Koninklijke Ahold Del Ord

Today we present our second quarter results. In the past month, inflation has remained at elevated levels due to higher energy, commodity, transport and labour costs. The flexibility that our brands and associates are showing by adjusting assortments quickly to customers' needs has been of great importance for our solid performance in this quarter. Our brands do this by extending own brand assortments with high quality products of good value and implementing personalized offers through loyalty programs. Combined with our 1 billion euros cost savings program, these actions are vital in helping us to support our customers in these challenging times. More recently, we have started to see some first signs that inflation has surpassed its peak. In response, our brands are reflecting this in product prices where they can, and particularly in fresh and healthy assortments. Looking at the Q2 numbers, group net sales increased by 4.3%. In the US, growth in loyalty sales and increasing online penetration were the strong contributors to our performance. Our brand Hannaford in the Northeast and Food Lion in the Southeast continue to show strong market share gains. In Europe, sales grew by 6.3% and our local brands maintained the loyalty of customers. A key highlight is the performance of Bold.com, where gross merchandise value grew by 10.5%. In the second quarter, the group underlying operating margin was 4.1%. Cost increases due to inflation have had an impact on our margin, especially in Europe, where the margin was down 20 basis points compared to the same quarter last year. Returning our margin in Europe to our historical levels is one of our priorities. A hallmark of our company is our portfolio of great local brands with deep roots in their communities. And as a great example, this quarter, we began celebrations for the giant company's 100 years anniversary. Across the states of Pennsylvania, New Jersey, Maryland, Virginia, and West Virginia, the giant company serves families in over 190 stores, including 132 pharmacies and 187 pickup points. centered and grounded in its communities, as part of the giant company's Eliminating Hunger program, it has delivered over $15 million to local food banks to date. A key investment and progress area for Isle de Les is our ESG agenda, no matter how challenging the business climate is. We are pleased to share that we have achieved a triple A rating from MSCI, which is an important benchmark for investors. Being categorized into the highest scoring range indicates that Alderles is a leader in the industry in managing the most significant ESG challenges and opportunities. In turn, it helps us attract ESG-minded investors to fund our efforts that contribute towards our mission of leading the transition to a sustainable food system. Another significant achievement is bol.com's B Corp certification. With 13 million customers and 52,000 local sales partners, we are proud that an e-commerce platform of its size has been able to achieve this. Another of our Dutch brands, Albert Heijn, has recently announced that they're also on the way to B Corp. And I'm proud of our teams and their ambitions. Looking to the remainder of this year, we are well on track to deliver on our expectations. continue to invest in our company with increased investments in digital capabilities, as well as in health and sustainability initiatives. We also remain committed to finding ways to become more efficient and save costs to reinvest in our customer value proposition. Above all, we remain focused on our central role as an active member of the communities that we serve. And by offering high-quality, affordable products for every wallet, both online and offline, and through offering extra help and care in times of need. I invite you to have a look at our website to read more about how our brands are contributing. Thanks, and see you next quarter, when I will be able to introduce our new CFO, Jolanda Poots-Bell, to you.

ladies and gentlemen good morning and welcome to the analyst conference call on the second quarter and half year 2023 results of our hotel hazer 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 uncertainty are discussed in the interim report, second quarter and half year 2023, and also in Aho Delherza's public filings and other disclosures. Forward-looking statements reflect the current views of Aho Delherze's management and assumptions based on information currently available to Aho Delherze's management. Forward-looking statements speak only as of the date they are made and Aho Delherze 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 Aarhus Dalherza. 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 today to our Q2 2023 results conference call. On today's call is Franz Muller, our President and CEO. 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 award-winning website, ajoeldelez.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-answer 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. So with that, over to you, Frans.

