Koninklijke Ahold Del Ord

Ladies and gentlemen, good morning and welcome to the analyst conference call on the fourth quarter and full year 2022 results of AHOL-Delhaize. Please note that this call is being webcast and recorded. Please note that in today's call, forward-looking statements may be made. All statements, other than statements of historical facts, may be forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the summary report, fourth quarter and full year 2022, and also in AHOL Delhaize's public filings and other disclosures. AHOL Delhaize disclosures are available on aholdelhaize.com. Forward-looking statements reflect the current views of AHOL Delhaize's management and assumptions based on information currently available to AHOL Delhaize's management. Forward-looking statements speak only as of the date they are made, and R. Holder-Heise does not assume any obligation to update such statements, except as required by law. The introduction will be followed by Q&A session. Any views expressed by those asking questions are not necessarily the views of R. Holder-Heise. At this time, I would like to hand the call over to J.P. O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead, J.P.

Thank you, operator, and good morning, everyone. I'm delighted to welcome you to our Q4 2022 results conference call. On today's call are Franz Muller, our president and CEO, and Natalie Knight, our CFO. After a brief presentation, we will open the call for questions. In case you haven't seen it, the earnings release and the accompanying presentation slides can be accessed through the investor section of our website, aholdeles.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 yourself to two questions. If you have further questions, then feel free to re-enter the queue. To ensure ease of speaking, all growth rates mentioned in today's prepared remarks will be at constant exchange rates unless otherwise stated. I'm now happy to turn the call over to Fran.

