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Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) SA (NYSE:DEG)

Q4 2012 Earnings Call

March 07, 2013 9:00 am ET

Executives

Frederic van Daele

Pierre Olivier Beckers - Chief Executive Officer, President, Director and Member of Executive Committee

Pierre Bruno Charles Bouchut - Chief Financial Officer, Executive Vice President and Member of Executive Committee

Roland C. Smith - Executive Vice President and Member of Executive Committee

Analysts

Andrew Gwynn - Exane BNP Paribas, Research Division

Fernand de Boer - Petercam S.A., Research Division

Fabienne Caron - Kepler Capital Markets, Research Division

Edouard Jean Aubin - Morgan Stanley, Research Division

Robert Jan Vos - ABN AMRO Bank N.V., Research Division

James G. Collins - Deutsche Bank AG, Research Division

Pascale Weber - KBC Securities NV, Research Division

Sreedhar Mahamkali - Macquarie Research

Operator

Good day, and welcome to Delhaize Group's Conference Call Concerning 2012 Fourth Quarter and Full Year Results. Today's conference is being recorded. I will now hand the conference over to Mr. Frederic van Daele of Delhaize Group. Please go ahead, sir.

Frederic van Daele

Thank you, operator, and good afternoon, everyone, or good morning. Welcome to the conference call regarding Delhaize Group's results for the fourth quarter. I will now read out the disclaimer, which you can find on Slide 2.

This presentation contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements. Factors that could cause results to differ materially from those in the forward-looking statements are detailed in the cautionary note regarding forward-looking statements in our earnings release that we issued today, as well as in reports filed by the company with the SEC. These forward-looking statements are made as of the date of this presentation. Delhaize Group assumes no obligation to update the information contained in this presentation.

During this call, we will discuss GAAP and non-GAAP financial measures, a reconciliation between the 2 is available in today's earnings release. An audio webcast of this call will be available on the company's website. Delhaize Group reserves all rights to the content of this webcast, and this webcast cannot be recorded or otherwise reproduced.

Today, we have the following people with us Pierre-Olivier Beckers, CEO, Delhaize Group; Pierre Bouchut, CFO, Delhaize Group; and Roland Smith, CEO, Delhaize America. During this call, we will first look back on our last year performance, follow it by comments on our priorities. Afterwards, we will take questions. And for those unable to stay on the call or wish to listen to it again, a replay will be available on the website.

I'll now turn to Pierre-Olivier Beckers for an introduction.

Pierre Olivier Beckers

Thank you, Frederic. Hello, everyone, and thank you for joining our conference call to discuss our fourth quarter and full year results. I think you will be familiar by now that we are using a slide presentation for this call, and I think you can find it on the website in case you did not receive it by mail this morning.

So Slide 3, that's where I am. Slide 3 summarizes our priorities, which are clear and consistent, obviously, as compared to November. Just to reiterate our first focus is on accelerating the Food Lion repositioning through expanding the brand strategy. Further, we are continuing to plan targeted price investments, mainly at Hannaford and Delhaize Belgium, but also in our Southeastern European banners. In this segment, and also in Indonesia, we are targeting to accelerate organic growth.

We remain committed to our pledge on capital discipline. The decision to decrease the dividend this year is a clear example of Delhaize Group's commitment to maintaining its financial strength. We will continue to spend our capital expenditure where we do expect to see the highest return. Additionally, we see further scope for working capital improvements. These are just a few pillars behind our goal to generate an average of approximately EUR 500 million of free cash flow per annum for the coming 3 years.

On Slide 4, we presented our accomplishments for Q4 and for 2012. As we said in January, we are pleased with the progress of our U.S. sales plans. These were primarily driven by positive transaction and item numbers as we reduced prices significantly, which certainly was the main driver for the lower margin in Q4 and 2012 as a whole. However, we are encouraged that the positive trends in transactions, items and sales has further developed and continued in 2013. We see the improving trends not only at Food Lion but also at Hannaford.

In Belgium, our market share trends in Q4, during which we generated strong year-end sales, were better than for 2012 as a whole. But certainly and clearly, more work needs to be done in Belgium.

In Southeastern Europe, previous trends continued. The macro environment was a challenge in most countries. We have, nevertheless, managed to make good progress in the these markets.

In Greece, we continue to gain market share. In Serbia, we have positive comparable sales growth and we realized our target of achieving a 4% underlying operating margin for the year. The strongest growth in that segment, however, was realized in Romania, held by 40 stores openings in Q4 alone, taking the total number of stores opened in this country to 89 for the whole year 2012.

Finally, our free cash flow generation was quite strong. But Pierre is, in a moment, going to talk about it in more detail. And I will come back later in the call to mention a few priorities for the year by region. So Pierre, the floor is yours.

