Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, good morning, and welcome to the Analyst Conference Call on the First Quarter 2019 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 risks and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the interim report first quarter 2019 and also in Ahold Delhaize's public filings and other disclosures. Ahold Delhaize's disclosures are available on aholddelhaize.com. Forward-looking statements reflect the current views of Ahold Delhaize's management and assumptions based on information currently available to Ahold Delhaize's management. Forward-looking statements speak only as of the day 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 are not necessarily the views of Ahold Delhaize.At this time, I would like to hand over the call to Henk Jan ten Brinke, Senior Vice President, Investor Relations. Please go ahead.

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

Thank you, operator, and good morning, ladies and gentlemen. Welcome to our first quarter 2019 results conference call.I'm here with Frans Muller, our CEO; and Jeff Carr, our CFO. And after a brief presentation, we're happy to take your questions. So without further ado, over to you, Frans.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you very much, Henk Jan. And ladies and gentlemen, good morning, and welcome to our first quarter results call. We reported a solid first quarter, growing both our top line and our bottom line compared to last year. As our results are starting to illustrate, the execution of our Leading Together strategy is on track. Throughout our businesses, we help our customers make healthier choices. Innovative solutions make shopping more convenient and less time-consuming. And we continue to invest in our network both in stores and online.Now let me give you a few highlights for the first quarter. Sales grew by 1.5% at constant exchange rates and was negatively impacted by the timing of Easter, which was in the first quarter last year and fell in the second quarter this year. Net consumer online sales grew by 25%, on track to meet our target of around EUR 7 billion in 2021. Our underlying operating margin remained stable at 4.4% compared to last year, and net income was up 2.4% versus last year at constant rates. Our U.S. business showed good performance with margins benefiting from synergies and with savings ahead of investments in our customer proposition as part of our Save For Our Customers program. The Netherlands performed solidly with margins including some start-up investments in logistics and distribution this quarter. Belgium had fewer opening days compared to a year ago, but we continue to see further operational improvements in the business. And our business in the Czech Republic and Romania reported a strong performance against this quarter.Now let me hand over to Jeff.

[Jeffrey Carr, CFO & Member of Management Board]

