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Etablissements Delhaize Freres et Cie le Lion SA (NYSE:DEG)

Q4 2013 Earnings Conference Call

March 13, 2014 05:00 ET

Executives

Frederic van Daele - Investor Relations

Franz Muller - Chief Executive Officer

Pierre Bouchut - Chief Financial Officer

Analysts

Edouard Aubin - Morgan Stanley

James Collins - Deutsche Bank

Andrew Gwynn - Exane

Rob Joyce - Goldman Sachs

Jérôme Samuel - HSBC

Fabienne Caron - Kepler

Patrick Roquas - Rabobank

Nicolas Champ - Barclays

Marco Gulpers - ING

Robert Jan Vos - ABN Amro

Frederic van Daele - Investor Relations

Okay, good morning everyone. I think we will start with our Analyst Meeting regarding the fourth quarter results of Delhaize Group. So welcome everyone here in the building. We will have presentations today by Delhaize Group’s CEO, Franz Muller and also our CFO, Pierre Bouchut. And this will be followed afterwards by a question-and-answer session. Only the participants here today in Brussels will have the opportunity to ask questions.

And before I start or we start, I just want to remind everyone that today’s presentations and discussion will include forward-looking statements. And 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 note in our earnings release and are contained in our SEC filings. The statements are made as of the date of these presentations of today and Delhaize Group assumes no obligation to update this information. Franz, the floor is yours.

Franz Muller - Chief Executive Officer

Thank you very much, Frederic. My name is Franz Muller I am CEO of the Delhaize Group since November of last year. Warm welcome to you all in here in this Brussels office and also warm welcome to those on the call. It’s a pleasure today also to share with you more about the accomplishments of 2013 and this we will together, myself and Pierre do this through the course of this call.

In addition, I would like to update you on the operations of our business, spend some time on Food Lion and also I would like to give you my first views on Delhaize Group after the first months, first four months of operation. Since November, I have done a lot of traveling within Delhaize Group. I have seen all the countries, except Indonesia. I have seen all the banners, have seen many stores, talked to hundreds of associates, talked to many customers and also connected to the consumer goods forum and FMI and connected also to a big part of my time to the U.S. markets. FMI conference in Arizona, spoke to many vendors, many customers and we have done very good thorough understanding in the meantime of our group.

It’s pleasing to see that our organization has a lot of tangible strong points, but we are very much determined to address our current weakness and I will explain to you our framework on how we are going to do, how we are going to deal with this and how we are going to do this. First of all, let me go through the key conclusions from the work over the first three months. Delhaize has strong leadership positions in the markets where we operate. In the U.S., Food Lion and Hannaford combined have leadership positions in markets where we generate two-third of our revenues. In Belgium, we are the second player with a market share of over 25.5%. And in our Southeastern European markets, we have number one positions in Greece with Alfa Beta, but also in Serbia with Maxi and Tempo.

Finally, Mega Image is the number one in the Rumanian Capital of Bucharest, with more than 20% market share. We experienced a very good revenue momentum in 2013. And this is driven by positive organic growth in all the three segments. As you can see on the chart, the sense of momentum is strongest at Food Lion where we managed to report positive real growth even after starting to face a more difficult comparison base. There are more highlights to mention though. Hannaford has seen a positive response to its price investments and we have managed to maintain market share in Belgium despite an unfavorable environment. In Greece, Alfa Beta saw continued market share growth which has resulted in effect that it has become the market leader in that country.

I am sure that you are aware that we have generated a strong free cash flow over the last two years. If you relate to this, our profitability levels like what’s the debt rating agencies tends to do, we have a solid investment grade rating by both Moody’s and S&P standards. That is why these slides indicate and you see clearly that S&P’s definition of adjusted net debt to adjusted EBITDA, we have a leveraged factor of 1.9.

It’s clear that the cash flows in recent years have reinforced our total financial profile. I am in, in the meantime, on Page #8. I have already mentioned in the introduction that I have engaged a lot with our associates and executives within the Group. They truly care about the state of the business. They are good merchants close to the customer and close to the merchandise. And I am convinced that we have the talent and passion within our organization that is required to continue fine tuning and improving our customer proposition across the whole group. However, it’s obvious that Delhaize Group also has to address a couple of real issues. Our profitability at Delhaize America and Delhaize Belgium has eroded in recent years. It’s to a high degree self inflicted and we have to step up our price investment and promotional activities in order to maintain our market share and improve our revenue performance. We have to stabilize this trend.

On page 10, we highlighted our complexity. Delhaize has €21 billion of revenues and is active in a number of different state and countries. We use different formats in these geographies from supermarkets, convenience, hypermarkets, discount and specialty stores. Going forward we would like to focus on supermarkets and convenience stores and both with an adjacent online extension. In order to become more decisive, have clear accountability and performance management, we will need to address this complexity in our organization. And as an example we have eliminated therefore the European layer in our organization to flatten the structure and to increase speed in decision making. Finally, we have recognized the growing importance of e-commerce which is impacting the food retail industry as you know just as it is impacting our other retail businesses and competitors. We are currently underrepresented in this area.

It brings to the next page and just to share with you what we did. We paid extensive energy and work in making banner by banner and country by country a very clear fact base of where we are. We did deep studies on competition of markets on our own position, on our competitive edge, on profitability and on assortments. And we have now a very clear picture banner by banner, geography by geography where we are. And based on this we also formulated for ourselves where are our strengths which is the strength of Delhaize Group with various banners where we operate. And we are very clear on who we are and even more clear on the principles and the priorities going forward.

We are and we will be a preferred food retailer in the supermarket segment. We are well known for our fresh assortments and of our private labels and this in all the markets where we operate the case. We have a differentiated concept and we offer what is really relevant to our customers and is not for nothing that we have leadership positions in almost all the markets where we operate recognized for fresh, recognized for private label, but also recognized for innovation. And we operate in many different markets.

We have a strong local identity. We are true local player, local with very good locations, local with local brands, working with local farmers and have local identity and we are very strongly connected to local communities. We don’t operate the Delhaize brand in all the markets where we are, but we have connectivity with Alfa Beta being in Greece the main brand with Hannaford in the Northeast being very high in local identity and of course Delhaize in Belgium being very strong local player everybody knows. And we are respectful to all the stakeholders and those are not only shareholders but those are also NGOs, those are also associates those are also people work together we can bring more brand equity.

This brings me to the next page on the principles. The customer is at the center and it is very intuitive. But I think we have a big opportunity with the millions of customers who get in everyday to do an even better job on communication, on brands, on assortments, on speeds and speed of check outs and this kind of things the customer is at the center in everything what we do. And based on the data we have now we see big opportunities and a few examples we will see later. Business is local and market share really matters. Relative market share matters gives you the critical mass, gives you the brand equity and in the markets where we operate happily heavily, so we have already high relative market shares and we will strengthen this deeper, will increase our footprints.

Our third principle is that we need to strengthen our core capabilities around our fresh and private labels, but we also need to improve capabilities where we have been less consistent for example around price and promotion strategies or by leveraging our loyalty cards data. We have plenty of data we can do much more with those. Our fourth principle is that we should continue to exercise discipline in capital allocation. This should speak for itself given how we look at our capital expenditure in the recent years. We made big progress in the last two years as a total group, but there is still scope to become better in this although it does not imply that our capital expenditure budget will come down further.

Our fifth principle is that Delhaize Group can do a better job to use its skill to reduce costs. Within the U.S. we intend to leverage our scale on procurement and logistics cost. In Europe private label sourcing is an area of focus for us. And in both the U.S. and Europe we believe spending on indirect costs, for example goods for not for resale could deliver more savings going forward. Finally, we need to be more proactive and respond to changes in customer trends and industry dynamics, for example, e-commerce, but also in dynamics of markets which starts to consolidate more.

It brings me to Page #14, those are the four key priorities and actions that we need to take in order to make Delhaize Group more successful than it is today. Put back the customer at the center and I will elaborate on the next page with a number of examples where we are going to address this. Our second priority is that we have to focus more on our core markets and we did an in-depth research looking at those core markets and we scored them on one hand market attractiveness and then you talk about the size of the markets, you talk about the GDP growth of the markets, GDP per capita growth in the retail business, growth in modern distribution. We size that market as market attractiveness on one dimension and on the other dimension how are we doing in those markets, what is our competitive position, what is our market share, what is our relative market share. And based on those criteria we set our priorities going forward from a strategic angle which core markets will get priority in capital allocation. And along those lines you also can understand the agreement we set two weeks ago to divest our Bulgarian operations and this decision can be seen in this perspective as well.

We have to realize more operating efficiencies. I think we all agree that Delhaize Group does not have the best track record to control its SG&A expense. And finally we should execute at a much higher speed than we did so far more decisiveness, clarity on decisions. And that might have been the reason that we have been late in some cases to respond to emerging customer requirements.

