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Koninklijke Ahold NV

Q2 2014 Earnings Conference Call

August 21, 2014 4:00 AM ET

Executives

Henk Jan ten Brinke – Vice President of Investor Relations

Dick Boer – Chief Executive Officer

Jeff Carr – Chief Financial Officer

Analysts

Patrick Roquas – Rabobank

James Anstead – Barclays

Richard Clarke – Sanford Bernstein

Fernand de Boer – Petercam

Edouard Aubin – Morgan Stanley

Robert Jan Vos – ABN Amro

Jaime Vasquez – JP Morgan

Marco Gulpers – ING

John Kershaw – Exane

Fabienne Caron – Kepler Cheuvreux

Sherri Malek – BofA Merrill Lynch

Pascale Weber – KBC Securities

Gerard Rijk – SNS Securities

Arnaud Joly – Societe Generale

Operator

Good morning, ladies and gentlemen, and welcome to the Ahold Analysts' Meeting and Conference Call on the Second Quarter 2014 Results. Please note that this call is being webcast and recorded.

In today's Analysts' Meeting And Conference Call, statements may be made that do not refer to historical facts, but refer to expectations based on management's current views and assumptions, and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in such statements. Such risks and uncertainties are discussed in Ahold's interim report, quarter two 2014 and they are discussed in Ahold's public filings and other disclosures which are available on Ahold's website.

The introduction will be followed by a question-and-answer session and any views expressed by those asking questions are not necessarily the views of Ahold. (Operator Instructions) At this time, I would like to hand the call over to Mr. Henk Jan ten Brinke Vice President, Investor Relations. Please go ahead sir.

Henk Jan ten Brinke

Thank you, operator. Ladies and gentlemen, good morning. Thanks for joining us in this second quarter 2014 results call. I am here with our CEO, Dick Boer, and our CFO, Jeff Carr and we will take you through a short presentation/ That’s also available on our website and after that, we are happy to take your questions.

So with that over to you Dick.

Dick Boer

Yes, good morning and thank you, Henk Jan. I will start with some Group highlights of the quarter and then Jeff will take you through the financial performance, after which I would like to discuss some of the business highlights today.

First of all, the Group highlights of the quarter two. In the United States, the rollout of our program to improve our customer proposition is progressing well, bringing better quality service and value to our customers. We are on track with the accelerated rollout as a program with 320 stores participating by the end of this second quarter.

As part of our – program, we took out the management layer of our European business. This reorganization resulted in a €29 million restructuring charge and has streamlined our head office functions and while at the same time improved Albert Heijn’s commercial focus and effectiveness.

In the Czech Republic, we completed the acquisition of the SPAR stores, which confirms Albert as the leading brand within the country. If you look at our online businesses, once again, we saw a strong performance with sales up by more than 18%.

We continue to invest in these platforms to extend our market leadership and we see great opportunities for future growth in this area. We saw no improvements in the Dutch supermarket channel, despite the benefit from sales related to the World Cup Football Championship.

And with these continued difficult conditions, Albert Heijn’s market share was in line with the previous quarter and stable versus last year. We continue to be pleased with our performance in Belgium where our Albert Heijn supermarkets showed strong sales growth through both identical and new stores. We now run 23 supermarkets thereby now customers have responded very well to our proposition.

I would like to hand it over now to Jeff.

Jeff Carr

Thank you, Dick and good morning ladies and gentlemen. As you see on the next chart, sales in the quarter were €7.4 billion, that’s down 1.1% of constant exchange rates. And as you’ll recall, that this quarter was adversely impacted by the timing of Easter. And overall for the Group, this had an impact on identical sales of 70 basis points. Underlying operating profit was €288 million, in the quarter and the margin as we discussed in May was down 50 basis points and I’ll break that out a little more on the next chart.

Operating income of €260 million was impacted by the €29 million restructuring charge which Dick has just mentioned and this is an important step in our simplicity program which will result in a leaner more efficient organization in Europe.

Net income of €147 million was further impacted by a €12 million charge from discontinued operations related to the true-up of the tax position concerning Waterbury litigation, which we raised last quarter.

And let me now move on to discuss the performance by each of our business segments. Now starting with the United States. Identical sales were down 1.8%, and Easter here had an impact of around 80 basis points on the quarter. This gives an underlying performance of around 100 basis points down versus last year.

Underlying operating profit margin was 3.7% down 50 basis points from last year. The fall in margin was basically the result as a continued accelerated rollout of the program to strengthen our customer proposition. This largely being funded by a simplicity savings. But in addition to that we continue to absorb commodity price increases notably in meat and dairy.

In the Netherlands total sales were flat year-on-year with €2.7 billion with growth on online and Belgium being offset by reduced identical sales at Albert Heijn supermarkets. Although market share was stable, we continue to see smaller basket sizes, however, transactions do remain broadly in line with last year.

Margins in the Netherlands were down 50 basis points as growth in the lower margin areas such as Belgium and online offset lower sales from supermarkets. Additionally, despite a simplicity program, we see the impact of sales deleverage at Albert Heijn which we will address with the restructuring announced earlier.

The restructuring – with the restructuring we expect to deliver around €30 million of benefits in 2015, largely attributed to Albert Heijn, partly which will be reinvested back into the customer proposition.

In Czech, sales in the quarter were under pressure, but margins continued to progress well up 20 basis points to 2% in the quarter.

Now moving on to cash, in the quarter, free cash flow was impacted by a reversal of working capital inflow in Q1. So it makes more sense for me to focus on the year-to-date number. Free cash flow for the first half was €372 million, €71 million below last year.

As you can see income tax paid was €111 million higher than last year, this was partly due to the settlement of a prior year obligation but also as a consequence of the elimination of economic stimulus programs in the US and the Netherlands which resulted – which had resulted in an accelerated relief of various capital investments. The higher tax was largely offset by lower net investments, down €103 million.