Thank you very much, JP, and a good morning to everyone. I'm pleased to report a strong end to an exceptionally challenging year. In the food retail industry, our company, Ahot Deleuze, is truly unique with significant and compelling competitive advantages. And these stem from, for example, the relative market share strength of our great local brands, our international and regional scale, operational excellence, and a well-invested asset base, and our strong cash flow generation and financial position. Together, these enable us to absorb the impacts of dynamic economic cycles without sacrificing long-term investment and value creation. On slide 6, 2022 was another exceptional year with very challenging and definitely dynamic market conditions. We have seen double-digit inflation levels on both continents for the first time in 40 years, an energy crisis created by the war and the ongoing effects of the global pandemic on people's lives. Our role during this time has been clear, providing a strong and competitive value proposition and keeping shelf prices as low as possible to support our customers. In this respect, there are three areas in particular we've excelled at in 2022. First, deepening our relationship with our customers by optimizing our digital engagement and loyalty programs, Our brands are interacting with 30 million active users in new and innovative ways. Secondly, expanding our own brand and healthy assortments. These options resonate strongly with our customers. And thirdly, we are diligently applying our knowledge and experience in supplier negotiations, while at the same time also delivering improvements in our own operations and end-to-end processes. As you can see on slide seven, this is evident in our Save for Our Customer results in 2022, where we generated 979 million euros in cost savings, which is 130 million more than we originally planned to. We did this by tightening our own belt, by lowering structural cost and streamlining processes, creating more agile organizations, capturing scale and empowering our people to take action to drive efficiency. Our new operating model in the Central and Southeastern European markets and bold.com plan adjustments and being good examples. I'm proud of our associates. I'm super proud of our associates who consistently leave no stone unturned in service of our customers. And I'm also proud of how our brands participate as important members of their communities. During 2022, our family of great local brands contributed €218 million in cash, products and food donations to local and regional food banks, hospitals and non-profit organizations. A few highlights here include the Food Lion Feeds program, which donated its one billionth meal since inception in 2014, and is well on the way to reaching its goal of 1.5 billion meals donated by 2025. The last Belgian donated emergency generators to the Ukrainian Red Cross, ensuring 95,000 Ukrainians continue to have access to clean water and heating. And Hannaford launched its Eat Well, Be Well, a path to better health initiative, that will provide $1.5 million in funding to local non-profit organizations to increase access to healthy, fresh food, as well as provide nutrition education tailored to the specific needs of an individual health condition. I would also like to offer our sympathy and condolences in light of the earthquakes that struck both Turkey and Syria last week. AHAdeles does not operate in the region, but of course, the ties to Turkey are manifold. being it through our associates and customers of Turkish descent, our suppliers and as fellow citizens. All the less centrally and many of our brands in Europe are supporting charitable organizations and facilitating customer donations through their store and marketing communication channels. This 360 degree relationship where I talked before between our brands, our customers and our communities is underpinned by our purpose, eat well, save time and live better. And it's a cornerstone of who we are. Our financial performance in 2022 builds on the strength of these relationships as customer vote with their feet and their clicks. Taking a quick look at our overall scorecard for the full year as presented on slide nine, we achieved or exceeded all of our key goals. As I mentioned in my opening, with a strong end to the year, with sales in Q4 increasing over 8%. Comparable store sales excluding gas grew 7.9%. Net consumer online sales increased 5%, and our online grocery sales were up 14.4%. Leveraging these strong sales, we delivered an underlying operating margin of 4.4% and diluted underlying EPS growth of 22.6%, at actual rates. And as in prior quarters this year, strong operating performance in the US, as well as the foreign exchange and interest rate changes drove earnings growth despite continued margin pressures in Europe. The underlying strengths of our brands is something we are proud of when navigating this environment. So let's look at a few examples. A great example of brand strength is the group's biggest brand, FoodLine, who enjoyed its 41st consecutive quarter of comparable store sales and that growth in the fourth quarter. The brand continues to elevate its omnichannel capabilities with Food Lion To Go, now available in 655 stores with 50 additional planned for 2023. Food Lion also on top of this has been recognized by Newsweek as one of America's greatest workplaces for diversity. And with its easy, fresh, and affordable positioning over the past 10 years, Pushline's success really epitomizes the potential for growth and market share with a relentless focus on the customer experience, keeping stores vibrant and modern, adding new digital features and functions, and investing in our associates and culture. And in that period, the brand has increased sales per square foot by over 80.80%. Moving on to Albert Heijn. With a particular strength in innovation, technology, and analytics, the brand continues to win market share. For the full 2022 market share, the market share was 37% for that 2022 last year, up 130 basis points versus 2021. In the fourth quarter, Albert Heijn introduced dynamic discounting in its stores. enabling customers to purchase certain products nearing the end of their shelf life, with discounts ranging from 25 to 70%. The discount which is displayed in the digital price tag is determined by an algorithm developed by Albert Heijn, which calculates the best discount, so that unsaleable products can be reduced dramatically, which leads to lower waste and great deals for price-conscious customers. The fourth quarter also marks the one-year anniversary of Albert Heijn Premium, who now has nearly 700,000 members. Albert Heijn Premium builds on the Albert Heijn Bonus Card, which last week celebrated its 25th anniversary. The Bonus Card has undergone huge developments in terms of convenience, value and engagement since 1998, with many of the features and benefits also being exported now into our other European brands. Finally, Albert Heijn entered into a partnership with Jan Linder Supermarkets with the majority of stores to be converted into Albert Heijn franchisees on receiving the required approvals. And this will make it our largest franchisee and the agreement allows us to expand our regional coverage in the southern part of the Netherlands. Moving on, let me spend a few moments on two other brands we are investing in which have significant potential and play an important role in our long-term fundamentals. Stop and Shop and Goal.com. At Stop and Shop, we are increasingly encouraged by progress with double-digit growth in our remodeled New York City stores. We plan to remodel further eight stores in New York City in the first quarter of 2023, as well as rolling out key learnings to 40 other urban stores with a strong multicultural penetration, for example, Boston and Hartford. And this we go to do throughout the year. Another area where we are seeing progress is within e-commerce, where penetration rates increased 70 basis points to 8.4% at Stop and Shop. This growth is partially driven by the expansion of same day delivery and the introduction of two hours click and collect, clicks and collect across all stores during the year. Stop and Shop is also piloting additional pickup options. providing customers the ability to shop in a manner that is convenient for them. And we also continue to refine deal lock in an effort to communicate consistent value messaging and promotional pricing to our customers. At bold.com on page 14, for the full year, GMV excluding VAT was 5.5 billion euro, down 1.9%. Net consumer online sales were down 1.8% in 2022 against the market, which declined around 6%. As we left lockdowns in the fourth quarter in the Netherlands, which will also negatively affect the first weeks of 2023, net consumer online sales were down 2.9% in the fourth quarter. As you will remember during the year, we made some significant adjustments to Bold.com's medium-term plans to adapt to the current environment. And as a result, despite higher investments in the business, cost increases and sales deleverage, Bull.com remained EBIT profitable and delivered 125 million in underlying EBIT DA. Looking to the future, I'm particularly excited as we see the first green shoots from our investments in new revenue streams. For example, Bull.com advertising revenues are up over 40% versus prior year. This includes over 70% growth in both sponsored product and growth in advertising revenue from other external sellers. Logistics services revenue was up almost 20% versus the prior year. In 2022, Bol.com has continued to expand its market position by growing share, therefore continuing its strong track record of winning in the market. Bold.com delivered strong and double-digit sales growth in emerging categories, such as daily needs, outdoor and fashion, whilst maintaining strong growth in existing markets, such as domestic appliances, which was supported by initiatives such as the Smart Shopping page to help customers save money by highlighting energy-saving products. As these areas compound, I expect a meaningful improvement in Bold.com's performance over the coming 12 months, which continued growth across most of our core categories and strong revenue progression in both advertising and logistic services revenues. So that concludes my comments on 2022. And with that, let me hand over to Natalie to talk more about the financials in the quarter, and I will be back to discuss our outlook and priorities for 2023.

