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

Q1 2013 Earnings Call

May 08, 2013 3:00 am ET

Executives

Frederic van Daele

Pierre-Olivier Beckers - Chief Executive Officer, President and Director

Pierre Bruno Charles Bouchut - Chief Financial Officer and Executive Vice President

Analysts

Fabienne Caron - Kepler Capital Markets, Research Division

John Kershaw - Exane BNP Paribas, Research Division

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

Pascale Weber

James G. Collins - Deutsche Bank AG, Research Division

Robert Joyce - Goldman Sachs Group Inc., Research Division

James Grzinic - Jefferies & Company, Inc., Research Division

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

Cedric Lecasble - Raymond James Euro Equities

Frederic van Daele

Thank you, operator. Good morning, everyone. Welcome to the conference call regarding Delhaize Group Results for the First Quarter of 2013. This will be a combined analyst and media call. I just want to remind you that today's presentation and discussion will include forward-looking statements. We want to caution you that such statements are predictions and that actual events or results can differ materially. Factors that may have a material effect on our business are detailed in the cautionary notes in our earnings release and our complaint in our SEC filings. These statements are made as of the date of this presentation and Delhaize Group assumes no obligation to update this information. Today, we have the following people with us: Pierre-Olivier, CEO, Delhaize group; and Pierre Bouchut, CFO, Delhaize Group. During this call, we will look back on our performance in the first quarter, followed by comments on operations. And afterwards, we will take questions. For those unable to stay on call or wish to listen to it again, a replay will be available on the website.

I will now turn over to Pierre-Olivier Beckers.

Pierre-Olivier Beckers

Thank you, Frederic. Hello, everyone, and thank you for joining our conference call to discuss our first quarter results. This morning, we also announced my intention to retire as CEO by the end of this year. I will remain thereafter as a non-Executive Director on the Board of Directors. After serving Delhaize Group for 30 years, of which nearly 15 years as CEO, I did not make this decision lightly. I think you all know my passion for this company, my enthusiasm for retail and my deep sense of responsibility. In addition, I can assure you that my energy level is absolutely intact. Nonetheless, the Board of Directors and I have agreed that the time is right to move forward into a succession plan. So why? And why now?

Choosing the appropriate moment for a CEO to retire is by no means, an exact science. Sometimes, there is a right time and now, it's that time. First of all, I have always been transparent and outspoken about my conviction that no one should have a sort of divine and permanent right to his or her job. And so, this applies to me as well. I have said that it is healthy and important from time to time for a company to install a new person at the top. Someone who will bring new thinking and a fresh pair of eyes to the reality, the challenges and opportunities facing the company. In addition, it is clear that after a challenging last couple of years, Delhaize Group is building again momentum as indicated by our results of the last 3 quarters. Our stock price has responded well. There is more stability in our operations. We are moving in the right direction.

And as I look into the future, I am confident that we have great strength. And I'm realistic that we face challenges as well. It is the nature of our industry that you must constantly reinvent yourself to capture growth where it will be tomorrow and to avoid the risk of becoming irrelevant to your customers. We are no exception. And this is why, now is the right time to start looking to my successor. We need to appoint a new captain who will bring his or her new thinking and then lead the company for many years as we execute our strategy. As a consequence, the Board and I are now actively engaged in a process that will consider both internal and external candidates, and that is designed to provide for a smooth and orderly transition by the end of this year.

In the meantime, I remain fully committed to lead our company and support each and every one of our 158,000 associates to the best of my ability. There will be no void of leadership. I am staying firmly at the helm until a smooth transition has taken place. And so, with this spirit in mind, I will now start the review of our Q1 results.

You will be familiar by now but that I will use a Slide presentation for this call, which you can find in the website in case you did not receive it by mail this morning. On Slide 3, we show the highlights of the first quarter and you can see that our Group recorded an accelerating organic growth at 3.8%. We have, in particular, a strong quarter in the U.S. comparable store sales growth of 1.9% with a further improved results compared to the second half of last year, especially if you consider that we were still running with around 50 basis points of deflation. Both Food Lion and, to a lower degree, Hannaford, experienced significant positive regrowth. Our profitability saw a strong recovery. This was boosted by favorable weather conditions, cost savings, lower losses at Bottom Dollar Food and the benefit from closing underperforming stores.

