Delhaize Group's (DEG) CEO Frans Muller on Q1 2016 Results - Earnings Call Transcript

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Delhaize Group SA (DEG) Q1 2016 Earnings Conference Call April 27, 2016 3:00 AM ET


Frederic van Daele - VP IR

Frans Muller - President & CEO

Pierre Bouchut - EVP & CFO


Edouard Aubin - Morgan Stanley

Sreedhar Mahamkali - Macquarie

John Kershaw - Exane BNP Paribas

Xavier Le Mene - Bank of America/Merrill Lynch

Fernand de Boer - Degroof Petercam

Nick Coulter - Citigroup

Frederic van Daele

Thank you very much, operator. Good morning, everyone. Welcome to Delhaize Group conference call regarding our first quarter 2016 results. I just want to remind everyone that today's presentation and discussion will include forward-looking statements. We want to caution you that such statements are predictions, and that actual events or results can differ materially. Factors that may have a material effect on our business are detailed in the cautionary note in our earnings release and are contained in our SEC filings. The statements are made as of the date of this presentation, so today. Delhaize Group assumes no obligation to update this information.

Today we have the following people with us, Frans Muller, CEO, Delhaize Group, and Pierre Bouchut, CFO, Delhaize Group. During this call, we will first reflect on our first quarter performance, and afterwards we will take questions. There will be a replay will be available on Delhaize's Web site.

Frans, please go ahead.

Frans Muller

Thank you very much, Frederic. Good morning, everyone, and welcome to this conference call, where we discuss our first quarter performance. I'm, in the meantime, on Slide Number 3, where you can find the highlights for the quarter. In the U.S., we achieved comparable store sales growth of 2.6%. This solid performance was achieved despite fewer snow storms than last year and, even more importantly, despite a retail deflation of 1.1%. Our real growth, therefore, continued to be strong at 3.7%. At Food Lion, we are looking forward to re-launching our 142 stores in Charlotte market in the fourth quarter, and we are on track with currently 83 stores under construction. At the same time, we continue our fine tuning process in the Easy, Fresh & Affordable markets of Wilmington, Greenville and Raleigh. It's important to say that shrink improvements at both Hannaford and Food Lion are another important factor behind our robust profit performance at the Delhaize America in this first quarter.

Turning towards Belgium, strong sales growth of our affiliate network is the main reason behind an increase of 50 basis points in our market share in the first quarter. We, nevertheless, need to complete the rollout of our new store organization and to improve the execution in our company operated stores, in order to sustainably improve our overall performance in Belgium. We have started to meaningfully improve our SG&A, as a result of the transformation plan savings. We remain on track to deliver at least 80 million of savings by 2018. In Southeastern Europe, we realized excellent top-line growth, with double-digit same-store sales growth and stable or improving market shares in all of our three countries. This outstanding performance is mainly driven by our operations in Romania and in Greece.

In Romania, we benefited from favorable market conditions, our focus on supermarkets and convenience stores and the reduction in the VAT in the summer of last year. In Greece, our successful commercial policy, weaker competition and further expansion resulted in this excellent performance. But also, in Serbia, we managed to grow our sales and same-store sales. The volume increase in the region also led to an improvement in our profitability. Finally, we remain well on track to complete the merger with Ahold by the middle of 2016. In this first quarter, we passed two important milestones.

First, as on March 14, we received strong shareholder support for the merger in our EGM. The proposed transaction was approved by 96% of our shareholders and all other resolutions also passed. Secondly, on March 15, we received clearance for the merger from the Belgian Competition Authorities, subject to Ahold and Delhaize divesting a combined 13 stores and a number of future projects. We still need to receive approval from the U.S. Federal Trade Commission before we'll be able to close the merger by the middle of this year.

I now hand over to Pierre to discuss our financial performance in more detail.

Pierre Bouchut

Thank you, Frans, and good morning, to everyone. Let me now review our Q1 2016 financial results. Slide 4 provides with our summary to Q1 income statement. At €6.2 billion, revenues increased by 5.7% at actual FX rate and by 4.3% at identical rates. Organic growth for the quarter was also 4.3%. Our gross margin reached 24.5% and increased by 8 basis points compared to last year at identical rates. This is explained by the following elements. First, a 15 basis points gross margin increase in the U.S., driven by lower shrink in Easy, in Fresh, and especially at Food Lion, as we are making progress in our initial Easy, Fresh & Affordable markets.

