Koninklijke Ahold Del Ord

Good morning and welcome to the Analyst Conference call on the fourth quarter and full year 2020 results of AHL Dorheze. Please note that this call is being webcast and recorded. Please note that in today's call, forward-looking statements may be made. All statements, other than statements of historical facts, may be forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the Summary Report, Fourth Quarter and Full Year 2020. and also in AHODO HESA public findings and other disclosures. AHODO HESA disclosures are available on ahodohesa.com. Forward-looking statements reflect the current views of AHODO HESA management and assumptions based on information currently available to AHODO HESA management. Forward-looking statements speak only as of the date they are made, and AHODO HESA 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 Harold O'Hazard. At this time, I would like to hand over the call to Alvin Concepcion, Senior Vice President, Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to our fourth 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, aho.haze.com. I ask that you please limit yourself to two questions. If you have further questions, then please re-enter the queue. I'll now turn the call over to Franz. Thank you very much, Elvin, and good morning, everyone.

In 2020, the effects of COVID-19 and the social unrest deeply impacted the communities we serve and created unprecedented challenges for our brands. I'm pleased with how the hundreds of thousands of associates across all our brands, distribution centers, and support offices demonstrated courage and care in protecting the safety of our stores and distribution centers while providing at the same time great customer service and community support. I would like to once again thank each and every one of them for their tremendous efforts. In support of these efforts, we made significant investments in additional safety measures, enhanced associate pay and benefits, and substantial charitable donations, which resulted in approximately 680 million euros in COVID-19-related costs in 2020. We also committed to contribute over 1.4 billion euros to improve the security of pension benefits for associates and reduce at the same time the financial risk for giant food and stop-and-shop. When we started to see consumers shift their purchases more online at the onset of COVID-19, we acted quickly to shift capital expenditure spending in 2020 to accelerate investments in digital and omnichannel capabilities. As a result of these combined efforts, we ended 2020 in a strategically stronger position than before the COVID-19 pandemic began. Now I'll focus a little bit on the financial results. And of course, Natalie will go into more detail on the financial performance in Q4, as well as our outlook for 2021. For now, you can see in our press release and on slide four, some of the highlights. We are pleased with the underlying Q4 performance in both the US and Europe. Comp sales grew significantly Excluding gas was strong in both the U.S. and Europe, and our leading local omnichannel platform generated nearly 130% net consumer online sales growth in the U.S., and nearly 75% growth in Europe in the quarter at constant exchange rates. The strong Q4 performance allowed us to exceed our full-year outlook. Underlying EPS growth was 33% in the full year 2020, versus our guidance of a high 20% growth. We were able to produce 2.2 billion in free cash flow in 2020, which compares to our guidance of above 1.7 billion euros. We were proud of this high level of cash flow, given the significant payments we made to withdraw, settle, and improve the security of pension plans in the US and the Netherlands, as well as our accelerated investments in digital and omni-channel capabilities. We strive to benefit all of our shareholders and aim to strike the appropriate balance between investing in the health and safety of associates and customers, supporting our local communities, prioritizing environmental, social, and governance initiatives. Therefore, we are also proposing a 90 euro cents dividend for 2020, which represents 18% growth from the prior year. Moving to slide five. You heard me mention that we were entering 2021 in a statistically stronger position versus the pre-COVID-19. And I will elaborate a little bit more on that now. In 2020, we were able to significantly improve our strategic position. We are exceeding the multi-year capital market state 2018 financial results and targets. We grew overall market share in both the U.S. and Europe. which has further strengthened our number one and two market share positions. We exceeded our three-year group net consumer online goal of €7 billion a year early by achieving €7.6 billion in 2020. And online now represents about 10% of our sales, and we are positioned for additional growth, giving our significant capacity increases in 2020 and 2021. And we significantly de-risk our US multi-employer pension plan liabilities by withdrawing from and securing plans that comprise about 90% of the year-end 2019 net deficit. Exiting 2020 in this position makes us feel even more confident about our prospects in 2021 and beyond. While no doubt that COVID-19 helped our results last year, We also know that the future for our hotel is very promising. Many consumers have found a new love for eating at home and found new ways to engage with our brands, both online and in-store, which are behaviors which we think will have a lot of stickiness. As a result, we are now setting more ambitious targets in several areas of our business, which you can see on the right side of slide number five. With increased capacity and continued momentum, We expect group net consumer online sales to continue to grow strongly in 2021, particularly in the U.S., both organically and aided by the recent acquisition of Fresh Direct. We are raising our cumulative cost savings target for 2019 to 2021. These cost-saving efforts will enable our brands to invest in providing more value and convenience to customers and help us mitigate cost pressures in the business. This will lead to a solid group underlying operating margin in 2021, which is expected to be at least 4% and will drive EPS growth versus 2019. It will be another strong year for free cash flow, and we are now on track to reach €5.6 billion in cumulative free cash flow from 2019 to 2021, which exceeds the Capital Markets Day 2018 target of €5.4 billion. Deadly will provide more color on this outlook in a few moments, but underpinning this financial guidance is our ability to further capitalize on our strong relationship with our customers and communities, who will continue to reward us for our efforts to innovate, provide convenience, and offer a healthy and fresh assortment at a good value. This guidance also reflects the consistent financial discipline and operational excellence which we have to come to expect from Al DeLess. This is particularly important as we lap a year where COVID-19 has created a lot of distortion in the financial result, as well as new challenges in 2021. Slides 6 and 7 summarize how we exceeded our key targets in 2020, as well as our new targets in 2021, beyond the financial targets I just discussed. We hold ourselves accountable when we set targets and believe in being transparent about them. In the spirit