Koninklijke Ahold Del Ord

Ladies and gentlemen, good morning and welcome to the analyst conference call on the first quarter 2022 results of Al-Dalaza. Please note that this call is being webcasted 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 Interim Report, First Quarter 2022, and also in Al Deleuze's public filings and other disclosures. Al Deleuze's disclosures are available on aldeleuze.com. Forward-looking statements reflect the current views of Al Deleuze's management and assumptions based on information currently available to Al Deleuze's management. Forward-looking statements speak only as of the date they are made, and Al Deleuze 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 Al Deleuze. At this time, I would like to hand the call over to JP O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead, JP.

Thank you, operator, and good morning, everyone. I'm delighted to welcome you to our Q1 2022 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 investors section of our website, ahuldales.com, which also provides extra disclosures and details for your convenience. To ensure everyone has the opportunity to get their questions answered today, I ask that you initially limit yourselves to two questions. If you have any further questions, then please re-enter the queue. I'll now turn the call over to Franz.

Thank you very much, JP, and good morning, everyone. I'm pleased to report a strong start to the year for ALDELEZ. In times like these, our strong global portfolio of number one and number two local brands provides distinct competitive and societal advantages. On the one hand, these allow us to successfully navigate short-term market volatility, and on the other, they provide operational bandwidth and financial stability so we can remain focused on our exciting long-term growth agenda. But before I go to that and our numbers, let me first start with the customer. For consumers, Q1 was characterized by significant challenges within and outside of our markets, headlined, of course, by the war in Ukraine. While we do not have direct operations in Ukraine or Russia, I'm extremely proud of associates at our brands. They quickly jumped into action and provided crucial support to those affected by this war. Our brands in Europe, together with Ajo de Les, donated more than €1.5 million worth of cash and in-kind support, and generated an additional €1.2 million in customer and associate donations to organizations like the Red Cross. Several brands are also supporting associates who are volunteering their time to provide on-the-ground support and are actively promoting jobs to Ukrainian people displaced by the violence. We will continue to provide support for as long as it is needed. We also know that consumers globally are feeling the pressure of high inflation rates. And therefore, we are working hard and having firm negotiations with suppliers to mitigate price increases where possible. We are also ensuring price increases are realistic and necessary via our should-cost models. As you know, we are, too, a manufacturer as well with our own private label brands. And therefore, we can deconstruct products down to component materials, like raw materials, packaging, energy, and transportation. So we have a good sense of what a product should cost. Moreover, we also have the powerful backdrop of our Leading Together strategy and the four priorities we are leaning on. to unlock even more value for our customers and our stakeholders. That starts with our consumer and customer value proposition. And as you can see with the many examples from the quarter on slide eight, all the local brands are continuously helping customers manage their omnichannel shopping baskets more efficiently. Our brands are also laser focused on helping consumers manage their spending by proactively highlighting savings opportunities along the customer journey. Powered by data and insights, we do this by the following things. Providing great value offers spearheaded by omnichannel loyalty programs. Prioritizing healthy food options through guiding stars and Nutri-Score linked promotions. And expanding the assortment and availability of high-quality, low-cost, home-brand products and bulk offerings. For example, as you can see on slide 10, own brand assortments, the page called own brand assortments, which offer great quality at reduced cost versus national brands. And these are being positioned more prominently and conveniently in stores and the omnichannel shopping journey through our apps and websites. As a reminder, we are very well positioned with our own brands relatively to peers. In the Benelux, own brands represent over half of all our brands' sales. And in the US, own brand penetration stands at approximately 30%, and our brands will continue to extend and invest in their presence and visibility in stores and online throughout 2022. All of the actions I just mentioned are clearly paying off, and we believe there is even more to gain going forward. Brand strength and relative market share are our most important measures of success. Our performance on these metrics again shines through in our results, which exceeded our original expectations. In Q1, net sales grew 8.3% to 19.8 billion euro, and diluted underlying earnings per share was up 1% to 55 cents. Now these results are coming off a very strong 2021, which large pandemic supported gains, especially with Bold.com being a big beneficiary. We therefore are very pleased that we have maintained the majority of these gains on an absolute basis and consolidated our market share positions in the process at the same time. In the US, FoodLine was a clear outperformer and right now is one of the fastest growing brands in the US with close to double digit comps. and we continue to make very good progress building new capabilities and consolidating activities in our support hubs, which is a central part of how we add speed and leverage scale to accelerate growth and drive costs lower over time. With a well-supported consumer environment in the US, we are in general more optimistic about our performance. In Europe, the reopening of societies across our markets and a return to normal life for most citizens created a challenging comparison in the Benelux. And this resulted in declining first quarter comparable sales and underlying operating profits for Europe. However, we see customer trust and loyalty as an important indicator of how well we are doing. And this is clearly reflected in the fact that our overall market share is increasing, being particularly robust at Albert Heijn and Bold.com. We expect the first quarter performance trends in both regions to continue in Q2 and potentially even intensify in Europe as inflation rates continue to peak. Therefore, to counter the market conditions we see in Europe, particularly challenging markets like Belgium, we will be proactive and swift and are focusing on two main approaches to strengthen our brands as well as intensifying our cost-saving efforts, which Nathalie will address in a moment. While adding additional short-term mitigation actions, our leading together operational priorities remain front and center in our work. Our omnichannel transformation agenda is core to this, and you can see on slide 12, we again accomplished a lot in the quarter. We continue to use a blend of organic investment and strategic partnerships to make smart choices to expand our grocery omnichannel proposition and reach. And as the industry is rapidly shifting to more same-day delivery options, we are positioning ourselves to accelerate in this space. For example, in the U.S., we have over 1,400 pickup points and have added new instant delivery options with partners such as Instacart. In Europe, Albert Heijn recently began making instant deliveries in Amsterdam by expanding its existing partnership with Deliveroo and thuisbesorgd.nl. to give sub-customers more ways to put a fresh, healthy meal on the table. We remain confident our brands will be winners from this long-term trend and fully expect to take significant market share as the more challenging environment shakes out competition. This is a good opportunity to spend a few minutes on how we intend to leverage our portfolio and to make it a priority to be bigger in this respect. Creating the ecosystem for smarter customer journeys is a clear passion of our company and a key differentiator from our peers. As you can see on slide 13, Albert Heijn and Bold.com have increased collaboration on several fronts in the area of joint loyalty, media monetization, and introducing new convenient customer solutions like joint parcel lockers. We also made good progress with Stop and Shop and Fresh Direct, where we plan to increase collaboration to accelerate growth and market share in New York City. I look forward to share more on this in the second half of the year. Finally, as you have seen at our AGM last month, we remain fully focused on our healthy and sustainability ambitions and have again made good progress on many fronts, as can be seen on slide 14. We were proud that Albert Heijn and bold.com were again recognized with the 2022 Sustainable Brand Index. Albert Heijn was voted the most sustainable market supermarket chain in the Netherlands for the sixth year in a row, and Bold.com was recognized as the most sustainable e-commerce brand for the second year in a row. Bold.com also became the first e-commerce company in the Netherlands and Belgium to be climate neutral, certified from the Climate Neutral Group. And in a similar light, our U.S. brand Hannaford also announced plans to be fully powered by renewable energy by 2024. In summary, all in all, I'm pleased with the performance of the business in what is an increasingly challenging environment, with the first quarter results better than our expectations. And many of these Q1 trends are continuing in Q2. Our strong global portfolio of number one and number two local brands provides ample opportunities and caution to navigate the environment. With our U.S. business remaining strong, our extensive toolkit to manage inflation, dependable cost-saving initiatives, and additional proactive action plans in Europe, we are increasing our 2022 earnings guidance today. And on that note, let me now hand over to Natalie, who will add her comments on the quarter, providing further specifics on the outlook, and update you on our progress on the sub-IPO of Bold.com.