And overall, we remain on track to deliver solid cash generation, albeit lower than 2013. Now, I’ll hand back to Dick. Thank you.

Dick Boer

Thanks, Jeff. I am now on Slide 6. So, where I would like to talk a bit about the business highlights of the individual businesses in the world of Ahold and first I would like to start with the US. As we already said, sales were lower than last year and our market share was slightly down in the US.

We informed you in the first quarter that we are responding to that by accelerating our program of the improved customer proposition and certainly a couple of the highlights we also give today to you where we are and what we are doing about it. We – first of all, have rolled out our program to the market where we have seen most intense competition over the last years and we have seen encouraging results by the program.

We are also on track to rollout further the program, but currently at the end of quarter two at 320 stores and we continue to focus on delivering for the rest of the year, at least more than 50% of our store base and implementing the program into more than 50% of the stores already in this year.

As I also said, and we have said also in the previous quarter that this clearly has an impact and Jeff mentioned it already in this quarter, but continued to also focus on the same time on our simplicity savings that’s on term of course you would see that most of the investment should be funded by the simplicity savings we have.

So, if you then go a bit more what is done and what we are doing and I think it’s important to highlight a bit more on a really the commercial activities we’ve taken into the stores that we really are improving the customer proposition.

First of all and on Page 7 of our presentation, we really work on significant improvements of our customer offering. First of all, about fresh, there is a lot of work done in all the stores to improve our fresh offering presentation, merchandising but also range adjustments, looking at the range adjustments in the markets and in the regions or even the cities we operate, are more ethnic, more upscale where needed and where possible and at the same time also improving the freshness of our products by working on the supply chain.

Besides that of course, also has a price points improvements because we’ve carefully looked at what is – let’s say important for the customers to focus on when we look at the price points and having the right SKU mix as such.

On the enhanced customer experience to follow, also one of the things we’ve done is to prepare ourselves well for the rollout of this program and that’s why it takes time and it’s sequencing of a lot of activities to prepare our stores to be ready to really work in the new environment where we would like to focus our customers to the lowest price that we give at the same time the better quality.

And that’s the understanding for the customers at the same time that this is something we continue to do. So that’s why store employee engagement associates is important to get in and that’s why we do a lot of work in preparing our stores working with the teams and improving the in-store communication at the same time. So that our customers see it but also our owners associates understand what we are doing and that they are – let’s say, the ambassadors for us in the stores.

In addition, we are also targeting our price reductions. So targeted price reductions as you can see on the slide, more than 1000 SKUs are focused a lot on the fresh, but also some of the dry groceries super KVIs are lowered in prices. So that customer really effectively see it when they buy the products and they also see the differences.

And what is important for the customer at the same time that we create a more effective leaflet and that they understand price reductions are not temporarily but they are permanently there. So that’s about the US I would say.

If I go to the Netherlands on Slide 8, Jeff mentioned already, focus in the beginning of this year has been a lot about simplifying our organization. That’s first and foremost was important, we took out the European layer and simplified the structure, also to create better focus of the teams of Albert Heijn on their commercial proposition.

So they are not distracted by the European layer anymore, but focusing really on the Albert Heijn brands as well in the Netherlands and Belgium.

And that should result in focus of our category teams and sources and buyers to be really focused on improving the value, the quality, the ranging and the product ranging for our customers in the Netherlands. That’s why we are doing this quite big change in the organization in the Netherlands, which has all been finished just before summer and the teams are now in the place to start working on, let’s say, in a different organization form but more focused on Albert Heijn.

Jeff mentioned already, as €29 million of cost restructuring and at the same time, €30 million of gross savings, partly certainly reinvested back into the customer proposition.

If you go to Page 9, what are we doing currently in the Netherlands, also there of course a lot of focus on improving our ranges, improving the quality of our products, focus certainly in the Netherlands continuous focus on, say on fresh. We started last year, there is a lot of focus on produce, on meat. on daily and this quarter clearly it was a lot of focus on bakery, improving the quality of our breads, but also the presentation of our bread in the stores.

We continue to be very successful with our store expansion in Belgium. Double-digit identical sales growth, already 23 stores opened and as we have seen from our customer tracking and studies we do in Belgium that they are very appreciating our store, whenever we open a store, we clearly have a lot of traction in the market and we clearly are able to continue doing that even in the stores we have opened a year or two years ago, that’s why they are identical also double-digit.

And we continue to work hard on the Albert Heijn to go forward. Also Albert Heijn to go ahead positive identical sales growth during this quarter, the revamps, we focused a lot on improving the assortment of Albert Heijn to go and that clearly has also helped to make step forward in Albert Heijn to go.

Then, to the Czech Republic, the next two pages which is focusing on the business highlights of Czech. First of all, we continue to make also our improvements there in the category of produce. We have launched a new supply chain since the beginning of this year engaging ourselves much more with local growers also in produce. So, that’s one area.

We also worked on the continuation about our profitability and we’ve seen that that we continue to see improvements of profitability also in this second quarter although for us the development of our sales in the second quarter was a little disappointed I would say, certainly, because of the performance we’ve seen in the quarter before.

Easter impact was quite heavily in the Czech Republic, so – and our competitive position is improving on a continuing base also with the opening and the remodeling of our Project One stores, which are outperforming our current stores and we are seeing encouraging results for our customer perception also there.

Biggest news course of the Czech Republic was the announcement that we completed our acquisition of Czech, the SPAR store that makes that Albert supermarket chain will become the leading brands in Czech Republic and the integration work has now officially started. And lot of new employees of course at SPAR and we expect our integration will take roughly till the middle of the next year.

