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Delhaize Group. (NYSE:DEG)

Q1 2010 Earnings Call

May 5, 2010 09:00 a.m. ET

Executives

Garrett Bowne - VP of IR and External communications

Pierre-Olivier Beckers - CEO

Stéfan Descheemaeker - CFO

Rick Anicetti - CEO, Delhaize America Shared Services

Ron Hodge, CEO, Delhaize America Operations

Michel Eeckhout - CEO, Delhaize Belgium.

Analysts

James Anstead - Barclays Capital

Fernand de Boer - Petercam

Edouard Aubin - Morgan Stanley

Fabienne Caron - Bryan Garnier

Alastair Johnston - Citigroup

John Kershaw - Banc of America/Merrill Lynch

James Grzinic - Jefferies & Co.

Operator

Welcome to Delhaize Group's First Quarter 2010 Earnings Conference Call. I now hand over the conference call to Garrett Bowne, Vice President of Investor Relations and External communications of Delhaize Group. You may begin.

Garrett Bowne

Thank you operator. Good afternoon everyone in Europe, good morning in the U.S. Welcome to the conference call concerning Delhaize Group's results for the first quarter of 2010.

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

An audio webcast of this conference call will be available on the company's website. Delhaize Group reserves all rights to the content of this webcast and this webcast cannot be recorded or otherwise reproduced without the prior express written consent of Delhaize Group.

Today we have the following people with us. Pierre-Olivier Beckers, CEO of Delhaize Group, Stéfan Descheemaeker, CFO of Delhaize Group, Rick Anicetti, CEO of Delhaize America Shared Services; Ron Hodge, CEO, Delhaize America Operation; and Michel Eeckhout, CEO, Delhaize Belgium.

During this call, we will first look back on our performance in the first quarter of 2010 followed by comments on operations and strategy. Afterwards, we will take questions. For those who are unable to stay on the call or who wish to listen to it again, a replay will be available on the company's website later today.

I'll now turn to Pierre-Olivier Beckers, for an introduction of our first quarter results.

Pierre-Olivier Beckers

Thank you, Garrett. Hello everyone and thank you for joining our conference call. Just a couple weeks ago when we announced our full year 2009 results, we spoke about new game plan, our comprehensive strategic plan aimed at accelerating profitable revenue growth. In this quarter, our operating companies effectively started to executive their new sales building and cost savings initiatives that make up this plan.

Despite a tough comparison with last year’s highly inflationary environment, the still challenging economic times we face today, and our significant price investments, started at the beginning of this year, particularly at Food Lion, our revenues increased by 1.7% at identical exchange rate.

Indeed, all our banners continued their price investments to achieve value leadership in their respective markets. In the U.S. the volume trends we saw in 2009 continued to improve and net real growth was almost flat in this quarter.

Delhaize Belgium generated outstanding results as the virtuous cycle of growth accelerates. Excellent revenue momentum, led there to uninterrupted strong weekly market share gains for the last 15 months. Furthermore, cost savings and sales leverage led to increasing operating margins.

Our Group’s operating margin remained stable at strong 4.9% at identical exchange rate. This is compelling evidence of our ability to maintain profitability at higher level even during times of unfavorable U.S. sales leverage.

Our cost savings projects are delivering and as a result our SG&A expenses as a percentage of revenues are decreasing as a result of local and regional cost savings projects.

We are solidly committed to our new game plan and while we remain cautious for the rest of the year, knowing that the profound changes to our pricing strategy will take time to deliver. We are convinced that our strategic growth initiatives supported by our solid balance sheet, leading brands and market positions, also the excellence in execution and our strong management teams, all of that enable us to confirm our guidance of 2 to 5% operating profit growth, or 7 to 10%, that you will at identical exchange rates between two last years restructuring, store closing and impairment charges.

Stéfan will now provide you with some additional color on the first quarter results and I will come back later to give you a brief updates on some current strategic initiatives. Stéfan?.

Stéfan Descheemaeker

Thank you, Pierre-Olivier and welcome everyone. As usual, I will review our figures based on identical exchange rates. In this quarter, the US dollar has weakened on average by 5.8% against euro, but obviously compared to the first quarter of last year.

As Pierre-Olivier just indicated Delhaize Group continued to grow greatly, despite the challenging economic environment, revenue growth amount to 1.7% for the Group. In the U.S., our revenue decreased by 0.4% and our comparable store sales growth was negative 1.8% or negative 1.2% when not adjusting for the impact of these two.

