Koninklijke Ahold Del Ord

Ladies and gentlemen, good morning and welcome to the analyst conference call on the second quarter and half-year 2021 results of Aral Doheze. 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 result, performance or event to differ materially from those included in the statement. Such risks and uncertainties are discussed in the interim report, second quarter and half year 2021 and also in AHAL De Hesse public findings and other disclosures. AHAL De Hesse disclosures are available on ahaldehesse.com. Forward-looking statements reflect the current views of AHEL Delhaize Management and assumptions based on information currently available to AHEL Delhaize Management. Forward-looking statements speak only as of the date they are made, and AHEL Delhaize does not assume any obligation to update such statement, 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 AHA Dohaese. At this time, I would like to hand over the call to JP O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. As operator said, I'm JP O'Meara, the new incoming Head of Investor Relations, and I'm delighted to welcome you all to our Q2 2021 results conference call. On today's call are Franz Muller, our CEO, and Natalie Knight, our CFO. Alvin Concepcion, the outgoing head of investor relations, is also joining us today. 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, aroldelhaize.com. To ensure everyone has the opportunity to get their questions answered today, I ask that you please limit yourself to two questions. If you have further questions, then please re-enter the queue. Before I turn over to Franz, I would like to announce that we are planning to host our Investor Day on November 15th, 2021. Please save the date for now with more details to follow in due course. Now I'd like to hand it over to Franz.

Thank you very much, JP, and welcome on board. Good morning, everyone. We are pleased with our second quarter performance in which associates in all of our brands continued to work tirelessly in a rapidly shifting environment. We would also like to express our support for everyone impacted by the recent floodings in the Netherlands and Belgium, as well as the fires in Greece and the tornadoes in the Czech Republic. We are committed to serving these communities and our branch associates during these difficult times. In this regard, we remain on track to deliver on our pledge to contribute 20 million euros in charitable donations in 2021. And again, this is just a portion of our broader spending for COVID-19 related care and other initiatives, which amounted to 84 million euros in the second quarter. In Q2, our brands, together with suppliers, remained focused on fulfilling their vital role in society by maintaining food and product supplies to local communities. And we remain thankful for the efforts of associates who have put a consistent emphasis on safety, while at the same time providing great customer service and community support. We are aware of the recent increases in infection rates in many of our markets and will continue to provide assistance in all our communities, including COVID-19 vaccination efforts in the US. Now let me highlight our key financial results. As a reminder, the second quarter 2020 was a particularly difficult quarter to comp against, as it represented the height of COVID-19 stock up activity. which drove 20.6% comp sales growth in the US and 10.2% comp sales growth in Europe during the year-ago period. In that light, I'm very proud of our second quarter performance, in which US comp sales excluding gas were only down 1.5% versus last year's very robust sales levels. And our European comp sales excluding gas grew even 2.4% year-over-year. On a two years stack comp sales basis, US and Europe grew 19.1% and 12.6% respectively, both representing an acceleration versus 2020. This strong result comes against a backdrop in which several communities across our markets reopened during the second quarter, suggesting that new behaviors picked up by consumers during the COVID pandemic continue to be quite sticky, as demand for food at home remains very resilient. At the same time, our results also underscore that our operations are exiting the COVID pandemic in a stronger position. led by our omnichannel platform, which continued to drive strong market shares during the quarter. As such, our online business posted strong double-digit growth in the second quarter, and our underlying operating margins were very strong in the context of historical levels prior to COVID-19. This has prompted us to once again raise our 2021 EPS guidance, reflecting the strength of our first half year results and we also increase our group underlying operating margin outlook to approximately 4.3 percent up from our original guidance of at least four percent. Naturally of course we'll go into more detail on the financial performance in the second quarter as well as our outlook for 