On Page 15, the group is currently engaged in a number of customer initiatives. And I will pick just three out of them for the moment. First, we have started to implement a new pricing tool at Delhaize America and the idea is that these two will be used for Hannaford and Food Lion. This should help us to become more consistent in our pricing architecture based on the solid pricing strategy which we already designed. But this also should enable us to respond quicker to competitive activities. This implementation is expected to take most of the 2014 and 2015 year with an initial launch in the first number of categories from this summer already. A huge task we have done the team – brought the teams together. We have made our investments in the tools. We have ready our strategies all done in the last three months with a lot of speed, but also with a lot of knowledge.

Secondly, we are rolling out the self check around the managed stores at Delhaize Belgium which is now the case in 75% of our integrated – the stores we manage ourselves or a percentage of our total stores. I think this is a great example that it doesn’t only help to make the customer experience simpler and easier but also gives our associates more time to spend on improving customer service.

Third, we are doing more research on the Maxi private label strategy as we do not carry a Maxi private brand today. And at the moment a variety of private labels account for 18% of revenues, but there could be significant upside if a Maxi private label is introduced this is still to be decided though. We did diligent work on the proper positioning of both Maxi and Tempo and this is and this is going to be operational as from next month. The group continues to have scope to improve its efficiency. I had already mentioned that SG&A is probably the best example. You can see on the slide, how SG&A expenses have increased compared to 2006. It’s our aim to come back to our historical SG&A levels. And although we have done a lot in terms of working capital improvement and capital allocation, there is still scope to make further improvements on both fronts.

Before I hand over to Pierre, I want to spend some time on the omni-channel opportunity. This is an area where Delhaize has not been operating as a first mover neither as an early adapter. And as already mentioned we do recognize that the growth and increasing penetration of e-commerce will also impact the traditional grocery industry. On the other hand, we are also recognized that by having a successful omni-channel approach as a traditional grocer, there is a unique opportunity that core customers will spend significantly more with you. We are therefore accelerating our growth plans in omni-channel and especially our digital proposition what will be – we will continue to remain both focused and flexible. We have started to build up a digital organization that is being led by Marcus Spurrell who we hired at the end of 2012. And we have decided now already on our e-commerce platform, which we will gradually rollout throughout the group.

In Belgium, we are most advanced where we already have shifted to this platform in the second half of last year and where we have now started to supply our pickup points at the stores through a dark store. The plan for 2014 is to build an enterprise data warehouse, where also our loyalty card data information is integrated and accelerate the growth of the less direct in Belgium. At the moment, this continues to be a small part of our Belgium revenues. As Hannaford is a second example, we have tested two pickup points for quite sometime now and we believe that we should now start accelerating looking at the success and the customer response. In April and May, we implement a new order management system and increased the rollout of the number of pickup points for Hannaford.

Finally, an Alfa Beta in Greece, we are already having direct delivery operation in Greece and we will now install our e-commerce platform there as well and all harmonized platforms with the same type of software and therefore also benefiting from scale. This should give us the infrastructure to accelerate growth in the Greek markets. Pierre, the floor is yours for a summary on the 2013 financial results.

Pierre Bouchut - Chief Financial Officer

Thank you, Franz and good morning to everyone. So, let’s now review our Q4 and full year 2013 financial results. This following slide provides the highlight of Q4 2013. Delhaize America delivered another encouraging quarter with solid positive volume growth. At Food Lion, we now have five consecutive quarters of positive volume growth. Phase 4 and Phase 5 repositioned store are also posting good results. Naturally, Delhaize America operating profitability has been impacted by our significant price investments. In Belgium, we have been able to consolidate our market share. Thanks to further improvement in CSS growth and network expansion.

Our decision to invest more aggressively in promotion in a stiffening competitive environment as well as the automatic indexation of wages is reflected in our margin performance in Q4. In Southeastern Europe in Q4, we continue to improve our results both in terms of revenues and in terms of profitability. In obviously a challenging trading background, Alfa Beta in Greece and notably Mega Image in Romania continued to perform well. Maxi in Serbia despite its strong market leadership position and its high level of profitability is still performing below our expectation.

This following slide provides you with our summary Q4 income statement. At €5.3 billion, our sales increased by 0.1% at actual FX rates and by 3% at identical FX rates. Organic growth for the quarter stood at 3.2%. Our gross margin stands at 23.9% and decreased by 21 basis point compared to last year at identical rates. This is explained by our 32 basis point gross margin decrease at Delhaize America, primarily driven by price investment both at Food Lion and Hannaford, but also by a similar 30 basis point gross margin decrease in Belgium, we have once again an increased level of promotion as a result of a more competitive landscape. At €182 million, our Q4 underlying operating profit decreased by 4.8% at identical rates and this year is mainly the consequence of a 5.5% increase, €61 million in absolute terms of our SG&A at identical exchange rate due relatively to salary indexations and other non-recurring items such as severances. Therefore, our European margin amounted to 3.4% down 28 basis points at identical rates. When taking into account €46 million of net finance cost and €30 million of tax expenses, we recorded a group share in net profit of €101 million in Q4. And we were able to generate in this fourth quarter €206 million of free cash flow.

The following slide is our 2013 summary income statement. As you see, group revenues increased by 0.6% at actual rates and by 2.6% at identical rates to €21.1 billion. Gross margin decreased by a limited 8 basis points at identical rates compared to last year as most of our sales price investment and promotional activities were offset by improved cost of goods, reduced shrink and better results at Bottom Dollar Food. Our SG&A as a percentage of sales increased by 12 basis points. However, let’s highlight that adjusted for the 2013 senior management severance expenses we succeeded as targeted to keep our SG&A flat as a percentage of sales.

In 2013, about €68 million of higher short-term and long-term incentives, €12 million of salary indexation in Belgium and €38 million in favorable impact from non-recurring items have affected our SG&A spend. As a result, our underlying operating profit has decreased by 2.1% at identical rates to €768 million and our underlying operating profit margin stand at 3.6% posting a 17 basis point decline at identical rates versus last year.

Other operating expenses amount to €270 million and are mainly €195 million impairment of goodwill and trade names mainly in Serbia, the €16 million store and property impairment in the U.S. and €15 million reorganization cost at Delhaize America. When taking into account €188 million net finance cost, the €42 million reduction versus last year owing to net debt reduction, but also to our 2012 bond refinancing. When taking into account €77 million tax expenses, €43 million loss from discontinued operation, we recorded a group share in net profit of €179 million, a 78.5% progression over last year at identical rates. You will note on that slide that over the last two years, our cumulative free cash flow has reached €1.442 billion.

The following slide shows the evolution of our EBITDA and underlying EBITDA in 2013. As you can note at identical rates, our EBITDA has increased by 5.1% up to €1.307 billion, while our underlying EBITDA decreased by 1.5% to €1.361 billion. At actual rates, EBITDA rose by 3.7% and underlying EBITDA decreased by 3.5%.

The following slide gives you more insight on the revenue evolution at Delhaize America over Q4 and full year 2013. In Q4, we reported a CSS growth of 2.8% with an underlying 0.4% deflation. Real growth was therefore positive at 3.2% for our three U.S. banners combined and has been gaining momentum quarter-after-quarter over 2013. When taking into account, the 40 basis point positive impact from store openings our Q4 organic revenue growth spent at 3.2%. With the negative 0.4% impact from store closures, our Q4 revenue growth is 2.8%. For the full year 2013, we report 2% CSS growth. If we add the 10 basis points positive calendar effect and 60 basis points from store opening, organic growth stands at 2.7%. This translate into 1.9% overall revenue growth after an 80 basis point negative impact from store closure. Full year real growth on its side stands at 2.3% for combined three U.S. banners when taking into account a 0.2% deflation.

The following slide provides you with background information on our underlying operating margin evolution at Delhaize America. In Q4, we reported the European margin of 3%, which represents a 61 basis points, I am sorry, drop over Q4 last year largely explained by the 52 basis point gross margin decrease resulting from price investments and a 9 basis point increase over SG&A. Over the full year 2013, Delhaize America underlying operating margin dropped by 29 basis points from 4% to 3.7% explained amongst others by up to 15 basis points of sales price investment and up to 5 basis points by SG&A increases.

The next slide presents Delhaize Belgium sales evolution of the Q4 and full year 2013. For the Q4, Delhaize Belgium 2.4% CSS growth was driven by a 2.1% internal retail inflation, 30 basis points lower than what we experienced in Q4 and a 137 basis point lower than in Q2. With a negative calendar effect of 50 basis point and a positive 60 basis point of network expansion, Delhaize Belgium organic growth stands at 2.5%. As a result, Delhaize Belgium market share slightly increased over Q4 last year and stands at 25.5% for the full year. Over the full year 2013, Delhaize Belgium organic growth stand at 3% when adding a 1.8% CSS growth, a negative 20 basis points calendar effect and a 1.4% impact from network expansion. Full year Delhaize Belgium real growth is a negative 70 basis points when taking into account 2.5% internal retail inflation, which is still well below the national food inflation level of 3.6%.

