Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) Société Anonyme Management Discusses Q2 2013 Results - Earnings Call Transcript

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

Q2 2013 Earnings Call

August 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

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

Andrew Gwynn - Exane BNP Paribas, Research Division

Sreedhar Mahamkali - Macquarie Research

Alastair A. Johnston - Citigroup Inc, Research Division

Marc de Speville - Redburn Partners LLP, Research Division

James G. Collins - Deutsche Bank AG, Research Division

Cedric Lecasble - Raymond James Euro Equities

Robert Joyce - Goldman Sachs Group Inc., Research Division

Operator

Please go ahead.

Frederic van Daele

Thank you, operator. Good morning, everyone, and welcome to the conference call regarding Delhaize Group's results for the second quarter of 2013. I just wanted 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 are contained 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 Beckers, CEO, Delhaize Group; and Pierre Bouchut, CFO, Delhaize Group. During this call, we will first look back on our performance in the second quarter, followed by comments on operations. And afterwards, we will take questions. And for those unable to stay on the call or wish to listen to the call again, a replay will be available on our group's website.

I'll now turn to Pierre-Olivier Beckers.

Pierre-Olivier Beckers

Thank you, Frederic. Good morning, everyone, and thank you for joining our conference call this morning to discuss our second quarter results. On Slide 3, we reconfirm our priorities for 2013. Our focus is on strengthening the different brands we operate in our markets through a combination of targeted price investments, focusing on elements of differentiation and accelerating growth in selected markets. We have imposed discipline on our working capital and capital expenditure resulting from an increased focus on free cash flow generation. We have reiterated today that we are confident to generate approximately EUR 500 million of free cash flow in 2013. Finally, we remain committed to improving our cost focus and reducing our complexity.

Slide 4. Slide 4 provides the highlights of the quarter. In the U.S., we reported another solid quarter. It was actually the third consecutive one of positive volume growth for Delhaize America. At Food Lion with the launch of Phase 4 in May, we now have almost 80% of the network repositioned, with the remainder scheduled for the fourth quarter. Profitability in the U.S. showed further improvement, but we will elaborate on this later in the presentation. In Belgium, our sales growth was mainly inflation-driven in the quarter, however, our market share increased by 35 basis points due to the successful reopening of our remodeled stores and network expansion. The positive sales growth also resulted in an improvement in profitability in Belgium. In Southeastern Europe, we also managed to improve our results both in terms of revenues and in terms of profitability. Over recent months, we have booked significant progress in terms of reducing the complexity of the group in order to enable us to improve our focus and allocate our capital to the areas where we're able to generate the highest return and growth prospects.

At the end of May, we have announced the planned divestiture of Sweetbay, Harveys and Reid's. And during July, we also announced the planned divestiture and master franchise agreement of our operations in Montenegro. Further, we continue to be on target to have flat SG&A as a percentage of revenues for the year, with the second quarter showing flat SG&A as a percentage of revenues compared to last year. And for the first half, we, in fact, decreased SG&A as a percent of revenue by 31 basis points.

Finally, we have generated a strong free cash flow in the first half, resulting in a further improvement of our balance sheet.

I'll now hand over to Pierre to give you more details about the financials and I'll come back later in the presentation. Pierre?

Pierre Bruno Charles Bouchut

Thank you, Pierre-Olivier. The following Slide 5 provides you with our summary of the second quarter income statement. Please note that we have classified Sweetbay, Harveys and Reid's as discontinued operations as from the second quarter, and we have adjusted accordingly the corporation values [ph]. At EUR 5.3 billion, our sales increased by 0.6% at actual exchange rates and by 1.7% identical exchange rates. Our gross margin stood at 24.3% and increased by 16 basis points year-over-year at identical exchange rates. A 70-basis-point investment in sales price at Delhaize America was offset by improved cost of goods, better shrink management and better results at Bottom Dollar Food. EUR 190 million of underlying operating profit increased by 5.8% at actual exchange rates and by 7% at identical exchange rates as a result of a 2.3% increase of our gross profit and of our continued control of our SG&A costs. Therefore, our European margins stands at 3.6%, up 18 basis point compared to last year. With EUR 70 million one-off charges, our operating profit stands at EUR 176 million with an increase of 1.3% at actual rates compared to last year. When taking into account EUR 47 million net finance expenses and a 20.4% tax rate, our group share in net profit stands at EUR 104 million, a 21.2% increase at identical exchange rates. We are able to generate EUR 66 million of free cash flow in the second quarter, a 54% increase compared to Q2 last year.

Slide 6 provides you with the same overview, but for the first half of the year. Group revenues have increased by 1.4% at actual rate and by 2.3% at identical exchange rate to EUR 10.5 billion. Gross margin increased by 8 basis point compared to last year, as our sales price investment were offset by reduced shrink, improved cost of goods and better results at Bottom Dollar Food. Our SG&A, as a percentage of sales, had declined by 32% to 21.2% owing to strong SG&A cost control. As a result, our underlying operating profit has increased by 8.8% at actual and at 9.8% at identical rate to EUR 394 million. The underlying operating margin at the end of the first half was 3.8%, an increase of 26 basis points compared to last year. Our Group share in net profit increased by 95.5% at actual rate to EUR 165 million due to lower year-on-year close -- store closing expenses and lower finance costs, which were partially offset by a higher tax charge. We posted a strong increase of almost 150% in free cash flow to EUR 321 million.

