Koninklijke Ahold Del Ord

Such risks and uncertainties are discussed in the interim report, first quarter 2020, and also in the Ajo Delhaize public filings and other disclosures. Ajo Delhaize disclosures are available on ahodelhaize.com. Forward-looking statements reflect the current views of Ajo Delhaize management and assumptions based on information currently available to Ajo Delhaize management. Forward-looking statements speak only as of the date they are made. and Ajo del Jez does not assume any obligation to update such statements, except as required by law. The introduction will be followed by a Q&A session. Any views expressed by those asking questions are not necessarily the views of Ajo del Jez. At this time, I would like to hand over the call over to Alvin Concepcion, Vice President, Head of Investor Relations. Please go ahead, Alvin.

Thank you, and good morning, everyone. Welcome to our first quarter 2020 results conference call. On today's call are Franz Muller, our CEO, and Natalie Knight, our CFO. After a brief presentation, we will open the call for questions. In case you haven't seen it, the earnings release and the accompanying presentation slides can be accessed through the investor section of our website, outholddelhaze.com. I ask that you please limit yourself to two questions. And if you have further questions, then please re-enter the queue. I'll now turn the call over to Franz.

Thank you very much, Alvin, and good morning to everyone. Before I go into the first quarter presentation, I'd like to mention a couple of things first. The first quarter of 2020 was unlike any we have ever seen before. The COVID-19 crisis has affected all of us, and I truly hope that all of our stakeholders, and in particular the people who are out on the frontline, are managing through the crisis as well as they can. I'm honored to represent the leadership and brands of Ajo de Les who are doing their utmost best to provide the essential service of helping to feed our local communities. I recognize and I'm very impressed by the hardworking and dedicated associates across our brands and geographies, including the people in the stores, distribution centers, and supporting functions who have stepped up to serve their local communities in the face of immense challenges. We have been and will continue to be committed to protecting the health and safety of associates and customers as our first and foremost priority. We must continue to operate well and ensure that we are leading together with our business partners, vendors, and service providers in order to provide customers better availability of food and supplies during this time. We must be able to adapt to a new paradigm shift in consumer behavior that emerge. and invest as necessary, particularly in digital and omnichannel capabilities, and in ways that allow us to serve our communities well during this crisis, and ultimately serve them even better after this crisis subsides. On a separate note, I'd like to welcome, of course, Natalie Knight, who was appointed as our CFO on April 8th. And this is her first earnings call with us, and I'm delighted to have her here. and I'm also excited about what she can bring to the table. Now, let's move on to slide number four on the Q1 results. Clearly, our Q1 performance across all our geographies were impacted by the unprecedented demand created by the COVID-19 outbreak. Naturally, we go into more details on the performance, but keep in mind that the margin reported in Q1 is mainly a function of timing and is not a fair representation of the cost pressures we will experience related to COVID-19. Instead, it largely reflects the timing of unexpected higher sales, which preceded the timing of significant investments related to COVID-19 at the end of the quarter. The margin rate you see in Q1 is not sustainable and not likely to be in subsequent quarters. Nevertheless, we will maintain our full year outlook that our group underlying operating margin in 2020 will be broadly in line with 2019. On slide five, you will see some examples how we are deploying over 170 million euros to prioritize safety, relief and support efforts during the COVID-19 crisis. This 170 million figure is by no means the full amount. And in fact, it will ultimately cost more than this. This is just what we are currently deploying. For our associates, we've implemented additional safety and protective measures, which also benefits our customers, of course. This includes plexiglass shields at registers and new flow patterns in the stores to maintain social distancing. We have announced associate pay and benefits and are hiring more than 40,000 associates who can play a huge role in providing the essential service of helping to feed our local communities. We also provided contactless delivery options to the benefit of both associates and customers. For our customers, we are working with local governments and agencies to provide a safe shopping environment which also helps our associates. We have announced already stringent cleaning and hygiene measures like shopping cart cleaning before and after use. We have invested in security personnel and optimize customer traffic flows at our stores. We have provided special grocery delivery service for healthcare workers and were the first in our markets to offer special opening hours for the elderly. And for our communities, we are collaborating with our business partners, vendors, and service providers to ensure food and supplies are available. We have also more charitable donations to local food banks, national and private health systems, the Red Cross and various medical facilities. While we are doing our part to prioritize safety, relief and support during the COVID-19 crisis, we also know it's not enough. In the nearer term, our priority is to continue to run operations safely and smoothly and offer our customers more convenience so we can serve them better in their time of need. This means there are a higher level of investments needed in the upcoming quarters to make this happen. I would categorize these nearer-term priorities into three buckets. Improving in-stock levels, adapting store operations, and accelerating digital and omnichannel capabilities. Let me start with improving in-stock levels. It would be no surprise for you to hear that we, along with the broader food retail industry, have had challenges with in-stock levels in categories such as paper, sanitation, frozen, proteins and in some cooking supplies such as flour. We are therefore proactively working with suppliers to provide better availability of products to our customers, including prioritizing SKU offerings to meet current levels of demand. We are using our scale to ensure that we have provided our fair share of allocation