Adjusting or comparable store sales growth for retail deflation, real net growth for the quarter turned almost flat up to more than two years of negative though improving volume trends. Retail food deflation was 1.6% in the first quarter of this year, compared to inflation of 4.1% in the first quarter of last year. Our cost price inflation was flat and the 160 basis points gap between our retail price and our cost price inflation results from the major price investments we started in January, mostly at Food Lion.

In Belgium, total revenues increased strongly by 5.2% in the first quarter. Comparable store sales growth was 4.3% and was supported by successful commercial initiatives and a continued focus on price competitiveness. This comparable store sales growth is entirely the result of volume growth as inflation stayed flat at Delhaize Belgium in the quarter.

Our price reality as well as perception further improved and resulted in market share gains in every week for the last 15 months in a row. Revenue growth at Alfa-Beta in Greece was again strong at 9.2%, on top of an outstanding quarter last year, and as a result of strong comparable store sales growth and network expansion. We are proud of our Greek results as they come in the context of a difficult economic environment.

Comparable store sales growth was entirely the result of volume growth since inflation stayed at a very low level for the quarter. Both the number of transactions and the number of items per transaction increased.

Revenues in our Rest of the World segment increased by 18.4% as a result of the expansion of the store network and strong comparable store sales growth in Indonesia. In Romania, the underlying sales trend is improving compared to the fourth quarter of last year.

The gross margin for the Group decreased to 25.7% of revenues as a result of our major planned price investments at Food Lion and Hannaford. This was partly offset by improved supplier terms coming from better negotiations in Belgium and Greece, and good inventory results at all our US operating companies.

SG&A amounted to 21% -- 21.3% of revenues, which is a decrease of 19 basis points at identical exchange rates. Cost savings across the Group have allowed us to decrease our operating expenses in a sustainable manner and we are on track to reach our targets of €300 million annual SG&A savings by the end of 2012. As a result of our SG&A decrease, we have been able to maintain our operating margin stable at identical exchange rates at 4.9% of revenues. Our operating profit grew by 1.7%.

Looking at our cash flow statement for this quarter, net cash provided by operating activities decreased by 19.5% due to higher inventories, lower accounts payable at Alfa-Beta that were partly offset by the absence of tax payments due to timing. Last year’s positive working capital evolution was the result of our operating companies’ increased focus on cash flow and ability to free up resources in a sustainable way.

We will increase our focus on improving our working capital position this year, while knowing that our position will remain subject to normal seasonal fluctuations. Delhaize Group generated €219 million in free cash flow at identical exchange rates mainly as a result of the strong profit.

Our first quarter results announced today and our plans for the remainder of the year allow us to confirm our full-year guidance as issued on March 11th. We expect our operating profit to grow by between 7 and 10% at identical exchange rates. As indicated in March at the occasion of the issuance of this guidance, we expect 2010 profit growth to be generated mostly in the second half of 2010.

I would like now to turn back to Pierre-Olivier to give you an update on our strategic and our operational initiatives.

Pierre-Olivier Beckers

Over the past quarters we have emphasized our commitment to our long-term strategy while successfully responding to the everyday challenges facing our sector and our business in a dynamic competitive environment. Today will be no different. Indeed, consumers continue to be challenged and even if we see gradual increases in inflation and early signs of up-trading at some banners, our customers continue to be influenced by high unemployment, increasing fuel and energy prices and depressed real estate prices.

So a key element of our New Game Plan is price. Across the Group, our operating companies strive to become the value leader in their markets by putting an even greater emphasis on price competitiveness. Across the Group, our operating companies now focus their price comparisons on the local price leader.

Early in 2010, Food Lion started resetting the prices of thousands of products. Later in the first quarter, the banner launched a strong advertising campaign featuring TV commercials that reinforce Food Lion’s strong “Low Price Heritage”. Hannaford also lowered prices as planned and as a result, our U.S. operating companies significantly improved their price positioning compared to the price leader in each of their markets, not only for some promotional items, but also in a sustainable manner for a large number of high volume products that our consumers need everyday.

Delhaize Belgium further reduced its prices, and as a result, closed its price difference to the price leader and the hard discounters to the lowest level in recent years. Also during this quarter, our Belgian banner ran powerful commercial actions, such as the use of savings cards and the stock-up discount, a successful feature that we have first tested in Red Market.

During this quarter, our Belgian operations realized strong volume growth supported by more customer visits. In early April, Delhaize Belgium stepped up its pricing effort again by launching a new campaign to decrease prices on an additional 1000 popular items, this was the 5th large price campaign since the beginning of 2009.