2021. So let me move to slide five. where we show why we continue to have confidence in the strength of our omnichannel proposition, which is being enhanced by the significant reinvestments we are making back into the business. On this slide, we highlight some of the key initiatives we are driving to increase our share of the customer wallet and improve our online capabilities. In support of our online fulfillment capacities, we are opening two new home delivery centers in New York, which will go live in 2022. We are also scheduling to open our first home delivery fulfillment center in Serbia in early 2022 as well. And in the second quarter, we expanded the acceptance of SNAP EBT benefits for online grocery orders, which is now available at all our U.S. brands, improving accessibility for low-income customers. Our no-fee home delivery service AHA Compact Albert Heijn Compact added 20 new areas during Q2 and is now in 26 areas across the Netherlands available. And our focus on productivity will be enhanced by an AI-enabled end-to-end forecasting and replenishment system being finalized later this year. Slide 6 highlights some of the key achievements in the US. We remain on track for A plus 70% online sales growth in 2021, bolstered by the expansion of our click and collect capacity, as well, of course, with our fresh direct acquisition. Speaking of click and collect, we opened 86 additional click and collect locations during the second quarter and remain on pace to end 2021 with approximately 1400 click and collect locations, up from 1100 at the beginning of this year. We also remodeled 14 additional stop-and-shop stores in the second quarter, bringing the total number of stores remodeled since inception of the program to nearly 100. And we continue to see solid sales uplifts from our remodeled stores. And finally, from a brand perspective, I'd like to call out Foodline, which achieved its 35th consecutive quarter of positive comparable sales growth. And in addition, the 71 stores that have been integrated year-to-date are exceeding sales expectations. Slide 7 highlights some of our key achievements in Europe. Our Benelux ecosystem continued to perform well and we gained market share in both the Netherlands and Belgium in the quarter. This was driven by both strong campaigns during the European Championships and continued strong performance of health and sustainability activities. We were encouraged by the 24.2% growth in net consumer online sales at Boll.com during the second quarter, which came on top of the 65.4% growth in the year-ago period. And the number of sellers on the platform also continued to grow and now stands at 47,000. We are pleased with the Dutch regulator ACM's approval of Albert Heijn's pending acquisition of 38 Dane stores, which remains on track to close in the next quarter. And in the second quarter, Albert Heijn upgraded another 18 stores to its fresh and technology-focused format, and they are performing right in line with expectations. We remain on track to remodel approximately 60 stores by the year-end. And in Belgium, Albert Heijn continued to expand its home delivery service by doubling its coverage versus the first quarter to 800,000 households. The BelAz Super Plus loyalty plan, which gives rewards and discounts to consumers of healthy and sustainable products, continues to gain traction, providing a nice sales uplift. And the program ended in the second quarter with approximately 1.9 million members, up from 1.7 in the first quarter. We were also very much encouraged by the rebound seen in the performance at our central and southeastern European brands. I move in the meantime to slide number eight. We continue to make progress in elevating our health and sustainability strategy and I'll discuss a few of these items. We are proud to be one of the leading signers of the EU code of conduct for responsible food business and marketing practices as part of the European Green Deal, which is committed to shifting to a sustainable food system. And as part of the pact, we have made 10 commitments in the area of healthier choices, product transparency, waste reduction and climate impact. Following successful implementation in other European markets, Mega Image in Romania became the first food retailer to introduce the Nutri-Score nutritional navigation system across its own brand products. And in the US, we are pleased with our result that 52.4% of our Q2 sales are healthy, earning the Guiding Stars 1, 2 or 3 rating. This is in line with our company-wide ambition to raise sales of healthy own products to 51% by the end of 2022. In 2020, we already reached 49.8%. And in the US, the giant company rolled out the Flash Food app across all stores in June. The app reduces waste and promotes healthy eating by providing customers with significant discounts on fresh foods nearing their best before date. And finishing on a very positive note, let me now hand over to Natalie.