Thank you very much, JP, and good morning, everyone. On today's call, I will cover both our business performance and the key financials. Following our EGM in July, we look forward to welcoming Yolanda Foots-Bell as our new CFO on October 1st. Next week... Jolanda will begin her extensive and immersive onboarding to our company. In the short interim, the finance leadership team will ensure a smooth and successful transition to her. So today, for a change, I will start with the key financial highlights and follow up with my usual commentary on the main business drivers and finally touch on the outlook for the remainder of the year. One of the key ambitions of our leading together plan is to grow faster than our historical average, and I'm very pleased we once again did so in the second quarter. Net sales grew 4.3% to 22.1 billion euros, supported by group comparable sales growth of 4.6%. Net consumer online sales grew 9.3%, driven by strong growth at bol.com and further increase in online grocery penetration. Group underlying operating margin was 4.1% in line with the prior year. A slight decline in our US and European margin was offset by insurance benefits at our global support office. Diluted underlying earnings per share was 62 cents, up 4.7% at actual rates. The solid operating performance was partly offset by negative US dollar exchange rate effects. Our 2023 interim dividend is 49 cents, up 7% from 46 cents in 2022, as a straightforward mathematical calculation in line with the group's interim dividend payout policy. In the first half, we bought back 18.9 million shares for a consideration of around 560 million, also in line with our 1 billion euro annual plan. On the balance sheet, compared to the prior year, net debt decreased from €15.3 billion to €14.7 billion. And finally of note, Q2 free cash flow was a healthy €864 million, which represents an increase of €269 million compared to the second quarter 2022. The main driver of the year-over-year increase was related to the collection of the income tax receivable following agreement with the Belgian tax authorities, which we outlined last quarter. When starting 2023, we see a clear agenda for our company, ensuring the right balance between navigating the complexities of the immediate environment, while at the same time positioning the company for long-term growth and success. Reflecting on these, I'm proud of where we are and also very proud of where we are heading. In our formula for success, I see three things that have been critical to this. First of all, being agile and adaptable to meet and exceed customer needs. Secondly, embracing transformation in our operating model. And lastly, continuing to advance our sustainability agenda. As for being agile and adaptable, the speed and flexibility that our brands and associates are showing, adjusting in real time to meet customers' needs, underpins the strong culture of care of our company and what our company delivers to our communities. I would like to thank all of our associates for their dedication and always going the extra mile to support their communities, particularly in times of need. Through our brand's loyalty programs, the scale and leverage provided by our global portfolio and award-winning own brand proposition, and our one billion safe for our customers program, by those we continue to help customers navigate these dynamic times. From a top line perspective, slide nine captures some of this dynamic, where you see the last four quarter trends in comparable sales growth by region. In Q2, U.S. comparable sales excluding gasoline increased by 3.6%, or 4% excluding the impact of weather and calendar effects. In Europe, comparable sales increased by 6.3%. Excluding the impact of strikes in Belgium, this would have been 7.6%. In the US, powered by growth in loyalty sales and increasing online penetration, we more than compensated for the negative headwinds related to a reduction in SNAP and moderating inflation rates. A hallmark of our company is our great local brands with deep roots in their communities. The Giant Company is a great example here. This year, the Giant Company is celebrating 100 years anniversary. With 193 stores and 186 pickup points, they serve more than 3 million customers in the states of Maryland, Pennsylvania, New Jersey, Virginia, and West Virginia. Already in 1979, the giant company introduced bonus buys and everyday low prices, paving the way for giant choice reward award-winning loyalty programs. And today, Giant has 95% of sales coming from its loyalty programs and has the highest e-commerce conversion rates in the U.S. Food Lion continued its impressive performance of 43 consecutive quarters of comp store sales growth. And the performance of the first batch of the planned 70 remodeled stores in the Wilmington Greenville markets in North Carolina is going according to plan. Constructions has already started on the next batch of stores in the Raleigh and Charlotte markets. At Stop and Shop, 17 of the 22 New York City stores have been remodeled. These stores are showing better results than anticipated, both in sales and in household traffic. In Europe, a great example of agility is how we have leveraged our long history and leading position in our own brands. For our total European assortment, We move fast and now have 6,500 EDLP or price favorite SKUs on our shelves, which is up 15% compared to last year. Our Eastern European brands also continue to benefit from the CSE Transformation Program, the Central and Southeastern European Transformation Program, in which we are aligning business models, centralizing our sourcing activities, harmonizing own brand, and working on other scale drivers. In terms of brand performance, with a double-digit online penetration rate, and after crossing 800,000 paid Albert Heijn premium subscribers, Albert Heijn's omnichannel strategy goes from strength to strength. While food inflation remains high in the Netherlands, 11.5% the last print for July, Albert Heijn continues to invest in the brand's most popular fruits and vegetables to ensure healthy and sustainable products, which are available and affordable for all our customer wallets. Albert Heijn also continues to pioneer new industry innovation, recently launching its own AI startup called Gen AI Labs. One of their first applications is the Recipe Scanner. This tool is available via the Albert Heijn app and allows customers to take a photo of a random recipe, which is then automatically converted into a shopping list with Albert Heijn products. Bol.com also stands out for its agility and adaptability. Esco's merchandise value, GMV, increased by 10.5% year-over-year to €1.4 billion. And this is a big turnaround in less than 12 months. since the team overhauled its mid-term strategy, again highlighting the tremendous value of the Bol.com company. Bol.com's GMV sales from its nearly 52,000 third-party sellers increased 13% and represented overall 66% of sales. In addition, we see strong partner take-up of our value-added services with advertising services up over 70% and logistics offerings up over 25% compared to last year. If we then move below sales, underlying operating margin was flat with the prior year at 4.1%. In the US, underlying operating margin was 4.6%. and the reduction in the SNAP federal assistance program, moderating inflation rates, as well as the dilutive effect of our increased pharmacy sales, were only partly offset by lower logistical expenses driven by our continued supply chain improvements. Underlying operating margin in Europe was 3.2%. In Q2 and down 0.2 percentage points from the prior year, mainly due to strikes in Belgium and the impact of higher energy costs. Together, these factors impacted European margins by about 70.70. These impacts were partly offset by non-cash service charge for the Dutch employee pension plan, which decreased 15 million euro as a result of higher discount rates in the Netherlands. Slide 16 shows you our results on an IFRS reported base for the second quarter. Our IFRS reported operating profit and earnings were mainly impacted by charges related to the Belgium transformation and the Accelerate initiative, including impairment charges for store assets in Belgium of €108 million and for the Jersey City Fulfillment Centre of €40 