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Executives

Geert Verellen - VP, IR & External Communications, Delhaize Group

Pierre-Olivier Beckers - CEO, Delhaize Group

Stefan Descheemaeker - CFO, Delhaize Group

Ron Hodge, CEO, Delhaize America Operations

Michel Eeckhout - CEO, Delhaize Belgium

Analysts

Fernand de Boer - Petercam

Paul Hofman - CA Cheuvreux

Edouard Aubin - Morgan Stanley

James Anstead - Barclays Capital

Andrew Gwynn - Bank of America

Frederic van Daele - Kempen & Co

Alastair Johnston - Citigroup

Andrew Kasoulis - Credit Suisse

James Collins - Deutsche Bank

Delhaize Group (DEG) Q2 2010 Earnings Call August 13, 2010 2:00 AM ET

Geert Verellen

Good afternoon everyone in Europe, good morning in the U.S. Welcome to the conference call concerning Delhaize Group’s results for the second quarter and first half of 2010. This presentation contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements. Factors that could cause results to differ materially from those in the forward-looking statements are detailed from time to time in reports filed by the company with the SEC. These forward-looking statements are made as of the date of this presentation. Delhaize Group assumes no obligation to update the information contained in this presentation.

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

Today, we have the following people with us: Pierre-Olivier Beckers, CEO Delhaize Group; Stéfan Descheemaeker, CFO Delhaize Group; Ron Hodge, CEO Delhaize America Operations; and Michel Eeckhout, CEO Delhaize Belgium.

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

I now turn to Pierre-Olivier Beckers for an introduction of our second quarter results.

Pierre-Olivier Beckers

Thank you, Geert. Good afternoon and good morning everyone. Thank you for joining our conference call today. During our second quarter, our group has been able to maintain stable revenues at identical exchange rates despite the significant impact of low inflation, caused in part by our own price investments, and the continued difficult economic environment. Our Food Lion operations suffered from the very difficult economic and competitive environment in the Southeast of the U.S., while our Hannaford operation in the Northeast was holding well against the competition.

Our Belgian operations performed outstandingly with great sales momentum and the highest comparable store sales growth of the last seven years. Delhaize Belgium’s market share increase was the highest of all retailers in the country. In Greece, Alfa Beta continues to perform solid revenue growth, mostly driven by real volume growth and again Alfa Beta increased its market share, thereby showing its resilience in an increasingly difficult economic environment.

This being said, we are disappointed with our sales results in the Southeast of the U.S. in the second quarter. Even though, and it is important, we had expected that the second quarter would be the most difficult of the year in terms of comparison, the deflationary effect of our fundamental change in price strategy since the beginning of 2010 was amplified by the un-abating pressure on the consumer and the fact that the gradual increases in inflation we expected as from the second quarter did not materialize. In addition, the macroeconomic environment has lead in the Southeast to a continued promotional aggressiveness in the market place.

Aside from this current reality, we are confident that we are moving along well on our path to implement our new game plan. Testimony to that is the fact that we are able to raise our gross annual savings target from EUR300 million to EUR500 million by the end of 2012, thanks to the identification of EUR200 million of new savings in cost of sales, and I will come back to this later.

As a result of our firm commitment to our new strategy of lower prices, the continued pressure on the U.S. consumer, the aggressive competitive environment, and the expectation we have of a significantly lower than expected retail inflation, especially in the Southeast of the U.S. for the remainder of the year, we have decided to adjust our full year operating profit growth expectations to minus 2% to plus 2% instead of the guidance we had previously, 2% to 5%.

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

Stéfan Descheemaeker

Thank you, Pierre-Olivier, and welcome everyone. As usual, I will review our figures at identical exchange rates unless otherwise stated. In this quarter, the U.S. dollar has strengthened on average by 7.3% against the euro, compared to the second quarter of last year.

In this quarter, Delhaize Group kept its revenues stable, despite the persistence of the challenging economic environment and low retail inflation, sometimes deflation, at our operations. In the U.S., our revenues decreased by 2.8% and our comparable store sales growth was negative 3.6%. Structural pricing investments made since the beginning of the year at Food Lion and continued low cost inflation have resulted in a retail inflation of zero for the U.S. for this quarter, creating a tougher comparison with last year’s inflation of 1.5% in the second quarter.

Even though we expected a tough second quarter, we are disappointed in our actual sales results. As already mentioned, the U.S. economic environment remains very challenging, especially in the Southeast. Consumers continue to be stretched and very prudent in their spending, while competitive activity remains very promotional.

We foresee that the price investments made at Food Lion since the beginning of the year will gain sales traction later this year, although starting from a lower base and later than initially planned. Our new earnings guidance also foresees our continued commitment to price investments at Food Lion.

In Belgium, total revenues strongly increased by 5.8% in the second quarter and our 5% comparable stores sales growth was the highest in seven years. Continued price decreases and strong commercial plans resulted in further market share gains.

Revenue growth at Alfa Beta in Greece remained resilient at 5.5%, the result of volume growth due to an increase in the number of transactions. Alfa Beta has further increased its market share in a Greek food retail market under strong pressure.