We expect the transaction to be margin enhancing from 2016 and onwards and as you can read on the slide, one-offs of around €10 million is expected for the second half of 2014 and the remainder will be then in 2015 of our one-offs and the underlying operating income will be impacted in the second half also by around €10 million and slightly margin dilutive in 2015.

Going to the fourth element of our business, of course important our online positions. We talked about often the changing habits of customers and the needs of shoppers to do their shopping in different ways and forms that’s why we continue to invest in our online propositions in both side of the ocean.

First and foremost, I would say on the Peapod, double-digit sales growth also in the second quarter. We opened our semi-automated warehouse in New Jersey a couple of weeks ago, which gives us really opportunities now to grow in the New York market, a huge market where – let’s say our capacity was clearly limited over the last year to grow and this opportunity of the newer warehouse will help us a lot in growing in the United States.

On Albert Heijn online, there we continue also to develop the opportunities for our customers in the Dutch market to shop online. On top of my head, I think we are almost at 80% of the Dutch consumers now buying and able to buy online from Albert Heijn and also the awareness of our customers of Albert Heijn online has gone up quite impressively I would say.

So, customer awareness of our online services is going up from 50% to 80%. We continue to open pick-up points. But let’s be clear also most of the online is still home delivery while we have a longstanding experience and also a longstanding already knowledge and experience in the Dutch market to deliver at home.

Of course let’s say Bol.com, the third element of our online proposition continued to grow also their double-digit, plaza sales up 121% in quarter two versus last year. It’s already almost 20% of total consumer sales and the same I would say for Belgium, more than 100% growth in the Belgium market and already Belgium being almost 13% of our net consumer sales in Bol.com.

Also their website has been clearly appreciated by our customers in the Netherlands and additional to all the information we have given already over the last couple of years about online strategy, we will have a comprehensive update for an Analyst Meeting in the Netherlands of our online strategy on November 17, I think in the evening and then start in the full day on the day on the 18. You will get your invitations soon to be invited for the analysts also see in real life what we are doing as well as Bol.com Albert Heijn and Peapod with our online strategy.

Then wrapping up and as we briefly touch on our outlook. We expect that ongoing investments in our customer proposition and further developments of our product ranges across multiple categories will result in improving sales trends.

For the year, we still expect to deliver close to €300 million in cost savings from our simplicity program that’s in line with last year which we are reinvesting back into our – to improve our competitiveness and we remain committed and focused on executing our Reshaping Retail strategy, to take advantage of our strong brands, leading market positions, our solid balance sheet, and our fast-growing online business.

And with that, I would like to hand it over to the other sides of the phone to you to ask questions to Jeff and myself. Thank you for listening.

Question-and-Answer-Session

Operator

Thank you very much. Ladies and gentlemen we will start the question-and-answer session now. (Operator Instructions) Our first question is from Patrick Roquas from the Rabobank. Go ahead sir.

Patrick Roquas – Rabobank

Yes, good morning gentlemen. I’ve got two questions on the Netherlands. Firstly, taking into account at Belgium Bol.com and Albert Heijn are largely included in the calculation of i.e. sales growth for the Netherlands.

Is it fair to say that the, or the sales growth of the fiscal Albert Heijn stores was more in the let’s say, minus 3%, minus 4% region than the reported one? And then, secondly, do you expect that the current measures taken in the Netherlands are sufficient to improve the sales spend, or is the price repositioning, let’s say like what we’ve seen a couple of years ago needed? Thank you.

Dick Boer

Thank you, Patrick. First of all, I would say on – of course the impact of Bol and the further rollout of Belgium, clearly if you look at the 1.7% of the identical which we gave for the quarter which by the way was impacted by Easter also. So, let’s say, if you take that out the 1.7% might have been closer to one of identical sales negative identical sales for the quarter.

If you then take into account, the Albert Heijn, that you are closer to the 3%, then to the 4% I would say. So, you are correct, there is of course still impact that means that Albert Heijn traditionally – let’s say, identical is still under some pressure.

On the other hand, we have taken the measures, as we said and then coming to the second question, I think, in general, we’ve seen, let’s say, not an easy quarter, not an easy first half year that started already of course in the second half last year where we had the fourth quarter and quarter one and quarter two clearly this year where we were under pressure and are under pressure.

We all know this takes time for all the measures we have taken. The reorganization is helping us to get much more focus of the Albert Heijn organization on delivering better value to our customers here in this market. And I always said and said it before, I don’t think in the Dutch market our pricing is the problem.

It’s more the perception, clearly, because if you take a blend of price of Albert Heijn including promotions, versus our major competitors, then we are more or less equal. So, the fact that our promotions still has impact of course our average price is clearly something we have to explain better and start getting much more known for customers that that’s a good price we have and the distance is small between major competitors in the Netherlands.

So, that’s not the major issue. It’s also the quality, the appearance, the innovation of Albert Heijn which is – has led over the last couple of years to be – let’s say, increasing the customers to spend a little more in our stores, because as we on this, market share is stable, secondly, the customers are in the stores the transactions are not under pressure, it’s the basket which is more under pressure.

Patrick Roquas – Rabobank

Okay, thank you very much.

Operator

The following question is from Mr. James Anstead from Barclays. Go ahead please sir.

James Anstead – Barclays

Yes, good morning. I’ve got three questions, if that’s okay. Firstly, Jeff, you’ve been very helpful in recent quarters giving us quite specific comments on the upcoming quarter in terms of what we should expect on sales and margins. I wonder if there is anything more specific you can given the general outlook comments on your slides?

Secondly, my understanding is partly related to the Russian imports and ban on various products, there is very significant produce deflation in the Netherlands right now. I just wonder, what impact that may have on you, whether that’s very negative to sales, whether there is even possibly an opportunity not to pass all of that on?

