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Delhaize Group (DEG)

Q2 2007 Earnings Call

August 9, 2007, 9:00 AM ET

Executives

Guy Elewaut - VP of IR and Corporate Communications

Pierre-Olivier Beckers - President and CEO

B. Craig Owens - EVP and CFO

Rick Anicetti - EVP

Ron Hodge - EVP

Michel Eeckhout - CEO of Delhaize Belgium

Analysts

James Anstead - Citigroup

Dan McFetrich - Dresdner

John Kershaw - Merrill Lynch

Fernand de Boer - Petercam

Mark Husson - HSBC

Philippe Suchet - Exane BNP Paribas

Nick Coulter - Morgan Stanley

Presentation

Operator

Welcome to Delhaize Group Second Quarter 2007 Earnings Conference Call.

I now hand over the conference call to Guy Elewaut, Vice President, Investor Relations and Corporate Communications of Delhaize Group.

Guy Elewaut - Delhaize Group - Vice President of Investor Relations and Corporate Communications

Thank you, operator. Good afternoon, everyone in Europe, good morning in the US. Welcome to the conference call concerning Delhaize Group's results in the second quarter of 2007. This presentation contains forward-looking statements that involve risks and uncertainties.

Actual results may differ materially from those stated in any forward-looking statements. Factors that could cause results to differ materially from those in the forward-looking statements are detailed from time to time in reports filed by the Company with the SEC. These forward-looking statements are made as of the date of this presentation.

Delhaize Group assumes no obligation to update the information n contained in this presentation. An audio webcast of this conference call will be available on the Company's website. Delhaize Group reserves all rights to the content of this webcast and this webcast cannot be recorded or authorized, reproduced without prior expressed written consent of Delhaize Group.

Today, we have the following people with us; Pierre-Olivier Beckers, CEO of Delhaize Group; Craig Owens, CFO of Delhaize Group; Rick Anicetti, CEO of Food Lion; Ron Hodge, CEO of Hannaford; and Michel Eeckhout, CEO of Delhaize Belgium.

During this call, we will first look back on our performance in the second quarter of 2007, followed by comments on operations and strategy. Afterwards, we will take questions.

For those unable to stay on the call or who wish to listen to it again, a replay will be available on the Company's website.

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

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Thank you, Guy, and hello everyone. Thank you for joining our conference call. We announced a great second quarter this morning with good sales and even better margin performance despite comparing with a very good quarter last year.

US operations again posted strong comparable store sales growth of 2.8%, particularly driven by Food Lion and Hannaford.

In Greece, Alfa-Beta posted a double digit sales increase for the fifth consecutive quarter, while our Belgian operations realized 2.7% comparable store sales growth, despite a strong point of comparison last year and an increasingly competitive environment.

In the second quarter, our margins continue to evolve very favorably, due to good cost controls, sales mix improvements, price optimizations and inventory management. This was combined with continued vigilance around our price position, including as required, investments and price reductions.

The second quarter was also important because of the successful restructuring of our debt and issuance of an investment grade rating by Moody's. The successful debt tender and refinancing have increased our financial flexibility and lowered our financial and tax charges. The investment grade rating is I believe, a recognition, of the strengths of our Company.

The good performance of the first six months and our many initiatives in the pipeline, make us feel comfortable that we will end up near the higher end of the revenues and operating profit guidance for 2007 that we had issued at the beginning of this year.

While we significantly increased our net profit from continuing operations guidance, and we expect a very solid net profit growth of more than 23% at constant currencies.

I will come back to our operations and the strategic initiatives later during this call. But first, Craig will run you through the financials. So, I will now turn to him, Craig.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Thanks Pierre-Olivier. Welcome everyone. In the second quarter our Group revenues decreased by 0.4% due to the weakening of the US dollar by 6.7% against the Euro. Our organic sales growth amounted to 4.7% compared to a strong second quarter in 2006.

Our key companies, all showed solid sales growth during the quarter, particularly Food Lion, Hannaford, and Alfa-Beta in Greece. Our US sales increased by 4.2% and comparable store sales by 2.8%, based on the continued strong sales performance at Food Lion and Hannaford.

In the second quarter, competition remained consistent, but rational in most of our US markets. We did not notice significant changes in consumer behavior.

Food Lion continued to benefit from its focus on executional excellence across the entire network of stores, from successful market renewal programs and from commitment towards price and promotion strategy. At Hannaford and Sweetbay, there continued to be a strong focus on competitive pricing.

In Belgium, total sales increased by 3.8% with comparable store sales growth amounting to 2.7%. This sales growth was supported by the opening of seven new stores in an environment marked by numerous competitive openings and aggressive pricing activity, particularly by the discount chains.

Our market share decreased slightly, compared to the same period prior year in Belgium, due to a decline in share of the selling space and the sales losses during the planned temporary closing of Cash Fresh stores during their conversion to Delhaize banners.

Delhaize Belgium saw an increase in sales per square meter faster than the market in the second quarter.

Our Greek Company, Alfa-Beta, realized outstanding revenue growth of 13.2% due to a good sales momentum in existing stores and an aggressive store opening program.

For the fifth quarter in a row, our Greek operations posted double-digit revenue growth. This sales dynamics were also evident in Indonesia and Romania, which resulted in an increase of 21.1% in revenues for our emerging market segment.

In the second quarter, as expected, we finalized the sale of our 97 Delvita stores in the Czech Republic and our 132 Belgian health and beauty care stores named Di. Both companies are now combined with other retailers in their markets, supporting their success going forward. While Delhaize Group will focus on the assets that we have with the best growth and return potential for us.

Gross margin increased to 25.5% of revenue, compared to 25.2% in 2006, and several of our companies we realized sales mix improvements. For example, Food Lion increased its private label penetration. And we also benefited from price optimization in some companies and better inventory results in Belgium and at Hannaford.