In our rest of the world segment, revenues increased by almost 20%, mainly as a result of the expansion of the store network and comparable store sales growth in both countries. In Romania, our price positioning continued to improve and the underlying sales trend is improving for the second quarter in a row.

Gross margin was stable despite the continued structural price investment, primarily at Food Lion. Improved buying conditions across most of our operating companies, a more favorable product mix at Hannaford and lower distribution and transportation costs at Delhaize Belgium offset the negative impact of the price investments on gross margin.

SG&A expenses increased by 65 basis points as a result of negative sales leverage in the U.S. and higher advertising costs in Belgium. In the U.S., our operating expenses were flat in absolute terms thanks to better store labor scheduling, reductions in other staff costs, the positive effect of the Food Lion store closing at the beginning of this year and the annualized impact of last year’s savings achievements. We are on track to reach our group target of EUR300 million annual SG&A savings by the end of 2012. Our operating margin decreased to 4.2% of revenues, mostly as a result of negative sales leverage.

Looking at our cash flow statement for this quarter, net cash provided by operating activities amounted to EUR331 million at actual exchange rates, more than double the amount of last year, as a result of better working capital management and lower income taxes paid this year as a result of optimization opportunities in the U.S.

Delhaize Group generated EUR182 million in free cash flow at actual exchange rates, a strong increase of EUR155 million compared to last year, mainly as a result of high cash provided by operating activities. Our net debt to equity ratio continued to improve and now stands at 43%, down 4 percentage points since the end of 2009.

Our results for the first two quarters and our plans and expectations for the remainder of the year lead us to revise our operating profit growth outlook. In the Southeast of the U.S., lower than initially expected inflation and continued competitive pressure will result in lower than planned sales during the remainder of the year. At the same moment, we are committed to continue our price investments.

We now expect our operating profit growth to be in the range of minus 2% to plus 2% instead of the earlier announced 2% to 5% range. Mainly due to delayed timing of real estate development and optimizations, we are adjusting our full year outlook for capital expenditures to EUR700 million and our net store network additions to 82 to 92 stores by the end of the year.

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

Pierre-Olivier Beckers

Thank you Stéfan. We are now six months, as you know, into the execution of our new game plan and all our operating companies have made good progress in putting in place the sales building and cost saving initiatives that are part of this plan. With the exception of the Southeast of the U.S., our other banners have performed well this quarter thanks to these initiatives.

Our confidence in the new game plan is further reinforced by the identification of an additional EUR200 million cost savings in the area of cost of sales, which allows us to raise our initial target for annual gross savings by the end of 2012 to now EUR500 million.

Let me now walk you through some of the initiatives that support our future growth and performance for the group, but I will also, don't worry, I will touch on the challenges we see at Food Lion and how we are addressing them.

Price, we believe now more than ever, matters to our customers and this is why offering competitive prices across the group, every day is one of the key elements in our new game plan. At the beginning of 2010, Food Lion lowered thousands of prices, resulting in a marked change in price reality and in substantial savings for our customers.

During this past quarter, Food Lion also launched a series of television ads supporting the new price strategy and referring to Food Lion’s low price heritage. In the stores, we started with the installation of coupon kiosks, enabling customers to benefit from tailor-made offers based on past purchases.

In June, Sweetbay launched the, what we call “Take Back Your List” website that allows customers to compare prices against competitors and to create and print shopping lists. The site is part of Sweetbay’s new advertising campaign promoting its everyday low price positioning and is based on the weekly price comparison of 30 products done by local media.

In this past quarter, Delhaize Belgium launched its fifth price investment campaign in a period of only 18 months, lowering prices of more than 1,300 national brand items. These sustainable price reductions are supported by targeted mailings and promotions such as the new summer campaign developed in collaboration with the WWF. And the impact it has had so far is just as strong as last year’s very successful Disney Pixar action.

At the end of July, just to give you one number, over 200 million cards had been distributed in Belgium since the start of the campaign. Overall customer satisfaction scores continue to improve and have reached their highest points since quite some time now in Belgium. We believe this shows that we are well on our way to solidify our position as value leader on the Belgian market.

As we progressed through the second quarter, the Greek economic environment started to impact consumer behavior. Consumers are now trading down to lower priced items. But Alfa Beta has shown remarkable resilience in this environment, and this is evidenced by continued volume growth due to an increasing number of customer visits and by sales growth significantly outpacing the market. As a result, Alfa Beta’s market share is now more than two full percentage points higher than in the same period last year.

At all our banners, private brands continue to increase in importance, mainly as a result of continued promotions and assortment innovation. Private brands are a great way to increase customer loyalty, certainly in these difficult times, and at the same time to support gross profit. At Alfa Beta for instance, private brand sales penetration has increased by over 60 basis points compared to prior year. In the U.S., private brand sales increased by close to 100 basis points on average.

At Delhaize Belgium, the recently introduced private brand baby food range took a great start, further proof of the strength of our brand, supported by, in here, guaranteed traceability and strict quality controls. To optimize shelf space and assortments and improve the stores’ performance, Delhaize Belgium also executed an in depth value chain analysis for poultry, wine, seafood, fruit and vegetables categories and will equip its entire store network with new store-specific planogram software by 2011.