for these products. We are also leaning upon idle capacity in the labor force and food service distribution providers in order to overcome capacity bottlenecks. We are also adapting our store operations to changes in customer behavior, preferences, and safety needs. We are working with local governments and agencies on health and safety measures for stores and distribution centers. And our leaders know it's more important than ever to push for a higher level of customer service through exemplary associate efforts. And we are adjusting our systems and processes, such as inventory ordering and labor scheduling, to better match the new demand patterns caused by community lockdowns and health and safety concerns. For example, weekends have historically been some of our highest traffic days. and customers have shifted towards more weekday and shopping during off-peak hours. We also know that for many reasons, including more recently, safety concerns and always for convenience that customers, both new and existing, younger and older, are preferring to engage us more online. Our near-term and long-term plans always involved investing more in digital and omnichannel capabilities, even prior, as you know, to COVID-19. But we know we need to invest in accelerating these capabilities even further this year. This is in significant focus in both the US and Europe, and we are accelerating our online sales. In the US, we initially target over 30% growth for this year, but we now expect it to be even higher at over 50%. In Europe, we expect to accelerate net online consumer sales growth this year too. And in the US, we will be able to generate this higher level of online sales by investing in incremental associates and supplemental infrastructure, such as through more storage units, picking devices, and stepping up the pace on the number of click and collect locations we plan to open this year in the US. We are upping our target to over a thousand locations in 2020, versus our initial target of roughly 1,000. In Europe, higher level of net consumers' online sales will be achieved by accelerating the timing of two home delivery fulfillment centers in the Netherlands, with one opening this summer in August and the other in fall around October. Albert Heijn will also begin to offer Sunday home deliveries this month, which is new. At bull.com, we will continue to press hard to increase the number of marketplace partners, where we added another 1,700 merchants in the first quarter, bringing the total to nearly 21,000 now. And this is key because these partners can help us flex capacity faster. These are just some of the ways we will expand our same-day and next-day offerings and capabilities. in order to drive the higher levels of growth I just mentioned. I'm now on slide 7, and while we are highly focused on our nearer-term performance, we will not lose sight of the long-term priorities and investments needed to drive our growth after the initial COVID-19 crisis. It's currently unclear what the long-term paradigm shifts in consumer behavior occur due to COVID-19, But we will monitor these, learn from them, and quickly adapt to them. Regardless of what these shifts ultimately are, they are things we already can do now to accelerate growth over the longer term and retain a number one and number two market position across our brands. There are three areas of focus I'd like to highlight that will be relevant in the post-COVID-19 world, which we think will increase our share of wallet. and our share of stomach. These are, first of all, enhancing associate and customer well-being by continuing to take appropriate health and safety measures and offering competitive associate pay and benefits and progressing on our health and sustainable retailing targets through 2025, which we already unveiled on February the 25th. These 2025 targets revolve around ensuring customers have healthier choices and see more product transparency. And also that we are doing our part to eliminate food and plastic waste. We will have more news to announce in this area later this year, as we are in the process of setting long-term science-based targets to reduce our impact on climate change. On offering competitive associate pay and benefits, we continue to focus on offering attractive and competitive packages with employee opportunities for advancement. On March 5th, we signed a four-year collective bargaining agreement for Giant Food and will continuously work with our union partners and on solutions to improve the position of our employee pension plans. The second item, we need to continue operating brands and supply chains smoothly in order to continue servicing local communities well, and we need to do it more efficiently. There are many ways we are focused on improving efficiency, which can help us to keep pace with evolving customer needs, while also improving our bottom line. A very good example of this is a three-year strategy we embarked on this year to move the US supply chain to a self-distributing model. This is not only reducing costs, which can be passed on to our customers, but it will also improve speed to shelf and improve product availability and freshness for our customers. We also continue to explore technology to improve the efficiency of our operations, whether that is online with our micro-fulfillment center pilot and innovation centers, such as Peapod digital labs in the US or artificial intelligence labs in the Netherlands. which aim to enhance the digital and omnichannel journey for our customers and improve our operations. Our stores are increasingly implementing electronic shelf labeling and various frictionless checkout options, which provide savings and a better customer experience. Item number three. You first heard us talking about this at our November 2018 Capital Markets Day. But we remain committed to investing CapEx at around 3% of sales on a year-by-year basis in order to accelerate our digital and omnichannel capabilities, some of which I described a moment ago. And it will also be used to improve our store fleet through remote programs such as reimagining stop-and-shop. And we will improve mule solutions capacity and private label offerings to further differentiate our offerings and help us gain more share of stomach. This is especially important if the consumer decides to eat more at home than in the past. Although our CAPEX investments excludes M&A by definition, we will continue to explore partnerships and M&A opportunities. Slide 8 and 9 highlight some of our advancements and progress in the US and in Europe. I've touched upon some of these highlights already. And for the interest of time, I won't go over them in detail, but I strongly encourage you to take a look. Now, let me hand over to Natalie.

