Delhaize Group Confirms Second Quarter Results - 4.1% Organic Revenue Growth For The First Half Year

Net profit from continuing operations increased by 80.9% at actual exchange rates (101.9% at identical exchange rates) compared to the second quarter of last year which included the refinancing charge, and amounted to EUR 113.8 million. Basic net profit from continuing operations amounted to EUR 1.14 per share (EUR 0.61 in 2007). The result from discontinued operations, net of tax, amounted to EUR 2.9 million compared to EUR 21.9 million last year as the second quarter of 2007 included a positive accumulated foreign currency translation adjustment of EUR 23.7 million recorded upon closing of the sale of Delvita in the Czech Republic on May 31, 2007. 

 

Group share in net profit amounted to EUR 116.3 million, an increase of 56.8% at identical exchange rates (42.9% at actual exchange rates) compared to 2007. Per share, basic net profit was EUR 1.17 (an increase of 39.3% over the EUR 0.84 of 2007) and diluted net profit was EUR 1.14 (EUR 0.81 in 2007).

 

 

In the second quarter, net cash provided by operating activities decreased from EUR 245.9 million in 2007 to EUR 133.1 million in 2008 as a result of lower profit from operations and more cash used in working capital. Capital expenditures increased by 16.4% to EUR 171.8 million primarily as a result of higher spending at Food Lion due to earlier remodeling activity than last year, the conversion of Plus Hellas stores in Greece, and increased spend on IT projects and IT infrastructure at Delhaize Belgium.

 

Delhaize Group had a free cash flow of EUR -25.5 million, a decrease of EUR 221.6 million compared to last year as a result of lower operating cash flow combined with higher cash outflows due to increased capital expenditures in the second quarter of 2008 and the EUR 119.0 million proceeds received in the second quarter of last year for the disposals of Delvita and Di. Delhaize Group held EUR 258.1 million cash and cash equivalents at the end of June 2008.

 

Delhaize Group’s net debt amounted to EUR 2.2 billion at the end of June 2008 (62.8% of equity), a decrease of EUR 20.9 million compared to the end of December 2007 (EUR 2.2 billion or 61.0% of equity), mainly as a result of the weakening of the U.S. dollar by 6.6% between the two balance sheet dates.

 

In the second quarter of this year, Alfa-Beta issued a EUR 80 million 5-year bond for the financing of the acquisition of Plus Hellas. Delhaize Group repaid a EUR 100 million 8% bond in May of this year using cash on hand and existing credit facilities.

 

 

 

In the first half of 2008, revenues of Delhaize Group increased by 3.7% at identical rates and decreased by 6.0% at actual rates to EUR 9.0 billion because the U.S. dollar weakened by 13.2% versus the euro. Organic revenue growth amounted to 4.1%. Revenue growth in the first half of the year was the result of:

·         a 3.7% increase of U.S. revenues in local currency driven by comparable store sales growth of 2.2% and by new store openings;

·         a 0.1% increase of revenues in Belgium, supported by 1.3% comparable store sales growth and negatively impacted by the sale of Di and conversions of Cash Fresh stores to affiliates;  

·         a strong 14.7% increase in Greek revenues due to store openings, the good performance of the stores remodeled last year and the acquisition of Plus Hellas; and

·         a 32.0% increase of revenues in Romania and Indonesia (Rest of World) at identical exchange rates.

 

Gross margin was 25.1% of revenues (compared to 25.5% in the first half of 2007) mainly due to the lower contribution of our U.S. operations as a result of the weakening of the U.S. dollar versus the euro. At identical exchange rates, gross margin declined by 14 basis points mainly due to the divestiture of Di and the conversion of Cash Fresh stores to affiliated stores in Belgium, price investments at Sweetbay and higher fuel costs, partly offset by favorable mix changes especially at Food Lion supported by an increase in private label revenues.

 

Other operating income decreased by 9.2% at identical rates and by 15.2% at actual rates to EUR 41.4 million primarily due to the sale of Di in the second quarter of last year and less gains this year related to the sale of Cash Fresh stores to independent owners in Belgium.