Our new game plan includes a considerable acceleration in organic store growth in our newer markets and with our newer formats, such as Bottom Dollar Food in the U.S. and Red Market in Europe. A few weeks ago, Bottom Dollar Food, our full-shop discount grocer in the U.S., announced the locations for approximately 20 new stores in the greater Philadelphia market, thus opening a brand new geography for our group that we think is currently underserved in the soft-discount grocery arena. By the end of the year between 15 and 20 of the Bottom Dollar Foods should have opened there, and this is an important step up, obviously, from the existing 28 Bottom Dollar Food we operate today.

By the same token, we see our European low cost supermarket grow its success and expand its network. By the end of 2010, we plan to have 6 Red Market stores in Belgium, 13 in Romania, and 3 in Greece. We are obviously learning fast from our first Red Market stores, and ideas first tried there, such as the stock up discount, or granting in other words lower average prices to customers the more they buy of a given product, have been successfully introduced in our classic Belgian stores to support specific promotions.

In the meantime, we continue our planned market renewals in the U.S. Food Lion plans to renew the Richmond market in Virginia with 21 stores, and the Greenville market in North Carolina with 10 stores in the next quarter. The Roanoke, Virginia market has been selected for market renewal in the first quarter of 2011.

In the second quarter, Delhaize Group also received the approval of the Greek Capital Market Commission to squeeze out the minority shares of its Greek subsidiary Alfa Beta. Acquiring 100% of our Greek operations is an important step to achieve a solid platform for further growth in Southeastern Europe.

Another one of the priorities in the new game plan is to fund sales-building initiatives and support the group’s profitability through internally generated resources to drive a virtuous growth cycle. And we are well on our way here to reach the targeted EUR300 million in annual gross SG&A savings by the end of 2012, even if, I realize, for the second quarter these cost reductions are less visible for our U.S. operations than during the first quarter, and that's the result of the negative sales leverage that we had due to Food Lion’s weak sales performance.

In the U.S., our operating companies have made great efforts to balance service levels with lower store labor hours resulting from, for instance, better planning of schedules and reviewing store processes. Examples include outsourcing the production of certain food items, converging back office tasks, or reviewing checkout processes to improve store payroll.

In the context of the supply chain master network project, all our U.S. operations will have switched to the same warehouse management systems by the end of this year, 2010, and the synergies and efficiencies of the unified network will start to come in.

At Delhaize Belgium, the new automated distribution center for fresh products that we opened last September, has reached cruising speed and is well on track to deliver the planned annual EUR11 million of cost savings.

And we continue to go further. After the start of the supply chain master network in 2008, and the shared services organization for the U.S. early 2010, we are today particularly excited about our U.S. operations about the potential offered by the creation of a single procurement organization for Delhaize America, which will support all our U.S. banners with assortment and promotion planning and execution, sourcing and procurement, private brand management and pricing expertise.

Further improvements in private brand management, product sourcing, value chain analysis and supply chain optimization will accelerate the significant savings achieved during the last quarters, and by the end of 2012, as I said earlier, these initiatives across the group will result in an additional EUR200 million of gross savings in cost of sales, increasing our targeted annual gross savings to now EUR500 million by the end of 2012.

Let's talk two minutes about corporate responsibility. Product, people, and planet are at the heart of our business, and this is where we can make a difference towards a more sustainable way of life. In the U.S., Food Lion recently received the ninth consecutive energy star for sustained excellence in energy management.

At Delhaize Belgium we've seen that we were able to reduce the energy consumption in the stores by more than 5% per square meter compared to last year, and that puts us well ahead of our target to get to 35% reduction in energy consumption by the end of 2020.

Just recently, all Delhaize America banners adopted a new sustainable seafood policy, which requires suppliers by March 2012 to guarantee to us that seafood is coming from sources managed for sustainability and encouraging local sourcing. This program was developed in partnership with a leading marine science center, ensuring the scientific evaluation of fisheries. And we are also making the same commitment for 2012, this time in Belgium, as we want to position ourselves as the leading food retailer in that domain. And in Belgium we will partner for this with WWF.

Let us now take a closer look at what is happening in the Southeast of the U.S., and what we think are some of the elements that have resulted in lower than planned sales at Food Lion and particularly on how we address this.

First of all, there is the continued tough macroeconomic environment. Unemployment is high in a large part of Food Lion’s market. Approximately 170 counties in Food Lion’s trade area have unemployment rates above 12%, and this obviously puts additional pressure on consumers. Increasing numbers of customers use coupons, making shopping lists they stick to, and always try to buy items that are on sale, so we have a large number of cherry pickers out there.

The number of people receiving food stamp benefits has increased 21% compared to prior year. In this difficult economic environment, all our competitors are using aggressive high-low promotional tactics to buy traffic, and the price leader is also promoting aggressive rollbacks.