Good morning, and thank you, Franz. I'm pleased to be here for my first quarterly results call with Ajo Deleuze, and I'm looking forward to meeting many of the analysts and investors who are on this call in the near future, hopefully in person, hopefully sooner rather than later, when conditions permit. But for now, let's get to the numbers. And as Franz already mentioned, our first quarter of 2020 was really shaped by the unprecedented levels of demand due to COVID-19. As a result, net sales grew 12.7% at constant exchange rates to 18.2 billion euros and operating income increased 40% at constant rates to 964 million euros. Net sales were driven primarily by our 12.2% group comp sales, excluding gasoline, and net consumer online sales grew 37.7% at constant rates. Underlying operating income increased 35.7% at constant rates to €961 million, with underlying operating margin up 90 basis points to 5.3%, largely due to the timing of the COVID-19 related sales. These higher sales preceded the timing of significant investments that only started to become material at quarter end. I'd also like to emphasize that this effect was more pronounced in the U.S. relative to Europe. As you probably remember, COVID-19 spread earlier in Europe, which correlated to earlier investments related to COVID-19. In the U.S., corona impacts really didn't begin until March, so the ramp-up of investments was later. Moving on to net income, it was €645 million in Q1, up 45.1% at constant rates. As an update to our share buyback program, we repurchased €336 million worth of shares in the quarter. Diluted EPS was €0.59, an increase of 51.8% at constant rates, and diluted underlying earnings per share were also 59 euro cents, up 46.5% at constant rates. With respect to the first quarter performance by segment, net sales in the U.S. grew 13.7% at constant rates to 12.5 billion euros. U.S. comp sales increased 13.8%, driven by double-digit growth at all brands. Food Lion and Giant Food led the way and we believe we gained overall market share in the quarter as well. So we're very proud of our performance across the board. In the U.S., online sales grew 42.3%, and this increase comes despite considerable product availability issues early in the corona crisis, which caused the U.S. to close click and collect operations under most banners for some portion of March. As Franz mentioned, we are now accelerating investments in our online business in order to rapidly expand our capacity. Q1 underlying operating margin in the US was 6.7%, up 180 basis points from the prior year, driven largely by the timing benefit from higher sales preceding material COVID-19 investment. Product sales were strong across the board, and we continued to make progress on our Save for Customers program. We did see a modest shift toward lower margin products in the period, but this had little influence on our margin as customers bought more products that were typically not on promotion and product availability issues prevented us from running certain promotions. These gains were partially offset by higher shrink and lower vendor allowances. In Europe, net sales for the first quarter grew by 11% to 6.9 billion euros. This development is strong but somewhat muted versus our U.S. growth due to the higher level of consumer lockdown restrictions, such as curfews and travel restrictions to our stores. It also is relevant to mention that the wallet share for food away from home is lower in European countries, so the shift to food at home was less pronounced. Europe's comp sales increased 9.8%, and while all countries experienced higher-than-normal demand, Central and Southeastern Europe European countries grew slightly faster than the overall segment. This translated to share gains in the Netherlands and Belgium and unchanged overall share in Central and Southeastern Europe. Net consumer online sales in Europe grew 36.3% despite capacity constraints. At Bol.com, our online retail platform in the Benelux, net consumer sales grew by 39.5%. And Bull's third-party sales grew 66% in the quarter, with nearly 21,000 merchant partners on the platform. Moving on to the European underlying operating margin, it was 4.1%, up 10 basis points from the prior year, despite COVID-19 investments, an $11 million higher pension expense in the Netherlands during the quarter, and additional planned investments in digital and omni-channel capabilities. While COVID-19 was clearly the main driver of sales growth in the quarter, I think it's worth mentioning that our business was also quite strong prior to the stockpiling period. What you'll see on this chart is that group comp sales growth, excluding gasoline in January and February, accelerated versus the full year growth rates in 2019. And most importantly, on an adjusted basis, at the bottom of this chart, where we exclude gasoline, weather, calendar effects, the stop-and-stop strike impacts from last year to really give you what we see as our best view of the underlying business performance of the business. Sales growth was strong at 3.7% in January and February, which showed clear momentum versus the 2.5% adjusted sales growth we had in 2019. This trend is visible both in the U.S. and European segments, which speaks to the underlying strength of both businesses throughout the entire reporting period. Now, let me move on to free cash flow. I'm proud to say that the cash position of Ajo Deleuze remains strong. Free cash flow in the first quarter was 1.23 billion euro, which compares with negative 136 million euro last year. This improvement was mainly driven by COVID-19 impact on our profit and working capital balances at the quarter end, which resulted in dramatically lower inventories, and higher account payable balances. And do note, these will return to more normal levels in subsequent quarters. Capital expenditure in the first quarter was €708 million, up €256 million from last year due to our acquisition of three CNS warehouses to help insource our U.S. supply chain activities. Therefore, as we progress into Q2, capital expenditures will be lower than the level we saw in Q1. Moving on to our outlook for 2020, I'd like to mention that despite the uncertainty generated by COVID-19, we are reiterating the financial outlook we provided on April 7th. Due to the significant quarterly fluctuation caused by the coronavirus, we do feel some commentary on Q2 is warranted, However, commentary on quarterly trends and expectations shouldn't be expected as a course of action in future periods. In April, we continued to see above normal baseline levels in both the U.S. and Europe when it comes to sales, but not as strong as those of March. We also accelerated our online sales growth in both regions relative to what we had delivered in Q1, reflecting increased capacity and better in stock positions we now have in the system. We believe these higher sales are occurring due to continued gains in share of stomach, particularly in the US, due to ongoing shopping restrictions. Despite this strong month going forward, it is very difficult to project how sales will develop as COVID-19 restrictions are reduced and recessionary trends take hold. Therefore, we won't be providing any specific top line guidance in line with our standard practice. What is important to reiterate, however, is that the investments related to COVID-19, which became material at the end of Q1, will become significantly more visible in subsequent quarters. Therefore, it's important to understand that the margin level you saw in Q1 will not be sustainable in Q2. Please see the footnotes in the outlook table we provided which describe other minor factors to consider in 2020. All of these we flagged to you previously, and none have changed. Now on to some comments about free cash flow. In our April 7th update, we indicated that we expect our free cash flow to come in above the 1.5 billion euro mark, which we had set at the beginning of the year. We have not changed this expectation. We are, however, modifying our view on what's driving that upside for the year. The upside is mainly related to the strong levels of free cash flow generated in Q1, rather than our previous indication that it would mainly be related to delays in capital projects. While some capital projects will inevitably be delayed versus our pre-COVID-19 plans, Front provided detail about how we will accelerate investments in digital and omni-channel capabilities to expedite our efforts to better service changing customer needs and demands. And we will continue to focus resources on operating our brands and supply chains smoothly with associate and customer health and safety as really our first and foremost priority. Therefore, we expect capital expenditures to be out of or around $2.5 billion, loaded more towards the back half of the year. As you know, at Ajo Deleuze, we are committed to maintaining strong cash and liquidity position as evidenced by a recent placement of a 500 million euro fixed rate bond due in 2027. We intend to maintain our dividend policy, which calls for a 40 to 50% payout ratio, and to repurchase the billion euros in shares this year. So our shareholder return policies remain in place. However, like all responsible companies these days, we will continue to monitor any macroeconomic developments. Thanks, and I'd now like to hand it back over to Frans.