million, as well as restructuring and related costs of €40 million. As I said in my opening, embracing and driving transformational change in our operating model to set our company up for long-term success is one of the critical agendas we are driving this year. Given our big transformation ambitions in new business models, in technology, in automation, and in data, we committed to higher investments in tech capabilities to fuel growth, reinforce our longstanding Safe for Our Customers program, and securing our industry-leading margins. While some of these actions, like those initiated by Deles Belgium, take a lot of courage and are disruptive in the short term, I am confident these measures will ensure the long-term success of our brands for the benefit of all our stakeholders. So let me give you a quick update on the most important initiatives. Let's start with Belgium and the future plan, which the local management team communicated in March. As stated then by having all 128 owned stores operated by local entrepreneurs, Deleuze will have a better opportunity to respond to changing market conditions and evolving customer needs. And as announced earlier this week, Deleuze has signed agreements for the first 15 integrated stores, which will be affiliated in October and November. Five of these acquirers already operate other Deleuze markets. Five entrepreneurs joined the Deleuze family for the first time and five acquirers are associates of Deleuze. In total, we have 400 potential acquirers for the 128 stores. Announcements about additional stores making the transition will be made at regular intervals over the coming months. The present development shows the confidence in our brand of DLS, but also the care we have to transfer our employees to the new acquirers with the same type of conditions on the labor front. Looking at the US, our connected customer strategy and omnichannel transformation continues to deliver exceptional results. Here are a few facts just from Q2. Online traffic was up 13%. primarily from app traffic, which was up 24%. And our focus on personalized offers is paying off, with 7% more offers being redeemed per household compared to the same time last year. To sustain the right trajectory as part of our Accelerate initiative, the US teams have taken a close look at the entire omnichannel operations. with a view to achieve fully allocated e-commerce profitability by 2025, as we said before. One such concrete action is to orient our online fulfillment capabilities towards more efficient, less asset-intense same-day delivery models, such as click and collect. And in line with this, we decided to close the afore management facility in Jersey City, which coincides with the lease expiring next year. Instead, we will utilize our existing stop and shop store network and partners to service customers with more same day delivery and pickup options, providing a more enhanced service and leveraging our existing asset base to better effect. Finally, let me spend a few moments on the third critical factor contributing to our success, our commitment to sustainability. We remain dedicated to making progress on our sustainability ambitions and are proud to share that we have achieved a triple A rating from MSCI. Being categorized into the highest rating indicates that ALDE-LESS is a leader in the industry in managing its most significant sustainability challenges and opportunities. This would not have been possible without all the initiatives that our brands are continuously implementing in their organizations. A selection of these examples is shown on the slide. From a holistic perspective, Hannaford is a great example of where our growth and sustainability ambitions reinforce each other. Their impressive performance of 27 quarters of market share gain during the last 29 quarters is a testament to this. The backbone of Hannaford's success is their ongoing investment in their fresh and convenient strategy. which continues to resonate with customers and is a clear driver of these great results. Hannaford is deeply committed to the important role they play in the local communities by continuously investing in hunger relief, healthy eating, sustainability and diversity, equity and inclusion initiatives. And this is also in line with Hannaford's purpose to be greater than groceries and can be highlighted by some great examples. More than half of Hennefert's own brand sales, which are the highest of all 80 USA at the 35% share, comes from items rated as healthy within our Guiding Stars nutritional rating program. Hennefert achieved zero food waste going to landfills in 2021, making them the first large-scale grocer in New England and New York to reach this achievement. And in 2022, these efforts resulted in donating nearly 26 million pounds of food to our anti-hunger partner organizations throughout the Northeastern States. And there is more to come. In 2024, Hannaford Stores' electricity consumption will come 100% from renewable sources. Another major sustainability achievement in the quarter was BOL.com's attainment of a B Corp certification. And with 13 million customers and 52,000 local sales partners, we are proud that an e-commerce platform of bold.com size has achieved this recognition. And finally, I'm a big believer that through creativity and innovation, we can create more transparency and positive impetus at the customer level. An Albert Heijn pilot currently being conducted in the GenAI lab is Degaswap. With this application, you automatically get a vegetarian version of a recipe in the Alejandra magazine. And so soon you will be able to opt for an alternative that produces at the same time CO2 emissions. So wrapping up for today, with our strong culture known for its agility, with our ability to drive transformative change, and with our commitment to sustainability, I'm very confident we are all well prepared to navigate the complexities of the current business environment. In terms of what to expect in the coming quarters, here are a few things worth noting. On a positive note, we see more evidence that inflation has passed its peak. But inflation still remains at more elevated levels due to higher energy, commodity, transport and labor costs. These factors will continue to impact the second half of profitability, particularly labor, as we implement changes related to our new CLA agreements. While inflation coming down is clearly a good thing for the customer, the consumer environment is still fragile, extending from the pandemic. This is clear in the US, for example, where we see the impacts of the reduction in the SNAP federal assistance program on sales growth rates. We expect this headwind to persist in the remaining quarters of the year, being a low single digit impact on our U.S. comparable growth rates. With the strain on household budgets and dynamics in the political environment, we see a widespread rise in social tensions, which are unfortunately leading to more incidents in our stores. We continue to see different patterns and disruptions from climate impacts, such as the fires in Greece, or in general, more seasonal volatility in weather, which is affecting harvests and supply chains. Nevertheless, from a competitive perspective, this environment plays to the strength of our company, and we are well positioned to deal with whatever comes our way. Therefore, taking all the moving parts together, I'm pleased that we are in a position to increase our free cash flow guidance for 2023 to a range between 2 and 2.2 billion euros. And we also reaffirm the rest of our guidance. As I said earlier, I'm proud of our performance and where we are heading. And you can continue to depend on us and our great teams to deliver consistent financial performance, to leverage the strength of our portfolio and to complete our transformation projects, to evolve our loyalty programs and own brand assortment to drive brand strength and relative market share gains. And above all, to remain focused on our central role as an active member of the communities that we serve, offering solutions for every wallet, both online and offline, and through offering extra help and care in times of need. With that, I would like to thank you for your continued interest in our company. And operator, please open the line for questions.