Thanks, Frans, and good morning, everyone. Our plans for 2022 and beyond underpin our clear goal to be the industry-leading local omni-channel retailer in each of the markets we serve. Even though we started the year in challenging market conditions, our operating model is proving to be very resilient, and our strong portfolio is well able to absorb the macroeconomic pressures. In this environment, and unlike many of our competitors, we are able to lean in on our strong global footprint and market-leading positions our longstanding and consistent track record of operational excellence, and our deeply rooted focus on delivering what matters most for customers in their daily lives. As I've said on previous calls, our financials in 2022 will show some conflicting trends as we lap country-specific lockdown periods, as well as the divergent consumer behavior patterns, particularly in absorbing inflation headwinds. So while there are clear differences in our regional performance, there are nonetheless three key messages I'd like you to take away today. First, by collaborating with suppliers but also negotiating hard with them when necessary, we are keeping price increases in check for our customers and have therefore continued to successfully manage to pass through inflation, albeit with different levels of consumer elasticity by region. Our increasingly omnichannel formula is really working for us and the customer. The transparency we are creating through our omnichannel ecosystem is unlocking the power of data and insights. These, in turn, are helping us to speed up, innovate, shape, and adapt our daily commercial initiatives at a local and personalized level, in-store and online, fueling growth and or market share gains. And thirdly, Our attention to detail and productivity in tightly managing our costs, planning our investments, and proactively managing risks and exposures like safety ensures that we can continue to provide strong visibility, agility, and dependability in our cash flows and our shareholder returns. As you'll see in detail in our press release and summarized on slide 18, we can take a lot of confidence from our Q1 results. Net sales were 19.8 billion euro, up 3.6% in constant exchange rates, or 8.3% in reported terms. Excluding weather and calendar shifts, primarily related to the timing of Easter, Q1 group comparable sales increased 1.2%. Group net consumer online sales declined 1% at constant exchange rates. as solid growth and increasing online penetration rates in the US were offset by the cycling of a very strong Q1 2021 in Europe, particularly at bull.com arising from last year's lockdowns. For context, excluding bull.com, net consumer online sales increased 4.6% at constant exchange rates. Group underlying operating profit was 4.2% for Q1, down 0.5 percentage points compared to Q1 2021 at constant exchange rates, reflecting higher labor, distribution, and energy costs than in the prior year period. Underlying operating profit also includes a 47 million euro increase in income from our global support office insurance activities compared to Q1 of the prior year, mainly due to favorable discounting effect on insurance provisions driven by the increase in interest rates. Diluted underlying EPS was 55 cents, up 1.3% at actual currency rates, and 9.4 million owned shares were purchased in the quarter for 268 million euro. Moving on to slide 20, you see the comparable sales growth by region, including and excluding weather and calendar, with Easter shift playing a major role this year. In the U.S., we posted a 3.9% adjusted comp sales number in Q1, keeping the pace of previous quarters. In Europe, the adjusted comp sales for Q1 declined by 2.8%, a deceleration from prior quarters due to the reopening of societies, as well as inflation began to bite harder in the region since the beginning of the year. Now let me go a little deeper on our first quarter performance by segment. Starting with the U.S. on slide 21, net sales grew 5.8% at constant rates to 12.2 billion euro. On top of that solid underlying comp growth, Sales were also benefited from favorable foreign currency translation rates, last year's acquisition of stores from Southeastern Grocers, and higher fuel sales. Brand performance continued to be led by Food Lion, which has now delivered 38 consecutive quarters of positive sales growth. In Q1, online sales in the segment were up 4.6% in constant currency. This builds on top of the significant 188% constant currency growth in the same quarter of last year. The underlying operating margin in the U.S. was 4.4%, down 0.4 percentage points at constant exchange rates driven by increased labor, distribution, and energy costs, which were partially offset by higher pricing and cost savings initiatives. Importantly in the quarter, Stop and Shop signed and ratified a new four-year labor contract with unions representing over 60% of the Stop and Shop workforce. As such, we have no other significant labor negotiations outstanding at this time. In Europe, as seen on chart 22, net sales increased modestly to 7.6 billion euros, driven by the 2021 acquisition of 38 stores from Dane in the Netherlands. Q1 comparable sales decline in Europe came as the segment lapsed strong comp sales growth in Q1 2021 of 8.3% for the reasons already