Ahold Delhaize's (AHODF) CEO Dick Boer on Q3 2016 Results - Earnings Call Transcript

| About: Koninklijke Ahold (AHODF)

Koninklijke Ahold Delhaize N.V. (OTCQX:AHODF) Q3 2016 Earnings Conference Call November 17, 2016 3:00 AM ET

Executives

Henk Jan ten Brinke - SVP, Investor Relations

Dick Boer - CEO

Frans Muller - Deputy CEO and Chief Integration Officer

Jeff Carr - CFO

Analysts

Bruno Monteyne - Bernstein

Sreedhar Mahamkali - Macquarie Capital Europe Limited

Matthias Maenhaut - ING

Jerome Samuel - HSBC

Xavier Le Mene - Bank of America Merrill Lynch

Fabienne Caron - Kepler Cheuvreux

Fernand de Boer - Petercam

Cedric Lecasble - Raymond James

Andrew Gwynn - Exane

Borja Olcese - JPMorgan

Nick Coulter - Citigroup

Robert Jan Vos - ABN AMRO

James Anstead - Barclays

Operator

Ladies and gentlemen, good morning, and welcome to the Analyst Conference Call on the Third Quarter 2016 Results of Ahold Delhaize. Please note that this call is being webcast and recorded.

Please note that in today's call, forward-looking statements may be made. All statements, other than the statements of historical facts, maybe forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the interim report third quarter 2016 results, and also on Ahold Delhaize's public filings and other disclosures. Ahold Delhaize disclosures are available on aholddelhaize.com.

Forward-looking statements reflect the current views of Ahold Delhaize’s management and assumptions based on information currently available to Ahold Delhaize’s management. Forward-looking statements speak only as of the date they are made and Ahold Delhaize does not assume any obligation to update such statements except required by law.

The introduction will be followed by a Q&A session. Any views expressed by those asking questions are not necessarily the views of Ahold Delhaize. [Operator Instructions]. Thank you.

At this time, I would like to hand over the call to Henk Jan ten Brinke, Senior Vice President, Investor Relations. Please go ahead sir.

Henk Jan ten Brinke

Thank you, operator. Ladies and gentlemen, good morning, and welcome to our Q3 results analyst call which is being webcasted as well. I'm here with Dick Boer, our CEO; and Jeff Carr, our CFO. And after a short presentation, that is available on our website, we’re very happy to take your questions.

So with that, over to you Dick.

Dick Boer

Thank you, Henk Jan ten. Ladies and gentlemen, good morning, and welcome to our third quarter 2016 results conference call.

We are pleased to announce a solid performance in our first full set of quarterly results, as Ahold Delhaize, since completing our merger in July. These results reflect the strength and resilience of our great local brands, as well as our continued focus on delivering cost efficiencies across our businesses while driving top line growth.

Let me start by taking you through the highlights of the quarter. We saw good sales performance in the quarter with 2.9% increase in pro forma Group sales at constant exchange rate. Our online businesses continued to show strong growth with net consumer sales up 25%.

The trading environment in U.S. remained challenging with ongoing price deflation and competitive pressure in our markets. Our pro forma EBITDA margin was 6.4%, up compared to last year, while the underlying operating margin remained stable, despite increased amortization and depreciation related to the merger. We remain on track with the integration, and I look forward to provide a more detailed update at our Capital Markets Day in London on December 7.

Now let me hand over to Jeff, who will take you through the numbers in a greater detail.

Jeff Carr

Thank you, Dick, and good morning, ladies and gentlemen. I must say I feel very proud to be here with Dick announcing the first combined results for Ahold Delhaize. In October, we published pro forma numbers for 2015 and in the first half of 2016, and today, we’ll discuss Q3 performance largely on a pro forma basis, which makes the comparisons more meaningful.

As Dick mentioned, sales of €14.5 billion are up 2.9% versus last year at constant exchange rates, and 3.3% excluding gas, which is a creditable performance, considering the deflationary environment in the U.S.

EBITDA at 932 million is up 10 basis points versus last year, and underlying operating income at 530 million is up 4.7% versus last year, with steady margins at 3.5%. Operating income at 425 million is slightly ahead of last year.

So on Slide 4, we show the quarterly performance by segment. And if you recall, we’ll report by segments; Ahold USA, Delhaize America, the Netherlands, Belgium and Central & Southern Europe. As you can see, sales growth was strongest in the Netherlands and Central & Southern Europe. In the Netherlands, we had a good performance at both Albert Heijn and bol.com. And in CSE, we continued to see strong sales performance in Greece and Romania.

Operating margins were slightly lower in the U.S. segment and the Netherlands, mostly due to strong comparatives in both segments last year, and margins were stronger in Belgium and CSE.