thank you to ask a question you will need to press star 11 on your telephone and wait for your name to be announced to withdraw your question please press star 11 again once again that is star 11 to ask a question please stand by while we compile the q a roster we will now go to your first question one moment please And your first question comes from the line of William Woods from Bernstein. Please go ahead.

Good morning. Thanks for taking the question. The first one is on food inflation. Obviously, you've called the peak of food inflation and said that you're past it. But could you just comment on your outlook of how food inflation will trend over the next 12 months? Do you think it'll last higher for longer? Are you still seeing some kind of structural pressures in some categories? And I suppose any differences between Europe and the U.S.? ? And then just moving over to the U.S. business, are you still seeing continued improvement in the stop and shop share and continued improvement? And has there been any change in the promotional environment within the brands there? Thank you.

Yes, thank you very much for those two questions. And those are also for us, for example, very relevant, of course. Food inflation and the outlook. I heard an echo, I hope. Am I still with you guys? Can you still hear me?

You are loud and clear.

All right, okay. So if we look at the June inflation, the food inflation in the U.S. at 4.5%, but for example, a double-digit inflation in Europe with 11.7% in the Netherlands. So there's a different rhythm of inflation, but we see in both geographies inflation coming down. And... We do not expect for the remainder of the year a negative development, but we see that inflation is coming gradually down. And of course, Europe is more impacted by the war in the Ukraine, by energy and by commodity prices than the U.S. is. If we look at commodities as well, another question there, there is a demand and supply commodity view which is different in U.S. and in Europe. For example, in in the U.S. and in Europe, by the way. Dairy is coming down quite dramatically, dairy as in milk products, but also as in cheese and as in yogurts and all these kind of things. Eggs is coming down firmly in the U.S. because the avian flu is absent. But beef prices are going up in the U.S., and that is commodity-related. In the Netherlands we see or in Europe we see a little bit more impact of climate. We have quite some adverse climate situation with floods and droughts. So potato and onion prices are going up because harvests are halfway down. Wheat prices are still going up and sugar and olive oil too. Now, that is a different situation partly for the U.S. in those categories. So mixed there, what we see overall, inflation is coming down. Can depend, as I just mentioned, by category. The supply chains are getting more professional and more filled there. Also our supply chain is helping there. So I think for customers it gets more opportunities to buy the product. If you look at the U.S. business, then... We see in the U.S. a couple of things I mentioned in my introduction, a few things on inflation is coming down, in principle good for households. We see SNAP and emergency funding of the government coming down, not good for households. We see that vendors also are very interested to have, again, positive volumes in their business. So we see an increased vendor funding in our business coming. We see promotional levels going up. The vendor funding in the US is not at pre-COVID levels yet, but we see an increase there. And I think we are a very interested partner for them to invest further with our number one and two positions on the East Coast and our strong business overall in scale. So we see an increased interest in funding there, and that's why We see a more moderating inflation not going into negative for the remainder of the year. We see more promotional money coming into our business. And I think that should be a good balance for the remainder of the year when we play this right as a company. Ben, there was a question on the stop-and-shop performance. Before I forget that one, we don't have the numbers yet for the second quarter from Nielsen. The first quarter showed overall for the total company a 20 basis points gain. We expect a flat outcome for the second quarter, and it will differ by brand. But we have to wait for the Nielsen numbers before we know that. Great. Thank you. Pleasure.

Thank you. We will now go to our next question. And your next question comes from the line of James Griznich from Jefferies. Please go ahead.

Yes, thank you. Good morning, Franz and JP. Just a couple of quick ones. The first one is, Franz, I think you referenced a new agreement impacting the second half. labor costs and how you were just really focused on that. Can you perhaps expand a little bit on the details of that and then what sort of incremental tax inflation you're thinking after that that you'll need to back solve? And I guess, secondly, just very briefly, how much of that 377 million tax, budget tax receipt is built into the new free cash flow guidance, please, for the full year?

Thank you, James. On labor costs, we had a few CLA negotiations, which came with some disruptions, as you might have noticed. That was mainly a topic for the Dutch market, both for our logistics business and for our stores. Those negotiations have been closed, that have been closed on sector level, so the total retail sector. And we closed those contracts with a 10% increase, which is, of course, historically high. But it's a sector level playing field element. And it means that we have now a calm social environment here, which is important with the social partners. We have agreements and good agreements. Everybody's back to work. And we also see that the business is developing well, the Albert Heijn business developing well within the historically strong market share. We see that more and more customers find their way into our stores and we might be able to later on to talk a little bit about why that is and why our proposition is that strong. In Belgium, we have also strong labor costs increases, not so much CLA negotiation necessarily, but because of indexation, which is also a level playing field topic. And of course, this is burdening the Belgian market already for a longer time. One of the reasons also to see what is a more agile business model for us in Belgium. Then on other CLA topics, there's not a lot of things happening in the U.S. There's no big CLAs outstanding there. We have a small CLA up, Stop & Shop, but it's a very small one. And we have giant food at the end of the year. So I think it's a rather overseable climate. And of course, in retail, if it's level playing field, that's good news because everybody has the same challenge. But I think we have proven in the last years historically that we're pretty good in driving productivity, and finding new solutions through technology and digital to make sure that we have smarter solutions, smarter ways of working. And if you look at our stores in Europe, you see all those elements coming in from labor-saving elements, but also be more efficient in working. And AI is helping us already here now. Then the second question was, The Belgium-Texas. All of the Belgium-Texas are included in the guidance. So the total amount is in.