mentioned. Nonetheless, as Franz discussed, our market shares across Europe remain strong, even in some of our most challenging markets like Belgium. Albert Heijn was a particular standout in the quarter, with robust market share gains attributed to strong executions, successful marketing campaigns, sales uplifts resulting from the brand store remodeling activities, and contributions from the newly acquired Dane stores. In Q1, net consumer online sales in Europe were down 3.8%, following 78.6% growth in the same period last year. Underlying operating margin in Europe was 3.5%. This compares to an underlying operating margin of 4.7% in the prior quarter. While last year's results included pandemic-related benefits, we are clearly not satisfied with this result. Therefore, we're doubling down our efforts in two key areas. Firstly, we're strengthening our commercial proposition. rolling out successful pricing and loyalty programs for customers in all our markets, and broadening our product offering to ensure affordable options for every wallet. Secondly, cost savings are more important than ever to be able to offer customers the most competitive price without sacrificing investments and growth. As such, in the more challenged markets like Belgium, on top of increased cost save for our customer initiatives, we are committed to more intensely reviewing structural costs. Overall, we are looking at SG&A, supply chain costs, store costs, and further potential and combined sourcing for brands. This is necessary to align our cost base to the changing underlying dynamics of the market. We'll provide you an update on our plans in August with our Q2 results. Moving on to chart 23, let me spend a little more time on bull.com. In Q1, net consumer online sales declined by 6.5%, following strong sales growth in the prior year period of 76.6% when sales at Bull.com were aided by lockdown measures limiting brick-and-mortar retail sales. Bull.com's sales from its 49,000 third-party merchant partners in Q1 declined at a slightly lower rate. Bull.com gross merchandise value, excluding VAT, was €1.3 billion in Q1, down 7% compared to the prior year when growth was 70%. Against a market backdrop which is estimated to have been down in the mid-teens, the strong position of Bull.com with customers and partners has therefore again yielded us strong market share gains estimated at near two points of market share in the quarter. We will also officially open Bull.com's new fulfillment center on Monday next week and sent soft opening we're already ahead of our initial productivity expectations. We also completed the acquisition of a majority stake in delivery expert Cyclone last week. We continue to make very good progress with the Bull.com management team in our preparations to have Bull.com ready for a sub-IPO in the second half of 2022, subject, of course, to the right market conditions and other factors. We believe strongly in the value and the potential of Bull.com. Our intentions remain firmly focused on securing the right future path to unlock this value and provide further funding for BOL.com, and I'll hold the lez to execute our winning strategy. Moving on to slide 24 and switching back to the group. Q1 free cash flow was negative €21 million, which, although very much in line with historical pre-COVID levels, does represent a decrease of €316 million compared to Q1 2021, mainly driven by unfavorable development due to the unwinding of COVID-19-driven working capital gains, higher net lease repayments, and net investments, which were partially offset by lower income taxes paid. I'd now like to give you a few comments on the 2022 outlook on chart 25. Higher than expected Q1 earnings, coupled with a more resilient consumer climate in the U.S., as well as a stronger U.S. dollar are forecast to more than offset challenging economic backdrop we now see in Europe. Therefore, we expect underlying EPS to be higher than our previous guidance of low to mid single digit decline, and instead be comparable with our 2021 levels. Free cash flow is expected to be approximately 1.7 billion euro. Net capital expenditures are expected to total a maximum of 2.5 billion euro and therefore be lower than our original expectations as a percentage of sales this year. Given higher labor, raw material costs, we remain committed to executing and phasing the timing of investments with the same discipline and focus you have come to know and expect from Al Deleuze, which means achieving required hurdle rates and internal return on capital metrics. We're committed to our dividend policy and our share buyback program. We again expect to increase our full-year dividend, and we are well on track to executing our €1 billion share repurchase program in 2022 as planned. So in conclusion, we're proud of our accomplishments at Ajo de Les over the past quarter. We have a strong competitive advantage rooted in our 19 great local brands. We have a clear, unique, and efficient formula for growth. We are committed to and have a strong track record of delivering consistent margins and cash flows. And you can expect us to remain vigilant, proactive, and agile in managing our financial performance in this environment. Thanks for your continued interest in the company. And operator, please open the lines for questions.