This puts additional pressure on prices, on top of the structural price reset we started at the beginning of the year at Food Lion. As a consequence, where we expected low levels of inflation resuming during the second quarter, we are now forecasting approximately a 150 basis points less inflation than planned during the remainder of the year.

In this environment, Food Lion embarked, in early 2010, on a fundamental price repositioning to respond to what we are convinced is the structurally changing consumer needs, and go back to its roots as the well-known low price leader in the Southeast among traditional supermarkets. This year, thousands of prices have been lowered on critical items, key value items, and nearly all foreground items.

Our traditional competitors have not reacted to our price repositioning and continue to use promotions to drive traffic. At the same time, we have consciously not increased until now our promotional efforts as we have focused our investments on permanent shelf pricing, and we do realize that this may hurt our sales performance in the short term.

We started, however, to see very quickly the first positive signs of our price decreases in those categories that were directly impacted by our price repositioning, through an increase in real unit sales compared to prior year. But it's fair to say that these positive evolutions were still overshadowed by the overall sales trend during the last month.

As said at the start of our price reset, we believe that it will take time to translate the impact of lower prices in more noticeable sales traction. Our price reset, in other words, is a structural and ongoing initiative, and as we try to strike a balance between sustainable cost savings on the one hand, price investments and the resulting sales uplifts on the other hand. However, as we continue to generate cost savings initiatives, we are committed to continued price investments this year.

Aside from price investments, Food Lion is using other tactics as well to drive customer traffic, such as the coupon kiosks that I referred to a few minutes ago. Using the data from our MVP loyalty card, we are leveraging customer insights to enhance the effectiveness of exit coupon marketing. Targeted programs are developed with some of our vendor partners to drive seasonal sales opportunities, such as back to school or fall football season, and of course the holidays.

Finally, we continue to work on structurally improving shopping convenience and to take advantage of the great locations of our 1200 Food Lion stores.

Let me conclude. Even though we are disappointed with our second quarter performance in the Southeast of the U.S., we are confident that we are making the right choices to respond to day to day challenges and support long-term accelerated growth across the group. The solid performance of several of our operating companies is a clear proof of the success of our new game plan approach. And now is absolutely the time to stay focused on the choices we have made and to accelerate our efforts where needed.

This concludes our prepared remarks. I will now turn to the operator. We are of course available to take questions. Operator, I will turn the program over to you. I think you will give you instructions for asking questions. Thank you.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question today comes from Fernand de Boer of Petercam. Please go ahead.

Fernand de Boer - Petercam

Three questions if I may. Firstly, on your guidance for the full year, it looks to me that you are looking for a 1% to let's say a 9% increase in EBIT for the second half. Given this minus 12% in the second quarter, where does that optimism come from? Then the second one, did I understand you correctly that you are actually stepping up your promotions again in Food Lion? And then the third one, you are slowing down the store openings program. Could you give some feedback on that one? What's the reason behind it and why not actually stepping it up given your cash flow and also the need for more discount oriented [unintelligible] in the U.S.

Pierre-Olivier Beckers

Three important questions. We'll try to answer them fully, and I will take a crack at the first one, but Stefan, please jump in. On the guidance for the full year I will not obviously answer specifically on your suggested 9%, but clearly we are looking at a second half that would be better than the first half. We have said from the beginning actually, of the year, that our PFO growth would be back loaded in 2010. By the way, we also said that Q2 2010 would be the toughest quarter of the year. It's fair to say that we were also expecting some sales traction from our price investments from some time during the second quarter and that has not yet materialized due to the number of elements, macroeconomic and competitive, that we have mentioned in our comments.

Clearly as we look at the second half of the year we do expect sales traction coming from our price repositioning, and we have, as I said, seen quickly real unit growth in those elements that we have - in those categories that we have already touched. Also, we had in the first half, and in particular in the second quarter, some one-offs. There clearly was a significant severance payment that I don't expect we would have in the second half of the year.

We are also going to continue our cost savings initiatives, and cost savings will continue to be delivered as we move through the years, helping us both to fund the sales initiatives and to support our profitability. And part of our view, and this is perhaps what the second question you raised here, which is the possible stepping up our promotional aggressiveness, and indeed we believe that as we continue to generate cost savings, and in this temporarily aggressive promotional environment, it is a place where we would like to focus some of our price investments in the second half of this year in the Southeast, of course, in particular. I'm turning to Stefan to see if I've missed anything.

Stefan Descheemaeker

Maybe something that is more macro driven than anything else. We're not expecting, neither, I'd say, [unintelligible] not any improvement in terms of economic environment or competitive environment as such. So it's more, let's say, something like more of the same, but obviously from a lower base than initially expected, on top of all the explanations provided by Pierre-Olivier which belong more to Delhaize Group as such.

Pierre-Olivier Beckers

So I think with that we probably have answered your first two questions. So on the store opening program, we're actually not slowing down the growth store opening programs, so we will open pretty much the same number of stores as we had expected, but we have a few more store closings that we expected, and the store mix in the store program is shifting somewhat, which is in part the explanation for the lower than planned cap ex guidance that we gave. That cap ex revision is also due to some store - some real estate projects coming later in the year than expected and also due to our own actions, because we're working hard at improving the cap ex productivity in other words, reducing the cost of construction, improving the negotiations for equipment and so forth. So I think that probably covers the three questions and again, thank you for those questions Fernand.