As shown on the following chart, Delhaize Belgium European margin decreased by 20 basis points over Q4 to 3.8% and by 8 basis points over the full year 2013 to 3.9%. This growth is largely explained by Delhaize Belgium gross margin decrease as a result of our decision to increase promotion in a more competitive market and also by the development of our affiliated business, which obviously generates a lower gross margin. In addition, Delhaize Belgium faced higher SG&A notably in Q4 with salary indexation, higher incentives and a payroll tax refund received in Q4 last year.

On the following slide, we provide you the sales evolution in our Southeastern Europe segment. Our CSS for Q4 stand at minus 0.6% for the segment, but the performance varies a lot across the region. In Greece, our CSS in Q4 stand at 2.4%. In Romania, our CSS is at 1%. While in Serbia our volume evolution is negative in a very adverse economic environment. In Q4 with a negative 40 basis point calendar effect and a 550 basis point positive impact from store opening, our organic growth was 4.5%. On a full year basis, we reported CSS of minus 0.3% if we add the 20 basis point positive calendar effect and a 510 basis point positive impact from store opening.

Our organic growth stand therefore at 5%. It is worth highlighting that in Greece as a result of its price investment and of its relevant positioning, Alfa Beta market share has progressed by 140 basis points over 2013. In Romania, as a result of our strong store expansion, our revenue in local currency increased by almost 33% in 2013 and Mega Image has now secured the market share close to 22% in Bucharest. In Serbia, Maxi has been able to globally maintain its market share at 13.4% despite the very adverse economic environments.

On this following slide, we provide you with more detail on the margin evolution for Southeastern Europe. In Q4, our European margin increased by 52 basis point to 5.9% with 116 basis points increase of our gross margin despite price investments, but owing to better end of year allowances and despite a 44 basis point increase of our SG&A. In full year 2013, our Southeastern European region only slightly increased by 13 basis points to 3.6% under the combined effect of 31 basis point improvement of our gross margin, despite price investment but owing to better procurement condition and of the 16 basis point increase of our SG&A largely explained by additional store opening cost in that region.

The following waterfall analysis provides a breakdown of our cash flow generation in 2013. Clearly, our free cash flow generation is supported by stable underlying EBITDA, working capital improvement, lower interest paid, CapEx discipline and lower bonus paid in 2013. Let’s highlight again the achievement of the DG teams to reduce our working capital needs by €593 million over the last two years from a positive €571 million at the end of 2011 to a negative €22 million at the end of 2013.

This next slide gives you another view of our financial debt situation. As a result of another year of solid free cash flow generation, our net debt has decreased by €1.167 billion over the last two years to €1.473 billion at the end of December 2013. In the same time, while cash balance position stands at €1.149 billion at the end of December. And our additional net debt capacity under the most demanding of BAA to BBB minus constraint stands at €650 million. It is fair at mid March to give you a bit of color on our Q1 sales trend and expected profitability. On the plus side, definitively the very solid sales transfer for our Delhaize America and notably at Food Lion. The phase repositioning is now complete in the U.S., the consolidation also of our good momentum in Greece and our profitable network expansion in Romania.

On the minus side, the cycling of Easter in Q1 2013 in the U.S., extra cost due to weather in the U.S. and intensification of price competition in Belgium combined with mounting SG&A pressure and persisting adverse trading environment in Serbia. The balance of those elements will be negative on our Q1 underlying operating profitability. And let me add that this will be quasi exclusively attributable to our Delhaize Belgium operation.

I now hand over to Franz to present you our operating agenda for the future.

Franz Muller - Chief Executive Officer

Thank you very much, Pierre. I want to give you an operational update on our activities and already indicated that I also would like to spend some more time on Food Lion specifically. This Slide 33 provides a mixed picture. Food Lion operates in the Southeastern U.S. and this continues to be a very dynamic market. This is fueled by continued population and GDP growth.

We believe the population will grow by 0.9% per year in the Food Lion States in the coming years and GDP for this area is foreseen to grow by 4.8% annually. These dynamics in the region have attracted and will continue to attract strong competition in our markets. We currently see high concentration of the top players and important low cost players are active in our markets, including Wal-Mart, which is the market leader in all our states.

We are using the designated market area, DMA, which is used by Nielsen. The sales and market share definition that we use excludes the sales of wholesale clubs, Dollar stores and drug operators, but it will include Wal-Mart’s food sales. As a result, Food Lion has not been immune for these developments and we have lost 200 basis points of market share over the period from 2007 to 2012. The decision to invest in new formats and inconsistent pricing policies in the past, are probably the most important reasons behind this. But despite the pressure on market share, Food Lion remains a very strong brand and it continues to have overall solid market positions.

It’s actually the market number or number two in markets that account for 72% of our sales. And last year, Food Lion sales growth outpaced the supermarket average which we estimated grew by around 2.6%. As a result, Food Lion actually saw some modest market share growth in the fourth quarter. The reason for the improved market share trends is the successful response we formulated in 2010. We realized that Food Lion’s main equity sits in the convenience of its locations and having attractive prices and promotions. It does operate smaller format stores compared to our traditional grocery peers, which we consider to be an asset and we should leverage this going forward.

Like I said, the pressure on our market shares was the main reason that we develop the phase plan in 2010 and which we rolled out in different geographies between May 2011 and November 2013. As you know, the focus was mainly on lowering our price levels by around 200 to 250 basis points in combination with the focus on improving our execution in the stores of improving our basics of operation.

We have enjoyed success with this plan as you can see on Slide 34. We have seen continued positive growth in terms of items, transactions, and comparable store sales growth. This has also improved some customer perception elements around price which you can see in the table on the right hand side. I therefore made the remark earlier that our brand equity to a high degree is built on our price and promotional offering capabilities. However, we have to be mindful that the overall improvement in customer perception has not been significant enough.

You can see that our sales density has improved over the last thee years from $7.5 per square foot in 2010 to $7.9 per square foot in 2013. And those figures are without pharmacy, without fuel and without liquor. It nevertheless stays some 23% behind our direct peer group, but we are convinced that there is an opportunity for us to reduce the gap and as a result we have developed the next step in our strategy.

Slide 36 highlights how Food Lion is evolving. There is a lot of information on this slide, but the key points are Food Lion’s next step is a logical evolution from the phase work we executed so far and is built on our strong points of price and locational convenience. We aim to improve the customer experience significantly and this is focused around the assortment around consistency, around giving an easy shopping experience, around having engaged our helpful associates. The ambition with our easy, fresh, and affordable strategy is to increase the customer share of wallet by delivering on the strategy.

And on Page 39, it gives you a little bit more background as what we described as easy. We really aim to be the easy place to shop. Easy to shop is focused on having a relevant assortment that is easy to fight back in the stores. Layouts and routing should be easy. Easy to save is having clear easy to understand and attractive prices and promotions, which are well displayed. The easy to get in and out quickly refers to the new checkout systems and additional labor we plan to allocate in order to serve our customers fast. And the last point implies a greater focus on deli, but also on fresh meats, meals and vegetables. It’s to make sure we have the right assortment also in that part of our offer.

Slide 40 is about our ambition around fresh. And this is about range and this is about consistency and we aim to prove on both and hopefully you can see that on the video of our concept store, which I will show to you in a few moments and especially for fresh, with our very good locations with a unique opportunity also to drive frequency. Affordable is all about our value proposition in both having attractive and reliable shelf prices while at the same time carrying compelling promotions. An important part includes that we communicate this message effectively and keep it simple. I did not mention the end sign, but it is key for us not to offer any compromise. So it’s easy, fresh and affordable.

This brings me to the overall strategy for Food Lion easy, fresh and affordable and you can count on Food Lion everyday. The last part really is all about being a consistent operator and having associates that care about the customer and are acting customer-focused. Although I just gave you high level overview of the next step in Food Lion strategy, the changes in the store are much more significant. And I will highlight a few of them.

We have completed an assortment review which will have an impact of 50% of our center SKUs and I will come back on that. We have developed new concepts for deli and bakery for promotional area and we will be testing a garden cooler for produce and a sealed fresh beef program. We are looking – we are rolling out new points of sales software and hardware in the stores. And those point of sales those checkout software, we are just on the way of rolling out this at the moment. And as I already indicated, we will allocate extra hours to the front end labor in order to improve the flow-through. We opened on the December 4 in Concord, North Carolina, our concept store and we have made a movie to give you a better indication as to what the strategy will mean in practice on a daily base for our customers. And I just would like to show you the movie now.