Thank you, Frans. Our underlying performance in the second quarter was strong and continued to be impacted by high sales due to demand from COVID-19. As a result, we saw the net sales grow 3% and constant exchange rates to €18.6 billion. Group comparable sales growth X gas were stable, which comes against robust group comp sales growth in the year-ago period of 16.4%. Group net consumer online sales grew 35.8% in Q2 at constant exchange rates, aided by the strong performance in the U.S., including the fresh direct acquisition, as well as at bull.com. Group underlying operating income declined 12.2% at constant rates to €832 million, with underlying operating margin down 80 basis points to 4.5% at constant rates. The Q221 margin was strong in the context of historical levels prior to COVID-19. Recall that margins in Q2 2020 hit record levels driven by the significant sales leverage and mixed benefits related to the COVID-19 stock-up activity. Underlying income from continuing operations was 551 million euro, down 15.5% in the quarter. And in Q2, we repurchased 7.5 million shares for 176 million euros. Diluted underlying EPS was 53 euro cents down 12.1% at constant rates compared to last year's record Q2 results. To put this into perspective, remember that the 2021 diluted underlying EPS grew approximately 55% relative to the 2019 at current rates, which is prior to the COVID-19 impacts. Slide 11 shows our results on an IFRS reported basis for Q2. And when I look at slide 12, we really are able to see here the ability to sustain continued high levels of consumer demand, even as we're lapping the COVID-19 impacts of last year. You heard France mention that many of the habits formed by consumers during the COVID-19 pandemic in 2020 are proving sticky. aided by our initiatives to improve our omnichannel offerings for consumers. You can see this in our results, particularly on this slide. Our comp sales trend for the two-year stack basis were strong and clearly better than the pre-COVID levels. In the U.S., we posted a 19.1% two-year comp sales stack in Q2, which is a clear acceleration versus the 15.8% two-year comp sales stack we achieved in 2020, as well as the 15.5% two-year comp sales stack that we achieved in Q1. In Europe, the two-year comp sales stack was 12.6% in Q2 versus 12.3% in 2020 and 18.1% in Q1. This reflects market share gains in Benelux, as well as Central and Southeast Europe countries rebounding after being challenged much of the past year. All in all, we have good momentum across our business, demonstrating that our brands are continuing to execute very well in this food environment and that consumer behavior towards eating at home is proving to be sticky. On chart 13, you can see that even after we adjust for the influences of weather and calendar on a two-year comp sales stack, it's the same story. Our sales trends are strong and remain elevated versus pre-COVID levels. I'll talk about what exactly those calendar and weather effects were in just a moment. From a regional perspective, we posted 15.9% adjusted two-year comp sales back in the U.S. in Q2, which includes the holiday shifts of Easter and the 4th of July, as well as the exclusion of 2019 stop-and-shop strike effect. This development is an acceleration versus the 14.6% adjusted figure in Q1. In Europe, the two-year comp sales stack was 13.4% in Q2 versus 17.2% in Q1 after adjusting for calendar and weather impacts. So any way you look at it, our two-year comp sales stacks were strong in both regions. Let me now discuss our second quarter performance by segment on chart 14. Net sales in the U.S. grew by 2.7% at constant rates to 11.1 billion euros, U.S. comparable sales ex-gas were down 1.5% against a tough comp of the year-ago period when COVID-19-related stock-up activity drove 20.6% comparable sales growth, excluding gas. Our U.S. online sales continue to grow at solid double-digit rates, even as we lap triple-digit growth in the year-ago period when COVID drove a step change in the way our consumers shop, favoring online purchases. U.S. online sales were up 61% in constant currency, driven by increased click and collect capacity as well as our fresh direct acquisition. Thus, the early read-through suggests that elevated online grocery demand garnered during COVID-19 pandemic is having a positive and sustainable effect on our business. And we stand ready to continue our strong execution in this environment and continue to increase our investments in our digital and omni-channel capabilities. Our underlying operating margin in the U.S. was 5%, down 1.1 percentage points from the prior year at constant exchange rates, as margins lapped the unusually high levels of the prior year. Nonetheless, the Q2 2021 U.S. underlying operating margin was elevated versus pre-COVID levels due to strong sales leverage. In Europe, net consumer sales in the second quarter grew 3.6% to 7.5 billion euros, and comparable sales increased 2.4%. Sales benefited from sustained food at home demand across our markets in aggregate and further growth at bull.com. It should also be noted that Q2 comp sales were negatively impacted by approximately 70 basis points from calendar shift in 2021. Net consumer online sales in Europe grew 27% in Q2. on top of the 64% growth in the same period last year. At Boll.com, our online retail platform in the Benelux, which is included within the European segment results, net consumer sales grew 24.2% in the quarter. Boll.com's third-party sales continued to grow and were up 26%, with nearly 47,000 merchant partners active on the platform. Underlying operating margin in Europe was 4.2%, down 0.3 percentage points from the prior year at constant exchange rates, due to reduced operating leverage versus 2020, as well as continued costs related to COVID-19. Moving on to cash flow in the second quarter, which you can see on chart 15. Free cash flow in Q2 2021 was €428 million, which compares to €533 million last year. This development was largely impacted by lower operating cash flows in Q2 2021 when the business lapped record margins from the year-ago period and were induced by significant COVID-19 stock-up activity. Last up from my side today is our outlook for 2021 on slide 16. We've mentioned more than once that COVID-19 continues to create significant uncertainty for the remainder of 2021. But our strong Q2 results provide us with confidence to again raise our full year 2021 EPS and operating margin outlook. As a reminder, COVID-19, and to a lesser extent, a 53-week calendar, significantly distorted our 2020 financial results. Lapping these effects will impact our results in 2021, which returns to a 52-week calendar. While higher sales demand drove unprecedented growth and operating leverage in 2020, this development, and to a lesser extent, the once every five-year occurrence of the 53rd retail week, are creating challenging comparisons in 2021. We continue to expect the comp sales trajectory to be better on a two-year basis in 2021 compared to pre-COVID-19 levels. And while it doesn't affect our comp store sales, our Q1 acquisitions of Fresh Direct, as well as the stores from Southeastern Grocers, along with the Dean Supermarket stores later this year, will provide us with incremental sales. We are raising our underlying operating margin outlook to approximately 4.3% versus previously 4%, reflecting the strong margin performance over the first half of the year. The margin continues to embed balancing the effects of cost savings of over 750 million euros in our Save for the Customer program, with cost pressures related to COVID-19, as well as the earnings dilution from increased online sales penetration. As such, we're raising our full-year 2021 underlying EPS outlook as well, which is now expected to grow by high teens relative to 2019. This is up from our prior guidance of low to mid-teens versus 2019. Moving over to free cash flow where we expect approximately 1.6 billion euros inclusive of net capital expenditure of around 2.2 billion euros. Free cash flow will be impacted by the unwind of working capital such as inventories and accounts payable due to the lapping of high levels of consumer stock of activities related to COVID-19. 19 in the prior year today we are also announcing our 2021 interim dividend of 43 euro cents compared to the 50 euro cents in the prior year period which is in line with our interim dividend policy of 40 to the year-to-date underlying income from continuing operations that said for the full year we remain on track to grow our full year 2021 dividend payment with the 40 to 50 payout ratio With that, I'll hand it back over to Van.