And finally, if I look at your cost of product which you very helpfully breakout, actually that’s gone down very slightly year-over-year, if I look at cost of product as a percentage of sales, which isn’t perhaps what you’d expect to see as companies investing lots in price.

So I wonder if there is any technical explanations for whatsoever you’d say a lot of that’s being explained by the fact that you are buying an awful lot better through the simplicity program perhaps. I wonder if you can talk about that at all.

Dick Boer

Yes, maybe Jeff will take the first and third of your question, I will elaborate a bit on the Russian crisis. Produce clearly has already infractions at the beginning of this year I would say, James, since the beginning of the year, we are seeing a quite a lot of deflation in the Dutch market on produce which has impacted clearly the pricing and clearly has a deflationary impact on our – in the Dutch market.

That’s why you don’t see any sales growth in the Netherlands, partly of course caused by the fact deflation in produce is quite a lot. And then you have to think between 5% and 10% on deflation. And so, the Russian crisis on top of that will continue, I think, put pressure on the deflation of produce.

I am not sure if it will increase even more, because I think, as I said in the beginning, the prices were already much lower than before, so the activities of course we only can do in the Dutch market here where most of the produce is exported by the way, so part of course stays in the Netherlands and lots going to export and not only to Russia that we could support the Dutch farmers and try to sell more products in our stores, actually we can do around direction boycott and then we’d like to go back to Jeff on the question one and three.

Jeff Carr

Yes, starting, James, with margin, in terms of the cost of produce, overall, in the quarter margin was down slightly about 10 basis points and this reflects basically the investments we are making in the US where margin is, gross margin was down a little bit more than that and relatively flat in the Netherlands.

So, those investments are reflected in the overall position. I mean, I couldn’t comment on the individual lines in terms of costs, because obviously the significant mix impact and also the dollar exchange rate is quite significantly impacting. But overall, I think the trend is that the gross margin is down and in the quarter by about 10 basis points.

Just coming back to the outlook in terms of guidance. We were quite specific in Q1 because we wanted to be very clear, where we were going with the investments we are making. I think, that message got through very clearly and the fact that we don’t see we need to say anything more specific this quarter just reflects the fact that we think most of you guys are pretty much in the right place. So, I don’t see any need to be more explicit in terms of guidance and I think the comments we made in Q1 have pretty much got people to where they need to be.

James Anstead – Barclays

Okay, that’s very helpful. Thank you.

Operator

The following question is from Mr. Bruno Monteyne from Sanford Bernstein. Go ahead sir.

Richard Clarke – Sanford Bernstein

Good morning. Hi, it’s actually Richard Clarke here. So, just one question from me. Are you still guiding towards the net debt over EBITDA of two times and how can we understand the pathway to that considering you’ve not said anything about any additional share buybacks in this note?

Jeff Carr

I think what you see is, quite a trend. Obviously, the guidance we gave on net debt to EBITDA was impacted by the sale of ICA and that has a quite a significant impact, but since we have largely returned a significant portion of that cash, we are making progress towards the two times.

So by the end of this year, we will be much closer towards that. I don’t think we will be quite at two but we will be approaching those numbers, when you consider at the end of last year, we were at I think less than one times. We will be certainly between 1.5 and 2 times by the end of this year.

Now in terms of saying anything and we are in the middle of a quite a significant buyback program which runs through to the end of 2014. In terms of saying anything about 2015, it’s just too early to say what we intend to do. We look at our cash position, we look at our capital structure towards the end of the year and we will make any statements related to that towards 2015 closer towards the end of the year.

Operator

The following question is from Mr. Fernand de Boer from Petercam. Go ahead sir.

Fernand de Boer – Petercam

Yes, good morning. Fernand de Boer, Petercam, two questions. One is on CapEx are you still guiding for – let’s say €900 million to €1 billion? The second question is, I did notice before a lot of sales to Russian market prospects which could be beneficial for your stop and shopping in the Boston area, could you elaborate a little bit on this and maybe on the last question, do you expect the rest – remainder of the year to increase in net debt further of payables thereof? Little bit cash focus.

Dick Boer

I think on the last question I will elaborate a bit more on that and Jeff will take the first question on capital. First of all, of course we have seen the turbulence in the New England market has clearly given a positive impact on our business. We all know this is most of the time of course this is temporarily, because you would suppose at the end of the day that they’ve already covered themselves and then get back on track.

So, it’s an – what is important for us by the way is that, and that’s the way we see our business moving at this moment that the underlying, let’s say business is stable or at least showing the first – let’s say signs of the work we are doing in the improvement of our US rollout of our customer proposition and I think that’s for us very important the turbulence on our market basket that’s something I would say extraordinary.

What we have to look at is, are we in most of our other markets with the rollout of our programs and that takes time. We know that we have seen that in the past when we do all these, say repositioning and repositioning works and the improvements we do in the customer proposition, that takes time. And there, I think, for us at least that we see the stores which are early in the program we see at least encouraging results. Jeff, something about capital?

Jeff Carr

Yes, on capital, I’d expect we will come in slightly below the guidance that we gave at the time. So slightly below €900 million, I’d expect the capital expenditure to come in at. And in terms of net debt, I expect an overall net debt to EBITDA ratio to continue to move towards the two times level towards the end of this year and net debt will be impacted by obviously the timing of the repayment which may be at towards the end of this year or early in 2015.

So it will depend somewhat on the timing of that payment. But it won’t change significantly. I don’t see a significant change by the end of this year relative to the end of quarter two. So I think it will – so it will be around a similar level, but it would be impacted by the time on that repayment.

Fernand de Boer – Petercam

Okay, thanks very much.