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So what are we doing today? Firstly, we have started to rollout the results of a large assortment review in our center store. That is mainly the dry grocery. Per category, we have analyzed whether we have the right assortment based on Nielsen market share data and we used a lot of other outside in customer data, where the categories were located correctly and had to right-size. This review resulted that out of 19,000 SKUs we will discontinue 6,700 of them while adding 3,300 new items. So this implies that there will be roughly 50% change to the overall center store assortment while at the same time, there will be an 18% net reduction in SKUs.

We have now started to implement these changes already for the full network, but this is a gradual process and it is restricted to the current space allocation that we have in the stores. Nevertheless, we believe that we can have completed half of this process by the year end of 2014. Secondly, we have also started the rollout of our new point-of-sales hardware and software. And although we are currently still in the testing mode we would expect the complete rollout in 2015. Finally, we have scheduled to do all the You Can Count on Food Lion everyday items and culture by training in a year like the video already mentioned.

Let me now talk about the 77 market test stores that we are planning for the second half of the year. We believe that we need to test the strategy more broadly and this test will be significantly different than the concept store test from which we have seen just the video. We will test the following elements in these markets that allow us to see how different elements will work in different stores. And we put a lot of emphasis on do proper testing, so that we see all the testing components individually. I can also therefore judge them in an isolated way to make in the end the proper combination of those concept elements. For example, how well customers respond to our garden cooler for a produce. Our customers respond to a self-served deli.

We will test different front-end labor models both from a software but also from a labor perspective. We will test the sealed fresh beef program. And additionally, we will be looking at different capital intensities, where remodels can vary between the $300,000 ticket and $2.4 million. Separately, we will test the assortment changes only without further remodels and just changed the assortment only in a different market to understand the standalone impact. For these 77 stores, we will be spending €115 million or €1.5 million average per store. And of this number, approximately 40% represents normal maintenance cost, regular maintenance cost. Per store, we have analyzed how much capital the store needs and how much the store deserves giving its potential in the marketplace with a lot of emphasis on exact scope of the remodeling and in the end also renegotiating and value engineering. We are confident that there is scope to bring this capital expenditure number down going forward.

And in terms of timing, we will launch the first 35 stores in the third quarter and the remainder in the fourth quarter. We will invite you this autumn to visit our market tests in the Southeast. If we are successful within the next step of our strategy, we believe that we should have the ambition to aim for a higher share of wallet of our customers. And you saw previously and you see in the graph here, that we have only 18% share of wallet compared to an average of around 26 for a selected group of local peers. We are very optimistic that we can narrow this gap versus our peers.

Let’s now move to Hannaford. Hannaford is a solid business operator from 184 stores in the Northeast of the U.S. It’s number one or two in markets that account for 60% of total sales. The banner has a lot of attributes. It’s known for its variety and good product quality within the fresh departments and throughout the store. It offers high service and a consistent customer experience. Hannaford also has a well-maintained store base and generates a high level of productivity.

Finally, I would like to make the point that Hannaford is well-anchored in its communities and that it has really an edge in developing its talent, management and routines. Hannaford has managed to grow by 3% per year. And as a result, it has managed to maintain its market share of the last five years. It’s main challenge, however, is that competitors such as Market Baskets, Whole Foods, ShopRite and Wal-Mart have become more and more active across this market area. And this has started to put pressure on revenues and profitability.

We have therefore set a priority list to defend and strengthen our market positions. And in line what we have already done in 2012 and 2013, we will have to continue to make targeted price investments to further work on its price positioning and price perception. Secondly, also at Hannaford, we have started to work on doing an assortment review in order to make its offering even more differentiated. The degree of change that Hannaford will see in its offer is likely to be much smaller than at Food Lion though. Thirdly, we accelerate the growth of our Hannaford’s To Go concept, and finally we aim to open at least two new stores this year and having 11 remodelings.

I will give you now a similar overview of Delhaize Belgium. Today, Delhaize operates in the Belgium market with supermarkets and convenience stores. It has a number two position with the market share of around 25.5%. Delhaize is a strong brand in Belgium and has excellent locations. One of the four attributes is that we have a large and broad offering in everything that is fresh, so produce, meat, fish, bakery, chills and deli. Another differentiating element in our offering is our broad private label range. Our network growth in recent years has mainly been driven by further expansion of our affiliated network.

And finally, as you know, we have started to accelerate the pace of remodelings since 2012. You can see on the last bullet on this slide that the average pace of remodels has increased from 16 in 2009 and 2010 to 23 over 2011 to 2013. We will continue at this higher pace in the coming years. But it’s also clear like Pierre already mentioned that we have challenges to deal with in Belgium. I think you can put our challenges in three different buckets. The first one deals with the economic situation, the customer is uncertain and he has become more price sensitive and he might have lost his job or he is uncertain that he will be able to keep his job. I think you are all aware about low confidence level in Western European markets, although in Belgium they slightly improved in the last two months.

The second set of challenges deal with the competitive environment. We have seen expansion from competitors such as the discounters and we have also seen new competitors enter the market. This in combination with the expansion plans of three incumbents puts pressure on price levels and profitability. The third set of challenges are more specific to ourselves. Although our price perception has stabilized, there is scope for improvement and it also underlines that our efforts to differentiate our assortment are not fully being recognized yet. Secondly, our profitability has come under pressure as our sales growth had not been high enough to offset the negative impact from investments in price and promotions. And also SG&A tends to grow at a higher pace than sales at Delhaize Belgium, which to some degree is being fueled by complex organization.

So what are our actions to deal with these challenges? We are convinced that we need to go further on the road of fine-tuning our differentiated position in the market. We aim to be the best in fresh. We want to have an innovative and efficient assortment. And as a matter of fact, we are also in the process of executing an assortment review in Belgium, which will result in a significant net reduction of SKUs in the center store.

Our areas we are focusing on include providing the customer with the best everyday value and with an attractive shopping experience. We just introduced to Belgium new local products, Belgium artisanal breads and a higher focus on innovation. We will work on the 365 value range and we also started this November, this Thursday, a new campaign for Delhaize in Belgium. We are currently developing our next generation of stores and we will open two new concept stores next month. We also opened the new proxy format, which we will be going to rollout by 15 to 20 stores per year. We are focusing on further strengthening our affiliates network as Pierre already mentioned. Finally, as already mentioned early in the presentation, we will accelerate the growth of Delhaize Direct. We are looking at efficiency improvements to ensure funding for our different initiatives.

I would like to now move to our Southeastern European segment and start with Alfa Beta. I think you are familiar what we have communicated in Alfa Beta over the last years. The business operates well in what continues to be a very difficult economic environment. Economy has contracted, but also the grocery market has declined since 2009 by almost 5% per year. However, do note that the contraction in 2013 of the market was only 2%. Alfa Beta has now become the market leader in Greece with the market share of around 23% or an increase of 140 basis points according to our own and Nielsen estimates.

The reasons why Alfa Beta has done well is twofold. Firstly, due to its high consistency and its strategy of building differentiation and customer relationship, win impressed perception and increase household penetration in key geographies. Secondly, our competitors have suffered more over the years due to a variety of reasons such as financing, the working capital, the ability to continue to invest in prices and assortment and paying their staff on time etcetera, etcetera. Although we are not confronted with major challenges at Alfa Beta, we do not anticipate the economy to meaningful recovery at this stage. However, there are some cautious signs of recovery and we believe that in the medium, long-term and through the right expansion significant and important regions in Greece, we will be able to maintain our market leadership.

Our priorities in Greece are therefore twofold. First, we will continue to fine tune our differentiated approach, which is also focused on fresh by developing online, being proactive in targeted pricing investments, make small changes in our assortments to leverage on our food and fresh expertise. Secondly, we will continue to expand our network back in 2012 in the middle of the Greek crisis, we have taken the decision to pause store openings. We have now resumed openings and Greece remains an area, where we believe we have some very interesting opportunities.

Let’s now turn to Serbia. Maxi is the market leader in the country with a market share of approximately 13% was especially a strong presence in the capital of Belgrade. Maxi benefits from a strong brand equity and healthy profitability and good locations with hypermarkets, supermarkets and convenience stores. In addition, modern trade still covers 43% of the market and this number is expected to grow in the coming years. On the other hand, Maxi also faces significant challenges partly due to the economic environment, such as high unemployment and negative GDP growth and partly due to the increased competition as for example the presence of open market, the presence of open markets has increased again. However, also our own performance is a challenge as it has been clearly under our expectation from a sales perspective and has as you know resulted in impairment charges over the last years.