The following Slide 7 shows the evolution of our EBITDA and underlying EBITDA. As you can note, at identical rates, our EBITDA and underlying EBITDA have increased by 31.9% and 5.5%, respectively. At actual exchange rate, EBITDA rose by 30.8% and underlying EBITDA rose by 4.6%. The improved performance at Delhaize America and Delhaize Belgium are the main reasons for such a progression.

The following Slide 8 gives you more insight on the revenue evolution at Delhaize America. We reported comparable store sales growth of 1.1% in the second quarter, which we consider as a solid performance given that we faced a further 20 basis point of deflation. When taking into account the negative calendar impact of 80 basis points and a 50 basis point positive impact of store openings, our organic revenue growth stand at 0.8%. With a negative 0.4% of store closures, our Q2 revenue growth is of 0.4%. On a half-year basis, the reported comparable store sales growth of 1.5%. If we had a 20 basis point positive calendar effect and 70 basis point from store openings, organic growth in the first half was 2.4%. This translates into a 1.3% overall revenue growth after a 110 basis point negative impact from store closures.

Slide 9 provides some background around the margin evolution at Delhaize America. Please note that the disposal of Sweetbay, Harveys and Reid's accounts for Delhaize America underlying operating profit margin improvement of just over 30 basis points in Q2 2012. The impact in Q2 2013 is lower due to lower losses at Sweetbay following the January store closures. We reported a UOP margin of 3.8% in the second quarter, which represent a 16 basis point increase over last year on a comparable adjusted basis. As already highlighted, the 70 basis point of price investment during the quarter were more than offset by the positive impact from volume growth, improved cost of goods and reduced shrink. The 10 basis points European margin improvement was also supported by continued good cost control. The same factors were at play in the first half of the year, where we reported an increase in the European margin of 28% and 4.1% -- of 20 basis points to 4.1%. We remain, however, optimistic, but prudent for the remaining of the year with the full impact from Phase 4, the Hannaford price investment, the around 10 Bottom Dollar openings and the implementation of Phase 5 in Q4. In addition, we recycle the impact of the release of the bonus accrual in Q3 2012. And finally, we continue to remain prudent on the overall consumer and competitive environment in the U.S.

The next Slide 10 presents Delhaize Belgium sales evolution over the second quarter and the first half. Our 0.8% comparable sales growth in the second quarter was driven by more than 3% of internal retail inflation, which is a higher level than what we experienced in the first quarter. Nevertheless, our 3.4% internal food inflation stays well below the national food inflation level of 4.25%. Our volume growth outperformed the bucket. With a negative calendar effect of 40 basis points and a positive 250-basis-point impact from network expansion, our organic growth stands at 2.9%. As you can note, over H1, our organic growth stands at 2.7% when adding the 1.6% same store sales increase, a negative 1.1% calendar impact and a 2.2% network expansion. It is worth highlighting that in the second quarter, we saw a material improvement in our market share. Overall, we gained 35 basis points of market share in the quarter and this almost fully reversed the negative trend we experienced in the first quarter. Such a market share improvement is mainly explained by the performance of our remodeled stores and the expansion of our network.

As shown on Slide 11, Delhaize Belgium underlying operating profit margin has increased by 30 basis point over Q2, up to 4.1%, and by 40 basis point over H1, up to 4.6%. Such an operating improvement is explained first by revenue growth, which resulted in a better coverage of our core space; second, by continued strict cost control, both in terms of cost of good, as well as logistic and SG&A costs; and three, to a somewhat -- by a somewhat favorable timing of SG&A expenses. This is why we remain prudent for the remaining of the year, and we are scheduling to have both have both higher advertising and overall SG&A cost level in the second half.

Slide 12 provides you with more details on the revenue and margin evolution for Southeastern Europe. For the region, we have reported 4.8% growth in the second quarter at identical rates and 5.3% at actual FX rates. Such a revenue growth was mainly driven by Alfa Beta in Greece, which continues to gain market share. We estimate that Alfa Beta has gained 160 basis points of market share in H1 to a total of approximately 22.8%. Moreover, owing to solid comparable same-store sales and store openings, our activities at Mega Image in Romania grew by almost 37% in the second quarter. In Serbia, we were able to grow as well, but below our expectation as we continue to operate in a tough environment of weak consumer confidence and high inflation.

Our Southeastern Europe underlying operating margin improved by 20 basis point, up to 3.4% in the second quarter, due to improved gross margin and a strict control over our SG&A expenses. While in Romania, the store base continued to mature resulting in better profitability. For the second half, the focus continued to be on further market share consolidation in Greece, on growing our store network in Romania, and finally, on improving our sales performance and gross margin in Serbia through better supply and negotiation.

And now on Slide 13, we provide 2 separate breakdowns over first half free cash flow generation. As you can see, opening to EUR 717 million in EBITDA and once deducted EUR 45 million for restructuring charges, EUR 44 million of additional working capital needs, EUR 130 million of interest and tax payments and EUR 177 million of cash CapEx, our H1 free cash flow stands at EUR 321 million. As you can see as well, EUR 190 million improvement on our free cash flow from H1 2012 to H1 2013 is mainly explained by EUR 194 million CapEx reduction and by EUR 26 million additional EBITDA. Please note that as of the end of H1 2013, our core working capital needs are over EUR 400 million lower than it was at the end of H1 2012 and we remain confident that we can further reduce our working capital needs.

