Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning and welcome to the Analyst Conference Call on the First Quarter 2018 results of Ahold 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 risk and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements.Such risk and uncertainties are discussed in the interim report first quarter 2018 and also in Ahold Delhaize public filings and other disclosures. Ahold Delhaize disclosures are available on aholddelhaize.com. Forward-looking statements reflect the current views of Ahold Delhaize management and assumptions based on information currently available to Ahold Delhaize management.Forward-looking statements speak only as of the date they are made and Ahold Delhaize 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 aren't necessarily the view of Ahold Delhaize.At this time, I would like to hand over the call to Mr. Henk Jan Brinke, Senior Vice President, Investor Relations.

[Henk Jan ten Brinke, Senior Vice President of Investor Relations]

Thank you, operator, and good morning ladies and gentlemen. Welcome to this first quarter results conference call and audio webcast. I am here with Dick Boer, our CEO, and Jeff Carr, our CFO. And after a brief presentation, we will be happy to take your questions. So with that, over to you Dick.

[Dick Boer, President, CEO & Chairman of Management Board]

Thank you very much, Henk Jan, and ladies and gentlemen good morning and welcome to our first quarter 2018 results conference call. We are pleased to report a strong financial performance again this quarter. It proves that the execution of our Better Together strategy continues to bear fruit, delivering sales growth and synergies throughout the business.We're benefiting from our scale and our leading positions both at the U.S. East Coast and in Europe. Our great local brands demonstrate our capability and agility to meet rapidly changing consumer needs and behavior both in our brick and mortar stores and online.Sales grew this quarter by 2.5% with consumer online sales up 23.2%, both at constant exchange rates. Our operating income was up more than 10%, also at constant exchange rates, and the underlying operating margin increased from 3.8% last year to 4% this quarter.In the United States, our comparable sales performance improved, also benefiting from the timing of New Year and Easter, and margins expanded by 30 basis points, driven by synergies. The Netherlands continue to report strong online consumer sales growth of [ 20.3% ]. Online consumer sales is already more than [ 15% ] of our total consumer sales in the Netherlands.In Belgium, we are seeing encouraging sales trend throughout the formats, as our new management team has started to implement commercial and operational improvements. I will say a little more about this later on.Free cash flow was very strong, it was EUR 441 million this quarter. Jeff will provide more background in this in his presentation.Now let me hand over to Jeff, who will take you through the numbers in greater detail.

[Jeffrey Carr, CFO & Member of Management Board]

Good morning, ladies and gentlemen, and thank you, Dick. I'm very pleased with the strong momentum of our businesses, which has continued from the fourth quarter last year into the first quarter. And as Dick mentioned, sales grew by 2.5% to EUR 14.9 billion at constant exchange rates.In 2018, we will report IFRS numbers and not like last year the pro forma numbers. That means, we still include the effect of remedy stores in 2017 comparatives, even though they were sold -- these stores were sold, the final stores were sold in quarter 1 and quarter 2 of 2017.So taken out the effect of these stores, at constant exchange rates sales actually grew by 3.1%.Both underlying operating and EBITDA margins grew by 20 basis points and underlying operating income was up by 8.5% at constant exchange rates to EUR 600 million. While operating income after one-time costs was up 10.5% to EUR 574 million.Finally, lower taxes and financing costs meant income from continuing operations was up at constant exchange rates by 25.6%.Moving on to the U.S., we see comparable sales growth in all of our brands and total comparable sales up 2.8%, keep in mind there was a strong calendar benefit of around 100 basis points from Easter and a benefit of 20 basis points from the timing of New Year in the quarter. Obviously, we expect the Easter effect to be offset in the second quarter.We saw a shelf price inflation of 2.3% in the quarter, and this is higher than we'd expect to see for the balance of 2018. We measure shelf price inflation on a fixed basket and it includes the effect of promotional activity. And during this quarter, we saw significantly reduced promotional activities, for example, at Stop & Shop and Giant Carlisle.Underlying operating margin was strong, as Dick mentioned, at 4.3%, up 30 basis points, as we continue to see the benefit of the synergies impacting our bottom line. As you can see in our interim report, we are now showing our e-commerce sales by segment and while total group e-commerce sales, as Dick mentioned, grew by 23%, the U.S. grew by 9.4% to EUR 181 million in the quarter. And this is a combination of growth from Peapod and the initiatives in each of our other brands.Moving on to the Netherlands. Comparable sales grew by 3.2% in the quarter. And excluding bol.com, comparable sales were up 1.8%. This reflects a very strong comparable period last year at Albert Heijn. Easter provided the benefit of around 90 basis points in the quarter, which, obviously, again will be offset somewhat in quarter 2. However, in this quarter, this was partly offset by the negative impact of New Year in the Netherlands.Net consumer online sales grew by 28.3% in the Netherlands, with strong growth at bol.com and particularly strong growth in our Plaza partners, we grew almost 50%. Underlying operating margins remain strong in the Netherlands at 4.9% and although this is down 10 basis points from last year, this is mostly due to the increased growth and the investments in online. Excluding bol.com, margins were 5.6% in line with last year.In Belgium, as Dick as mentioned , we saw strong net sales growth at 5% and strong growth across all the store formats and comparable sales grew 4.1%, again there was a benefit of around 90 basis points from Easter. But excluding Easter, we're encouraged by the underlying improvement resulting from better operational execution and the new commercial plans, which has translated into higher transaction and basket size.Underlying operating margin [ was ] slightly down versus last year recovered strongly versus the fourth quarter. In Central and Southeastern Europe, we continue to see strong comparable sales growth in Romania, Serbia and the Czech Republic, somewhat offset by the ongoing rebalancing that we see in the Greek market. Year-on-Year in the Central and Southeastern Europe region, we opened an additional 115 stores, mainly small convenience stores and we saw total sales growing 2.6%.In Romania specifically, total sales growth was just under 20% and comparable sales grew 11.9%. Operating margins for the region -- for the segment were flat versus last year at 3%.And moving on to cash flow, as you can see on this next chart, free cash flow stood at EUR 441 million and that's well ahead of last year. Following a strong fourth quarter, I'm pleased to see continued improvements in working capital, some EUR 143 million better than last year. And a little of that may reverse due to the timing of Easter, this leaves us well positioned to deliver our full-year target of EUR 1.9 billion free cash flow.And finally let me move on and discuss our synergy delivery, during Q1 we delivered a total of EUR 100 million cumulative net synergies, that is equivalent to incrementally EUR 44 million in this quarter versus last year.For 2018, we continue to target cumulative net synergies of EUR 420 million, equivalent to EUR 152 million incremental net synergies for delivery in 2018.So with that I finish, and I think it's the 25th time, I'll say thank you and hand back to Dick.