All right. Good morning, ladies and gentlemen, and thank you, Frans. I'll just highlight a couple of facts before we get started. This is the first quarter that we're reporting results under IFRS 16. Therefore, there are a few numbers that may look a little unfamiliar. However, as we discussed in our March 27th update, we've adopted the full retrospective approach, and the comparative figures for 2018 have also been restated. And second, as Frans mentioned, there's a significant impact from the timing of Easter. The Q1 sales numbers in 2018, Easter was included in the final week of the quarter. And in 2019, obviously, it falls outside of the quarter into quarter 2.So moving on. As we mentioned, net sales were EUR 15.9 billion, up 6.3% at actual rates and 1.5% at constant rates. Underlying EBITDA at EUR 1.4 billion is up 4.6% at actual and down slightly 0.4% at constant rates. Underlying operating income was EUR 695 million, up 6.8% and 1.4% at actual and constant rates, respectively, and that was partly due to lower D&A charges in the quarter, as we've previously mentioned. Underlying operating margin was flat at 4.4% compared to last year.Now if we move on to look at the segment reporting. In the U.S., comparable sales grew 1.2%, and that's 2.2% adjusted for the impact of Easter. As Frans mentioned, we had strong synergy in Save For Our Customers delivery in the first quarter. And therefore, underlying operating margin was particularly strong in the quarter at 4.9%, up 30 basis points versus last year. However, we'll see more investments in our customer proposition in the following quarters, and I'd not expect to see that high trend of margin continue. In the Netherlands, comparable sales grew at 2.9% or 3.2% when adjusted for Easter and also a New Year effect that comes in for the Netherlands. I'm delighted that bol.com and ah.nl continued their strong sales development, and we saw increased net consumer's online sales, which grew by 29.5% in the quarter. Underlying operating margin was 5.0%, and that's down 20 basis points. And as Frans mentioned, that's partly due to the ramp-up costs related to the opening of Albert Heijn's new mechanized warehouse. In Belgium, comparable sales decreased by 2.3%. However, if we adjust for Easter and the fact we had fewer trading days compared to prior year, comparable sales were down 0.3%, remember cycling a very strong first quarter last year. Underlying operating margin of 2.4% was 10 basis points ahead of last year. In CSE, net sales grew by 2.4% at constant rates, and comparable sales grew by 0.8%. Romania and the Czech Republic showed very strong comparable sales growth while Greece remained negative in the quarter. Underlying operating margin was 3.2%, and that was down 50 basis points mainly due to higher labor costs in Greece and in the Czech Republic.Now I'm going to move on now and talk about synergies. We're very proud obviously of the work we've done to deliver the merger synergies, and this work reaches a conclusion in quarter 2 of this year. And here, you can see we're very close to delivering the final results, which will be EUR 750 million of gross synergies, EUR 500 million of net synergies at a run rate through the first quarter of EUR 488 million of net synergies through the end of the first quarter. Of course, we're not dwelling on these achievements. And already, in 2019, our teams are focused on our Save For Our Customers programs, which are running on track in the first quarter with our full year plans, which is to deliver EUR 540 million of savings in 2019. And obviously, we have a target to deliver EUR 1.8 billion in the next 3 years by 2021.Now looking at free cash flow. Our target for the year under the IFRS 16 definition is EUR 1.8 billion. And despite negative free cash flow in Q1 and the Stop & Shop strike in Q2, I remain confident we can achieve this for the full year. As you can see, operating cash flow in the first quarter was strong, and that remains an important KPI. However, we had a negative working capital outflow in the quarter. This was EUR 195 million adverse to last year largely due to the timing of Easter. Additionally, cash tax of EUR 226 million was high in this quarter, and that's just purely due to a phasing issue. And then capital expenditure of EUR 452 million was significantly higher than last year. And obviously, those are all manageable impacts.So if we move on, in summary, in Q2, we will deliver on our synergy program. However, we will see the benefits as we ramp up our Save For Our Customers program continue to come through in the balance of the year. The Stop & Shop strike is expected, as we've already mentioned, to have an impact on underlying operating profit of $90 million to $110 million in Q2. And consequently, we've adjusted our guidance, and we now expect to see full year group margins slightly lower compared to last year and earnings per share growth to be in the low single digits.So I'll conclude now and hand back to Frans. Thank you.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you very much, Jeff. Quickly we're now on Page 11 of the deck. And before I give you a brief overview with some examples of how we are implementing our Leading Together strategy throughout the business, I'd like to give you an update on where we are at Stop & Shop 2 weeks after the strikes in our New England stores.The members of the UFCW unions ratified the new collective labor agreement last week. We feel that the new contract is fair and responsible. Our total labor costs at Stop & Shop is expected to increase in line with inflation.As we announced on April 23, we estimated a sales miss of $200 million in the 11 days of strikes, leading up to and including Easter. As a result of lower sales, increased product waste and additional supply chain costs, we anticipate a one-off impact an underlying operating income of $90 million to $110 million in the second quarter.Now 2 weeks after the strikes, customers are coming back, and sales continue to ramp up. We continue to do preparation for the next phase of the rollout of Stop & Shop's reimagining program in Long Island, New York, based on the learnings from the remodeled Hartford, Connecticut stores in the fourth quarter last year. And we are still awaiting FTC approval for the acquisition of King Kullen stores on Long Island.A few other highlights in the U.S. Food Lion announced that it's investing $158 million to remodel 92 stores in South Carolina this year as well as $40 million to remodel 23 stores in Virginia as part of the Easy, Fresh and Affordable program to make shopping easier with simpler in-store navigation, expanded variety and enhanced customer service experience.Giant/Martin's launched its new online brand, Giant Direct, in partnership with Peapod Digital Labs by offering a pickup option where customers' online orders are delivered directly to their vehicles outside the store. It will also provide same-day delivery solutions in markets where only next-day service is currently available. Giant Food launched its Nutrition Made Easy podcast, making it even easier to learn about healthy eating for consumers and associates who are trying to eat better or want to know more about how food affects health and wellness. And it's hosted by experts, Giant's own nutritionists.Hannaford now has already nearly 1.2 million customers signed up to its My Hannaford Rewards loyalty program, a unique and personalized way to save money and rewarding customers for buying our own brands.On Slide 13, we move to Europe. In the Netherlands, Albert Heijn launched the Prijsfavorieten, Price Favorites, a range of more than 1,000 fresh and nonperishable popular high-quality products at everyday low prices, and we'll further extend this range with several hundreds of new products in 2019.bol.com and Albert Heijn.nl continued their strong sales performance with net consumer online sales for the segment up almost 30%. And Albert Heijn plans to open a fifth online fulfillment center in the third quarter and is expanding the number of distribution hubs with smaller trucks to make city deliveries.In Belgium, Delhaize continues to improve store execution and on-shop product availability for its customers. And in addition, Delhaize is enhancing speed and convenience for shoppers with the launch of a mobile payment application called YesWeScan that will be rolled out during this year.Mega Image in Romania has agreed to acquire Zanfir, a supermarket chain with 10 stores in the Vrancea County, further strengthening Mega Image's presence in Eastern Romania and underscoring how our brands are strengthening their market positions through organic growth and fill-in acquisitions.So before we start the Q&A session, let me briefly wrap up. Today, we've reported a solid quarter in which we grew sales, operating profit and net income. We continue to see growth of our online businesses, up 25% at constant rates for the group. Underlying operating margin for the group was stable compared to the same quarter last year. Second quarter results will be impacted by the Stop & Shop strikes with a onetime loss of operating income of $90 million to $110 million. And the new labor agreement in New England has been ratified by the UFCW members. And we expect our total labor cost at Stop & Shop to increase in line with inflation as a result of our contract agreement. We reiterate the guidelines on our outlook for 2019 that we gave to you on April 23rd.Thank you, and we will take now happily your questions.