The next Slide 14 gives you another view of our financial debt situation. Mainly as a result of a strong free cash flow generation over this first half, our net debt has decreased by EUR 191 million to EUR 1,881,000,000 at the end of June. On the right-hand side of the slide, we can measure the evolution of our net debt capacity according to the most stringent ratio under our BBB- Baa3 investment-grade rating. If we include the divest -- the impact of the divestiture of Sweetbay, Harveys and Reid's, our net debt capacity stands at EUR 880 million and has increased by a factor of 2.5x compared to the group position at the end of 2012. Actually, our cash balance position stands at EUR 830 million at the end of June.

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

Pierre-Olivier Beckers

Thank you, Pierre. On the following Slide 15, we have provided an update of our priorities per segment. They are similar, obviously, to what we discussed in May at the occasion of our first quarter results.

In the U.S., the focus is on completing the rollout of the phases this year, and the last phase, Phase 5, is scheduled to be implemented in the fourth quarter. In addition, we are planning to further accelerate the transformation at Food Lion, and I will discuss this on the next slide. At Hannaford, we have scheduled and implemented targeted price investments, which helped us to successfully deal with increased competition in some of our markets. Finally, at Bottom Dollar Food, we continue to refine our operating model in order to achieve a satisfactory return on invested capital. And as a consequence, our operating results at Bottom Dollar Food have continued to improve throughout the first half of this year, in line with our plan. At the end of Q2, over 2/3 of our Bottom Dollar Food stores were actually EBITDA-positive.

In Belgium, the focus is on reinforcing our historical strength on assortment, freshness and quality. We are also improving the store experience by focusing on service levels and on the acceleration of our store remodeling program. Finally, we aim to further grow our network of affiliates.

And in Southeastern Europe, the focus in Greece is on further market share gains, as Pierre already mentioned. While in Serbia, we still see significant possibilities to improve the gross margins.

On the next slide, Slide 16, we give an overview of our performance of the repositioned stores at Food Lion. At the end of the quarter, we had, as I said, nearly 80% of the network repositioned. As indicated in the graph, our repositioned stores continue to show positive growth, both in terms of items and comparable store sales. The slowdown that you can see in the second quarter, compared to Q1, was driven mainly by Phase 2. It has annualized its repositioning at the end of March, and also Phase 2 is dealing with increased competitive activity in its markets. However, all phases continue to show positive comparable store sales growth. The sales uplifts we are seeing do provide us with confidence on the value of the Food Lion brand. Therefore, we are currently involved in making Food Lion a more differentiating shopping experience for our clients. The unique selling proposition our team is currently working on will be centered around easy, fresh and affordable.

On Slide 17, we go a little more in detail on Food Lion. When analyzing Food Lion's key commercial figures, we can note that the average basket is made up of a relatively low 10 items, 85% of sales are done through loyalty cards, 35% of sales are done through promotions and our proportion of dairy and fresh products is below traditional grocery competitors. In fact, most of our core customer see Food Lion as a store to buy groceries at good promoted prices and to shop only part of their everyday essential store items. Clearly, in categories such as meat, produce, bakery and dairy, we do not get our fair share of sales, even though the phase work has already delivered solid growth in fruits and vegetables. We are, therefore, convinced that we can increase our share of wallet, firstly by leveraging on our strengths, which are convenient locations, small store format, attractive promotions and a heritage of good prices. And secondly, we can increase also our share of wallet by improving our sense of store assortment by enhancing our fresh product offer and through a better overall shopping experience, with -- in particular, a better and more consistent execution. These elements are the core of our USP work, which we began testing portions of in various stores and markets this summer. And we will expand this test to full pilot stores in the coming months.

I'm now on Slide 18. At Delhaize Belgium, let me first highlight that we are encouraged by the 35 basis points of market share increase in the second quarter, which was mainly the result of the successful reopening of our remodeled stores and also of expansion. On average, the Delhaize Belgium realizes sales uplift of 5% in its remodeled stores. We have already done 7 remodels so far this year, but we have an ambitious schedule with another 13 for the second half. Finally, we have added 5 new affiliated stores in the first 6 months.

To deal with the more challenging competitive environment, we are further working on increasing our overall level of differentiation in Belgium. We are currently focused on reinforcing our historical strengths such as quality, freshness and the innovative nature of our assortment. These efforts should support our return to our strong DNA. Then we'll be continuing to support our price improvement, in both national brands and private brands. Also, improving the shopping experience with the acceleration of the store remodeling program I was just referring to, growing our affiliate network, and finally, developing our e-commerce operations. And in this regard, in the first half, we experienced a growth of 36% in orders from our click and collect activities, which we call Delhaize Direct.

On Slide 19, we highlight our action sets and accomplishments for Southeastern Europe. We remain convinced that this area forms a growth engine for the group. Despite the fact that the current challenging macroeconomic conditions are not helping the area, we achieved, nonetheless, a number of significant accomplishments. In Greece, the performance in the first half was resilient and strongly supported by Alfa Beta's ability to increase its market share by another 160 basis points. In the Balkans, we want to position Delhaize Serbia as the undisputable leader in the Serbian food retail markets. Maxi is also becoming more focused with the planned divestment of its lossmaking activities -- or divestment now of its lossmaking activities in Albania and planned in Montenegro. Finally, in the first half of the year, Mega Image in Romania managed to open 39 new stores and realized sales growth of 37% at identical exchange rates. So we remain focused on further improving our Southeastern European operations.