And thank you very much, Natalie. So let me wrap up. We are pleased with our second quarter results, which featured accelerating two years comp sales tech plans for 2020 and continued growth in our online business. These results are not only indicative of strong food at home demand, but also reflect the power of our accelerating our omnichannel platform capabilities. It's also important to note that our top line performance is translating into solid profitability. Our second quarter underlying operating profit margin of 4.5% compares favorably to our pre-COVID margin profile, and our first half results give us confidence to raise our full year 2021 underlying EPS and UOP guidance. We have also announced an interim 2021 dividend of 43 cents per share, 43 euro cents per share and remain on track to growing our full year 2021 dividend payment. We have recently received approval from the Dutch regulation body for our pending acquisition of the 38 Dane stores, which we anticipate closing in the third quarter. And importantly, we are proud to be one of the leading signers of the EU code of conduct for responsible business and marketing, which is in line with our ambition to elevate healthy and sustainable ambitions. Before I pass it on to the operator for the Q&A, I would like to take this opportunity to thank Elvin Concepcion for his strong contributions to our organization over the last three years. Elvin will continue to support us and onboard JP in August. And Natalie and myself, we want to wish you, Elvin, and your family all the best for the future. We are now happy to take your questions. And operator, could you please proceed with making that possible?

Thank you, sir. 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 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. And the first question is coming from Robert Jan Vos, ABN AMRO. Please go ahead.

Good morning, everyone. My two questions. Yeah, you increased your guidance for EBIT profitability and EPS, but you did not change your guidance for free cash flow. So my first question would be, can you elaborate on why you decided to keep your free cash flow guidance unchanged? And my second question, what are your thoughts on cost inflation that we see in many areas now? And maybe more specifically, any thoughts on wage cost inflation in the US and Europe? Thank you.

Robert, this is Natalie. I'll take your question on free cash flow and Frans will come on inflation. Essentially, when we look at the free cash flow for the year, what I would say on that one is, We are anticipating now the remodeling costs of Dean, which we've talked about. There's 38 stores coming online. We expect that in Q3, and we're going to have them all remodeled and up to the Albert Heijn standards by the end of the year. And that's something that is going to have a cost to us of almost $100 million. And in addition to that, we continue to have the unwind of our working capital. So that's something that, you know, it's been almost a billion euros that we saw as an impact. And we expect a good piece of that to unwind between now and the end of the year. So I think those are the big call-outs. I'd also add, you know, you've seen us continue to mention that we're going to increase our spend on omni-channel, e-com, and digitech, and that's definitely something that will play into our CapEx as well. So you may see that CapEx number go a little higher than what we have at the $2.2 billion.

And, Robert-Jan, on inflation, wage inflation, and I will tack on commodity inflation, but most likely that question is also coming later. On wage inflation, if I started the U.S., yes, there is a tight labor market, especially also in transportation, but also in the total supply chain. We think that there will be a relief in that labor market after September, but at the moment we try to deal with this in a proper way, both with manufacturing industries and with retail. At this moment... We managed this quite precisely. We were also able, being an attractive employer, to attract more than 8,000 people at the Food Lion brand. So we are able to attract people for our DCs, for our stores, and for our overall supply chain. And if we would have extra costs for wages because of this reason and inflation, then it's included in the guidance for the full year. On the European side, also their markets are getting tighter, also on specific talent, on technology and digital, as you can imagine. But so far we imagine this and we manage this and we have to make sure that we are an effective supplier, an effective employer, both for... careers both for primary and secondary benefits. And that's exactly what we do. And I think we are well positioned in the labor market with perspective people have, but also without total packages we offer. On the commodities, because there's quite some questions on commodity inflation in both Europe and in the U.S., We see roughly 1% inflation in our cost prices over the second quarter. The USDA authorities see 2.3% for the full year on inflation. That means that we will have a slightly elevated inflation level in the second half of this year. We think this is very manageable and we have, as we said in the last quarter, good economists working on our shoot cost models to make sure what is legitimate to accept as potential price increases. But also those price increases for the second half year as we envisage them at the moment are included in the guidance. In Europe also roughly 1% inflation we see on commodity prices and We all see the same on commodities and energy and these kind of things. There are some things which are timely effects, and there are some things which we have to calculate carefully. But we also think that inflation in Europe is manageable, and we all know that a moderate inflation is also healthy for retail in the end. So that's on inflation, Robert-Jan. Very helpful. Thank you.

And the next question is from William Woods Bernstein. Please go ahead.

There are two questions for me. Could we just have a bit of an update on ships to me and kind of what's happening with that in the next kind of path? And then secondly, I suppose your outlook on further into Lemonade, particularly in the U.S. Thank you.

On ship to me, William. That's one where we are, that's, you know, our endless aisle opportunity in the U.S. where we're going to bring general merchandise products that are in related categories along with our Prism opportunity for offering for different brands in the U.S. That is very much on track. We expect that that'll go live before the end of the year. And it's a nice opportunity, as you remember, to give us some incremental margin because it's a a project where basically we create the platform and we have a guaranteed margin on the products that go through.

On the outlook on M&A in the US, especially on the US, you mentioned, I think we commented on this in the first quarter, we saw due to COVID and strong free cash flows for all kinds of retailers, a pause on the consolidation speed. I think that consolidation will pick up again in the second half of this year. When we talk to financial investors, we see also an increased activity around the M&A front, IPO front, M&A front, etc. So I expect more activity. As you know, we have a strong balance sheet and we have also a strong visibility on potential strengthening our network. We mentioned in the past that same-store sales is the most profitable where we focus on that growth. The second thing is infill markets and dancing up the markets where we are already present because it's easy to to run those on the existing brands and supply chains, so that's also very accretive from the first moment. A nice example is here the South Eastern Grocer, 70 stores in the Carolinas, which as I indicated before are doing very well and according to our expectations, or the Dane acquisition, we also made happen 38 stores in the Dutch market, and the other thing is adjacencies, and a nice example there is our Fresh Direct acquisition, where we We have now a strong position in Manhattan where we were not that strong before. So for our New York strategy with Stop and Shop and Fresh Direct, that is also a very healthy addition. So we are focused on this, good visibility. We have a strong financial base and we have our eyes wide open to see what's possible there going forward.

Mr. Woods?

That's perfect, thank you.

And the next question is from Mr. R. Joyce, Goldman Sachs. Please go ahead.