And just on that last point, sorry, Frans, just to clarify, that should be a net 377 million. You don't expect any reversal over the balance of the year.

Just to give you a little bit of color on that free cash flow, because it might be a question on more mines in the call here. We gave you a free cash flow guidance, an upward guidance for the full year of 2 to 2.2, which was around 2 before. And we have a few elements which we know already in the first half. We have a tax return of the 377, which is there. We have a number of things in Belgium which we have to digest. And we also have our Accelerate program. A few topics are already mentioned in this call. But we have an ongoing Accelerate program where we would like to simplify our business, where we would like to make the right choices, where we are on the way to make e-commerce more profitable and profitable in 2025. And those all initiatives, the running, the initiatives which you already know in the first half, Any initiatives which are coming in the second half are included in our guidance. So that's why we gave you the guidance, and that is all in, I would say.

Very clear. Thank you.

Pleasure.

Thank you. We will now go to your next question. And your next question comes from the line of Nick Coulter from Citi. Please go ahead.

Hi, good morning. Apologies to two questions, but the first one just to come back on James's question there on free cash flow. Apologies to Labour the point, but I think you're right in thinking that it's on quite a few minds this morning. Can I ask if the 377 was in the guidance already that you'd issued, and then if the right way to think about this is that you're utilising inflow to kind of get on with the forward-facing initiatives that you have outlined? And then I guess, if that's the case, what were the underlying drivers to the free cash flow guidance upgrade? And then secondly, another follow-up, if I may, please, just on whether you expect to see shelf-edge deflation in the U.S. next year. You kind of left us hanging with your comments, Franz, around not expecting negativity or deflation this year. But clearly, it will be a question on people's minds for next year. So if you could talk to the possibility of deflation for next year, noting that wage inflation is still flowing through. And those would be my two. Thank you.

Thank you. And apologies when I have not been 100% clear. In our guidance, in our previous guidance, a part of that tax settlement was in, but we didn't know what the outcome would be of that settlement negotiation. So a part was in, and now we have the money in the bank. That's what our conservative view and prudent view is. We only come out when the money is there. So the 377 is now in the bank. So a part of that money was in the guidance and a part was not, because we now know the final result of that settlement. The other thing is that I mentioned, I hope I was clear there, that we have an environment in the second half where we have accelerated initiative, but we also still have an rather dynamic outlook as a total market is rather dynamic. So I'm pretty happy with upping our free cash flow guidance therefore. And underlying reasons why we think we are optimistic is that we see a better margin profile in Europe. We see also an opportunity to have a better job done in the second half as well on the working capital performance. And there are a few elements there which gives us a positive outlook on that free cash flow guidance for the full year. Then the next year, inflation, I think is your question, in the U.S.

Sorry, can I just come back? How much was in the original guidance, if you don't mind me asking specifically, just so that it will be on people's minds in the market, whether this is an underlying upgrade or downgrade for free cash flow?

Apologies. I would say roughly about half was in. And we see, based on the operational cash flow and based on the outlook and based on the full year expectation for Accelerate, we see this ourselves as an upgrade on our free cash flow. But hopefully we are clear there. But in the end, it's your interpretation.

It sounds like it's a net nil, but you're taking the opportunity to accelerate. So that's helpful.

Yeah, and accelerate is a serious program. It's meant to simplify the business. You saw AES, the GRC facility. You saw our courageous, determined initiative by the Belgium team for our business model reconfiguration. And those are elements there. And that's what we said earlier when we talked about accelerate. We would like to simplify, improve our business. In the same fashion that we also took courageous and principled steps on our total supply chain on the east coast of the U.S., where we also tremendously changed that supply chain. That comes with changing and changing pain. But we're now already in a situation where we have 95% of the supply chain under our own control. The Chester network, the Chester DC is coming this week, is coming now through the network. So these kind of things are all meant to make sure that we have a more solid, simplified, and in the end, more agile and profitable business. And that's what Accelerate stands for. And that comes with one-time costs and decisions you take based on a very solid business case and good value creation. For next year, inflation in the U.S., we think it's coming down and it's now 4.5%. It could mean that we have already a zero inflation level this year. So expectation for next year is a little bit difficult. I don't have that crystal ball based on commodities and all these kind of things. But inflation is coming further down in the U.S. That's what we expect and faster than in Europe.

And if there's a deflationary environment next year in the U.S., how do you think about your operating model and I guess the context of historically high margins through an inflationary period?