Thank you. 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 our 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 Ms. Fabienne Caron-Kepler-Chevreau. Please go ahead.

So good morning, everyone. My two questions would be the first one, can you share with us some color on the top line regarding inflation volume and mix in the U.S. and Europe? And the second would be, where do you see more gross margin pressure in the U.S. or in Europe? Thank you.

So Fabien, good morning. We see inflation levels in the U.S. with a March number for the CPI in the northeast of roughly 8% in food. And the just released numbers, for example, for the Dutch market, yes, there was also an 8% in food. So where the U.S. was ahead of inflation, we see now that Europe caught up in the meantime. And that means that our 8% growth has a higher inflation share than we used to have in the past. We don't give numbers on price and volume as such, but we have a higher part of price in our sales numbers at the moment. Cross-margin, both geographies are still priced very rational, we see. We see that... price increases are passed on. It depends also how well we negotiate and how realistic and necessary those price increases are we going to accept. But so far, both in the U.S. and in Europe, we have been able to pass on the price increases. So we have very stable gross margins.

Okay, thank you. Fabienne, maybe I'll add a little from my side as well. I think when we look at the price and price volume effects, we know that in the first quarter, You know, our growth was really driven by pricing. And what I think is fair to say is that we see that tradeoff between price and volume being higher in Europe than it has been in the U.S., although absolute inflation levels in the U.S. were higher in the first quarter. And when it comes to gross margin, the piece I would add there is that we have a lot of discipline around making sure that we maintain the gross margin euros or dollars that we achieve as a business. That won't always translate into margin when you look at it just from a mathematical perspective due to the inflation, but that's something that we are very diligent about and where we've had a lot of success in the first quarter and continue to be pretty optimistic about that as we go forward. Okay, very clear. Thank you.

Professor, we'll take our next question.

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

Yeah, hi. Good morning. Maybe just a couple of brief questions then, please. Firstly, you mentioned U.S. contract with Stop and Shop. Can you give us an idea what kind of wage increases that you now secured for this four-year contract on an annual basis? That would be helpful. Secondly, in terms of Europe, You've also clearly hinted there is more that you're now starting to work on in terms of cost savings. Firstly, can you give us an idea in terms of European margins, if it's possible? Xworld.com, you used to give that to us a little while ago. What's happened to underlying food retail margins in Europe? And when should we be expecting your cost savings plans to take shape and start to protect the margins in the U.S.? Those are two questions. Thank you.