Hi, thanks very much for taking my questions. So the first one is just on the sort of ETF guide. As I read it, it's sort of guiding to broadly flat ETF in the second half versus 2019 ETFs. Just wondering if, A, that's the correct read, and, B, if you could maybe talk about the current trends or the assumptions underpinning that. And then the second one, I had a few investors ask about the potential for an investor event in the sort of fourth quarter of this year. Is that something you guys are looking at? And if so, would you be able to help us, maybe guide us on what you'd be looking to talk about? Thanks very much.

Okay, let me take that one in terms of EPS guidance first. You're right that it's pretty in line with the 2019 levels for the rest of the year. I think it's modestly higher than that. But essentially, our assumptions are a more normalizing economy following COVID. You know, we said in the presentation multiple times that there's a lot of uncertainty out there, that that's definitely something where, you know, we're going to monitor what happens with the environment. But if we look at kind of where we see things, a more normalized promotional environment, a more normalized shrink than where we were, you know, in the first half, which are obviously still at quite elevated levels, not something that, sorry, quite depressed levels. So that's definitely something that we see as playing an impact there. But when we look at this environment, we believe very strongly that our margin outlook is strong. We're continuing to see good flow through on sales. So I think that's one where we're keeping our eyes open a bit on if there could be other opportunity there. With respect to the investor event in the fourth quarter of the year, This has been something I think we've been waiting on bated breath to do. But given COVID, it was really what's the right time in terms of when would the investor community be most interested in hearing some of the new activities we have planned. And there'll be different topics, but I think two of the ones that I can call out already today or we'll be talking about Certainly more about bowl.com and our activities there and how we work with that to integrate it even more in a food, non-food platform environment. And secondly, we'll be also making some very nice comments, I think, in terms of sustainability and our activities there and our ambitions. So expect to hear more. Those are I'll call them two teaser topics for you. But it's definitely something where we have, I think, some news to tell in terms of where we are in a strengthened position post-COVID.

Thanks very much. Sorry, just within the first question, I was just sort of asking about the thank you for those explanations. Just the current trading. So maybe on a two year stack, we think about U.S. and Europe. Are we seeing any big differences?

Are you talking about on a sales level now?

On a sales level, yeah.

Okay. Well, you know we don't give formal guidance on sales, but I can say that we certainly expect in the second half to still see our sales at elevated levels versus pre-COVID.

Okay. Thank you. But we can say, Natalie, that we had a strong start of the third quarter, especially in the U.S. And I think we also follow the news in the U.S. with growing infection levels, unfortunately. and that has also an impact on the stickiness of our in-home consumption and customer behaviors. Also appreciating our very strong omnichannel proposition, not only in the U.S., but also in Europe. So I think we are well positioned, and that's why we saw a good start of the third quarter. Thank you very much.

And the next question is from Nick Culture City. Please go ahead.

Hi, good morning. Thank you for taking my questions. Welcome to JP and all the best to you to Albin. Firstly, please could you talk through the volume market share evolution in your U.S. banners? I guess you may have the P6 data by now as well as P4 and P5. I'm just curious really about the context of your U.S. like-to-like performance. It looks to be well ahead of some of your U.S. peers. And secondly, on the Europe segment, please could you talk a little about the margin evolution year over year? I'm guessing the likes-likes picture wasn't the same at a banner level, but very simplistically for the segment, likes-likes went up and margins went down. Thank you.

Shall I take the first one and you the second, Natalie?

That's fine, but would you actually repeat the second one, Nick? I'm sorry. We heard something about Europe and differentiated views across the markets.

Sorry, apologies. I'll turn volume up on my phone. On Europe, around the margin evolution year over year, You have positive like-for-likes for the segments, but I'm guessing that wasn't the case with Albert Hein or some of the constituent parts. But very simplistically, like-for-likes went up and margins went down. So it's just a question in terms of if you could give some visibility on the margin bridge year over year for Europe, please.

No problem. But why don't you start with the market share?

So I understood the first question, Nick, as some indication of volume development in the U.S.

Yeah, I mean, you have historically given indications of whether you're gaining volume markets shared by banner. You clearly are in the food line, but it'd be interesting to know what you're doing in your other banners. And I guess my point here is that you're clearly outperforming, but I'm trying to understand why you're outperforming, I guess, in the U.S. Yeah.

To be very precise, we know that those Nielsen numbers for the second quarter are also still not available for us. They come already quite late. But we have some proxies with IRI data. And what we see is that we have roughly a flat market share with Stop & Shop, but the other brands all gained market share, both in sales and in volume. We have also seen our rather moderate inflation levels in the Northeast. If you look at the CPIs in the Northeast, we gave you a number of roughly 1% inflation. So that also means that we will have gained in a lot of markets, and especially, of course, in food line, also volume as well. So we are very positive about our trends, and we see no big change to the previous quarter, where apart from Stop & Shop, we gained share in all our brands in the U.S., And we gained overall share, market share, on the East Coast as a whole, as an ADUSA. So we're very pleased with that.

And just to follow up there, is the East Coast market, grocery market, seeing similar trends to the rest of the U.S.? Or is it a better geography from a sales perspective?