Yeah, let's not forget that when I talk about inflation levels, then I talk about two things. I talk about commodity levels, and that is raw materials priced. That's one thing. The other thing is I also talked about stronger support from trade funds, from our vendors. And that is a very beneficial income lever, of course. The other thing what we work very hard on is when you talk about save for our customers, our 1 billion savings program, that is of course also accretive and that is also helping us and that is what is helping us already for years. to have also a very strong margin in the U.S., which people asked us a couple of years, how sustainable is that? Well, with the 4.6% margin also this year in the U.S., I think we are confident that we are very well positioned, strong brands, strong relative market shares, and proactive investments in our business, $2.5 billion for the total company, investing in digital technology, AI, productivity, automation, I think all these elements will help us also for next year, even if raw material inflation is coming down.

That's very helpful. Thank you, sir.

Thank you. We will now go to your next question. And your next question comes from the line of Andrew Gwynn from BNP Paribas. Please go ahead.

Hey, good morning, friends. Apologies, because I'm going to come back to cash flow, and I know you're not the CFO, so again, apologies. But what's the total tax payment for 2023 anticipated at? In 2022, the level of tax payment was really pretty low versus the P&L tax. So I'd assume certainly there was a bit of a catch-up effect in 23. So the total kind of net tax paid in 23 would be very useful for modeling. And then the second question, online does seem to have re-accelerated a bit in this quarter. I think particularly, of course, you call that bold, but even in the U.S., the e-commerce business is – trading a bit better so do you think we've sort of turned the corner is sort of growth officially back any thoughts that would be very welcome thank you okay give us give me a second for the text question and the position you need this is not on my heart this as an

as a day-to-day CEO. But we'll come back to this in this call. And my colleagues here are looking at the files. On the e-commerce business, yes, I think it's true. I mean, with a lower inflation level and still 9.3% online sales, net consumer online sales, we're quite happy with that development. And we think also that we gained share both in the U.S. and in Europe. We're also very happy with the 10.5% for Bol, where we know that we gained share, although the data on market shares in the Netherlands on e-commerce are rather proxies, but we gained share also in the Dutch market. And another good thing with Bol is that We also gained a lot of more loyalty with a growth of our logistics viable and our advertising viable. So the advertising income is also going up, which of course will help also our bottom line. And the third thing is that you see that in ball we are now going to new categories. where we think we can compete even stronger. And we also opened a new warehouse for XL, for extra large items, which gives us the opportunity also to compete more in the areas of big TVs, white goods, big items, air conditioners and these kind of things, which is opening up a new strength in our categories. We are already very strong in brown goods, so electronics, but we think that we have here a big opportunity in the market. So I'm very optimistic about our online sales, both in Bol, the general merchandise marketplace, as well as in our food section.

And I noticed otherwise this morning you were talking again about the sort of prospect of listing Bol.com. Is that just sort of open thinking at this moment or anything more concrete?

Sorry, could you repeat that question because I didn't get it?

I think on Bloomberg this morning you were talking about the prospect of listing Bol. Obviously that has been a project that's been put on the back burner. So is it still on the back burner or is it something which is more active?

I hope I was very clear this morning with Bloomberg, because I said we interrupted that IPO process because the market timing was not right. But that project is not off the shelf. And that's why we're happy with the sales development. That's why we're happy with the margin development of Bull and also the EBITDA margin development. And we come back to the market with our plans because the IPO... idea is still on the table when we think that the market timing is right.

Okay, very clear. I'll let you come back on text in due course. Thank you very much.

Thank you. We will now go to our next question. One moment, please. And your next question comes from the line of Sweden Mahamkali from UBS. Please go ahead.

Frans and JP, good morning. Thank you. Just one clarification back on the free cash flow. Frans, I suppose you're now regretting the upgrade, drawing all the attention to it. The question is, have you also, to question me, these Accelerate projects, have you brought them forward to 2023, perhaps given the cash inflow from the Belgian refund, 377 million? Is that what's happened here to explain the delta in pre-cash flow guidance, i.e., why is it only going up to 2.2 is really the question on all our minds. So does the discretionary measure of these projects being brought forward into 2023 consume some of that away? Is that the explanation? That's the follow-up. And a couple of questions then, one on the U.S. and one on Belgium. You've talked about continuing lower inflation, potentially going down to zero by the end of the year in the US. You've also talked about a low single-digit impact on SNAP in the US in the second half. Taking those into consideration, is there anything we should be thinking about margins in the US? I know you don't necessarily guide on segments, but just help us understand, is it reasonable to continue to think They say for our customers and efficiencies from distribution will help you offset any of the pressures and we should see more or less stable profile in the U.S. margins or anything else we should be aware of that's on the U.S. margins. And then on Belgium, helpful to see the progress of 15 stores in the next couple of months. into franchisees. What are the next steps for the remainder of the stores? And is there a timeline? And does the transfer of 15 signal you're now able to really confidently assume some timelines to transfer the rest of the estate to franchisees for the coming months? Thank you.