Thank you very much, Natalie. Let me wrap up. We had a strong first quarter performance, which was impacted by the unprecedented demand from COVID-19. But even prior to the COVID-19 demand, the underlying business performed solidly. Although there is uncertainty caused by COVID-19, and we are making significant investments in the near term, To continue to run operations safely and smoothly, we are maintaining our 2020 outlook and shareholder return policy. But we continue to monitor the macroeconomic conditions like all responsible companies do. Longer term, we will anticipate and adapt to the shifts in customer behavior, and our focus is to continue to invest in omnichannel growth to maintain our number one and two market positions. We have a strong cash flow and liquidity position that will provide us the means to make the near and long-term investment necessary to drive growth, while at the same time returning capital to shareholders. I also would like to thank the teams across our brands again for their very hard and successful work in the first quarter. This is the end of our presentation, and we open now up for questions.

Ladies and gentlemen, to be registered for the question and answer queue, please press star 1. To remove a question, please press star 2. When asking your questions, be aware that everyone on the call can hear background noise, so please keep this to a minimum. If possible, don't go hands-free or use the speaker. In order to allow enough airtime for all participants, we would like you to limit the number of questions to 2. Please stand by for a moment as we wait for participants to register for the queue. Thank you. The first question is from Mr. Bruno Montagne, Bernstein. Please go ahead, sir.

Good morning. My first question is on grocery e-commerce in the US. A few years ago, you were clearly ahead of the competition of your people brand. Then a few years ago, the competition was finally waking up and you were losing some market share. At the current growth rate, would it be fair to say that you're maintaining your gross e-commerce market share or would you be gaining or losing it? And my second question is around, I think if I'm not mistaken, one of your multi-employer pension plans in the US is currently in the process of being renegotiated. Could you just remind investors exactly what the issue is with that? multi-employer plan and how big potentially liability could be and what kind of options that are available to you in that whole process. Thank you.

Yes, Bruno, let me take the first question and Natalie the second one on the pensions. Our e-commerce business in the US, you're referring to the US, is a food business only. And We have already a very strong store position on the East Coast, but also an omnichannel position, which we consider to be the leading grocer on the East Coast in an omnichannel fashion. We grew this quarter 42%. We already gave you the outlook for the full year with a 50% growth, and we're ramping up both our click and collect, our home delivery, and our digital performance towards our customers. So... The data on e-commerce sales are not available through companies like Nielsen and so on, so it's very difficult to see those market shares. But we feel that with a 42% growth of e-commerce in the US, we are at least maintaining our market shares in the food online business. A few things on the pension topics. In our annual report, we have a very clear paragraph on all the multi-employer pension funds with all the financials. But let me ask Natalie to give a little bit more color.

Sure. Thanks for that, Frans. What you do see is we have several items open, and I think in France's comments today, you heard very specifically about some activities that we've done with Giant Food in resolving collective bargaining agreements where pensions have been one of the cornerstone topics in that conversation. That one, if you see in our notes, is related to Felra. There are, as I said, others. We've disclosed the size of that as 750 million US dollars in terms of what the impact could be.

And that negotiation, that particular one, is now completed. Would that be fair in that matter?

It's not completely finalized, Bruno, but we know that it's a complicated negotiation process with four partners in place, with the UFCW, with the PGBC, the pension fund, with Safeway and ourselves. But it's going very constructively and we hope to finalize those discussions soon.

Thank you very much. The next question is from Mr. Andrew Quinn, Exane. Go ahead, please, sir.

Hi, good morning, friends, and welcome to Natalie as well. Two questions. So the first one, we've seen quite a lot of press reports about some shortages, I think particularly in the protein areas. I'm just wondering if you can comment on how you're seeing that yourselves and whether or not it's having an impact. And the second, if you could just help us out a little bit more in April, just so we can shape Q2 a little bit better. But still good trends, a little bit below, but I'm wondering if you can put some numbers to that. Thank you very much.