[Operator]

[Operator Instructions] The first question comes from Mr. Judah Frommer, Credit Suisse.

[Judah C. Frommer, Senior Analyst]

First, I was wondering if we can get a broader update on the U.S. inflation and competitive environment. Inflation does seem to be coming through in center store categories per your peer commentary. So anything in particular? You mentioned on incremental price investment in the fresh category in particular will be helpful, especially given Whole Foods incremental investments there. And then separately on Stop & Shop, if you could share any incremental trends following the end to the strike, color on customer recapture. Has there been any price investment necessary on your part to drive traffic? And would you consider altering the Stop & Shop remodel program in any way, either magnitude of CapEx or store cadence because of the strike?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you, Judah. Let me talk a little bit about Stop & Shop first, and then Jeff will take care of the inflation numbers we see. First of all, at the moment, of course, we are concentrating on recovering the business, and we see customers coming back to our stores. Our supply chain is -- was already, 4 days after closing the agreement, completely back on track. So we're very happy about the work done there by our associates, and we of course, follow this very carefully. The second thing is that we have, of course, marketing and promotional budgets also for seeing for Stop & Shop in this year. We feel these are going to help us also to make sure that we get customers fully back as we used to have. That's the best thing Stop & Shop can do to serve our customers.On the remodeling program, we have remodeled the 20 stores in Connecticut, Hartford. We will follow with our 20 Long Island stores in the third quarter of this year. And we are awaiting the FTC approval for our King Kullen announced acquisition, and we expect that answer coming in the coming weeks or months. So that's a few things on the remodeling scheme under reimagining Stop & Shop. That's also an unchanged pattern because the strike, which we consider a one-off effect, an unfortunate one-off effect, will not bring us away from strategy for Stop & Shop. A few things on the inflation numbers we see, Jeff?