Also, in Belgium, we experienced a better result. We saw an improvement in volumes, helped by good trading over Easter, and to some extent, by weather conditions, which supported our revenues. Profitability was helped by better control over SG&A cost. Nevertheless, our market share remained under pressure, indicating that we still have to do more to convince our customers that Delhaize does offer competitive prices and promotions while providing a unique assortment and a high service level.

In Southeastern Europe, our results were lower than last year. This was for 2 reasons: Firstly, in Greece, we have invested in prices which has been driving deflation and also, of course, further market share gains on the positive side. Secondly, all other countries experienced negative regrowth as inflation was high in the first quarter in every market, and especially in Serbia. Finally, our control of our SG&A has improved markedly this quarter while we also delivered strong free cash flow.

And now, we'll give the floor to Pierre who will give in -- or go in more detail over the first quarter financial results. Pierre?

Pierre Bruno Charles Bouchut

Thank you, Pierre-Olivier. Good morning to everyone. The following Slide 5 provides you with our summary first quarter income statement. At EUR 5.5 billion, our sales increased by 2.1% at actual exchange rates and by 1.5% at identical exchange rates. Our gross margin stood at 24.7%, and decreased by only 10 basis points year-over-year at identical exchange rates. We invested over 80 basis points in sales prices at Delhaize America, but impact was mitigated by improved supplier terms, Bottom Dollar Food citing their grand opening in Pittsburgh last year and better shrink results. Let me draw your attention on the fact that SG&A, as a percentage of sales, decreased by nearly 70 basis points year-on-year, down to 21.5%, in line with the objective to reduce SG&A as a percentage of sales. A EUR 214 million, our underlying operating profit increased by 13% at actual exchange rates and by 13.7% at identical exchange rates. These resulted in an UOP margin of 3.9%, up 40 basis points compared to last year and driven by improved operating performances both at Delhaize America and Delhaize Belgium.

When taking into account mainly EUR 99 million one-off charges, linked to a decision in January to close down 51 nonperforming stores, out of which 33 Sweetbay stores and including EUR 17 million reorganization expenses, mainly at Delhaize America, our operating profit stands at EUR 150 million. It posted a sharp 3.5x improvement versus our EUR 32 million Q1 operating profit last year, which was negatively impacted by much higher one-off charges. Net financial expenses are EUR 51 million and an effective tax rate of 7.7%, positively impacted the portfolio optimization charges resulted in a group share in net profit of EUR 61 million compared to a loss of EUR 3 million last year. You notice certainly that we are able to generate almost EUR 255 million free cash flow in the first quarter.

The following Slide 6 provides you with the progress in EBITDA and underlying EBITDA in the first quarter, both at identical and at actual exchange rates. As you can note, at identical exchange rates of EBITDA and underlying EBITDA have increased by 44.3% and 7.1%, respectively. The improved performance at Delhaize America and Delhaize Belgium are the main reason for such a progression.

The following Slide 7 gives you detailed insight in our cash flow statement. As you can note, over Q1, the EUR 369 million EBITDA, the EUR 25 million reduction in working capital, made up for EUR 24 million of interest payment, EUR 5 million of taxes, 17 -- EUR 78 million of cash CapEx and EUR 32 million of portfolio optimization cash out and therefore resulted in EUR 255 million reduction in our net debt. Therefore, the EUR 168 million improvement of our free cash flow from EUR 87 million in Q1 2012 to EUR 255 million in Q1 2013 is mainly explained by: First, the EUR 82 million increase in our EBITDA; 2, the EUR 60 million improvement of our working capital, which is largely explained by better payment terms; and 3, up to EUR 67 million by our CapEx discipline.

The following Slide 8 gives you more detail on the revenue trend at Delhaize America. Comparable store sales growth of 1.9% is an encouraging improvement as compared to flat comparable sales growth reported in the fourth quarter of last year. Lower deflation of only 50 basis points, favorable weather conditions and improved trends at all our banners and particularly at the Food Lion repositioned stores generated these results. When taking into account the favorable current item impact of 1.1% and the 0.7% positive impact of store openings, we booked organic revenue growth of 3.7%. With a negative 2.7% impact of store closures, we realized 1% revenue growth.

Slide 9 and 10 are probably familiar to you by now and provides you with the respective sales performances of our Food Lion repositioned and non-repositioned stores. On Slide 9, you are able to see how the sales volume evolution is broken down between the number of transactions and the item per transaction. We continue to be encouraged with the positive trend that we see in the number of transactions in our repositioned stores. Overall, we can note that volume growth is 6% higher in our repositioned stores versus the non-repositioned stores and this is a similar result compared to Q4 2012.