It's a geography with historically lower inflation levels, with lower CPI numbers. It's a geography which is very different from north to south, as you know. We see in the Carolinas population growth and GDP growth for investments of foreign investors and these kind of things. So that's a different geography than the northeast, where you don't see that much population growth. But I think with our omni-channel strategy, where we added a lot of capacity well before COVID, And while we're enjoying, and we see for the US in total for this year, 70%, including Fresh Direct, of course, 70% growth in our online business. I think a lot of people appreciate our multi-channel strategy, our click and collect going to 1,400 locations by the end of this year, our same day, our next day. And for example, if you look at the shift, what we've made, the strategic shift in our online proposition, which people appreciate, You will remember three years ago, Peapod was 95% the next day. We now have already 60% same-day click and collect in our network. So I think we were able to anticipate very nicely to customer behaviors. It's increasing loyalty under this brand, one brand, omnichannel brand philosophy. So I think we gained attractiveness. The other thing is that historically we have very strong fresh and private label levels in the U.S. where we can differentiate a lot. Consumers in the U.S. are eating healthier. are cooking more at home, have more in-home consumption that will be around because also offices will still be closed. So working from home will stick as well. So all these kind of elements, I think, pay into our positioning and we will benefit from that. So I'm quite optimistic also in the future about our market share developments. That's great. Thank you.

I was just going to say, and on your second question, which was just on the EU margin evolution issue, I think there really, you're right, it's a little different by every brand, but actually the trends were pretty similar. What we just saw in the second quarter was a bit less sales leverage than what we've had in previous quarters, and we did have a disproportionate amount of the COVID costs were in Europe this quarter.

But sales were up, so I guess that's a crux of my question. I don't quite understand the sales leverage point, unless it's due to sales leverage. It would balance with different levels of profitability, I guess, might be the explanation.

That piece is correct, Nick. We talked about recovery of our East European markets, for example, where profitability is, in general, lower than our Benelux business. But one of the other things is it's a different level of sales. If you look at last year, the incremental sales that were coming into the business were very quick COVID only, you know, sales where you didn't, you had very limited, we couldn't keep up with the cost at that point in the year. Whereas this year, what you're seeing is, you know, the natural development, you know, if we open new stores, for example, that kind of thing, that stuff comes at a different sales leverage.

Okay. Got it. No, thank you. That's great. What is also a positive thing, Nick, and you will, you will hear for more, more from us in the, in the, in the second half of this year, we are going to implement more and more tooling and digital and tech tooling from the Benelux also to the Central East and European markets. So learnings from the Benelux, if it's home shop centers, if it's digital, if it's loyalty, if it's pricing and promotion tools, will all be rolled out to the other markets in Europe as well. I think that will give us a synergetic effect there. And the other thing is... It's quite competitive also, of course, in Europe, but we're very happy also with the sales development and the market share development of the Albert Heijn brand, where we had in all the markets in the second quarter market share gains, and in June was even 90 basis points over last year market share gains. So apparently the team there is doing a great job, and we do quite some things in a good manner. Well, that's very helpful. Thank you. Look forward to November. Thank you.

And the next question is coming from Mr. Andrew Gwynne, Exane BNP Paribas. Please go ahead.

Hi there, good morning all. Yeah, two questions if I can. So firstly, on the fresh direct, just wondering if any kind of early learning from that business, particularly with the fabric installation that I think they have. Second question, actually also on online, but obviously you're in the process of adding a lot of capacity with the clicking collectors. I think by year end about 70% of stores in the U.S. So plans further forward would be interesting. And then kind of connected to that, but just what is the competition doing? I suppose there's a view that the independents are struggling to keep up. Is that what's borne out on the ground in the U.S.? Thank you very much.

Yeah. Let me start with the fresh direct earnings. The company is with us not even six months as we know. We learned a lot there in the meantime. So, first of all, it's a very complementary brand in the total setup. Strong foothold on Manhattan and the tri-state New York. What we have seen is that a lot of Fresh Direct customers also would like to have, next to their Fresh Direct commitments, also strong supermarkets on their site. And that gives us an opportunity with Stop and Shop and with Fresh Direct to combine and to capture that omnichannel proposition for customers in the New York area. And especially in the tri-state space, there is quite some room for us to win. The second thing is that... We see, as we have seen before in our due diligence, a very high loyalty of existing customers and a very strong proposition of Fresh Direct overall on the fresh, convenient and healthy part of the assortment. We will and we have now embarked on using the private labels of our Hannaford business into FreshDirect, which gives a stronger center store proposition for FreshDirect, which was an opportunity as we saw before. And we also brought FreshDirect closer to our overall group governance from an IT, from a digital, from an administration, finance, HR, compliance and governance perspective. And we see quite a nice opportunity with two strong brands in the New York area to grow faster. Like we have Takeoff and like we have Swiss Lock as micro-fulfillment center pilots. We also have Indeed with Fabric in Washington, a pilot which we are ramping up. It's too early for the learnings there. But we will run that for the Washington D.C. market and pick up those learnings and see how we can integrate this in our total micro-fulfillment strategy. And now with having three suppliers, I think we have a very good view there. We're all learning here, right? I mean, we're not the only retailer who's learning what is the best technology, but we are very much convinced that micro-fulfillment centers close to customers, agile, low investment levels, flexibility, and parked and housed in existing assets is the right thing to go forward. And I mentioned already earlier that we will, by the end of this year, open that new facility, the Swiss Lock facility in Philadelphia. So... positive about our directions, learning every day, and I think also with Takeoff, we get close to our productivity levels we strive for, and the same hopefully also for Swiss Lock and Fabric.