Thanks, Frans, and good morning, everyone. Our fourth quarter performance again highlights the unique and resilient position our company enjoys. This allows us to manage opportunities and risks in a much more balanced and effective way than many of our competitors and peers. As France indicated, today's consumers are price conscious. They're smart and well-informed. Succeeding as a retailer in this dynamic economic and geopolitical environment is a delicate balancing act. It's all about optimizing the price-volume equation. The fast action of our brands to match and exceed customers' current needs is clearly reflected in our strong Q4 results. Net sales grew 8.1% or plus 15.9% at actual rates to 23.4 billion euro. This is supported by group comp sales growth in Q4 of 7.9%. Group underlying operating margin was 4.4% in Q4, an increase of 0.2 percentage points versus Q4 2021. Both regions were able to mitigate the majority of margin pressures thanks to our Save for Our Customers cost savings program, which helped offset higher energy costs, particularly in Europe. Diluted underlying earnings per share in the quarter was 72 euro cents, up 22.6%, driven by higher-than-expected underlying operating performance in both regions, as well as positive U.S. dollar exchange rate effects. Turning to slide 18 for completeness, full-year net sales grew 6.9% to 87 million euros. Our underlying operating margin for 2022 was 4.3%, a decrease of 10%. basis points versus 2021, but still nicely above historical levels. Diluted underlying earnings per share for the year was €2.55, up 16.5% and well above our latest guidance of low double-digit growth. Slide 19 and 20 show our results on an IFRS reported basis for Q4 and the full year 2022. On an IFRS reported basis, Our operating margin in Q4 was 5.0%. The difference here versus our underlying figures is primarily due to gains of 158 million euros on the sale of four distribution centers in the U.S., which had already been leased to a third party for a period of time. For the full year, our operating margin was 4.3% on an IFRS reported basis. Now let's turn to our regional performance. In Q4, as throughout the year, we rallied our organization around our core strengths, operational excellence, tight cost control, and disciplined capital allocation. This is what fuels our ability to reinvest in our customer value proposition and offset the impact of inflation where possible. On to slide 2021, you see comparable sales growth by region, including and excluding weather and calendar effects. In the U.S., comparable sales accelerated at all brands with the strongest sales growth coming towards the end of the year. In Europe, comp sales grew 5.7%, but were heavily impacted by a challenging e-commerce environment in the Benelux. Excluding Bull.com, comp sales growth for our grocery brands increased 6.9%. In the U.S., sales grew by 9.2% and comparable sales growth was 9.3%. Food Lion and Hannaford delivered double-digit comparable sales growth for the second consecutive quarter. The U.S. brand sales from loyalty programs and online orders reached all-time highs. This has been a trend we saw building throughout the year as our consistent investment in growing these capabilities again delivered incremental sales gains. Our brand's direct customer engagement activities are a good example, now reaching around 30 million households and delivering over 10 billion personalized offers annually. Net consumer online sales grew 17.3% in Q4, with e-commerce penetration rates increasing another 50 basis points to 7.7%. At year end, we had 1,547 click and collect points in the U.S., an increase of 162 compared to 2021. with 97.5% of our customers now having access to our online grocery offerings. Our underlying operating margin in the U.S. was 4.7%, up 40 basis points compared to the prior year, reflecting the strong sales growth and Save for Our Customer initiatives. Within this number, there was a positive benefit of around 20 basis points related to a one-time favorable reserve adjustment. For comparison, remember we had a 30 basis point benefit from a favorable reserve release in the prior year. Turning now to Europe, sales increased 6.2% in the quarter. This was supported by mid-teens growth in our East European countries. For the full year, 8 of our 10 markets showed positive market share gains. As inflation rates on our input costs increased again in the region, our teams did an excellent job of further adapting the customer value proposition. For example, in Central and Southeastern Europe, we harmonized 700 own-brand products and continue to benefit from increasing collaboration and best practice sharing. In Q4, net consumer online sales in the segment decreased by 0.6%. Excluding Bull.com, however, net consumer online sales increased 8%. In Europe, Our Q4 underlying operating margin was 4%, down 20 basis points from the prior year due to elevated energy costs in the quarter, which negatively impacted margins by around 50 basis points. This is sequentially better than the 70 basis points of Q3, as energy prices fell during the quarter, positively benefiting our unhedged brand. While we are very pleased with the performance in Europe in Q4, we still have a lot of work to do to return the region to its historical level of profitability. Food inflation is still high in Europe, which we expect to negatively impact consumer purchasing power and therefore volumes again in 2023. While energy will still pose an incremental headwind, mostly in the first half, we expect other inflationary pressures to be partly offset by pension benefits from rising interest rates in Europe in 2023. Moving on to slide 24, as I talked about in Q3, in this environment, cash is king. And at Ajo de Les, we remain laser-focused on cash flow generation. In Q4, free cash flow was almost €1.5 billion, an increase of €1.1 billion compared to Q4 2021. Higher operating cash flows were the biggest driver of this improvement. We also paid normalized income taxes in 2022, versus the one-time tax assessment in 21 of approximately €380 million related to Delhaize, Belgium. And we remain confident in our position that this assessment is without merit. For the full year, we generated free cash of €2.2 billion, with net capital expenditures also of €2.2 billion. This demonstrates the strength of our business model, and our continued confidence in balancing investment growth and shareholder returns. To complete the picture on slide 25, you'll see our net debt bridge year over year. The increase was mainly related to foreign exchange as free cash flows more than offset the nearly 2 billion euro shareholder returns during the year. With that in mind, I'm also pleased to announce our proposal to increase the dividend per share by 10.5% for 2022 to €1.05 per share. This is, of course, subject to approval at the AGM, but we've also initiated a €1 billion share buyback in January as planned. At Alja de Les, we believe that it is important that we continue to make progress and investment in our healthy and sustainable strategy, and that this is helping us to deliver continued progress on these KPIs, which align very closely with our company values. In 2022, we achieved reductions in CO2 emissions in our own operations that are now 32% lower than the 2018 baseline. Our tons of food waste per food sales has now declined 33% versus the 2016 baseline. Our brands also continue to increase the percentage of own healthy brand food sales to 54.4% in 2022, up one percentage point compared to 21%. In November, you know we announced our updated interim CO2 emissions reduction targets for the entire value chain, or the so-called Scope 3, to at least 37% by 2030. The updated targets were the result of extensive review and are in line with the UN's goal of keeping global warming below 1.5 degrees Celsius. We also reconfirmed our commitment to become net zero in own operations by 2040, and across the entire value chain by 2050. This wraps up my review of Q4 2022. We're now fully focused on 2023 and further progressing our leading together strategy. With that, I'll hand it back to Frans to talk about our 23 outlook.