Our U.S. gross margin was also supported by lower cost of products, although this was partly offset by the price investment started in Q4 of last year at Hannaford. Second, gross margin increased by 20 basis points in Southeastern Europe. Third, the gross margin in Belgium decreased by 7 basis points, this was mainly the result of a higher shrink in our company-owned supermarkets, while our price investments were largely financed through better procurement terms.

Our SG&A was 21.3% of sales and improved by 52 basis points compared to last year at identical rates. This decrease is the outcome of the following points. First, positive sales leverage and transformation plans savings in Belgium, where SG&A as a percentage of sales decreased by 140 basis points. Second, lower SG&A as a percentage of sales in Southeastern Europe for 140 basis points, which is the result of the strong sales increase. And three, in the U.S. our SG&A was stable as a percentage of revenues as the higher labor expenses in line with minimum wage increases, were absorbed by increased sales volume. At €221 million our Q1 underlying operating profit increased by 28% at actual rates, and by 26% at identical rates.

Our European margin reached 3.6%, up 62 basis points at identical rates, due to the profitability improvement in Belgium and in Southeastern Europe. When taking into account €47 million of net finance cost and €36 million of income tax expenses, we recorded a Group share in net profit of €109 million compared to €28 million last year. Our free cash flow was negative in this first quarter with the usual seasonal negative Q1 movement and amounted to minus €268 million. The decrease, compared to the minus €93 million of last year, is approximately €175 million and can be explained by the following items. First, non-recurring transformation plan cash out in Belgium and merger related cost for around €40 million.

Second, approximately €70 million of higher receivables in Belgium, due to strong payment collection at year end 2015 from our affiliates, but also to the negative impact of the early Easter this year. Three, favorable cutoff time at year end at Delhaize America for around €50 million. And four, €40 million due to inventory reduction initiatives at Delhaize America, also at yearend 2015, and which we expect to be recurring. Therefore, out of this €155 million decrease, we estimate that approximately €125 million is explained by non-recurring items and cutoff time impacts. Therefore, for the full year we remain confident to generate a healthy level of free cash flow. Please note that in 2016 we should incur €65 million cash out related to the transformation plan.

Slide 5 shows the evolution of our EBITDA and underlying EBITDA in Q1. As you can note, at actual exchange rates our EBITDA increased by a strong 17.9% and our underlying EBITDA by 15.6%, up to €391 million, at identical rates our EBITDA has increased by 16.2%, while our underlying EBITDA increased by 13.9%, up to €386 million. The following slide gives you more insights into the revenue evolution at Delhaize America over Q1. In Q1 we reported same-store sales growth of 2.6%. Retail inflation remained negative at minus 1.1% for the quarter, and was negatively impacted by meat and dairy to a lower extent. Real growth, therefore, stands at a strong 3.7% for our two U.S. banner combined, in fact, slightly higher than in Q4 last year. Let me highlight as well with France that this good result was achieved despite fewer snow storm than last year. Then, when taking into account the negative 50 basis point calendar impact and a 20 basis point negative impact from store-closing, our Q1 organic growth stands at 1.9%.

Slide 7 provides you with details on our underlying operating margin evolution at Delhaize America in Q1. We reported a Q1 underlying operating margin of 3.9%, up 10 basis points compared to Q1 last year. The following elements have impacted our European margin in this first quarter. First, good momentum in sales at both banners, second, a 15 basis point decrease in shrink in fresh, especially Food Lion, notably in Easy, Fresh & Affordable where we have worked on lowering our shrink levels, third, lower purchase price on some product categories and notably on meat. Four, further price investment for 35 basis points resulting from continued investment at Food Lion and the Hannaford price investments, started in Q4 last year. And five, an increase in labor expenses for 20 basis points, which mainly results from salary increases.

I am now on Slide 8, which present Delhaize Belgium sales evolution. In Q1 Delhaize Belgium same-store sales increased by 2.9%, our internal retail inflation stood at 2.2% and was mainly driven by food and vegetables, wines and spirits, while cost inflation stood at 3%. With a positive calendar impact of 100 basis points and a positive 10 basis points from network expansion, Delhaize Belgium revenue growth stands at an encouraging 4%. Our market share in Q1 has increased by a rewarding 50 basis points compared to Q1 last year, and was driven by the strong performance in our affiliate network. However, our Company-operated stores continued to lag our expectation as the recovery takes longer than anticipated.