And when it comes to click and collect, you'd asked on that, that we're going to be hitting 1,400 stores by the end of the year in terms of having those click and collect locations. We've got over 2,000, so we're not quite at a 70%, 75%, but we're at a very good level. You'll continue to see us expand that, but let me also mention that with the e-com coverage we have, including home delivery, we already reach about 95% of our customers. So we're going to need to be thoughtful as we go forward to say, hey, where does it make sense? Where is it economical? There's a piece about capacity, but I also think it's very important that we focus on productivity of the sites that we have available. And you're right, we've had about that 70% increase in capacity over the last year, year and a half. I think as we go forward, what you're going to see is a real need on our side to... focus on everything we can do with that click and collect options, but also how do we improve our whole CVP? How do we make sure that the fee structure is optimal, that we've really got things available online and in-store and that real connecting the omni-channel piece of our business? But when we look at click and collect capacity and the business, we're very pleased that it's gone from being a pretty nascent business a year and a half ago to being about 50% of our e-com sales in the U.S. today. So it's something that I think also shows very much the agility of our business and how we're able to respond to those trends in the marketplace. We see consumers wanting a new avenue, being able to bring it very quickly to them.

And our click and collect proposition offers the full store assortment, right? And we have this proprietary prison software. We talked about it last quarter, which we developed ourselves recently. So we have a full ownership of customers and customer data, which is very important to us. But in every click and collect location, you have the full assortment in your hands. And I think that is a big advantage compared to quite some competitors.

Okay, all very clear. Thank you very much.

And the next question is coming from Mr. Sridhar Mahamkali, UBS. Please go ahead.

Good morning. Thanks for taking my questions. A couple of quick ones then. For me, on the sale for our customers and COVID costs, please, on the sale for our customers, 715 million euros, can you give us a sense of what was delivered against that so far this year and how it compares to last year? And also related, I guess, is the COVID costs in Q2. If you can shed some light on that. And I think you mentioned 150 million if I'm right in Q1. And the second one is on just a bit of a clarification on free cash flow, please. Is the CapEx now 2.3 billion as opposed to 2.2, given your comment earlier about 100 million costs on D? And then again on working capital. Is there any thoughts you can share with us in terms of how it might look by the end of the year relative to what had a $900 million contribution last year as we wrap up 2021? How might it look if there is any sort of direction there? That would be super helpful. Thank you.

On the save for our customer number, we only update that on an annual basis. So sorry, not too much, too specific on that. But I can tell you we're tracking very much in line. I'm very confident that we're going to be able to hit that number for the full year. When you look at the COVID costs in the second quarter, you heard $84 million. So divide $750 by four. That's probably a conservative expectation in terms of how that number falls. And you see that that exceeds the COVID costs in the period. When we look at the free cash flow, I haven't given any specific numbers in terms of are CapEx. What I've said is do expect something on the day in acquisition and it's around $100 million, so your assumption is not a bad one. But I did also mention look at that CapEx number. We will evaluate that as we go through the year. One of the things that I think we really developed as a skill last year was saying as opportunities present themselves, especially on the omni-channel and digital front, that we've become very quick at being able to invest there when we see opportunities. So that's something where we have done so far this year. You see at the half year, our CapEx number is actually for the second quarter up versus where it was a year ago. And I think that's something you may see us looking at as we go through the rest of the year. In terms of working capital, that's something, again, we don't give a specific quantification, but you know there's a You know, a working capital unwinds that's going to be quite sizable, and it'll be in the fourth quarter something that, you know, it's hundreds of millions in terms of the impact.

Thank you. Maybe just a very, very short follow-up to what Nick was trying to understand earlier on the performance of different brands. Just a connected question. Are you able to give us a sense of where online penetration is for Food Lion, Giant and South and South? Is it different? Is it broadly the same as the U.S. overall?

You're talking just about the U.S. market?

Yes.

They definitely do vary. We haven't disclosed the penetration levels by brand, but what I can tell you is our highest penetration is at Stop and Shop. Our lowest penetration is at Food Lion. And you know the overall number, we've kind of passed the 6% number there. Actually, I'm sorry, we're even higher than that, right? I think it's actually, if you look at that number, 7%.

7% penetration for the total U.S., and what you say is correct, Natalie, that those brands which grew up historically with the Peapod facilities and Peapod delivery, those are the AD, the former Ahold USA brands, they have historically a higher penetration If you see that both Hannaford and Food Lion are catching up, that's correct. Stop & Shop, the highest penetration degree, and Food Lion, the lowest. But we are catching up very fast, Sweden. And you see also that the customer behaviors are, of course, different in more urban and less urban areas. So I think we're moving very fast. And also with Food Lion, although a relatively lower present penetration, I think we run there at 4% at the moment. is growing very fast. It's the fastest growing brand there on the online proposition.

Okay, thank you very much. And the next question is from Andrew Porches, HSBC. Please go ahead. Yeah.

Hi, team. A couple from me. So just looking at your guidance again, I think you talked before about effectively second half being at pre-COVID levels of earnings. And just wanted to clarify why you expect that to be, because it sounds from your commentary like there's no sign of any sort of, no sign of demand returning to pre-COVID levels. So I'm just wondering what you're seeing there and whether, you know, what you expect to drive that very fast normalisation as we move through the second half. And then a second question really around U.S. supply chain. I think you talked a little bit about some tightness there. I think there's been quite a bit of news flow around sort of issues with supply chains, not only in the U.S., across Europe as well. Just wondering what you're seeing there and whether you think you're sort of relatively better positioned than the rest of the market when it comes to that side of things.