Pierre Bruno Charles Bouchut

Thank you, Pierre-Olivier, and good morning or good afternoon to everyone. The following slide, 6, is our summary income statement for the full year 2012. At EUR 22.7 billion, our sales increased by 7.7% at actual exchange rates supported by the 8.3% appreciation of the U.S. dollar versus euro, while at identical exchange rates, our sales rose by 2.9%. Our gross margin was 24.5% and decreased by 102 basis point at identical exchange rates, mainly as a result of our decided sales price investments across the group, notably in the U.S. and Belgium.

At EUR 810 million, our underlying operating profit, which I will call UOP, going forward, decreased by 13.4% at actual exchange rates and by 17.5% at identical exchange rates. This resulted in an UOP margin of 3.6%, down 88 basis point identical exchange rates, in line with the magnitude of our sales price investment. When taking into account, among others, EUR 125 million one-off charge linked to a decision in early 2012 to close down nonperforming stores, mainly at Food Lion, and EUR 270 million of impairment charges, of which EUR 150 million at Maxi, our 2012 operating profits stood at EUR 390 million and represented a 1.7% margin.

Our net financial expenses reached EUR 241 million, a EUR 50 million euro increase versus last year, explained by EUR 19 million premium pay as part of our debt restructuring in late 2012 and by the needed additional debt to finance the Maxi acquisition.

On the tax side, our effective tax rate decreased from 24.6% in 2011 to 15.8% in 2012. This evolution is explained by the deductibility of the portfolio optimization charges in the U.S. in the first quarter of 2012 and by the favorable resolution of several tax matters in the U.S. in the third quarter. This impact was partially offset by the nondeductible goodwill impairment charges in Q4. As a result, our full year group share in net profit stands at EUR 105 million and is down by 83% at identical exchange rates versus last year. Despite these challenging trends, you have seen that we were able to generate the robust EUR 772 million free cash flow.

The following slide, 7, gives you the evolution in our underlying operating profitability for Delhaize Group, Delhaize America and Delhaize Belgium, both for Q4 and for the full year. For the group, our underlying operating margin decreased by 130 basis point in Q4 to 3.5% and by 80 basis point for the full year to 3.6%. This is explained by the decided acceleration of our price investments throughout the year to support our sales growth, and notably in Q4, at Delhaize America and Delhaize Belgium.

At Delhaize America, in particular, you can note that in Q4, the drop of nearly 180 basis point of underlying profitability down to 3.3% versus a drop of only 100 basis point down to 3.8% for the full year. The same applies to Delhaize Belgium, which show a 90 basis point drop in its underlying operating profitability in Q4, down to 4% as compared to an 80 basis point drop for the full year.

Slide 8 provides you with more detail on our U.S. profitability trend in 2012. At Delhaize America, throughout the year, our price investments to support sales expansion were largely focused at Food Lion and its brand prepositioning, although during the year, we also started to make targeted price investments at Hannaford. In Q4, price investments reached 200 basis point. The highest level for the year and this was combined, obviously, with the higher compression in our underlying operating profit margin.

The drop in our profitability can be explained by the following factors: First of all, about 2/3 of our Food Lion stores had been repositioned by Q4 2012 versus only 15% by Q4 2011. Second, additionally at Food Lion, as of early October, we conducted an EDLP test through the whole of the Food Lion network with 2 categories of products, dairy and frozen, which account for a very significant portion of our center of stores opened. We also invested more in prices at Hannaford over Q4. Three, at last, year-on-year, both Sweetbay and Bottom Dollar posted high ROCs.

In the near future, we are confident that operating margin at Delhaize America should moderate. Since, first, 2/3 of our Food Lion repositioning has now been achieved. Second, the formal test made with dairy and frozen has not been compelling and will not be extended. Three, further sales uplift should support our underlying operating profitability in the near future. Four, realized cost saving and the closure of nonperforming stores should also help our profitability.

In the same way, the following slide, 9, presents the evolution of our underlying operating margin in Belgium throughout the year. Delhaize Belgium saw a total underlying margin decline of 80 basis points in 2012, of which 90 basis points in Q4. Our average price investment in 2012 in Belgium were 90 basis points and therefore, identical to our underlying operating margin decline. As you can note, our price investments had been quite consistent throughout the year. The 90 basis point drop in our Q4 margin is mainly explained by those price investments, but also to a certain extent by the negative margin mix resulting from a higher sales contribution of our affiliate network that generate the lower gross margin for Delhaize Belgium.

As you can see on the slide, 10, EUR 550 million of gross saving has been achieved through 2010, 2011 and 2012. This is 10% more than our target announced to the market. When reviewing savings achieved, we can derive 3 lessons: First, Delhaize Belgium has been good at improving its procurement condition but has been struggling at cutting down its SG&A costs. Two, on its side, Delhaize America has been good at cutting its SG&A, but not at improving its procurement costs. Three, when taking into account cost inflation, store opening costs and our different strategic initiatives, those EUR 550 million gross savings translate into EUR 220 million net savings and therefore, into a EUR 240 million shortfall to finance our total EUR 460 million price investment cumulated over 3 years. Each of those 3 lessons makes us confident to realize further cost saving in the future.