Good morning. Let me take the first question. What I understood is that you would like to know a little bit more about the CLA negotiations outcome. We got the CLAs for Stop and Shop ratified for a period of four years at rates which are in line with our expectations. So we are quite happy with that stability for the coming four years. And we, in the meantime, also got the ratification for three years of our fresh direct, which is a much smaller topic, of course. But we also ratified the CLAs there. So I think that is, for us, a big achievement there so that we have stability for planning for the coming four years. On cost savings, Natalie.

I'll talk to margin and cost savings, but let me start with the cost savings. You know that we have our Save for the Customer program in place where we plan to deliver $850 million of savings again this year. And that is somewhat weighted to the second half. What we were also talking about in our presentation was that in Europe, where we're seeing heavier margin pressure, that's a place where we are reviewing in all of our markets what is the optimal cost structure given the market conditions that we have going forward. And that's something that we're going to talk to you more about in August when we come back. With respect to the European margin specifically, because you asked the question, We don't disclose at Expo, but I can say that that impact was almost half of the decline.

Okay, got it. Maybe very briefly, Franz, just in terms of U.S. labor costs, how does that compare to European inflation wage costs versus U.S. wage inflation versus European wage inflation? Any color you can share there?

It's not so easy to give a number for Europe as a total, but let me give you an indication. The CLA contracts for Europe and the U.S. are reasonably in line with the percentage of growth per year. And don't forget that for the U.S., We follow already for a long time our legal obligations, the minimum wages. We have absorbed a lot already, being also a pretty unionized company on the East Coast. So we won't have a lot of extra exposure there on these type of topics. And that's why the four years stability outlook for Stop & Shop is for us a good outcome to plan for. And that's why we feel pretty confident that we also can mitigate and also can absorb these costs. And that's what we did in the last couple of years, but also for the years forward. I think that is not our major concern at the moment. Okay, thank you.

And the next question is coming from Mr. William Woods, Bernstein. Please go ahead. Good morning.

A quick question on the U.S. consumer. Could you just talk about the behaviors that you're experiencing, particularly at stop and shop? Are you seeing trading down, market share loss, that kind of thing at stop and shop yet? And then secondly, could you just talk a little bit more about the Belgian situation? Are you seeing the situation in Belgium alleviating or is it really a continuation of the pressures on pricing and things that you've seen over the last few months? Thanks.

Let me take the first one and, Natalie, maybe the second one on Belgium. The consumer behavior in the U.S. We have a very strong consumer in the U.S. We still see a strong support with government programs, for example, the U.S. SNAP programs. We have a strong consumer there, which we only see happening, which we see happening also in the recent seasonalities. Strong Easter, strong Mother's Day. Consumers are just buying quite a bit and We had also there a very good Easter business as well. So strong consumer, supported by programs. And although we see that Northeast CPI index of an 8%, we were able to pass on those price increases to consumers like our competitors also did, a rational market there. But there is no holding back of consumers. Of course, we prepared ourselves to make sure that in our stores, when there is... when the wallet is smaller for specific customers, that we have entry prices which are very competitive, and that counts for all our brands with the buildup and the architecture in our brands, not only in the national brands, but for sure also in our private labels, for which we have a share of 30% over sales. So a strong private label share, strong architecture, for whatever wallet you have, you can find your groceries in our stores. Natalie already mentioned in her address that Foodline, 38 quarters, and I mentioned already myself that we had a very strong growth there and market share gains for Foodline. Overall on the East Coast, with the IRI proxy we have, because the Nielsen numbers are not known for this quarter, we think that we gained market share on the East Coast as an overall U.S. business, where at the top end we see... We see food line and at the low end we see stop and shop, but overall market share gains there. At stop and shop itself, we do not see down trading of consumers in their geographies in itself in New York and in Massachusetts, in New England. But overall, stronger share gains at food line compared to stop and shop.

And I think that is one of the differences when we look at the U.S. and Europe is that in the U.S., you know, there really continues to be, despite a pretty high inflationary environment, a quite resilient consumer. And we do see that across all of our banners. When you come over to Europe, it is different on a case-by-case basis in the different markets, depending on how much people have been open, particularly in the first quarter versus in the COVID period last year. And Belgium is the one you've discussed. That's when I look at the second quarter. Overall for Europe, I don't see changes in terms of trend. I think we're going to continue to see things go as we've seen them in the first quarter. Belgium is a market where the inflation has been about 5% in the first quarter. It's obviously accelerating. And within our group, it has some of the highest consumer elasticity, that when we start to see prices go up, we start to see impacts on volume. And it's just in addition to what we're seeing in our own stores, we know it's a very challenging market overall. Supply chain issues from last year with the floods, changes on the competitive front, and it's really something where we believe overall as we look at Europe, we just want to make sure that we have the optimal cost base, the best CVP for our consumers so that we're able to go out with great pricing and things that are really affordable for each of the consumer wallets.

Great. Thank you.