Our immediate next steps consist in fixing the business by improving our execution. We will focus efforts on stabilizing our same-store sales by pricing and promotional strategies. In combination with improved execution, we will also accelerate our IT systems rollout and impose improved processes of the headquarters and in stores. From a gross margin perspective the construction of a new distribution center, which will come live in coming November will also therefore decrease direct store deliveries. Once we have improved execution and only then we can go back to expansion both by remodelings and new store openings. The few stores which we will open in 2014 are only commitments that we had already made.

The last market I will discuss today is Romania. In this country, our banner Mega Image has posted high growth. Multiplying the number of stores, it operates by almost eight over the last five years. It operates today a total of 300 stores and we are a leader in the capital city of Bucharest with an estimated market share of 21.7% and operate convenience stores and supermarkets. The economy has been overall resilient comparing to surrounding countries and we have been able to increase profitability to healthy level.

As part of the challenges, I would mention that competition is also expanding fast and that our ability to expand outside of Bucharest, where purchasing power is much lower is still to be proven. In addition, the organization needs some further professionalization. Our action plan in Romania is very much centered around growth. We want to keep expanding in Bucharest and the construction of a second distribution center, where both support our expansion, but also reduce our cost of goods. We are also working on our customer proposition by accelerating private labels, improving empty prices, sourcing and focusing our associates on better customer service.

I would like to turn back to Pierre who will discuss now our financial framework.

Pierre Bouchut - Chief Financial Officer

Thank you, Franz. So let’s now review in more detail our financial situation. As exposed on this following slide owing to €1.442 billion accumulated free cash flow over the last two years, our net debt gas been reduced on €2.660 billion at the end of 2011 to €1.473 billion at the end of 2013 and our cash position increased from €419 million to €1.149 billion at the end of 2013. As a result of Standard & Poor’s adjusted net debt to EBITDA ratio significantly improved from 2.5 times in December 2011 to 1.9 times in December 2013. Delhaize Group is henceforth endowed with a solid financial situation.

As already mentioned the €593 million reduction of working capital over the last two years accounts for a significant proportion of accumulated free cash flow generation over those last two years. Despite such an achievement and the reduction of our working capital levels by 8 days at Delhaize America and 7 days at Delhaize Belgium over the last two years, we do consider that we have still room for significant further reduction in working capital notably in U.S., if we continue to work actively on it.

The following slide provides you with a breakdown of capital expenditures by geography and by category. As you can note by being demanded in all capital – by being demanding in our capital allocation, and discipline in our capital expenditures control we have been able to reduce our total annual CapEx by 17% from 2012 to 2013 while realizing our planned store openings with 260 new stores in 2013 and while realizing our store remodeling program.

You will note that our CapEx allocation by geography is quite stable from one year to another. However, in 2013, the proportion of our CapEx dedicated to store openings and remodeling has decreased at the benefit of mainly distribution centers. We have as mentioned by Franz ongoing significant DC projects in Belgium, in Serbia and in Romania and maintenance CapEx to a lesser extent. In this context we have decided to formalize our dividend policy actually the benefit of a clear dividend policy are obvious, transparency and visibility which are key for investors and rating agencies, simplicity to facilitate financial planning, consistency with management incentive program. We target a dividend payout ratio of 35% of our underlying net profit. Such a payout ratio is in line with the 31.5% DG average over the last five years. But also in line with the 47% historical payout average of European peers, retailers over the last five years and more conservative 28% average of U.S. payers. As a result, we would recommend the €1.56 2013 gross dividend per share at our next shareholders meeting.

I will now hand back to Franz for the conclusion.

Franz Muller - Chief Executive Officer

Before we turn to the question round just we would like to say a few words to conclude. I wanted to give you a realistic picture of our group today. And this is based all my initial few months within the company as new CEO and supported by diligence fact based analysis which we did in a very extensive way. Our group has strong foundations with leadership positions in nearly all our markets, the solid balance sheet and passionate associates. However, we also faced key challenges which we want to address namely, complexity and declining profitability in our key markets.

And finally, of the highest importance to put a customer back at the center this means differentiating our offer based on an outside in approach approving our prices and promotions and focusing on customer service. The improvements we are targeting in efficiencies will be reinvested in our business further more from a portfolio point of view we go to focus on our core markets. We will exercise discipline in capital allocation. Today we are giving you CapEx guidance of approximately €625 million and 180 new stores for 2014. We plan to execute with speed, but however not with rush and today was about giving my first assessment of the group. We plan to update you along the way and invite you to visit of Food Lion stores in the fall of this year. Thank you very much for your attention and we are now ready to take your questions.

Question-and-Answer Session

Edouard Aubin - Morgan Stanley

Do I need to put something? Edouard Aubin, Morgan Stanley. Two simple questions for me, you indicated that you intended to move in the U.S. from a vendor driven to a customer driven center style selection and we know that in the U.S. retailers rely heavily on the manufacturers rebates, so obviously looks like a wise decision long-term, but why shouldn’t we be worried that in the coming months your P&L in the U.S. will not be impacted by the move. And on SG&A you mentioned that it will be a focus a big focus for you guys in both the U.S. and Belgium this year. You have made some good progress in the U.S. can you just elaborate a bit more in terms of your initiatives on the SG&A reduction in both Belgium and the U.S.?

Franz Muller

On SG&A?

Edouard Aubin - Morgan Stanley

SG&A reduction, yes?

Franz Muller

Thank you. And on the assortment changes in the U.S. why, what is happening, could this have an impact on our total margin I think that’s the question and we do a few things at the same time. We did first of all very good diligence on what should be the amount, the assortment going forward. And this will have a very positive customer perception and therefore I think we also can improve the margin mix in general. The second thing is we will strengthen our private label assortment which has normally an higher margin than our national brand assortments. And thirdly we have to pay indeed full attention if you make such an big shift and I just mentioned to you the numbers that we have a good understanding together with the industry. But if you take about changing those assortments and replacing stock that you do this in a good way that it will not cost you any margin and this is what exactly what we are doing. So we have a very clear understanding with the industry for the switches. We have a better – we will see better mix of private label and national brands and we believe that we will have a flat margin going forward.

On the SG&A I mentioned already that in a number of markets we have opportunities to improve our supply chain and therefore we also invest in general in distribution centers we mentioned Romania, we mentioned Belgium Easy, Fresh. We mentioned also Serbia and this is also an opportunity we have in the markets where we operate to reduce the supply chain costs in general. And this will also have an impact on the labor in the stores. So I think this is an opportunity where we have to make sure that SG&A cost is going further down. I just mentioned that we will have to get back to historical levels which is roughly 0.5% what you have seen over SG&A costs and our efficiencies in the supply chain, our efficiencies in order management, our efficiencies when we load a number of SKUs and its also we have in mind in number of our markets and therefore we think we can control SG&A in a much better way.

James Collins - Deutsche Bank

Thanks. It’s James Collins from Deutsche Bank. I have got a few questions if I may. So firstly you have talked about the fact you have got leading one or two market positions in 72% with sales in Food Lion what are the implications for the other 28% i.e. is that the scope for more rationalization of the Food Lion estate. Second question, on Food Lion is just given the 77 store trial you are doing what kind of time, scale do you envisage in terms of what you are going to be able to conclude when and what that might dictate in terms of rollout. And if there were to rollout over what kind of period would you anticipate changing the whole of the estate. And the last question is there is three relatively significant businesses you haven’t mentioned at all today which are Bottom Dollar, Red Market and Bosnia. Can you just talk about what your feelings are about those businesses and whether they do have future within the Delhaize Group?

Franz Muller

Thank you. 72% in markets where you are number one and two of your sales is already a very impressive number and doing the research – when we did the research we found out within those DMAs we are much stronger than we initially thought. We have much better market positions when you really do look deep in those markets, so that’s very promising. And you asked about the other 28% so we also did the same work on our total DMAs in the U.S. same for our Food Lion as we did on our core portfolio in total. And we will have a look at those DMAs and we will take decisions on which DMAs can we make winning DMA and which DMA cannot win going forward and then we will be also consequent in the action we are going to take. And the exact – if you would like to have seeing the exact percentage or the exact number of stores this we don’t have at the moment.

James Collins - Deutsche Bank

Sure and so when will that review be carried out?

Franz Muller

Pardon.

James Collins - Deutsche Bank

When will that review be carried out?

Franz Muller

It will be done in the course of 2014 and we work fast on this but be very consequent there what the findings are coming very clear on the table which is the same logic of market attractiveness, competitive position also on DMA level like I mentioned before on states or on country level. Rule out of the Concord test store I mentioned that we have – we are very happy with the results in the Concord test store so far. Yes, retailers are a little bit longer into the business. We are very prudent to be happy about first results. We are now three months down the road, but of course we have a Thanksgiving effect, we have a Christmas effect. The Concord Store at the moment is roughly running 25% more sales.

