Page 14 of 14