Thank you very much, Natalie. While we expect 2023 to be at least as challenging from external factors as the year gone by, At the same time, we're also excited about opportunities for our brands and our company to continue to raise the bar competitively and drive relative market share gains. In 2023, on page 30, we will speed up some of our game-changing plans around our omnichannel ecosystem, monetization, and mechanization, which I'm convinced will drive long-term competitive advantage and benefits for our customers. For me, Maintaining vibrant, customer-centric stores is vitally important. Also, customers should see and feel a real difference when we commence any new remodeling program. I'm particularly excited by our plans at FoodLine, where we will begin the remodeling of 70-plus stores in Wilmington and Greenville. This is our first group of omnichannel remodels under the brand's new store model program. The modern look and feel will include things like e-commerce options for all customers, a redesigned front-end configuration including self-checkouts, updated resets and pictures, for example, in fresh and center store, and sustainability improvements like LED lighting, doors on the cases, refrigeration updates, and so on. Another area where we are gathering steam is with customer mobile apps. and to lead in this space, speed is critical to win the features and functions war. Therefore, we will roll out a new native PRISM app that has been designed and built from the ground up, leveraging the power of our PRISM technology platform. The app will be fast, simple and easy to use, integrating our advanced analytics to create hyper-personalized experiences. In Belgium and CSE, We have also launched an app convergence project, which will remodel the mobile application landscape. The aim of the project is to create one mobile application value proposition, making it possible for IT to scale, reuse and customize applications easily. We will start with this project in the last Belgium and then Albert in the Czech Republic. Next, if we look at monetization, we continue to make great progress. In 2022, revenues from complementary revenue streams were up 25% and we expect another 20% growth in this year. In the US, Peapod Digital Labs finished setting up the in-house media structure we announced in the third quarter. An initial feedback from top US vendors has already been positive with double digit increase in commitments. Finally, for mechanization, which is critical in how we plan growth capacity in our operations, Albert Heijn will open its first automated home shopping center in Barendrecht, that's close to Rotterdam. The warehouse is being built using an integrated solution from Swisslock that allows the automation of filling shopping crates similar to the EFC in Philadelphia. The home shopping center can support a capacity of 45,000 orders per week, once complete and we expect the facility to be online in the fourth quarter of this year. While all this is exciting, it goes without saying that it remains essential that we keep doing the right things for our customers, communities and associates in the face of persistent inflation. Our outlook for this year, as you will see on slide 32, represents our expectations of consistent strong results in 2023 with our usual focus on delivering excellent cash flows. Free cash flow is expected to be approximately €2 billion, and net capital expenditure is expected to be approximately €2.5 billion as we continue to make digital and omnichannel investments. Our guidance also implies further growth and a strong underlying operating performance, which will offset the non-recurrence of one-off gains in 2022 related to interest and exchange rates. We are encouraged by the good start to the year, with much of the trends remaining the same in our key markets. But we know we are also staying vigilant and proactive, anticipating headwinds to come. To that end, in 2023, we are introducing a new initiative called Accelerate. And this initiative builds on our existing efforts, from our Leading Together strategy to create more agile organizations, to capture more scale, and empower our people to take action to drive efficiency. This means evaluating additional savings and efficiency levers to streamline organizational structures and processes, but also optimize go-to-market propositions, increase joint sourcing and consolidate IT with a clear priority to unlock resources to accelerate our Save for Our Customers program, and focus investments on high-return, high-impact projects to enhance our customer experience. We will provide a more comprehensive update on Accelerate in May during our Q1 results. I'm confident that all these actions will make our organization stronger and ensure that we continue to deliver on our track record of driving continuous long-term value creation for all of our stakeholders. And in the short term, it's also relevant as we expect to set a new high in our Save Our Customers program in 2023 of at least 1 billion euro. Finally for today, in January, you have seen the announcements that Nathalie will leave the company to pursue a new opportunity and return to the US after more than 25 years in Europe. Nathalie has been a great contributor to our company, but we respect and understand her decision. I'm happy that Nathalie will stay around for the coming month to ensure a smooth transition to her successor. With that, let me finish right where I started. I truly believe that in the food retail industry, our company is unique. Significant and compelling competitive advantages as we continue our mission to be industry leading local omnichannel food retail. We're also unique. that we have great people and great teams to support us to make our targets here. We have a healthy outlook for 2023 with good momentum, and I'm confident we will master whatever challenges and opportunities come our way. Thank you very much once more for your continued interest in our company. And operator, please open the lines for questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A queue. This will only take a few moments. Once again, it's star one, one to ask a question. We will now take the first question. It comes from . Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking the questions. Perhaps a couple for JP's instructions. So the first one is a clearly very strong margin performance in Q4, both in the U.S. and in Europe. Beyond the 20 basis points Matthew highlighted in the U.S., it seems to be outgiven by overall customization.