of transparency, slides 8 and 9 show our progress versus the initial 2018 Capital Markets Day promises. And I won't go through them all, but clearly we have exceeded or are on track of exceeding all of our financial goals through 2021. We are happy with our track record here, which I recall was also a very good pre-COVID-19. I am confident in our ability to achieve our more ambitious targets in the year to come. The last quarter, on slide 10, we spent a bit of time discussing some of our early initiatives to solidify our position as an industry-leading local omnichannel retailer and increase our share of the customer wallet in 2021 and beyond. Even more confident about our efforts to make that happen. On slide 10, you can see that we increased share in 2020 in our key markets in the US and the Benelux and maintained share in the Central and South Eastern European markets. It's widened in a positive sense our already leading one and two position market share. And our aim is to retain this leading position in 2021 and beyond. So I think it's worth giving you an idea how we plan to do that. On slide 11, we described some of the reasons we think additional wallet share opportunities remain. While no doubt COVID-19 creates challenging sales comparisons in 2021, we are confident that our two-year stacked comp sales growth rates will be better than they were pre-COVID-19. One of the reasons we believe this is because of our ability to capitalize on changes in customer behavior. We have shown in 2020 our ability to adjust our operations and shift investments in a short amount of time. And we will continue to remain nimble. Even as COVID-19 subsides, we think customers will work more from home than they did before COVID-19 and therefore eat more at home than before. We think the preference for healthy and fresh products will step up even further. And we think online demand will continue to grow strongly. These behaviors portend well for our future as a company because they are the areas we have been highly focused on and already play well into our strengths. In fact, with our investments in increased capacity and continued innovations, we expect over 30% growth in net consumer online sales for the group in 2021. And we expect the US to outperform that rate with over 60% growth. In Europe, Bold.com has exceeded their net consumer online sales target a year earlier. reaching €4.3 billion in 2020 versus our target of €8.5 billion in 2021. We expect growth to continue and are upping our forecast for Bold.com to €5 billion in net consumer sales by 2021. There are a few other reasons we think incremental sales opportunities exist. Our recent acquisitions of FreshDirect, and stores from Taos Ethan Grocers, as well as yesterday's announcements regarding game supermarkets in the Netherlands, will drive incremental sales. We think there's organic growth opportunities here as well. The store remodels we are doing across the US and Europe should also continue to drive sales uplifts, and many of these are focused on some of our largest brands in Stop & Shop and Albert Heijn, which you have heard us talk about before. There are also new opportunities for increased sales in general merchandise and on-brand products in the U.S., as well as improved meal solutions offerings in both the U.S. and Europe. On slide 12, you can see some highlights of ways we are bringing to life our goal of being a leading local omnichannel retailer, building upon key initiatives which we announced last quarter, our activities centered around several areas. First of all, significantly stepping up our online capacity, supply chain, and technological capabilities. In 2021, we have plans for increased online capacity in both the U.S. and Europe, on top of a significant increase in 2020. We will also continue to make progress in our U.S. supply chain transformation efforts, which are absolutely on schedule. Two. Advancing our omnichannel offerings to consumers, we will roll out AHA Albert Heijn Compact, which is a no-fee home delivery service targeting smaller households to more markets in 2021. Giant company launched a choice pass in January, which offers unlimited free grocery delivery and pickup with an annual membership fee of $98 as a sort of subscription system. And last quarter under three, We mentioned that improving online productivity across all our brands is one of our highest priorities for 2021 and beyond. It remains a key focus for us, and we have some new things to share with you on this front. We plan to accelerate U.S. online grocery fulfillment productivity growth through an end-to-end improvement of processes, systems, operating practices, and innovation beginning in 2021 and continuing through the end of 2022, which will lower the cost to serve. To improve efficiency even further, we will open an additional micro-fulfillment center with other store and Swiss lock inside of a new omnichannel fulfillment center in Philadelphia in the fourth quarter of 2021. In both the US and Europe, we will utilize technology to improve route optimization in order to reduce last mile costs. We are also working on ways to optimize the numbers of orders per trip and leveraging new fulfillment centers to reduce distance traveled. And at Bold.com, we are pleased with the team's ability to drive positive operating profits and double-digit return on capital in 2020, and we expect this to continue in 2021. We also remember that we want to continue to address the call to action in ESG. Slide 13 shows our recent actions. It's great to see that our substantial efforts in the past have been recognized as well. We were the top-ranked food retailer in the U.S. and Europe, and number two globally in the 2020 S&P Global Corporate Sustainability Index, and therefore recognized as a member of the Dow Jones Sustainability World Index and the GGSI in Europe. Going forward, we continue to push our efforts on the ESG and announce that, In January, Albert Hang halved their CO2 emissions per soar and switched to 100% wind energy. The U.S. partnered with HowGood on an easy-to-use environmental and social impact rating system. The U.S. brands pledged support to the CEO Action for Diversity and Inclusion program, which is the largest CEO-driven business commitment to advance D&I within the workplace. And our U.S. brands were recognized as best places to work for LGBTQ and equality, receiving a perfect score on the Human Rights Campaign Foundation's 2021 Corporate Equality Index. We also announced a $1 billion sustainability-linked revolving credit facility. All elements to underline the importance of ESG and our efforts to make it even more important for ourselves, our associates, and our customers. On slide 14 and 15, we highlight some of the key achievements in Q4 for the US and Europe. In the interest of time, I won't cover all of these, but in the US, we saw high levels of online growth continue. Also, the shop and remodel stores continue to perform in line, and we will accelerate the number of removals in 2021. In Europe, We were also pleased with the high level of net consumer online sales growth, particularly at Bull.com, which started the year with 26,000 sellers on the platform, the year of 2020, and ended the year with over 41,000 of sellers on the platform. And it continues to grow in 2021. I will now hand over to Natalie.