As shown on Slide 9, Delhaize Belgium underlying operating margin increased by 130 basis points over Q1 from the low of 1.4% in Q1 2015 to 2.7% in Q1 this year. This 130 basis points increase is explained by several elements: higher revenues for 60 basis points and transformation plan savings for 65 basis points. On the negative side our supermarkets were impacted by a higher level of shrink, which resulted in a slightly negative gross margin for Belgium in total. We expect that this higher shrink to persist in the coming months until we have fully implemented, by the end of September, our new store organization across our Company operated store network, and trained all staff accordingly.

On Slide 10 we provide you the revenue evolution in our Southeastern Europe segment. Our same-store sales for Q1 was very strong and stood at 10.8% for the segment with double-digit same-store sales increases in Romania and Greece, despite deflation in Greece. Serbia also reported both, same-store sales, positive same-store sales and rate growth. In Greece Alfa Beta which is uniquely positioned and implemented successful promotional and marketing plans, continued to perform very well across in a grocery market which continues to shrink. We also benefited from operating disruption at a few of our major competitors. In Romania, Mega Image continued to build on its strong momentum and commercial programs and benefited from favorable economic condition, partly driven by a lower VAT on food since June 2015, as you know.

Serbia benefited from the successful remodeling in the Maxi supermarket business. Our market share strongly increased in Greece and Romania and remains stable in Serbia, with a 50 basis points calendar effect and a 570 basis point positive impact from store opening, our organic growth stands at 17%.

On the following Slide 11 we provide you with more details on the underlying operating margin evolution for Southeastern Europe. Our European margin increased by 180 basis points from 2.3% in Q1 2015 to 4.1% in Q1 this year. This improvement is, first and foremost, attributable to the positive leverage impact of the very strong revenues uplift. In addition, cost control and improved supplier terms have also supported our profitability. I now hand over to Frans to give you an update on our strategic priorities for 2016.

Frans Muller

Thank you, Pierre. On Slide 12 you find our strategic priorities and our outlook for 2016. Obviously, it remains key for us to complete the merger with Ahold on schedule by the middle of this year. As I mentioned, we have realized two important milestones in the first quarter with receiving shareholder approval for the transaction and receiving merger approval from the BCA.

In addition, we plan to spend approximately €825 million on capital expenditures, whereas, at the same time, we aim to generate a healthy level of free cash flow. At Delhaize America our priority is evident. We need to maintain the sales momentum that we have been able to build over the last few years, especially at Food Lion. Apart from the capital that we are spending in selected markets, we also earmarked a number of initiatives that we aim to roll out throughout the Food Lion banner in 2016. We will firstly complete the repositioning of our private brands portfolio. We will be completing the roll out of our newly designed mid tier labels by the second quarter. We will also finalize the launch of our entry level price label brand, as well as relaunch Nature's Place later in the year.

Secondly, we will continue to roll out initiatives throughout the banner that have been successfully tested on a smaller scale, such as expanding our limited reserve wine range or our craft beer selection. We already mentioned that we will remodel 142 stores in the Charlotte market and we're well on track to complete this process by the fourth quarter.

At Hannaford we will gradually expand our Hannaford to Go proposition, continue to test new approaches in Fresh in six of our stores, and additionally, we aim to open our new concept store in June in Bedford, New Hampshire. In Belgium our priority remains to sustainably improve our operations by executing the different elements from our transformation plan. Just last week we have launched a third wave of stores that have implemented the new store organization and now have 91 stores under this organizational structure out of our 128. The NSO aims to realize significant productivity improvements within a store. We have our last wave scheduled for October in this yea.

As we already discussed, the better than expected performance of our Belgium operations in the first quarter was mainly driven by affiliate and convenience formats, the operating standards in our Company are improving notably with better shelf availability, but still have some ground to cover. Finally, Southeastern Europe, I would like to make a complement to our associates in these markets, which have proven to be difficult over the last years. In Greece, the overall markets continue to be challenging with the FMCG markets even contracting by 11% in March. We have been able to grow our like for like sales by double-digits, helped by successful promotions and marketing efforts, but also helped by disruption, as Pierre already mentioned, at a number of our competitors. We remain focused on outperforming the market and growing our network of stores through our target expansion.