Sridhar, could you speak a little bit more into the microphone because you are hard to hear and also with the background noise. Sorry. Can you hear me now? Better? Voice up a little bit. Yeah, like this.

Yeah, perfect. All right. Fantastic. Sorry. So I was basically saying the Q4 margin performance was very strong both in the U.S. and Europe. I think, Natalie, you flagged 20 basis points benefit in the U.S. in the quarter. Beyond that, it all seems to be driven by, say, for our customers and operating leverage. In that context, can you perhaps talk through the puts and takes in the at least focus on margin guidance for the year ahead. And if it is potentially a bit conservative, then you might end up with stable margins in 2023 versus 2022. Secondly, in the US, can you perhaps give us a little bit more visibility into banner-wise performance? I saw you called our food line in Hannaford. had double-digit comp sales in the quarter. What about other banners and the market share trends? And really the question there, I'm trying to see if you are seeing any tailwinds from competitors potentially being distracted as they pursue their own M&A strategies. Thank you.

So I'll start with the margin, and I think Franz will give some comments on the U.S. market. The one that you mistreat are in terms of what I had mentioned was also in Europe, One of the things that helped us was the – we had about 20 basis points improvement on I'll call the headwinds from energy. So it was 70 basis points in the third quarter and 50 basis points in the fourth quarter. So that was a bit better driven by our unhedged markets, which are Romania and Greece. When we look at the rest of Q4, it really was this, you know, strong performance in the U.S. in terms of strong holiday season, the business doing well. but also the save for our customer. And you know that our goal had been to be around the 850 mark, and we came in at close to a billion. So that was a big upside, and over 100 million of that was in the fourth quarter. So we really are gaining some nice momentum in terms of our save for the customer activities, and that's also what's encouraged us to move forward with Accelerate as we look at 23. When we talk about puts and takes on margin in 23, I think there the comment I would focus on is really looking at the next couple quarters. We are coming into a period where in Europe energy is going to be a bigger headwind for us. This is the period right now, especially in Q1, where we're ahead of the war in Ukraine, so there's a piece there where we're just normalizing as we go forward in the year. It's still at a higher level than we would like, but the comps will be easier. And the other call-out I'd make in the first quarter – is remember it's a small quarter for bowl, and it's also a quarter where last year there was a lockdown because of COVID for a good part of the quarter. So that also impacts it. But I think as we look at going forward into 23, there are lots of puts and takes, right? What happens in the balance of the business? What happens with the dollar? What happens with strengths of different markets? But I think it's one where, you know, that's why we give you our guidance for the full year and we tie it to, you know, we believe it's still going to be at least a 4% level. But more than that, let's talk about it as we go through it on a quarterly progression.

So thank you, Sarita, for the question on the U.S. brands. I think the overall view has not changed much compared to the last quarters. Natalie already highlighted and myself, we highlighted the food line results But the good news is also here that we see some more sparks of light also for Stop and Shop, where we see some positive momentum coming in, and not only on the remodelings, but also how they picked up a strong fourth quarter, a relatively strong fourth quarter with the year end. And if we look at the Q4 numbers with 9.2% growth in the U.S., plus in the same quarter 17% online sales growth in grocery, Those are strong numbers, which, although we don't have the numbers from Nielsen yet, which would give me the feel that we gained market share along the whole East Coast. And that is most likely higher from a market share gain with Foodline than with Stop & Shop. But for the total company, we should have gained share. And that also with the profitability you have seen and with all the other initiatives we have taken on. on IT, on loyalty, on digitization, on media monetization. It gives me a good confident feel for the 2023 year.

Got it. And Natalie, very quick follow up there on energy. 70 going to 50 in Q4 from Q3. Is that the level that you see based on your hedging for Q1, Q2 should be what we should have in mind?

I think it'll actually be a bit higher than that in Q1 of this year because, remember, this is the period where we – it's kind of the last quarter before the war in Ukraine broke out, so it's the period where, you know, although we're now very heavily hedged in all of our unregulated markets, last year we definitely had an opening, and so you'll see those prices go up.

Thank you. Thank you. We will now take the next question. It comes in the line of Isabel de Breva from Morgan Stanley. Please go ahead, your line is open.

Hello, good morning, and thank you for taking my questions. My first one is a follow-up on the European margin. So we discussed the energy headwind already, and you also mentioned some pension benefits. So if I put it all together, I wanted to ask you, do you expect the European margin for 2023 to be up year on year as the full year impact of the savings program really flow through? And then my second question is on the U.S. business. Could you comment on your volume expectations here for the year ahead and how you're seeing the customer wallet developing, both in terms of trade down into cheaper products, but also the competition from dollar stores? So what does that mean for your volume outlook for the U.S., please?