Good morning and thank you, Frans. Our underlying performance in the fourth quarter was again strong and continues to be impacted by high levels of demand due to COVID-19. As a result, net sales grew 18% at constant exchange rates to 19.6 billion euros, and group comp sales ex-gas were 11%. Net consumer online sales grew 84.2% at constant rates, This was driven by strong demand from both existing and new customers, as well as by accelerating investments in our online business to rapidly expand our capacity in both the U.S. and Europe. Underlying operating income increased by 10.8% at constant rate to 811 million euros, with underlying operating margin down 30 basis points to 4.1% at constant rate. This was primarily due to significant costs related to COVID-19, which amounted to €210 million in Q4. That's a significant step up versus Q3's €140 million due to a resurgence in COVID-19, as well as lower margins in the U.S., which I'll elaborate on more in a moment. These factors were partly offset by a margin benefit of 0.2 percentage points from the calendar effect of a 14-week quarter in compared to a 13-week quarter in 2019. Underlying income from continuing operations for the quarter was €561 million, up 3.4% at constant rates. On a reported IFRS basis, however, there was a loss from continuing operations of €9 million, reflecting the €841 million pre-tax provision for the previously announced withdrawals and settlements from U.S. multi-employer pension plans. We also repurchased 296 million euros of stock in the quarter, which brings our full-year share buyback to 1 billion euros in 2020. Diluted underlying EPS in the quarter was 53 euro cents, an increase of 7.3% at constant rates. Now, slides 18, 19, and 20 show our results on an IFRS reported basis, as well as for the full year 2020. Moving on to our fourth quarter performance by segment, let's look at chart 21. Here you see that net sales in the U.S. grew by 18.7% at constant rates to 11.4 billion euros. Comp sales ex-gas increased 11.2%. Brand performance was strong across the board, with the highest growth rate again coming from Food Lion. Another important call-out on the U.S. top line was our online sales, which increased by 128.5% in the quarter. This led to 105% online sales growth for the year, exceeding our already upgraded 90% growth target. Click and Collect was a significant driver of this growth, and we ended the quarter with 1,116 locations, up from 692 at the beginning of the year. The underlying operating margin in the U.S. was 3.9%, down 40 basis points from the prior year. Q4 comp sales moderated relative to the growth rate we delivered in Q3, and at the same time, costs related to COVID-19 in Q4 also increased relative to what we'd seen in Q3. This drove a different margin profile relative to what we've seen in the other quarters of the year. In addition... One-time items and previously announced transition expenses related to the U.S. supply chain transformation initiative unfavorably impacted margins by half a percentage point. In Europe, net sales in the fourth quarter grew by 17.1% to 8.2 billion euros, and comp sales increased 10.6%. This improvement was led by our brands in the Benelux markets. Growth was mixed in the Central and Southeastern Europe, due to higher level of consumer lockdown restrictions, reduced tourism, and lower demand in urban centers where many of our stores are located. Net consumer online sales in Europe grew 73.4%. At Bull.com, our online retail platform in the Benelux, which is included within the Europe segment results, net consumer sales grew by 69.6%. The big driver of the development was Bol's third-party sales, which grew 110% in the quarter. Europe's Q3 underlying operating margin was 5.1%, up 10 basis points from the prior year at constant rates. Operating leverage from the higher sales growth was offset in part by higher costs related to COVID-19, as well as €11 million of pension expense in the Netherlands during the quarter, which had been flagged in previous earnings calls. Moving on to slide 22, where you see the underlying segment performance for the full year in 2020. Now I'll look at what you've seen in terms of all of the announcements we've made on pensions in recent months. Up on chart 23, you see a summary of our activities on this important front. We've committed over 1.4 billion euros in the U.S. to improve the security of pension benefits for associates, and significantly reduce financial risks for the group going forward. This relates to withdrawing from and settling our largest U.S. multi-employer pension plans. We took the full charge for these liabilities in our P&L in the second half of 2020, of which 841 million euros was taken in the fourth quarter and was excluded from underlying operating income. In terms of cash impacts, we paid 487 million euros in 2020, of which 470 million euros was paid out in the fourth quarter. Together, these plans represented about 90% of the year-end 2019 deficit for all of our U.S. multi-employer pension plans, as disclosed in our 2019 annual report. We'll disclose an update on this on the 2020 report, which will be released on March 3rd. But suffice it to say, you'll see a significantly improved profile here. In the fourth quarter, we also paid out an additional 122 million in cash to our Netherlands pension plan based on an existing agreement to improve the funding position. In total, the cash payouts in the U.S. and Netherlands related to all of these activities totaled 609 million euros for the full year in 2020, of which 592 million was in the fourth quarter. That's a nice segue to free cash flow in the fourth quarter, which is the top of chart 24. Here you see that free cash flow was 262 million euro, which compares to about a billion last year. This was largely impacted by the 592 million in pension plan withdrawals and incremental pension funding payments I just discussed. There was also an increase in capex of 238 million euro as we accelerated and increased omnichannel investments in the quarter. And taxes increased by 69 million euros due to higher income as well as the timing of tax payments in the Netherlands. At the bottom of chart 24, you'll see there a free cash flow for the full year. It was really something that was a very strong result. Free cash flow was 2.2 billion euros. which compares to about 1.8 billion last year. And this would have been even higher had we not paid that 609 million euro for pension plan withdrawals and incremental pension funding payments. We also spent 476 million euros more in 2019 on CapEx than we had in 2019 for a total of 2.6 billion for the year. as we accelerated and increased our omnichannel investments and acquired several CNS wholesale distribution centers and made other investments into our U.S. supply chain transformation, totaling over 300 million U.S. dollars. Now on to chart 25. Here we're proposing a cash dividend of 90 euro cents for the financial year 2020, an increase of 18.4% compared to 2019, which is the highest increase since the merger. This represents a payout ratio of 40% based on the expected dividend payment on underlying income from continuing operations on a comparable 52-week period, which is right in line with our dividend policy. This means our compounded annual growth rate is 12% since 2016 with this proposal. Moving on to our outlook for 2021 on slide 26, As you know, COVID-19 continues to drive a significant amount of uncertainty for our business, and this is an important factor in all of our guidance for 2021. While higher demand drove unprecedented sales growth and operating leverage in 2020, this development, and to a lesser extent, the absence of the 53rd retail week, will challenge comparison significantly this year. Let's start with operating margins. where I'm pleased to announce that we are expecting at least 4% in 2021. We believe this return to historical levels is realistic compared to the unsustainably high margins we experienced in 2020 due to the very strong sales related to COVID-19. It also reflects our ongoing commitment to drive cost savings, and we'll need to do that in 2021 to offset cost pressures, including the continued costs associated with COVID-19. I'll share a few items to consider when you think about this year's outlook. First, we expect comp sales trajectory to be better on a two-year basis in 2021 compared to pre-COVID-19. While it doesn't affect our comp store sales, our recent acquisitions of Fresh Direct, as well as the stores of Southeastern Grocers and Dean Supermarkets, will provide us with incremental sales, which will be modestly dilutive to earnings as we integrate them. It may, however, still be challenging to overcome the abnormally high growth comparisons from 2020 overall. Therefore, compared to 2020, we expect sales to deleverage as we lap the strong results driven by COVID-19. We expect costs related to COVID-19 to continue, albeit at a much lower level than what we experienced in 2020. And you've heard this from us before, but as a reminder, U.S. supply chain transformation costs are still expected to have about a $50 million impact in 2021. One of our key priorities is to improve online productivity as our guidance suggests, and we are finding new ways to balance the impact from increased online sales penetration that we expect to come into our numbers in 2021. And lastly, one of the big ways we're balancing all the pressures I've mentioned is is through significant cost savings of over 750 million euros in 2021, which is higher than our previous expectation of about 600 million. So underlying ETS is expected to grow mid to high single digits relative to 2019. Free cash flow is expected to be approximately 1.6 billion, inclusive of our capex of around 2.2 billion. This puts us on track to reach 5.6 billion euros in cumulative free cash flow from 2019 to 2021, averaging 1.9 billion euros annually, exceeding the capital markets day 2018 target of 5.4 billion euros, that was 1.8 billion euros annually. As a reminder, our free cash flow guidance has always excluded M&A, and we have made that pretty clear consistently. If we were to exclude investments needed to improve the operations and capabilities of the aforementioned M&A deals, as well as the ongoing CapEx related to our three-year supply chain transformation, free cash flow for this year would actually be on track to the $1.8 billion number. When we look at slide 27, this outlines the increased outlook for the Save for Our Customers plans. And this is something that you see us over-delivering, and it really gives us confidence that we will continue to over-deliver against that initial plan for 2021. So I'll now hand back to Franz.