In addition, in the second quarter of last year, gross margin was impacted negatively by price reductions at Hannaford.

Cost inflation in the US was higher than in recent... sorry, was around 3%, which was higher than recent quarters and generally we were able to pass this through in retail prices. We intend to continue to pass through cost increases, while maintaining our commitment to our targeted price positioning.

Other operating income was higher than in prior year mainly due to the sale of several Cash Fresh stores to independent owners who will operate the stores as Delhaize's affiliates.

Selling, general and administrative expenses remained almost flat for the quarter at 20.7% of revenues, thanks to cost control work and the strong sales dynamics at our operating companies. At Hannaford, the cost reduction program launched in the second quarter of 2006 continued to support margins.

Due to combination of higher gross margin, higher operating income and stable SG&A, our operating margins increased from 4.7% to 5.2% of revenues. Operating profit grew by almost 10% to €248.9 million despite the negative US Dollar impact.

Our net financial expenses amounted to €162.6 million, compared €68.6 million in same period last year. This increase is due to a one-time charge of €103.8 million recorded as result of our tender offer on US$1.1 billion of Delhaize America debt.

The effective tax rate decreased significantly from 38.9% to 27.2% for the quarter, partly due to the effect of the tax deductible charge related to the debt financing in the US.

We also benefited from Company tax reductions related to the exercise of employees stock options in the US and from comparison to a quarter when Delhaize America paid a dividend to the parent company, subject to tax in both jurisdictions. No dividend was paid this year.

The higher operating profit and lower taxes were offset by higher financial expenses and the US dollars weakening, resulting in a decrease of our net profit by 14% to €81.4 million.

In second quarter, we generated free cash flow of €196.1 million. At the end of June our net debt-to-equity ratio was 63.6%, compared to 74% at the end of 2006. This was mainly due to the generation of free cash flow, the partial conversion of convertible bonds and the weaker US Dollar

This quarter, we had a series of events that have significant improved our financial structure and debt profile. The success of these measures has been a welcome recognition by the financial markets of the operational and financial strength of our Group.

Delhaize Group obtained published credit ratings for the first time, achieving an investment grade ratings from Moody's and a BB+ rating with positive outlook from Standard & Poor's. Delhaize Group has now replaced Delhaize America as the rate identity.

With a Group-level rating and debt-cross guarantees in place, we were able to execute a successful tender offer for Delhaize America debt. This operation enabled us to proactively address a major debt repayment of $1.1 billion due in 2011.

We have financed this dept repurchased through the issuance at favorable terms of new debt securities in the amount of €500 million due in 2014 and US dollar issue of 450 million due in 2017. The Euro debt has been effectively swapped in to dollars to maintain its match to associated dollar cash flows.

The new structure substantially improves our financial flexibility and debt profile. It also improves our tax structure and effective tax rate. From 2008, Delhaize Group expects a positive annual net earning impact of more then €18 million at current exchange rates, because of lower financial and tax expenses.

Based on our strong sales performance in the first half of the year, our expectations for the remainder of 2007, we now expect revenue growth for the Group to be near the top-end of our 4% to 5.5% guidance range at identical exchange rates. With US comparable store sales growth similarly high in the forecasted range of 2.5% to 3.5%.

The strong sales and margin performance in the first half of 2007 should also allow us to deliver near the higher end of our operating profit guidance of 6% to 8%.

And excluding the €62.5 million after-tax charge related to the Delhaize America debt tender, net profit from continuing operation is expected to grow by 14% to 18% in 2007 compared to the earlier expected growth between 8% and 12% at identical exchange rates.

Including both the one-time debt tender charge and the results of discontinued operations, net profit of Delhaize Group is expected to increase by 23% to 29% in 2007 at identical exchange rates.

Net finance expenses should be approximately €250 million at identical exchange rate, excluding the €103.8 million pre-tax charge related to the recent refinancing. Effective tax guidance is brought down significantly due to the refinancing, stock option and stock option exercises in the second quarter of 2007, and a US tax refund in the first quarter. The rate is now expected to be between 34% and 35% instead of the initial expectation of around 37%.

We expect our store base to grow by approximately 97 stores, most of which will come on line in the second half of the year, and we should finish the year with approximately 2,573 stores, also taking into consideration the divestitures of Delvita and Di.

Capital expenditures excluding finance leases continued to be forecast at about €825 million, including $755 million for our US business.

With that I will now turn it back to Pierre-Olivier to discuss strategy and give you an update on operational initiatives. Thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Than you, Craig. Our excellent second quarter results build on four years of continued solid performance by the Delhaize Group. During these four years, we have consistently strengthened our businesses and the portfolio of our Company, while accelerating the sustainable growth of Delhaize.

Today, Delhaize Group can look to the future with very differentiated brands, strong market positions and a high profitability. Delhaize Group is well equipped to see new opportunities for growth and face ongoing challenges of our environment, like the current inflationary environment or the increase in competitive activity by discounters.

The basis for our confidence is firstly built on the quality, experience, and creativity of our management teams in every area of our Group.

The second reason for our confidence is the strength of our local brands. The brands of Delhaize Group have a clear distinctive positioning within their specific markets and continue to be reinforced by identifying and answering the needs and desires of our customers.

Let me give you a few examples of what I am talking about. The market renewal program of Food Lion has been a key lever to reinforce its brand in the Southeast of the United States.

In May of this year, we reopened 20 renewed Food Lion stores in the market of Myrtle Beach in North Carolina. Customers reacted enthusiastically and revenues increased significantly.

Currently Food Lion is in preparation in the important Norfolk, Virginia market, where we will reopen approximately 80 stores under the Food Lion Bloom and Bottom Dollar brands, before yearend.