Good. Next, we'll come back to April and potentially a little more color on the second quarter sales-wise. On protein, I think you're mainly referring to the U.S. because on shelf availability in general in the European markets, we are close to be back to normal with some exceptions on baking products, some sanitization products, and so on. But we are almost back to normal in all our European markets on supply. If you look at the U.S., the situations, they're different. We still face a number of supply chain challenges in the total chain. Together with our vendors, we simplified SKUs to make sure that we can simplify production and that we have fuller shelf sooner. And there we see a number of shortages on the same sanitization, on the same things like baking products like flour and these type of things, because there's a lot of baking at home. There's a so-so supply on paper products. And indeed, protein is at the moment the biggest issue. Due to COVID and due to how factories and slaughterhouses are organized in the U.S., where people work shoulder to shoulder with quite some interruptions due to health reasons in those plants, a number of big meat vendors were handicapped by that. We see now that protein is low and that is both for poultry, pork and for beef. That is an overall market phenomenon and we see now slowly but surely that supply is coming back. Same for our own meat factory but also for our vendors in the rest of the network. This will take some time, because the procedures look like this, that if there is an infection rate which is too high, it will be closed down by the authorities. A deep cleaning process and a restart of the plants, that's what's happening at the moment. And with the new Defense Act of the President, I think we get a little bit more leverage there to do this faster, so that the protein supply will come back sooner. But at the moment, it's still a topic, both for frozen and for fresh meat. But everybody's working on to bring that back. Overall, of course, in the U.S., there is enough food supply in the total chain. So it's not a worry on that end. Natalie, something on the second question on the second quarter sales.

Yes, on April. I think what's fair to say if we look at April is that in Europe, we started to see sales levels, I'll say, normalized. Whereas in the U.S., we were positively surprised at how strong the sales continue to be. So we definitely had very good top line growth in the month of April. And the other thing that I think is really important though to call out is if we look at expenses, this is also really a period where we started to see those significantly higher level of operating expenses that we signaled to you primarily around labor and safety. you know, when you translate that into your modeling for the second quarter, I mean, you're going to see, you know, a deceleration of trends versus Q1, a little bit on the top line, but definitely when we look at margin and free cash flow, because that's also been pretty heavily impacted by those big working capital gains we had in the first quarter.

Okay. I'll open up to somebody else. Thank you.

The next question is from Mr. Andrew Gwynn, XM, Go Athletes. Mr. Xavier Lumene, Bank of America, go ahead, please. Mr. Lumene, your line is open. Please proceed.

Yes, thank you. Sorry, I was on mute. Just two questions, if I may. Just on the $170 million of costs you're expecting due to COVID-19, can you help us to break that down across the quarters going forward? And just looking at the guidance that you set up for the full years, You said that you are expecting, of course, a lot of uncertainty about COVID, but you are still maintaining the guidance. So should we see the guidance and the comment about uncertainty, the kind of low-end guidance, i.e. you are very cautious when guiding flat-mountain year-on-year?

Would you like to take the $170 million question, Natalie? That's how I understood from Xavier the question, the $170 million to...

Yeah, and I think it was also as well just the guidance in general. And so, I mean, I think when you look at the cost for the rest of the year, you will see that basically in those same big buckets that we've talked about, labor being the biggest, but in addition to that, big costs in terms of on safety, sanitation, hygiene, and those are things that we currently do project will continue for the majority of the year. I think your comment in terms of how are we seeing those and what's the uncertainty, we tried very hard to be really clear in terms of guidance for the year on the margin being very consistent with what we've said all year, broadly in line with the prior year. So that does tell you we will be expecting lower margins for the rest of the year than what we saw in the first quarter. But I think it also says it's something that if you look across the period that just reflects losing a little of the sales leverage that we've had so strongly in the first quarter.

Xavier, I think it's fair to say that about the $170 million, like Natalie already indicated, the breakup in categories, that $170 million by the 7th of April was the committed costs we gave you, but roughly $100 million of that cost fell into the first quarter, and the remaining will fall in Q2, plus additional costs we did not commit to yet on the 7th of April, but in the meantime have committed. So we see a cost overhang in the second quarter, and that's why you should not extrapolate those margins from the first quarter. The second thing is that you referred briefly to consensus on the second quarter margin. We think that the consensus of the second quarter margin is at the low end of our expectation.

Thank you very much. The next question is from Mr. Scott Mashkin, R5 Capital. Go ahead, please, sir.

Hey, guys. Thanks for taking my question. So I wanted to just keep going on what you guys were talking about in the short term and ask a more long-term question. So on the margins, specifically in the U.S., I think you guys were coming into the strike, and I think they were down pretty significantly last year. It seems that our data says sales are probably running still in the U.S., maybe in the mid-teens or something, maybe a little higher. So when we think about incremental margins, understanding the expenses, it seems that margins in the U.S. should come up still quite a bit, or am I missing something?