Thank you very much, Natalie.

So let me wrap up. While our 2020 results were impacted by increased demands from COVID-19, we made significant moves to enter 2021 in a strategically stronger position when compared to pre-COVID-19. For that, we thank the associates across our organization for their contributions during these unprecedented times. We had a strong 2020 performance which exceeded our guidance. We also are exceeding our key multi-year financial targets established at the 2018 Capital Markets Day. Our significant efforts in ESG were recognized as the number one ranked food and staples company in the US and Europe by the S&P Global CSA, which led to being selected as a member of the Dow Jones Sustainability World Index, as well as the Dow Jones Sustainability World Index in Europe in 2020. We are now able to propose a cash dividend of 90 euro cents for 2020, an increase of 18%. Our recent acquisitions should add incremental sales and market opportunities in 2021 and beyond. And this leads to our confidence in providing a 2021 outlook which reflects a balanced approach to margins and another year of strong free cash flow. We will now be happy to take your questions. And operator, could you help us here and could you please proceed?

Thank you, sir. Ladies and gentlemen, to be registered for the question and answer queue, please press star 1 now on your telephone. 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, please don't call 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 two. Please stand by for a moment as we wait for participants to register for the queue. Thank you very much. Our first question is from Mr. Spencer Hannes of Wolf Research. Go ahead, please. Your line is open.

Good morning. Good morning. Thanks for taking the question. My first one was just under guidance. Can you talk about how sales are trending quarter to date and then any additional call you could provide on how much higher your two-year stack comps will be in 2021? And then in terms of EPS growth, what do you see as the biggest factors that could lead to outperformance there?

I think you've picked a good topic when you look at sales. We obviously don't provide you with you know, quarterly guidance on that one here. But we have started out the year positively. And, you know, I do think we expect there to be some nice COVID stickiness as we go through the rest of the year. When we look at how that translates on an EPS basis, you've seen there that we've given the guidance for the year that, you know, we're expecting that mid to high single-digit improvement versus the 2019 number. And really, I'd say the piece there that is the the biggest mover is what we do see in terms of sales. If that were to be a higher number, if we continue to see a higher COVID sales throughout the year, that could be an upside.

That's helpful. And then we're starting to see reports of increased cost inflation. What is your expectation for inflation next year? And then did you see own brands gain share versus national brands in 4Q in the U.S.? ?

On the cost inflation, that's one we don't give our numbers on that. But in terms of the fourth quarter, what we saw on own brand was that was definitely something where we did see those levels go up. It's something where, you know, this year we've actually planned to bring an extra about 2,000 SKUs into our private label collection because it is something where we want to make sure that we're addressing that, you know, slight shift to, you know, I'd say more promotional behavior.