By the end of this year, more than 450 Food Lion stores will have been part of the market renewal program that has significantly improved customer satisfaction about the value delivered by Food Lion in assortment service and prices. Not every Food Lion now has benefited from the continuous improvements, in freshness, service, assortment and daily execution.

Based on the success though of the previous market renewals, Food Lion has identified four markets for renewal in 2008, and they will be Wilmington in North Carolina, Savanna in Georgia, Richmond, Virginia, and Charlottesville, Virginia, comprising approximately 110 stores.

Current plans include a multi-brand approach in markets where the Company's cluster and segmentation information supports the combination of more than one brand in the marketplace.

Another example of brand building is the conversion of our Florida business Kash n' Karry to Sweetbay supermarket. During the third quarter, we will complete the significant task of the physical conversions into the Sweetbay brand, which we started in late 2004.

During the second quarter itself, 13 Kash n' Karry stores were converted and before the end of September, on schedule, the seven remaining stores will be completed, allowing the local management team to focus exclusively it's energy and resources on building the Sweetbay brand.

As a result of our continued efforts in improving the impact of our conversions, the stores that were recently converted have performed very well with double digit sales growth year-to-date, post conversion and have done so with a lower average cost per store than for earlier conversions.

A learning process has been obviously the balancing act between our quality and price messaging for the new Sweetbay brand. A few weeks ago, we launched a major price initiative to improve consumers price perception of Sweetbay in the currently, highly competitive Florida marketplace.

Brand building does not happen overnight and demands hard work and regular adjustments to market realities. We are encouraged that the initial response to the new initiatives has been positive, but we recognize certainly that there is yet much to do and accomplish in order to reach profitability.

Our confidence for the future is also the outcome of our relentless focus on innovation, and differentiation, both being essential elements to stay ahead of the game. One good example of our strength in this area is our private label offering. Private label products can be a major contributor to brand differentiation and great value for consumers.

In the US, our different companies continue the rollout of a common three-tier private label offering, including a value brand called Smart Option, on the other end of the scale, a premium brand call Taste of Inspirations, and of course, our house brand in the middle.

In addition, we launched the common Healthy Accents for health and beauty care products and the Home 360 brand for general merchandise products among our US companies.

Our European companies rolled out a second pan-European private label line, this one for beauty care and general merchandise products, we call it Care. Delhaize Belgium is now offering 140 Care products. The 365, the other pan-European private label line, 365 value line, continued to grow in importance and currently represents more than 3% of our sales in Belgium with 420 SKUs.

Another corporation between our European companies has been the very recent rollout of a range of more than 50 Greek products from Alfa-Beta into our Belgian stores, recognizable under the authentic Greece logo.

Healthy eating and of course healthy lifestyles are another focus point for innovation and differentiation at our operating companies. In the second quarter, Hannaford initiated a new Guiding Stars store to a program, but also reached out to Child Care centers and the medical community to raise awareness about the value of Guiding Stars in stimulating healthy eating habits.

Our US companies also introduced the renewed and extended Nature's Place range of natural and organic products. At Hannaford, this category already represents now 3500 SKUs or 10% of the total range of a typical store.

In the second quarter again, Hannaford become the only full range supermarket operator in the Northeast of the United States to be certified as an organic retailer in recognition for its outstanding efforts in providing organic and natural foods... natural food product.

Another example of our focus on innovation and differentiation is Food Lions industry leading customer segmentation work. This year, it is implementing specific learnings from the previous work in this area, and will do so in approximately 200 of our stores.

This includes changes in assortment, pricing and promotions, and merchandizing initiatives in grocery, produce, meat, daily departments. In addition, targeted training is provided to associates to better serve the identified customer segments.

In building our brands, the innovation and differentiation initiatives actually require healthy margins to fund those investments. Continued focus on cost discipline and gross margin opportunities are therefore crucial to allow us to remain price competitive in our operating companies, but also to offset structural cost increases and to grow our profitability.

Delhaize Group's management teams are committed to work on both, the quality and the sustainability of our gross profits, with tools like price optimization, better sales mix, private label, inventory management, and state-of-the-art systems. Within all of our companies, we have now form and efforts in place to improve productivity and avoid unnecessary costs.

Hannaford launched in the second quarter of last year, you may remember, a major cost reduction program.

More recently, it has begun to rollout Computer Assisted Ordering or CAO for half of its SKUs at 108 stores so far and certainly targets 140 stores or pretty much the entire chain to be equipped with CAO by year-end. We anticipate that the reduction in out-of-stocks will have a positive impact on sales and CAO should also lead to a meaningful reduction in inventory.

Food Lion also continues to improve its replenishment system, reducing cycle times and out-of-stocks. In Belgium, Acis starts to impact positively our business delivering actionable data to our store operators and buyers.

The ongoing cost reduction programs and the many initiatives supporting our margins, enabled our operating companies to continue investing in their price competitiveness.

In the second quarter, as an example, Delhaize's Belgium resumed it's presence in the national newspapers, particularly highlighting fresh products, and at the end of July we continued to improve our price position in Belgium against our major competitors, despite the more aggressive competitive environment.

Food Lion remained committed to its targeted price position, even in the phase of increased competition and this has enabled us to drive robust sales growth in the second quarter.

Hannaford, recently refocused its price efforts on the New York markets to support its dynamic growth in that region.

Our last point supporting our confidence in our future is the added value of Delhaize Group to each of its brands and the way we leverage our scale and our diversity across the group.

Major systems and proven IDs such as Acis or the successful private labeling, home meal replacement program are transferred to the operating companies and all these is leading to efficient standardization across the Group, and of course new projects are developed in common.