Operator

Our next question today comes from Mr. Paul Hofman from Cheuvreux.

Paul Hofman - CA Cheuvreux

A couple of questions also. The first one, coming back to that guidance. You expect some growth, if it will be 1% or 9% is of course a question, but do you already expect a return to - do you already see a return to volumes and can you say something about the trends during the second quarter? Because you expect some improvements year on year so what's that EBIT growth based on? That's the first one. And secondly, on Belgium, it was clear that in Q1 that margin improvement was not to be reiterated [unintelligible] on 30 base points. Is this half year level now more a level that you are comfortable with to continue during the rest of the year? And then a final question on the savings. What can you say about the phasing of the 200 million? I get that it's most 2011-12 weighted, but can you say something about any phasing there?

Pierre-Olivier Beckers

On the guidance, Paul, clearly, and that's what I meant but I guess I was not clear enough in my first answer. When I say that we believed from the start that we would have a back loaded PFO growth program for this year, what we really have in terms of the situation in front of us is an easier base of comparison in H2 this year compared to H1, and so that's a significant element that you have to look at. Next to that, clearly we are hoping to continue the good trend in the banners where we have already performed well and as we said, we do expect sales uplift and sales good traction in the Southeast, but as Stefan indicated, yes, we start as the result of the macro and competitive reality from a lower base and suddenly at a later stage in 2010 than what we had expected. And again, in Q2, as I said during my remarks, we saw positive volume growth, real unit sales in all those categories and SKUs where we have acted but this has not been sufficient to overshadow the entire store volume because we have lowered thousands of items but we have thousands of items more to go and this is why this structural - it's a structural program, and a continued commitment to price investments. Why don't I turn to you, Michel, for an answer on the Belgian question?

Michel Eeckhout

Thank you Pierre-Olivier. So just to remind on Q2 we had a 4.8% operating margin, first half of the year 5%. Last conference call we said that we will be between 4% and 5%. Of course, we will end close to the 5% and further away - still between 4% and 5% but close to 5%, this is our expectation for the full year.

Pierre-Olivier Beckers

And your third question was in regard to the phasing I think about savings in '11 and '12. Stefan, some words on that?

Stefan Descheemaeker

And again, I will make the difference between the first EUR300 million savings we identified in SG&A earlier in the year, and the way we said very explicitly that it would be probably be something like reasonably, let's say, split evenly between the three years, '10, '11, and '12, and that's what we can see so far. We're on track for these three hundred. For the EUR200 million that we know have identified in terms of [costs] and where we're putting the same time horizon, in other words '10, '11, '12, without surprise you understand it's going to be more, let's say, between 2011 and 2012, because we're coming later in the process. We still need to put in place this procurement center in the U.S. It's going to take more time, and as a result, yes, I think it's fair to say that it's going to be between 2011 and 2012.

Operator

Our next question does come from the line of Edouard Aubin of Morgan Stanley. Please go ahead.

Edouard Aubin - Morgan Stanley

In December '09 you provided us with some slides showing the price positioning of Hannaford and Sweetbay. However, you didn't show a slide for Food Lion. Can you give us a sense, in July, August 2010, of where you stand in terms of the price gap you have vis-a-vis some of your competitors. Now I understand the macro and the competitive environment remain difficult in the Southeast, but wasn’t the fundamental problem that your pricing at Food Lion at the end of '09 was not where it should have been? And an additional question on Food Lion and that's maybe for Ron. If I may, Ron, you have recent taken over as a CEO of Delhaize U.S. Operations. Now Food Lion had now more than 10 quarters in a row of negative like-for-like volume decline. You've made Hannaford one of the most successful supermarket chains in America. Can you just give us your sense in terms of the issues at Food Lion, is it just a pricing issue? Or do you think you need to do some tweaking with the format? Is the format still as relevant today, with the customers in the Southeast of the U.S.?

Pierre-Olivier Beckers

All right. Thank you Edouard and you're absolutely right. We think that Food Lion was not where it should have been and that is why we decided to structurally embark in a long term sustainable price repositioning on the shelf. Not high-low, but on the shelf. And Ron, why don't you address maybe, because we've made terrific progress, and I think it's worth talking about that. So if I may ask you, Ron, to address this? And of course, the second question. I hope you didn't have your tie too tightly put there.

Ron Hodge

Well first, I'd like to ask Edouard to be my negotiator for compensation. [Laughter.] In terms of the pricing, as Pierre-Olivier said, clearly we were not where we wanted to be at the end of '09, and with the major pricing reset that we have put in place starting in January, we have improved our price relationship, both versus Walmart, and versus our more conventional competitors.