In Romania we are helped by a robust economic condition. Nevertheless, we believe that our double-digit like for like are outperforming the overall market trend, and we are able to continue our store network expansion. Also, in Serbia the focus is on like for like growth and building on the current success of our Maxi remodeling plan where we continue to experience double-digit sales uplifts.

Operator, now I would like to open up for questions. So please could you give instructions and lead the Q&A session.

Question-and-Answer Session


Thank you. [Operator Instructions] And we will take our first question from Edouard Aubin, Morgan Stanley. Please go ahead.

Edouard Aubin

One question on Belgium and one on the U.S., so in Belgium clearly a solid performance, I think if I heard correctly, Pierre, you talked about 65 basis point benefits from the transformation plan. Is that more or less in line with the budget you had? And, I think you talked about a target of €80 million by 2018. So if you could please update us on the progress over the next quarters. Should we expect a more or less linear progression in terms of the benefit from the transformation plan? And just on the U.S., I think you've experienced some deflation for over nine months now in your basket. But the market as a whole only turned deflationary at the beginning of the year, so how do you expect inflation to evolve this year? I know it's difficult to guess, but should that be a reason for concern for investors or not?

Pierre Bouchut

Edouard, in Q1 this year the positive impact from the transformation plan is €8 million. Therefore, we are on good track towards the €80 million that we indicated as a minimum positive impact in 2018. So normally for the year you could extrapolate at least this €8 million for the full year that we have had on Q1. I think it answers your question.

Frans Muller

For this year we are completely in line with our forecast for Belgium also to reach the targets according to the transformation plan.

Pierre Bouchut

Regarding deflation, it's difficult to give precise forecast. We know that we post a price decrease, which are higher than I would say most of our competitors, but please remind that we continue to invest in our sales price not at Food Lion but also at Hannaford, as mentioned at several occasion during this conf. call. We started the price investment at Hannaford in two areas actually, Albany and Hudson Valley, which are doing well and this encourages us to move forward. We not have any specific precise information or forecast to give you on the respective evolution of our price increase and deflation in the U.S. But a part of or, in general, deflation is fueled by your own price investment.


Thank you. Our next question comes from Sreedhar Mahamkali, Macquarie. Please go ahead.

Sreedhar Mahamkali

A couple of questions from me as well, firstly, on Greece, what was the shape of the 10.8% through the quarter please? Are you able to elaborate a little bit on it? Also you mentioned the benefit from disruption at your competitors. Is there a way you can perhaps quantify it or just give us some qualitative understanding how it is currently, the levels of disruption at your competitors? And secondly, on the U.S. deflation and volume trends, compared to the overall U.S. number reported, how divergent are Food Lion and Hannaford volume trends and deflation trends please? If there's anything you can color that that will be very helpful. Thank you.

Frans Muller

What was exactly your first question, Sreedhar, with the 10.8%, because the line wasn't clear.

Sreedhar Mahamkali

Sorry, was the shape of 10.8% persistently throughout the quarter it was as strong as that, or if there was a particular period where you'd actually benefited from disruption to your competitors? And also, how is that disruption now at your competitors? Is that still continuing?

Frans Muller

You talk about the 10% I think you referred to the sales growth in the region.

Pierre Bouchut

Same-store sales.

Frans Muller

Same-store sales in the region, if you talk about Greece specifically, we are extremely well positioned in the Greek market and I think that's mainly also the reason for our sales and performance growth, if you look at disruption of our competitors, you might have noticed that there have been a few acquisitions in the market with the Metro family, including Veropoulos, Sklavenitis on collaboration with Marinopoulos, the hypermarket section. So there have been a number of things there. The crisis in itself and, therefore, also the cash issues in the markets have caused, with a number of competitors, a much lower shelf availability than they normally would have had. So we have benefited from this. How fast this will kick back on their side? I don't know, but what we see also in the period of April that we have a very solid sales growth as well. So, we see a continuing story of market share gain in Greece and in Romania, and also in Serbia, as I mentioned before.