Operator

The following question is from Mr. Edouard Aubin from Morgan Stanley. Go ahead sir.

Edouard Aubin – Morgan Stanley

Yes, good morning guys. Just three questions on the US specifically. When you look at the US at your internal as well as your third-party surveys, are they showing any improvement or deterioration in your price perception looking at your different banners?

Number two, when you look at the DC and Baltimore markets, it looks like they’ve gotten a bit more competitive, could you just maybe elaborate briefly on the dynamics in the market which retailers are accelerating their expansion there? And finally, I think you made some comments this morning about the potential US acquisition, if you could maybe elaborate on that as well?

Dick Boer

Okay, thank you, Edouard. First of all on price perception, we always know that price perception is the most difficult one to change. So the perception of – what we have seen and noticed by the way with all the activities we do and with the consideration of activities because it’s a plan which is continuing to – let’s say, add new elements to it.

That clearly starts, let’s say, giving customers at least a perception improvement. It’s slight, it’s not big, but at least we see that the customers start noticing that we lowered our prices and that we improved our let’s say total offering in a way. There is also numerous presentation, more mass, so more boxes, so help also to show to the customers that let’s say the prices are good in the stores.

That’s why it’s a combination of presentation, merchandizing and pricing and communication in the store. Then on the DC markets, yes, you are right, it is one of the most expanded market in the US for ours, and expanded I mean, expansion. So, to my belief I think, we know this 50 extra stores over the last one-and-a-half year in the DC market.

So 50 is a lot. And over all different formats, from Wal-Mart, new Wal-Mart to Wal-Mart expansion to supercenters from new Harris Teeters to Wegmans. So, that clearly has given some pressure on our market share, because we didn’t opened, on the contrary, we closed two stores.

On the other hand, I think with the new leadership we have in place in Landover the commercial program we are now rolling out, all the aspects. I think we are in a good position, although and we all know that – of course the acquisition of Kroger and Harris Teeter will also make the market more competitive. So we continue to have to move on and that’s certainly what we have taken up.

In the DC market, I think on the US acquisitions, I never speculate on that during calls like this or whatever. If there is anything to mention we will certainly will do that, but what I said I think in the call this morning was, we are always open and looking at opportunities everywhere, small, bigger, but clearly, focused on three elements where we think we are good at supermarkets, convenience and align, in the market, adjacent markets, as you know is our strategy and principle.

Edouard Aubin – Morgan Stanley

Okay, great. Thank you.

Operator

The next question is from Mr. Robert Jan Vos of ABN Amro. Go ahead sir.

Robert Jan Vos – ABN Amro

Yes, hi, good morning. I have two questions remaining, concerning the rollout schedule you mentioned in the presentation, you expect to rollout to about 150% of the stores, it implies more than 384 stores and it could suggest a bit of a deceleration in the first half.

Is that a fair assumption? And if so, why would you decelerate the program? That’s my first question. And my second question relates to the SPAR acquisition. Do you still expect some €50 million in one-off expenses for the integration knowing that you on boarded slightly lower number of stores than previous year? Those are my questions. Thank you.

Dick Boer

Yes, Robert, thank you very much for your questions. First of all the rollout is certainly not decelerating what of course is important in the US market we have to be careful in the last quarter, because that’s the timing of all the events as you know, the Thanksgiving, Christmas, that’s not the timing which really helps to rollout further.

So, that’s why you will see clearly further rollout in the third quarter and it might certainly be very limited in the fourth quarter where we will end up everything off the repositioning or improved commercial proposition during the first half of next year. So no deceleration, nothing about that we are happy with the program and we also believe it’s important to continue to rollout. On the SPAR one-offs, maybe Jeff, you want to say something about it?

Jeff Carr

Yes, I think, €50 million is the number that we gave guidance to in terms of the total one-offs, most of which will be in 2015 and however, I said, that will be the top end of the estimate, if anything come in slightly below that and it depends really on the decision still to be taken on the portfolio. So, it’s something which I would say would be the top end of the number and we may come in slightly below that number, but 50 will certainly be at the top-end of the guidance.

By the way Robert, as we were at the end pleased with the outcome of the anti-trust. So, we are anticipating something, but clearly we are happy with the outcome at the end of the day.

Robert Jan Vos – ABN Amro

All right. Thank you. Very helpful.

Operator

The following question is from Mr. Jaime Vasquez. Go ahead sir. He is from JP Morgan.

Jaime Vasquez – JP Morgan

Hi, thank you. You alluded in the Netherlands to a price perception problem, but not a price problem. I was just wondering if you plan to take any actions to improve your price perception, perhaps, we think your balance of promotions versus shelf pricing? Second question is on the US program, I was wondering whether you can be a bit more specific on – you referred to encouraging results, what do you mean by that.

The 190 stores that have moved into this program by the end of the first quarter, did they deliver positive identical sell-through for example? And finally, the Peapod and your warehouse in New Jersey, perhaps a bit of color on the level of automation of the facility and the impact it could have on Peapod’s profitability. I understand that Peapod doesn’t make any EBIT, will this warehouse that will double the capacity of the business make any impact either in the short-term or in the medium-term earnings profile of Peapod? Thank you.

Dick Boer

Okay, I will take myself the last and the first question, maybe Jeff, this time you could tell something about the US program in between. First of all, I think on the Peapod side, we invested and we announced it also around €60 million that makes that it is really an investment in a well – let’s say, location but also in automation.

We call it semi-automated, so there is a part is really, let’s say, the customer in a way where people have an easy way to fill the basket towards the customers. So that’s something which is clearly automated.

So a big part of our dry groceries is in automated warehouse where it can really accelerate the volume you would like to get through, through a warehouse like this because, in tradition, and that’s most of the time, is the traditional warehouses we have for instance in the Netherlands, the limits at the end of the day, the capacity is the number of people you can have in between the racks and that’s not the case in this case.