 

Selling, general and administrative expenses slightly increased to 21.1% of revenues (20.9% last year) as a result of the negative operating leverage of soft sales, the Food Lion market renewals, the start of the integration of Plus Hellas and higher fuel costs.

 

The operating margin of Delhaize Group decreased to 4.5% of revenues compared to 5.0% in the first half of 2007. As a result, operating profit decreased by 6.6% at identical exchange rates and decreased by 16.5% at actual rates to EUR 399.6 million. Excluding the effect of the start of the integration of Plus Hellas, the Di divestiture and the gains on the sale of Cash Fresh stores to affiliated owners, operating profit declined by 4.2% at identical exchange rates.

 

Net financial expenses significantly decreased, amounting to EUR 95.3 million, a 58.1% decrease compared to last year as a result of the debt refinancing transaction in 2007 and the weakening of the U.S. dollar versus the euro.

 

The effective tax rate decreased to 28.1% in 2008 from 31.1% in 2007 because of the positive resolution of federal tax matters in the U.S. in the first half of the current year, while the tax rate in the first half of last year benefited from the favorable tax impact of the debt refinancing completed in the second quarter and from a tax refund received in the first quarter.

 

Net profit from continuing operations amounted to EUR 218.7 million, a 26.4% increase compared to last year, or EUR 2.17 per basic share (EUR 1.74 in 2007).

 

In the first half of 2008, the result from discontinued operations, net of tax, amounted to EUR 2.7 million compared to EUR 25.0 million last year which included a positive accumulated foreign currency translation adjustment of EUR 23.7 million recorded as part of the closing of the sale of Delvita.

 

As a result, Group share in net profit amounted to EUR 218.1 million, an increase of 13.1% at actual rates (24.3% at identical exchange rates) compared to last year. Per share, basic net profit was EUR 2.20 (EUR 2.00 in the first half of 2007) and diluted net profit EUR 2.14 (EUR 1.91 in the first half of 2007).

 

  

·         In the second quarter of this year, revenues from our operations in the United States grew by 2.3% to USD 4.7 billion (EUR 3.0 billion). Comparable store sales growth was 1.9% (1.0% non-adjusted for the timing of Easter). Revenues in the U.S. in the second quarter of this year were supported by high retail inflation and 24 new stores compared to the second quarter of 2007. During the first half of 2008, U.S. revenues of Delhaize Group grew by 3.7%.

 

During the second quarter, we have seen a reduction in the number of items purchased per visit across our U.S. operating companies, reflecting more prudent consumer spending. The softer economic environment has also resulted in fewer transactions at Food Lion and Hannaford. At Sweetbay, strategic price investments started in the summer of last year have continued to bear fruit as evidenced by the increasing number of transactions and the strongest comparable store sales growth of our three U.S. operating companies.

 

In our three U.S. companies, private label revenues have increased, in particular at Food Lion where during the second quarter private label penetration has increased by almost 150 basis points compared to the same period last year as a result of the roll-out of our three-tier program and customers trading down to meaningful alternatives.

 

At the end of June 2008, Delhaize Group operated 1,575 supermarkets in the U.S. In the second quarter of 2008, Food Lion re-launched 58 stores that were part of the market renewal programs in Savannah, Georgia and Wilmington, North Carolina. The market renewal programs have now covered approximately 500 stores and nine markets since they started in 2004. In addition to the market renewals, during the first half of this year Food Lion opened 11 new stores, closed or relocated 17 stores and remodeled 6 stores. Hannaford remodeled 2 stores and relocated 1 store.

 

In the second quarter of 2008, operating profit decreased by 6.4% at identical exchange rates, due to higher operating expenses as a percentage of revenues. The increase in operating expenses was the result of soft sales, the timing of market renewals that were more weighted towards the first half of 2008, higher energy costs following significant fuel costs increases and expenses related to the data security breach at Hannaford. Also, advertising expenses were higher as a result of the launch of Guiding Stars at Food Lion and the roll-out of the three-tier private label program and the assortment of chilled prepared meals On-the-Go-Bistro in our U.S. companies.