Pierre Bouchut

If I may add up, Sreedhar, two things. First of all, we are posting, without releasing the figures, a double-digit same-store sales growth in Greece. There is still significant deflation in Greece and, therefore, our growth volume is higher than our same-store sales, which is very positive, of course and as already mentioned, this is largely supported by, on our side, more promotion. The market has become more promotional and, of course, we are leading the market in that area.

Frans Muller

And we also are very strong in our price competition now. So I think also the various segments of society in this difficult time for Greece, I think we can give them good relief and support with our promotions, pricing and assortments.

Pierre Bouchut

Regarding deflation, the respective deflation between Hannaford and Food Lion, we are not really seeing any figures. But it's clear to say that, of course, the deflation is higher at Food Lion. But we still have a deflation level at Hannaford, and the difference is not that big at the end of the day.


Thank you. Our next question comes from John Kershaw, Exane BNP. Please go ahead.

John Kershaw

Just if you could talk a bit about the competitive backdrop in the U.S., because driving north of 3% volume like-for-like growth is impressive. So, are you seeing particular competitor responses in any areas or the encroachment of new competitors in Publix is starting to head further north? And also, just more broadly, I don't expect immediate impacts you referred to 20 basis points of wage pressure headwinds. But you've also had target now go to $10 an hour, or talking to going to $10 an hour, so, perhaps an update on just how you see the wage pressures evolving in the U.S. market?

Frans Muller

Yes, John, to start with that last question, we already highlighted that we have some wage impact on our margins in the U.S. caused by two things, just the normal day-to-day work to make sure that we are competitive in the market, including wage increases from a Federal or State level, which we see, which are included in our numbers, like the same for the 2015. We also had a merit increase in the U.S. this year, which is also part of those numbers. I think the wage increase, or the minimum wages will keep us busy in the whole industry for the 2016 year. We see this in several States in several cities even sometimes so far we can deal with this and can absorb it also with our productivity gains. We are rightly priced at the moment, but what we also have to deal with, what we call the so-called wage compression, where the entry levels that get up, that we also manage the total population in the Company, and we do this accordingly. So we feel comfortable with the measures we took so far. But let's see how this will develop furthermore with competitors, or with the Federal and State Government, and we have to manage this. The other question was on what we see on competitive behavior.

If I just -- as our banners are in very different geographies competing, let's start with Hannaford. We see overall that we gain, in most of the States, or market share, or are stable. We do have a very good competitive position towards the players in New Hampshire, in Hudson Valley, in Albany, upstate New York. We do excellent work in Maine and Vermont. But also, do what Pierre already mentioned before, we also invest in prices. So we see that we are at the moment very competitive in those States, and I would say also that the areas of Hannaford, of course, we have strong market share and the brand is extremely strong. So, what do we see in competitive pressure? I think we can all see that Market Basket is completely back on its feet, including their promotional schemes and we do not know yet how we have to assess the behavior of Walmart overall. When I look at Food Lion, we invested also there in prices, we feel at the moment very comfortable with our pricing levels, and we have roughly a flat market share development. The main reason for this is that our competitors open more stores than we do at this moment, although, if we see the like for like numbers we have at Food Lion, they're very encouraging as well.

In Food Lion geographies, yes, Publix is moving north in this respect. You can say so, but, at the same time, we compete successfully with them in areas like Charlotte, so we feel comfortable with our positioning there and what was the, especially for the Food Lion areas, we have to see how Walmart is positioning their neighborhood stores, and also, how Walmart, for their part, is going to compete with Discount & Dollar stores in the U.S. So, competitive pressure's absolutely on, fighting for market shares. I think so far we are doing well. We are well positioned on the prices and we keep a very strong eye on this, that we keep investing in prices where necessary.

John Kershaw

And perhaps just one follow up in terms of probably looking at Fresh, Easy & Affordable as well, but are you winning in particular areas of the basket, areas you particularly in Food Lion, increase the penetration in Fresh? Or is it just more custom and bigger basket across the entire shop?

Frans Muller

We gained basket across the categories, off course, especially in Fresh and produce, but also areas in center store, double-digit growth in health and beauty, and these kinds of things are also there just by revitalizing the stores. We did, as you know, a huge re-engineering of our total center store assortment. The private labels are now kicking in with check in as price entry but also the mid-tier and that will be all done by the end of the second quarter. So I expect quite a good offering there and I can share with you double-digit sales on all the organic products which we also have, but is, of course, not the most impacted part in the total sales numbers, but across the categories, in Fresh, in produce, in deli, and the numbers are even higher, but also in center store we see sales uplifts.