And now I'm going to go through each segment in turn, very quickly starting with Ahold USA. So on Page 5, we see Ahold USA. Total sales grew 3.4%, excluding gas, and that's largely due to the acquisition of the A&P stores in the New York market in quarter three last year. And obviously we'd be cycling that impact in the fourth quarter of this year.

Comparable sales were up 0.3% and we continued to see deflationary environment with average prices down 0.8%, and that's broadly in line with quarter two, and again largely due to the continued commodity deflation in meat and dairy. Underlying operating margins of 3.9% are in line with the last quarter, but 20 basis points down from last year. And if you recall, last year Q3 was particularly strong with good Simplicity savings and we were seeing stronger gas margins a year ago.

In Delhaize America on the next page, we had a strong real growth of 2.9% and we saw deflation increasing to 1.6% in the quarter, with Hannaford at similar levels to the USA, Ahold USA, but more deflation at Food Lion resulting from the same commodity price pressures, but also increased competitive pricing activity which developed during the quarter.

Underlying operating margins were 3.5% for the segment, up 10 basis points from the first half but down 30 basis points versus last year. And remember, Delhaize America was impacted more than other segments as a result of the pro forma adjustments. And in October, we explained that operating profit margins would be some 60 basis points lower due to the impact of the store divestments and purchase price allocation.

Looking at the year-on-year performance in the pro forma numbers, we had a 30 basis points impact, and that was due to ongoing higher labor costs in 2016, and the fact that the pro forma adjustments in the third quarter were slightly higher than this time last year.

In the Netherlands, sales reached 2.9 billion in the quarter, and we saw a strong growth of 4.3%, with our stores performing well and our e-commerce business continuing to deliver good numbers, up 30% with good growth at ah.nl and bol. Underlying operating profit for the Netherlands was in line with last year at €128 million, however margins were down a little at 4.4%.

Our investments at bol remain on track and are delivering impressive growth. However the investments were more weighted this year in the third quarter, and this combined with the impact of the strong growth of bol, resulted in 70 basis points margin dilution for the segment. In other words, excluding bol, the Netherlands margin was 5.1%, in line with last year.

In Belgium, sales grew 1.7% and comparable sales were up 1.3%. And this was driven by inflation and the good performance in the affiliate stores, while volume growth remains negative in the company-operated stores. While growth remains the key challenge, we are pleased to see continued progression on the margin with good development in the quarter at 2.0% versus 1.1% last year.

So moving on to CSE. As mentioned, sales growth remains strong, up 8.9%, and comparable sales up 6%. In Greece, we continued to take advantage of the market conditions and grow our business and strengthen our brand, and we continue to see strong growth in Romania, while comparable sales were in line with last year in Czech and Serbia. Margins for the segment remains strong at 4.2%, up 60 basis points versus last year, helped by good margin development in Czech and obviously continued margins improvement in Greece.

Looking at free cash flow, I'm now going to change tack a little and focus on IFRS cash flow, not pro forma, since at the end of the day, cash is cash and we need to take into account those items excluded in the pro forma, such as transaction costs. In the quarter, free cash flow was €27 million, down from €230 million last year. Mostly the reduction was due to the increase in the net investments of €146 million.

And while operating cash flow was positive, up €222 million, working capital was down €272 million in the quarter, which is mostly timing-related and is expected to reverse in the fourth quarter. Year-to-date, free cash flow was €567 million versus €783 million last year. Now I'd like to spend a couple of moments looking at the net debt evolution for Ahold Delhaize from Q2, when the two companies were separate to Q3, combined. At Q2, Ahold stood at just over €1 billion, as you can see in the chart, and Delhaize was just under €1 billion net debt.

Now to that, we add the adjustment in value of the Delhaize debt result of the purchase price allocation exercise and that's an incremental €698 million. Of course just prior to the completion date, Ahold returned €1 billion cash to shareholders, and that gets us pretty much to the Q3 net debt position of €3.6 billion. One further point on the balance sheet as a result of the new accounting guidelines, the cash pooling by the former Delhaize, which was previously reported as net balance is now shown gross, thereby increasing gross debt and cash by €990 million.

Obviously this has no impact on the net debt position. So moving on, we've consistently approached view on capital allocation as a balanced approach, investing in growth, returning funds to shareholders and reducing debt where appropriate. So earlier this week, we announced the buyback of a ¥33 billion note, which was due in May 2031. This note was fixed at an interest, annual interest rate of 7.1%, and by buying back, we’re able to reduce our annual interest expense of around €21 million per annum.

And the details of the transaction are shown on this page. So moving onto the outlook. We expect the deflationary environment in the U.S. to continue at current levels through the fourth quarter. Pro forma underlying operating margin for the full-year 2016 is expected to be broadly in line with the year-to-date numbers and slightly ahead of last year. We continue to expect free cash flow of €1.3 billion for the year, and that's after the capital expenditure of €1.8 billion, and the free cash flow is based on IFRS numbers and includes the full-year impact of the Delhaize Group. It includes all transaction and integration costs and the costs of the Belgium Transformation Project and the cash flows from store divestitures. And finally, and on a fairly anticlimactic note, we anticipate the effective tax rate to be in the mid-20s for the full-year.