[Jeffrey Carr, CFO & Member of Management Board]

Yes. We see in inflation, food inflation, running at around 1.2%, certainly between 1% and 2%. A little bit more in terms of fruit and vegetables and some dairy. We're not really experiencing the sort of center store inflation, but I do see some commentary about it from the CPI manufacturers. Of course, there's always requests for higher increases, but I think what the key drivers of inflation that we're seeing at the moment is in produce, and center store is slightly below the average in terms of total inflation numbers.

[Judah C. Frommer, Senior Analyst]

Okay. Great. And then just general competitive environment following a tax reform year, where there may have been some incremental promotional dollars flowed through into pricing. Has anything backed off thus far in 2019 that you can tell?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

No. Judah, what we see is that's also in line with our last quarter. We see a competitive environment in our East Coast markets, but not different or changing or becoming less or more than before. So we see a constant competitive environment on the East Coast.

[Operator]

The next question comes from Scott Mushkin, Wolfe Research.

[Siddharth Deepak Dandekar, Research Analyst]

This is actually Sid Dandekar on for Scott. You had a slide in the November 2018 Analyst Day on U.S. e-commerce with a target of 65% of customers having same day pickup for delivery by 2020. So now Amazon moving to 1 day across the board for Prime. Has that altered your vision or your time line in any way? How are you thinking about the cost now in order to be competitive and maybe quicker than your original plan? And then secondly, could you just parse out the Stop & Shop volume trends? What are you seeing specifically in that banner? If you could somehow quantify what store remodels are doing to sales there.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you, Scott (sic) [ Sid ]. Go ahead, Jeff.

[Jeffrey Carr, CFO & Member of Management Board]

No. I was just going to say, on the U.S. e-commerce, we are not currently accelerating our plans beyond what we discussed in November, where we have quite a broad acceleration of our U.S. e-commerce, and we expect to get -- and remember we already have a pretty strong e-commerce business. We expect to get to 20% growth in 2019 and 30% e-commerce growth in 2020.I think one of the key aspects of that is obviously the growth of Click and Collect, where we are seeing stronger growth than we've seen in the past as the U.S. customers get used to Click and Collect process. And obviously, that offers a same day and a next-day option in terms of Click and Collect. And the economics of Click and Collect obviously are more -- slightly more attractive than home delivery, and the fees are much lower. And I can imagine Click and Collect fees, which are very low today, potentially under some pressure as we see continued competitive market in terms of e-commerce. So I think we need -- we are currently on a program to really roll out the Click and Collect, accelerate our same-day home delivery and continue to grow our next-day home delivery. And I think by developing our omnichannel offering, we will have a competitive offer in terms of fresh food relative -- especially with a focus on fresh, relative to Amazon, for sure, which obviously 1 day is for Prime customers, which has quite a bill attached to it. It's not a free offering of course.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

The other thing, I think what is fair to say is that we believe our customers are still calculating the total costs. So not only the small fee for delivery or for Click and Collect, which charged, but also the cost of the merchandise. Even Whole Foods' offer is 20% to 30% more expensive than ours. Customers keep calculating what is my total cost for my delivery or from a click-and-collect shop. And there we feel comfortable to be well positioned with a lot of fresh food competence over the years which people trust.

[Jeffrey Carr, CFO & Member of Management Board]

In terms of Stop & Shop volume trends, it's a bit early, 2 weeks after the strike, to get into the specifics in terms of the volume trends that we are currently seeing. Customers are coming back. We continue to see a recovery, and we're obviously hopeful that our customers will be back in the store and will be back to normalized level of sales as soon as possible. But that is on the recovery trend, and we expect that to continue over the next few weeks as we go through the second quarter. So it's a bit early to be specific on that, but we expect the strike to see a full recovery, following the recommencement of our associates coming back into the stores at the end of April.

[Operator]

The next question comes from Bruno Monteyne, Bernstein.