[Dick Boer, President, CEO & Chairman of Management Board]

Thank you very much, Jeff. I will show you some of our business highlights to illustrate how we continue to seek to improve our great local brands. Relentlessly focus on our customers to provide a better place to shop and further strengthen our market-leading positions by innovating and developing new products and concepts.Starting in the United States, where just as in Europe, a healthy lifestyle is becoming more and more important for our customers, all our brands have now implemented the so-called Guiding Stars nutrition navigation program to help customers eating healthier and making grocery shopping more convenient and all at an affordable budget.Food Lion continues to drive volume growth by rolling out its Easy, Fresh and Affordable program. We currently have more than 500 stores rolled out showing a good sales performance in what we consider to be a tough market with strong discount competition. We’re planning to roll out Easy, Fresh and Affordable to another 160 stores in the course of this year. Hannaford has rolled out its digital My Hannaford Rewards program chain with this quarter, offering participating customers a reward of more than 5,000 own brand products as well as personalized coupons for national and regional brand products.In the Netherlands, we are very excited to work with scientists in our Artificial Intelligence Retail Lab, using AI to optimize our supply chain and further improve our product range and availability both in our stores and online.Albert Heijn continues to extend its range of Best Buy products, offering great value for money on basic, daily product with now more than 800 SKUs and more to come.bol.com was again voted for best store in the Netherlands this year, loved for its wide range, fast delivery, and convenience shopping. Third-party Plaza sales grew by 47% with today 20,000 merchants selling products on the bol.com platform. As I said in the beginning of this call, we see encouraging signs of an improved top line performance in Belgium. Xavier and his team are working hard to improve the competitive positioning of the Delhaize brand focusing on health, convenience and great taste.Starting at the end of last year, and throughout this quarter, Delhaize launched successful commercial campaigns focusing on interesting deals that attract new customers to our stores, we're also using best practices for Albert Heijn. Investments in the supply chain is creating a more stable flow of goods, which results in lower shrink and improved product availability in our stores. And as in many of our brands, both in the United States and in Europe, Delhaize continues to significantly reduce sugar in our own products, for instance, in cereals this quarter, as you can see on the slide.In Central and Southeastern Europe, Alfa Beta is successful with their loyalty program offering personalized promotions, with strong redemption to the customers. But as we talked about before, competition is normalizing in Greece, recovering and reopening and remodeling the stores, which clearly impacted our comparable sales growth in Greece.Romania on the other hand posted 90% sales growth, driven by comparable sales growth of almost 12% and successful in new store openings, both in the greater Bucharest area as well in a couple of major cities.Also our brands in Czech and Serbia performed well this quarter, both in supermarkets and our compact hypers with strong comparable sales growth numbers this quarter too.Now before I wrap up, let me briefly give you an update on the Stichting Continuïteit Ahold Delhaize or SCAD in short.As you probably know, the current option agreement between Ahold Delhaize and SCAD is set to expire on December 15, 2018, and provides the possibility to be extended by mutual consent of the contracting parties. After actively engaging with shareholders and other stakeholders in recent months, we decided to adopt 2 important commitments to shareholders. Firstly, within 6 months after the option has been exercised, we will call a shareholder meeting to discuss the situation with our shareholders. And secondly, within 1 year after the option has been exercised, we will call a shareholder meeting to vote on cancellation of the shares issued to SCAD and SCAD will not vote its shares on that matter.We believe that this provides increased transparency, predictability and interaction with shareholders in a situation when the option is exercised. With these 2 important additional commitments to shareholders, we have decided to extend the current agreement for 15 years, effective December 15, 2018.So before we start the Q&A session, let me briefly wrap up, quarter 1 showed a strong financial performance with operating income more than 10% at constant exchange rates. We're well on track to meet our synergy target of EUR 420 million this year, realizing already EUR 100 million this quarter, which resulted in a 20 basis points underlying operating margin.Our free cash flow was very strong and we are confident to deliver a free cash flow of EUR 1.9 billion this year. And as you can see on the slide, we expect to host a Capital Markets Day in the United States on November 13. And before I hand over to start the Q&A session, I would like to thank you on this call also for your support during my 7 years as CEO of Ahold Delhaize. Most of you I have known for a long time, as I am working already 20 years for this company and I met you as CEO of Albert Heijn, [ or in ] my later marathon board positions of Ahold and Ahold Delhaize. When I counted this morning, I counted that I have been presenting 30 quarter of results now with you.And as Jeff said, as my great fellow [ I still remember ] CFO, Jeff Carr, we did together more than 25, and I've been in many, many Capital Market Days and enjoyed the conversation with all of you as well in these calls as on road shows. I'm also proud of what we have achieved, with more than 100% of total shareholder value creation returns in at least the last 5 years or even more in the last 7 years. And that's thanks to all the great work of our 370,000 associates around the globe.With Frans now succeeding me as the CEO on the 1st of July, I'm confident that with our strong leadership, it continue to drive innovation and growth in stores and online, being a better place to shop for our customers , a great place to work for our associates and a better neighbor focused on our sustainability responsibilities and specifically also how we can help our customers live a healthier life. And that will continue creating value for our shareholders. And before I hand over, I would like also to thank Henk Jan Brinke, Head of Investor Relations, because he supported us over the last 7 years, and then me personally in these calls. And I would like to hand it over now to you to ask the questions to us.