And so with that, I'll now hand back to Dick.

Dick Boer

Thank you very much, Jeff. And I will get you through some of the business highlights of this quarter, and of course exciting also about the fact that we talk now about the Ahold USA and the Delhaize Americas or the Netherlands and Belgium, so really sharing you the business performance on Delhaize banners and the Ahold banners, make it really one merged company. So looking at some of the business highlights of the Ahold USA first.

The five stores divestitures related to the merger were completed this quarter. Another 10 remedy stores are planned to be sold in 2017. And additionally, announced Richmond stores are being marketed and expected to be sold also in 2017. The program to improve our customer proposition is ongoing, while we rolled out all of our new Produce departments and all our new Bakery departments in Ahold USA. We implemented at the end of the quarter, in October, a new wave of price reductions for more than 1,800 items, heavily supported by store, digital and media campaigns.

And staying in the United States and going through the Delhaize America banners. They have completed all merger-related store divestitures. Food Lion had 142 grand openings after remodeling their stores in the Charlotte market, rolling out its Easy, Fresh and Affordable initiative and improving the fresh perception, and driving increased customer traffic. The previously launched Easy, Fresh and Affordable markets continued to perform according to plan, both in terms of sales and cost.

And great compliments also to our Food Lion associates. They provide great support to help communities into wake of Hurricane Matthew, one of the largest single-storm in Food Lion’s history at the start of quarter four this year. And Hannaford recently opened a concept store in Bedford, New Hampshire, performing well ahead of their expectations.

Going to the Netherlands on the next slide. Sales at Albert Heijn were positively impacted by continued assortment of innovations and improvements with a focus on health. You can see some of the examples on the slide, like the launch of a beverage guide for sodas and sugar and sweeteners, and for our young customers, even make healthy choices more really easy and fun.

Albert Heijn opened also the first 100% CO2 neutral XL supermarket in Purmerend. Albert Heijn-to-Go started the pilots at six high-traffic gas stations together with British Petroleum in the Netherlands.

In Belgium, as part of the Delhaize Transformation Plan, the fourth and last wave of the New Store Organization was implemented now across all company-operated stores of Delhaize, simplifying the organization structure and processes in the supermarkets. With similar focus on how Delhaize Belgium continues to innovate to further reduce sugar, for instance in its own brand's ice cream. And we recently announced that our 13 Red Market stores will be converted to AD and Proxy Delhaize stores.

Let me also share some highlights about Central & southern European business with you. Alfa Beta in Greece successfully reopened the Thessaloniki flagship store after an extensive remodeling, showing overall continued growth. At Albert Heijn in Czech Republic, we ran successful campaigns on storage boxes for Curver and reading books for children, and appreciated by our customers similar to what we are doing in the Netherlands.

Mega Image Romania opened its 500th store, continue its double-digit sales growth and started operation in a new distribution center in the North of Bucharest in September. And in Serbia, Maxi introduced a Super Lunch program to help parents and children make lunch time healthier offering balanced tasty meals in the Maxi stores for kids. So great stories about Ahold strategy going forward in a combined world of Ahold Delhaize with great initiatives in all our local strong local brands.

I would like to also to have some words on our fast growing online business. At bol.com, we continued to introduce new delivery options, including seven day delivery, extended opening hours for next day delivery, and a new option Delivered Today for 300,000 articles across all product categories.

At Peapod, the capacity at our New Jersey facility continues to buildup, meeting growing customer demand, especially in New York City. And at ah.nl, more than doubled one of their three home shopping centers to enable continued strong growth. Delhaize.be launched an integrated ecommerce platform with home delivery, which was very well received by the customers so far.

On the last slide, you will see what we have listed our most important upcoming events for you. We look forward to see you at our Capital Markets Day on December 7 in London. We will provide a further update on our strategic framework, our progress on the integration, and including more details and timing on synergies and guidance on our financial framework going forward.

I’d like now to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Bruno Monteyne from Bernstein. Please go ahead sir.

Bruno Monteyne

Good morning, Jeff and Dick. Three questions from me please. On the U.S. trading environment, lot of discussion about the pricing pressure from Wal-Mart all the dynamics. Is the trading environment still getting worse as the quarters go on, or do you see it getting better now with sort of Trump related inflation? So is it getting worse or getting better again? On Delhaize Belgium, you frequently mentioned that the company fully owned stores are doing worse than the affiliated one. Can you provide some more color on why are the fully owned stores doing so much worse and what's being done about that? And last is on the synergies that you're going after. Any update on the progress of Ahold that's working today talking to suppliers? Thank you.