Scott, first of all, thank you for being so early with us. We gave you the guidance for the full year on margin. And we gave you a guidance on a number of other elements for the full year, which I think is pretty rich data compared to the uncertainty of COVID. And at the same time, we also gave you a guidance for an upping the online sales in the US up to a 50%. And we know that the online sales is of lower margin quality than our bricks and mortar sales. So we also absorb that within our guidance. And we do not give, let's say, quarter-by-quarter U.S. or European margin guidances.

Okay. So I'll just move on to longer term. So in front of you, you were kind of going where I was going with the idea that Omnichannel is... going to be more of the business. As we think about that, what do you think the ramifications are, not this year, but even as we go out, if this is more permanent behavior changes and Omnichannel becomes a much larger part of your business much more quickly, how should we think about that?

You know that, Scott, that Our omnichannel proposition has always been a very big part of our strategy, and that is both in the European and in US markets. And also the first question on Bruno on the e-commerce on the East Coast was also referring to that. We gave you a number of having 7 billion euro online sales by 2021. And that number might come closer and faster looking at the growth rates we have at the moment, the 50% in the US, but also at the European end. where we also grow almost 40% with our bowl.com and also very strong growth rates with our European business. What is clear for us is that online sales will be sticky in that growth perspective for our customers and be accelerated due to COVID-19 also for food. So that's one thing we see. The second thing is that we will have been always... convinced as well that an omni-channel proposition, both the combination of online and bricks and mortar, is a proposition where we get a higher share of stomach and higher share of wallet from our customer base. So we believe that in the end it will drive growth, it will drive loyalty, and in the end it will also drive profitability. And in the mix this will be a good thing to have for us. The second thing is So that's the margin mix of the two. The second thing is that on the cost levels of e-commerce fulfillment, we made quite some progress there. And also there you see a different type of margin mix. We have now more sales, more sales growth coming from click and collect versus home delivery, which as you can imagine from a cost perspective is a good thing. So it gets more economical, that sales. And the second thing is we have a lot of measures in place to increase productivity fulfillment centers, our pilots with micro-fulfillment center and so on. So it's a combination of a number of things. It's a sales perspective, it's a share of wallet and we see and we know that omni-channel customers are getting bigger faster and are in the end also more profitable. And the third thing is our own ambition to get our e-commerce sales more economical by using it, by working at productivity and a more favorable mix, click and collect versus home delivery. And the last data point, Scott, is that we started in the U.S. with a 100% home delivery proposition for online in our PPOD days, and we're cruising closer and faster to a 50-50% distribution of click and collect and home delivery. And this year we will have more than 1,000 click and collect operations in the U.S., and therefore also growing our penetration levels.

Perfect, guys. Hey, thank you so much for taking my questions. Appreciate it.

The next question is from Mr. Judah Homer, Credit Suisse. Go ahead, please, sir.

Hi, good morning, and thanks for taking my questions. I first wanted to follow up on e-commerce in the U.S. Maybe you could help us a bit with the trajectory of ecom business as you move into second quarter availability of product and availability of delivery slots seem to have gotten better so what are you seeing in terms of kind of in-store shopping into early q2 versus the acceleration in online and are you seeing that reverse at all as we get into may yeah thank you judah and uh also for your early days

Early moment in the day. Thanks for the question. When we had the hype of that stockpiling, we paused our click and collect locations on services because we gave preference and priority to our availability of stock for our bricks and mortar customers. In the meantime, we have reopened all our click and collect locations. So that has to do with the fact that the stock levels are improving and getting better. And to give you a roughly a number, we are not availability of stock differs a little bit by brand and by region and by category, but an over 80% availability of stock. So that's why we see a very good reason to reopen the click and collect locations. we think that we can combine both now again at the same time as i mentioned before we are going to increase our capacity from 700 to more than thousand click and collect locations for the us in this in this calendar year so we also open more opportunities there and that is the same for our home delivery services capacity-wise so we increase capacity we will have more capacity in our system than the 50% growth. So we also can grow further than the 50%. And that's maybe something we can talk about in the second or the third quarter when we know a little bit more about how the online sales is developing.

Is that helpful? It is. No, that's great. And then my second question was more related to gross margin implications for the U.S. business. You mentioned that products on promotion – were less in terms of mix of total sales. And clearly, promotions across the industry have been pulled back on. So how do we think about price competition currently? And as we ramp toward normalization in a post-COVID or in a reopening world? And then separately, I did think you mentioned that shrink was an offset. I would think that faster velocity in the stores may actually improve shrink. people buying more fresh product, but why didn't that happen?