[Bruno Monteyne, Senior Analyst]

On the strike, I'm still feeling that I'm missing a part of the store that we sort of just can't compute. On the one hand, you say the deal was fair and responsible, something along those lines. When we were reading the press report that looks like the union got what they wanted on Sunday premiums, pension contributions, health care contributions. So they seem to be so happy with the deal, what was wrong with the original deal? We're obviously being misinformed. So given the delta between what was initially proposed and what the union agreed on, I still don't really understand how it can have an ongoing impact or was there really much of a difference between the original deal and what was agreed. So a bit more understanding of that. And the second one, as I think about your Dutch margin impact, you mainly highlight what seems to be transitionary kind of impact of your new depo? Is that all the risk to the Dutch margins, although some of the higher transport costs permanent and especially with your investments in those 1,000 products. They look targeted at Lidl with some of them even gaining market share. Should we really anticipating a permanent impact on the margins in the Netherlands beyond the depo for the transport costs and these price investments to competing against Lidl?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

So let me take the first question on the agreement with the unions, and then Jeff will say a few things on the depo, and then we can come later back to the Prijsfavorieten, the Price Favorites.Fair and responsible. We gave that comment as -- at the moment, we have a good agreement with the unions. And therefore, our employees, ourselves. And that's why we call it fair and responsible. We gave you a quantification of this being in line with inflation, and we mean this for the total labor cost. So the total labor cost is including what we agreed on salaries and wages, what we agreed on health care, what we agreed on pensions. And it's a very detailed agreement with a lot of things on full-timers and part-timers and Sunday extra amounts for work. And those are all included in that number. And inflation as, as you know, just below 2%. So therefore, we feel that we have a fair and responsible agreement. Therefore, we also closed an agreement which is in line with our projections, and what is of course, for nobody involved has been a good thing that we had an 11-day strike. We feel that if it would have stayed within the dialogue between the partners, for this you always needs 2 partners to stay in the dialogue, that we also would have achieved this type of result without the damage. So that's on the strike.Then I just take the Price Favorites. 1,000 items now. Price entry products and very comparable without discount competition indeed, both on specs, packaging and pricing and we will add a few hundreds more. We see a very good uplift there in what Price Favorites is bringing us because I think we market it in a smarter way than before, and we're quite positive for about that development.Jeff, on the depo costs?

[Jeffrey Carr, CFO & Member of Management Board]

No. I think on the Dutch margins, it's very much -- I'd say that's a transitionary issue. We are very proud of the fully mechanized warehouse we just opened in Zaandam. It's ramping up. It's on schedule. It's going exactly how we'd expect it to go. It's state-of-the-art technology, very impressive, but there is an element -- a small element of a ramp-up cost associated with that. And so I see that as a transitionary issue solely. And obviously, I don't expect to see any -- longer-term impact in terms of the Dutch margins at all, which will remain robust in 2019.

[Bruno Monteyne, Senior Analyst]

And if you include the impact of the Price Favorites, you do not expect that to have a material impact on the Dutch margins?

[Jeffrey Carr, CFO & Member of Management Board]

No, no. We have an incredibly successful Save For Our Customers program, which has been running in the Netherlands. We have been -- and the Price Favorites are has just been launched in the first quarter. Very high-quality products aimed at low prices, entry-level prices, but we can manage that within the normal span of Albert Heijn, which is to offer great products at different levels in terms of the range that we offer at Albert Heijn across call it high-quality range, entry-level pricing and luxury pricing as well.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

And we have a lot of innovation going on in Albert Heijn there. Also our new fresh concept stores. We opened roughly 30 now. We would have opened by the end of the year roughly 140 stores, where we offer a different price -- different fresh propositions, convenience, bakery, delicatessen, ready-made meals. And those stores are doing very well compared to the control group. So there's a lot of things going on. Also on innovation to attract more customers and to have an even better and healthier propositions.

[Bruno Monteyne, Senior Analyst]

Just coming back to the first question...

[Operator]

Sorry, sir. We'd like to give the floor to others as well. Maybe there's a later stage for questions. I would like to continue now with -- the next question comes from Mr. James Anstead, Barclays.