Dick Boer

Okay, thank you, Bruno, for your question. On the trading environment in the U.S., what we have seen during the year was more deflation and we've seen that in the last couple of quarters. I haven't seen any difference on the competitive environments quarter three versus quarter two. I think competitive environment is clear that is some more, let's say, pressure in the Food Lion market. We've seen that, and we also said that this morning. I don't think that has changed a lot over the last couple of months clearly that Wal-Mart has driven some more price reductions in that market, and at the same time, of course the deflation. But I don't think that really have changed a lot. And on the inflation part. At the end of the day, deflation at this moment is mostly driven by commodities and that will cycle, as we expect, early next year. And it's too early I think to comment on the election of the new President.

On Delhaize Belgium, clearly when you, what I've seen and I have been experienced now also more directly myself, was the big transformation going on in their own stores. Of course it has impact on adjusting the work systems and processes in the new store environment, and that clearly has an impact on the performance of the owned stores. The good news is that the transformation plan has now finished the reorganization or organization changes in the Delhaize stores in Belgium. So we now stabilize, I assume, going forward, the opportunity also to start working with the owned stores on a performance improvement.

And on the synergies. We have been, let's say, working hard starting in Europe. We’re talking with our suppliers. Happy to see that most of the suppliers have now agreed in the discussion we've had about aligning the conditions, certainly here in Europe between Netherlands and Benelux, so that our commercial teams now start focusing from, let's say, harmonizing the deal structure between , in the Benelux, focusing again on driving the commercial discussions for the year to come. So that's good news. And in the U.S., we just started with our negotiation with our A-brands that will continue also in the first quarter next year.

Bruno Monteyne

And so far things are progressing as per plan of what you were budgeting things for synergies. You have no reason to change your views on those yet?

Jeff Carr

Absolutely. This is Jeff. We’re still targeting the 500 million and obviously we'll give you a fuller update on that in December at the Capital Markets update. That is intended to be one of the key subjects that we’ll cover then.

Bruno Monteyne

Thank you.

Operator

The next question comes from Sreedhar Mahamkali from Macquarie Capital Europe Limited. Please go ahead sir.

Sreedhar Mahamkali

Three questions from me as well. First one, in terms of the U.S., it will be very helpful if you can talk to the drivers of gross margin improvement in Delhaize USA, and if you could also comment on the picture as far as Ahold USA is concerned? And the second point. Dick, you mentioned the price cuts of 1,800 items in Ahold USA. Could you perhaps give a little bit more background to this, and which banners and markets you've actually implementing these? And finally to follow-up on Bruno’s point on synergies. You’ve guided for 30 million in the second half. Is that in the numbers that we've seen in Q3, some of it? If you could help with that, that will be helpful. Those are the three questions. Thank you.

Dick Boer

Well, thank you, Sreedhar. I will take just the question on the items. This was clearly focused on the, what’s called the, Ahold USA banner, so Stop & Shop, Giant Landover and Giant Carlisle. It's an event just at the end of the quarter. So clearly it's one of the, what we call, the price improvements launches we do. We did one in April. We've done another one in October to close the gap in a way from shelf price because we've been much more promoting of course as Ahold Delhaize versus other retailers. Let's see if we can close the gap on the shelf price more by, say shifting a bit from promotion to also shelf prices. That's one of the reason we do it in the same time of course to strengthen our position on being ready for the holiday period also at this moment.

On the other two questions, may be Jeff you can take.

Jeff Carr

Yes, there is no change on our view on synergies. But the €30 million this year will be mostly, if not all, fourth quarter. And as I mentioned before, we remain on track for the €500 million. We remain confident about delivering the €500 million. On the gross margin in Delhaize America, I think the biggest impacts are reduced shrink at Food Lion. We've seen some improvements in shrink management and also so with the deflation-related commodities, we've seen reduced input cost as well.

Sreedhar Mahamkali

And Ahold USA?

Jeff Carr

Well, we don't breakout gross margin really by segment, but I think with Ahold USA, margins, total margins at 3.9% is pretty much in line. So I don't believe there is a significant gross margin delta versus the first half.

Sreedhar Mahamkali

Thank you.

Operator

The next question comes from Matthias Maenhaut from ING. Please go ahead sir.

Matthias Maenhaut

Yes, good morning. Three questions also from my side. First one maybe on the U.S. You are lapping the bankruptcy of the A&P stores in the fourth quarter. Could you maybe give a little bit more flavor on how the like-for-like sales are actually holding up in the fourth quarter with [indiscernible] the sales? Then another question maybe on working capital. Could you give a little bit more flavor on the working capital outflow in the third quarter, and also maybe what we can expect for the full-year there? And then maybe a question on Delhaize Belgium. Could you give a little bit more flavor on how the gross margin is evolving there, and if you see any tailwind from the narrowing CPI/PPI spread? Thank you.