The following Slide 10 provides you with a breakdown items growth and price per item in order to derive comparable sales growth in the repositioned and non-repositioned Food Lion stores. As you can see, both our repositioned and non-repositioned stores experienced price deflation. As already explained, price deflation was less pronounced in the first quarter than in the fourth quarter last year. Here again, our comparable sales growth is about 5% to 5.5% higher in our repositioned stores versus the non-repositioned stores, both in Q4 2012 and Q1 2013.

The following Slide 11 gives you more details on the evolution of the underlying operating profit at Delhaize America. As you can see, the UOP margin increased by 50 basis points from 3.7% in Q1 2012 to 4.2% in Q1 2013. This increase is explained as follows: First, from approximately 40 basis points by lower losses at Bottom Dollar Food, and by the closure of nonperforming Sweetbay stores. As you remember, Bottom Dollar Food hasn't opened stalls over the last 9 months. Two, for up to an estimated 40 basis points by the calendar and favorable weather impact on our revenues. Three, by up to 30 basis points by the realized SG&A cost savings; four, around 20 basis points is coming from other elements such as sales leverage, Food Lion store closing and improved shrinkage. While the negative impact of realize project investment at Delhaize America is estimated at 80 basis points. You will therefore understand why we remain prudent on the evolution of Delhaize America underlying operating profit over the coming months when taking into account, in particular, that first, the current item tax should be negative in Q2; second, the launch Food Lion repositioning in the coming week, and an additional price investment at Hannaford as of Q2 should have inevitable negative impact on our gross margin; three, the release of Delhaize America bonus accrual was recorded in Q3 last year; and four, 12 Bottom Dollar store openings with their underlying pre-opening cost are scheduled in the second half of this year.

The next, Slide 12, presents Delhaize Belgian sales evolution over the first quarter. Our 2.4 comparable sales growth was driven by around 2% of retained inflation, which is a slightly higher level than we experienced in Q4 2012. Our positive volume trend was also helped by a good Easter and, to some extent, by favorable weather conditions. The negative 1.8% calendar effect we experienced in Belgium due to 2 fewer trading days, promptly offset by the timing of Easter on the other hand, was exactly compensated by the same 1.8% impact from store openings.

I am now on Slide 13. This slid provides another view of our sales growth and UOP margin development in Belgium. Actually, we only exhibited limited price investments in this quarter. The most important factor behind our UOP margin improvement to 5.1% from 4.6% last year is therefore a better control on our SG&A cost. In particular, in Q1 this year, we benefited from lower year-on-year redundancy cost among others. You will therefore understand that we are prudent on the evolution of the UOP margin at Delhaize Belgian in the coming month since SG&A cost are likely to show a less favorable trend, given continued wage indexation and since we expect for price and promotional activity to increase again compared to a relatively quiet first quarter.

The following Slide 14 shows a similar overview between revenues and profitability for S -- Southeastern Europe operation. As you can note, at 6.8% over Q1, revenue growth at identical exchange rate has been significantly lower than in most quarters in 2012. Actually, in most of Southeastern Europe countries, our sales growth continue to be supported by store openings. But in most of those country as well, consumer spending is under strong pressure. This pressure, combined with higher retail price inflation, result in a negative evolution of our sales volume in many Southeastern Europe countries. The decrease of our UOP margin to 1.4% over Q1 2013 is therefore explained by first, negative total sales volume evolution and its related negative impact on the operating profitability; two, our accelerated expansion in Romania and it's related negative impact on our SG&A in the first stage; three, offsetting the [ph] price investment at Alfa Beta in Greece and in Serbia and its related negative impact on our gross margin.

For 2013, we continue to target revenue growth and growth in UOP in southeastern Europe over although it is obvious that the backdrop remains challenging in order to realize this. We are nevertheless hopeful to reverse this trend in the coming month owing to, first, our close control of S&GA through the region; two, the expected leverage of our cost base from [indiscernible] from openings in Romania in the second part of the year; and three, the expected leverage effect of realized volume growth and market share gain in Greece in the second half of the year as well.

I now hand over to Pierre-Olivier for operational comments and the conclusion.