Our next slide, 11, it will give you the evolution in our EBITDA and underlying EBITDA figures. As you can see, at actual exchange rate and at EUR 1,456 million, our underlying EBITDA has proven to be resilient with a limited 4.2% decrease.

I am now on Slide 12. This slide provide a detailed breakdown of our free cash flow generation and makes a bridge between our 2011 free cash flow, excluding the Maxi acquisition and our 2012 operating free cash flow. In 2012, despite a EUR 222 million EBITDA decrease, we posted an all-time high EUR 772 million free cash flow. This is a result of EUR 600 million working capital improvement, including a EUR 438 million inventory reduction, the EUR 84 million increase in account payable and the EUR 78 million decrease in receivables. The inventory reduction was largely attributable to Delhaize America, with the successful implementation of a new automatic reordering device.

Our CapEx discipline, on its side, generated EUR 74 million from 1 year up to another. If we now filter the EUR 772 million 2012 free cash flow, with the impact of nonrecurring items and notably EUR 50 million positive inventory impact from the store closures in early 2012, the EUR 120 million positive impact rate -- impact from delayed deliveries in our different distribution centers in the U.S. at year end, largely because of tough weather conditions and EUR 30 million of delayed tax settlement, our adjusted sustainable 2012 free cash flow stands at EUR 542 million, above our communicated EUR 500 million target for 2012. And naturally, such an achievement in quite a challenging environment make us confident to achieve our target of an average EUR 500 million free cash flow per annum over the 3 coming years.

The following slide, 13, shows a breakdown of our capital expenditures by geography and by category. As you can see, our CapEx breakdown by geography has been rather stable. We have Delhaize America accounting for 52% of our CapEx, Belgium 22% and Southeastern Europe and Asia 23%. On the other way, you will note that in 2012, we have increased the share of our CapEx for remodelings from 24% to 34% with a corresponding decrease of the share of our CapEx for store openings from 30% to 23% with, in particular, the slowdown of opening at Bottom Dollar Food in Greece and in Serbia.

The following slide, 14, gives you a comprehensive view of our key financial structure ratio. Owing to an all-time high free cash flow of EUR 772 million, our net-debt-to-equity ratio has notably improved from 49% at the end of 2011 to 40% at the end of 2012, close to our best level of 35% at year-end 2010. When it comes to adjusted net debt over EBITDAR, which is obviously the key ratio for rating agencies, you will note that we have succeeded to stabilize it at 2.9x, despite our EUR 220 million EBITDA drop. We did it, owing to our strict financial discipline throughout the entire organization. It is the same financial discipline and our commitment for long-term growth, which leaves us to reduce our dividend by 20% at EUR 1.40 per share. Actually, you'll note, that with EUR 1.40 dividend per share, the underlying payout ratio of underlying net profit stands at 33.5%, in line with the Delhaize Group 30% to 35% dividend payout ratio over the last 10 years.

The following slide, 15, provides you with some key elements of guidance for 2013. First of all, the major target for us is flat SG&A as a percentage of sales along with a significant reduction of corporate cost. Second, we are confident to reduce our net financial expenses to approximately EUR 210 million in 2013. Three, we plan approximately EUR 650 million CapEx, with total store openings of about 200. Four, we reiterate our objective to generate an average EUR 500 million sustainable free cash flow per annum over the 3 coming years.

I thank you for your attention and give the floor back to Pierre-Olivier.

Pierre Olivier Beckers

Thank you, Pierre. Before moving to our operational update on Delhaize America, let me just reintroduce to you, Roland Smith. Roland, as you know, has been with us since mid-October 2012. As Ron Hodge was going to retirement, we looked for someone who could have the drive and energy and the proven track record to accelerate the transformation of Delhaize America. And in the short number of months, since he joined our group, Roland has not only began analyzing in depth our challenges and opportunities, but has wasted no time in beginning to take decisive and far-reaching steps that will strengthen Delhaize America. So Roland, I give you the floor.

Roland C. Smith

Thank you, Pierre-Olivier, and good morning or good afternoon to all of you. Since joining Delhaize America a little over 4 months ago, my senior leadership team and I had been focused on identifying Delhaize America's priorities, challenges and opportunities. I plan to cover these in much greater detail on the May 8, but I wanted to take this opportunity today to introduce myself, share some of my early thoughts and report on some of the actions or changes we have recently initiated.

In terms of priorities, I believe it's important that we focus our resources, people, money and time on the few critical priorities that will ensure we achieve our goals in 2013 and beyond. So my team and I evaluated the hundreds of initiatives that Delhaize America was working on and identified 15 critical priorities for 2013. We segmented these priorities into 2 categories, profitable growth and improved productivity. And today, I would like to update you on the 4 critical priorities that are highlighted on Slide 17.