We've moved from, on our KVI items, from between 5% and 7% difference down to 3% and 4%, and have increased the positive variance that we had relative to the conventional competitors to more like 8% to 10% as a result. And critical items, Walmart is currently 1% to 2% lower than us, and the conventional peers are 4% to 5% higher, and on the foreground items Walmart is 4% to 5% less, and it was around 8%, and our peers are 6% higher, and it was more like 3% to 4%. So the impact of the price repositioning has clearly put us in a different position relative to all the competitors in the marketplace. We're pleased with that. When we put the repositioning in place, we said that this type of move takes several months to be truly realized by consumers. We're talking in terms of 6-9 months. We're not happy that we haven't gotten overall recognition for our price positioning, but we do know that on those categories that were reduced, we have seen volume improvement.

So we have more work to do, but the results relative to competition are very good and I think it sends a signal to us that we're on the right track here and we need to continue with it. And that is clearly our intention. In my work with Food Lion in recent months, what I've seen is a very profitable 1,200 store chain that is located near the population that we serve. Almost all of the customers in the marketplace shop with us at one time or another. We have convenient locations. We're improving the convenience of the shopping experience, and we believe that continuing to sharpen our price message, our structural base pricing, will continue to make Food Lion more relevant in the future and that is the path we're on.

There was a question about increase in promotional spending. If you look at what's happened in the first half of this year relative to the numbers I just mentioned, you can see that the investment that we've put into structural base pricing has improved our position relative to those competitors who have chosen to be more promotional. On the other hand, it's a noisy marketplace, and we need to be heard, and really believe that an increase in promotional spending the second half will indeed get more customers in our stores to see the lowered prices and we're going to do that, and we are not going to do it at the expense of our base pricing.

Pierre-Olivier Beckers

Thank you Ron. I think it was very complete.

Operator

Our next question today comes from the James Anstead from Barclays Capital. Please go ahead.

James Anstead - Barclays Capital

Most of my questions have been asked, so there's just one really, which is that you're now almost halfway into the third quarter, and I understand you can't give us out any specific numbers, but can you tell us whether there are any reasons to be more optimistic in the third quarter so far? Because clearly the first six months haven't really shown any volume improvement. Is there anything that's making you more encouraged about the third quarter?

Pierre-Olivier Beckers

Well, I'm not going to make specific comments on the third quarter, and in a way our new guidance takes into account what we think will happen and what we see. It's fair to say that we haven't seen, from a macroeconomic environment, any improvement, but at the same time, as Stefan mentioned, we don't see any deterioration anymore. We think that we have found a more stabilized position in terms of the consumer's - how much the consumers are [heard]. So we believe also that as we move through the rest of the year we will begin to have more traction on the entire store as we continue. And I remind you that the Northeast is doing extremely well. So as we continue our efforts in the Southeast we will increase our promotional intensity as Ron just mentioned, and we do have an easier base of comparison to look at. So these are, I would say, are the main factors that give us confidence as we move through the rest of the year.

Stefan Descheemaeker

Building on your point, on the last point Pierre-Olivier, you may remember that last year deflation really started to kick in during Q3, so that's also - back to the back loaded part of the year. That's one of the reasons. But we are neither more optimistic nor pessimistic. It reflects what we've seen in the marketplace.

James Anstead

Just one quick follow up question then. You said all along you expected six to nine months really for the consumers to really get what you'd done with price investments, and given that the competition has moved in almost the opposite direction in terms of their promotions do you now think that maybe nine to twelve months is more realistic?

Pierre-Olivier Beckers

I think that that's a given. That's exactly what we're saying. We are saying that we were expecting an earlier, more rapid change in our customers' behavior and we haven't seen it from the second quarter, and we haven't seen it materializing. So we do expect to see traction this year but it's fair to say that it's more nine and twelve month than the earlier view on this.

Stefan Descheemaeker

And from a lower base.

Pierre-Olivier Beckers

And obviously we start from a lower base.

James Anstead

So if we're looking for the quarter where we really see the definitive stabilization and improvement it's really the fourth quarter, which is really the realistic opportunity?

Pierre-Olivier Beckers

Well, again, I don't think I should make specific comments for quarters in front of us.

Stefan Descheemaeker

I think James it would also depend on the impact of the promotions and [unintelligible].

Operator

Our next question today comes from Andrew Gwynn of Bank of America. Please go ahead.

Andrew Gwynn - Bank of America

Promotional intensity. It's obviously going to be rising. Could you just quantify where you expect to take that to? Are you going to be lifting it up, because obviously the market has got more promotional. Are you going to be chasing the most promotional supermarkets in industry, or are you talking about a level which is slightly elevated from where you are? And could you just clarify as to whether or not you have already upped your promotional intensity in the market? And the second question is just on market share. Clearly it's been a difficult quarter for you. We're seeing Publix, we're seeing Harris Teeter, they both reported not materially, but certainly slightly better sales development than you are. Are we right to assume, and I think this probably is the case, that you've lost market share during Q2?

Pierre-Olivier Beckers

Okay, let's address those questions. Ron, would you start with the promotional intensity, and continue if you will with the market share?

Ron Hodge

On the promotional intensity, we certainly believe we need to heard in the marketplace, so we're going to dial that up, but we're going to do it in a targeted way. It's not a matter of just throwing a lot of money at the wall and seeing what sticks. We have a plan to target how we do it, where we do it, and I don't want to get into the specifics right here, but it will be a targeted approach and we believe it will be effective. What we need to have is more people coming in our stores and recognizing the structural change that we've made in base pricing.