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

Thanks very much for taking the questions. So first of all, just on the free cash flow, just if you can help us or remind us what your expectations are for working capital this year in that free cash flow guidance. And also on the lease costs, I noticed in the bridge there you had a 75 million cash increase in lease costs in the quarter. Can you say what's driving that and whether we should extrapolate that for the full year? And then finally, just to pick up on that quick comment Natalie made there about changing the competitive front in Belgium. Can you just elaborate on what you mean by that? Thank you.

Talking about Belgium and the competitive front, we know this for a longer time already that the market is... has an over-offer of square meters in retail. And the country in itself, from an economic point of view and from a consumer point of view, is not growing. We see quite some entrance of competition, and we talked lately about also Jumbo and our own Albert Heijn, and we talk about the market shares and the high shares of Koolruid Carrefour and Deleuze. So tough market on comps. We also know that from a social perspective, it's not an easy market to navigate. And then we see also a number of new entrants to that marketplace in itself. The market is still quite, let's say, quite traditional regarding e-commerce. E-commerce penetration is much lower there in that market than, for example, the Dutch market is. And that's why we also said that we will once more look at our overall competitive cost levels in Belgium. We see good strides in supply chain in Belgium with our automated warehouses. But we have more room to go there to make sure that we also can further invest in pricing when necessary. We have a customer value proposition in Belgium where we work on with Deleuze. And at the same time, we will also introduce stronger our price favorites, our entry prices in the Belgian market. And like Nathalie said, there's a different price elasticity in Belgium. So I think that also will help our positioning furthermore in Belgium. And the Belgium team is working very hard on that. At the same time, European-wide, we have opportunities to look fiercer at our cost positions and to make sure that we have a further mitigation of an inflationary environment.

With respect to the two questions you'd asked, both related to free cash flow, I think the first one was on changes in working capital. And this is one where I think the story is less about where do we end at the end of the year, which is probably in the neighborhood of, I don't know, 200 million less, depending on what happens with inflation at the end of the year. It's more about you really need to look at it as it's going to be a little bumpy across the quarters because of how COVID moved in each of the regions in terms of when things were open and not open last year. So I think that's one where, as I said, for the full year it's probably a net unwind, and that's pretty strong given the higher sales volumes, but that's one we will be managing very actively. In terms of your question on the leases, there there's a couple different things in it. The majority of it is related to our acquisitions. That's probably 60% related to the acquisition of the Southeastern Grocery Store in the U.S. and Dane in the Netherlands. And in addition, there was also some FX effects in that as well to the tune of about 20 million.

Thanks very much.

And the next question is coming from Mr. Robert John Foss, ABN AMRO. Please go ahead.

Yes, hi, good morning all. I have two questions as well. Nathalie, you just mentioned the inflationary mathematical impact on the gross margin. It dropped by 60 basis points in the first quarter. This was really the first quarter with real significant price inflation. Well, maybe a bit in Q4 of last year as well. My question is, would you say this development in Q1 is a proxy for the coming two quarters as well? That's my first question. And then second, I don't recall seeing global support offers being an operating income. like it was in this quarter. You explained it. It's self-insurance costs and high interest rates. In your assumptions for the remainder of the year, what do you assume for Global Support Office? Is that going to be a plus in the coming quarters as well? Those were my two questions. Thank you.

So let me start with the second question first on GSO. You know, essentially what's happened since the beginning of the year is a significant increase in the expectations for interest rates, which impacts discounts, which, as you said, positively impacts our insurance. We've now seen that impact. As of today, we've got everything that was planned for the rest of the year in our expectations. So, you know, it's always a moving item, which we can see change, but I think there's quite a bit of upside in terms of interest rate movement now priced in our expectations for the full year. When we look at things on the gross margin, that is something that we believe are holding up quite well versus last year. If you see that, as I said, on the gross profit, euros and dollars, very solid delivery. That's something we're really proud of that we've been able to have really good, and I'll say often tough, negotiations with our suppliers to ensure that that's the case. You may see modest changes across the quarters, but I believe we are at a level we believe we can certainly maintain going forward.

And what we also said is that we see the first quarter as a proxy for the second quarter, but for the second half of the year, We see that we have our cost-saving programs, which are slightly backloaded, so we see a stronger effect coming from those. And we also see a more moderated inflation in the second half of this year. So confidence also to look into the second half, very strong consumer in the U.S., rational market on pricing, cost-saving programs, which are giving even more grips, apart from the already reconfirmed high levels of cost savings anyhow. but also slightly backloaded those programs. So that gives us confidence that we can mitigate the inflationary environment and stable gross margins. And that is, of course, also good news in itself.

All right. Thank you.

And the next question is coming from Mr. James Grisnick, Jefferies International. Please go ahead.