The roll out of a common private label program for all of our US operating companies, sourcing initiatives and platforms, the roll out of Acis on both sides of the Atlantic, the active exchange of management talent within the Group, all contributes to the increased value of Delhaize Group.

Let me conclude, during the last year Delhaize Group has consistently strengthened its store formats, its systems and processes, and its management teams, making us one of the most profitable food retailers in our industry. Our continued strong results including these of the second quarter validate this strategy.

So, we are now available to take questions. And at this time I will turn the program over to our conference call operator who will give you instructions for asking questions. Thank you. Operator?

Question and Answer

Operator

[Operator Instructions]

Our first question comes from the line of James Anstead. Please go ahead announcing your company name and location.

James Anstead - Citigroup

Good afternoon. It's James Anstead from Citigroup in London and I have just got three quick questions, if that's okay. Clearly, you've had a very, very strong quarter in the US in the second quarter of the year, particularly in Northeast and Southeast, but... although, this is our second quarter conference call.

Can you just perhaps give us any idea whether if those conditions have changed, particularly in the third quarter so far, now we are five weeks in, probably this is the first question and than just two other quick technical ones for Craig.

Firstly, I know it's a small thing... your corporate cost have doubled year-on-year that perhaps related to the restructuring cost and that's been treated or whether that's something that's going to continue.

And finally, you have talked about now delivering EBIT growth of towards the top-end of the 6% to 8% range. But even if 8% growth for the full year that seems to be implying a slowdown from almost 12% in the first half, down to round about 4% or 4.5% in the second half?

Looking at your figures from last year it doesn't seem the figures would dramatically better in the second half of 2006 and the first half. So, can you just remind me of some of those factors that you are expecting to cause your earnings to grow a little bit more slowly in the second half of the year?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Okay. Thank you, James and let's perhaps handle these in order. And obviously, we are not going to make concrete comments about the current trading quarter. But, it's obvious that we continue seeing inflation and that we are looking at the other elements in the US from a macro economic point of view that could impact our consumer behavior going forward.

I will ask Rick, and Ron who are on the call to make some specific comments about what they see in their environment.

But generally speaking, we have walked out of a very robust quarter and we feel well equipped with the commitment to our pricing strategies and the other initiatives we have in the pipeline, the convenience of our stores which is a good tool to have when consumers look for convenient alternatives.

And we feel in a good position as well beginning this quarter. Perhaps, Rick and Ron would like to add specific comments about their own markets.

Rick Anicetti - Delhaize Group - Executive Vice President

Yeah, generally speaking, I absolutely agree with everything Pierre-Olivier has mentioned. As we look across our Food Lion, we had strong robust sales across all of our divisions and I would say that, that continues as we... we've only been five weeks into this quarter.

I think what Pierre mentions though is worth repeating, there are number of economic factors that are sort of starting to play themselves out, and how they impact consumer behavior is yet to be seen.

We haven't seen really anything significant at all in the last five weeks and those are obviously the housing market being driven by sub-prime lending, fuel prices that continue to remain high, and what impact passed-on retail increases are going to have on consumer behavior. But, in the short five weeks we continue to see pretty strong results.

Ron Hodge - Delhaize Group - Executive Vice President

And... this is Ron. I would add to that, in the Northeast we are seeing very little change, if any, in the beginning of the third quarter in relation to competitive activity or other economic factors.

In Florida, Pierre-Olivier mentioned pricing activity that was evident from competitors, and along with our own aggressive pricing program in the second quarter and those things are continuing in the third quarter as well.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

And I will ask Craig may be to take the second and third questions.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Yeah. I think I'll do them out of order actually, because the way Ron and Rick and Pierre-Olivier just addressed the start of the third quarter its may be a good place to finish off and talk about the forecast for the second half.

You are right, the application is that our operating profit would grow at a slower rate in the second half of the year, than it has in the first. I think it's worth pointing out, that we are not looking for very much change in the rate of topline growth, first half to second half.

So clearly, what we are saying is that we have may be... don't see quite as robust an expansion of margin in the second half. Part of it's because we are cycling a somewhat better half from last year than we just cycled in the first half of this year.

Part of it is some of the caution that we have ourselves around exactly where the consumer is and what the impact that some of the things that we just talked about here might be.

And then finally, I think it's just our absolute commitment that we are going to keep our topline healthy. Even potentially, in a more difficult environment both from the competitor and potentially from the consumer, and so I think that's where we are; and we feel good about having moved up our guidance at the operating line to the top end and giving you some new guidance.

It lies below that now that we have some of these one time things behind us. And we are looking for, really strong year at the net profit line in total.

On corporate costs you are right, just about doubled in the second quarter. I think in terms of thinking about what the year might look like, you should look more at the first half. We are still up a lot, but it's not double, it's about 40% increase.

Most of that increase is driven by systems work on our common European platform and ultimately those will be cost and charge that get built into systems that are shared across the European businesses.

And just a final reminder then, in terms of our total corporate cost versus the size of the total Group organization, I think we are still probably well down at the lower end of corporate costs. But that's what's driving that, it's really... it's IT work that will ultimately for operational IT systems for the most part.

James Anstead - Citigroup

Okay. That's very helpful. Thank you very much.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Thank you, James.

Operator

Thank you. Our next question comes from the line of Dan McFetrich. Please go ahead announcing your company name and location.

Dan McFetrich - Dresdner

Yes good afternoon everyone. Dan McFetrich here from Dresdner in London. Can I just ask a little bit more please, to you Craig, on the '08 expectations for the tax rate and the interest costs? Given today, obviously you have moved both of them up in terms of a lower interest charge and also a lower tax rate. Can you give us more feel for your expectation for '08 on those two?