To support this goal, our action steps are to: In Greece, continuing to make targeted price investments in order to further grow our market share. In Serbia, the focus will be on improving the revenue trend and the overall gross margins. Although our profitability and market share improved in the first half, we have recently made some changes to management in Serbia in order to maximize the potential in the region. And finally, in Romania, our goal is to continue to sustain the accelerated expansion in the coming 12 months.

Slide 20 shows that we are on track with our agenda set for the year. It summarizes the different priorities and the key progress, which I have already highlighted earlier today. And so I wouldn't not, therefore, not walk you through it, but clearly, our goal here is to demonstrate that we have confidence that we will meet all targets mentioned on this slide.

And so as a consequence, and to conclude on Slide 21, we have updated our guidance today. Our underlying operating profit guidance was issued on April 22 and still included at that time, of course, Sweetbay, Harveys and Reid's, which have since then moved into discontinued operations. Following a solid performance in the first half of 2013 and based on the previous scope of the group, we have raised our underlying operating profit guidance from approximately then EUR 775 million to now at least EUR 780 million. With Sweetbay, Harveys and Reid's in discontinued operations, this new underlying operating profit guidance translates into at least EUR 755 million. In addition, we aim for a flat SG&A as a percentage of revenues. We see net finance expenses at around EUR 200 million, considering the planned divestiture of Sweetbay, Harveys and Reid's. And we have set a target level of capital expenditure of EUR 650 million. Finally, we targeted approximately EUR 500 million of free cash flow for this year. All numbers I just gave are at identical exchange rates.

So this concludes our prepared remarks, and I'm going to now turn back to the operator to open up for the question time. So please, operator, could you give us the instructions and lead the Q&A session, please?

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Fernand de Boer from Petercam.

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

Actually 2 questions, if I may. One is on the U.S., if I look at the Food Lion volume growth for the repositioned store, you're talking about 2.2% and comps are 2.3% or actually some inflation, while overall it was deflation for you. If you look at the slowdown, does it actually mean that at some point, you might need and step up in price investments in order to drive volumes to higher levels?

And the second question is on Belgium, you mentioned that you see higher SG&A in the second half. Well, I thought that actually if you look at the rate inflation, that you'd come down. So what is driving this higher SG&A in the second half? And taking into account that you're going to remodel quite a lot of stores in the second half in Belgium, could be we expect some market share losses then again?

Pierre-Olivier Beckers

Okay. Pierre, you want to take the...

Pierre Bruno Charles Bouchut

Yes, if I can take the second one.

Pierre-Olivier Beckers

Okay. So well, Fernand, about the Food Lion phase work, obviously, we're pleased with the overall performance, especially when we compare to our Q1. Because you have to remember that there seems to be a big drop versus Q1, but Q1 was partly helped, as we had announced at the time, by the very strong winter weather, which helped sales by about 1%. And so you have to look at this including this impact. Clearly, also, we have the impact of now Phase 2 cycling, fully cycling last year. But it's true that if we look at the work in the phases, we see good performance in all of the phases with a bigger slowdown in Phase 2 indeed. And this is the result above the other elements that I have mentioned, the result of stepped-up competitive activity by Kroger in that region.

So when it comes to the future, obviously, on the one hand, we are, as you know, working on the next step. And the next step is the preparation, which we're assessing now through elements in a variety of stores of our unique selling proposition. And the unique selling proposition is aimed at further accentuating the differentiation versus our competition, making Food Lion a true convenient neighborhood supermarket and making it easy for customers to buy their food daily items. And then we'll have to see phase by phase, even though, by the end of the year, the phase work will be completed.

But, yes, by market-by-market, will stay attentive, and we might have to step up price investments here and there. But it's something that we will monitor. And in the meantime, we continue to see good performance by Delhaize America overall on cost of goods and SG&A. So we feel confident that our formula is working here.

And so, you wanted to take the second question on the Belgium shares?

Pierre Bruno Charles Bouchut

Yes, just for Delhaize America, the whole price investment as a whole were 70 basis points, and of course, they were higher at Food Lion, just to -- arrange it from that but to give the comprehensive of picture.

Regarding SG&A in Delhaize Belgium, effectively, we are scheduling towards, as I said it, both higher advertising and overall SG&A cost in the second quarter. Regarding the other price increase, this was scheduled. It's in line with our promotional and commercial activity. The Delhaize Belgium tends to be more active on this front in terms of advertising in the second half of the year. And as already -- I'm sorry, as I've tried to explain it, we benefited the first half of the favorable timing of SG&A expenses versus last year, which is why we are prudent for the second half of the year.

Pierre-Olivier Beckers

Regarding the last part of your question, whether we see a perhaps a market share loss due to the remodeled stores in -- or the remodeling of stores in the second half, the pressure on market share that we experienced with that work last year was particularly due not to the remodeling themselves, but to the fact that we closed completely a number of heavy, heavy stores, big performing stores, which we don't see with the same intensity this year. So we are less concerned by that issue.

Operator

We will now take our next question from Andrew Gwynn of Exane.