So let me take that one because you've picked on a couple topics that are all those fun things that help us think about margin as we go forward, and there's certainly lots of different pieces there. I think when we look at it from kind of the gross margin implication, and those are I think most of the topics you were looking at, if we look at promotion first, That's one where obviously we saw promotions decline quite a bit in the first quarter because there just wasn't a lot of product availability and it was all about how did we get product in store and to our customers. What we've seen is we're still in a period where promotions have declined, certainly through the month of April. And that's just because, again, looking at what was available, responding, there's a certain amount of time it takes until you can change circulars, et cetera, and you saw that happening. We're now in the process of looking at how we start to re-ramp up some of that commercial activity. There will be several events that we know won't be happening as we look into the second quarter and third quarter that had initially been planned. I'm thinking about the Olympics in Europe, Formula 1. the European World Championships. But it is something where we're starting to see, I think, more activity and we know also from our competitors. So I think you'll see that, you know, normalized you know, kind of May, June, certainly, you know, 4th of July in the U.S., you know, we'd expect to see things at normalized levels. You also talked about shrink. And when we look at shrink again in the first quarter, think about the number of things that just because of the social distancing, when we think about, you know, our salad bars, our self-service, our bulk items, a lot of those things had to be closed down and definitely had impacts on it. There were also in the earliest days of the coronavirus just the issue of getting things in store and we've started to see some of that correct itself in terms of just the I'll call it the paperwork and everything behind that. As we go forward, I think your assumptions on shrink will probably be more at normalized levels as we get past this kind of first surge in terms of prices, of sales velocity. And then the last one you didn't mention but might be interesting, as well as when we look at the vendor allowances, that's something that it's largely you know they're fixed levels and so as volumes increased that was something that uh worked a little against us in the first quarter um that too will i think normalize more as we go throughout the year hope that helps it does thank you the next question is from mr nick walter city go ahead sir uh good morning both uh thank you for taking my questions um

Firstly, it sounds like the £170 million cost figure for COVID is somewhat of a snapshot in time. When you think about the costs that are now coming into view, the kind of the uncommitted costs, so to speak, or perhaps the committee costs that have come to light subsequently. How could that £170 million scale over the coming quarter? Does it increase by 50%? Does it double? It would be really useful to get a sense of how you're planning for those expenses. in future quarters. Then secondly, when you think about the building blocks or indeed the reverse building blocks down to a flat margin, how does the online P&L investments scale versus the COVID-19 costs? It'd just be good to get a sense of what sort of drag you see in the income statement from the push into online. And then lastly, if I may, just a supplementary And if you could update kindly on the partnerships to automate and online, I guess that's more pressing. Thank you.

Thank you, Nick. Natalie will take your second question. Let me take the first. I gave you already some color on 170 million, the press release. We gave some color what kind of categories it was, 100 million booked in the first quarter out of the 170 and the remainder in the second quarter. If you look at the total cost for the full year related to COVID, that is, of course, very difficult to assess, right? I mean, we have limited disability. How this will exactly develop has strongly to do with government regulations when you talk about safety, health measurements, security in stores and all these type of things. But I would say that if you look at the first quarter, 100 million in... A couple of hundred millions more in the total remainder of the year, I would say, as an indication. And you have already 170 now, so it will be more than 170 for sure. We don't know exactly the amount.

It could broadly double then. I mean, that sounds sensible to me.

That is a too early conclusion. But as a multiple of the hundred in the first quarter, I don't know. I don't give you the multiple number. Thank you.

Okay. What I would say when you look at this question of COVID versus online, I think COVID is a meaningful cost for us as we look at Q2 and beyond. So I think it is very fair to assume that for this year, the COVID cost impacts are going to be larger than the omni-channel dilution that we see. Having said that, one of the things that's really important to us as we look at the year is, and we maintained our guidance, is that is how we've built our margin, is that we're looking at the opportunities to absorb both of those things and maintain our overall guidance.

When you look at the drag, it sounds like it's a fraction of COVID, but a meaningful proportion. I'm just trying to get a sense of, so obviously you're accelerating into a degree of, You're using the operating leverage from the first quarter to push harder into online and to flex the customer demand.

Yes, that's exactly right. You'll see as we go through the year, investments both on the CapEx and the OpEx side to really secure those share of stomach gains that we've been able to achieve and we think we can accelerate through the rest of the year.

And we're very proud, Nick, about increasing our online presence and sales. Natalie already mentioned a number of cost elements linked to that. But in the meantime, we also launched our completely new PRISM, let's say, system to organize our store picks. And those are already operational with... with Giant Martins in Pennsylvania, and we rolled this out now through this year and the beginning of next year. This is all 100% proprietary software, and we are very proud and very strategically for us that what we do on Omnichannel is for a huge part proprietary organized, both from systems, both from fulfillment, both from the way we market it, both from media monetization and so on. So it's a strategic part of our business which we feel we keep it very much in our own hands. And that prison system is one of those elements. And so far the experience is extremely good and the customer response on the front end is extremely favorable. If we just switch over to Europe, what's happening there is we will increase our capacity for Albert Heijn by pulling forward two home shop centers. And we also, as I mentioned before, will open up the Sundays for delivery to increase capacity for the market, because at the moment we are running at full capacity. If you look at bol.com, doing extremely well in the Dutch market, but also in the Belgian market, we are growing very, very fast. And Nathalie already mentioned in her comments that we grow with our plaza 66%, and that we have now 21,000 merchants on our platform. also in the belgian market we get a lot of uh good feedback from our belgian merchants on the platform as well so i think strategically we do the right thing here and we accelerating our implementation of our omnichannel strategy but this in a way where we own let's say the majority of the fulfillment and and frontend ourselves

I know you're running a trial with Takeoff in Windsor. Are you running any other trials with other partners?

We are now looking at the full operation of the Takeoff Center in Connecticut. You have seen it. And we are getting closer to the required productivity levels. But we also see other initiatives in the market. And of course, we keep our eyes open. Super. Thanks so much.

The next question is from Mr. James Grishnick. Jeffries, go ahead, please.