Pierre-Olivier Beckers

Thank you. Pierre and I just want to briefly provide you with an operational update before we turn to you for questions. Slide 16 summarizes our priorities, which I'm sure you're familiar with by now. The importance of the Food Lion repositioning, as well as further targeted price investments at Hannaford, Delhaize Belgium and also in our Southeastern Europe banners. This is something that we have consistently talked in the last 12 months. We further continue to accelerate our organic growth in selected markets and aim everywhere to strengthen our brands. You are aware that our focus on capital discipline, working capital improvements but also on cost supported by a progressively accelerating top line, as indicated again in Q1, are the main reasons why we believe we can generate approximately EUR 450 million to EUR 500 million of free cash flow on average for the coming 3 years.

At Delhaize America, on Slide 17, our priorities are clear. Accelerating the transformation of Food Lion, the strengthening of the Hannaford and optimizing Bottom Dollar Food. We have booked significant progress on all of these in the first quarter. At Food Lion, the main focus today is on implementing Phase 4. We plan to go live next week in the Baltimore and Washington market, and this will result in 78%, almost 80% of our Food Lion network being repositioned according to the phase strategy. We are confident that we will see there similar results as in earlier phases. As Roland Smith mentioned in March, we currently involved in defining a unique selling proposition for Food Lion. This work is ongoing and we will report later in the year on our progress. Strengthening Hannaford is another priority. We mentioned before that Hannaford scores well -- very well, I should say, on all customer metrics except price. This is why we have plans to make further targeted price investments and we have started to do accordingly in April. This will continue and should fuel further growth in volumes and sales.

Thirdly, accelerating the path to profitability at Bottom Dollar Food is key and I'm happy to report that we have booked significant progress so far this year. At Delhaize Belgium, despite our strong first quarter performance, we have continued to lose some market share in the first quarter of 2013 and the priorities provided on this slide summarizes -- summarize our strategy to stop this trend.

We are implementing a strategy in Belgium to regain our historical differentiation. First, we are working on reinforcing the quality, the health and assortment aspect, and we have outlined a number of initiatives to improve on these points. Secondly, we differentiate the store experience by having clean, modern and well-laid-out stores. We have decided last year to accelerate our store remodeling program. The idea is to renew, remodel, refresh 80 to 85 company-managed stores between 2012 and 2015. Third, we focus on pricing and promotions and plan to further improve our competitiveness in 2013. In spite of more limited price investments in Q1, we have further improved our price positioning compared to our peers in the Belgian markets. Finally, we continue to focus on our affiliated network. Our affiliates continue to show of that are performance in our integrated stores and we are putting measures in place to strengthen and grow our network.

Finally, on Southeastern Europe, we also have set 3 priorities. Firstly, in Serbia, at Maxi, the focus is on operational excellence. Our efforts are aimed at improving our gross margin. This is done through supply negotiation and by reducing direct store deliveries. And to that end, we have recently kicked off the construction of a new distribution center which should be ready in the second half of 2014. We further plan to increase our market share through store openings and a more effective pricing policy in Serbia. At the same time, we are currently developing a format which we aim to roll out in the countryside. Serbia remains strong on cost control and we are planning to further improve this. Secondly, for Southeastern Europe we would like to consolidate our market share gain in Greece. We have significantly stepped up our pricing efforts in the first quarter which has fueled further market share growth. Finally, we are aiming to maintain or even accelerate growth in Romania and Indonesia through further store openings and comparable store sales growth.

So to conclude, we are reiterating our guidance today, as you can see on the last slide. Our underlying operating profit guidance was issued on April 22. It recognizes that we had a strong first quarter indeed, but also with we are still planning to make significant investments in our strategic priorities over the remainder of the year. As a result, we currently foresee a modest decline in underlying operating profit compared to last year.

The rest of this slide is similar to the one we have provided in March. This means we are targeting a flat SG&A as percentage of revenues, a reduction in net finance expenses to approximately EUR 210 million. And also, we are foreseeing about EUR 650 million of CapEx, of which we plan to finance 200 growth store openings. And finally, we target approximately EUR 500 million of free cash flow.

With this, I will turn to you for -- and to the operator to organize the question side. Thank you. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Fabienne Caron from Kepler Capital.

Fabienne Caron - Kepler Capital Markets, Research Division

2 questions for my side. The first one for Pierre-Olivier. Pierre-Olivier, is it right that you were thinking about retiring the main reason why you decided to postpone the Investor Day? If not, could you give us a bit more detail on the exact reasons behind. And the second question would be, can you update us in the U.S. on how your price gap to Wal-Mart has moved, please?