Okay, I'll take that European margin conversation. And let me just repeat here that, you know, delivering a group UOM or a margin of at least 4% is one of our top financial priorities. And so when we look at this over time, having a healthier European margin of that 4% is definitely part of the formula. But when we look at 2023, and, you know, your question was, is it going to be higher than 2022? I'm not going to comment on segment margins specifically in the year we don't do it. But I'd also say that remember that when we look at this, we, you know, as I mentioned, there's going to be a difference in terms of how we see first half and especially first quarter versus what we see in the rest of the year.

And Isabel, on the question on the volumes and the volume developments, I think we see a generic picture for all our 19 brands in Europe and in the U.S. with these kind of inflation levels that in most of our brands volumes are down. And the U.S. is no exception there. You can imagine with a 9.3 percent inflation or 9.3 percent sales growth in the U.S. in the fourth quarter and the just released inflation for the CPI northeast out of home of 11.1 percent, you can imagine and you can understand that volumes are at the moment down in the US, which is not only for us the case, that is an industry phenomenon. That is an unhealthy development, both for retailers and for manufacturers. And that's why we see also now in our conversation with the manufacturers that most of them also would like to fund and to sponsor again volume growth and case growth. So we have constructive conversations with our vendor partners especially also based on the strong market share positions we have on the East Coast, to see how can we find a trajectory again to positive volume growth. And we see now also that funding this with more promotions and more prices therefore going down as a healthy development for the remainder of this year. We expect that inflation levels for the remainder of this year will go down, but still will be at elevated levels from, let's say, for example, pre-COVID. But we also see that investments and trade funds of suppliers will grow again, especially also looking at our positions. On the other thing, on the behavior of customers, customers are very smart, like Nathalie already mentioned in her document as well. And they look at comparisons in stores on products. national brand detergents versus private label detergents. And if they see a gap which they cannot understand, or if we see an effective private label product of very good quality, they make those choices. So we see both in Europe and in the U.S. a 2% up in private label participation in both Europe and in the U.S., which is quite a big swing, I must say. And you see that customers make those choices. And that is for the U.S., not different. The good news is that we have strong private label ranges in both the U.S. and in Europe, whereby customers can make in-store that decision, and they don't have to leave our store, for that matter. So in-store, they can trade differently into our private label sections, but also within private label in the more price entry assortments. So this is how I would see this. I think volume growth is important for all of us, the vendors and retailers. We see a higher private label participation because customers making smart decisions. And I expect also that we have a very constructive relationship with our vendor partners in the coming year in the U.S. to find both better prices and trade funds, but also find growing volumes again.

Thank you very much. And if I can just follow up. Quickly, on the margin point, in terms of FAS, it sounds like you're expecting it to trough in Europe in one queue and then start to recovering onwards with perhaps the drop year-on-year kind of similar to what we have seen this quarter. Is that fair?

As I said, I don't want to give specific comments in terms of the margin by quarter, but I think in terms of In general, when we look at our business and in Europe versus the full year, we have talked about that trend that you've called out there.

Thank you very much. Thank you. We will now take the next question. It comes from the line of Fernand from the group Peter. Please go ahead. Your line is open.

Yes, good morning. Thank you very much and congrats on the results. One follow-up on Europe. You mentioned the pension benefit in 2023. Nathalie, could you quantify that? And also, could you tell us a little bit on pricing surveys, especially in the Netherlands, because I hear more and more people complaining also about the price levels at Albert Heijn.

Yeah, I'm happy to talk about both of them. On the pension levels, that's something that we'll see probably in the range of $50 to $60 million in terms of this year, and that's really interest rate driven, and so the discount rate in terms of how we see that play through. On your comment on Albert Heine and the pricing there, what I would say is I look at this, and so does Franz, we look at it every single month, of what's happening with prices that are coming through overall in the Dutch market, how are we pricing through in the market. And at the moment, there is a significant difference between those two numbers. And the reason I know there's confidence there is we also see it being mirrored in the market share gains. At Albert Heijn, we've grown to have now our highest market share ever, 37%. That's also excluding the acquisition of Dane. that we've been able to grow that. And so I think it shows very clearly that customers are seeing we've got the right value proposition. Costs are going up. You've seen the inflation rates in the Netherlands, 17% in the last month. So there's a lot of room to be lower than that and still be perceived as being higher than what customers would like with tight wallets. But I think our performance continues to be very strong there. It's mirrored in the market share. And we do see customers being very excited about whether it's the entry price points that we've got, where we've got 1,500 products, where we're matching the lowest prices in the market, where it's the special offers we have, like the two-euro meals that are available, whether it's the loyalty programs where we've now got personalized loyalty going out to people every time they enter the store, the dynamic discounting that's now available in all the stores. I think this is a place where it's about what's the whole value proposition, and we're very proud of the way that we've been able to bring it to market at Albert Heim.

Okay. Thank you very much.