Dick Boer

Okay, on your, of course cycle in the fourth quarter really the impact on A&P, because it started in third with the acquisition of A&P and the conversion of stores was mostly an event of the fourth quarter. So we're now cycling our stores acquisition of last year and recycling that clearly in the fourth quarter the stores of A&P were really down, and that will certainly impact our fourth quarter expectation on New York. On the working capital and Delhaize Belgium on the margin, maybe you could,

Jeff Carr

Yes, on working capital, there was no specific stand out event. We just so - payables and inventory slightly worse across several businesses in the third quarter. We normally have a bit worse third quarter and a better fourth quarter, that's the trend. It was a bit worse than normal. And I'd expect that to be corrected in the fourth quarter. So I don't think there is any major issues.

We remain on track, as I mentioned, to deliver the €1.3 billion free cash flow for the Group in the full-year. I think in terms of Belgium, I think the margin improvement that we’re seeing on an underlying margin operating is really coming from the Transformation project, which is really operating expenses and not gross margin driven. I don't think there is a significant gross margin impact or trend. So the improvement that you see year-on-year is certainly coming from the Transformation.

That's the key driver of that, which again is related to SG&A or operating expenses.

Operator

The next question comes from Jerome Samuel from HSBC. Please go ahead sir.

Jerome Samuel

Yes, good morning, Dick and Jeff. First question on the Netherlands. Can you come back on the contribution of online and the impact on the overall like-for-like? And also why underlying EBITDA margin is flat while EBIT margin is down 20 bps? That's the first question. And on Delhaize America, of course it's likely that higher labor cost will continue to impact the margin in Q4, but what about 2017? Are you confident you can have flat margin there? Thank you.

Dick Boer

Yes, we’re not giving guidance for 2017 as you can imagine at this moment.

Jerome Samuel

On December 7.

Dick Boer

On 2016 at this moment. So the labor cost developments, clearly in most cases, we see steadily increases going to higher level of minimum wages. I think it's now aimed to $9, and we believe with our Simplicity savings on one hand, and at the same time also improving our productivity in stores that we are able to offset that. And of course the expectations on long run are, even on a higher minimum wage but that's also on 2020 expectations. So that's further away, and I think we can adjust our business to offset then hopefully also in the long-term.

On the Netherlands, maybe you can say something about the margin impact on online, Jeff?

Jeff Carr

Well, yes, the overall online impact this quarter was a bit stronger than we've normally seen. It was 70 basis points, so ex bol, we were at 5.1%, which is in line with last year. And the reasons I laid out in the presentation, bol and some of the investments in bol were higher in this quarter, pretty much in line with our expectations and our business plans. And also as bol grows, and the strong growth of bol, it becomes a little bit more diluted.

In terms of the EBITDA and EBIT for the Netherlands, I think that's mostly related to some accelerated depreciations, some depreciation costs obtained during the quarter related to some small items which were being replaced and we did therefore the accelerated depreciation came through in the quarter.

Jerome Samuel

Okay, thank you. Just on bol.com, what was the contribution to like-for-like, about 2 points, if we take the overall online?

Jeff Carr

A bit less than that, I think. More like 1.5.

Operator

The next question comes from Xavier Le Mene from Bank of America. Please go ahead sir.

Xavier Le Mene

Yes, good morning, Dick and Jeff. Two quick questions actually from me. Can you give us an update on the market chain in the U.S. for the Ahold part and the Delhaize part, and to see exactly where you are and what you've seen in Q3? Second one, you mentioned actually Hurricane Matthew will have a positive impact on the Food Lion sales. Is it able for you to quantify already what would be the impact in Q4?

Jeff Carr

On the Hurricane Matthew, no, not at this point. I don't think it will be dramatic. There were some considerable costs in relation to food waste and so forth. A lot of that will be covered by insurance. There was no real property damage in this hurricane. It was mostly in relation to food being scrapped, and again a lot of that will be covered by insurance. But it's too early to really give a full input on the financial impact of that.

Dick Boer

And the U.S. markets, on the U.S. the Ahold side, of course the market share improves mainly driven by New York.

Operator

Next question comes from Fabienne Caron from Kepler. Please go ahead.

Fabienne Caron

Yes, good morning, everyone. Two questions for me. First, I would like a remark is to say thank you that you put the inflation in the presentation. I found it very useful. I was wondering as well if you could put your consensus on your website. I think it will be really investor friendly. I've got only two questions. The first one would be on Belgium. Do you have some plan to improve the price perception of Delhaize? And the second question, which may be a bit too early, but should the corporate tax rate in the U.S. go down to 20%, what would be the impact on your Group tax rate, please?