Pierre-Olivier Beckers

Okay. Thank you, Fabienne. Well, indeed, we were finally -- finalizing a few weeks ago, the board and I, the plans for my retirement and we decided, with my executive colleagues, that it was not appropriate to go into the last stretch of preparing a Capital Markets Day and to perhaps be with you on -- in London today, with this news about my retirement, which most likely was going to slightly bring everybody off the main track and the main track being to talk to you about our strategy, our progress, our strategic initiatives for the future, the Food Lion USP [ph]. And we felt that it was better to postpone all of this to later in the year. This will also give us a little more time to be more ready with concrete developments regarding the future developments at Food Lion and in other parts of the Group. So I will turn Pierre perhaps to you, Frederic, price gap versus Wal-Mart?

Frederic van Daele

It's Frederic. I would say, on Wal-Mart, on pricing, on the price gap, we have nothing really to say how that has evolved. I would say, we are on strategy internally on how we compare to Wal-Mart. And for the rest, everything remains the same, as we stated to you last year.

Fabienne Caron - Kepler Capital Markets, Research Division

So is it -- I think I remember we were talking about between 6% and 8% price difference, is it still the same?

Frederic van Daele

It's -- on the index, as we measure it, we are in the reposition stores around 5% more expensive than Wal-Mart. That's what he said.

Operator

We will now take our next question from John Kershaw of Exane.

John Kershaw - Exane BNP Paribas, Research Division

In terms of your guidance for the full year, the EUR 775 million. Can you perhaps give us an indication of what you're assuming in terms of the comp store sales, particularly in the U.S.? The drawing stocks [ph] clearly has been a better Q1 than you might have envisaged, so why doesn't that persist? Then secondly, taking the alternative tack, why are you assured more this time, this isn't just a 1-year benefit and then you go to volume declines in subsequent years?

Pierre-Olivier Beckers

The second question, John, was on the -- I'm sorry, I'm not sure we're looking at each other here?

John Kershaw - Exane BNP Paribas, Research Division

In terms of the strategy, clearly, you're getting -- you've repositioned, you invested. But as you're alluding to, you're still a good bit more expensive than Wal-Mart. So give people assurance as to why your volume accretion in like-for-like terms once you annualize this price investment can continue to progress and so profit be secure?

Pierre-Olivier Beckers

Yes, we have -- clearly nothing is ever a guarantee in life. But there's no question that we are seeing momentum not only in the initial quarters of our phased repositioning but also as we look at Phase 1, we see that we are continuing to get traction in all of our phases, experienced the significant same-store sales growth including Phase 1, and that's of course a good indication of our -- of the resilience of the work we are doing at Food Lion. It is also worth noticing that in the meantime, the competition has not stood still and we have had reactions by some of our tougher competitors. And in spite of that, we continue to see and enjoying the good momentum in the reposition stores. So we are continuing the work. We are continuing to improve our operations everyday. You know that we have made some management changes at the beginning of the year to make sure the Food Lion would be even more customer-centric as we look to the future. And all of those elements give us confidence that we are moving in the right direction. And of course, that is something we need to defend every day. And that is why we believe that we will continue to generate positive comp store sales in the coming quarters.

John Kershaw - Exane BNP Paribas, Research Division

And just to come back on [indiscernible] to positive comp store sales. But can you go...

Pierre Bruno Charles Bouchut

No, we are not -- John, we are not going to give you any indication of, I would say, the underlying assumption on this line of budget for 2013.

Operator

We will now move to our next question from Fernand de Boer of Petercam.

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

Fernand de Boer, Petercam. 2 questions. One is with regard to Bottom Dollar. You are planning a number of -- 11 openings in the second half. Is that in the new region or is it in the existing regions and do you now see already a positive contribution from Bottom Dollar? And the second question is regarding your successor. Has that to be an external candidate, or is it still possible that someone from the current executive team pops up as the new CEO?

Pierre-Olivier Beckers

Well, at Bottom Dollar Food, obviously, we have made a commitment to continue strengthening the regions in which we are in and advancing up our market share there. So clearly, coming store openings will be in the existing 2 regions of Philadelphia and Pittsburgh. As a chain, Bottom Dollar Food is not yet PFO-positive [ph], but obviously, we have significantly reduced the losses during first quarter. That was the goal, that was reason why we decided to slow down the growth at this time and focus on management's attention on accelerating the path to profitability. We are delivering on that and we see, obviously, that a number -- a growing number of stores are in the individually contributing positively not only to EBITDA but also to PFO [ph]. In terms of my successor, we are, as I indicated, starting a search and this will take into consideration both internal and external candidates. We have put together over the last few years a strong team, a strong management team that I'm very proud of, and we have strong executives. At the same time, I think, as any best-in-class company would do, it is important to benchmark the bench you have would with possible external candidates, and that's exactly what the board and I are going to do.