 

Gross margin increased slightly in the second quarter, mainly due to favorable product mix changes at Food Lion, through an increase in private label sales in both fresh and dry grocery categories. Cost inflation was largely passed on to the consumer, with the exception of Sweetbay where price investments that started in the summer of 2007 continued. In June, Hannaford reduced prices on more than 1,500 products to retain price competitiveness. During the first six months of 2008, the operating profit of our U.S. business decreased by 3.1% to USD 477.3 million.

 

In 2008, Delhaize Group plans to open between 37 and 42 new supermarkets in the U.S. In addition, the Group plans to close approximately 13 stores of which seven will be relocated, resulting in a net increase of 24 to 29 stores. Approximately 150 U.S. stores will be remodeled in 2008. Food Lion will remodel 141 stores as part of its market and store renewal programs. Two more market renewals are planned by Food Lion for the year 2008: Richmond, Virginia, and Charlottesville, Virginia.

·         In the second quarter of 2008, revenues of Delhaize Belgium decreased by 0.6% to EUR 1.1 billion. Excluding the negative impact of the divestiture in June 2007 of Di, the beauty and body care business, and the conversion of Cash Fresh stores to affiliates, revenues grew by 2.1 %. Comparable store sales grew by 0.7% (0.4% unadjusted for the effect of the forced closing of company-operated stores on May 2, 2008). Delhaize Belgium continued to record an increase in transactions, but revenues were negatively affected by a lower number of items per transaction as a result of more prudent spending by consumers. During the first half of 2008, Delhaize Belgium revenues increased by 0.1%.

 

During the second quarter, the sales network of Delhaize Belgium grew by 4 stores to 752 at the end of June 2008, including 135 company-operated supermarkets in Belgium, 34 stores in the Grand Duchy of Luxembourg and four stores in Germany. Market share continued to be under pressure but the trend has improved during the recent months.

 

Operating profit decreased by 23.3%. The operating margin of Delhaize Belgium was 4.2% (including the effect of the change in cost allocation policy previously announced). The decrease in operating margin compared to the second quarter of last year was partially due to the divestiture of Di and the sale of Cash Fresh stores to affiliated owners, which had a combined net effect of EUR 4 million on operating profit. Excluding those elements, the operating margin declined to 4.0% compared to 4.9% the previous year mainly as a result of softer sales, higher utility costs, salary indexation and higher depreciation expense, partly offset by cost savings initiatives. For the first six months of 2008, the operating profit at Delhaize Belgium decreased by 17.0% and amounted to EUR 85.8 million.

 

Delhaize Belgium remained committed to its strategic price reductions that started at the beginning of this year, which have been largely compensated through more favorable buying terms. Internal food inflation of Delhaize Belgium remained well below national food inflation in the second quarter of 2008.

 

Delhaize Belgium expects to end 2008 with a store network of between 784 and 789 stores, as a result of the net addition of 46 to 51 stores (including two company-operated supermarkets), compared to 27 in 2007. Delhaize Belgium plans to remodel 16 stores in 2008 and convert the remaining Cash Fresh stores to Delhaize banners.

 

·         In the second quarter of 2008, revenues in Greece grew by a strong 14.5% driven by solid comparable store sales growth, particularly due to the good performance of the stores remodeled in 2007, the acquisition of Plus Hellas and new store openings. These were partially offset by the effects of a strike in the transportation industry and a weaker economic environment. Excluding Plus Hellas, revenues would have grown by 10.8%. Both transaction count and average basket size continued to increase, showing customer loyalty to the Alfa-Beta brand. In the first half of 2008, revenues in Greece increased by 14.7%.

 

Alfa-Beta’s operating margin was 1.0% of revenues due to the start of the integration of Plus Hellas that had a negative effect of EUR 6.6 million on Alfa-Beta’s operating profit. Excluding Plus Hellas, the operating margin of Alfa-Beta was 3.1%, a decrease compared to 4.3% last year due to higher fuel prices, increased staff costs and higher advertising expenses due to timing. Operating profit for the first half of 2008, decreased by 27.3% to EUR 13.9 million.