Andrew Gwynn - Exane BNP Paribas, Research Division

Two questions, if I can. The first is just on the cash balance. I think you said you got over EUR 800 million of cash. So I'm just wondering what opportunities you have to use that, and in particular, obviously, are there many opportunities to pay down the long-term debts that you have? The second question I have, just comes back to the guidance, actually. And I guess, probably, you've explained elements of it, but it seems incredibly cautious. You're guiding to at least EUR 755 million, so it's effectively down in 2012, yet when we look at the first half performance, you're up nearly 10%. And if you look at that Q4 comparative, it looks phenomenally easy. So is this just a question of you guys being exceptionally prudent; you've mentioned the competition backdrop, you've mentioned the consumer and some SG&A and so forth? Or is there something else that perhaps we're missing and this is really sort of fairly genuine guidance?

Pierre-Olivier Beckers

Do you want to take the first question, Pierre?

Pierre Bruno Charles Bouchut

Yes, regarding the first question, it remains our priority and objective to further improve our financial and balance sheet structure, so this is what we are dedicated to and we continue to be dedicated to that, I would say, until mid-next year. And we'll be asking ourselves the use of the funds that we may have available at that time. You're mentioning one possibility, this is one, there could be some others. At this stage, we haven't made any decision, obviously, and we have to continue to work to improve our financial structure. And it is what we are doing for improving EBITDA, generating strong free cash flow, through also working capital improvement, and this is what the team is dedicated to at this stage, and we are not asking ourselves this question for the time being.

Pierre-Olivier Beckers

Regarding the guidance, first of all, we are happy with our performance in the first half, and it gives us confidence that we will generate a good result for the whole year. And it's true also that we continue to remain prudent on the overall consumer and competitive environment. So that's a fact. However, there are a number of specific elements that will influence our performance in comparison, in relative terms to the previous year. And so just to recap them, first of all, we will have in the second half a full impact from Phase 4 because in the second quarter, it was only a partial impact. And then we will, obviously, implement Phase 5 later this year. We will continue to have the price investments at Hannaford and a full impact as well because we implemented those price investments at Hannaford only during the quarter, the second quarter, so we will have those. And in comparison with the previous years. The previous year, obviously, will have a full impact. We will be opening 10 to 12 Bottom Dollar Food stores in the second half. We will also, as Pierre said, we will assess the timing of some SG&A expenses in Belgium. And then, finally, and I would say, last but not least, we will cycle in the second half the release last year of the, in particular, the America bonus accruals for the full year but we'll release that in the second half of the year due to the weaker performance last year. And obviously, we have good performance this year and we have our accruals loaded with a comparison of the release last year. So that all of those elements are specifically influencing our relative performance expectation versus last year.

Andrew Gwynn - Exane BNP Paribas, Research Division

Just coming back to the cash points, I think you mentioned other uses of cash. You thought [ph] that dividend of, say, last year, should we expect maybe cash return or anything like that? Or is it simply we'll see what happens in a year's time?

Pierre Bruno Charles Bouchut

It should be a Board of Directors' and a shareholders' decision. I'm sure, at this stage, it's honestly very too early to elaborate about it.

Operator

We will now take our next question from Sreedhar Mahamkali from Macquarie.

Sreedhar Mahamkali - Macquarie Research

Three questions, please. Firstly, going back to the phased stores performance, particularly, actually, the -- in terms of the price investment you talked about, 70 basis points, there was only part of the quarter you've had an impact of Phase 4. But still, sequentially, it was 80 basis points in Q1 to 70; I would've expected a little bit more. Can you just explain why this is not greater than it was...

Pierre-Olivier Beckers

Just on this one, Sreedhar, to avoid any misunderstanding, it's 70 basis points for Delhaize America as a whole. And we said that, obviously, price investments at Food Lion were much higher, but we're not committing that it is.

Sreedhar Mahamkali - Macquarie Research

Okay. To the extent, Hannaford was presumably...?

Pierre Bruno Charles Bouchut

[indiscernible] is that Phase 4 was launched at the end of May, so we have had only a very, I would say, 1/3 impact over the quarter to make it simple.

Pierre-Olivier Beckers

And the same for the Hannaford price investments which were implemented later in the quarter as well. So...

Pierre Bruno Charles Bouchut

Yes.

Sreedhar Mahamkali - Macquarie Research

Okay. Is there any help you can give us in terms of second half of the year price investment? Should we be thinking 80 basis points, 100 basis points? Anything you could help there, that will be useful, but I respect if you can't really do that.

Pierre-Olivier Beckers

Not in particular, but it should be at least that or what we we're saying before because it now will have the full impact of the Phase 4 and we'll have Phase 5 and the full impact of the Hannaford price investments. So you should see something that is both of what we've just -- but we'll be taking over Phase 3 as well in the last quarter. So, no, it's -- we are not releasing any figures in respect of that.

Sreedhar Mahamkali - Macquarie Research

Yes. Okay. And Belgium, coming back to the timing of favorable impact of SG&A expenses which you referred to, any idea in terms of magnitude, please, in the quarter and how -- then we can figure out how it will reverse in the rest of the year? And I have one last question.

Pierre Bruno Charles Bouchut

No, we have not released any figure of [indiscernible] in this respect. We did take into account our guidance and the expected impact, but we are not going in such details today.

Sreedhar Mahamkali - Macquarie Research

Okay. Last one in terms of Bottom Dollar, clearly, you're making very good progress. Extrapolating it, is it realistic to expect Bottom Dollar to be potentially EBIT positive in 2014? Or that EBIT, not EBITDA, is that a bit too aggressive and optimistic?