Pierre Bouchut

Yes. And do not forget, just report what Frans is saying, that we closed down 10 Food Lion stores, from one quarter to another, that competitors have been opening a lot of stores in our catchment areas and therefore, we are very encouraged by Food Lion sales evolution, since our market share only very marginally eroded, although competition is opening stores and we are closing Food Lion stores and this may encourage us, this Easy, Fresh & Affordable, overall, may encourage us in the near future to resume expansion of Food Lion.

Frans Muller

Raleigh is doing very well, John, very close to our pro-forma, Charlotte, 83 stores under remodeling is also having positive sales and developments. That's also remarkable, so there must be a lot of things in the proposition, in the assortment, in the pricing, which is attractive to our customers. So we're very happy with what we see there.

John Kershaw

Very clear, thank you guys.

Frans Muller

And also the first three weeks of April were very good for Food Lion, forward-looking statement.


Our next question comes from Xavier Le Mene in Bank of America.

Xavier Le Mene

A quick one actually from me on Belgium, you're currently saying that you are below expectation with your own store, so can you tell us exactly in which area you are below expectation? Is it sales, is it shrinkage, is it, because it seems that you are delivering actually the cost saving, so what exactly is not doing as well as expected? And what does that mean going forward during the coming quarters, because your affiliate seems to outperform your expectation, your own stores outperform, so can we expect the chance to change or can we expect the affiliates to still out perform with you actually reducing the gap with your expectation?

Frans Muller

On Belgium, Xavier, have in mind what we did in the total transformation operations, so have in mind, the more than 2,000 people, experienced hands, leaving our Company, and that we have, at the same time, this new store organization implemented with different levels in leadership, more efficiencies, plus all the transformation effects for the people, who are in our Company, talking about working hours, tariffs and so on. So a massive, let's say a massive change, which, of course, has on our population quite some effect, to get used to the changes, and to get trained for new departments and so on. So that is the fundamental thing we have to deal with and if we then go a little bit more in detail, then you see that in our Company operated stores, that we invest now a lot of, a lot in training, that the new store organizations have, overall, a very high level of acceptance and that we now with building up more routines, which we lost with more than 2,000 people leaving us, building more routines that we get a better grip on re ordering, on shrink management, on labor management, and these kinds of things and. Those numbers you see getting now into our numbers, getting into our figures.

But we had a dip on shrink, because produce is a big element from the Delhaize in Belgium, and if you lose some routines on reordering merchandise and these kinds of things, then shrink will be impacted. So what we expect is that, as shelf availability is even more improving now and is getting to much better levels compared to the disruptions we had, that we also see customers coming back. And if you look at our customer satisfaction survey results, which are done by a third party, by the way, we see that people recognize that our price perception is getting better, it's not there where it should be, but it's getting better. That our operations in the stores are getting better, that is not in all the stores the same, stores which are just moving to a new store organization, and as they get used to these kinds of things. But also, things on shrink and labor are getting better. You see now in our SCA numbers also, clearly the transformation plan effects coming in after the heavy burden of the one off cost and the heavy burden of the disruptions we had.

If I go to the affiliate stores, why are the affiliate stores doing so well? First of all, I think this, of course, in all our convenience stores, if the Proxy and the Shop'n Go are, of course, operated by affiliate stores, but also our AD stores do very well. If you talk to affiliates, they're very happy with an improved supply chain reliability. They're very improved with productivity measures we took, like row containers, which is also driving that cost down they're very happy with this. They are seeing that our campaigns are getting traction, our campaigns where we, not only highlight quality and innovation, but also are clear about our price levels, and, they're very happy with the shelf availability numbers we have now coming from our DCs and our supply chain. So I think affiliates do, indeed, better than operator stores, that's clear. The trend I see is that operating operated company operated stores will get better, and will get closer to closing the gap with our affiliate stores. That is our target.

Xavier Le Mene

Okay. May I ask one other question? Any target for the free cash flow for this year, actually?

Pierre Bouchut

Well, we're comfortable, I would say, with a free cash flow of €400 million as I would say, as this is our target, this don't forget that this is including the expected merger, cost and transformation plan cost. So for the full year transformation plan cost, could be about €65 million, as I already mentioned. Merger cost is not yet clear. But if we take that into account, and before deducting those expenses, we are very comfortable with €400 million free cash flow guidance for the year.