Andrew Gwynn

It sounds like you're talking in the future tense there, i.e. halfway through Q3 these plans aren't yet in - well you've got them formulated, but they aren't necessarily on the shop floor.

Ron Hodge

Not necessarily so. The promotional intensity changes week by week and we recognize the need, have started doing that today. We have initiatives in different markets that are going on today, and I foresee that continuing and maybe slightly improving.

Pierre-Olivier Beckers

And obviously we have - for the moment company-wide in the U.S. - a pretty aggressive campaign called the Great Grocery Giveaway, and you just don't need to add too many things on top of one another otherwise they finish neutralizing each other. So as Ron says, it's absolutely about targeting and focusing, about time and location.

Ron Hodge

One other point. In terms of how we target promotions, we have the great benefit at Food Lion of our MVP card that virtually all of our customers hold, and it gives us a great opportunity to target specific offers to specific customers and we have been doing that for quite some time and are improving our ability to get the right promotional incentives into the right hands to drive sales. So I think it's a real key lever for us to use even more going forward. And in terms of market share, generally our market share has increased in the Northeast and slipped some in the Southeast, and I wouldn't get a lot more specific than that. But that is reflected in our sales.

Pierre-Olivier Beckers

And the only thing I would want to add to that is obviously you have to also look at how any retailer is cycling its current numbers to previous numbers, so obviously I think I heard you mention Publix and others. I think it's important also to look at how they compare to where they were last year.

Stefan Descheemaeker

And another element I think that's important on the market share is that we've opened relatively less stores than the rest of the competition, so that of course also contributes to the market share being under pressure.

Andrew Gwynn

And I suppose just to ask both questions in a more direct manner, would you expect the trading performance, the comp store sales performance, in Q3 in the U.S. to be better than Q2?

Pierre-Olivier Beckers

And I'm not going to answer in any direct manner. That's really guiding on the third quarter, and I'm not going to do that. I think we've really, and please make sure you contact Geert and his team, but I think we've really been to the full extent of what we can and want to say about the elements we think will influence our trading as we go forward through the rest of the year.

Andrew Gwynn

Okay, worth a shot. And thanks very much. [Laughter.]

Operator

Our next question today comes from Frederic van Daele of Kempen. Please go ahead.

Frederic van Daele - Kempen & Co

I have three questions as well. First of all, you mentioned in your prepared remarks that food inflation was 150 base points lower than you initially thought. Could you say what type of food inflation you're sort of budgeting for the second half? That's the first question. Secondly, could you also say a little bit more about the performance of Sweetbay relatively, and also absolutely, and whether you're still happy it will be breakeven by the year end? And finally, I wondered if you could specify maybe a little bit more what the reason was behind Mr. Anicetti's departure and whether the Food Lion organization itself was impacted by his departure and maybe one of the reasons of the poor performance in the quarter? Thanks.

Pierre-Olivier Beckers

Well let me handle that one first, because it's going to be very easy. I will not make any comment on Rick's departure. Rick was the CEO of a specific company called Food Lion LLC at some point, and at a specific time, and these are different times and I am very enthusiastic about the management team we have to address the opportunities and issues that we have. And with that there will be no other comments on Rick's departure. So we will turn to the first question on the expected inflation. Here, Ron, I think I will turn to you -

Geert Verellen

Yes, Frederic, what I wanted to say about that is when we looked at the plan at the beginning of the year we were expecting for Food Lion low inflation for the full year. When we look at the plan now, taking into account the outlook for the rest of the year, the full year is going to be low deflation, so and that in total going from low inflation to low deflation, that in itself is 150 approximately basis point swing, which is of course a very important element in your total plan that trickles down to the PFO line, it being the important element of our guidance update.

Pierre-Olivier Beckers

And on Sweetbay, just to, because I think it's important to perhaps correct the impression you could have left that we said that we would be profitable or breakeven by the end of the year. Our commitment has been, and is, that we would break even at some point during the year 2010 and of course be breakeven for the year from the year 2011. And we did break even. We did achieve this result. In the first quarter we said that as you well know where the first and the fourth quarter are seasonally stronger, much stronger, for the business in Florida, and we did reach that breakeven in the first quarter. And we continue to make great progress in gross margin and SG&A management and we are very happy with that. At the same time, Florida has been hit with the worst recession since the Great Depression. Everybody knows that it's not necessarily an easy situation for food retail.

Operator

Our next question today comes from Alistair Johnston from Citigroup. Please go ahead.

Alastair Johnston - Citigroup

I just wanted to follow up on the inflation question before. You said in the press release that you had zero inflation this year in the United States. So am I to take it from there, that if you're saying no deflation in the full year, effectively you're saying the second half of the year will have more deflation than the first half, which you say was zero? Is that the way I should read this? And then just two other questions, little questions. Could you give some guidance on tax rates? I noticed the tax rate was 32.5% in the first half. Should I just expect that to continue? And finally, just on working capital, is the improvement in the first half sustainable through the year? Those are my three questions.