Dick Boer

Thank you, Fabienne. On improving our price positioning, that's something we never stop it. So wherever we are, and certainly also in the markets where what you mentioned, so Belgium, Holland, we continue to try to improve our price positioning by, say, what we call our Simplicity savings and our thinking about improving our efficiencies to return it back into a better proposition to our customers. And that's clearly also something we are facing in all markets, not only specifically for Belgium but in all markets where we operate. And on the tax rate, yes.

Jeff Carr

Yes, a couple of points, Fabienne. Yes, we are considering the consensus website question. I'm not going to say anything more than that at the moment but it is a discussion we're having and Ken is driving that but we've been talking about that.

In terms of the U.S. tax and obviously at the moment we have a high U.S. corporation tax. Obviously if that comes down, then that's a good thing for our overall effective tax rate. So, I look forward to the announcements once the new President takes office, and if there is going to be a reduction in the U.S. corporate tax rate, I think that’s simplification I think of the U.S. corporation tax position I think. That's what people are looking for. Then I think that will be positive for us. But we have an effective tax rate for the Group around in the mid 20s, so it won't be a major improvement but it will certainly simplify things and will help if we have a better environment for U.S. corporation tax.

Fabienne Caron

Can you remind us your effective tax rate in the U.S. currently?

Jeff Carr

We don't publish it by region. That might be a requirement in the future, but we don't at the moment.

Operator

The next question comes from Fernand de Boer from Petercam. Please go ahead.

Fernand de Boer

Yes, good morning. Fernand de Boer with Petercam. I have one question left on Belgium, just [Indiscernible] increase. Could you say something about the competitive environment in Belgium because I assume your inflation is in line with the national inflation, but the inflation at the [Indiscernible] or getting more aggressive?

Dick Boer

Fernand, it’s very difficult to follow you. There is some noise on the phone.

Fernand de Boer

Yes, I think I changed our headsets, so. But competitive environment in Belgium. Can you say anything about that?

Dick Boer

On?

Fernand de Boer

In Belgium?

Dick Boer

Competitive environment?

Fernand de Boer

Yes.

Dick Boer

I don’t think that changed a lot. You see in all markets discount continued to improve the position, but certainly in the markets we are in, like in the Netherlands, we have been able to, let's say, stop the growth is a big thing but at least to mitigate the growth rate of discount, you see a bit the same in Belgium is only a little. On the other hand, I think what we need to do and that's clearly also why we're working with Delhaize Belgium team is how to improve our positioning and if we also can benefit from the merger as a company going forward. But yes, there is not a lot of difference, I would say, this quarter versus previous quarter in Belgium.

Operator

The next question comes from Cedric Lecasble from Raymond James. Please go ahead.

Cedric Lecasble

Yes, good morning, Dick and Jeff. Cedric Lecasble from Raymond James. Lot of questions have been already answered, but I have two remaining. So first one is a follow-up on the Netherlands on this mix between online and offline. Do you think mid-term you could have some scale benefits on your bol.com and particular business, and mitigate a negatively impact as the lower margin on the overall contributions in terms of Netherlands? That's the first question. And the second question related to merger costs already in 2016. Can you update us, you were mentioning €100 million merger costs linked to the merger itself, and some costs linked to the ongoing integration. Can you update us on how much would be in 2016, especially as you said that your cash flow targets were after all the costs linked to the merger? Thank you very much.

Dick Boer

Thank you for your question. On the scale of bol and all online of course, in both cases, building the scale is now important to drive, at the end of the day, the profitability of both companies. And it's more than ever before, I think in online, important to create scale as early as possible that you need to do is the investments we do today. bol will get a billion sales, consumer sales, and get over the billion consumers sales this year. Certainly ah.nl is growing with 30% in the markets. We are by far the number one online food retailer in this market.

Well, scale is important because you have to cover most of the Dutch markets. And if you don't have a scale, it will cost you an awful lot of money. And that's the same for bol. We have to build our scale now to be sure that we can benefit in the long term of a more profitable situation on bol.com. And clearly building that current base is important.

Now the timing, of course of our ambition on bol.com and aha.nl is something we will also address in our Capital Markets Day to talk a bit more about where we are expecting the continued growth will continue, because as we also said in previous calls, as long as we see high growth, it's more important to benefit from the high growth at this moment than to clearly have already a high demand on operating margin. But we will come back on that also on Capital Markets Day in December.

Jeff Carr

Yes, I think the split online, offline in the Netherlands and the impact on margin is something people are going to have to get more sophisticated about, because we don't just measure the business purely on a margin perspective, we also look at return on capital. And as I’ve said many times, the return on capital of our online businesses, where we have much less capital investment, ultimately needs a lower margin to sustain that. And our target is to make sure that we get return on capital on all of our businesses over time.