[Henk Jan ten Brinke, Senior Vice President of Investor Relations]

Thank you, Dick. Operator, can we start Q&A session?

[Operator]

[Operator Instruction] The first question is coming from Mr. Cedric Lecasble, Raymond James.

[Cedric Lecasble, Financial Analyst]

I have 2 actually on the U.S. So the first one, could you give us a little more color on the volume performance by region or by banner, what has developed positively and where could you make some progress? So second one is on the digital initiatives and digital progress still in the U.S., what have you improved? What is still to be done in terms of convenience alternatives for the consumer, maybe you could elaborate a little bit and tell us where you stand versus competition?

[Dick Boer, President, CEO & Chairman of Management Board]

Thank you very much. Cedric, I would leave the question on the volume in the markets to Jeff. But as we announced already, the 23rd consecutive quarter of Food Lion volume growth I think is a clear achievement of the teams there, but Jeff will allude a bit more on the different markets. And maybe to start with the digital and the online performance, 9% growth, we for the first time now also are specifying, informing you also on the online sales development in the U.S. and in Europe, specifically if the market, how much growth we show, so 9% growth in the U.S. market. We do a [ lot for this moment ]. So Peapod, of course, is our major business in the U.S., but also from a digital point of view, we have now all banners up and running with loyalty card systems. Just Hannaford launched this year their loyalty system, which, of course, the knowledge we get from our customers by using the card, can help them to order easily, to predict their orders better, certainly when they order and use their bonus card to have much more insight, we can help them. For instance, in Peapod, we alert you to check allergies or health support. If you look at the market where we are operating now, there's Peapods in most of our Ahold USA markets. They have now in major cities whole presence of Peapod, we working on more bigger points, certainly with Hannaford. Their growth is outstanding also at Hannaford to go on the Click & Collect solutions. We're testing with Food Lion a couple of initiative, for instance, with Instacart. So we're trying and continue to grow our online business there and also with digitization. So that's really where the focus is. We as a company have been investing over the last decade a lot in it and with our home delivery, we are still on the forefront of the industry in the U.S. market. Maybe Jeff, you want to say something about first quarter on the performance.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, specifically on volumes in the U.S., I think we continue to, as Dick mentioned, to see strong volume growth at Food Lion, we continue to see -- Food Lion as you know in the market where we are seeing more discount activities than any of our other markets. We also saw strong volume growth at Hannaford and in the Giant Carlisle market. Stop & Shop, as we reported over the last few quarters, we don't see a lot of market volume growth and the volumes were pretty much flat at Stop & Shop and down slightly a Giant Landover.

[Operator]

The next question comes from Mr. Bruno Monteyne, Bernstein.

[Bruno Monteyne, Senior Analyst]

My first question is a clarification around your free cash flow guidance, you are talking about a cash tax benefit of around EUR 200 million, but there you see versus 2016. Is that a typo, should that be versus 2017, rather than 2016? I am confused by that. And also you talk about the working capital improvement of EUR 175 million, again this is versus 2016, is it an absolute cash inflow from EUR 175 million, or is it an improvement on working capital free cash flow of EUR 175 million. So a little bit confused by the language there. The second one is all around online growth in the U.S. Do you start seeing any change in dynamics with this sort of Amazon acquisition of Whole Foods and particularly thinking about your statement actually investing more in prices in Peapod, is it on the [ products that you are ] facing potential Whole Foods competition, is it a different range and why do you feel the need to do so? And also could you elaborate a little bit how your pricing at Peapod compares to your normal banner stores, if they are in the same area, are they at the same price or do you have differentiated prices?

[Dick Boer, President, CEO & Chairman of Management Board]

I will start with the online and Jeff will come back to the cash flow and working capital. On Peapod's, we have been investing certainly in the Chicago area, not to say, on development of Amazon Whole Foods. In traditional retail, a lot of retailers are stepping into the online food market now, so most of our regional competitors in the Chicago market, for instance, are now stepping up. They quite often are using their normal store prices. So a lot of pickup points, so it's a lot of Click & Collect but anyway it's, of course, a need for us also to come closer to the traditional supermarket prices with Peapod and that's why we reduced our prices in the Chicago area to be more competitive. That's similar, by the way, what we do in other markets, so we are trying to get closer to the regional Stop & Shop prices and Giant prices. Traditional Peapod was always up priced but with upcoming competition of traditional retailers also with online delivery models but mostly with Click & Collect models, we feel the need also to continue to invest in our price points in Peapod.