 

In 2008, the sales network of Alfa-Beta is expected to pass the milestone of 200 stores thanks to 15 store openings and the acquisition of Plus Hellas completed on April 1, 2008.  

 

·         Revenues in the Rest of the World segment (Romania and Indonesia) increased by 15.4% (32.1% at identical exchange rates) in the second quarter of 2008 to EUR 46.5 million, as a result of the expansion of the store network in both countries and high comparable store sales growth. Operating profit increased by 19.3% in the Rest of the World segment to EUR 0.5 million. In the first six months of 2008, revenues grew by 16.6% (32.0% at identical exchange rates) and operating profit grew by 4.6% to EUR 1.5 million.

 

On March 31, 2008, Delhaize Group has entered into an agreement to purchase the La Fourmi chain of 14 supermarkets in Romania for an amount of EUR 18.6 million, subject to contractual adjustments. On August 1, 2008, the Romanian antitrust authorities gave their unconditional approval for the acquisition, which is expected to close in the third quarter of this year.

 

In 2008, Delhaize Group expects to increase its sales network by 25 stores in the Rest of the World segment to a total of 103 stores, including the 14 La Fourmi supermarkets.

 

 

 

Delhaize Group confirms the full year 2008 guidance which it updated on July 18, 2008. In 2008, Delhaize Group expects the following financial results at identical exchange rates (1 EUR = 1.3705 USD) and excluding the 53^rd week in the U.S. and the impact of the acquisition of Plus Hellas:

 

For the U.S. operations of Delhaize Group:

·      Comparable store sales growth of 1.5% to 2.5%

 

For Delhaize Group:

·      Revenue growth of 3.0% to 4.5%

·      Operating profit growth of 0.0% to 3.0%

·      Net profit from continuing operations (including minority interests) growth of 15% to 20%

 

Including the effects of the 53^rd week in the U.S. and the acquisition of Plus Hellas, revenue growth of Delhaize Group is expected to be between 4.7% and 6.2% in 2008, and operating profit growth is expected to be between 1% and 4% (all at identical exchange rates).

 

As already announced our full year 2008 earnings growth will be entirely weighted towards the second half of the year. The reasons for this are:

·      Timing of the expected positive earnings impact from market renewals at Food Lion, with

·      Higher remodeling costs in the first half of 2008 compared to 2007;

·      Roll-out costs of the U.S. private label program in the first half of 2008;

·      Timing of the EUR 60 million planned cost and efficiency savings;

·      Timing of store openings in the Group.

 

Additionally, the second half of 2007 is an easier basis for comparison mainly due the major price investments made last year at Hannaford and Sweetbay and the weaker results of Delhaize Belgium in the second half of 2007, as well as the Sweetbay impairment charge in the fourth quarter of 2007.

 

In addition, Delhaize Group repeats the guidance 2008 (at identical exchange rates):

·      Net financial expenses to be approximately EUR 215 million

·      An effective tax rate between 34.5% and 35.5%

·      Capital expenditures for the Group of approximately EUR 775 million, including USD 750 million for our U.S. operations.

 

Delhaize Group plans to end the year with a store network of between 2,686 and 2,696 stores, as a result of the net addition of 141 to 151 stores.

 

Delhaize Group’s management will comment on the second quarter 2008 results during a conference call starting August 4, 2008 at 03:00 pm CET / 09:00 am EDT. The conference call can be attended by calling
+ 44 20 7162 0025 (U.K.) or +1 334 323 6201 (U.S.), with “Delhaize” as password. The conference call will also be broadcast live over the internet at http://www.delhaizegroup.com. An on-demand replay of the webcast will be available after the conference call at http://www.delhaizegroup.com.

 

Delhaize Group is a Belgian food retailer present in seven countries on three continents. At the end of 2007, Delhaize Group’s sales network consisted of 2,545 stores. In 2007, Delhaize Group posted EUR 19.0 billion (USD 26.0 billion) in revenues and EUR 410.1 million (USD 562.1 million) in net profit (Group share). At the end of 2007, Delhaize Group employed approximately 138,000 people. Delhaize Group’s stock is listed on Euronext Brussels (DELB) and the New York Stock Exchange (DEG).