Operator

Our next question comes from Robert Barsnick [ph] of Reuters.

Unknown Analyst

Fernand just asked the first question for me, about your potential successor. Another question that I have, maybe a bit more wider, if look back at your very long career at Delhaize, are there any regrets you have? By the same token, what is your biggest achievement, do you think?

Pierre-Olivier Beckers

Well, thank you very much for this nice question, but you know what, I'm not the going yet. And I feel personally that it's very not -- it's certainly not the right time for me to make any comment on my career and what my legacy could be. I'm staying firmly at the helm, I'm the CEO, I'm in charge, I'm leading this company and I will be very happy to talk about those elements in my legacy when the time comes for me to take, indeed, my retirement after a smooth transition has taken place. For the moment, I'm fully focused on what my team and I need to do to continue the good progress over the last several quarters and support initiatives that we have put in place with a new game plan. But if you want 1 answer, I would say the only regret I have is that, perhaps, you always think you could do things faster and for the rest, why don't we meet again when I do indeed retire?

Operator

We'll now take our next question from Pascale Weber of KBC.

Pascale Weber

I've got a question about the retail inflation in Belgium that has picked up in the first quarter compared to the fourth quarter of last year. It is because of cost inflation picking up or does it mean that price competition is less fierce [ph]?

Pierre-Olivier Beckers

Well, a bit of both Pascale, but certainly your second suggestion is most important. We have seen indeed in Belgium over the last -- over the first quarter, a more benign competitive environment. And I can confirm this as we invested somewhat at a lower pace in our price -- in our price strategy in the first quarter. But nevertheless, we continued closing the gap with our competitors. We improved our price positioning versus our competitors despite the fact that we invested at a lower pace in prices. So this reflects, I think, very clearly the slightly more benign environment and the combination of the 2 elements, slightly higher cost inflation and the environment -- competitive environment leading to the slightly higher inflation.

Pascale Weber

Okay. And just a second question. [indiscernible] What kind of profile are you looking at for your successor? What should be his main attributes, his main characteristics?

Pierre-Olivier Beckers

Well, obviously, I'm not going to go through that profile but we need -- we're going to look for the person who's best suited to do this job. And we need somebody with -- who's going to bring new thinking, expertise, technical skill. But also somebody will be a good fit in terms of our vision and values and who will be a good cultural fit. There's nothing more important than making sure that the person who will take the lead of Delhaize Group is going to be a great fit from a cultural point of view because otherwise, even if you come with great strategy, ideas and new thinking, it's going to be difficult to implement them over time. So the board and I have -- with the support of an executive search firm, we have put together what we believe to be the ideal profile for my successor and we are working now in terms of evaluating, as I said, possible internal and external candidates against that profile.

Operator

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

James G. Collins - Deutsche Bank AG, Research Division

Could I just pick up on something that you said in response to John's question, on the phased stores. So I think you said, that all of the phased stores are in positive -- well, all of the phased store sections, if you like, are in positive comp growth. So does that imply that Phase 2, which is obviously now past its anniversary, is still delivering positive comps? And second, Phase 1, I guess, is just this month, goes through the second anniversary of its relaunch. And you're suggesting that perhaps that those stores are still in positive comp growth. So that's my first question. But the second question is looking to Q4. Are you doing anything differently now in terms of the phase relaunches than you were doing in Phase 2 and Phase 3, so in terms of the price investment, the relaunch itself? And the last question was, you talked about competitor response to what you've been doing at Food Lion. We're seeing, in recent weeks, what Kroger has done in some markets. Can you just talk about what other competitors have been doing and where, please?