And to your private label, overall, we gained share in the U.S. in private label in the fourth quarter. And for this year, we would like to add, like Nathalie already mentioned, the 1,500 SKUs to the assortment.

Great. Thank you.

Next question is from Mr. James Amstead, Barclays. Go ahead, please.

Yeah, good morning. Two questions, please, on your guidance of 2021. Firstly, on the EBIT margin guidance of at least 4%, and I know clearly you understand that you wouldn't give us guidance by quarter, but I just wonder whether we should be aware of any possibility that individual quarters, perhaps particularly the first quarter, might be below that 4% minimum for the year as a whole. That's one question. And then the second one was around the free cash flow guidance of around 1.6 billion. I just wondered, two kind of big elements, I guess, within the free cash flow number are working capital and the amount you're injecting into the pension. And I think you told us there's another 250 million or so you're going to inject over the next three years as a whole. I just wonder if you can Is it central to assume we just divide that number by three and assume something's even over the next three years, or might it be a bit more focused on 2021? And on the working capital element of it, clearly you have a very nice inflow in 2020. Is it, I mean, it seems to me, central to assume an outflow in the year ahead, but is that inevitable? Can you give us any colour on what that working capital number might be for the year ahead? Thank you.

Okay, James, there were a couple things in there. I think it was primarily around working capital and pensions. If we look at the working capital for kind of our expectations of how those developed this year, you're right, we had a very favorable 2020 and particularly a Q4. So we will see an unwind of that as we go through the year. I think that's something where our expectations are That is one of the big drivers, I think, in terms of where we believe our cash flow will end for the year. In terms of pensions, that one I think you've oversimplified that a little bit. Not all of that has to come in the next three years, and we don't have any specific agreements on timing. So I wouldn't just take that as a division by three. I think that's something where it's not going to be a big visible impact when we look at 2021. Okay. So when I look at our free cash flow for this year, I would say, you know, we feel very strong about what all the underlying elements are in that number. You continue to see us right on track with kind of the development we've looked at, you know, ever since the capital markets say less that working capital unwind that's, you know, an important number.

That's very helpful. And then if you're able to give any, well, maybe there's nothing to say on it, but the whether any individual quarters might be below that 4% minimum you've guided to for the year ahead.

Yes, sorry, I missed that one. Obviously, we don't give you operating margin by quarter, so good try. But what I would say is we're very pleased with our performance in the first quarter so far.

That's very helpful.

Thank you.

Next question is from Ms. Fabiana Caron of Kepler. Go ahead, please.

Good morning, everyone. Two questions from my side. The first one, can you help us a bit with what kind of COVID costs do you believe will be sticking in 2021? And the second question will be on the online. So you announced that you are doing a new micro-fulfillment center with Freeslog Auto Store. Can you share with us the comparison or how should it compare to the one you have currently with take-off? Thank you.

Yes, so Fabienne, the thing on the stickiness of COVID-19, At the moment, we all see in all the markets, European and U.S. markets, that we are still in COVID times, unfortunately, both with lockdowns and a lot of limitations everywhere. And what you said earlier, also last year, that a lot of fixed costs for equipment and these kind of things are already covered in 2020, so those will not reoccur. But we will might have a reoccurrence of things like sick leave an extra labor. But if that takes place, that will be overcompensated by the COVID sales in the end. So we will have amounts of money based on extra labor and sick leave, depending on how long COVID will take. But this will be overcompensated by the contribution from the extra sales, most likely. The other thing is EFCs, the Fulfillment Centers for E-Commerce. We have our take-off pilot in Connecticut, and we are working towards this to make it according to the specifications, and we are pretty confident there. But at the second time, we also are going to open a Swiss Flock auto store unit in Philadelphia in the fourth quarter. That's based on 100,000 square feet space in that store in Philadelphia, and 6,000 orders per week capacity. Takeoff is a multi-shuttle goods-to-men type of system. Swiss Log Auto Store is more a goods-to-men grid system. So those two pilots we will run, and... And we compare and we'll see and we learn. And that's one of the elements where we are going to gain productivity in our total e-commerce frame. We also mentioned a few other things on productivity, like better processes. Also, the manual pick systems of Prism are getting more and more learning curve and delivering more productivity. So also that part will contribute to an earlier profitability of e-commerce. And the last thing is the last mile. where we work with technology partners both in Europe and in the U.S. to make that route planning for that last mile more efficient. So a number of elements where technology and digital is going to help us to make e-commerce more profitable, and those are the initiatives we are working on. And you can imagine with the growth in e-commerce, this is for us a top priority.

Okay, thank you.

Next question is for Mr. Andrew Gwynne, Exxon, BNP Paribas. Go ahead, please.

Hi there. Well, two of my questions have already been asked. So the other question I had was just on the guidance. I just wanted to give a bit more color on the two divisions, really how we should think about the margins of both. I guess the share reaction today does suggest people are a little bit spooked by the U.S. margin during Q4. And then maybe actually connected to that, the other question would be, could you just elaborate a little bit more? I guess normally we'd expect to see quite significant positive operational gearing from an 11% comps or sales growth. I appreciate the COVID costs and also transformation costs, but any more color you can give us there to help us with our forecasting for 2021 would be much appreciated. Thank you.