In Greece, while we are mindful of the worsening economic outlook, Alfa Beta has not seen a negative impact of the difficult macroeconomic environment on its performance so far.

Our Greek banner lowered prices and carried out a successful promotion of its private brands such as Alfa Beta Choice, Close to Greek Nature and the Bio the organic brand, leading to a 28% jump in private brand sales during the campaign.

Overall, I should say private brands continue to fare well across our group. At Food Lion, private brand revenues increased to 19.8%, a full percentage point above last year’s first quarter, mainly as a result of more specific private brand promotions, as well as assortment innovation.

Our operating companies have always used their assortments as a key instrument of differentiation. Over the past quarters, Delhaize Belgium has executed value chain analysis projects in close cooperation with our vendors on departments like wine and fruit and vegetables, aimed at critically reviewing the contribution of these categories to our performance.

Alfa Beta is currently reviewing the results of assortment optimization pilots in its center store and meat departments. On the other side of the Atlantic, Food Lion’s vendor portal is increasingly used to share collaborative insights and drive mutual business opportunities with its suppliers.

Our new game plan also focuses sharply on the growth of our newer markets and our newer formats, such as the low cost supermarkets Bottom Dollar Food and Red Market. This quarter one year ago, you remembered we opened the first Red Market in Belgium. Our Red Market stores have continued to perform well and get positive marks from the customer.

In addition, as indicated last year, Red Market has provided us with the opportunity to test new concepts, like the stock up discount I mentioned a minute ago, for implementation in our other stores.

And since the opening of the first Red Market store last year, we have now opened five more, four of which in Romania. In Greece, our two Lion Food stores have now been converted to Red Market and a new Red Market will be added there by the end of the year.

In a couple of weeks, our 3rd Belgian Red Market store will open close to Brussels. And by the end of 2010, we expect to reach a total of 12 Red Market stores across Europe. And in the U.S., we planned to nearly double the size of the Bottom Dollar Food network to about 50 by year-end.

Our commitment is to fund these structural price investments by sustainable cost savings, and these are a key instrument in our new game plan. As such, our operating companies strive to generate a virtuous cycle of growth, where topline momentum is driven by investments in the business that are financed by sustainable cost savings.

Our plans, as Stéfan reminded you a minute ago are to generate €300 million in annual SG&A savings by the end of 2012. And while it is still very early to say, we are absolutely on track to achieve that goal.

We are very encouraged by the fact that during this first quarter, our Group has been able to realize a decrease in SG&A expenses as a percentage of revenues. This means that notwithstanding the tough comparison and sales deleverage effect we faced in the U.S., all our major operating companies have managed to save significantly.

Some of these savings come from local initiatives such as advertising efficiencies, value based procurement practices leading to better supplier conditions, better labor scheduling, staffing model changes or productivity improvements through the use of case stocking.

Others is costs savings initiatives are more complex and are pursued on a regional level. At Delhaize Belgium, the Excel 2008-2010 plan continues to gain momentum as sales leverage and cost savings initiatives are providing for the necessary means to reinvest in price.

Strategic initiatives such as the fully automated fresh distribution center, store automated reordering with specific planograms, or the expansion of Delhaize Direct are moving ahead according to plan.

In the US, we have fundamentally changed the way we are organized. Under the Delhaize America umbrella, all support services are now centralized into one shared services organization and all of our store operations are managed as a single unit, while maintaining each banner’s unique go-to-market strategy.

So structured, Delhaize America will be a much more nimble organization. In addition, we are confident that significant cost savings will be delivered over the next couple of years as key departments such as human resources and finance are further streamlined.

A great example of our regional initiative is the US Supply Chain Master Network that is now in its second year of construction. In the first quarter of this year, we concluded a year of work to achieve common master data, one common hierarchy and unique store and distribution center numbers so that each item now is seen as one “Delhaize America” item. This achievement enables us to optimally leveraged Delhaize America’s collective size and negotiating strength.

By the end of 2010, all US operating companies will have switched to the same warehouse management and procurement systems and the synergies and efficiencies of the master network will be coming in increasingly.

And then, we continue to cater to the needs and expectations of our customers, not only in price, but also in the area of corporate responsibility and socially responsible products and shopping experiences. Our companies are supporting local economies and actively seeking to source products locally. For example, Hannaford and Delhaize Belgium designed a program to help local dairy farmers to stay in business.