We are very prudent not to connect any extrapolating conclusions going forward but this is very promising and encouraging. We do down the test with 77 stores as I mentioned and two big clusters where we test all the different elements but also test the different opportunities not at DMAs and we will have the findings of those elements ready in the end of 2014, first quarter of 2015. And along the line we will also see a few testing elements of the components you just mentioned when the assortment only can do the job then there is also new information when there would be case those findings will be out in 2014 and then we have to take the conclusions on the rollout. But we do this in a very diligent way, we have talked about the store network of 1100 stores and at the same time it would take conclusions about the components of the tests we also have to make sure that we are having a very CapEx lean scheme going forward what I just mentioned as well.

We did not make any remarks on Bottom Dollar Foods, Red Market and Bosnia that is correct. Let me give you a little bit more light on the core markets and we did this overview in those two dimensions. One dimension was market attractiveness for the dimensions I mentioned before which is not only growth but is also size of the market and which is not only growth in GDP but also the retail market. And I mentioned a few things on the other axis, so to say how strong are we already in those markets, what is our relative market share.

And our relative market share in Bulgaria was not strong enough, the market is not of a size and also growth level which would give us a huge potential going forward that’s why we took a very consequent decision there. And if you think further then we see is our core markets and it will be on one hand very specific, but this is not a black and white story. Our core markets we identified Food Lion, Hannaford, Greece, Belgium and Serbia and those are the markets where we will prioritize our CapEx and this is a capital allocation priority scheme. This is a strategic view and so this is a view we are going to consequently execute over the years to come or over the time to come and at the same time at Bottom Dollar Food to just give you one more example.

At Bottom Dollar Food we made tremendous progress in 2013 and the team is completely engaged to make sure that they make the next steps in making this business model more profitable. So that’s the task at Bottom Dollar Food, it’s not the priority therefore for capital allocation. Their priority is to make sure that raise the profitability and they work on the business model just to give you a few examples. But I think with this picture I give you a clear strategic focus on core markets. We talk about capital allocation at the same time to underline and to illustrate this is not a black and white story. We also say at the same time we would like to further invest in Bucharest, because we have a great market share we can grow very profitable and we are doing very good, a team does a very good job there. So not a black and white story, but I think with this set of clarity, I think you get a little bit more focus.

James Collins - Deutsche Bank

And just on Bottom Dollar specifically, I mean, do you have a timeline or a deadline in mind as to when that team has to produce evidence of that being a profitable format that would be worth investing in?

Franz Muller

We opened this year four stores, but those stores had been decided already. Talking about decision taking forward, the team is tuned to bring a good result in 2014 and during 2014 we will align our decisions going forward.

Andrew Gwynn - Exane

Good morning. It’s Andrew Gwynn, Exane. Just on the Franz for yourself, could you just give us some clarity on what the Supervisory Board have set for you, perhaps in terms of your LTIP program and so forth, that would quite useful just to sort of frame the ambition? The second will be a question for Pierre you have talked about obviously the free cash flow generation, you have plenty of cash in your balance sheet and dividend policy is sort of modest. I think even that might be a bit generous, but is there scope for further cash return, because given that your debt is very long-dated, it doesn’t like you are going to be carrying a significant level of cash on your balance sheet for the foreseeable future?

Pierre Bouchut

Well, we are confident that we will continue to generate solid free cash flow in the coming years. This being said, as you understand, we are engaged in a significant potential reshaping of the group and we are engaged not only in U.S. with fresh, easy and affordable at Food Lion in an ambitious project. And it is our intention not to do anything as long as we don’t have the clear visibility on the outcome of the different project that we have. To be very straightforward with you, I think we will have such a clear visibility, I would say, at the end of this year or in early next year. In the meantime, we think it’s wise to continue to reinforce I would say your financial structure.

Andrew Gwynn - Exane

And so just to sort of almost jump to that conclusion 2014, do you think the scope for share buybacks or anything exceptional?

Pierre Bouchut

Let’s wait until end of 2014 early 2015. I think I can’t be more clear.

Franz Muller

On your first question, I think you are aware of our remuneration scheme for the executive team. We have a base amount, we have an STI amount, mainly linked to UOP, same-store sales and personal targets and we have a long-term incentive, which is based on shareholder value. Those three elements are therefore also in my package with an strong agreement and complete alignment with the board and the executive team on the strategy going forward. And therefore also the targets will be according to execution of our strategy.

Rob Joyce - Goldman Sachs

Okay, thanks. Rob Joyce from Goldman Sachs. Just a couple following along the free cash flow from Andrew’s question, is it safe to assume given that you are saying something probably needs to be done in the U.S., the CapEx should go up next year? And could you maybe, without giving us maybe precise numbers, give us a range based on the options you are considering of where we should expect CapEx on a kind of more normalized basis going forward maybe? And the second one was just on the competition in the U.S., I am not sure I heard correctly, but did I say in terms of market competition you are not looking at market share, including discounters, Dollar stores and the warehouse clubs. I was wondering what the market share would look like we did include those and perhaps why you don’t consider them in competition if it’s not if I have understood that correctly? Thanks a lot.

Pierre Bouchut

Yes. Once again, we are not going to give you any precise indication, if I understand correctly your question, on 2015 CapEx. You understood that we are engaged in once again in an in-depth reshaping of Food Lion that we have this test of 77 stores. We have different level of CapEx, different situation. And of course, we are going to learn a lot out of those tests. And in particular, in terms of CapEx magnitude, it is our intention of course to do this easy, fresh and affordable over time by limited as much as possible, the CapEx. And therefore, the lessons that we are going to derive out of those 77 in-live tests would be critical in this respect. So once again, at the end of this year, early next year, not only shall we be able to precisely quantify or very precisely quantify the amount of underlying CapEx for the coming years, but also we will be able to precisely also get the lesson of the underlying business case. So we are not going to – we cannot give you as of today precise figures, you will understand on 2015 CapEx. Apart from this Food Lion easy, fresh and affordable, the level of CapEx in the other different geographies should not be dramatically changed, if this was the remaining part of your question.

Rob Joyce - Goldman Sachs

So we should assume an increase – we should assume something will be additionally in Food Lion, we just – we estimate where it comes out if we are looking to forecast beyond this year.

Pierre Bouchut

I will not elaborate as long as I don’t have precise figures.

Rob Joyce - Goldman Sachs

Alright, thanks.

Franz Muller

Good. On the other question, on the market share question, we have to start somewhere to calculate market share as we switch the best to your own business model. As you know, Dollar stores is mainly non-food driven. That’s why we are getting closer to our food business, that’s one reason. Dollar and work together is roughly 25% market share in the markets where we operate and you have to make a cut somewhere to make some comparison. We think we make the most relevant comparison in a food retail supermarket business to connect ourselves to what is our competitive landscape and how do we do ourselves.

Jérôme Samuel - HSBC

Yes, good morning. Jérôme Samuel, HSBC. Sorry Pierre to come back on the CapEx, I understand that it’s far too early to give guidance for 2015 and it will depend on your conclusion about the refit for Food Lion? However, given the CapEx to sales ratio of delays for the last few years is pretty below the average of the sector and you intend to invest about 3% of that sales in 2014. So the question is what would be the maximum level of CapEx you would be ready to do spend in terms of percentage of sales? That’s the first question. And the second one is can you come back on your comments regarding the Q1 costs related to the bad weather in the U.S., how much you expect it could be?

Pierre Bouchut

But once again on CapEx, I will not give you anymore color. Of course, we are I would say extremely confident on the outcome of easy, fresh and affordable base on what we are currently doing. And you will understand that if the business case is according to our expectation, there won’t be no reason not to execute it, because the payback would be there. So the CapEx is not so much a question of how much CapEx is a question of the underlying business case. Then it’s also we have plenty of moving pieces this year as I highlighted it, we are investing a lot in three DCs. With a CapEx of three DCs, you can do a lot of remodeling in Food Lion prices.

So I am not going to give you more color, but do not expect drastic increase of our CapEx as a result of easy, fresh and affordable, because once again we will be very disciplined. Franz, for instance, mentioned to you that if you can achieve a big chunk of the sales uplift only by a reshuffling of the assortment in center of store, maybe we won’t need to do a significant amount of CapEx in the 77 stores that we are currently doing. It is a very heterogeneous situation. They are stores that will require, let’s say, a significant amount of CapEx and store where we are going to do it with a low amount of CapEx. So let’s wait once again for the conclusion of those tests. We have a meeting with you in October probably so that you can visit them, visit the stores.

And I think in October within six or seven months, we will be in a position to provide you, I hope so with precise figures, but as of mid-March, it’s too early to say anything, I would say solid and reliable. And the 77 stores not only deliver us a clear test result of the various, let’s say commercial operational components, but deliver us with very clear test on how can we prudently spend our CapEx in those areas, which I really appreciate the customers apart from the regular maintenance. And this is an exercise we do now which is done in a very professional way by proper scoping, value engineering, good negotiation and we have something to negotiate with the batch of stores we have and you can count on the fact that we will re-look at every dollar to make sure that we have the right investment done.