Sure. Hi, Andrew. Maybe I'll just speak a little bit about the U.S. operating margin because I think that's really where a lot of these questions have come from. And, you know, I think the real easy way to think about it is if we look at the fourth quarter, you know, on the one hand, our COVID costs were quite a bit higher than we expected. You know, we talked about it being 50% higher than where the Q3 costs had been and also, you know, significantly above what we had expected. And that was really driven by what was happening – on the one hand on incentives, but in particular in the Q4 on higher sick leave and safety costs. And we saw that at the beginning of the year. We think that's actually crested in terms of how that's developed. And the other one was we had some one-time impacts. It was about 50 basis points, the biggest piece of that being the supply chain transformation, but the others were one-offs. So if you look at that, you can think of the U.S. underlying impact operating margin really being around the 4%. And I think that's something that, you know, when you look at that in the environment of some deleveraging going on with COVID is actually a pretty good place to be. And, you know, also I think gives you confidence in terms of, you know, the number that we've looked at for our global number in 2021. I think when you talk about the European side, there's a place where I think margin in the fourth quarter was actually quite promising and, you know, gives good outlook. The only small pull on that was the Dutch pension expense, which we flagged all year.

Are you able to be a bit more specific about the margin evolution for 2020? Essentially, what makes up the 4% guide for the group? Should we expect further pressure in the U.S.? Are you holding strong or something else?

I think when you look at both of those, what you should see is, return to more historical levels in terms of what we've been able to deliver in both of those markets, and that's very much both for Europe but also for the U.S.

Okay, thank you very much.

Next question is from Mr. Nick Coulter, City, Galatia.

Hi, good morning. Thank you for taking my questions, and I hope everyone's keeping safe and well. To me then, just to come back on Andrew's question on the operating leverage flow-through in the U.S. in Q4 on a 13-week basis, you kind of alluded to some smaller impacts, I don't know, maybe in terms of P&L investment and promotional shift, back margins. I don't know, but it'd be quite useful just to kind of get that kind of extra granularity, because I think it's certainly from where I'm sitting, the flow through looks notably weaker in this quarter, notwithstanding the level of comps and COVID costs. I guess one of the missing pieces would be the weighting of COVID costs between the US and Europe, which would be be helpful, additional color. And I'll ask myself one in a second, if I may. Thank you.

Okay. I think I'm not going to be able to give you too much more color on that one, Nick. What I can say is you're clearly right that the COVID costs and the COVID sales, by the way, are heavily weighted to the U.S., and that was also the case in the fourth quarter. And the comments that I made around, you know, especially the absenteeism was also a stronger comment about the U.S. than in Europe. When we talk about those other kind of discrete costs that we discussed, that isn't something where we're going to give a lot of color on each of those. What I can say is that it's less something about promotions, which, you know, you were suggesting there, more operational, you know, I'll say items in terms of I talked about the supply chain, but other, you know, just I'll call them, you know, core basics that we wanted to get in place. And that's definitely something we do not expect to continue. you know, either in Q1 or in 2021.

If you back out the supply chain, which we knew about, the other one-off impact, what do they take? Is that 20 or 30 basis points? 40. 40. Okay, so 40 excluding supply chain. I mean, that's obviously quite a meaningful impact.

It sort of means, Nick, also that with those discreeds and the supply chain together, we are above four in the U.S., also comparable for the fourth quarter.

Okay. I mean, obviously, we're not able to share specifics there, but those are really one-off items.

Okay, fine. And you know that we're also transparent about this ourselves. Those are one-off items that don't reoccur. So that fourth quarter, quarter US margin is a four plus margin when you look at the operational effect. Okay, thank you.

That's clear. And then secondly, online, would it be possible to share some sales base numbers for Fresh Direct for 2019 and 2020? And then on the auto store, it looks from the pictures like it's manual pit, but the cube or the auto store cube is being used as a tasteful bin buffer. But for any details on how you're using the automation there would be gratefully received. And I guess also some initial thoughts on the Fresh Direct collaboration with Fabric as well would be interesting to hear. Thank you.

Yeah, so apparently you're very interested in the EFC operations, the total bin. That explanation I haven't heard yet, but we have now indeed also with Fabric, with Fresh Direct, three quality micro-fulfillment center pilots in working, which is great because we all learn about technology and performance. And that grid system in Philadelphia will be used for the total ambient assortment. And next to it, for the ultra-fresh, we have a manual pick to complete the orders, roughly the same type of distribution of assortments we have also for takeover in Connecticut. I think it's, for us, important to be as close as possible to our customer base, to be as agile as possible with our MFCs, to have overseable investments, and that those pilots are, let's say, very limited risks, and we think with quite some opportunity upsides, and we run them in existing real estate buildings also in Philadelphia. So... Those were our beliefs. Those are still our beliefs, but this is the right thing to do. And we gain a lot of insights, and also the take-off machine is getting very close to the pro forma. So that is all good news, but it's only the picking process. The second thing, of course, is that you see that our click-and-collect prison software for the manual pick in the stores is doing very well, and also there we gain learning curve and productivity. So that's another important element, and it's all proprietary software. It's ours. And then what I mentioned earlier on, that with some technology partners, we make good progress with the same partner in Europe and the U.S. on the last mile, and we have a lot of last mile experience in Europe when we talk about delivery and home delivery. So various technology partners for various parts of the total supply chain for online delivery, We grow very fast. We added 40% capacity last year in the Dutch market. We will double capacity online in the U.S. in 2021. Click and collect growing very fast, 1,400 click and collect centers by the end of the year, and we're very happy with that rollout. We're also very happy with the acceptance of our customers there, and I think we are learning with technology, but we're on a very good trajectory here. It's great to see you in here. Thank you very much.

Our next question is from Mr. Andrew Porteous, HSBC. Go ahead, please, sir.

Morning, team. A lot of mine have already been passed, but I've got a couple left. Focused a lot on sort of the e-commerce side of things this morning, but I just wanted to talk about your stores a little bit more, and in particular the sort of Stop the Shop Store Refresh program. Could you give us an idea on, you know, what your... you know, what the progress has been in the stores that you have refreshed over the past year, but also really what the outlook is there. I mean, how quickly can we ramp that program back up and how are you thinking about that? And then a second sort of small one just around the dividend, obviously a big increase this year reflecting COVID. You've kept the payout. How should we think about that for next year? I mean, would you, you know, if your earnings are going to progress, should we just expect a smaller payout ratio next year or do you think that you can continue to progress the dividend there?