Hannaford’s Guiding Stars nutritional rating system continues to gain momentum following the licensing to another US retailer. Kings Super Markets, operating in New Jersey and on New York’s Long Island, will start using Guiding Stars to rate both national and private brands.

Our operating companies continue the development of “green stores”. Alfa-Beta will open its first “green store” later this year and recently received the “green building award” for significant energy reductions at one of its stores in Athens. Food Lion also will open another green store later this year in South Carolina. During this quarter, Progressive Grocer, a leading retail industry publication, nominated Delhaize Group as one of the 10 first members to be inducted in the Green Grocers Hall of Fame for its continued leadership in green store design and other socially responsible initiatives.

The US Environmental Protection Agency also awarded Food Lion for the ninth consecutive time the Energy Star award as recognition for one of the most advanced energy conservation programs in the country. These are just some examples of the many initiatives that we have in place and that are evidence of our lasting commitment to operate responsibly in all of our markets.

Let me conclude. Our first quarter results clearly reflect the successful implementation of our New Game Plan. While we see continued volume improvements in the US, we do realize that the macro and competitive environment will continue to put pressure on our customers.

At the same time, we believe that we are very well positioned to meet the dynamic needs of our customers. Our operating companies can finance price investments through sustainable cost savings while simultaneously maintaining strong profitability levels. As a result, our first quarter numbers as well as our plans for the remainder of the year give us the confidence to confirm our operating profit growth guidance for the full year.

And this concludes our prepared remarks. We will now be available to take your questions. At this time, I will turn the program over to our conference call operator, who will give you instructions for asking questions. So operator?

Question-and-Answer Session

Operator

Thank you sir. (Operator Instruction) And our first question will come from Robert Boss [ph]. Your line is open.

Unidentified Analyst

Yes, good afternoon everyone. I have couple of questions if I may. I noticed that capital expenditures were quite low for the quarter considering the guidance of 800 million for the year. Can you say a few words on the timing of CapEx in 2010? And the second question is, can you specify the main drivers behind the EBIT profitability jump in Belgium and how sustainable is this profitability going forward? And my last question is, is the tax rate of Q1 sustainable for the remainder of the year? Thank you.

Pierre-Olivier Beckers

Thank you. Stéfan why do you take the first and the third question perhaps and then I will --?

Unidentified Company Representative

Yeah.

Unidentified Analyst

You shall for over the question on Belgium?

Unidentified Company Representative

Yeah indeed at this stage, the CapEx is of Q1 is little below. Something we embedded anyway with we set up and basically most of the stores would be open in the second half of the year, so it’s going to be back load. Not to be exclude that we maybe slightly below the budget at this stage we don’t expect any major decreased. Back to your point about the sustainable rate of the tax rates, indeed we think it’s sustainable for the full year. So it should be between 33% and 34% for the full year.

Unidentified Analyst

(inaudible) of the question on the main drivers of the EBIT margin in Belgium?

Unidentified Company Representative

Yes. Certainly, as you remind two rate we start the excel plan and the excel plan brings now to good results on differed to a cycle of growth. And clearly it’s working, it’s translated by a steady increase of the market share of gains since earlier ’09. Every week we have an additional market share gain. Backed by a strong commercial plan also we improved since 2009 on a regular based our price positioning, just to remind that we are now at our fixed price script and we have also booked efficiency gains and this all bring to I would say the level of operating margin we know today.

Of course, that level of more than 5% is not expected to be continue towards 2010. Then we expected to be 2010 out of global year between 4% and 5% because as you know we will do -- additional price gets in. We have an additional price gets in April also in Q1. I would say the operating margin was influence by exceptional buying conditions driven by volume growth and I would say global enthusiasm of our supplies to participate to that the sales list, and also in quarter two and quarter three additional expenses have been -- an operating expense have been fore seen to support strategic initiatives slide rolling out further the planet ground and that store specific ordering systems.

Unidentified Analyst

Okay, thank you, but briefly if you come back on the tax rate, I think the press release states 31.6%, you said now that 33% to 34% is sustainable. Can you help me out here?

Unidentified Company Representative

Remember Tom (inaudible) I think we’ve said at most full occasions that the underline tax rate for the full year the guidance that we put out there you should take into account 33 to 34. Now every quarter there are some elements that influence that either up or down. But underline you should use 33 to 34, sorry for the confusion there.

Unidentified Analyst

Okay, that’s very clear. Thank you.

Unidentified Company Representative

Thank you. Next question.

Operator

The next question comes from James Anstead of Barclays. Your line is open.