On the outlook... Shall I take the first one or the second one? The second one. The second one was on the supply chain, right? So the situation on the supply chain. We see in Europe a pretty normalized supply chain and shelf availability numbers. You can imagine that the natural disasters of the floods in Holland and Belgium, the Czech Republic and Greece are not helping there. So we'll see an effect. That's in the guidance, by the way, but we see an effect there that the supply chains are hindered due to those natural disasters and supplies with many factors are more difficult. Roads are blocked and all these kind of things, but it's a temporary matter. On the U.S. side, we are in a fortunate position that we have a lot of supply chain self-managed. So we own a lot of vehicles and we have a lot of drivers on our payroll as well. So we have a strong control of our supply chain. The other positive thing is that, as we announced earlier, we are more in a direction of self-distributing for our total supply chain network in the U.S., with the CNS asset acquisitions, as we commented before. And that is absolutely strategically in the right direction. And the more we control ourselves, we can more control our destiny and we're less independent on third parties. So that's now paying off. And, of course, in the U.S., L&D, logistics and distribution, is still stressed. Availability of labor... fuel prices and availability of vehicles. But I think we are potentially better positioned there because we have a lot of drivers and vehicles under our own management.

And when it comes to the outlook, I'm essentially going to repeat what we've said so far in the call, which is there really is still a lot of uncertainty when we look at the rest of the year and how it impacts COVID-19. It's something where we've got the cost savings that are still coming in, but we also have the cost pressures from COVID-19. Remember that when you look at the first half of the year in terms of that comparison to 19, there was kind of an artificial piece that impacted that number, which is the stop and shop strike that was 100 million impact to our operating margin in 2019. And that number, we don't have that advantage as we go into the second half. And I mentioned, I think, earlier one of the questions that we're expecting, you know, a more rational promotional environment. And that's something as, you know, we see these supply chains normalizing and, you know, the more people, you know, eating out of home, that's just something that's going to become, I think, part of the landscape. But... It is something we have a lot of things in place. That's why we've increased our guidance. And I think we just want to be very cautious as we look at the second half of this year in terms of saying it is very unclear what's going to happen in the U.S. with vaccines and if there's another wave and how that would potentially impact things going forward.

Okay, thanks a lot. That's really helpful.

And the next question is for Mr. Clement-General Brian Garnier. Please go ahead.

Mr. General? Good morning. Two questions from my side, if I may. The first one is, yeah, good morning. Do you hear me? We can hear you, absolutely. Nope. Okay, good. Sorry. My first question is on QuickCommerce. What's your view on the rise of QuickCommerce players, such as Gorya, the market here in the Netherlands, and also Magopass in the U.S.? Are you willing to So, let's see, why not sign more partnerships with platforms just to secure your conveniences to our business? And my other question is just to come back on the floods in Belgium and the lands in Olai. So, we have to expect a kind of impact on this operation and on costs. What about sales? Do you have closed stores in Belgium and the Netherlands right now? Thanks.

Okay, thank you. The line was not great, but I think we understood your questions clearly. On the last to start with, we had heavy floods in both the Netherlands and in Belgium. In the Netherlands, we had no damage to assets and no stores closed. So it's a pretty normal situation at the moment. So no effect there. In Belgium, we had stores underwater and a number of stores closed. The teams are doing a tremendous good job by bringing those stores back in operation. We will have an effect on sales and therefore UOP, but it's all included in our guidance. So we don't expect a deviation from our guidance for that. And the stores are getting one by one again back to the network. Same for road quality and the total supply chain. But the supply chain has some damage there in total for the total network, not only for us, but also for other retailers in that part of Belgium as well. It's more a national topic than it is a less specific topic. So included in the guidance... The teams are doing a great job to support also the communities and the people affected in that region. On a flash type of business, the instant, the gorillas you mentioned, I think we are a long time in business and we see with our omni-channel strategy a lot of different customer journeys and a lot of different channels of distribution. And we made ourselves an enormous dynamic journey with next day, same day, hourly delivery, click and collect, home delivery, pick up from stores, and these kind of things. And that we see both in Europe and in the U.S., and both with Albert Heijn in the Dutch market, but also with our people of business before in the U.S. I think we were frontrunner and pioneer. So we always have been very alert towards these kind of customer expectations and dynamics. And the same for the examples you just mentioned. We have also in the US a couple of examples we saw years before. And we make those judgments and we monitor this properly. We talk to customers to see what they would appreciate. And at the same time, we also like to make sure that we have an omni-channel view, a total profitability view, but also that we look economically what is viable and what might not be. So we are monitoring the situation there. We added in the Dutch market Albert Heijn Compact, which is very much focused on single households. smaller baskets, and no delivery fees. It's doing extremely well for us. We grow share there, and we have already rolled that out to 26 markets, as I said before. So we're very happy with that thing. That's an addition to our services there. So we monitor this very closely, and the same also for what you call that instant type of delivery. And, yeah, I think we are on top of this to see what is the best choice for our customers in the future.

Okay, thanks a lot. There are no further questions. Please continue.

So, ladies and gentlemen, that concludes our call for today. As we said earlier, we'll be giving you some more details on our investor day in November later, and we wish you all a pleasant day.

Thank you.