And secondly I was just hoping to maybe get some more details from Rick on what's going on with the Wal-Mart in particular in Southeast. And also maybe the non Wal-Mart competitors in terms of the traditional supermarkets competing against Food Lion, have we seen anything change there in Q2? Thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Alright.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Yeah, on the first question, we are not going to go too far down the road of '08 forecasting here. I think the only thing we have pointed to is to say that our... the combined tax and interest benefit from the refinancing going forward in '08, it will be around 18 million.

But since we don't have operational forecast out there for '08, we don't have the mix of profitability, I don't want to forecast the tax rate at this point. Certainly, we will do all of that in due course, but I think if you look at where the run rate was and take into account the refinancing, it will be about 18 or so million better next year than we were prior to the refinancing.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

So, Rick?

Rick Anicetti - Delhaize Group - Executive Vice President

Yes, a couple of things on Wal-Mart. I said... I would say at the highest level, what we've seen across the US is a portfolio approach, where Wal-Mart is not pricing in a uniform way across all of its geographies.

And obviously, as they do that, we find opportunities ourselves, to sort of mirror that and bake-up for any reduction that we have to have in other operating areas.

They have been a little bit aggressive at the end of the second quarter and a bit into the third, in terms of some new advertising that they've been doing, that is a little bit uncustomary for them, from a historical basis.

And they have had a fair amount of press around thousands of prices that they've reduced, most recently, here in the back-to-school season and what we found is, that was very little comparison between us and what they sold, mostly clothing and back-to-school items that we would not carry in our stores.

And that perhaps, the biggest impact that we've seen over a number of weeks has been in the area of what we've called critical item.

I think we've spoken with the Group here before about four levels of items that we place into different buckets when we do price checks and review pricing and analysis and critical items are about eight items that we believe customers recognize quite well.

And they seem to have been focused on two of those and we've made the corresponding changes that we needed to, to remain competitive and continue to see positive transaction growth.

Dan McFetrich - Dresdner

Okay. Great. Can I ask as well about the other competitors, normally more competitors, Rick, is there anything going on there?

Rick Anicetti - Delhaize Group - Executive Vice President

Really no significant change in Q2 to what competitors were doing prior to that time period.

Dan McFetrich - Dresdner

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of John Kershaw. Please go ahead announcing your company name and location.

John Kershaw - Merrill Lynch

Good afternoon gentlemen, John Kershaw from Merrill Lynch in London. First of all, just a follow-up on James's question on the corporate costs. I think, I understood, Craig that you have said... were you saying that the trend in the first half of 40% is a better trend for the full year.

Though you were actually saying that once the costs are fully borne, you push those down into the individual operating channel. So that would still to be too strong a growth. That's my first question just for clarification.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

40% for the full year is probably about right. I was just trying to make the point that the actual work that's going on, is work that will eventually translate itself into systems that will be used operationally and... but I think for the year '07, the trend line to look at is around the 40% increase.

John Kershaw - Merrill Lynch

Okay. And then on to the operations in the US, and absolutely, a very good performance. But being an [inaudible] wouldn't be right, and I didn't try and push you for more. In terms of the 2.8% comp store sales, clearly a good performance especially given the very tough comps, about 3% cost inflation you have been passing through.

So it's directionally it is very little in the way of volume increase. I suppose, this direction, is that something you are comfortable with and going into some of the detail. And Rick, also you referred to some of the local pricing this Wal-Mart is now engaging in.

Just to get comfort, that very much you still are on the price message and there isn't a risk overtime as we've seen with the retailers that you end up locally profit maximizing, rather than really doing the right thing by the customer. If you could just perhaps comment in on those for probably Hannaford and Food Lion please.

Rick Anicetti - Delhaize Group - Executive Vice President

Well, I think from a pricing perspective that is the major plank that we stand on at Food Lion. We are very aggressive in understanding what's happening in each of our price zones.

And so price max... a gross margin max... maximizing gross margins for the interest of profitability at the expense of sales is clearly not a direction that we are headed in.

We have strategies in each one of our price zones against both primary competitors, secondary competitors and Wal-Mart, and we are very aggressive in making the choices and decisions that we need to in order to remain competitive in that respect.

Ron Hodge - Delhaize Group - Executive Vice President

John, I... this is Ron. I would also add that in the Northeast, relative to Wal-Mart, their recent pricing has actually gone up not down and has given us a little cover if we choose to take it. We also have to look at competitors... the regular competitors in the marketplace.

I think everyone knows that Stop & Shop has been on a conversion program for several months to more of an everyday low pricing program. So, we take that into account as well. And the sum total of this is we have been able to grow our market share across the Northeast fairly regularly and it happened again in the second quarter

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Yeah. I would say that the point here is that we have a... obviously a very healthy operating margin and we are totally committed to maintain our price competitiveness, and above the price competitiveness to continue investing in the development of our top-line through other innovation and differentiating initiatives.

The launch and the rollout of Guiding Stars include a number of marketing initiatives, and in fact already 25% of our customers at Hannaford do tell us that they are buying more as a result of the Guiding Star navigation system.

The roll out of common private label system, where the upper tier, the value tier, all of that contributes to continued building the health of our top-line and we are absolutely focused on that.

John Kershaw - Merrill Lynch

Okay. Then just one final one... perhaps Pierre that you can answer it, because to give you the positive side of my question, clearly things are going well. The US... perhaps than the European markets is less perhaps like-for-like driven in the weighted number.

Therefore, can we perhaps expect some acceleration in new space contribution on the sort of one and two years you... to really keep the momentum going?

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Well, I would say that generally yes. Clearly, we have done that in a pretty aggressive way at Hannaford in the last... some of the last years. But, it is certainly our intent as we move forward to accelerate our store opening program at Food Lion.