James Anstead - Barclays Capital

Yes, good afternoon. Just a couple of questions about the US and also (inaudible). I was wondering if you can just talk a little bit more detail about the consumer reaction you’ve seen to the price that you have made in the first quarter. Talking perhaps about how quick the response was and how that’s builds across the first quarter and perhaps even give us some insight in to whether there have been any changes in the second quarter so far?

And indeed, whether there is been any competitive reaction. And also in the US, I think when you talked in mid-March, you were asked about whether you’ve seen any dramatic change in strategy from Wal-Mart and at that point, you were saying you haven’t noticed anything dramatically different, is that still the case speaking now six weeks later?

Unidentified Company Representative

Okay. Thank you, James. Ron, would you --?

Ron Hodge

Sure. James, in reply to your first question. Our repositioning on price, particularly at food line is one that we intended and in fact have done throughout the first quarter. And at the time, said our expectations weren’t to see a lot of customer reaction to that until the later part of 2010. And I say that holding through, we do have the price reductions in place, have not noticed the identifiable consumer reactions at this point.

And in reaction to your second question about Wal-Mart, still no change on our view of what we’ve done. We see some price reductions, but I can tell you that we are closer to the low price leader and in many of our markets, most of our markets in the south-east that is Wal-Mart. We are closer to them today than we were in January.

James Anstead - Barclays Capital

Okay. You haven’t done any particular your reaction from other competitors to what you’ve done with your base line prices?

Ron Hodge

No. Our investment is in based shell pricing.

James Anstead - Barclays Capital

Yeah.

Ron Hodge

Long-term approach to having the right pricing of our markets relative to the low price leader and we have seen no one react in that passion as we've said in the past, and it’s still true there is a lot of promotional activity in the marketplace, we see probably more of it in the Southeast, and we do the Northeast, but that has been that way for the last several quarters.

Unidentified Analyst

Okay. That’s very helpful Thank you.

Pierre-Olivier Beckers

Thank you, James.

Operator

And our next question will come from Tom Van Ooijen from Kepler. Your line is open.

Unidentified Analyst

Hello this is (inaudible), Kepler. I also have some questions regarding to the US it’s about your March impression due to the price investments. You say consumers are not really reacting at this moment. Does that mean that we should expect same March impression going forward in the next quarters and only improving again of the year? And the other question is about you say you don’t see compare of this, reacting on your lowering of your prices, did you increase your marketing to attract the customers? Do you expect at that time it will react and can it be reason for you to again on over prices? Or do you say we've lower prices in the Q1 and we are not doing it in the next quarters?

Pierre-Olivier Beckers

Tom Just a first comment for me and then I'll turn again to Ron. We didn’t say that consumers have not reacted so far. You should be, but you should make a difference perhaps between existing customers and new customers certainly it takes time before the pressure yourself inflicting on your average price per item is more than offset by additional items purchase by customers and then through new transactions and we believe as seen an experience from history that it will take certain time for that to happen. But, we have seen a true line a pretty good trends in number of items per transaction since our price investment. So we certainly think that customers begin to get it and our existing customers in particular.

Ron Hodge

The last question. Lot of noise in the marketplace with a lot of claims of lower pricing from Wal-Mart to conventional grocers, what we have done is made a sustainable price reduction based on reductions in cost. We think that anybody else who is going to react in that passion has to come up with a same type of cost reductions that we have identified and are well underway in achieving.

So, even though we’re turning up the heat if you will on the marketing side, we hope that gets to customers who are not shopping with us today and come in and see the prices that we have on our shelves along with the promotional activity that we’ve continued at Food Lion. So, for competitors to react in a long-term way, they are going to have either reduced their earnings or find a cost reductions like we have.

Unidentified Company Representative

The only thing I would add to that Ron and Pierre-Olivier, that the marketing program has really just initiated and is expected to continue right straight throughout the year and is part of our plans.

Unidentified Analyst

Okay. And the impact on margin then because you see now in Q1 pressure, specially on gross margin, compensated by cost savings, which you will increase your marketing so, that will partly increase the operating cost again?

Unidentified Company Representative

Well, we are doing everything in accordance to our plans for 2010. And absolutely we see a more direct impact on gross margin, the day we low our prices and our cost reductions which will cover all of that again gain traction as year goes along.

Unidentified Company Representative

And as you saw our operating profit growth is 1.7%, we confirmed our guidance of 2 to 5 and that clearly indicates as that as we both progress through the year, we will become -- we will begin to see improvement in other country in fact in terms of margin.