Yes. Good morning, everybody. I had two super quick ones. The first one is... When we think about that, Natalie, those margin comments you made to the U.S., you quite clearly said pricing was a positive. Was there a mixed dynamic as well within that? And if so, can you perhaps suggest what sort of magnitude you had on that? And second one, just in terms of understanding what U.S. dollar effects assumption you're taking on your guidance. Should we be looking at the spot now, 1.8? Note 5.5 and 1.06.

So on the second question first with respect to the U.S. dollar, yes. I mean, we have looked at it as we were setting our guidance and assume that that rate will stay at about that level for the rest of the year. In terms of the U.S. margin, there is something when we look at mix, which is, you know, obviously there are, as we're developing our business going forward, we're seeing not only are we growing in channels in some of our brands where we have higher margins, but we also see opportunity for the rest of the year in private label, where in some cases we have better margins than the rest of our portfolio.

Great. Thank you. And the next question is coming from Mr. Fernand de Boer, de Groot-Peterkamp. Please go ahead.

Yes, good morning. Thank you for taking my questions. The first one is on ball.com. On the listing you said, Natalie, depending on market conditions and other circumstances, I believe you said, could you remind me what that second part actually means? I can understand market condition, but what are the other ones? And then maybe to come back on Belgium, I guess because you didn't give any number on market share that you didn't gain any market share there. Could you confirm that? And that on the cost side, given the fact that Belgium is heavily unionized, that you're also working with a lot of franchises, I think that's half of your business. Is it then really likely that you can do a lot on the cost side and that your margin can move up substantially in Belgium? Those are my questions.

Yeah. I feel that I'm going to take all three of them. Let me work backwards. When we talk about cost levels, we talk about that we see opportunities on top of our present running programs to find cost savings in total Europe. That's one thing. And this we need, and with this we think out of prudence, we need to have those cost savings to deal with the inflationary levels. And of course, those levels are a little bit different an impact with the Ukrainian conflict quite close by, and we also would like to make sure that we are precursoring on those effects, potentially getting bigger for Europe than for the U.S. So that's why we will step up our cost plans on top of the present successful running saving programs. And when we say cost, then it is supply chain cost, it's COGS, it is a better allocation of labor, it's further automation for which we invested quite a bit. And we also think that on NFR, not for resale, that we have quite some opportunities. And the European team is diligently working on those, and we have already a number of cost pockets on top of the present running programs. And as I mentioned earlier, already for now, that the existing programs, which we already planned for and reported on, are more back-loaded heavy in the second half of the year. Then on the market share in Belgium, it's difficult because we don't have those Nielsen numbers yet. We see for overall Belgium a flat market share. But we also saw that we lost share with Deleuze and we gained share with Albert Heijn in Belgium. And on bol.com, we stay put to our plans for the second half of this year. The sub-IPO planning to get ready for that is absolutely in line and on track. So that is all going well. But at the same time, we get questions, or is the IPO climate the right climate at the moment? First of all, this we have to see, and we have time because it's not the second half yet. We have some time there. There are a couple of things which are for us important. First of all, we are a strong company and well-financed and with a strong balance sheet. So there is not an extremely high level of urgency. That's one thing. The second thing, Bol.com is a very well-managed and well-positioned company. And we would like to make sure that we can crystallize the proper value for Bol on one hand, and finding also the funding out of that crystallization in a sub-IPO to invest further in Bol to make that company grow further. We saw the minus 7 percent growth of Bol. The market does minus 16. so we gained also again roughly a 2% market share with Bol, just underlying how strong that company is in both the Netherlands and the Belgium. So in summary, strong company, well managed, on track with the IPO, and given the market conditions, we have to see how realistic is the second half of this year to crystallize the right value for Bol and to make sure that we look at these kind of things. At the same time, we have to find ways to make sure that we keep our investment commitments to a ball, because we would like to grow that company, as we said at our November Capital Markets Day. Is that an answer to your question for now? Yeah, absolutely. Thank you very much.

And the next question is coming from Mr. Andrew Porches, HSBC. Please go ahead.

Yeah, hi, guys. A couple from me. First one sort of related to the last question, really. I guess... If Bold.com IPO doesn't go ahead, what sort of options are you considering for that business? Would you fund the CapEx program out of your own free cash flow, or would you maybe think about sort of changing the timing a little bit and smoothing it? Second question, really, I guess coming back to the market share data that you gave. Stop and Shop really was to stand out there as one that's probably not doing as well. I mean, clearly other brands are performing very well. What is it that's lacking at Stop and Shop, and are you taking action to correct that?