Well, there's a whole shopping list, Sridhar, but let's start with this. Thanks for your interest in the company, of course. I think a broad forward of initiatives, I think, is not the way we think about this. What we think about, we have more determination. Looking at the dynamic environment, looking at our strength of our P&L and balance sheet, we felt it's the right timing now to have more determination, attack a few of these kind of things, which on the longer run, in the mid and longer term, are simplifying our business, make it easier for us, reduce our cost, and in the end have a benefit for both customers and bottom line. So that is more the effect there. And as I said before, we take into account here the first half and the second half accelerate projects. And one of the things, as you know, is also to bring our e-commerce to profitability. And so those is one of the elements of determination too. Then the Belgium situation. We have announced Monday 15 stores being signed out of the 128. I consider that to be good news because, first of all, we have first-class entrepreneurs coming into the network, one-third existing entrepreneurs who already work with Deleuze, one-third new entrepreneurs, and one-third entrepreneurs coming from our associate base. And it gives a lot of confidence to us and to the market that people see, hey, this is a great brand to be an owner of and to be an affiliate here, which is one good news. The other good news is that we also have very clear agreements with our associates who are moving to an affiliate environment and where we kept the labor conditions as they were, because that is how our values are organized. And they also get a transition premium as well. And I think also, I could imagine that gives us a level of comfort to our social partners as well, that we do this in a very careful way when we... when we have those employees transitioned. On margin stability, with all the programs we run, we talked about Accelerate, we talked about Safe for Our Customers. That's of course our intention, to have a stable margin environment in the US. And I mentioned before that we intend to come back to historical margin levels in Europe. And they are not there, as you have seen, with initiatives rerun in Europe. And the energy, hopefully, which will be much more released next year in 2024, we hope also that those margins are also coming back and bouncing back to historical levels over time. On the tax question, we paid taxes in 2022 of around 400 million euros. And we're going to pay taxes in 2023 about 240 million euros. And for this year, that would mean a low 20s ETR.

Frans, if I can very quickly follow up on the Belgium. Is there a clear pipeline now of transfers coming through or is it all further negotiation?

We embarked on this project, which has been initiated by the Belgian team and very much endorsed and supported by the group, of course. And this is a big project with quite some impact. impact and uncertainty for people and for customers and potentially for entrepreneurs. So that's why we have engineered this project very careful and thought this through up to the end. So that means that gradually over time we will franchise or affiliate those stores and gradually over time we also will convert them from a company operated operation into a affiliate organization. The first 15 announced I expect another 15 also for this year. The first 15 will be converted in October, November. And the second 15 will also be announced this year. But it will bring us into 2024. We have a big interest in those stores because we have super locations. You can imagine when you're 155 years in business and you're one of the first companies who could choose locations. Our locations are extremely of very high quality. So there's a big interest on 128 stores. And we go now batch by batch gradually over time with a finalization in 2024. And I'm very confident this will go well. The first 15 stores are completely in line with our business plan, but also very much in line with both the affiliates' interest. So we have good entrepreneurs who are excited about becoming the owner and the entrepreneur in the last store. And we have also positive feedback from our associates who see what it means to transfer to an affiliate owner and also how we treat them from a human and contractual point of view. Was that a clear and honest answer, Sridhar?

Thank you, yes.

Yeah, pleasure.

Thank you. We will now go to your next question. And your next question comes from the line of Robert Voss from ABN AMRO-ODO-BHF. Please go ahead.

Yes, hi, good morning. Thanks for taking my questions. My first question is on Europe. Your 3.2% EBIT margin was quite strong, stronger than expected. When looking also at consensus, I thought you said earlier that the impact from energy costs should be a bit easier in the second half. likely also a smaller impact from strikes in the second half. You mentioned that in Q2 the impact of these two was 70 basis points negative. Is it fair to assume that sequentially the EBIT profitability in Europe should be higher than the 3.2% reported in Q2 in the next two quarters? That's my first question. My second one is on the US. You mentioned an expected low single-digit impact on growth from the termination of the SNAP programs. I assume that this had also impacted growth in Q2 negatively. Can you quantify? Was it a similar effect, so a low single-digit impact on growth from the termination of SNAP earlier this year? Those were my two questions. Thank you.

So thank you for those two questions. On SNAP, yes, also in the second quarter, we had a two points effect from the SNAP calibration by the government. That's also, of course, also an industry-wide phenomenon. And that is a negative for those families with the smaller wallets. So that assumption is correct. And the other assumption you made is, will we have, for the second half, the European margin, an uptick effect, a better European margin? That assumption is also fair.

That's very clear. Thank you.

Thank you. We will now go to your next question. One moment, please. And your next question comes from the line of Fernand de Boer from De Graaf Petercam. Please go ahead.

Yes, good morning. It's Fernand de Boer from De Graaf Petercam. Sorry for coming back on the cash flow comments. But in the previous quarter in the conference call, I thought it was Natalie who actually said that this 377 million was not included in the cash flow guidance of 2 billion. So could you please clarify if you now say half of that was included in the cash flow guidance? So which one is not correct then? And then coming back on Belgium, because I thought in the press release of Monday of Belgium Group, it was said that everything had to be completed, let's say, before 2028. And also this morning, there were quite some press articles on, let's say, the Franciscans, the existing Franciscans, not happy with the changes in the conditions you are preparing when their contract expires. Could you comment on that? Because it seems now that the new ones will have different conditions than the old ones. And what's the risk here of things getting disrupted?

So thank you, Fernand. I think I can clarify a few things here which might have been confusing for whatever reason. We checked here internally and Natalie did not say, has not said that there was no tax at all included in the guidance for the first half, in the first half. So what we shared with you now, that half of that amount was assumed in the four-year guidance, knowing that we did not know what the settlement exactly will be and what would be landing on the bank account. So that's one thing. So the 50%, what we mentioned before, is the right understanding. On the Belgian stores, we... have those negotiations with the entrepreneurs. And we have a high interest from the market, as I mentioned before. So I'm very confident that we will have a good closure here. This project will take us up to 2024. What we said in the press and also for our social partners to be very clear there, that if in the rare case that we would not close one of these 128 stores, that we would carry company operated of that specific store or stores in the rare case up to 2028. So we gave an operating guarantee as a company that we would have employment and operating the store up to 2028. We intend, and we have a big interest here, we intend and to expect that in 2024 we have transferred, signed and converted all the stores.