So, here we have the opportunity to really build huge volume which specifically is also important for the New York market, because that’s a dense populated market. There are millions of people living in the areas, the suburbs, Manhattan. So that’s where we really believe business cases for semi-automation could really be beneficial for our business where in a lot of other cases, the distance is more applicable to the business case.

So then you more open warehouse or you open small DCs, small warehouses in a way as we do here. So then it’s more the distance for the customer which plays a role. On the promotion element of the Albert Heijn, I think, what I mentioned also is that, if you look at blended promo impact and the shelf price that the distance and the price comparison of a basket of products you buy at our major competitor and Albert Heijn that it would be almost similar.

We already lowered our promo share by the way versus last year, because one of the things of course, the more promo you do the less visible your prices and price comparisons will be. So if you look back a year ago and today, we have lowered our promo share in the Netherlands.

That of course has an impact and might have also one of the causes of the impacts of the first half year sales we got up, but on the other hand, it is a way, at the end of the day to focus more on shelf price to have clarity for the customer, this is the price of a product versus, let’s say more everyday low price operators we have in the Netherlands like the discounts and of course our major competitors in the Netherlands, which and the supermarkets who were doing, let’s say more everyday low than high low.

So, that’s why we have to be very cautious in that. And at the end of the day to create perception customers, yes, need to see that in the basket they buy and in comparison they can make with others. Then, maybe, Jeff you want to say something about the rollouts of our programs there in US, right?

Jeff Carr

Yes, I’d say certainly, when we look t the performance of the stores launched in 2013, we do see and we have been seeing some encouraging signs and I hesitate to give specifics at this stage in terms of volume and sales of this, but that was encouraging enough for us to make the decisions to accelerate the rollout throughout the network in 2014 and we finish, as Dick mentioned in 2015.

I think it’s a little too early to talk about the 2014 stores, obviously, on a more limited basis with less competitive reaction, you would expect the early stores to show the biggest improvements.

I would expect as we go through the course of this year, rather than Q3 or Q4, we will get into more specifics about what we see. But I think it’s a little too early to talk about the 2014 stores most of which were launched towards the end of Q1 and really hardly at a time to go through a full quarter’s performance.

However, in current trading, we do see some slight improvement and we are – we do remain encouraged and we will continue to push forward. So we are still seeing some slight improvement in the current performance in terms of the current trading even if we try to factor out the uplift that we are seeing on the benefits of market-backed which we mentioned, which we will talk about earlier. So, all in all, we remain on track. I think we do need to get into some specifics.

Dick Boer

As I said, we purport lowered a bit our promotion share versus the last year, that’s also because we had some mix effects from different times. Promotions which we finished. Clearly, I don’t see any reason to go further down. I think it is more balancing the promotion effectiveness and intensity of the promotion to the customer that is clearly attract customers to get them to store which is important.

Jaime Vasquez – JP Morgan

Thank you.

Operator

The following question is from Mr. Marco Gulpers from ING. Go ahead sir.

Marco Gulpers – ING

Yes, good morning gentlemen. I’ve got three small follow-up questions. The first is on the US. Can you help us out a little bit, you mentioned in the first half there is a divergent trend between TPI that is – and CPI is more competition, having an effect that should be on your margin there.

What’s exactly TPI versus CPI trends do you expect in the second half of the year? The second question is on the basket side, specifically in the Netherlands, it looks like the K. S. Scott data highlight a little bit of a trend change in July where the average ticket spend is actually up.

Should we see this is a first glimmer of light changing or is it a way too early to tell? And the last question is, you referred to the Netherlands where promo spend is down, Could you also update us on Belgium. Do you see a change in the competitive environment there and is there a reversal taking place in Belgium? Thanks.

Dick Boer

Thank you, Marco. Jeff will come back on the CPI and the meat and dairy, maybe the GFK data, we haven’t seen much light on the changing – let’s say much big changes on the basket side of our customers still now. I think it is still lower than last year. We haven’t seen that summer has changed a lot, I would say, so, I think it’s still early to say anything.

Second on the situation of the promo share. There is not a big change in Belgium or the Netherlands, we in principle have the same type of activities. Of course, adjusting some of the promotions to the Belgium market, we’ve seen continuous of course, competitor reactions on openings and I think clearly I think this is also from the media reactions of the reactions of our competitors that they are much more watching now us. But I can tell you that, we still have a lot of customer traction.

Jeff Carr

In terms of CPI we saw some easing of the gap in Q2 though it wasn’t fully reconciled. However, I would say, we are cautious about Q3 and the rest of the year, because again, we saw some spiking up of the prices in the – at the beginning of the third quarter. So, all in all, I’d expect that to continue to be a challenge versus as we go through the rest of this year.

Obviously, we are – we look to manage that as carefully as possible, but clearly we need to be cognizant of what the rest of the market is doing in terms of passing on those prices and it is quite a challenging system of category at the moment. But we still continue to see an overall margin impact as we go into the third quarter and I think that will continue through the rest of this quarter for sure and possibly into the rest of the year.

Marco Gulpers – ING

Very helpful, thanks.

Operator

The following question is from Mr. John Kershaw of Exane. Go ahead sir.

John Kershaw – Exane

Good morning guys. Most of my questions have been asked, but just three from me. Just following on from the comment on inflation coming through and your comment that trading has improved in the US.

Can you give us a bit more flavor on what the inflation backdrop is and what uplift you're seeing in ID sales trends, which follows to the second question, because if you're still in negative ID sales territory. Are you doing enough in terms of investment to drive the top-line or are you still too favoring perhaps profit over driving the sales forward, given absolute sales for the Group is still down on constant currencies?