Yes, good morning to all. I just have two quick ones. The first one is, can you perhaps describe what shows slow down you expect over the balance of the year that underpins that reiterated full year guidance? I'm intrigued by the fact that you're saying that the channel shift is stickier in the U.S. so far in Q2, so I'm wondering just how quickly you expect that to fade from here. And the second one, I presume a huge swing factor is absenteeism and doubling of costs and wages. So can you perhaps describe, especially in the US, what the peak of that was through the crisis and where it currently is at? Thank you.

James, the line was not so clear. I understood the first question is, can we substantiate how we're going to grow our online sales in the U.S.? Is that correct?

Hopefully you can hear me better now. I'm taking off my hands free, so apologies for that. Yeah, the first question was, how are you hypothesizing sales will slow down, sales growth will slow down over the balance of the year? So what sort of underpin on sales are you taking on that reiterated guidance today? And the second, I was just wondering what peak absenteeism was through the crisis and how reducing, I presume, and what you're learning from Europe on that front that may apply to the U.S.? ?

Okay, so our base case assumption on the sales level, James, is that we go back to normal levels in the second half. We were very proud about the first two months of the year, like Natalie already mentioned, that we had a good sales development, which is also in the report. On absenteeism, we also shared with the market that we hired 20,000 workers in the U.S., to compensate for people not coming to work because of quarantines or self-chosen quarantines and people got sick. In the meantime, we see that people are coming increasingly back to work, which is very good. We have a lot of very engaged people in our workforce in the US. So if we look at our DCs and our stores, they are properly staffed now. But of course, it comes with higher costs and those are A couple of things whereby the surplus and cost coming in for the second, for the remainder of the year, of course, is very much labor-driven, therefore.

So, Frans, I guess, as a follow-up, where is that 20,000 number now? It feels as if it's a lower number.

It's a slightly lower number now. It's mainly concentrated in the New York and Washington markets. there is the biggest impact from COVID, the biggest impact on people falling ill. So that number is going down, and those are mainly part-time workers we hired.

Understood. Thank you very much.

The next question is from Ms. Fabienne Caron. Kepler, go ahead, ma'am.

Yes, good morning. Two questions from my side. First, on Europe, I appreciate you don't give a margin per regions anymore within Europe, but could you give us some qualitative comments on profitability development from the Netherlands, Belgium, and Central Europe? I'm particularly thinking here of the Netherlands, given the high share of online food products. And my second question would be regarding bol.com. How do you forecast sales of bol.com in the second part of the year or mainly already for Q2, given the much tougher economic environment? Thank you.

Yeah, Fabienne, two things on the margins. And thanks for your understanding that we only report the European segment nowadays. In the Belgian market, we see roughly flat margins compared to last year, but a good increase of sales. We see in the Dutch market a slightly lower margin than last year, but it's mainly impacted, like we already said, with the investment in our pensions of more than 14 million for the full year, and also our further investments on OPEX in digital and online. So that's a little bit more color on those margins, and very, very stable margins also in the rest of Europe, which gives us this slightly higher margin in the first quarter for total Europe. Your second question was on bull.com, what we see on the growth rates for the remainder of the year. You can imagine that we don't report out on this, but myself, I see at this moment no reason to assume that the bull... growth rates we see now will be much lower for the second half of the year okay so you don't see any change in consumer behavior regarding some some some items and they're buying using non-food yeah i think we have a very strong proposition and we also grow faster in belgium now than last year and you also know that we will um We will attract more French-speaking customers in Belgium by having the French language module operational by the middle of this year. So that will also help us. We have a very strong product and last-mile delivery in the Dutch market with a very high penetration. We, I think, have organized a good plan to make sure that we attract more customers given some new entries of competitors to the Dutch market. So we feel well positioned in the Dutch market, and we also make a number of combinations for Bol with our Platza partners, which understand the Dutch market extremely well. The last mile in fulfillment is unique, which Bol offers in the Dutch market, especially also on evening deliveries and very reliable next day deliveries. So we feel confident that we can grow further also with Bulbot.com in the Dutch market.

Okay, thanks a lot.

Next question is from Mr. Rob Joyce, Goldman Sachs. Go ahead, please.

Hi. Thanks for taking my questions. So the first one, just on the costs you're incurring related to COVID, are there any regional differences you're seeing in these costs? And do you consider these cost levels the sort of market standard costs? Are there any additional costs you're incurring that your competitors might not be? And then the second one, just if you could remind us, if we include the picking fee, are your click and collect sales equivalent profitability to your sales install? Thanks very much.

So let me start on the cost comment in terms of regional differences. I think the only thing that I would, the biggest thing I would call out is just the timing of those differences that we saw earlier in Europe than what we saw in terms of timing for the U.S. I think what we believe is as we go forward, you know, there's costs related to safety and hygiene. Many of those are probably going to stay with us. And when we look at labor, those really do vary quite a bit depending on market and uh... timing so there have been some differences there in terms of how that plays out uh... and that's also part of the reason we've given you the guidance in terms of really expecting to see that increase in cost in the second quarter when you see the u s uh... labor peace come in a much more substantive way than what we saw in the first quarter when you're i think your second question was just looking at if we look at click and collect versus in store and you know how does that profitability uh... very I think it's fair to say that even if you take the picking fee out, they're getting closer, but there still is a difference in those profitability levels today.

Thank you.

All right. With that, thank you for joining our call. We appreciate the time. Have a great day, everyone, and take care.