We'd focused our attention in the last few years on really strengthening the foundations with all of the initiatives that you know very well. But, we see that we have opportunities in our markets, in adjacent markets.

You have seen our new entry in Greenville/Spartanburg and we believe that we have opportunities to accelerate the store opening program at Food Lion and that will be built in our plans for the future.

John Kershaw - Merrill Lynch

Okay. Thanks very much, guys.

Operator

Thank you. Our next question comes from the line of Fernand de Boer. Please go ahead with your question, announcing your company name and location.

Fernand de Boer - Petercam

Fernand de Boer from Petercam in Amsterdam. Good afternoon. I had a couple of questions. First of all, if you look now at your financial position it has improved quite a lot and also next year it might improve further.

Could you say a little bit about what your targets are there and at what moment in time would you decide to raise your dividend payout ratio for even more to buyback shares, that's my first question.

And than on the second one, on the competitive situation, you are mentioning that the discounters are getting more aggressive. Is that something what you would expect continue in the next quarters or is it also due... you have lost some market share due to weather conditions?

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

I guess you are referring to Belgium for that second question?

Fernand de Boer - Petercam

Yeah, correct.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Okay. So... well, Craig may be you can talk about the first question.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Well our financial position has strengthened. We would like to go ahead and push over the line and have a unambiguous investment grade rating. Right now we are... as I mentioned it we are split rated.

The dividend policy as expressed by our Board is to look for a steadily increasing dividend as we increase our performance over time, retaining adequate resources to grow the business and I don't see... I don't foresee us changing that. But, just to be clear... I mean it would require policy change for us to do something different with the dividend.

With respect to buyback, we buyback a small number of shares now to support the... support the stock option program, it's conceivable that we would expand that a little bit to more nearly neutralized the stock option program. But, again, beyond that I don't see... I don't foresee a policy change that would get us in to a large buyback program.

Our grade preference is to use the flexibility and the strength that we have to fuel our growth rate.

So, we look at both things and if we feel like we don't have ample opportunity, as we think we will, to use our resources to grow the business than we would start thinking about some of those things that you just mentioned. But, I think right now we'd be more focused on using additional flexibility to find greater growth.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Okay. I will turn to Michel Eeckhout, our new CEO of Belgium for the second question. I realized that he is just been appointed, but it's never too soon dive in.

Michel Eeckhout - Delhaize Group - Chief Executive Officer of Delhaize Belgium

Just to answer on your question, market share decrease is not only due to higher... hard discount activity, but also it's slightly due to competitive openings and temporary loss of sales related to the disruptive impact of the closing of Cash Fresh stores during the conversion to the Delhaize banner.

In Delhaize Belgium we remained however disciplined in store openings and saw an increase in sales per square meter faster than the market in Q2. Above that, we have of course a strong commercial dynamic ongoing, which really will increase and keep sales at good level due to a lot of elements like our working out our commercial differentiations strength.

The fact also that we are staying and are very active on price position and coping our targets there, and this is reflected in the fact that our internal food inflation is 1% lower than the external food inflation and also we have active increased marketing activities ongoing.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

I think it's important to notice that our price position compared to our competitors in Belgium has significantly improved through the semester, all the way to July and obviously we are just like with... for the answer we gave in the United States, we are committed to stay extremely disciplined in price positioning and maintain our price competitiveness there.

Finally the activity we have seen in the first half in Belgium is really the work of the hard discounters, Aldi and Lidl, you may remember that they had a more difficult year in 2006. We have seen Lidl, in particular, focusing on fresh products and national brands of course, which has been there... which has been launched in the... since the beginning of the year roughly.

Fernand de Boer - Petercam

One last question. Did I hear you correctly say that across the Group, the food inflation was 3%?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

That's about right. It was about 3% across.

Rick Anicetti - Delhaize Group - Executive Vice President

The external food inflation but at Delhaize Belgium is... it was 100 basis points lower than that.

Fernand de Boer - Petercam

Okay. Thank you very much.

Rick Anicetti - Delhaize Group - Executive Vice President

Yeah.

Operator

Thank you. The next question comes from the line of Mark Husson. Please go ahead announcing your company name and location.

Mark Husson - HSBC

Yeah. Mark Husson with HSBC in New York. Couple of questions, a bit financial, with the risk of having people's eyes glaze over. Can you... with your tax rate guidance for this year, can you tell us what tax rate you've assumed for the second quarter? There are several that we could choose it all.

Rick Anicetti - Delhaize Group - Executive Vice President

Second half I assume

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

For the second half?

Mark Husson - HSBC

What are you including in the second we can work out the second half if you tell what the second quarter was? Is it one excluding the charge or including the charge?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Sorry. Well in the second quarter, the actual rate is 27.13%. So the guidance was around 37% and the refinancing charge had an impact of about 4% or 4.8% off of that.

The fact we didn't do a dividend was about 2.5% favorable variance and then there was a benefit that we picked up from notional interest deduction in Belgium of about 1.4% and the US stock option exercises favored us about by 1.2%. So that's the reconciliation between the 37% guidance and the 27% actual.

Mark Husson - HSBC

The 27% is what you have included in the 34%... 35% guidance?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Yes.

Mark Husson - HSBC

Okay. Second question on new financing, sort of taking a step back, this is a major piece of long-term financing. And you did it... having become an investment grade business to semi-investment grade, and clearly they have an impact on pricing.

Can you talk about the covenants on this debt now, and what happens at some stage in the future, if you decide not to become an investment grade company?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Well there are no covenants that would be restrictive in anyway from us making an investment decision that might cause us to become investment grade. I want to match that quickly with the statement that the intention of the Board is to get us back us to investment grade, and to maintain a solid credit rating.