[Jeffrey Carr, CFO & Member of Management Board]

Bruno, coming back on the free cash flow, just to be very clear, the free cash flow guidance for this year is EUR 1.9 billion. The tax benefit of EUR 200 million was a benefit relative to 2017. The benefit in working capital, the reason we put 2016 in there, which is correct is that we set at the Capital Markets Day a baseline that we said we would get EUR 175 million in 2017 and '18 from a baseline of 2016. And I can understand if you read the 2016 to include tax, it wasn't meant to show that. So if that's confusing, apologies, but the tax is a incremental benefit due to the -- mostly due to the U.S. tax reform, which is a '18 versus '17 benefit. I hope that's clear.

[Bruno Monteyne, Senior Analyst]

So just to rephrase, Jeff. So the EUR 200 million of tax is versus last year and the working capital improvement of EUR 175 million, that's the level of working capital improvement, you would expect this year.

[Jeffrey Carr, CFO & Member of Management Board]

No, that was the target we set in the Capital Markets Day at the end of 2016. That was relative to a baseline of '16 over 2 years. Now we already achieved pretty much that number, so you could interpret it that we'll deliver. So we haven't given a specific target for '18, we gave a target for 2 years '17 and '18 off a baseline of '16. I think we achieved around about EUR 140 million last year. And if you look at this quarter's performance, you can see we're exceeding the EUR 175 million over 2 years, but we didn't give a specific working capital target just for '18.

[Bruno Monteyne, Senior Analyst]

Okay. So that's not really new guidance, sort of it's a cumulative.

[Jeffrey Carr, CFO & Member of Management Board]

We're just reiterating what we said at the Capital Markets Day in December 2016.

[Dick Boer, President, CEO & Chairman of Management Board]

And it's cumulative there, for you've had most of it already and so that's not really new news , if anything it's..

[Jeffrey Carr, CFO & Member of Management Board]

No, I think the pleasing issue is that we continue to see improvements in quarter 1 after a strong performance in quarter 4. And I think you could reasonably assume we should be exceeding the EUR 175 million.

[Operator]

The next question comes from Mr. Alan Vandenberghe, KBC Securities.

[Alan Vandenberghe, Senior Financial Analyst]

I have one and it's regarding the outlook statement in the press release, it is the first sentence, where you reiterate the fact that you're confident to reach EUR 750 million of gross synergies for 2019 and after that you mentioned that, of which more than EUR 250 million will be reinvested in addition to your -- for customer savings, does that imply that from the EUR 750 million, you will reinvest more than EUR 250 million in pricing and as such, the net synergy target of EUR 500 million will also be partially used for price investments.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, Alan. Let me take that, this is Jeff. What we said in February, we were very clear that we saw around 2/3 of the net synergies in 2017 impacting the bottom line. And we give clear guidance that we expect that ratio of net synergies in terms of incremental EBIT or incremental underlying operating profit continuing to flow through in 2018. Therefore, I can confirm that we're still delivering the EUR 500 million, we are still delivering the EUR 750 million, but of the EUR 500 million, what we said in '18 is we expect to see around about 2/3 of that incrementally hitting the bottom line. So by default, you can assume that what isn't on the bottom line is, therefore, incremental to the EUR 250 million, it has been used in the U.S., for example, mostly to help defend our market position. So that you could say it's price investments, but we still see significant margin improvement, 20 basis points this quarter, 20 basis points last year relative to 2016. But we were very clear in February that for '18, we continue to see around about 2/3 of the EUR 500 million impact on the bottom line, and we see that evidenced by the margin improvement this quarter.

[Operator]

The next question is coming from Mr. Fernand de Boe, Degroof Petercam.

[Fernand de Boer, Research Analyst]

I have actually 2 questions, one is on Peapod, the fact that you are now heavily investing in price at Peapod, does it also mean that your operations, l believe, everything is on order at Peapod? And the second one is on the Netherlands. I think you mentioned it's around 1.7% comparable sales growth for Albert Heijn in the Netherlands. Does that mean that during the quarter, you regained the lost market share at the beginning of the quarter and how do you look at that going forward on the Dutch market?

[Dick Boer, President, CEO & Chairman of Management Board]

On the Netherlands, we clearly flagged that at our year-end results that we had a tough start in the Netherlands comparing ourselves to a very strong start of the quarter 1 in 2017. We clearly explained it [Technical difficulty] time because of continuity programs at that moment. We're much more attractive in 2017 and ' 18, so that was the way we explained it also at year-end. We've clearly seen in the Easter period regaining ourselves in the Dutch market. But, of course, the loss of the first quarter has not been compensated fully by that Easter period. But we still have a year to go, and I'm confident that the team of Albert Heijn is working hard to regain back that slow start of the year. Let's put it in this way and all the campaigns and all the things they do currently should help them to drive that back. Secondly, of course, what you see is that, Albert Heijn is growing fast in online. So another quarter of 28% growth in the online business in the Netherlands for [ ah.nl ] and bol is clearly also taking that you will see some slowing of our store sales growth in the quarter, but again the slow start [ of growth ] and more coming from the negative start of the continuity program influenced in the first 2 months. On Peapod, we have been addressing a lot of these operational issues over the last 2 years. As you know, our New Jersey warehouse was certainly in the beginning not delivering what we were expecting. It's now in a much better shape delivering the orders, it's continuing to grow also there. We are able to get more deliveries out of the New Jersey warehouse and we're getting up to reasonable good levels and even increasing our levels going forward. So growth is there, first of all, and the same is in Chicago, were some issues in the beginning, but also that's all solved.