Thank you. We will now take the next question. It comes from the line of James Grzynik from Jefferies. Please go ahead. Your line is open.

Thank you. Good morning, Franz, Nathalie and JP. I just had a couple of quick ones. The first one is perhaps around the shape of the inflation normalization in the U.S. in particular. Franz, you talked about inflation lasting for longer. I think the big acceleration in inflation really started coming through inevitably post-Ukraine, sort of March, April, May in 22. So do you think that as we hit that base, we start getting a big step down on inflation or what you're seeing your suppliers asking for probably suggests that that's not going to be the shape of that normalization process? And I guess the second point around the building blocks to the 23 margins, Are you expecting any provision help out of the U.S., provision release help within the guidance? And I guess it feels like you're going to really step up your digital monetization efforts. Can you perhaps tell us how helpful a margin driver that will be in 23, please?

I think Netly will take the digital monetization efforts to get a little bit more quality there. And let me try to answer the other two questions. We had interesting debates, James, in the last quarter about inflation levels going forward, right? It's not so easy, apparently, to predict those. And we see in the Dutch market a 14% food inflation in January. And we see in the U.S. the number quoted on the Northeast, food out of home, 11%. So... It went up still in January, we can say. So what is important for us is what is the inflation to our customers when they leave our stores through the checkouts. And there, Natalie already gave some very nice examples about what we do at Albert Heijn to deal with that inflation level. And we are well below the inflation levels for the felt inflation by our customers after the checkouts. So we work very hard on those. And what we also see is that commodity prices coming down, for example grain prices coming down, energy prices year on year over the whole year might come down too. And we see also that prices for sunflower oil go down as well, which is in many products available. We have discussions with our vendors on those topics to see those prices deflating again. They will stay at a higher level than, for example, pre-COVID. There will be still relatively high inflation, but it will come down latest by the second half due to commodity prices and the impact of energy. So that's what we will see. I mentioned earlier already, the volume declines and therefore how do we find a way back to case growth again that will also have a deflationary effect as I just mentioned. We see the trade cuts going up as well. The other positive thing in the U.S. we see is that also the supply chain gets more complete. So availability of product was much better in Q4 than the quarters before that. And that means also that there is again more room for promotions when your supply chain is full We still have a few items in the U.S. which are kind of remarkable, which are still difficult in availability, frozen potato products, baby formula. We have seen that everywhere in the press, but also pet food is still weak. So we still have a few categories which are difficult, but I think we get more and more to more normal levels in our own supply chain, but also the supply chain of our vendors, both for national brands and private level. So that would all have a deflationary effect over time. On the 2023 margins, we gave you a group margin outlook, right, at least 4%, and that is the guidance we give you. And you can, of course, understand and expect that in the balancing of the portfolio that the U.S. will have a stronger margin than Europe and that we are very proud about our portfolio, that we have that balance in our portfolio where at the moment we see some strong margin support from the U.S. At least 4% for the 2023 year, that's the number we give you.

And I'd even say on that, I think the piece, it sounds like as we've been getting these questions from a few different directions, is let's not forget that one of the things we wanted to call out today was this new Accelerate program, which is really going to help us save for our customer on steroids. We're going to be accelerating the billion euro mark. This is something where you'll see things. Franz talked about the supply chain improvements. Those are playing through. We are really calling on both of our businesses to deliver the best margin possible in this environment. It is tough. It isn't easy. This is something where we're very focused on how we do it. And there was a question about digital. Digital is not going to be a big mover in terms of the margin in 2023. We are expecting to grow 20% and exceed the 500 million euro marks. I'm very excited about the positioning of it. But what I can say is our e-com profitability, of which it's a part, is definitely improving. And that's one of our goals, you know, in 2025, to have a profitable e-com business. That is something that's stepping very nicely in the right direction in 2023 and will help us.

That's great. Thank you.

Thank you. We will now take the next question. It comes from the line of Nick Coulter from Citi. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking my questions. So two from me, please. Firstly, can I ask about how you think about your resource or I guess your human resource allocation between getting into the meat of the stop and shop remodels and starting the Food Lion cycle? And I guess the trade is complicated. between accelerating to get stopping down and the growth available in food line. And then secondly, with the year complete, could you talk through the ebbs and flows of working capital in 2022 and then kind of what scenarios we might reasonably expect for working capital in 2023? Thank you.

Nick, good morning. Talking about human resource, Let me illustrate this a little bit like the following. Food Lion and Stop and Shop are the biggest brands we have in the US and both Gordon for Stop and Shop and Mac for Food Lion are very close to each other both from a professional point of view but also exchanging a lot of experience and best practice. And although the brands are very differently in the positioning and very differently in the markets where they operate from a geography point of view, they share a lot what's working for me and let's see what's going on. For example, there are vice-diverse learnings. I would say Food Lion was rather late. or consciously maybe rather late in adopting self-checkouts, where Stop and Shop was much earlier there already and really a frontrunner. So they exchanged that experience, for example, of customer satisfaction and productivity. FoodLine has a very smart way of how to remodel the stores by different batches, and I think that's the learning where Stop and Shop took up a few things. So they exchange these kind of things and it comes with a very natural flow. We have a lot of exchange, of course, like we talked about PRISM and digital programs and Click and Collect. And I think there will be a positive learning from Stop and Shop to Foodline when we talk about the ethnic assortments, the cross-cultural assortments, which are now proven to be – and one swallow doesn't make a spring or a summer. I don't know if that's an English expression, but at least it's a Dutch one. And we have very positive news on the ethnic assortments in the New York area, the New York boroughs with Stop and Shop. I think we also transferred those learnings. In the U.S. leadership team, brand presidents talk about these kind of things, and not only those of Stop and Shop and Food Lion, but also the other brands. And, of course, this is the minimum we can expect from brands in tough markets that they exchange experience and share costs and make sure that best practices – properly transferred where applicable. So count on that effect, Nick, that we have full transparency on what's going on where and that we share as much as we can. Working capital, Natalie.