Accelerating the transformation of Food Lion is our most important priority. Food Lion, as you know, is in the process of regaining its price competitiveness and ensuring that it stays relevant to its customers. The strategic phase work, which we began in May of 2011, has been successful in stabilizing Food Lion and reversing the negative sales trends that you are all aware of. As you remember, the focus of this work was to reduce prices, enhance quality and improve service. Approximately 65% of stores were completed in Phases 1, 2 and 3, and Phase 4 is scheduled to be implemented in May. This will bring the total number of phase stores to almost 80%. While we are pleased with the continued progress of Food Lion, we know that we must continue to grow sales and market share and we also must better differentiate Food Lion from its competition. To ensure we accomplish this, we are now focused on more clearly identifying Food Lion's unique selling proposition. I plan to share greater details on this opportunity on May 8.

The second critical priority is strengthening the Hannaford banner. While we were pleased that Hannaford maintained its strong market share in the fourth quarter, the Northeast is becoming increasingly competitive. Hannaford continues to perform very well on the key customer needs, except for price. So in 2012, we invested in targeted price reductions at Hannaford in an effort to address this issue and improve price perception. As a result of these efforts in Q4, Hannaford experienced positive item growth and improved transaction trends. This year, we will continue to improve our overall price competitiveness, which we believe will drive sales momentum at Hannaford.

Our third priority is to optimize Bottom Dollar Food. As you know, Bottom Dollar operates in the fastest-growing part of the food retail market. We are pleased with the progress we are making at Bottom Dollar Food, and our primary focus is to grow sales and reduce operating costs to ensure we have the right economic model before further expansion.

Finally, I would like to talk about the recent organizational changes that we have made at Delhaize America. As you may have read, we restructured our organization above the store level to improve our efficiency and to create a more effective organization that is capable of competing and reacting to the changing environment in which we operate. We completed this reorganization in 3 steps. The first step was revamping my senior management team to ensure we had both the right structure and the right talent to accomplish our goals. As a result, the majority of my direct reports now have new responsibilities. Fortunately, we had excellent internal talent and only one position, the Chief People Officer, will be filled from outside. As a second step, we reduced the number of officers by 25% and relocated the majority of my senior leadership team, as well as some of the key functions to Salisbury, North Carolina. And third, we eliminated approximately 450 positions below the officer level. We believe this new organizational structure is both more efficient and effective, and this will result in significant cost savings that we can reinvest.

Thank you for your time, and I look forward to sharing our progress in greater detail on May 8. Now I give the floor back to Pierre-Olivier.

Pierre Olivier Beckers

Thank you, Roland. On Slide 19, we have provided some priorities designed for Delhaize Belgium. The first priority is that we are implementing a strategy to regain our historical differentiation, this exists out of 3 pillars. First, we want to reinforce on quality of health and assortments, very important historical differences, and we have outlined a number of initiatives to improve on these points. We are planning to more sharply position our mainstream private brands, while product innovation and supply-chain improvements should drive a better perception of our offer. The second pillar is to differentiate the store experience by focusing on customer service, such as fast checkouts and service desks where customers expect this. The final pillar is focused on pricing and promotions where we plan to further improve our competitiveness in 2013.

We plan to fund these initiatives by a strong focus on capital allocation and a reduction also in a number of initiatives. We are also planning to further improve our cost structures, especially where we believe that we have cost gaps with our competition. If we implement these steps, we believe we can deal successfully with our challenges, which are mainly focused around market share.

In Southeastern Europe, on the next slide, we have also listed 3 priorities. Firstly, we would like to consolidate our market share gains in Greece. We are planning, for instance, to strengthen our pricing and promotions there and to emphasize as well our fresh offer and to emphasize it even more. Secondly, at Maxi, the focus is on operational excellence, especially on improving our purchasing conditions and also on remodeling our Belgrade stores and on realizing further synergies.

Finally, in Romania and Bulgaria, the plan is to continue with the store expansion plans in Bucharest and Sofia, respectively. In Greece, Serbia, Romania and Bulgaria, in those are 4 markets, but also in Indonesia, we have 150 store openings scheduled for this year. Southeastern Europe continues to be promising for Delhaize Group. The food retail channels there offers strong growth opportunities and we still have the scope to improve in, for instance, private label penetration.

On Slide 21, let me summarize there. Our priorities are clearly accelerating growth at Food Lion, making targeted price investments at Delhaize Belgium and Hannaford, while accelerating our organic growth in Southeastern Europe and Indonesia. At the same time, we will continue to work on our free cash flow generation through focused capital allocation and strict cost control. And so far this year, we are really encouraged with the start of the year helped by further continued positive trends of Delhaize America.