But there is no covenant restriction, and we have also said at the time that have said... that in the policy sense we have said if we... the primary goal of the business is not to be investment grade, it's to grow shareholder value, and if see an opportunity out there that the priority would be to do any transaction. I think we thought would be additive over time.

Mark Husson - HSBC

Okay. So this doesn't encumber you any sense, if you wanted to add $1 billion a debt at some stage.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

There are no covenants in the new debt that will encumber us from that $1 billion of new debt. No.

Mark Husson - HSBC

And then, final question just on operations again, on the Food Lion business, could you just talk about the Food Lion markets, which have not gone through the renewal process, yet? You know, giving what comp store sales... and given I think, what Mr. Kershaw's question was about volumes.

Clearly some of those markets have got negative volumes, are they losing share or are you reasonably comfortable with where you are?

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Craig?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

We are essentially flat. I would say across the entire Group with regard to share. As I mentioned earlier, I think what we are really pleased about is that as we look at same-store sales, and we can find individual stores that vary from what I am about to say.

But broadly speaking, we are seeing same-store sales improvements across the entire five divisions that we have internally at Food Lion and many... two of those divisions have not had a market renewal yet.

So what's exciting is well market renewed areas are outpacing the company in general, we are continuing to see very broad games across the entire Group. So, what we want to continue doing, we have talked about expanding our new store growth overtime.

Market renewal is a model that we were going to continue to pursue. The dense markets of Washington and Charleston and of Raleigh and Charlotte, are starting to taper off once we get the Norfolk and Richmond and Bloomington. And so you'll probably see us doing a greater number of small markets.

But the intension between individual store renewals and market renewals would be about 150 a year that we are anticipating.

Mark Husson - HSBC

Just one final question on the same note, you talked before about Sweetbay having double-digit sales growth when it does the conversions from Kash n' Karry. And you'd also talked in the past about how about in the second year than sort of flat line it at new higher level.

And perhaps one of the reason was price perception. You have been at this price perception thing for quarter or so now. Do you have anything to tell us about how the second year is playing out?

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Yes Ron.

Ron Hodge - Delhaize Group - Executive Vice President

Yes Mark, this is Ron. I think we still see, generally the same trend in place in terms of second year sales at Sweetbay, up until the point where we've made the fairly dramatic price investments at the shelf level, which actually went in place in early July... early to mid-July.

Now we are encouraged by what we are seeing across the entire base of Sweetbay stores with that investment. But it's very, very early in that process.

Mark Husson - HSBC

Okay.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Maybe we'll take another question.

Operator

Thank you. The next question comes from the line of Philippe Suchet. Please go ahead announcing your company name and location.

Philippe Suchet - Exane BNP Paribas

Good afternoon. This is Philippe Suchet from Exane BNP Paribas in Paris. I have got two questions, and first one is about inflation. You told that inflation was about 3%. Can we have the detail of these for US operations, Belgium and Greece?

And the second question is regarding Belgium and your operating margin in Belgium. It seems that a part of your operating profit has been summarized by the divestment of some businesses to independent operators for Cash Fresh. Can you have an idea of the contribution of these divestments to your operating margin in Belgium for Q2? Thank you.

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Okay. Well, on inflation, actually in terms of external or cost inflation the number were not very different between the US and Belgium. There was a lot bit of variation within the US. Inflation running a little bit higher in the Northeast than it did in the Southeast.

Where there was a significant difference, as we mentioned earlier, is that our internal inflation rate was about a 100 basis point slower inside of Belgium than the external inflation rate. Or to put it another way, we significantly improved our price positioning versus the total market during the quarter.

I don't have a firm number on the Belgium inflation number but if... we'll really get back to you separately or... but, I think it was not much different than the sort of 2% to 4% range that would have averaged out around where we were for the total company.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

The second question had to do with the operating margin in Belgium and the impacts of the gains we made of the Cash Fresh sales at the time of the conversion. Obviously, yes it had a small impact... I am looking for the number.

But, clearly the operating margin excluding this impact was still positive to the second quarter. So, clearly indicating a very healthy quarter for Delhaize Belgium partly held for... how many points of the operating margin... looking at Craig, I am sorry. The impact of the Cash Fresh...

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

40 basis points.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

40 basis points. So, instead of 5.6% we would have had 5.2% operating margin for the quarter, clearly a healthy quarter for Belgium.

Philippe Suchet - Exane BNP Paribas

Well, thank you very much.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Sure. At this time, operator, I guess we will take two more questions.

Operator

Thank you. The next question comes from the line of Nick Coulter. Please go ahead announcing your company and location.

Nick Coulter - Morgan Stanley

Good afternoon, it's Nick Coulter from Morgan Stanley. Apologies for laboring the point, but back to John and Mark's question. Could you explain why volumes are flat if your strategies are designed to drive volume?

I guess other way of asking this is, if we didn't have market inflation of 3% would the comps then be flat and would you still be happy with that? I am sort of just missing a link here in the explanation. That's the first question. Thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Okay. Well, I will ask Rick and Ron to add some color to that. But, obviously account sales is not just the result of comparable volume of... or comparable pricing environment.

There are a number of elements building our same store sales, especially inside a Group that has so many initiatives in place from the sales mix to new ranges like private label. And of course, as we are... this is a good example, as we are building our private label assortment, especially in the US where we are catching up perhaps with the kind of trend that Europe has known over the years.

You are creating a good value for the customer and a lower price per item along the way with a higher loyalty over time. And all that plays into your success in long term, but with some impact, doing in both directions, as you are developing all those initiatives.

So I think it's difficult to take too simplistic view on what actually constitutes the comparable sales from quarter-to-quarter. But, Ron and Rick you might want to add some color to your specific market areas and the sales for the quarter.

