Etablissements Delhaize Freres et Cie "Le Lion" S.A. (DEG)

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Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) Société Anonyme (DEG)

Q2 2013 Earnings Call

August 08, 2013 3:00 am ET

Executives

Frederic van Daele

Pierre-Olivier Beckers - Chief Executive Officer, President and Director

Pierre Bruno Charles Bouchut - Chief Financial Officer and Executive Vice President

Analysts

Fernand de Boer - Petercam S.A., Research Division

Andrew Gwynn - Exane BNP Paribas, Research Division

Sreedhar Mahamkali - Macquarie Research

Alastair A. Johnston - Citigroup Inc, Research Division

Marc de Speville - Redburn Partners LLP, Research Division

James G. Collins - Deutsche Bank AG, Research Division

Cedric Lecasble - Raymond James Euro Equities

Robert Joyce - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Please go ahead.

Frederic van Daele

Thank you, operator. Good morning, everyone, and welcome to the conference call regarding Delhaize Group's results for the second quarter of 2013. I just wanted to remind you 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 notes in our earnings release and are contained in our SEC filings. These statements are made as of the date of this presentation, and Delhaize Group assumes no obligation to update this information.

Today, we have the following people with us, Pierre-Olivier Beckers, CEO, Delhaize Group; and Pierre Bouchut, CFO, Delhaize Group. During this call, we will first look back on our performance in the second quarter, followed by comments on operations. And afterwards, we will take questions. And for those unable to stay on the call or wish to listen to the call again, a replay will be available on our group's website.

I'll now turn to Pierre-Olivier Beckers.

Pierre-Olivier Beckers

Thank you, Frederic. Good morning, everyone, and thank you for joining our conference call this morning to discuss our second quarter results. On Slide 3, we reconfirm our priorities for 2013. Our focus is on strengthening the different brands we operate in our markets through a combination of targeted price investments, focusing on elements of differentiation and accelerating growth in selected markets. We have imposed discipline on our working capital and capital expenditure resulting from an increased focus on free cash flow generation. We have reiterated today that we are confident to generate approximately EUR 500 million of free cash flow in 2013. Finally, we remain committed to improving our cost focus and reducing our complexity.

Slide 4. Slide 4 provides the highlights of the quarter. In the U.S., we reported another solid quarter. It was actually the third consecutive one of positive volume growth for Delhaize America. At Food Lion with the launch of Phase 4 in May, we now have almost 80% of the network repositioned, with the remainder scheduled for the fourth quarter. Profitability in the U.S. showed further improvement, but we will elaborate on this later in the presentation. In Belgium, our sales growth was mainly inflation-driven in the quarter, however, our market share increased by 35 basis points due to the successful reopening of our remodeled stores and network expansion. The positive sales growth also resulted in an improvement in profitability in Belgium. In Southeastern Europe, we also managed to improve our results both in terms of revenues and in terms of profitability. Over recent months, we have booked significant progress in terms of reducing the complexity of the group in order to enable us to improve our focus and allocate our capital to the areas where we're able to generate the highest return and growth prospects.

At the end of May, we have announced the planned divestiture of Sweetbay, Harveys and Reid's. And during July, we also announced the planned divestiture and master franchise agreement of our operations in Montenegro. Further, we continue to be on target to have flat SG&A as a percentage of revenues for the year, with the second quarter showing flat SG&A as a percentage of revenues compared to last year. And for the first half, we, in fact, decreased SG&A as a percent of revenue by 31 basis points.

Finally, we have generated a strong free cash flow in the first half, resulting in a further improvement of our balance sheet.

I'll now hand over to Pierre to give you more details about the financials and I'll come back later in the presentation. Pierre?

Pierre Bruno Charles Bouchut

Thank you, Pierre-Olivier. The following Slide 5 provides you with our summary of the second quarter income statement. Please note that we have classified Sweetbay, Harveys and Reid's as discontinued operations as from the second quarter, and we have adjusted accordingly the corporation values [ph]. At EUR 5.3 billion, our sales increased by 0.6% at actual exchange rates and by 1.7% identical exchange rates. Our gross margin stood at 24.3% and increased by 16 basis points year-over-year at identical exchange rates. A 70-basis-point investment in sales price at Delhaize America was offset by improved cost of goods, better shrink management and better results at Bottom Dollar Food. EUR 190 million of underlying operating profit increased by 5.8% at actual exchange rates and by 7% at identical exchange rates as a result of a 2.3% increase of our gross profit and of our continued control of our SG&A costs. Therefore, our European margins stands at 3.6%, up 18 basis point compared to last year. With EUR 70 million one-off charges, our operating profit stands at EUR 176 million with an increase of 1.3% at actual rates compared to last year. When taking into account EUR 47 million net finance expenses and a 20.4% tax rate, our group share in net profit stands at EUR 104 million, a 21.2% increase at identical exchange rates. We are able to generate EUR 66 million of free cash flow in the second quarter, a 54% increase compared to Q2 last year.

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