As we have said before, we will host our Capital Markets Day on May 8 in London, and we are looking forward to seeing you and updating you then on our strategy and our Q1 results. And so with that, I will turn the mic back to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Andrew Gwynn of Exane.

Andrew Gwynn - Exane BNP Paribas, Research Division

Just 2 questions, if I can. The first is, I've been thinking, pretty much all your regions you’re talking to ongoing price investments and I appreciate that the trial of the EDLP test is maybe being put on hold. But consensus is looking for only a 3% fall [ph] in EBIT during 2013, is that really realistic? My second question is just on the free cash flow generation, you will target EUR 500 million for '13 bridge of '15, you highlighted, I think it was, EUR 230 million of one-off sort of elements that might reverse, is that included in the EUR 500 million?

Pierre Bruno Charles Bouchut

Let me maybe take the first -- the second question first. We have been very precise and transparent in reporting to you for the full year, the EUR 772 million free cash flow and by explaining that from -- if you view it on the sustainable basis, this free cash flow actually is only EUR 542 million. And therefore, this is just to reinforce our confidence that we'd be able to produce, as an average over the 3 coming years, the free cash flow of about -- of an average EUR 500 million per annum.

Andrew Gwynn - Exane BNP Paribas, Research Division

2013, you will see some of these elements reverse the one-off inventory credit and so forth that will...

Pierre Bruno Charles Bouchut

And absolutely, we have been taking that into account and once again, we'll be producing in 2013. Now we've target at producing in 2013 the free cash flow, sustainable free cash flow, deeper [indiscernible] of those element of about EUR 500 million, and then we'll be also pluses and minuses.

Pierre Olivier Beckers

Andrew, on your first question, I'm sorry, I'm not sure that I fully understood where you said, "Is this realistic?" But I'm not exactly sure what you mean by this, the continuation of our price investments or the generation of underlying operating profit?

Andrew Gwynn - Exane BNP Paribas, Research Division

No, no. I don't think anyone is -- I'm disputing you still have some profit, but the question I had was that the consensus is looking for evolution in this group underlying operating profit of only 3%. And yet when you've gone through every single country on the call there, we're talking about price investments. Now we did say that the EDLP test you did in Q4 won't to be repeated for whatever reason, maybe you could elaborate on that later, but I'm just wondering is minus 3% realistic given all these prices...

Pierre Olivier Beckers

Okay. Well, obviously, first of all, you know that if we had not felt comfortable with the consensus, we would have said something about it and we are not. That's the first indication without my going further into any type of guidance. Secondly, it is correct that we will continue putting efforts in terms of our price competitiveness. This being said, obviously, as we turn into 2013, we have already the funding [ph] of 65%, 66% of our Food Lion stores repositioned. We have begun price investments at Hannaford. We are going to, as we said, about Belgium continue price investments but in a more balanced way because we are focusing on other commercial aspects so there will be less pressure there. Then we are going to benefit from the work we had on -- the store closure at Sweetbay, we should experience much significant reduction in the Sweetbay losses, improved situation from Bottom Dollar Foods. So we have a number of elements that are going to help in supporting our operating profit generation while, at the same time, it is true that we absolutely want to continue our price investments and that we will have a Phase 4 and a Phase 5, a Phase 5 coming towards the later part of the year in which you have a reduced impact on our operating profits generation. So while I will not give you precise estimate of our UOP, we are not uncomfortable with what we've seen in the consensus.

Operator

We will now take our next question from Fernand de Boer.

Fernand de Boer - Petercam S.A., Research Division

Fernand de Boer of Petercam. A couple of questions. First, you said that, on the EDLP rollout, it was put on hold or definitely canceled, could you give a little bit of reason behind it? Because in the conference call of January, I thought that Pierre Bouchut stated that it was well received by the consumers? And then secondly, on the cost saving measure in Belgium, you are not -- probably not satisfied with the cost measures there or what can be explained there? And the last question, if I may if you look at cash flow generation, very strong, but partly in the first -- in the first quarter, frankly. Then you have the dividend payment, is there a risk that, let's say, half year 2013, you will be at the net, adjusted net debt to EBITDA above 3x?

Pierre Olivier Beckers

So the last question is about our -- sorry.

Roland C. Smith

It's Roland. And I'd like to respond to your question about the EDLP test. If you remember, and Pierre covered this with you not only in his prepared comments but previously, this was across the Food Lion banner. It was in frozen and dairy and obviously, we lowered our shelf pricing and used a lot less promotion. It was about a 4-month test, it started in October, as you remember. And while I can confirm that we saw some clear volume increases and we saw some nice customer response, these volume increases were not across all of our categories and they were not to the level that we were hoping for. Nonetheless, we got some great learning and we've been able to moderate and modify our pricing, but we're not planning to expand that to any other categories in the Food Lion and so it will not have a negative impact that it had in 2012 in 2013.