Jérôme Samuel - HSBC

Okay. And in the meantime, you still expect Food Lion to maintain the positive momentum although the pricing investment has been done?

Pierre Bouchut

I mean, the figures year-to-date are extremely encouraging. I thought we were clear in the pluses and minuses presented on the slide.

Jérôme Samuel - HSBC

About the costs please the weather condition?

Pierre Bouchut

And….

Jérôme Samuel - HSBC

The cost of the weather condition in the U.S. that was mentioned?

Pierre Bouchut

Yes, it happens that effectively in terms of an energy consumption and this is not unique to our stores, but the energy consumption as a result because of weather condition is significant additional cost, but also cost to clean up the parking and so on. Yes, it’s a fact.

Franz Muller

The weather conditions have been rather rare, I think a few of our peers also report the list and have been the long part, a big part of my four months in the U.S. So I have really now recognized what they mean by bad weather. And it came also in a different timing and a different strength than the year before. Just to give you a very simple example, if you have Valentine’s Day and the roses are still in the warehouse, but not in the store and come 1.5 day later because of supply chain problems, which everybody had by the way at that moment, your roses come two day later in the store. First of all, the roses are maybe not in the best condition and maybe timing wise maybe not the right day to surprise somebody two days too late. So that’s Valentine’s Day. The other thing was snow removal costs, like Pierre already mentioned, those were much heavier and not only in Northeast, but this time also in the Southeast. Also at Food Lion we had snow and if they see in the south, snow coming in then they are not so well prepared as they are in the Northeast or in Switzerland. So we have really extra snow removal cost there, those incidental costs is part of the business everybody has it in the industry and we also suffered there some extra cost.

Fabienne Caron - Kepler

Good morning. Fabienne Caron, Kepler. I have got three questions. First one, when you talked about simplifying the growth structure, the complexity of Delhaize Group, can you share with us what according to you is very complex and what you are going to simplify? And the second question is on Belgium, you had very difficult start of the year, you talked about new entrant to the Belgium market, I guess everybody knows that Belgium market is difficult because of the cost structure for integrated stores and the difficulty to negotiate with the trade unions, what is your plan there longer term? Do you see you mean whereby you could move to more franchisee and what makes you confident for DC in Belgium in term of margins given the very poor start or why should we be more confident that the margin may improve for the remaining part of the year? And the last question will be on the U.S., you talked about new pricing tools that you are using that it means that we should expect more price investment in the U.S. market?

Franz Muller

Good. I see the glass more full than you might see it, but let’s start with the last point in the pricing tools. We already let you know in the last quarters that we invested on pricing in Hannaford and in Food Lion, that’s no surprise, but pricing in general in our industry became a much more complex environment. It’s almost a science, let’s say. And although our category managers did the best job they could based on range planning and the regular toolsets we decided to make an investment to have an more intelligent tool on price tactics. And this will maybe not necessarily mean less price investment, but this will for sure mean that we allocated and invested there what makes a more sense for to service a number of customer groups or to reduce a few of disadvantage positions for example health and beauty care or to make sure that even pushes your top line sales more. So and that is absolutely a good item for our company. We tested this now in the U.S., but I think it is going well and as I said from June 1 the first categories already running, which is very fast by the way. Then we also transfer that knowledge to Europe, this pricing tool. So we would like to get more out of our U.S. dollar investment. And I think this will be very beneficial and the teams are very excited to get also this system support. The pricing strategy you still have to do yourself. This tool is going to do for you and there we also have now ordered our house.

The second thing on Belgium, the total environment in Belgium and most likely it will keep us a little bit longer busy than only today. We see a few macroeconomic views, economy, customer confidence. There are too many square meters of retail in Belgium as we all know and start increasing we see still more and more entrants into the markets and most of them international competitors coming in. Those international competitors come in also with imported lower COGS or some times imported lower supply chain cost. That is reality after market.

Secondly, a phenomenon to the Belgium market is that we have relatively high labor costs and that we have also a lot of experience in labor in the market, but at the same time experience in Belgium comes also with an ageing pyramid, which is more expensive. So those are all the things in the Belgium market we have to deal with.

Then you talk – when you think about yourself what are we going to do about this. That is the logic of next question, Fabienne. And there are two things there, one thing is first of all we enjoy at the moment and customer satisfaction level at very high level and is not measured by ourselves but by external parties. Secondly, we see net promoter score also getting better. So there are a lot of customers in Belgium who would like to see that the last Belgium will be successful and is their neighborhood supermarket or convenience store. We invest a lot now in this year and you will see a number of things. We invest further in stores. We have those two new store formats going to open this 22 and 23 of April (indiscernible).

We will roll out the proxy format, which we tested very properly and we will open roughly 20 stores per year. We will work on more fine-tuning for our city and Shop n Go formats just all on the sales side to make sure that the customer offer both in the shopping experience and the assortments is getting better. And we also are working now on fresh modules in a number of formats. The second thing is coming to – talking about the products more innovative levels of products the customers are used to our beautiful Delhaize brands and they expect that we bring innovation, which gives us a bit of spin even compared to the national brands. An example is the range of Belgium artisanal breads. I mean if you see them in the stores you will recognize this is different than you see with our competition.

Another example is high quality of pre-packed pork meet, which will also be new to the Belgium market last year, at the beginning of – at the end of November. I talked about our beer ranges, local products, farmers from the Belgium regions. We have a lot more of those initiatives coming in. The other thing is yes, we have to further invest in our pricing because we would like to make sure that we are competitive with our competitors in the market for a proper price value comparison. We will start today and the brochure is there at the table for you, complete new campaign, freely translated means well bought, buy well, eat well type of thing (indiscernible). And this will give a very clear positioning, a new spin, a new spark to the Delhaize brand by offering not only very rich fresh assortment, but also very competitive in price. That’s a new baseline.

We also look at the redesigning this 365 price entry range with new packaging, new photography and this will also be done this year. And we work on the strongest CRM and omni-channel approach, Delhaize Direct I have already mentioned to you. We are going to roll out the Delhaize Direct e-commerce initiatives so that we have now already 150 stores connected and that we connect the rest of our integrated network this year. And at the same time, we work hard on our people to make sure that people get also more understanding and training of – about the assortment just so because we extended our fresh ranges. So, that’s one component, that’s a component of top line sales, brand equity and building on the trust the customer has in the Delhaize brand of which we are very proud and for which the team worked very hard over the last years.

The second part, Fabienne, is the pressure on pricing and therefore the pressure on profitability. And this is I think which we – which is not new to us in 2014. This is a challenge a lot of retailers in Western Europe, a lot of retailers worldwide had almost everyday, how to compete and how to make sure that your cost base is acceptable that you are able to compete. So also in Belgium, we have already over the years a lot of productivity measures, lot of ways to make sure that we also on the cost level competitive. And for example, the DC fresh is one big example maybe rolled out this semi-automated warehouse for chilled, to make sure that we work also there on our cost levels to reduce our supply chain cost. So, it’s clear that we have there work to do. It’s also clear that we do already a lot of things also on the productivity side to make sure that we can on one hand side have competitive selling price levels and the other hand if we had some good margin development. As a lot of activity in Belgium, a very active professional team and taking up the challenge here, which is, for us, shall I say, daily bread and butter normally.

Fabienne Caron - Kepler

And so the point on complexity, can you share with us complex?

Franz Muller

Sorry, I forgot this, not intentionally, but I forgot this one. So complexity, if you look at retail in general and those of you who know the sector very well, it’s sometimes a much more complex type of industry than, for example FMCG, not to be insulting on the other side but it’s a complex industry. And we took few decisions on the way would like to operate with the center, with the corporate center from here. We defined very clear for ourselves what kind of center we want to be, we don’t want to mix in country responsibilities.

We have a lean center here would clears stewardship function. And we also reduce this European layer, that’s one level of the reduce complexity. The second thing is that we embarked on very clear decision rights and governance type of structure which will also make our organization faster, more decisive and also there are less complex. And third thing is we also identified that we have that say on the overall the structure in the company still opportunity to increase productivity. And that’s in general in the store network. Pierre mentioned few things, but its also on the head offices in the countries and we also work on those.

And the good thing is that in the last three or four months we were able to identify is very clearly to do a very good fact-based analysis plan. It’s not just gut feeling, we now know where we are but a number of – for example, head office changes or head office potential savings have to do also with the IT environment. And you have seen from the press release that IT department will be on the responsibility of peer. And we will hand to hand there to make sure that also our IT environment and the rollout will be accelerated and that will also enhanced and again productivity opportunities.