[Fernand de Boer, Research Analyst]

Maybe one on Belgium, fairly good comparable sales growth there, is this kind of sustainable level or -- and that do you see this continuing going forward?

[Dick Boer, President, CEO & Chairman of Management Board]

No, it was a bit influenced by Easter, of course, also in Belgium, so let's not forget that, there is also some Easter impact. On the top off my head, I think it was 1% but I'm looking to my colleagues here. But secondly, I must say I'm pleased with the recovery we see, most important also we see it in all formats, we see it also in our own stores. And I think as I explained also in our call this morning, we see improvement on the operational sides, the team has been working hard to more engagements with the associates. But more important also, the engagement with our customers. One of the things Xavier has been doing is first get the basics right, operational, then he was working and continue to work also on the commercial side to make more attractive promotions, learning also best practices from the Netherlands, taking that into the commercial programing. And last but not least, from an engagement to his customers, he has been taking what we call the [ right-table ] in the stores where we actively engage with customers talking about what they expect from us. Affordable is, of course, always necessary for every retailer, but also regain again the pride of Delhaize with the product, the innovation and adding there a nice color of innovation and I think it's clearly what he is doing and that seems not only to me, but I think for all of us that gives us confidence going forward for Belgium.

[Operator]

The next question is coming from Ms. Fabienne Caron, Kepler.

[Fabienne Caron, Head of Food Retail Sector]

3 quick questions. The first one on the U.S., Jeff you said that the level of promotion at Stop & Shop in Giant Carlisle went down in the quarter, can you explain why? Is it because the market was a bit less promotional? And the second one would be on Belgium, did you benefit from the strikes of Carrefour and Lidl? And third one, I see that the sales from the own stores in the Dutch market was slightly down in the first quarter, how do I reconcile that with the positive like-for-like at Albert Heijn please?

[Dick Boer, President, CEO & Chairman of Management Board]

The Albert Heijn, I tried to explain those to Fernand, what you see, of course, the cycling to a very good quarter last year, the first quarter is having impact on our, let's say, stores, owned or franchise, it does not make any difference. That's what we've seen recovering in the third period of the quarter, certainly supported also by a good Easter and that's why you see, and if you do the math well and you did, that, let's say, the growth of traditional stores in the Netherlands was on the low side, but you should still see positive Albert Heijn supermarket sales, if you do the math. Because then if you take the online off, you still see positive like-for-like for the supermarkets in the Netherlands. So that's encouraging certainly versus the weak start we had. On the second question you asked on Belgium. No, we didn't impact [ a lot of our strikes ], they were minor on the impact for Delhaize, that's also positive, because that's really that we are regaining customer traffic and we are also regaining more customers into stores who are spending more. And that's where I alluded to in my previous discussion on Belgium. And then on the U.S., Jeff, you have a question direct from Fabienne on the U.S.

[Jeffrey Carr, CFO & Member of Management Board]

No, there's nothing specific, Fabienne, I think on Stop & Shop and Giant Carlisle, we had a much heavier promotional cycle in the first quarter of last year. There's a couple of things as we look at this year, we've been looking at the effectiveness of some of those promotion activities. We continue to look at that, we've been looking at that for some time. And fine-tune that and we were able to lower the level of promotion in some areas, without seeing any real detrimental impact. I do think, obviously, we were also cycling a very deflationary period last year that resulted in the inflation number 2.3%. I do think looking forward, we will see lower inflation through the U.S. business. By the way, there's quite a range of inflation across different brands, we see much less inflation in the Food Lion markets but I do think looking forward, we'll see that number come down. I don't see us returning to a deflationary environment at this point. I don't see any indication of that, but I do see us coming down to a lower number than 2.3% as we go through the Q2 in the balance of this year.

[Fabienne Caron, Head of Food Retail Sector]

Okay, thanks a lot. And Dick, all the best for the future.

[Dick Boer, President, CEO & Chairman of Management Board]

Thank you very much, Fabienne. I will miss your Paris visits on the shareholder meeting.

[Operator]

The next question comes from Mr. James Grzinic, Jefferies.

[James Robert Grzinic, Equity Analyst]

Dick, best of luck on your future endeavors also from me. I just had 2 very factual questions really, the first is can you perhaps clarify the scale of market share gain you enjoyed in Belgium in Q1. I'd be interested in hearing that. And the second one, can you perhaps specify what the weather impact would have been in the U.S. in Q1? You call it out in the release and you helpfully gave us the calendar help, what was the snowy weather impact in Q1?

[Jeffrey Carr, CFO & Member of Management Board]

Let me start maybe with the weather. I think you can see a number of around 30 basis points from weather. So if you take into account weather, you take into account New Year, about 20 basis points and 100 basis points from Easter but, obviously , the only one which will affect Q2 is the Easter effect.

[Dick Boer, President, CEO & Chairman of Management Board]

Yes, and on Belgium, we gained market share in the first quarter.

[James Robert Grzinic, Equity Analyst]

I was just wondering, Dick, sorry, the scale of that gain?

[Dick Boer, President, CEO & Chairman of Management Board]

Top off my head, I don't have it. no, I don't have it. I think it was 30, 40 basis points, something like that. 30 is correct, what I hear -- 40. I think it's [ 30 or 40 ].

[Operator]

The next question will come from Xavier Le Mené, Bank of America Merrill Lynch.