Yeah, there's a lot we could go into in detail there, but let me talk about maybe 2022 first, which is 2022, I would call kind of the last year of the COVID unwind. And if you look at our working capital, for those of you who have fun looking at it sort of on a quarterly basis, You can really dive into the detail in terms of which brand had which part of the COVID lockdown, when, and how did that play through. So that's gone there. Remember that in Q3, we had talked about because of our SAP Go Live, there had been a little shift in terms of our working capital that we expected to improve in Q4, and we did. Having said that, Q4 also had normalized inventory levels, I would call it, in the U.S., Supply chain still isn't at 100%, but getting a lot closer. That was a big quarter, so we saw inventories being there. We also made a decision at Bohl in the fourth quarter to be ready for a good Christmas holiday, and I think that was a good decision. And so that's something we'll also see normalized in the next quarter. When we look at 2023, there still are going to be issues in terms of what happens with I'll call it two big things we're keeping our eye on. One is the self-distribution in the U.S. where we're moving from about 80% to 95% by the end of the year. That's something that's normal when you take it on. You are going to have inventory that's associated with it. And we also continue to see some UTP effects that are coming through in Europe. So I think when we look at 23, working capital probably isn't going to be a big mover one way or the other, but it's certainly not something where I'd say, oh, expect a lot of tailwinds from that. Having said it, when we look at what's our free cash flow and why are we confident in terms of our ability to deliver that, when we look at this year, we feel very strongly about our operating cash flow in terms of how that's going to develop. And when we look at the core pieces of our business, we see all of those moving in the right ways to continue to support a strong 2 billion in terms of the free cash flow.

That's helpful, thank you. So what was the effect you called out in Europe?

Sorry, UTP, which is the, I don't even know if I love the name, but it's unfair trade practices. And it basically has to do with extending or shortening the trade terms for our markets in Southern Europe. So that I'll call it especially agricultural suppliers are being able to be paid more quickly.

It's European legislation, Nick, far away from the UK. But there's European legislation talking about advancing payment terms for mainly focused on smaller suppliers who use agricultural products to support farmers and agricultural sector. I would say it went a little bit out of hand, because that also suddenly qualifies also some bigger companies where you would say, is that really necessary? But that is more... political remark on my shoulders.

And to be fair, it's a topic, I mean, we've been talking about it for two and a half years. It's rolled out more slowly than I think people initially expected, but there still is that piece that needs to come next year.

With quite some different interpretations of implementation in various markets, too. Yes.

Thank you.

Thank you. We will now take the next question. It comes from the line of James Anstead from Barclays. Please go ahead. Your line is open.

Good morning, and thanks for taking my question. Apologies, it's quite a micro question, given most of the other ones have been asked and answered. Just on Dutch market share, I think you say that share was up 130 basis points in 2022. as a whole. I just wanted to check, I know gain was in the base period to a small degree, but how much of that gain was due to those Dane stores? And if you're not prepared to put a precise number on it, would market share still have been up without those stores being acquired? And on a similar note, the agreement you've signed with Jan Linders, can you quantify roughly what that might add in either sales or market share terms? And roughly when would you expect to hear whether that's got the necessary approvals? Thank you.

James, thanks for the questions. We integrated now Dane fully and very successful, by the way, in our network. The Dane stores are... cruising better than business plans, so that's also good news. And out of the 130 basis points, market share gain roughly 80%, 80 basis points is coming from the data acquisition. And that gives you a little bit of a feel. We also have a smaller other acquisition with Heerschop, but it goes in very much detail, so there's also a few basis points there. but also organically we gained market share too in the Netherlands. So it's not only inorganic. The team did an excellent job there to be more competitive in the market and also organically to gain share.

I think there was also a question about the... Jan Lenders, yes.

Oh, so what was that micro question, James?

It was just roughly how big is that deal in terms of sales and when do you expect to hear whether that's allowed or not?

Sorry about that. My memory is lapsing already. So that is with the authorities at the moment, the ACM authorities now for approval. So it's formally handed in for approval. So we wait the outcome. But in the way we have the transaction signed at our end is roughly in another – 90 basis points for roughly about 50 stores.

Very helpful. Thank you very much.

So, ladies and gentlemen, that concludes our call today. Thank you very much for your continued interest in the company. We will see you on the road, and for anyone who we didn't get to today, we'll follow up with you shortly.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.