Our next question comes from Fernand de Boer, Degroof Petercam.

Fernand de Boer

One question left for me. If you look at Belgium, sales are quite driven by inflation. If I listen to some of your competitors, they are seeing less inflation in their stores. So do you feel still feel comfortable with your price level, or is it just that we, in a later stage, we might see some price inflation? Could you comment on that?

Pierre Bouchut

Yes. Well, if I may on that, our fresh and produce content is, as an average, much higher than our competitors. Inflation is mainly on those products. Do not forget that in H1 last year, and particularly in Q1 last year, we had a strong deflation, in particular, in fruits and vegetables. This is this difference from one quarter to another which explains, to a large extent, the price inflation that we have in our stores, and probably at a higher level than competitors. But our price positioning globally has significantly improved in Belgium, and it actually translated in rewarding, as I said, 50% 50 basis point market share gain in Q1.

Frans Muller

Two companies gaining market share Fernand, that's ourselves and Colruyt. Apparently, our customers appreciate the mix we have now on value and price.


Of course, and we will take our last question from Nick Coulter, Citi. Please go ahead.

Nick Coulter

Two, firstly, could you add a little more on the Easy, Fresh & Affordable remodels, and how you're refining the operating model in the markets that you've already addressed? And specifically, with respect to some of the challenges in the cost lines that you've spoken about before, then, secondly, could you update on Hannaford to Go. It seems like you're pressing ahead with that format. So could you share what you're seeing, and why you're encouraged with that format? Thank you.

Frans Muller

Yes. Start with the last question, Nick, Hannaford to Go. Up to 35 Hannaford to Go units in 2016. It's doing very well, because I think in those areas where we have those stores, we really come up with the requests of our customers. The service is, as you might know, linked to our stores, so it's based on an in store pick. It's the full assortment we offer. Customers drive up to our stores and in three minutes, they have all their groceries in their boot, have paid the amount. What we see is, overall, the customers shop throughout the assortment, that the invoice values of Shop'n go -- of Hannaford to Go are three times higher than a normal basket in our stores, including shopping throughout total assortment, so also fresh and ultra-fresh. So they trust our quality. We increased quite a lot our picking productivity. Based on that confidence that we can apparently offer something in the market, which is heavily requested and rewarded, we increased our store format -- our total format count. So that's Hannaford to Go. Same time, we didn't talk that much, but we have hit North Berwick 20K store for Hannaford as well, launched that store is doing exactly on pro forma, with a very high customer rating. So we seem to have found and one swallow doesn't make a summer, but we seem to have found a format 20K, which is much smaller than the regular Hannaford format.

As we mentioned already in the text, in Bedford, coming June, a full flagship new format in the full strength of Hannaford, so, we are very happy now that we see that the Hannaford brand can support more formats and that we also can -- based on the very strong brand, can support it with growth in the market. The second thing, remodeling Food Lion, I think you're aware what the concept elements are. In Raleigh, if we correct this for the deflation we see now, which were not in the budgeted Raleigh numbers, then we are exactly on par in sales numbers, in volume, in real growth for the first year of Raleigh. Let's not forget, it is not even one year back that we had the grand opening, we had the grand opening October last year. So we are very happy with that development there for 162 stores in Raleigh. In the other markets, Wilmington and Greenville impacted by extra competition. But if you look at the numbers of the concept in itself, sales, improvement in shrink, improvement in labor, also, in those markets we get very close to our pro forma, which is a little bit longer ago that those stores started. So, the team and the Food Lion team is very confident that we have here the right things. The CapEx per store, $1.5 million, is a reliable value. Therefore, 142 stores in Charlotte, that's why it also appears that -- if we have a sustainable and consistent performance on the growth numbers and we always said 12% in three years' time, then there is reason to reengineer, to relook at can we expedite, potentially, the rollout of Easy, Fresh & Affordable.

Frederic van Daele

Thank you very much, everyone, for participating in today's call. A replay, like I said at the beginning, is available on the Web site. And if you have any additional questions, do not hesitate to contact the investor relations department. The next date for us is May 26th, when we will host our AGM. Thank you, and have a nice day.

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