Pierre-Olivier Beckers

Well, so all phases indeed have shown positive comps in Q1. In fact, all phases were above 3% and it indicates that all are doing well. The Phase 2 has been our strongest phase so far and, in Q1, we are not making comments about Q2, so the cycling for Phase 1 is actually happening now in Q2. But we have seen good continued momentum in all of our phases. And again, as I indicated to John, it gives us confidence for the future. It's clear that, with each of the phases, we have learned from the previous phases and the previous launches and we've tried to be more dynamic and more successful in each of the phases. When we did Phase 1, we did not launch all of our tools, all of our instruments at once and we staggered them. We learned that obviously we could have a better impact. And when we launched of course, Phase 2, we had a stronger impact from the launching date. So yes, we continue to learn. I don't think that we should say that there are significant changes between the different phases. But in each of the phases, we have tried to fine-tune the 6 elements of the brand and focus more on the ones where we believe we have the best consumer response. So yes, Phase 4 will include some differences from Phase 3, 2 and 1, but we will talk about them when we have indeed launched Phase 4. Consumer response -- yes, sorry, competition response. It's difficult to say whether Kroger's reaction is exactly and only linked to the Food Lion work. It would be very nice to think so, but I assume that Kroger is also trying to understand the competitive nature of the markets better, not only against Food Lion but also against others. I would say that next to Wal-Mart's continuing -- obviously to promote very aggressive price marketing campaigns, in selected markets, against would Food Lion and others, but against Food Lion certainly, I would say the rest of the competition is solid but we haven't seen any particularly different or elements that we need to highlight here today.

James G. Collins - Deutsche Bank AG, Research Division

Sorry, just one last one. On the factors on Slide 11 that you talk about influencing the margin for the remainder of the year in the U.S., you talk about Food Lion Phase 4 but I thought that Phase 5 was also going to be launched. Or have you just not included that because it will be towards the end of the year?

Pierre-Olivier Beckers

Yes, it will be toward the end of the year. This is why we mainly highlighted the impact of Phase 4 which is going to start next week.

Operator

We will now take our next question from Rob Joyce of Goldman Sachs.

Robert Joyce - Goldman Sachs Group Inc., Research Division

Couple for me. Firstly, on Bottom Dollar. Could you give an indication when you think it will go PFO [ph] positive? And then on Bottom Dollar and Sweetbay I guess, is there any chance you could close the remaining stores that you have if they don't progress as you expect? And then the last one, just on the working capital improvements you've made in the first quarter. Can you talk us through a little bit more detail and say whether we should extrapolate those across the rest of the year?

Pierre-Olivier Beckers

Well, on Bottom Dollar Food, I'm not going to give a timing but clearly and I think that was in our prepared remarks, we have strongly reduced the losses over the first quarter and we are very confident that we're moving in the right direction. I also indicated that the growing number of stores are now already PSO positive and, hence, that confirms the strategy and it confirms the sustainability of the brand and its resilience. So we are quite confident. Obviously, as we will and open new stores, that these would have a temporarily negative impact on our PFO [ph] but by each month, we see more stores, more Bottom Dollar Food stores joining the positive territory and that's very important. Sweetbay, we continue to say that after closing the 33 stores at the beginning of the year, we are looking at all solutions to optimize our assets there and, obviously, it could include, if necessary. But if we wanted to close stores in the very short term, you can think that we would have closed them in the first quarter. Why do more stores in the second quarter? We are looking at other possibilities like disposal and, of course, in the meantime, we are optimizing, we are doing everything to optimize our operations. There was a question on working capital?

Pierre Bruno Charles Bouchut

Regarding working capital, we will not provide with precise guidelines or information on working capital improvements for 2013. What we said is that for the coming 3 years, we plan to generate free cash flow of EUR 450 million to EUR 500 million as an average per year and obviously, we said at the same time that we will achieve that owing to the Reid reservoir or working capital improvement that we are to [indiscernible] in reducing our inventory level of improving supplier's terms.

Operator

We'll move to our next question which comes from James Grzinic of Jefferies.

James Grzinic - Jefferies & Company, Inc., Research Division

Just had a quick one, given the changes in leadership, would it be fair to assume that the Board will not be in a position to weigh M&A opportunities during the rest of this year?

Pierre-Olivier Beckers

Well, I think I said it twice. I'll say it a third time, there is no disruption in the leadership. There's no disruption of business. We are living in a very vibrant and competitive world and this board and I and my management team are running the business as usual. We are looking at the decisions we made need to make and we will make the decisions that we need to make whether they are regarding current operations or possible opportunities in our assets in general. So there will be no disruption whatsoever in the way we look at our future.

Operator

We will now take our next question from Robert Vos of ABN AMRO.

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

I have 2 questions. CapEx was particularly low Q1 and clearly below the quarterly average for reaching your guidance of EUR 650 million. What will be the main drivers behind the implied exploration in CapEx in the forthcoming quarters? That may be new store openings? Can you maybe elaborate on that? And then second question, I noticed some comments on the probe by the Serbian authorities into C market. Can you give some additional color on that and maybe explain how an eventual outcome of that probe could not affect Delhaize?