Pierre Bruno Charles Bouchut

Well, as you know, we are going to open 10 Bottom Dollar in the second half of the year, and this would affect negatively, because of open fees, the operating profitability of Bottom Dollar store. And we will not post -- Bottom Dollar will not post positive underlying operating profit in 2013, that's for sure. And 2014, as you know, we do work to continue to improve our business model. We have made, I would say, significant progress in terms to operating costs, productivity in the store. We have made significant progress when it comes to total CapEx in trying to limit and reduce the CapEx for an opening. We continue to work on the assortment structure so that will improve the number of items per basket. We still are gaining clients which is extremely encouraging. So there a lot of positive things, but it's too early to elaborate about potential underlying operating profit positive in 2014.

Operator

Our next question comes from Alastair Johnston of Citigroup.

Alastair A. Johnston - Citigroup Inc, Research Division

Two or 3 questions from me. First of all, I may have missed this, but do you actually have a restated full year EBIT base for 2012, excluding Sweetbay and Harveys? I presume that, that the EBIT contribution was around EUR 25 million, but it'd be nice to have a clarification. So that's the first question. The second question is on industry growth in Belgium and we've now seen, I mean, you've slowed in the second quarter as have Colruyt and Carrefour, could you just elaborate about what's going on in the Belgian industry? And specifically, do you feel that there was a very big weather impact in the second quarter? And by that token, with the better weather, have you seen some sort of improvement? And finally, on working capital, I think working capital was quite poor in the second quarter, is there any specific reason for that?

Pierre-Olivier Beckers

I can take the first question and the last one, if you would like to join in. With the first one, yes, we have restated, we said it in the opening comments, the comparison base for discontinued operations at Sweetbay, Harveys and Reid's. Yes, you're right, the impact, the expected impact for 2013 is EUR 25 million. And actually, we absolutely did a transparent review taking into account a reduction -- an expected reduction of the shared services as we continue to, of course, to assure; of course, we then are resident [ph] as we plan to cut once the divestitures are realized. So this is for the first question. And the last question was about...

Frederic van Daele

And, Alastair, it's Frederic. Maybe to add, there is a restated table on the website including all the quarters, excluding Sweetbay, Harveys for last year as well.

Alastair A. Johnston - Citigroup Inc, Research Division

Okay, great. That's very useful.

Pierre Bruno Charles Bouchut

The last question was on the free cash flow?

Frederic van Daele

Yes. The working capital and the [indiscernible].

Pierre Bruno Charles Bouchut

Yes. Well, you have always a phenomenon of cutoff time where you would have to look at it, I would say, over the last 6 months. Over the last 6 months, the progression is extremely strong, as I said it. It's a progression of 150 basis points. We are still -- we do confirm our objective or target of our free cash flow of around EUR 500 million for the remaining of the year and if you look at the working capital needs at the end of June 2012 versus June 2013, this is what we are saying also during the conference. It has been reduced by EUR 400 million, as you note about the magnitude of the achievement which has been made over the last 12 months.

Alastair A. Johnston - Citigroup Inc, Research Division

Just to jump in on the working capital point, is it coming from inventories? And looking forward, would you expect sequential reductions of inventories, as a percentage of sales in the U.S.?

Pierre Bruno Charles Bouchut

From a combination of 3 elements, inventory, for sure, and in particular, if you remember, we were significant in inventory reduction in the U.S. in the second half of last year due to the functioning of the automatic railroad system which went on well, which allowed us to reduce the inventory both at store level and at DC level. It's also by negotiating different terms to suppliers and also, do not forget that in some countries, like for instance in Belgium, a significant part of our business is done with affiliate and franchisees, and we are also paying attention to control the payment terms on the import [ph] as well. So every part is bringing its contribution to the improvement. And, yes, we think that we have, over the time, further opportunity to continue to improve our working capital. As a whole, you should look at Delhaize, as you know, we are a food retailer with a positive working capital need, which is a bit unusual.

Pierre-Olivier Beckers

In regard with your other question, Alastair, the industry growth in Belgium in the second quarter, what happened there, it is true that the market was difficult in Belgium. The volumes were negative for the entire market. And we, as Delhaize Le Lion, we slightly outperformed the entire market. We continued maintaining our price pressure and, in fact, our internal inflation at 3.4% was significantly below the 4.25% national food inflation. And as a consequence, we gained the 35 basis points market share. So we're relatively happy with our performance, but obviously, the volumes were negative. So what we believe has happened, we have 2 or 3 thoughts. First of all, the consumer confidence is still very negative. We have seen that it has started improving, but still in negative territory towards the end of the quarter, but it stayed in negative territory, especially in Flanders which is the more -- the richer region traditionally. But you know that last year, there were a few significant factory and company closings which have affected the economy and the confidence level. Also, we believe that inflation has played a role. With that level of inflation, we think that it has impacted consumption, especially due to the fact that inflation was driven in the quarter mainly by seasonal products like fruits and vegetables due to the weather. And clearly, the fruit and vegetables are very sensitive products and have an influence on the perception of the consumer on the overall price levels. So we believe that had an impact. But with the better weather now, that should go away. And clearly, yes, the weather in Belgium in the second quarter was absolutely terrible. It would rain everyday for 3 months. And of course, it has impacted negatively a lot of traditional family events and student events in June, but family events in May with the communions and so forth, and it has affected volumes, and therefore, performance for the retailers.