Patrick Roquas - Rabobank

Patrick Roquas from Rabobank. Two questions on Belgium. First I say a follow up on price you’ve indicated to intend to reduce price or improve price perception. Do you have any there is a price gap versus your peers that you should improve? And how far are you willing to – would use that gap? And secondly, do you believe there is an imbalance between the profitability between your company-operated stores and your franchises in Belgium? And if so, do you believe that that in balance you sustainable going forward? Thank you.

Franz Muller

Good. The profitability on the franchises, Pierre, that’s a typical question for you. I will talk about the price perception. Price perception is a thing we measure, of course. And if I say that customer perception and customer satisfaction improved. This improved in the last quarters over all the dimensions. So that is a very good sign. The second thing is what is a healthy price distance towards your competition and we have quite some various competitors in Belgium and in various regions and that’s where we see some effects of some international entries in the market like Ghent, which is completely different than the market like Brussels. So we do this regional market by market. I think that our customers are prepared to pay a slightly higher price, because we have a much better offer, so that the price value is in combination, but I also think that there really should not be too far away from our competitors, which in the food market segment and as a matter of definition region by region with prices. We at the moment have in some areas a gap, where we will take some measures now. But there is quite some dynamics in regions in the north of (London) where we see some new entries there, where also competition is reacting and we will make sure that we follow also there. We will fight with the less – with our strong brands, our good operating, our people, for every square meter, every square foot of store operations in Belgium.

Pierre Bouchut

Well, regarding our franchisees or affiliate stores, I am not sure I understood the question, but it is true always and everywhere that in most cases operated integrated stores are less performing than the franchisees. This is a case as well in most cases with our franchisees in Belgium. The level of profitability of our affiliated stores or franchisee stores is much better. And we have a network today of I would say very satisfied franchisee. It is also our reading that in most cases the profitability of our franchisees are higher than with competitors. So these are facts. Clearly, you understand that with mounting price pressure, there is also pressure on their profitability. And this is why we want to take the appropriate steps to continue to fight as well on this front.

Nicolas Champ - Barclays

Nicolas Champ, Barclays. Two questions if I may. First one, you clearly flag a relatively weak set of numbers in Q1, but could you elaborate about the current underlying EBIT consensus for the full year? Do you feel comfortable with the number of €754 million as of today? Second question, Indonesia, so I understand this is not among the growth market value, but could you please give us some color regarding the evolution of the future of your participation in Indonesia and did you engage discussions with your local partners? And third question, could you give us your view regarding the food inflation or deflation this year in both Belgium and the U.S. how do you see food inflation and deflation trends this year? Thank you.

Franz Muller

I can take the first question. I mean, you understand that at mid-March, it’s very uneasy to give any precise guidelines for the full year, but let me tell you that if our budget figures trend were significantly different from the consensus we would have made today a statement.

Pierre Bouchut

On Indonesia and that’s what I also mentioned before core, non-core is not a black and white phenomenon. We are talking about its strategy. And if you look at the market attractiveness of Indonesia with 250 million people with a growth of 5%, 6% per year GDP with a retail market, which is even growing faster. And with our business being profitable and able to be self-fund their expansion, we are in a very good shape. At the same time, we have also developed this strategy going forward together with our very well-respected partner and it is also the planning for the coming year. That’s only Indonesia. Then you had a question on Belgium and U.S. inflation rates, are you talking overall inflation, our internal inflation or food inflation?

Nicolas Champ - Barclays

Food inflation.

Pierre Bouchut

Food inflation. And the exact question there was how does this relate to our growth or by coincidence?

Nicolas Champ - Barclays

Outlook.

Pierre Bouchut

Outlook.

Nicolas Champ - Barclays

Yes.

Pierre Bouchut

Outlook food inflation I think we – do we have this figure food inflation with us?

Pierre Bouchut

No we don’t have any precise figures our gut feeling is that there should be no food inflation in the U.S. and in Belgium. But once again I think we have flagged that several occasions the increased price competitiveness in this specific country. In the U.S., I think we are in a very different situation of the economic cycle. And therefore let’s say “food inflation” pressure should be a bit lower than in this specific country where once again competition is stiffening and investing in sales price. And we have maybe in Belgium the same sort of situation maybe to an lesser extent because the market is much more I would say already polarized but what you have in the UK or in France.

Franz Muller

Food deflation in the U.S. you see a number of categories in the last two months which really is a high inflation that we talk about dairy then we talk about milk specifically and then we talk about meats and this we see coming also this is in line what Pierre already mentioned some inflation coming slowly more in the model. Gentleman in the back then we have at least a new table to serve.

Marco Gulpers - ING

Thanks a lot. Marco Gulpers, I have two questions if I may. First is can you give us your view on the current consolidation that is happening in the U.S. markets, do you maybe envision to pick up some stores on the side. Second is you mentioned for Food Lion that the current level of private label within the stores is slightly too low what is it currently and what is your ambition level or your target level? Thank you.

Franz Muller

Let me start with the last question first then I will come with a little more strategy or philosophical question on consolidation in U.S. Food Lion private label, we have roughly cruising a 30%, but the share in itself is not the most important for me. For me it’s more important if we have to write assortment and if the assortment really is compelling for our type of core customers. So we worked in the last month and we did look in the last months by the way but we worked in the last month on rearranging and reengineering our total private label range. So you will see soon coming up for the mid-tier segment which of course the biggest part of your private label very convincing Hannaford range already have the Hannaford label in our stores, but we will enlarge it and give much more attention to brand Hannaford compared to – also in line with the expectation for our customers and the strength of the Hannaford equity in general. And we will do the same with Food Lion.

In the past we had also Hannaford labels in Food Lion stores and some private label so we will make sure that we get a very convincing Food Lion private label range both in center store, but also in Fresh. In Fresh we started already picking up a very good acceptance from our customers. And I think yes, Food Lion is a strong brand as a store. We also can strengthen and also can adopt more brand equity to our private label range. So we have done all the work we talk about 5000 SKUs in private label for both Hannaford and for Food Lion different type of proposition of customers therefore also different type of private label propositions.

We are working now on let’s say the value range the price entry range. We think there are about roughly 300 SKUs. We had there My Essentials but we will rebrand that name. And on the top we have My Inspiration also there which we go to extent as well because also from the premium products there is room in our ranges. What is more important then the brand architecture is even more important go category by category. That work has been done also in the Concord Store because in total you look at your range of paper, let’s say and look at your natural brands, you look at your private labels, you look the different architecture but in the range and that is the most value creative part of the work.

And there we would like to make sure that we have a better proposition understanding our customer base better, so we did a lot of outset in customer research in both banners Hannaford and Food Lion. On the consolidation in the U.S., I think you all noticed that there is more activity in the last 12 months than there has been maybe in the previous five years. And we all saw that there are few parties try to consolidate markets in various sectors of the U.S. We also noticed by the way. So I think we did our homework. And if we talk about core markets, where we talk about capital allocation and assets before that we would like to deepen our footprints in those markets where we have already an high relative market share and first of all we think about organic growth, that’s a first step we are going to do with the existing store network really become better.

The second step we are going to look at is to a smaller fill-in acquisition like Hannaford used to do already and we also picked up here and there a store for Food Lion for all kind of reasons. Those are the two things where we really focus on which is in line with capital discipline, which is in line with our core statement, which is in line with relative market share support those DMAs to win and make from 72%, make 80% in winning DMAs, but we will not be blind let’s say for consolidating opportunities, but we cross the bridge when we come there.

Frederic van Daele

Maybe one final question if there is one.

Robert Jan Vos - ABN Amro

Thank you. Robert Jan Vos, ABN Amro. I have two final questions if I may. Firstly on your – on some of your outlook statements, you are quite explicit about Belgium, you expect lower profitability there in 2014. You have not been so specific on the U.S., should we conclude that you expect at least stable profitability in the U.S. in 2014 at this stage? That’s my first question. Second just related is a related question, what precisely is healthy free cash flow that’s what I am looking at? Your CapEx is not going through the roof you see further opportunities to improve working capital. So healthy free cash flow, should we think about the 500 million number you have mentioned before or can you say anything on that for 2014? Thank you.

Franz Muller

Good. Pierre and myself have very close cooperation. So I think Pierre already answered that question and we have the same vision on this. So we do not give a guidance on that free cash flow other than we already did namely we didn’t. The second thing is on the margin development in the U.S. also there we don’t give guidance for the full 2014 year, but we feel that rather run at an flat margin there in U.S. as well.

Frederic van Daele - Investor Relations

Thank you, all. This concludes the Analyst Meeting. I want to invite you now for lunch next door and for the people on the line, thanks for attending. There will be a webcast, there will be a replay available on the Delhaize Group website and we will report our first quarter results on the May 7. Thank you.

Franz Muller - Chief Executive Officer

Thank you very much.

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