So I think we have to start thinking not just in terms of margin but also in terms of return on capital. But having said that, we will continue to report the margin of the ah business, the Albert Heijn business on its own as well. And as you’ve seen and we've shown presentations in past meetings, overall the food margins, the brick-and-mortar margins remain very strong. Just very quickly in terms of the merger-related costs, and we will expand on this again at the Capital Markets Day because it is quite a complex situation, especially with the pro forma in the IFRS numbers. But what we, and I think if we stay in line with what we discussed at the last quarter update that we expect around about 140 million of merger-related costs in the second half and that was split between transaction costs and integration costs.

So I think we are pretty much in line with those numbers, but obviously there maybe some variation around it. But generally the number we said for the second half of 2016 was actually 143 million expected cost in the second half of 2016. And again we'll update with any reviews on that in the December Capital Markets Day.

Operator

The next question comes from Andrew Gwynn from Exane. Please go ahead.

Andrew Gwynn

Hi, good morning. Could we go back a little bit on the U.S. You said at the very beginning that the, you didn’t see a marked difference in the competitive environment, but then obviously you’ve mentioned Food Lion seeing a bit more deflation with Wal-Mart maybe cutting prices. And so is there something happening in the Northeast?

Obviously the level of deflation there is markedly lower, maybe actually looking at it all if that, could you just comment on the differential between the cost deflation you’re seeing and the shelf hedge deflation that’s been passed probably. The second question, that’s quite a long first question, but the second question just on remedy. On the store disposals, which obviously you needed to do to get the merger completed, when should we expect to see the proceeds from those? Is that coming in at the very end of this year, or will we see it next?

Dick Boer

Yes, on deflation you see clearly a difference between Food Lion and maybe also the Carlisle area by the way, whereas deflation is, but it's mainly by the way I think Food Lion where, let's say, on all the Northeastern businesses including Hannaford and Ahold USA, it’s around 0.8%. It's mainly driven by commodity deflation, where in the Delhaize Food Lion business, so the Carolinas, the impact of competitors, and what I mentioned was more, we haven't seen a big change of second and third quarter.

We continue to see pressure on the competitive pricing in these markets, but not accelerated by the way in the third quarter. It's similar to the second quarter already where we've seen more impact on shelf prices also and to react also from Food Lion, and that continues in a way also what you see in the fourth quarter continue in the same way.

So that's why you see the inflation. Deflation in the Food Lion division or more or less double of the commodity deflation, and that tells something about what your deflation is in prices, in shelf price, sorry.

Jeff Carr

Again I just reiterate, in the Northeast, we are certainly seeing, I think, input prices and deflation, sales deflation aligned, no major difference, and a bit more pressure in the South of our markets in Food Lion because of the impact of Wal-Mart. In terms of the timing of the proceeds, it will be split between 2016 and ‘17. There was a little in this quarter. But again let's expand on that in a bit more detail in the Capital Markets Day. So there will be these proceeds in themselves were not significant. But there will be, I think roughly, 50-50 split between 2016/2017.

Andrew Gwynn

And I don’t think you have given a number for the proceeds, couple of hundred million, is that unreasonable?

Jeff Carr

No, I think we did give a number. Yes, we gave a number in the second quarter. It's about $174 million.

Andrew Gwynn

Dollars.

Jeff Carr

That was dollars. And that’s excludes the 10 additional stores that we discussed in the Richmond market, the Martin stores in the Richmond market, and that also excludes obviously anything that happens in Belgium.

Operator

The next question comes from Borja Olcese from JPMorgan. Please go ahead.

Q - Borja Olcese

Hi guys. I was wondering if the new guidance for flat or slightly up Group margins imply margins down year-on-year in the U.S. or not? Thank you.

Jeff Carr

Well, I think if you look at year-on-year for example, Ahold USA, we had the impact of the 53rd week, which is quite strong. So if you adjust for that, it probably implies pretty flat margins, and similar for Delhaize under the when you take into account the purchase price adjustments, I think the margins for Delhaize are broadly in line with last year as well.

Borja Olcese

Okay, that's helpful. Thank you.

Jeff Carr

So we are not really seeing margins contract in the U.S. We are still seeing margins again going back to Ahold USA this quarter, we've said all along high-3s to 4% is the sort of margin we like to operate in. Obviously that will pick up as we start seeing the synergies come through in at a bigger place in 2017. But that's the sort of range that we have been operating, and so this quarter is pretty much within that range.

Borja Olcese

That’s clear. Thank you.

Operator

The next question comes from Nick Coulter from Citigroup. Please go ahead.

Nick Coulter

Hi, good morning. Two questions from me, if I may. Firstly on Food Lion. Can I ask about which categories and tiers are seeing the most competitor activity? And could you talk about your price gap versus the competition, and how that has evolved given the pricing action? And then secondly on Belgium. Should we expect volumes to stabilize from here, and then can I also ask if the affiliate store volumes are positive, just to get a sense of the moving parts. Thank you.