Unidentified Analyst

Okay. Thank you.

Unidentified Company Representative

Thank you.

Operator

And our next question comes from Fernand de Boer of Petercam. Your line is open.

Fernand de Boer – Petercam

Yeah. Good afternoon. I have couple of quick, firstly on which is a something on Sweetbay how was your trends going there, and all for in the North East what do you see actually happening at charge one of you may that is for Hannaford?

Unidentified Company Representative

Maybe on Sweetbay is to we have started, well we are very pleased with the continued improve that we see at Sweetbay now, its no secret to anyone that Florida has been probably mostly impacted about any staging in the US from the financial and the economy crises by that same time we had in 2009 the best year of Sweetbay and we were on plans. And in the first quarter we did reach breakeven in the first quarter as we said we would sometime during the year either in the first quarter and the fourth, we will see it’s too early to talk about the fourth quarter, but we certainly did reach again a good improvement leading to reaching breakeven in the first quarter. So, we’re very confident about our business there. It remains challenging because the state is in -- in challenges from -- consumers are challenged. But again, the first quarter was absolutely unplanned for us with Sweetbay and we are -- and our plan remains to breakeven up for the whole year 2011.

Fernand de Boer – Petercam

In the north-east?

Unidentified Company Representative

Nothing really new in the north-east, because no particularly noticeable reaction from them that has listed [ph] the responses from any other competitors or as we have invested more in price at Hannaford in the first quarter and are very comfortable with the price positioning that we have in this market place.

Fernand de Boer – Petercam

Thank you

Unidentified Company Representative

Thank you, Fernand.

Operator

And our next question comes from Edouard Aubin of Morgan Stanley. Your line is open.

Edouard Aubin – Morgan Stanley

Yeah, good afternoon. Two questions if I may. First of all, regarding Bottom Dollar. It will be a big part of share expansion in the US going forward. Could you give us the sense of the, a kind of mix of the format as stall level if possible and also regarding cost price inflation you’ve mentioned that it was flat in the first quarter? What should we be expecting in the second quarter?

Unidentified Company Representative

Rick?

Rick Anicetti

I will address Bottom Dollar food. It really is what we’ve characterized is a soft discount a format. Roughly about, for the typically 19,000 to 20,000 square feet. Probably 7,000 to 8,000 items currently priced below Wal-Mart on a total market basket a basis. And we believe that it's a great opportunity to begin to think about new markets where our entry will not be one of five or six traditional players that already exist, but something unique and different as it introduction to the market place and very excited about the way our prototype has performed to date.

Unidentified Company Speaker

Second question?

Unidentified Company Representative

Yes, in terms of inflation, obviously nobody has a crystal ball what the cost inflation will be. We have seen you’re right is what we have seen, the flat cost inflation for Q1. We expecting a gradual increase in the course of Q2 and for the full year we think there will be overall next some of the inflation, but the final level is difficult to predict. We are expecting some gradual increase in the course of the year?

Unidentified Analyst

Okay. Great. Thank you.

Unidentified Company Speaker

Thank you.

Operator

And our next question comes from Fabienne Caron from Bryan Garnier. Your line is open.

Fabienne Caron – Bryan Garnier

Good morning, everyone. To come back on the US, you said that you’ve mostly done your price repositioning at Food Lion in the first quarter. Can you say as well that you have done most of the price repositioning at Hannaford because you mainly talked about Food Lion in Q1 or should we expect Hannaford for too many quick questions in the second quarter. And my second questions would be regarding the margin in that US is it fair to assume that we should see continued margin decline in the second quarter? Please.

Unidentified Company Speaker

I will take the first one, Fabienee. We completed the non-price changes in Food Lion in Q1 and also at Hannaford in Q1. So our strategy is to target the low price leader in every market place and we’ll continue to monitor that quarter-by-quarter as we go through the year, but as far as our active plans for the year most of those price reductions were in Q1 and that have been accomplished.

Fabienne Caron – Bryan Garnier

Okay.

Unidentified Company Representative

On the first question, although the second question on the margin what we’re not going to comment on quarterly, we’ll guidance on quarterly margins but as I said I think to an earlier question, we expect that as we go through the year, the pressure coming from the self inflicted the price reductions will be gradually offset and then more than offset by the price, the cost savings that we’re generating across our US business, and in particular, in the local initiatives this year because if Delhaize America savings will come more online from 2011.

Fabienne Caron – Bryan Garnier

Okay. Thank you.

Operator

And our next question comes from Alastair Johnston of Citigroup. Your line is open.