[Xavier Le Mené]

2 questions if I may. Just on Belgium, you used to have 3% operating margins target, so is it still valid and what is the time frame on this? And the second one, can you comment a bit the competitive landscape in the U.S. maybe the [ Carolina ] area and also the Stop & Shop area?

[Dick Boer, President, CEO & Chairman of Management Board]

We said, I think in the past also, that we believe that Belgium should go back to A normalized operating margin between 3% and 4%, that's what we said also and we still believe that's possible. Of course, you have to acknowledge that, of course, Belgium has a huge [ parse ], 50% of their sales is affiliate. So that's why it traditionally is a bit lower than other markets, where we have fully-owned stores. So that's a bit where you see a [ big ] difference, but that also, of course, is lower capital involved for that. So that's what we still believe, Xavier will later this month, I think even in the first half year, also tell more about the strategy going forward for the Belgium market and I'm sure it will be part of our Capital Markets Day, although I'm not there, but on the 30th of March to tell a bit more also what we do there. So I'm sure that that's going forward. And I'm pleased to see and I would stress this also, if I see how Belgium and Delhaize has been going through this last 2 years, and where we are today, I think there's a lot of new energy. I see a lot of, let's say, renewed view. And I think Xavier is a straight operator with A good background, I mentioned it also, his mark in France and Romania is still visible there on the growth. so I'm expecting also that he will make his mark here in Belgium. On the competitive side, we've seen, of course, continuation in the U.S. of the normal competition , I would say. Walmart continue to invest, we've seen that over the last quarters. less of an impact for us in the Northeast as you know, less impactful with Walmart but clearly for the Carolinas. We've seen Lidl, as you all know starting last year, we have not seen the impact as everyone was predicting and that's good news. Although we should acknowledge this is a formidable competitor with a -- certainly we'll adjust their format. And so we'll continue to see them going in, we will expect and expect less openings this year than in the plans. So that's good news. In the Carlisle markets, I was there recently, we also see similar trends as before, Walmart continue to invest. But also [Ahold ] is there. But our Giant Carlisle business has been very resilient also this quarter, as you can see, with also new leadership there was building the brand, so let's not forget the structure we have now in place allows also the brands to be more regionalized and because we have a brand-led organization since the 1st of January, teams are building their brand plans, their structure, their strategy. So they are moving now into the right way forward and I'm 100% confident that -- also that will lead to more agile in a way of acting towards your competition in the market.

[Operator]

The next question comes from Mr. Andrew Porteous, HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A couple if I may, it's quite an inflection that you've seen in Belgium, appreciate you've talked about it a little bit, but is there anything, in particular, you can pick out in this quarter that's really driven that inflection in comparable store growth, is it just the change of management? And then the second point was just really a clarification around free cash flow, you've got your EUR 1.9 billion of free cash flow guidance and you've got your EUR 175 million of working capital, is it fair to say that the EUR 1.9 billion is based on you achieving that EUR 175 million and if you do a little better on the EUR 175 million, you'll do a bit better on the EUR 1.9 billion?

[Dick Boer, President, CEO & Chairman of Management Board]

Well, let's take the first question. Commercially and operationally, we, of course, have been stepping up and that's exactly [ why ] Xavier is leading that, but he's not doing that alone. So with his team and with his people, he set clear guidance again on operational improvements, logistical improvement, we had issues last year, was the shelf enough full? So that has all been stepped up already by Xavier, have been working diligently with our leadership on including more the store operations, with engaging our staff, something was clearly missing. So I our leader of operations who has taken really the step-up also with engaging with store staff, which I think is important in the Belgium market. Thirdly, commercially stepped up in commercial campaigning much more, let's say, surprising to the Belgium customers, learning a bit from as well the Dutch, as well as the experience Xavier brings himself to be a bit more, let's say, more surprising to our customers with his campaigns, they have strong campaigns going out, which is helpful. And last but not least, really having listen to customers what they want. And I think that's what you see back in his plans and I'm really confident with the leadership now in place, that Belgium can be a successful brand and will be a successful brand as it always has been 115 years long even going forward even further.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, Andrew, just on the free cash flow, again, let me reiterate the EUR 175 million working capital improvement was a 2-year target for 2017 and '18. Obviously, if we exceed the EUR 175 million, then that's a positive to free cash flow. But I think it's too early in the year to start talking about improvements on our EUR 1.9 billion free cash flow target. If you remember, we significantly exceeded free cash flow targets last year, we had a target of EUR 1.6 billion and we delivered EUR 1.9 billion. I think if we deliver another EUR 1.9 billion this year it's a very strong performance. But, obviously, working capital is an important part of that number. We are pleased with the numbers that you see in the first quarter, but the improvements in working capital have continued to follow in the fourth quarter. And as I mentioned earlier on the call, there is good reason to think that we can exceed the EUR 175 million target that we gave in 2016, which was for an improvement in '17 and '18 over a 2-year period. So I hope that's clear.

[Andrew Ian Porteous, Analyst, European Retail]

Appreciate the color. So just one quick follow-up on the U.S. if I could squeeze it in. You talked about Walmart investing in pricing. You've obviously reported sort of 2.3% inflation. Could you just give a bit of comfort around the price gap value you've perhaps not seen [ in a while ] at the moment?