Pierre Olivier Beckers

You were asking a second question regarding the cost savings in Belgium. And clearly, as you know, Fernand, the cost of doing business is quite high in Belgium. For instance, we had a gain and of course, it hits other companies as well, we had to absorb a 4% of automatic wage indexation in Q4 of 2012 versus Q4 2011. And as one of the early players in the market, we have a cost structure that is established and we are absolutely in a number of lines with a cost gap versus new entrants or hard discounters. And there is no question that as we look into 2013 and beyond, we need and we will look at every line of our SG&A, cost of goods as well, to see where we can generate some efficiencies so that we can maintain our efforts on price competitiveness and the other elements of brand strengthening that I have mentioned. We have no particular and specific plans to talk about here today, but we will continue to look at every line to make sure that we address, in particular, the issues where we believe that we have cost gaps versus our competitors. Pierre, perhaps some of the free cash flow coverage?

Pierre Bruno Charles Bouchut

The adjusted net debt of our EBITDAR ratios, which are given to you on Slide 14, are obviously ratios at year end. As you know, we are in a business where the seasonality impact is quite important. And the seasonality has a significant impact on our ratios. These being said, we are confident that these ratios will improve from 1 year to another i.e. will improve from July -- from June, I'm sorry, 2012 to June 2013, as well as from December 2012 to December 2013. And therefore, we are confident to continue to improve those ratios. We would do it by generating free cash flow through financial discipline, as we said, but also we do expect through better EBITDAR in the coming future.

Fernand de Boer - Petercam S.A., Research Division

May I come back on the EDLP test. Are you now going to be back in those 2 categories to, let's say, higher level promotion, how does it work?

Roland C. Smith

We are taking a look at our shelf pricing across all of Food Lion and obviously, a big part of our phased work is to reduce shelf pricing where we think it's important from a competitive standpoint. We are still, certainly, using promotions, but our shelf pricing has been reduced. From the EDLP standpoint, we reduced the shelf pricing significantly, as I mentioned, and really significantly reduced that promotion. And what we believe we've learned is we have to do this product by product, category by category to make sure that we're competitive with what's happening in the market and that we provide enough promotion pressure to get people in the store. So it will be a combination of low pricing and promotion.

Operator

Our next question comes from Fabienne Caron of Kepler.

Fabienne Caron - Kepler Capital Markets, Research Division

Three questions, the 2 on the U.S., one on cash flow. First on the U.S. Given the fact that your margin in Q4 was slightly lower than expectation, could you help us by quantifying how much it cost you in terms of margin, your EDLP testing in frozen and dairy? The second question, regarding the price investment in Hannaford, shall we expect a price investment as strong as Food Lion, where I think you were going -- you invest something like 200 basis point in Q4, should we expect such a deep price cut, as well as Hannaford in 2013? And thirdly, my question for Pierre, we work in capital and many stocks [indiscernible] triggers for free cash flow in 2013, please?

Roland C. Smith

Let me address the Hannaford question first. As I mentioned in my prepared comments, we score very well at Hannaford on a lot of customer metrics, except for price. And so in 2012, we took some targeted price reductions to make sure we remain competitive. And as I mentioned, we believe that with the increased competition in the Northeast, we're going to have to continue to take targeted price reductions in 2013 so that we can keep customers in our store. However, these price reductions will not be nearly to the level of Food Lion. And so it will not have a nearly as significant impact on our margin. We're pleased that, as I mentioned, that in Q4, our share stabilized and we also saw a positive item growth and some improved transaction trends. So we think that it's working. We'll continue to do it carefully. But it will not have a significant margin impact on us in 2013.

Pierre Olivier Beckers

I might take the 2 other questions. First, regarding our free cash flow generation in 2013, we gave you already plenty of information and at this stage in early March, we are not giving, Fabienne, to give you any further detail on our working capital improvement target for 2013. The second, what has been the impact of the EDLP test in Q4 in terms of price investment. I think that we have an idea, but it is not precise enough for that to be released. We prefer -- but it has not been unsignificant. But we prefer not to, at this stage, to release any precise figures.

Operator

Our next question comes from Edouard Aubin of Morgan Stanley.

Edouard Jean Aubin - Morgan Stanley, Research Division

Just to -- sorry to come back on the cash flow and the CapEx questions. You indicated in the recent past that Delhaize might have protected its margin excessively in the U.S. in the past few years. And aren't you now in a situation where you could be actually excessively protecting your cash flow. By that I mean, if you look at your CapEx guidance over U.S., I think you're guiding towards around EUR 360 million while your depreciation level on average over the past 3 years was around EUR 400 million.

Pierre Bruno Charles Bouchut

If I may, all of us around the table, we do think it's a good question and we are working hard to fix many of our business model and many of our formats. And as soon as it has been fixed, I think we'll be ready, all of us, to resume CapEx to overall business. But we still have, I would say, work ahead of us to do it. And we think that we have some good format. Roland was mentioning Bottom Dollar Food, I think it can be -- and all of us, we trust in this format for the long run. We have to fix a few details and then we would be ready to expand it if we succeed fast.