Alastair Johnston – Citigroup

Hi, afternoon, everybody. Most of my questions have been answered. One thing I would like to circle back on is the Belgium margin, can you just, I didn’t get the impression as anything funny about the net Belgium margin, there wasn’t any kind of lump of supplier rebates in that, I guess you’ve benefited from costs were having strike action during the quarter. Could you just confirm that, first of all there is no supply rebates in that first quarter effecting the number, and secondly, the current effect some cost will strikes, is that anticipating in to key or is it sort of continue benefit to you through the second quarter so far? Thank you.

Unidentified Company Representative

Who will take that, Stéfan, Michel?

Stéfan Descheemaeker

I can take that and Michel, please compliment what I could say. In terms of -- it's much more question of better negotiation more than anything else, which help the margin in the first quarter, and that should also be to some extent sustainable.

In terms of the strike, in the end the impact of the strike was very limited for the first quarter. By definition, it is very difficult to foresee what is going to happen for capital [ph] for Q2, Q3, Q4. So, by definition, we don’t foresee anything in the second part of the year, because we just don’t know. So the 4% to 5% margin indicated by Michel is mainly based on what see from our own operation more than anything else.

Alastair Johnston – Citigroup

On Carrefour [ph] I mean, I think Carrefour stated that they are only that. It did something like minus 9.7% like-for-like, and if they are playing that like-for-like almost entirely on the strikes during the quarter. So, if their 25% market share and they given up 10% to their sales, yes, I presume you have been quite a large beneficiary of that. Is that fair to say? And if that goes away then things will turn out…

Stéfan Descheemaeker

Let me say strongly that we believe that the strength and the good numbers of Delhaize in the first quarter, absolutely the result of what we have engineered and indulged and team in particular has engineered in the last -- from the last few years and is bearing fruits now. The acceleration of sales, the Excel Plan creating few from Raven with very strong cost savings, and all of that is producing the results. Excluding the Carrefour impact for the first quarter and Delhaize Belgium would have had a very strong quarter period and that’s what you have to remember.

Unidentified Analyst

And you not only gaining market share the day of the strike.

Unidentified Company Representative

That should be [ph].

Unidentified Analyst

That’s why I was asking did you really noticed on the days of the strikes, November strike, did you notice big (inaudible) because of customers when it's back to sort the numbers, can you dial [ph] at that, but I guess you are saying it would be a good quarter any way so ?

Unidentified Company Representative

Yeah. Obviously, when the stores were closed that we and other retailers in Belgium are benefited from earning flexible customers that is absolutely right.

Unidentified Analyst

Okay. Thank you very much.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from John Kershaw of Banc of America/Merrill Lynch. Your line is open.

John Kershaw – Banc of America/Merrill Lynch

Yes, good afternoon or good morning, guys. First of all on the US perhaps you kindly said on Belgium that your price perception is being improving. Clearly it's still early days in the price cost, but can you possibly give us by market overall the by (inaudible) trend in price perception.

Secondly, given the price of CoStar genuine on, a persistent, can you perhaps -- if this come to play, I am going to tell you that whereas conference call but given the essence of what the messages is being in your marketing to change perception externally.

And then finally just thinking broader picture to long return, can you again just on a Bottom Dollar, I knows it's only 25 to 50 stores, but have this is going to be your gross vehicle for the future. Can you tell us why you think if returns will be versus to drive on this absolute cash profit contribution versus the third line because the risk is -- on demand your core if you know castle.

Unidentified Company Representative

Okay, I’ll talk about the price, price emergence, its really, really too early John, to say we're measuring a price image changes in any of our markets but we had made dramatic cuts in the items most frequently purchase by consumers to levels that really haven’t been seen before and it is in our short pricing that takes longer to notice were its not like a promotion on investment where you put it out on Wednesday and its notice that day this takes time and we will count it for that and we expected to take time before we get the real price image improvements that we clearly expect from this, so it's too soon to measure that at this point in my opinion.

Unidentified Analyst

On that Bottom Dollar Food.

Unidentified Company Representative

Yes, as we talk about Bottom Dollar Food where obviously you heard that now on a couple of different messages that were very excited about the potential this particular format has and we've also been a little bit reluctant and sort of naming where it's going because we're prefer not to give our competitive advance notice of that. Surprising to say that it will not be can mobilizing existing market share with relative to food line as we proceed forward.

Unidentified Analyst

Just to be cleared and is this new stores I suppose is previously you try to convert on that forming food line and I didn't work basically -- conforming despite the new geographies?