Finally, just coming back to Market Basket. Can you, one, quantify the extent of disruption benefit you're seeing; and two, address the possibility that a bid could be made for Market Basket or, rather, can you bid for the business given the store overlaps? Would it just be too difficult to acquire from a regulatory perspective?

Jeff Carr

Yes, quite some questions John, shall I come back on the trend and we are seeing, I guess on an AIV basis, just under 2%, I think about 1.8% inflation. So we are starting to see mostly driven by meat and dairy, as we mentioned, we are seeing some inflation it’s impacted by market basket we haven’t wanted to quantify that out.

I think it’s a bit too early to – we’ve seen about, I guess five weeks of that disruption and if they have it, I think we will get to Q3, we will probably give some guidance as to how much of that impacted the Q3 results, but there will be a positive impact in terms of the market basket disruption in New England in the third quarter.

It didn’t impact the second quarter. But as we look to – break that our we are starting to see some signs albeit that we are pretty cautious and pretty limited of improvements and we have to see the 2014 stores, that we launched the program into really cycle a couple of quarters before we come back with more specific details in terms of what we are seeing.

Dick Boer

Yes, clearly and I think, we mentioned that also in the call this morning and also now again. When you start cycling in these programs, you continue to have programs coming which always have immediately an effect on because you are lowering prices most – in categories, so you also have a deflationary effect in the first quarters when you start launching these programs.

So that’s why me and Jeff mentioned, if you look at the 2015 stores which is a small sample of stores of course, there you are seeing the volume uplift. On the longer term of course, that investment what you are referring to John, should pay out in sales increases, is it enough.

I think it is, let’s say, if you work in retail, we would never stop continuing to invest in our network although I think that this plan what James has rolled out now it’s much more focused and coordinated than before, so we really have programs rolling in and over each other which should continue to get messaging to the customers that we have good prices, that improves our quality and our offering to the customers.

That’s a bit what we have said in our what we call the good to great strategy for the people, but we will really continue to focus on improving our value messaging, but at the same time, and that’s yes what is the investment and you’ve seen the margin drop for this quarter, simplicity savings at the same time should help us to recover some of these investments we do.

And yes, what the future will bring on that we’ll tell you in the third quarter and what happened with market baskets, I think the lowest speculation in the market about, let’s leave with this I would say.

John Kershaw – Exane

Can you just clarify though, are you – I don't know you can cherry pick stores, but given the seventy stores in your geographic overlap, would that feasibly stop you from bidding for the whole company?

Jeff Carr

I mean, John I mean, if we were thinking about it we wouldn’t be able to comment on it, you wouldn’t expect us to comment on this call.

Dick Boer

Good try John.

Operator

The next question is from Ms. Fabienne Caron from Kepler. Go ahead please.

Fabienne Caron – Kepler Cheuvreux

Good morning. I've got three quick questions on the Netherlands. The first one, can you quantify the decline in promotion year-on-year that you are referring to? And the second question would be, out of the minus 50 basis point margin decline in the Netherlands, how much is due to the diluting impact of BOL in Belgium? And the last one would be, given the like-for-like, which are rather difficult currently, how comfortable are you with the 5% EBIT margin in the Netherlands? Thank you.

Dick Boer

First of all on the promotion, a couple of percentage points, we have been impacted for promotions versus last year. You might recall, we had at that month also what we call a (inaudible) bonus which was couple of percentages of sales of the stores that has been terminated in the second half of last year, so that clearly has changed the promotion share of the Dutch – of Albert Heijn.

The impact on margin of Albert Heijn clearly, of course, as Jeff mentioned, let’s say the growth of our online business and Albert Heijn in Belgium has some pressure on margin year-over-year. But the majority of the margin pressure is more because we couldn’t let’s say pass through the cost inflation into Albert Heijn because the growth is too limited.

So, as we always know, your cost inflation goes up, and you need to offset was a sales increase in your business and that has been as you noticed over the first half year not easy in the Netherlands and with the point Patrick already made in the beginning, yes, if you look at supermarkets itself, they had a negative identical clearly. Jeff, do you want to make some?

Jeff Carr

No, just to reiterate, so, Fabienne, it’s mostly a deleverage issue in this quarter. The impact of BOL in Belgium is lesser than it was in Q1 ended year back in 2013. Obviously as Belgium becomes more interesting from an EBIT perspective, we expect that to continue because of the top-line.

In terms of the outlook for the rest of the year, in terms of margin, we – as I mentioned earlier we don’t see the need to comment on it at the moment we are comfortable with where the market is in terms of the overall consensus and I think I believe it’s around the number that you quoted.

Fabienne Caron – Kepler Cheuvreux

Okay, thanks a lot.

Operator

The next question is from Ms. Sherri Malek from Bank of America Merrill Lynch. Go ahead please.

Sherri Malek – BofA Merrill Lynch

Hi, good morning. Just one question from me. You stated you expected investments to result in an improving sales result, can you be more specific in terms of the timeframe? I mean, can we expect to see sequential improvement in H2? Or do you think the program will take more time to actually see or benefits come through?

Dick Boer

No, I think the statement we made is, clearly that we expect that, let’s say looking at what we are doing that during let’s say, the quarters to come including last year, we expect that our sales will improve and that’s what we expect.

So, I can’t say more about it, which has have been a specific, the trends are positive to that and that’s why we expect that the sales trends will go during the set of quarters to come in an improved trend and we would have said it differently which is also mistaken.

Sherri Malek – BofA Merrill Lynch

Okay, thank you.

Operator

The next question is from Ms. Pascale Weber of KBC. Go ahead please.