[Dick Boer, President, CEO & Chairman of Management Board]

No, we are very close to the same price points in the Food Lion market, because that's where Walmart is most aggressive as you know, that's also where Walmart's impact is. I flagged it because it's something which is widespread in - and in your own reports, Walmart continues to invest. But we also noted that Walmart balances that out. So you might see that some super KPI would invest more and then compensate in some other categories by increasing the prices or at least not lowering the prices further. If you look at our Stop & Shop market, where Walmart is less impactful, there the gap with Walmart has been widened a little bit, but on the other hand, our strong position -- our position price points versus the traditional retail, has strengthened. So that's how I would explain the 2 different markets and the 2 different entities. And, of course, let's say, full service supermarkets, of course, have different customers traditionally, than the Food Lion, Walmart [ head-to-head ] because it's more head-to-head in competition there.

[Operator]

The next question comes from Mr. Nick Coulter, Citi.

[Nick Coulter, Director]

Three and a half questions from me, if I may. Firstly, it's a follow-up on the U.S. promotion, [indiscernible] with the rebranding work that you are beginning. And if so, is it the beginning of a migration to less of a hi-low strategy, any detail around what you think would be appreciated there? Secondly on the [ expo ] margin in the Netherlands, could you give a sense of what you invested for ah.nl [indiscernible] bit more than just growth in a lower margin business. I don't know whether the [ promo ] impact of [ oven versus pan ] had a margin effect or not, but just a little bit more sense around the moving parts within the Netherlands margin would be great please. And then lastly, could you talk a bit more about the drivers of the working capital improvement as you move beyond the EUR 175 million that you've targeted and why they should stick? And then just a quick supplementary, if I may, on the tax rate, which I think was 21% for the quarter. Should we take that as indicative for the year?

[Dick Boer, President, CEO & Chairman of Management Board]

Well, I think the last 3 questions are all for Jeff. So I will start with the promotion part. We, of course, are in the traditional [Ahold USA ], more really a hi-low operator. And as Jeff explained, we tuned a bit down the promotions during first quarter certainly on some of the categories, which were highly promoted like meat and poultry, so there we tuned down a bit. I wouldn't see that at this moment as a revised strategy at all, that's clearly not what it is. And I wouldn't read into that, Nick, at this moment. Of course, the teams are working and building their brand strategies now, but, traditionally, certainly our [ Ahold USA ] operations have been always a hi-low operator and known by the customers as a hi-low and highly -- or at least in effective promotion, but highly also. So I don't want to read it in this tuning down of a bit of the promotion that will be now immediately followed by a new strategy. And certainly at the later stage, again at Capital Markets Day, teams will explain much more about strategy going forward on Stop & Shop, but I wouldn't read more in that than I just said.

[Nick Coulter, Director]

Was that lower promotion reinvested into price or they just into different promotions or what?

[Dick Boer, President, CEO & Chairman of Management Board]

No, I think it's really effective -- being more effective in your promotion. So you, as you know, you can do a lot of extra -- more promotions, which doesn't affect anything your sales [indiscernible], and that, of course, would lead -- that's what Jeff explained, a bit higher inflation because you sell the product at a normal price and not at a promo price. That's why the inflation of the Ahold USA markets, certainly Stop & Shop was a bit higher than the traditional inflation in the market. So we've not invested back in anything out of it.

[Jeffrey Carr, CFO & Member of Management Board]

Dick, just to add, I mean, there has been a small movement over to more EDL, everyday low pricing, that we have seen over the last couple of years in USA, we talked about that in the past.

[Dick Boer, President, CEO & Chairman of Management Board]

Yes, I know, but that's already -- yes, I agree with you, Jeff. So yes, of course, we started already a couple of years, Nick, so that's a trend we continued but I wouldn't read it now as a complete change from hi-low to EDL.

[Jeffrey Carr, CFO & Member of Management Board]

I think very quickly on the other areas on the tax rate, yes, I think we've given guidance of low 20%. And I think this quarter was in line with that for P&L effective tax rate. On the working capital improvement, I don't think there's anything specific to say except what experience tells me is the whole purpose of working capital is, if you focus on it, you can make improvements, and we have the whole operations and our teams, not just in finance, focusing on all aspects of working capital. And certainly most of the improvement we see is in inventory management and in payables. Payables, we very much [indiscernible] pace to our terms, in terms of aligning terms with suppliers, we see still some opportunities to improve our payables. I think inventory, there's still some opportunities to further improve our inventory management and we'll continue to do that. So I said, the main aspect of why we see the improvements is just a case of focus and having management focus on that. Then in terms of the Netherlands, ex-bol, the margins were flat at 5.6%. So there's no real news to report in terms of this -- quite limited synergies coming through into the Netherlands, in the first quarter. I think we have seen more investment in ah.nl but I don't think there was significant numbers. So I think overall, the biggest impact in the group Netherlands margin was the effective -- both the growth and the extra investments in bol. Having said that, the overall performance of bol in terms of EBITDA, we mentioned last year it was break even EBITDA in bol, will be positive EBITDA in 2018. It continues to grow at 30%. So the weighting of that is quite a significant impact.

[Operator]

The next question comes from Mr. Andrew Gwynn, Exane.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

So, 2 questions from me, the first is, how do you think that life after synergies. Obviously, the Group is growing earnings at the moment, if you back out there is synergies I think profit maybe sliding backwards, a little bit. So do you think is we sort of think about 2019, '20, that should be also underlying assumption. And the second is why does Ahold need to [indiscernible]?