Pierre-Olivier Beckers

Regarding the CapEx, we do maintain our guidance for the total CapEx for the year. We are in a business, as you know, where most of the CapEx is realized in the second half of the year and in particular, in the last 4 months. So it is not unusual to see the slowdown of CapEx in the first part of the year. On the C market, in Serbia, C market is -- was it -- a company that was acquired by Delta Maxi. And so when we acquired Delta Maxi, there were some -- Delta Maxi itself was a result of several acquisitions. C market being a relatively small in the total market number of stores. And the weight of -- in sales in particular, because C markets were small stores. We took with the acquisition around 75% of the shares of C market and there were still some minorities. We -- everything was going fine and we still believe that everything will be fine eventually, but the authorities a few weeks ago decided to put the finalization of our acquisition of the remaining minority shares on hold for a limited period of time and that is a way for them to verify all elements. It's clear that I think Serbia, like some other countries, needs to look at all elements from its past and make sure that everything is in order. I want to underline that the decision from the authorities to put the finalization of the minority acquisition on hold has absolutely nothing to do with Delhaize. They are not investigating Delhaize. They are not looking at how we made the acquisition. Everything was very clean, transparent and there's no problem with Delhaize whatsoever. So for that reason, we are absolutely confident that after the holding period, we will be to able to conclude our acquisition of those minority shares, which once again, are representing a very small portion of the total Delta Maxi side. We'll take 1 more question at this stage and obviously, our communication teams remain available for you after the call. But operator, we'll take 1 more question at this stage?

Operator

We will now take our final question from Cedric Lecasble of Raymond James.

Cedric Lecasble - Raymond James Euro Equities

I have 2 questions on the U.S. and actually linked questions. So first 1 is on space growth from competitors. Did you see any acceleration or slowdown in the space additions as [indiscernible] by competition over the last month? And turning into a medium-term prospect in the U.S., how do you intend to defend your market share once every -- all the operations are repositioned and stronger than they used to be? What are your main schedule growth initiatives to cope with this space addition and fight on keeping or defending your market share in the medium term?

Pierre-Olivier Beckers

Well, on the first question, I think I answered that the competitive response we see or activity is, I would say, generally in line with what we have seen in previous quarters. So it is healthy, it's vibrant but there's nothing particularly important to highlight except for Kroger, as I indicated, which stepped up its price investments in the last few weeks and Wal-Mart, which continues to do a number of price campaigns in selected markets. As far as our general strategy to defend our market share, well, obviously, the various initiatives that we are putting in place are designed to defend our market share, and the results show that we are going in the right direction. We are focusing not only on improving structurally our price positioning in our markets, and this of course, will help us to continue defending our market share and grow our sales over time. So being well-positioned in price is not an endgame, it is a continued process, and it's something that we'll continue to monitor. But obviously, this is not the only thing we're doing. And in particular, at Food Lion where, as you know, we have a lot of opportunities to continue growing our transaction per store and the number of items per basket which has been lower than the average of the competition historically at Food Lion. And the phase work is absolutely delivering on this, as we have shown again in the slide but we are not going to stay idle. Once we complete our work on the phase repositioning, we have mentioned, and Roland Smith has mentioned in March, that we are working on the next phase, on the next horizon which is building a unique selling proposition and additional differentiating elements to the strategy of Food Lion, so that we can not only attract more customers but create even more loyalty in our current customers in the chain. So we are confident that we will continue creating a platform that will be more competitive and of course, as we do that, we look forward to open new stores at Food Lion, at Bottom Dollar Food, with the tremendous progress that we are doing and also, with Hannaford and other chains. So I think the variety of tools we have in the coming years to grow and defend our market share and be more relevant to customers is pretty large and we intend to use this variety of weapons.

Frederic van Daele

Cedric, it's Frederic. Maybe just to add, I think you were also asking about store openings. We have not seen a step change from U.S. competitors in the first quarter in terms of new stores. I would say, also from a seasonality perspective that Q1 tends to be a somewhat lighter quarter. So how that will develop for the rest of the year, we'll have to see.

Pierre-Olivier Beckers

Thank you all for participating in today's conference call. A replay is available on the company's website, as I mentioned before. If you have any additional questions, do not hesitate to contact our Investor Relations department. Delhaize Group will announce its second quarter results on Thursday, August 8, and thank you again and have a nice day.

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Source: Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) Société Anonyme Management Discusses Q1 2013 Results - Earnings Call Transcript
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