Thank you, Andrew. On Bol, I expected that follow-up question based on what also Fernand's question was already. Let me be very, very clear. Bol is a great company. We are going to grow that company dramatically. And this present market environment where Bol is gaining 2% share might be even a bigger opportunity to grow faster because we are well capitalized, well managed, well invested as a company. And we see also big opportunities still together with our Albert Heijn and Deleuze food brands to proceed with our plans to combine those food and non-food customer journeys as we already mentioned to you at the Capital Markets Day. And we see now already a growing collaboration between Bol and Albert Heijn to make it even easier and seamless, more seamless for customers. And more to share with you in the next quarter, but I think it's a pretty exciting journey there. So well positioned. The other thing is that if we might not find funding, if we might not find funding through an IPO in the second half, because we would like to invest further in Bol, then we have to look at alternative ways to find that funding. And there are a lot of options open there, but I think it's a little bit too early to speculate because at the moment it's 11th of May, and we talk about the second half of the year.

And this is Natalie. With respect to your question on stop-and-shop and market share there, when we look at the U.S., thanks for calling out. We're very proud of the performance of our brands. And overall, we're definitely gaining share in that market and believe that's going to be the case again when we get the Q1 numbers. I think at Stop and Shop really the challenge has been that when we look at that from a store perspective, we really just haven't had the opportunity to complete the really aggressive remodeling program that we have envisioned. If we look at Food Lion several years ago, that was really the key to success is in addition to looking at pricing and culture, you got a different look and feel when you went into the store. Look at Stop and Shop. That's something where we definitely have big plans. They have been slower than we would have liked during COVID because it was really just hard to get spots secured, all of the technical requirements able to do it. We are moving in at full speed at the moment. There's a real focus in terms of what we want to do in the New York area because that's a place where in that tri-state area, we believe we can be really impactful and show people what we want to do with the brand. And as Frans mentioned in his presentation earlier, we're also looking at how do we work much more collaboratively between Stop and Shop and Fresh Direct to really capitalize on the benefits that both of those brands can do to help each other in that area.

And one thing, Andrew, I also, it's not completely your question, but I would like to use the opportunity to be also clear on this point. We got quite some comments and questions on our CapEx levels after the Capital Markets Day and after the first quarter. when we upped our 3% to 3.5% over time in a 2025 timeline because we would like to make sure that we are a well-invested company. On that topic, because we see inflation in groceries, we also see inflation in building materials, raw materials, and these kind of things, you can be rest assured that we will be very, very careful on our capex levels, that we have the same thresholds like we had before on return on capital, and that we will not compromise on these type of things And we might see that we or have to negotiate harder for the building materials, or we have to make choices that we, let's say, push out a few things where the rates are not good enough to bring us the right returns. We will not compromise on those. We will be very careful and prudent on these kind of things. And that's, I think, what also we mentioned in the press release today. But, of course, we also raise our focus, laser focus on these kind of things. to manage those capex costs as well, also in the environment of inflation. And you can count on us there that we are very cost-conscious.

And I think I'd add on that one, part of why we have so much confidence there is, yes, we have some clear areas where we want to make sure that on the ground you see changes and the consumer gets the best service. But remember, we're also in the process of shifting our investments to being much more around omni-channel, digital investments, really getting in those places where we're going to have an impact on the customer of the future. And those aren't growing at the same increases as we see when it comes to some of the raw materials and labor and some of the other areas. So it's actually an advantage for us when we're looking at how do we make those CapEx dollars go farther for us.

That's super, guys. Just one quick follow-up, if I could. Do you have any KPIs on the stores that you have referred in Stop and Shop to maybe show that they're performing better? So perhaps we can hope that... As you roll through that refurb program, market share improves.

We said compared to our control groups, and those are on nominal base, we said that our investment should yield first, second, and third year 642 sales uplifts. And those are the numbers we also see. We're happy with the performance of our remodeled stores. Those come in batches as well. They are in line with the pro forma. So that is a good thing to see. But let's also not forget, it's not only the sales levels, but also how we invest in the communities and we understand them better. We have a few things to do there and we have quite some opportunities and we will open soon our first completely remodeled store with a much better cultural and ethnic assortment in the Bronx in New York. And Natalie mentioned already there that we have a nice opportunity to be in New York, a better combination of Fresh Direct and Stop & Shop and to combine our store network in a much more locally adapted stores in the boroughs of New York. That's one example. But also learnings from there will also help us in the assortments in the other 400 stores of Stop and Shop with or without remodeling to understand our customers better. So happy with the remodelings of Stop and Shop. Tough market, as we know, there in that northeast, which is not growing population, as we know. But we are confident that we're going to make that happen. Super. Thank you.

So, thank you, ladies and gentlemen, for joining us today. We're very much looking forward to getting out physically on the road again for the first time in several years. So, we're looking forward to catching up. And for any follow-up questions, please feel free to reach out to the IR team during the course of the day. Thank you.

Ladies and gentlemen, this concludes this Aholdale Health event call. You may now disconnect your line. Thank you.

The conference is no longer being recorded.