Pierre Olivier Beckers

In addition, Edouard, if I may, in the past, a good portion of the CapEx we have for the group was linked to opening stores at Food Lion. Obviously, since last year and even the year before, we decreased significantly to basically a point of not opening stores right now because we are focusing on the transforming our business model at Food Lion, repositioning the stores, that is the priority, and that has contributed to a significant extent to the reduction of our CapEx as a percentage of sales, for instance. So when I look -- when we look around the group, we don't see any areas where we feel that we are materially under investing and taking any risks for the long term.

Edouard Jean Aubin - Morgan Stanley, Research Division

Right. And your 3 -- just to follow-up, your 3-year EUR 500 million free cash flow guidance includes a step-up in CapEx in the coming years or no?

Pierre Bruno Charles Bouchut

Well, at this stage, financial discipline is our priority. I would say it will remain our priority, more or less, until year end. Then obviously, depending on the evolution of the market environment, on one hand, depending on our capacity to have fixed some of the issues we are coming across. We may address our policy, but this is a fact of life. But at this stage, yes, it is taken into account that financial discipline remains the rule for the coming 3 years.

Operator

[Operator Instructions] Our next question comes from Robert Vos of ABN AMRO.

Robert Jan Vos - ABN AMRO Bank N.V., Research Division

I have 2 questions. You expect more moderate margin decline in the U.S. in 2013 versus 2012. Is it possible to also provide some flavor on the margin in Belgium in 2013? And second question, sorry to come back on working capital, but is it perhaps possible to elaborate on what component of working capital you see the most potential for improvement? Those are my questions.

Pierre Bruno Charles Bouchut

So working capital, once again, we are giving you a target on free cash flow. We are confident that in 2013, we can improve our working capital. You know there are 3 components, receivable, inventory and payables. We did a lot of work in, as you understood it, in 2012 at the inventory level. We think that we have some further margin for improvement on this side in many different -- in many of our operations. But we still have also margin of improvement in receivables and payables, so we'll be using all those leverages to improve our working capital in 2013. Regarding Belgium, I don't think that, at this stage, we want to give any figures regarding targeted operating profitability in Belgium in 2013.

Pierre Olivier Beckers

To give you some color on Belgium, another trend on the -- over sort of guidance. But we have said, we've said that we will continue to improve our price competitiveness. But we expect to invest at a more moderate level than what we have done in the past. We believe we can continue to strengthen our private brand program, which is a source of support of gross margin. We are working on our SG&A. The affiliates will continue to grow at a slightly faster rate and therefore, should help as well as the operating margin overall is healthy with our -- in our affiliate business. So these are a few indications that perhaps help you to make up your mind. But we are not going to give you any precise number.

Operator

We will take our next question from James Collins from Deutsche Bank.

James G. Collins - Deutsche Bank AG, Research Division

I apologize for going back to the free cash flow issue. But just to clarify on singly 2013 itself. So are you saying that in 2013, you would expect to generate EUR 500 million of positive free cash flow? Or are you saying that if you have an outcome of EUR 260 million, that would be consistent with your guidance because that takes account for the reversal?

Pierre Bruno Charles Bouchut

Let me be precise because -- forget about 2012. What we are saying is that for the coming 3 years, we target an average sustainable free cash flow of EUR 500 million. It means per annum, it means that for the coming 3 years, on a cumulative basis, we are targeting EUR 1.5 billion of free cash flow. I cannot be clearer, I think.

James G. Collins - Deutsche Bank AG, Research Division

Sure. Okay, that's very clear, indeed. And can I just quickly clarify. . .

Pierre Bruno Charles Bouchut

And once again, to cross the T and dot the I, once again everything being equal, you understood when we did answer from one question to Edouard Aubin, that if, obviously, the market environment and the economic situation were to change, for instance, by year end, and if we have been able to fix some of the format [ph] issues we are coming across and we have successful winning format [ph], we'll be ready to resume CapEx to create value. We are people, we're adapting ourselves, we will show flexibility when the time comes.

James G. Collins - Deutsche Bank AG, Research Division

Okay. And just one other question on the EDLP test. Is that the end of the kind of debate or work within the business about whether -- I thought that there was a pretty firm conclusion there that Food Lion probably was too high, low in its pricing relative to what's becoming increasingly dominant competition. Whereas it feels like, at the end of that test, you said, "Well, no, high, low is the way that we're staying and they'll be no move towards EDLP. Is that the right way to read it?

Roland C. Smith

No. Let me be real clear on that. We went all the way down to EDLP in our test to see what the bottom level of the expectation and the delivery would be. And so now what we've learned or what I try to relay is that we will probably end up somewhere between where we were with a significant high, low and all the way down to EDLP, where we did not find that the increase in the volume was what we needed in order to be comfortable with it. Did that help you understand?