I'll start with the dividend and then hand over the store question to Franz. What you saw in our guidance is that it is the biggest increase ever, but we're actually only paying out at the 40% number there in terms of the payout ratio. So we've also already guided that for next year we will expect another increase in terms of that dividend. So that also by definition implies probably a higher payout ratio next year.

And on Stop & Shop, we planned for this year another 60 stores. We said and shared with you earlier that we see Stop & Shop 60 to 80 stores per year remodeling. So that is in four or five years program for the 400 stores we have. What we also do is that we see that the rollout of the remodelings are very much in line with our pro forma program. That is for the markets we opened earlier, but also the stores we open now. So we're very happy with that response there. So we're in line with Proforma for Stop & Shop. We rolled out 60 stores this year, and we'll continue to do so. And we feel that all the other brands in the U.S. are very well invested, and we also see that Stop & Shop is benefiting from those remodelings when we see also the sales trends getting better and better quarter by quarter.

Thanks.

Next question from Ms. Victoria Petrova, Credit Seat. Go ahead, please.

Thank you very much for taking my questions. First one is, again, on U.S. operating margin. In general, have you seen any difference in consumer behavior in the U.S. versus previous quarter, in the fourth quarter 2020, and versus what you're seeing in Europe. Obviously, we have slightly different dynamics there. That would be my first question. Anything non-related to Europe or even one that's more related to consumer. And my second question is, again, on micro-fulfillment. You're currently working with auto store fabric and take-off, two of which obviously overlap with Walmart. Have you chosen micro-fulfillment solution as the way to go? what are the key differences between three trials, and are you considering, or three pilots, and are you considering choosing one, or you will create sort of an infrastructure of these micro-fulfillment centers with several vendors simultaneously? And also, when you compare your first MFC with take-off versus your last agreement, what are you seeing on the cost side? Is it decreasing, given that there is more competition? more vendors, or is it increasing given there is more, I don't know, technological upgrades? And ultimately, what percent of cost savings could you extract from automation of picking? Thank you very much.

I'll talk to your question on margin in the U.S., and I think the only thing that we've seen on the consumer side is, and I'll call this, it is a U.S. phenomenon, a little more pushback, a little more increase on the promotion side. We're still not at historical levels, but that's really why we believe we've seen the, you know, improvement in our private label, not just the share gains. That's, you know, obviously us delivering better on that offering. But it is something that we did see pick up a little in the fourth quarter, and our expectations are obviously as we go into 2021 – Again, still nothing moving at a high speed, but there is more promotion than we saw in Q3 or Q2.

So, a few more things potentially on the detailing of the various micro-fulfillment solutions we have. Just to start at the very beginning, and there we are very consistent with what we said earlier. First of all, You saw our phenomenal growth in the U.S. with 128% online growth in the fourth quarter. And you can imagine that also click and collect sales is growing faster for us than home delivery. And that we have now a number of different fulfillment methodologies. So we have home delivery. We have click and collect next day, same day, and instant delivery. and we see click and click growing faster in home delivery, which is in the end also for us, for our total margin profile, a good thing to have. So that's one thing on the fulfillment, the growth of the online and how we use also our store assets to make the fulfillment work. The second thing is the MFC type of technology. Yes, we still are very consistent and believe that multiple MFC network along the East Coast is for us the best solution I mentioned before also two years ago when we had the opportunity to look at the stores in Connecticut and so on that important for us that we are close to our customers that we are close to customers when we pick with an MFC but we in the end have also a delivery solution next to it that we see that we can use existing real estate so we can also shred those assets better, that we can react very fast with those MFCs because you can build them very fast. The buildings are already there, so you can very fast operate and roll out when you make your final decisions with whom to work, and that also the costs are much lower than that we would build huge centers which need a big catchment area. The U.S. market, especially also on the East Coast, apart from a number of bigger cities, is much less populated, of course, than a lot of European markets. So the density in those markets, we think, is much more fit for an NFC solution. So we are very consistent on that strategy. Then going to give you a few details, in the take-off machine, we have roughly 15,000 SKUs. In the auto store machine, we... We look rather at a bigger assortment of 25,000 SKUs. It's all the same type of goods-to-men technology, although grid and multi-shuttle, those are technologies we check. We learn from this, and we have not made up our minds if we can work with one or two or three vendors there. That's exactly what we try to work out and to learn from. from take-off and from fabric. The labor productivity with take-off and auto store is reasonably comparable. So it's not only an economic thing there, but they have very much higher pick rates than we do manually, of course, but reasonably comparable on labor productivity. The capacity is... for take-off roughly 4,000 or 5,000 orders a week, and for auto store 5,000 to 6,000 orders a week. We have investments which are relatively low because we invest roughly 3 million in the machine, which is for both companies decently comparable, but of course we have the buildings already, so we don't have that asset cost anymore. and we have to learn over time how those offers are, how this productivity is developing, and we do not get more details on pricing, negotiations with those vendors.

Thank you very much. It's very helpful.

Next question is from Mr. Xavier Le Men, Bank of America. Go ahead, please.

Yes, hi, good morning, and thank you for taking my question, too, if I may. The first one, can you help us potentially just to quantify the impact of the acquisitions you made in 2020? So Fresh Direct was the store you bought, so can we get a bit of insight there? That would be quite helpful. The second thing, sorry to come back on that, but still on the operating margin of at least 4%, you have been mentioning, you know, existing 2020 in a stronger position. So at least we should see some benefits from 2020 heading to 2021. So what should we expect also? You know, we talked a lot about the legacy, but what are the positives which we will also see in 2021?