Pascale Weber – KBC Securities

Yes, good morning. I've got just questions about Belgium. We see that in the past year that Aldi and Jumbo are gaining primary customers, while Albert Heijn has been losing, then I know that you have been rolling out the basic, to the discount range in an effort to countermine the pressures from the discounters.

Can you just tell us about how successful the rollout of the basic line has been? Is now the sales level similar to the sales level you used to achieve through the EuroShopper? And then, secondly, I mean, I visited some stores in Belgium and I compared the products of Aldi and Lidl with the basic line of the Albert Heijn stores and the price level was similar, it was exactly the same.

But however the appearance was a bit disappointing. For instance, when I give an example of the mayonnaise at Lidl and Aldi was nicely packaged in glass while at Albert Heijn it was in some cheap plastic. So I'm just wondering whether the basic line will be sufficient to defend yourself versus the discounter Aldi and Lidl?

Dick Boer

Thank you, Pascale, and I hope you did also shopping at Albert Heijn at the same time when you visited our store.

Pascale Weber – KBC Securities

I did, I did,

Dick Boer

Okay, thank you. Thank you for that. But first of all, the first question I think, you was very clear, replace EuroShopper mainly with basic and similar sales level as with EuroShopper. So, let’s say the consequence you could say that customers did understand the convergence as simple got the same, I would say the same understanding of basic versus EuroShopper.

On your second question I think, you have a good point there, I think at the end of the day, what you see was traditional our retail environment. We quite often have a free layer model in our branding, so you have the national brand equivalent which is the Albert Heijn brand, you have the EuroShopper basic in this case for the low price entry point and then you have of course A brands and excellent brands in the case of Albert Heijn. But clearly the basic is the price points for customers in our stores.

You basically have on – let’s say the appearance of the product, but don’t forget the appearance of the – all the legal products is the only product that most of the time have in that store. So they don’t differentiate themselves with two or three layer mall, they have a one layer mall.

The discussion I think is clearly that this price point is enhanced for discounts but we would like of course our customers to buy our Albert Heijn brand instead of the basic product at the same time which of course is one of the advantages of the three layer mall. And essentially enough at the long-term, clearly, what you see is that more or less a lot of retailers are, let’s say, looking at what is really the positioning you need to take to the discounters and the basic entry point is good.

But I think at the end of the day, you need to do it not only with your basic entry point but also on fresh, also on the quality of your private-label brands. And that’s I think were you pointed out quite well, a point of depreciation, where all the legal clearly was the price points at this point have an advantage.

Pascale Weber – KBC Securities

Okay, thank you.

Operator

The next question is from Mr. Gerard Rijk of SNS Securities. Go ahead sir.

Gerard Rijk – SNS Securities

Yes, good morning. Two questions. First question is about your free cash flow. You explained already something about year-to-date, but on the second quarter you explicitly mentioned that changes in payables were worse year-over-year mainly attributable to timing, but also some current negative identical sales. Was there anything more in that? And can you maybe elaborate on these trends?

Second question is on the US rollout and some change in consumer proposition. What does it – how many quarters usually does it take time to get better market share because until now your market shares and you mentioned that explicitly are still coming down. So, within your plan, which quarter do we have to expect increase in market shares in the United States?

Dick Boer

Jeff will say something about the cash flow and what traditionally, let’s say repositioning commercial proposition work what you do with that, it will take you minimum two to three quarters, before you start, let’s say seeing it back in improved sales and market share.

So it will take you some time and as I said before, if you see the rollout plan of our business, it will take us, let’s say, till the beginning of next year to do the rollout of our, to the middle of next year our rollout will be finished. So you will continue to see an impact in our – in the markets we operate that we are rolling out it. So, but then at the same time, with the rollout we don’t have the 320 stores, you should see certain moment reflection already back in these stores.

So that’s a bit the mixed performance you will see of course via the rollout plan on one hand, on the other hand, or the quarters, longer quarters in those stores. So that’s why it takes time.

We’ve seen that also in the past developed back at my own Albert Heijn experience, that you take time to get the customers understanding if you price it lower that they buy more in the store and that the volume at the end of the day is also taking the sales decrease you got by the deflation you created by lowering of prices.

Gerard Rijk – SNS Securities

But mathematically, can I ask another question on this? Mathematically, it means that somewhere in the first quarter of 2015 you should see some improvement in total market share?

Dick Boer

Yes, it’s what your statement is, so, I didn’t put the statement on that and so sorry how that, but, we clearly want to see that back that market share start improving again, that’s clear.

Gerard Rijk – SNS Securities

Okay then.

Jeff Carr

And I think that’s the timeframe we should be giving more details and explaining exactly how the performance of the program is developing. Gerard, in terms of free cash flow, we flag that at the end of the first quarter, the benefits of working capital inflow which we would expect to see reverse in Q2, that’s what we’ve seen, nothing more than that.

The overall trend by the end of the half is about in line with where we expect to be which is down versus last year and as I mentioned earlier because of tax somewhat offset by CapEx, capital expenditures. So, I think, the half number is balanced out and is in line with where we expect to be.

Gerard Rijk – SNS Securities

Do you see anything else happening in the payable period?

Jeff Carr

No, no, I mean, nothing of significance there is a change in Czech Republic, but that’s relatively small change for the Group, which was related to local legislation in payment terms, but overall, there is no real change in terms of our payable days in the US or in the Netherlands. It’s pretty consistent.

Gerard Rijk – SNS Securities

Okay, thanks very much.

Operator

The next question is from Mr. Arnaud Joly from Societe Generale. Go ahead sir.

Arnaud Joly – Societe Generale

Yes, good morning, but my questions have been answered, thank you.

Henk Jan ten Brinke

Thank you. Thank you. I believe that was the last question. Thank you very much for your questions and for being with us and we look forward to talking to you soon. Thank you very much.

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