James G. Collins - Deutsche Bank AG, Research Division

Yes. No, that's great. That's very clear.

Operator

We will now take the next question from Pascale Weber of KBC.

Pascale Weber - KBC Securities NV, Research Division

Most of my questions have been answered. Just the 2 left. First on the cash position, the EUR 900 million. Is it possible to use it to lower debt? And then secondly, can you give us a guidance on the tax rate for 2013?

Pierre Bruno Charles Bouchut

Well, regarding on effective tax rate for 2013, we expect something close to 20%, probably lower between, let's say, 18% and 20% Regarding the cash position, we have been looking at that. Unfortunately, there is not a compelling business case because of the existing covenants in existing bonds in the market. So, so far, there is not a compelling business case, unfortunately. Otherwise, we'll be doing it, yes.

Operator

[Operator Instructions] We will now take our next question from Sreedhar Mahamkali of Macquarie.

Sreedhar Mahamkali - Macquarie Research

I'm really sorry, I missed most of the call in the prepared remarks there. I was in a train back to London. I'll ask the questions anyway, and will you please shoot me down if you think you already answered them. Firstly, does the U.S. bonus accrual impact, was there any in Q4, I think, it was about EUR 50 million in Q3 and how should we think about that in 2013? Secondly, you talked about cost savings to help in 2013, I understand. But despite meeting your target by about EUR 50 million in 2012, there was really no margin offset to the gross margin investment in 2012. So why will that be difference in 2013? And then finally, are you able to give us any more color at all by what you mean in terms of moderate margin decline in the U.S. I guess 100 basis points or 130 basis points if you strip out the bonus accrual, so far, as I could calculate. Is moderate 30, 40 point basis, or 70, 80 basis points. I'm just -- if you could just help put a magnitude a little bit that would be very helpful. As I said, just shoot me down if these questions have already been asked and you've answered them.

Pierre Olivier Beckers

So Frederic, maybe the last question, moderate -- what moderate means.

Frederic van Daele

Well, okay. We said that we expect our declining underlying operating margin should moderate over time and what we mean is that, obviously, we are expecting to see a progressive stabilization of our margin. We are quite aggressively continuing to support our various revenue growth and acceleration initiatives that create, in the short term, pressure on our -- and it has in 2012 in a more significant way. But for the variety of reasons, which I have explained in the call and in the first questions, we believe that we will start to -- from the start of 2013, we are in a better place to offset some of those pressures from Sweetbay, from Bottom Dollar Food, from the cycling already or 2/3 of the Food Lion stores, which are behind us now, and from our cost-saving work that we continue aggressively. And so for all these reasons, we believe that with the lag, we are more and more in a position to offset the pressure on our operating margin. And that, indeed, you will see that the decline will progressively stabilize over time, and that's where we are. I think you also had a question on the bonus accruals. That was your first question, whether there was anything in the fourth quarter. In fact, if we look -- because I guess that's what's behind your question, is there any support of the margin of the underlying operating margin in the fourth quarter due to the fact that we had reversed accruals in the third quarter. Well, we did accrue some bonus in the fourth quarter as we saw our performance was slightly improving compared to our expectations at the end of last summer. And all in all, when we compare year-on-year Q4 to Q4, we see a wash and we don't have an influence in Q4. So you don't have to worry that the underlying operating margin of Q4 2012 was supported, in any way, by bonus accruals. There was a third question about cost savings, but I forgot which one it is.

Sreedhar Mahamkali - Macquarie Research

Sorry, can I just come back in 2013, how should we think about the bonus accrual? I'm not sure we expect that to reverse, that EUR 50 million in Q3 to reverse because that's a pretty material...

Pierre Olivier Beckers

We saw the year with the full expectation that we're going to pay our bonus and we are ready to do that. So we don't build the year where you say I'm going only to pay half or therefore, accrue for half. So we're back to normal.

Sreedhar Mahamkali - Macquarie Research

Okay. Last question, just to follow-up on what you said Pierre-Olivier. Can I ask, the way the U.S. margin, are you happy with where consensus today is, I think, 30, 40 basis points declined in the U.S. operating margin?

Pierre Olivier Beckers

We answered that and we said, we talked about the group and we said that if we had seen anything that we are not comfortable with in the consensus, we would have mentioned this. So you can conclude that we are not unhappy with what we see. But I invite you to call back, Frederic or -- we've answered many of those questions.

Frederic van Daele

So I think with that last question, I would like to thank you all for participating in today's conference call. A replay is available on the company's website. And if you have additional questions, do not hesitate to contact our IR department. We will report our first quarter results and host our Capital Markets Day on Wednesday, May 8. Thank you, and have a nice day.

Pierre Olivier Beckers

Thank you.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.

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Source: Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) SA Management Discusses Q4 2012 Results - Earnings Call Transcript
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