Alastair A. Johnston - Citigroup Inc, Research Division

Just one further question on Belgium. You're saying that SG&A will go up for various reasons in the second half of the year in Belgium. Isn't -- aren't wage rates going to come down in Belgium in the second half? I thought wage indexation and the automatic link to inflation will be a supportive factor in the second half of the year in terms of, there will be less inflation of wages in the second half. Is that not correct?

Pierre-Olivier Beckers

We'll have to see. But, well, Frederic, you...

Frederic van Daele

So, that's right. I think -- so there is less wage indexation scheduled for the second half of the year, but still we do have timing of SG&A expenses that's why our SG&A levels will be higher in the second half of the year.

Operator

We will now take our next question from Marc de Speville of Redburn.

Marc de Speville - Redburn Partners LLP, Research Division

Could you please elaborate a bit on the reasons for the improved cost of goods in the U.S., which offset the 70 basis points gross margin? If there's better supplier terms, can you elaborate what could be driving that for instance, or inventory, et cetera? And also, you mentioned Bottom Dollar as being a reason for the improvement in the gross margin. Can you say what specifically at Bottom Dollar is helping the gross margin?

Pierre-Olivier Beckers

We did launch in the second and third quarter -- in the third and fourth quarter of last year the work so that we improve our purchasing conditions with suppliers. And it has started paying off in the first half of the year, so this is the -- mainly the -- the improvement in cost of goods is mainly the outcome of this. Bottom Dollar has, yes, a significant impact on Delhaize America underlying operating profit improvement because, as you know, Bottom Dollar was bleeding significantly last year. I think, in particular, in the first half. And with all this season slowdown, the expansion on one hand, the decision to work hard to improve the business, but then on the other hand, it's obviously we have been able to reduce to a very large extent the Bottom Dollar losses. This has a very significant impact on Delhaize America underlying operating profit improvement in H1 this year.

Marc de Speville - Redburn Partners LLP, Research Division

Okay. Just if I could follow up on the sort of work you've been doing with suppliers. Is it mainly to leverage the improved volume growth you've been seeing with the relaunched stores and/or any other particular things worth highlighting?

Pierre-Olivier Beckers

No, it's much more traditional. As you know, looking at respective market share vis-à-vis the suppliers looking at the respective market share evolution vis-à-vis each suppliers and expecting a market share evolution, each supplier in the market and trying to leverage on what we're delivering to suppliers that we were not able so far to extract. So it's a usual work that you do when you want to improve your suppliers terms.

Operator

Our next question comes from James Collins of Deutsche Bank.

James G. Collins - Deutsche Bank AG, Research Division

I've got a couple around Food Lion, please. First off, just on the USP work that you're doing, can you give us a little bit more detail on exactly what it is that you're trialing? Are they changes to the ranges? Are they changes to the format of the store? And what's your view on the timing of the trials you're doing and when you'll reach conclusions and when you might move to rollout? That's the first question around the USP work. Second question is, can you give us a little bit more detail on how the Phase 4 stores have performed? So what were their characteristics before the relaunch, and how have they perform subsequently? And second, can you give us a bit of detail on the timing of Phase 5, and how many stores are going to be involved in that phase, please?

Pierre-Olivier Beckers

All right. So perhaps, Phase 4, we're not going to break down anymore and give details, but what we've seen in terms of performance is excellent performance both in Phase 3 and 4 actually. They were, in terms of comparable sales -- or comparable sales increase, they were our best phases, both of them, so quite good performance there. Phase 5 is pricing of the remainder of the stores. We talk about more than 200 stores. This being said, we don't believe that all of them will receive the, if you will, the full treatment, I think something like 150 stores will receive the full treatment of the phase work. And the others will receive elements for a variety of reasons because they are less impacted by competition, because they are in better shape, because they are not necessarily performing well, so we'll see. But definitely 150 stores will have the full phase treatment, and this will come in the fourth quarter of the year. In USP, so what we want to do is transform Food Lion from a convenience -- large convenience stores more to a convenience neighborhood supermarket. So indeed, the concept that we're working around are the concepts of easy, we want to make it easy for the customer to shop in the stores, finding the -- easy in the way they find their products, so we don't want to clutter our stores with products that they don't need or buy. But we want to make sure that we have the right assortment. We want to make sure that we attract customers on their daily needs, and their daily needs means a lot of fresh focus. And we believe we need to improve our fresh offering at Food Lion, that people can feel convinced, be convinced of attracting -- of buying, shopping for their fresh product as well. And then the third concept is affordable. And of course, we've started that in a big way, returning to our historical price DNA, and we'll continue staying on that ball and playing it very strongly over the coming years. So, yes, what we're working at now, are changes to the assortments, the service level in the store and, of course, the overall assortment -- the overall freshness and store experience that customers can get through a better fresh offering. So we are actually beginning to test elements of the concept right now in the end of summer in a variety of stores. So we don't have all of the elements yet in 1 store, but the different elements in different stores. And we will have full pilot stores in -- with all of the elements in the fourth quarter. So we should have a couple of stores and then we'll see how we go from there.

Operator

Our next question is from Cedric Lecasble of Raymond James.