If Nathalie takes a second one, and I will take the first one later on.

Sorry, could you repeat what you wanted on the operating margins, Xavier?

Yeah, we talked a lot about, you know, the negative and why, of course, you know, 2021 margins should be lower than 2020, obviously. But are there also any positives that we should consider? Because, as you said, you are indeed in 2020 in a stronger position, as you said, than you were in 2019. So I want also to see what are the positives that we should see in 2021.

Well, I think the biggest positive is that you look at our Save for Our Customer program, where we really have, over the last two years, I think, built a strength within the organization that tells us we're going to continue to be able to deliver at that high level. So when we look at 2021 in particular, we're very focused on activities around store efficiency and logistics. The logistics one you can imagine is already starting to pay out because of the vertical integration of our supply chain in the U.S. But on the store efficiency, that's one where we're rolling out our electronic shelf labeling. It's going to be in at least 50% of our stores in Europe, which allows us to do dynamic pricing, dynamic discounts, we're more effective with our labor. You also know that we've been active in looking at how do we look at cashierless options, other things for automation. So I'm very positive in terms of on the cost side because we've been very focused as we look at 2021 saying there are a lot of unknowns, but what we do know is how we can control our costs so that as we have benefits that come through because of you know, COVID stickiness or other opportunities, we're able to capture them. And I'd say that's the other, you know, big potential upside to margin is, of course, if we were to have higher sales at a longer, you know, for a longer period, there would also be some sales leverage you would see come through in the margin as well.

Good to know. And also realizing at the same time that I was not so complete in the same type of question from Nick earlier. On Fresh Direct. Fresh Direct is a company which is a very nice fit to our total network. And it has a very strong position, as you know, in New York City, Manhattan, but also in the Tri-State. And it's a number two player there as a pure player. And excelling in fresh and ready-made meals. And had not only in 2020 a very good year, but also had a strong start of 2021. It fits for us very nicely because it's in that part of New York where we are not strongly present, and therefore we can deepen our footprint there in New York City and the tri-state. We don't disclose sales numbers for Fresh Direct, but you can see in the documents that our part of the purchase price was $327 million dollars. for 80% of share. We're excited about FreshDirect because it's a big market area. That whole New York's Tri-State area is a market volume of 9 billion. So there's quite some things to win there. They have a very solid and loyal customer base and have an impressive quality and order completeness and on-time delivery. And it's, of course, all built by a very passionate and good professional team there. So we now, since the 5th of January, when the deal was closed, we're now looking into the company, of course, and we're working together with the team there. We are bringing in the good things from Ahop De Les to make sure that we learn from each other and that we also can... can bank on the synergies in Cox, in Not For Resale, in IT, and in digital. And that's why we're very positive there about the acquisition, but we see also a mutual learning opportunity here to learn also from a number two in the market, successful pure player company. On the other things, on SEG, because you asked fresh direct, but we are also in the way of integrating 62 SEG stores, and we're also looking at the Dane company, where we have now, although still under approval, we're looking forward now to integrate 39 Dane stores in the Albert Heijn network in the second half of this year. I think in the next quarter, we have more to say about FreshDirect. We are now six weeks in the company, and we have more things to see how we can combine the knowledge and the leverage and how we can grow the company further.

And maybe what I'll add from my side on that, because I think you didn't ask the question, but I think it's interesting, is if you look at the sales impact of those acquisitions, we are expecting... um, in 21, that that'll probably, you know, basically even out for that 53rd week that we're losing. So it's pretty significant for us.

Thank you.

Final questions are from Mr. Robert Rontoff, ABN AMRO. Go ahead, please, sir.

Yes. Hi, good morning. I have two questions from the Netherlands, please. Um, First one, can you tell a little bit more about the gain acquisition? For example, what sales were generated in the 39 stores you acquired, and is that a proxy for sales you expect to be able to realize with those stores when converted to Albert Heijn stores? And maybe also a comment on the price paid and additional conversion investments required. And my second question is on market share in the Netherlands. I think Albert Heijn's market share was relatively stable at 35% in 2020. What can you share about the development in your online market share, the combination between delivery and click and collect for Albert Heijn in 2020 compared with the previous year? Thank you.

Thank you. First of all, we are awaiting approvals. Secondly, the family decided not to continue the business, and we're happy that we are able to convert 39 Dane stores into Albert Heijn stores. We expect that the approval might take six months before we can start working on that. Dane has a 2% market share. That's a Nielsen market share. It's a public number. and 39 stores is roughly half of the 80 stores of the total day network. So I think you can do your math and it would mean for Albert Heijn another 1% market share gain. Also in the full year we gained market share with Albert Heijn to 35%. What is more important for us is that this is a nice addition to our network in the northern part of Holland and I think also with the locations, but also with the people of Dane, and also with a number of local suppliers in the northern part of Holland. I think that's also a nice addition to our total company. So we're very happy because you can imagine with 35%, there's not a lot on share under regulation you can do. We're very happy that we got a good alignment with the family on this, and As I said, six months we took into account for the approvals.

And on the online share, what can you say on that directionally? Because I think that most of your competitors that started way later are catching up a little bit. So can you say anything on that?

Yeah, what do we see? And we talk about the Dutch market here, right? Yes. Now we... We see a lot of numbers passing by. We are now well beyond 1 billion in Holland on food. So we grow very fast. We added a lot of capacity. And I think there's a very good chance that we further will gain share in the Dutch market. And we have more than 50% share at the moment. We expect to gain based on the added capacity we put into the Dutch market in food. In the bowl story, I think you're well aware that we also gaining share there. All right. Thank you.

With that, this concludes Conference Call on Webcast. Thank you for joining. Please take care, stay safe, and have a great day. Bye.