Pierre-Olivier Beckers

Geert, inflation?

Geert Verellen

Yes, I can take the one on inflation. Alistair, just to be clear, when we said in the press release that retail inflation was flat, that is for the U.S. My comment there, talking about the swing, is for Food Lion. So that's where maybe the confusion comes from. On the tax rate, our underlying run rate, tax rate, as a result of tax optimizations and of the tax restructuring, it's 31-32%, something like that? Obviously you have one-offs every quarter, like the Greek tax levy that we incurred in Q2 here. So, sorry Stefan I stole your thunder on that one.

Pierre-Olivier Beckers

There was also a question on working capital . . .

Stefan Descheemaeker

Working capital. The question is, is it sustainable? Yes, it is - the short answer is it is sustainable. And it's still, you know, pretty much a focus for all the operations, in Belgium as in the U.S. and in the other countries. And so we're making good progress.

Pierre-Olivier Beckers

All right, I see that time flies and I understand that there were a lot of questions today, but I will take - why don’t I take two more questions and then I encourage obviously all those of you who still have questions to call Geert and his team.

Operator

Our next question today comes from Andrew Kasoulis of Credit Suisse. Please go ahead.

Andrew Kasoulis - Credit Suisse

Two questions, if I may. Firstly, does your new guidance rely on the EUR300 million of OpEx savings being more phased towards 2010 than previously? I know you said you expect an even phasing, but does that need to change to achieve your new guidance? And secondly, can you please give some indication of the scale of divergent comp sale performance between the Northeast and the Southeast, please?

Pierre-Olivier Beckers

Okay, on the first part, I would say that we are committed to, as we said, to the EUR300 million. Fundamentally, the big projects are going to stay where they are. A number of them have very specific time horizon and deadlines. We can't change that. But as we are facing the reality of this year and as we intend to increase our promotional spending, we have decided to make some short term choices to create additional cost savings to fund our additional promotional intensity in order to balance both our willingness to support sales traction and support our profitability. So that's where we are on this one. And then -

Andrew Kasoulis

So, sorry, to be clear does that mean that your 300 is going up? Or 300 is being phased more into 2010?

Pierre-Olivier Beckers

No, 300 is 300 -

Stefan Descheemaeker

300 is 300 but what's important is two things. One is we're pushing even further, absolutely. That's one thing. And second, we actively, and I think the testimony to this is the 200. We're actively pursuing other savings opportunities, because we think, and I think Belgium is a perfect example, that there is a clear cycle, and the relationship between cost savings and price investments. So in other words, the more cost savings we can define, we can identify, then we can implement, obviously, the faster we're going to be able to position ourselves the right way in terms of price. And again, in Belgium that's exactly what we have seen. I think Michel you must have been in your fifth, now, price decrease?

Michel Eeckhout

That's right.

Stefan Descheemaeker

And again, it's a direct connection with all the savings you've been through, mostly in costs.

Pierre-Olivier Beckers

And Ron, could you say a word about the second question?

Ron Hodge

On the difference between inflation in the Northeast and Southeast?

Andrew Kasoulis

No, the difference between your comp sales growth in the Northeast and Southeast, please.

Ron Hodge

We're slightly positive in the Northeast, and we're negative in our Southeast markets.

Operator

Our final question today comes from James Collins from Deutsche Bank. Please go ahead.

James Collins - Deutsche Bank

Thanks, I will try and keep it brief. On the categories that you have implemented, the price reductions, your comments imply that you still have more work to do. So can you just give us a feel for how many of the categories you have implemented reductions across? So maybe what percentage of sales those represent and what is still to go in the phasing of that? Or is it just that you have addressed the KVIs across all categories and then it's a question of working through foreground more? So just kind of get a feel for how much more of the range still needs that investment.

Ron Hodge

It's not a matter of categories. It is critical items, KVI and foreground across all categories, that we've chosen to attack first, and for obvious reasons. Those are the ones customers buy most. They are the ones that affect your price image most. But our intention is a full price reset with our Food Lion business, which entails the background items as well, and that will be the bulk of the next phase of our price repositioning. We've reduced thousands of prices and as Pierre-Olivier said in opening remarks, we have thousands more to go. And I don't think I'd get any more finite than that.

James Collins

But at the moment does the amount - is that representing, say, 50% of sales? Or more or less?

Pierre-Olivier Beckers

We won't go to that extent, I'm afraid, but we have more work to do, certainly, with several thousand, as Ron indicated. It's not yet done. Sorry for not giving more detail.

All right, thank you again for those questions, and as I said, please contact Geert for more questions. Why don't I turn to you Geert for closing remarks?

Geert Verellen

Thank you for participating in today’s conference call. A replay is available on the company’s website. There you can also find the text with our prepared remarks. If you have additional questions, do not hesitate to contact our investor relations department.

Delhaize Group will announce its third quarter results on Wednesday November 10, 2010. Thank you and have a nice day.

Pierre-Olivier Beckers

Thank you everyone. Bye bye.

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