Ron Hodge - Delhaize Group - Executive Vice President

I think it would be tough to add much to that explanation. But, relative to the Northeast, as I said earlier, our market share is growing and I think that's a good indication of where we are relative to our competitors generally. I don't know exactly where would be without inflation, but we would certainly have some growth in there. It's very, very difficult to be finite about that number. Rick?

Nick Coulter - Morgan Stanley

So, volumes are growing in Northeast from what you are saying... your volumes are growing in the Northeast?

Ron Hodge - Delhaize Group - Executive Vice President

Market share is growing in the Northeast, and certainly some big part of the... significant part of the actual sales growth and same store sales is similar to the inflation number.

Rick Anicetti - Delhaize Group - Executive Vice President

The two additional things that I would mention and they were sort of embedded in Pierre's comments as well. We've seen a... well, I don't want to characterize this is a change in sort of historical numbers.

But, in the first half of the year we've seen more competitive openings, and that was true in Q2, than what we've seen in the past. Wal-Mart has remained roughly consistent with what it has done historically. Harris Teeter has opened a significant number of stores in Northern Virginia.

We've seen Farm Fresh doing a number of things in the Norfolk area. So, we've had some competitive openings, which obviously have had an impact and we're still pretty pleased with the results that we are getting.

The other thing on a far more incremental basis, but I think it's in keeping what Pierre talked about, we are continuing to see... and it's really, I guess a change in consumer behavior, but one that's been caused. And that's continuing to see our consumers moving more in the area of private label.

And I think that has a lot to do with what we've actually caused, and I am not ready to say in any way should perform that it's economically driven. I think we've got better packaging, I think we've got better price points, I think we've added items.

We are getting into more categories, we are getting into three tiered kind of program that Pierre mentioned earlier, and I think that also has had an impact, incrementally, on sales. We can expect to see that continue, because we're being very purposeful in the area of private-label, but obviously have also had something to do with our profitability from a gross margin perspective as well.

Nick Coulter - Morgan Stanley

Surely the private-label would drive your volumes with it also...

Rick Anicetti - Delhaize Group - Executive Vice President

Well, now you are actually looking at a lower retail per item than national brand.

Nick Coulter - Morgan Stanley

Okay. So, you are talking the sales... sorry.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Overtime you would feel it, but in the short-term you might simply replace one item...

Nick Coulter - Morgan Stanley

Yes, sure.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Number of items. Over time that's the name of the game, obviously.

Nick Coulter - Morgan Stanley

Yeah, I think we are talking across... sorry. And than lastly just on the level of market inflation, obviously its taken a lead from last quarter in the US and I think it was around 1% that you called on last conference call up to 3%.

Could you just talk through the dynamic, and perhaps the structural influences and how that... the excitement that pan out? Thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Who wants to take this? Craig?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Okay.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Okay Rick.

Rick Anicetti - Delhaize Group - Executive Vice President

I'd venture just this is again looking at a crystal ball without any indication of whether it's true or not. But, obviously what we see impacting us most significantly as manufacturers talk to us about price increase or rising fuel costs, and believe it or not rising corn, grain costs, as more of that is put into Ethanol and other purposes.

And as we have seen in the past the some of the trend is slightly higher than it was last year. We're starting to see some relief in fuel prices compared to what it was earlier.

We would like to think that as crops start to migrate into other areas that's going to soon start to flatten. So, we would like to think that while we have continued to see inflation running through these five weeks since the end of the second quarter that out towards the end of year we would start to see some modifying in that rates.

Nick Coulter - Morgan Stanley

Okay, and you have not seen that inflation have any impacts on the volume spend from consumers?

Rick Anicetti - Delhaize Group - Executive Vice President

Not at this point, we really haven't.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Okay?

Nick Coulter - Morgan Stanley

Thanks very much.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Sure. Thank you, Nick. We will take the last question at this stage.

Operator

Thank you. The final question comes from the line of Fred Speece. Please go ahead, announcing your company name and location.

Fred Speece - Speece Thorson Capital Group

Yes. Speece Thorson Capital Group in US. You've done a terrific job in the US and all across. And I would hope you would reconsider publishing information about the US not in the full 10-Q form, but in a information we can get the breakdown of the margins and there is no reason to hide it, it's a very proud information you should share and appropriate?

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Thank you for the suggestion. Craig?

B. Craig Owens - Delhaize Group - Executive Vice President and Chief Financial Officer

Well, hi Fred. We have... we continually reevaluate the disclosure that we are doing. I mean the release that we have just done brings us up to the IAS 34 standard sooner than they were actually required to get there, which provide some additional footnote disclosure and that sort of thing.

I know it doesn't address the issue you've raised. But, I mean, my point is just that we are continually in a process of reevaluating what we are disclosing and generally in a process of I think being more complete and more transparent wherever we find the opportunity to due that.

We have not chosen to replace all of the information that we eliminated with the elimination of the 10-Q and 10-K filings. Although, you pick a lot of it up on an annual basis through the 20-F filing and you pick some of it up through the segmentation reporting. But, I have heard you on that and we will keep it in our thinking as we reevaluate on ongoing basis.

Fred Speece - Speece Thorson Capital Group

Thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Thank you. Alright then operator, I will turn back to Guy Elewaut for concluding comments.

Guy Elewaut - Delhaize Group - Vice President of Investor Relations and Corporate Communications

Thank you for participating in today's conference call. The replay is available on the company's website. You can also find on the website a text with our prepared remarks.

If you have additional questions, do not hesitate to contact our investor relations department. Delhaize Group will be announcing its third quarter 2007 results on Thursday, November 8th. Have a nice day and thank you.

Pierre-Olivier Beckers - Delhaize Group - President and Chief Executive Officer

Thank you, bye-bye.

Operator

Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect your line. Thank you.

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