Unidentified Company Representative

I’m sorry this is not a conversion strategy it is in fact in new store strategy.

Unidentified Analyst

Okay, now it's clear and just perhaps want to circle back in some ways. Yes, your margins has suffered a little bit but I am -- in some way I am -- in the US. I am trying to – I am struggling to square the circle because have you really genuinely cut prices so much and yet your cost saving, hasn’t yet really kicked in and your like-for-like was still weak volumes broadly flat, why wasn’t the US worse? Has the price gotten genuinely been as deep as you said --?

Unidentified Company Speaker

John, you misunderstood or probably we were not clear enough, but our cost savings has started to kick in from the beginning of the year with local initiatives, and they will continue in terms of strength throughout the year but they have started from January 2nd. There is a big impact on our ability to maintain margins.

Unidentified Company Representative

Those are also coming in addition to all the local initiatives in part early, but in part, because the work that we began around the creation of Delhaize America as well that Pierre mentioned in his opening remarks.

Unidentified Analyst

It was more broadly, just the price costs 160 basis points, you need a lot of obviously other benefits because your 300 million over three years is running about a 50 basis points is cost savings. So, it may be sounds like you’re building towards 300 not a 100, a 100, a 100 each year, but now each times is our -- perhaps you’re more stable at this straight line, cost savings.

Unidentified Company Speaker

But John maybe you’re trying to create map [ph] where there is no good basis from map [ph], but maybe if I can try to a little more inside here.

Unidentified Company Speaker

Or the map [ph] is slightly different and probably more dynamic. I think what you can see is it probably relates to the difference between cost inflation and price inflation. The 160 basis points, which is more a result at this stage of price -- of our new price positioning. And our new price positioning is not so much related to the customer change and that’s much more where -- where we think Wal-Mart is, and so that might change. In another words, we’re going to focus on Wal-Mart as we are on strategy or even slightly better than strategy at this stage. And it should help us and then obviously we shall see, we will see what cost inflation is doing. But the gap between or no gap between price and cost inflation will be the result of a price strategy that it will be Wal-Mart more than anything else, so it’s a very dynamic world.

Unidentified Company Representative

I would also add to that one thing that we have to got to keep in mind is as we come back from deflation broadly and across the industry, different regions of the country are going to be able to take that costs increase and pass it along in retail pricing as quickly as others and in a very competitive market place particularly Southeast, some of what we see is simply lagging with regard to cost increases that are recurring from manufacturers and not part of the price reset if you will that we did with the comparative space.

Unidentified Company Representative

All right, I think would -- I try to be complete here, I don't know if it help, but why don’t we take one or two more questions.

Operator

Thank you, sir. The next question comes from James Grzinic of Jefferies. Your line is open.

James Grzinic – Jefferies & Co.

Yes. Good afternoon. Just a simple one, can you perhaps specify and your price gap versus Wal-Mart, how that is develop beginning of Q1, end of Q1 and where we are now? And can you also perhaps clarify how you measure that, how big is the basket in which you measure that? Please. Thank you.

Unidentified Company Representative

One of it, I’ll take that. Our GAAP versus Wal-Mart as we came into the year we were some where in the range to 5% to 7%. We’ve targeted 3% to 4% and we’re ahead of that pace. So, we’re very comfortable that the price reduction is very real and that is done also with the announcement out of Wal-Mart above mass price reduction. So, what we’re saying is that our price reductions are at the shelf level and have gotten us much closer to Wal-Mart and at least on our strategy. And that is across a large a segment of the items most often we purchased by our customers.

Unidentified Analyst

And just to clarify the mechanics of that, if the benchmark changes, you’ll want to maintained the 3% to 4% spread?

Unidentified Company Representative

Yes, absolutely.

Unidentified Analyst

Great. Thank you.

Unidentified Company Representative

Thank you very much. Why don't we stop here and obviously we remained available Guy Elewaut his team as usual for any questions that you might have later. But I’ll turn back to Guy for concluding comments.

Guy Elewaut

Thank you for participating in today's conference call. Replay is available on the company's website. There you can also find the text with our prepared remarks. If you have additional questions, do not hesitate to contact our Investor Relations department. Delhaize Group will announce its second quarter results on Friday, August 13th 2010. Thank you and have a nice day.

Pierre-Olivier Beckers

Bye-bye. Thank you.

Operator

Thank you for participating in today’s conference call. You may all disconnect at this time.

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Source: Delhaize Group. Q1 2010 Earnings Call Transcript
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