Dick Boer

Thank you, Nick. On your first question, if you look at the Food Lion proposition versus Wal-Mart, they kept their positioning on pricing as was previously, so that's why you see more deflation in the Food Lion division. So to keep at least on their major commodities but also - and let's say stable, what you see also own brands is quite heavily used by Wal-Mart and that means there is also an action and activity of Food Lion to continue also reducing the price there. So it's not only in the commodities but clearly also in our brands where they have to react. And our ambition is that we keep at least the same price list as before to continue to be a good alternative for our customers searching for value in the Food Lion division. On Belgium, it's clear that the affiliates continue to see volume growth and it was more driven by our own store network reduction.

Jeff Carr

Yeah, and I mean, we haven't given a specific forecast for Belgium, but obviously we are optimistic that the plan that we've put in place should start seeing improvements. And as Dick mentioned earlier, we’re just through the Transformation plan and we could focus on making sure that we get good growth throughout all of our stores in Belgium going forward.

Nick Coulter

So there is nothing structural that would imply volume should be disruptive from here in Belgium, as you say, you’ve lapsed through it or you've gone through all of the improvement activities?

Dick Boer

Yes, that’s what you expect now. There is a lot of work done by the team, so it’s a big change for the own stores. So there is a new working methodologies and processes and structure, so that has impacted that on stores and that's finished now, so that should lead to improvement going forward.

Operator

The next question comes from Robert Jan Vos from ABN AMRO. Please go ahead.

Robert Jan Vos

Yes. Hi, good morning. I have two questions. First one, can you share with us what your lease adjusted net debt to EBITDA ratio currently is? And considering the PPA impact on net debt, is this still comparable with the 2.0% level you mentioned in the past level where you feel comfortable? That's my first question. And then the second one, technical tiny question on the buyback of the yen bonds. Just to confirm, by value accretive, do you mean that it adds to net profit and EPS, or do you mean anything different by that? Thank you.

Jeff Carr

No, we mean that in terms of EPS accretive. That's what we meant by value accretive. I think on the net debt EBITDA, we will come out with some new commentary around that in December. Where we currently stand is below the target. If you think of the 2 times as an old target, we will look at how we define net debt to EBITDA because we may look at it slightly differently going forward and we'll have to wait until December to hear what we have to say about that.

But the leverage of the combined company in Q3 is still below our old target of 2 times and didn’t significantly changes the result of the merger, both companies were at similar levels. But we'll come back with some much more specific numbers in December. As I said, I think at the moment we’re comfortably below that target. And whether or not we stick with that definition and stick with those targets, you’ll have to wait until December to find out.

Operator

[Operator Instructions] The next question comes from James Anstead from Barclays. Please go ahead sir.

James Anstead

Yes. Good morning. It’s a question, I think, probably for Jeff. You’ve given a much more specific margin outlook comment than normal, saying you were expecting a slightly higher 2016 margin than last year and similar to what you’ve done year to date which seems to imply a fourth quarter margin for the Group of about 3.6%. Now even taking into account the benefit you got in the fourth quarter last year from the extra week, particularly in the U.S., that just strikes me as a bit cautious given you’re up by 24 basis points year to date and you should have the synergy benefits in the fourth quarter, which should be quite visible hopefully. I just wondered if there is any particular pro forma impact as expected in the fourth quarter or any particular market where you would highlight potentially weaker quarter ahead or perhaps an abnormally high starting point in the fourth quarter last year. I just wondered if there is anything particular you’re pointing towards there?

Jeff Carr

No, not particularly. I think in terms of the pro forma, there is a slight increase year-on-year in the Delhaize America numbers but it's not material to the Group. In Delhaize America, it's probably a few basis points. But first, what we've said is, yes, we are comfortable with the full year to be broadly in line with the year-to-date, which is just over 3.6% and that's up versus 3.5% last year, so I think that's a credible performance taken into account last year also had the 53rd week in it for Ahold and we had deflation in the U.S.

We've given clear guidance, and I think that was important since this is the first quarter as a new company. And the numbers are based on the pro forma numbers, which are new to everyone. Additionally as I've mentioned, we had the 53rd week in Ahold last year, and let's say, consensus is in a wider range than we normally see it and that's understandable considering the merger. So we’re not uncomfortable with consensus and I don’t, but I don't really want to get much more specific on the fourth quarter to say we maybe 1 basis point or 2 basis points or a few basis points up or down is getting very specific, which is why we say we are broadly in line.

So there is nothing specific. We feel fine with the numbers as they are in consensus. But 3.6% to 10 or 20 basis, sorry, 1 basis point or 2 basis points around 3.6% is quite a big swing in terms of absolute profitability. So I don't want to get more specific than saying broadly in line with the year-to-date.

Henk Jan ten Brinke

Ladies and gentlemen, this concludes this conference call. Thank you very much for joining or listening in, and we hope to see you all on December 7 in London. Thank you.

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