Okay, thank you very much.

So that is on that part. And yeah, I mean, the other thing is, It's a store-by-store operation, and of course there's a lot of moving parts and moving elements in a store location and the leases and the equipment and the contract. So I think this is normal, but I think we have very smart entrepreneurs in Belgium, and we have a good organized Belgium team so that we make the right conclusions here for both parties and that we have a mutual interest transfer here.

Okay, thank you very much.

Thank you. We will now take our final question for today. One moment, please. And your final question comes from the line of Isabel de Brova from Morgan Stanley. Please go ahead.

Hello, good morning. I'm sorry if the questions have been asked because I missed some of the call. My line is connected. But I have three questions. So firstly, on the free cash flow guide, I'm sorry to come back to this, and I'm going to try to simplify the earlier questions. I guess what's really on our minds is, are you upgrading the operational free cash flow guidance? So if we strip away the tax, the restructuring costs and so on, are you upgrading your expectation of what the business will operationally deliver from a cash flow perspective? And if so, where does the delta come from? That's the first question. Then my second question is on private label penetrations. How would you expect this to evolve in a disinflationary environment? Do you think that the gains in penetration which you have reported are going to be sustainable and durable? Or would you expect to see a little bit of a reversal as the inflation rates start to come down and the cash flows are under less pressure? And then my final question is on the U.S. margins. I think last quarter you mentioned that there were still some small tailwinds to come from shelf availability improvements as well as normalization of the supply chain. I was just wondering if you could give us an update there and whether you see any further benefit to come to the margin from those two factors over the second half.

Thank you, Isabel. We forgive you that you're a little bit later and that you have not heard everything, but I think I'm happy to once more give you a little bit more clarity on the free cash flow. On your question, is the upward guidance of the free cash flow also fueled by a positive view on the operating free cash flow? The answer is yes. The second thing is... On the margins in the U.S. and supply chain and shelf availability, I mentioned why we believe that we will have a strong U.S. margin also going forward, because we have strong positions and all these kind of things in the marketplace, which we already proved for many quarters, that we have a strong business and therefore a market-leading margin in the U.S. But we also said that we spent money with Accelerate, and we have initiatives with Accelerate, which are focused on simplifying the business and making the business more agile and in the end also more competitive. We have a lot of investments in digital and tech and AI, big initiatives with PRISM in our US business. The loyalty programs get a better quality. We get more media monetization income. We have a safe for our customers program, which is very strong. So there are a lot of elements which give us the confidence that we can stabilize, have stabilized US margins. And supply chain plays a role there. And what I mentioned before, 90-95% of our supply chain is now self-distributing. With the Chester warehouse coming to the family and we see a better effect on availability. We see a better effect on freshness. We see a better effect on working capital and more to come in the second half of this year is our expectation. There's still a few categories industry wide which are weak. HPC is still not easy on availability, and pet food is not easy on availability. But that is not our issue, that is the industry's topic. So I think I'm positive about the positioning of our U.S. business, the online penetration of our business. So I'm quite optimistic there. Your last question, what was your second question? The private label penetration levels. What we see... We see different views in Europe and the U.S. In Europe, and most of you know, we have a 30% penetration level in the CSE countries and roughly 50 plus in the Benelux countries. And we see in those countries a stronger demand for our price entry products, the price favorites, 6,500 in Europe already on the shelf. 2,000 at Albert Heijn, 1,000 in Belgium, and also the CSE countries are following suit. And those products are great value, but also great quality. And why do I say that last? Because that means if, for example, inflation is coming down, or households would get more income, available income, disposable income for groceries. I don't see those shares coming down. First of all, apart from price entry, we have in the mid section and the highest section of private label very cool and interesting products if you have a little bit better wallet. And the price entry products are very well-priced products, but also at the same time very good quality. I mentioned in my text award-winning, and that is not just Bragg. We have brands which are chosen in the Dutch market as the best private label product, the price favorite product, for example, detergents, dishwasher taps, and these kind of things. And we see indexes of the products of 200%, 300% in volume. So I don't expect that those private label penetration rates will go down. Good products, price entry, but people might within our private range move up when there's more income into mid-tier or higher tier elements of our private label range. And I think coming back to the US, I think in the US we still have an opportunity to grow our total private label sales, which we see now growing by the way. Small dip in COVID, we see it now coming back and we see it growing. And if we look at the plans of the US team on private label, both in fresh and in center store, I see an upward potential there. And that is also there to stay, I think. And that is because, yeah, I think those products have a very good price quality proposition. Were those answers to your question, Isabel?

Yes, thank you very much.

Pleasure. And then, operator, thank you very much for your support today. We would like to close the call.

thank you i will hand the call back to jp for closing remarks thank you operator and thank you for all your questions for any questions we didn't get to today please feel free to reach out to the ir team during the day and we look forward to seeing you guys on the road tomorrow and also throughout september and october thank you very much thank you this concludes today's conference call thank you for participating you may now disconnect