[Dick Boer, President, CEO & Chairman of Management Board]

I will take it last one. And Jeff, the first one, and I leave the first one to Jeff to answer.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, Andrew, I think very much -- I have seen our teams really focusing on our continuous improvement, say, for our customer programs. I think these are critical to all of our brands as we go forward into '19 and '20 as the synergies become less impactful. We have many, many really exciting initiatives in terms of lowering our cost base, both in terms of right through the P&L and effectiveness of promotions we discussed, is one of those areas that we focus on to make sure that we get the right return on investment on the billions of dollars and euros we invest in promotional activity; our activities in buying better, educating our buyers and really going through fact-based negotiation programs. Looking at our packaging and continue to optimize our private label packaging throughout all of our businesses and to improve the quality of our private label, but at a lower cost and more efficiency in terms of reducing plastic, which is good for the environment, it's good for our cost basis, it's good for our customers. In terms of looking at our labor cost, in terms of looking at our overhead cost, we have many initiatives going on in the group and that just becomes more important in 2019 and '20 and I don't want to give long-term guidance on margin. But clearly I don't think unless -- if I go back to how I described that in Ahold terms pre-merger, pre-synergies, I would focus on flat margins using, [ say, for ] our customer initiatives to add to our price investments, our quality investments, so that our key focus is to grow the top line and not to improve margin and I think that's a reasonable assumption for the future. So, I'm very excited about how those, say, for our customer programs can come along and ensure that we can protect our position once the synergy programs are complete in the first half of 2019.

[Dick Boer, President, CEO & Chairman of Management Board]

I think it's a [indiscernible] confidence with the consensus, which is out in the market also for the year 2018. And if you look at the quarter, I think we are on the mark for that. So that's also where we prove, I think, as a company to deliver and I can only admit also what Jeff is saying, is what we do currently also again on top of synergies working with safe invest programs has been incredible already in the team. So I'm really excited about it again and under that leadership of Jeff, I'm sure that will continue to go as he did over the last 7 years with me. But then on your last question, regards first question I don't know what it was? Let's also take this last point, which you asked that if we have and let's say, we are also convinced that the best form of protection is a good economic performance of the company. That's first and foremost. And we've done that over the last decade as a company, and I am really convinced that that will continue also going forward, but we also believe that the foundation is in the best interest of the company and all the stakeholders because it gives us a procedure in place that allows us, if needed, to fully and carefully investigate alternative scenarios and take the time for that, that's in interest of all our stakeholders, including our shareholders, and that's why we believe that the foundation is the right thing to have. That's why we today announced that we will extend the foundation, but we also listened carefully to all our stakeholders over the last couple of months and certainly meeting as of the 28th of February almost close to 150 shareholders and other stakeholders. And that's why we have made new commitments, which we announced this morning also. The commitments to ourselves are that within 6 months after the option has been exercised, Ahold Delhaize will call a shareholder meeting and even in the event the option is exercised, Ahold Delhaize will call a shareholder meeting to vote on cancellation of the shares issued to SCAD within 12 months, that's a clear commitment. But also when that shareholder meeting will be called, and at that moment SCAD has agreed to refrain from voting on the matter. So I think we have been making clear that we extend the option, but also that we did it in a transparent way and listen to all our stakeholders.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

Sorry, just on the final point, I mean, obviously, this shareholder vote, does that then stop the foundation from sort of coming back, that sort of draws a line in the sand and --?

[Dick Boer, President, CEO & Chairman of Management Board]

At that moment, yes. If we have the shareholder meeting and, let's say, we can so we vote on the cancellation, at that moment the SCAD will, of course, cancel, the shares will be canceled and shareholders will vote for that. And I guess SCAD will not [ throw it in ] themselves. Of course, then the current agreement will stay but at that moment, the length of the agreement has been shortened in a way from 2 years to 1 year. And I think that's a good for 1 year, at least, when we can call the shareholders meeting within that year and then we have the shareholder meeting, you can have the discussion with your shareholders.

[Operator]

The next question comes from Mr. Robert Jan Vos, ABN AMRO.

[Robert Jan Vos, Analyst]

.I have 2 small questions remaining. You mentioned online growth of 9.4% in the U.S. in the first quarter. Can you perhaps share what the growth rate for Peapod was in the quarter and the second question, I think you pretty much answered it, but just wanted to check. It's on SCAD, prior to the additional commitments that you issued today, in the event of shares issued to Stichting, these shares were then issued for, did you say, 2 years, max. Is that correct? So the changes that the max move from 2 years to 1 year, can you elaborate on that?

[Dick Boer, President, CEO & Chairman of Management Board]

What you do, Robert Jan, is the last question is in the traditional way the SCAD has the right for 2 years. We now will call a shareholders meeting within the year and that will then lead to cancellation of the shares after the shareholders meeting has been held.

[Jeffrey Carr, CFO & Member of Management Board]

On the online, no is the answer. I think we've increased the transparency of our online sales significantly by reporting online sales by segment. I think that gives a lot of more clear transparency. Beyond that, obviously, the importance of Peapod is the main U.S. constituent part of our online business. It's still something like 85% of our online business in the U.S., but we do have other growing areas like Hannaford to go and I think I don't want to get into then dividing up the U.S. into smaller parts. It's fair to say all parts are growing and I wouldn't get into and then breaking out some parts of the U.S. e-commerce growth. But I think that transparency is something, which we, I think, will benefit the market and this is a positive step that we've made going forward.

[Robert Jan Vos, Analyst]

Alright, thank you, and happy retirement to you, Dick.

[Henk Jan ten Brinke, Senior Vice President of Investor Relations]

That ladies and gentlemen concludes this conference call and webcast. Again, thank you for joining and have a nice day.