Cedric Lecasble - Raymond James Euro Equities

I had a question on the kind of price reduction adaptation in your latest phases. What has drastically changed in your new phases implementation versus the initial ones? Have you put more in prices? Do you change more of the range? You put more private labels? There were some questions close to this one, but how have you adapted your model in the last phases, and especially in Phase 5 coming for the 150 stores?

Pierre-Olivier Beckers

There was no fundamental change in the more recent phases. But what we've seen is that we needed to start to reopen our stores, to represent them to the customers with all of the attributes at once which was not the case in the early phases where we staggered the introduction of some concepts. So this was one element in the later phase work. Another one was clearly the learning curve. The more you go, the better you become at execution. You learn from the mistakes in terms of training, and so forth, so that was another element. And you know what, the third element is the overall improvement that we have seen throughout Food Lion with new management since last year, a new culture, a different sense of urgency and around execution and customer service. We have also, of course, since last year, continued to improve our private brand range with our 3-tier level, the MyEssentials, as a full year of being present and known by the customers, and we're making progress there which improves our price image overall. So a variety of elements, really, but nothing that I would say is rocket science or different between the later phases or what we expect for Phase 5 compared to...

Cedric Lecasble - Raymond James Euro Equities

If I may, just as a follow-up, where do you stand now in terms of private label exposure? And were the private labels responsible for the nice volume uptick you continue to have in your performance?

Pierre-Olivier Beckers

Okay, well, private label range helps and continues to grow. But I wouldn't say it was mainly responsible for improvement. Pierre, do you want to say...

Pierre Bruno Charles Bouchut

Yes, maybe one element to mention is that in Phase 4, but also in Phase 5, we'll be engaging much less in modeling capital expenditure which is a bit of a paradox. And this is, to a certain extent, what explained that we made less capital expenditure in the second quarter of this year versus the second quarter of this last year and the same for H1. So we are able to get this sales price -- sales agreed [ph] without capital expenditure or with limited capital expenditure, and the rationale behind it is that since we're preparing ourselves for the Food Lion unique selling proposition, and we know that we'll -- in the coming 2 or 3 years, we'll have to remodel our stores, we decided not to do it for Phase 4 and for Phase 5. So this is an element where there is a difference that you can measure in euro or dollar terms.

Operator

The last question comes from Rob Joyce of Goldman Sachs.

Robert Joyce - Goldman Sachs Group Inc., Research Division

Just a couple from me. I'm just going to follow on, on that CapEx point, actually. So I guess what just -- the question is what do you see as the run rate CapEx for 2014, and beyond? What would we be looking at there as a normalized CapEx rate given the U.S. store reinvestment? And the second one is just on the relative price positioning. Could you just update us on where you now see the repositioned stores versus Walmart, and whether that's changed in the positioned earlier phases? And just finally on that, whether you see that changing in light of the new proposition you're going to be offering. Is that relative pricing, are you going to target a different level there?

Pierre Bruno Charles Bouchut

For the CapEx, I mean, we have been emphasizing in the guidance given to you, we expect the total level of cash CapEx in the neighborhood of EUR 650 million.

Robert Joyce - Goldman Sachs Group Inc., Research Division

But beyond 2013, sorry, Pierre?

Pierre Bruno Charles Bouchut

Beyond 2013, it's a bit early to say. But if you remember, we said that normally, our CapEx -- or cash CapEx should start to increase again as of 2014, and we still have the same sentiments. In particular, with the deployment of Food Lion USP but also because we have planning some store openings in some areas where we expect the better economic environment in the coming years.

Robert Joyce - Goldman Sachs Group Inc., Research Division

But no numbers there?

Pierre Bruno Charles Bouchut

We haven't released any precise numbers. And on the USP work, it's clear that price is going to continue being an important element. And as I mentioned, the 3 words that summarize the concept: easy, fresh and affordable, affordable is clearly about prices. But we've done a significant effort over the last 2, 3 years now. We certainly want to maintain that momentum. We're seeing that we have reached success, and the fact that some of our competitors are reacting means that we are having an impact on them. So our work is going to be maintaining that pressure and maintaining the gains. But the key about the USP is it's mainly about the other elements. If that's going to be new or newer, it's how to further differentiate Food Lion and take advantage of its smaller store format; convenient to reach; convenient to park; and enter and shop the store, because, obviously, with a more limited space than much bigger supermarkets or hypermarkets, it's an advantage we can take certainly into the future. So, how to create the other elements and get more differentiation out of that, the assortment, the freshness, the service, that's going to be the focus mainly of the USP work.

Robert Joyce - Goldman Sachs Group Inc., Research Division

And normal relative pricing, as you see it now?

Pierre Bruno Charles Bouchut

The second question was the repositioned stores price.

Pierre-Olivier Beckers

No, I think nothing has changed, Rob, compared to what we have earlier indicated in terms of our price position.

Robert Joyce - Goldman Sachs Group Inc., Research Division

So that's around 5%, from memory, price count, is that right?

Pierre-Olivier Beckers

Yes, on our index, yes.

Frederic van Daele

All right. Thank you, all, for participating in today's conference call. A replay is available on the group's website. If you have any additional questions, do not hesitate to contact the Investor Relations Department. Delhaize Group will announce its third quarter results on Thursday, November 7, 2013. Thank you, and have a nice day.

Pierre-Olivier Beckers

Thank you very much.

Operator

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

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