[James Robert Anstead, Director]

Two questions for me, please. Firstly, the sales lost during the strike, you quantified at $200 million approximately, but I guess it will take some time to get back to where you would have been. So $300 million, $400 million are more likely impact overall for the second quarter. And secondly, although you've mentioned the new labor agreement shouldn't be particularly inflationary. You have quoted higher labor costs as an issue in the first quarter in the U.S. I think also in Czech Republic and Greece. And some of the things you're doing, I guess, in the Netherlands with new DC will add labor costs. Is that a trend in terms of high labor costs generally we should be paying some attention to?

[Jeffrey Carr, CFO & Member of Management Board]

James, let me take that. In terms of higher labor costs, I wouldn't get overly carried away with it. What we are seeing is, for example, we're not recovering that type of, we've mentioned, in line with inflation in the U.S. running at just about under 2%, but we're not passing that through to the customer. We don't see that in terms of our shelf price inflation. That's in the U.S. If you go to the Czech Republic, we quoted, we are seeing -- if you go to Prague, for example, there's practically 0 unemployment. So we are seeing significant labor inflation in places like the Czech Republic and Romania. And obviously, that is one the -- and Greece and that's one of the key callouts we mentioned in CSE. So I think we have experienced higher labor inflation than we see shelf price inflation for some time now, and we have to continue to work on our Save For Our Customers program to ensure we can offset that and maintain stable margins. So that's nothing new, and that's something that we're used to and we'll continue to execute.On the sales lost during the strike, we mentioned the $200 million, which is, you're right, which is just the 11 days of the strike. And therefore, we are going to a ramp-up period following the strike as we get back to normalized levels. It's 2 weeks in, and I don't want to quote a number in terms of what that impact is, but we have said any margins lost due to that we will be able to mitigate, but it's too early to quote a number as to how we expect that ramp-up to result in total delta, but the $200 million is the number we're quoting for the actual days lost during the strike. There is a ramp-up, but it's heading to the right direction. The momentum is good. Customers are coming back. The stores are obviously fully stocked and open. And at the moment, it's just a bit too early to say exactly what we see as the impact -- full impact in Q2.

[Operator]

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

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

I want to come back to the strikes again, maybe at final bite, but it seems unusual eventual cost was just below 2%. I mean, why take it to 11 days of strikes? It just doesn't seem compatible, but maybe I'm missing something. The second is just on the takeoff dot com [indiscernible] you showed us that with the Investor Day. So I'm just wondering if there's any sort of early findings from that. I'm presuming it's all operational now, making deliveries. Apologies if I missed that earlier. And then final one just very quickly in Belgium. Obviously, slightly softer this period but tough days as you mentioned. How would you expect the progression to be for the rest of the year?

[Jeffrey Carr, CFO & Member of Management Board]

Andrew, do I understand your question on the 11-day costs, $100 million being relatively high incremental cost to the sales lost. Is that your first question?

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

No, sorry. Just more of the fact that the eventual outcome is 2%, which is below 2% [indiscernible] go an 11-day strike, it seems a high cost to pay for quite a benign outcome.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

I think, like I mentioned, I think nobody has won in this strike. It's a very unfortunate event for everybody involved. We always had a very good reputation, and we have a very good reputation with our associates with our brands in the U.S. paying competitively and taking care of our people, not only for wages, but also for health care, pensions and these kinds of things and also comparing ourselves in the New England markets, we have a very good package for our associates. The second thing is that we just gave you some more color how we closed the agreements, talking about total labor costs including all the components. And it's fair and responsible to do this at inflationary levels. Your question is how come then that you had an 11-day strike, and that's why our -- we feel that it's a pity that we could not continue that dialogue. And we could have reached these results also with a proper dialogue. So that's why we feel it's unfortunate. And of course, it has not been a good thing for customers, reputation, associates, unions and the company. So I think that's unfortunate. Also the conclusion of this as a onetime effect. We are very good relationship with our union partners also in other parts of our total network. We have confidence that we can keep this climate also well for the future. On takeoff, the micro fulfillment center, this is now in the full test. We lost a little bit of testing ground and testing volumes due to the strikes because we didn't have the full volumes. We have good channel through the system in itself, but we are working with takeoff as our supplier to make sure that things are working well. And I think we come back to you one of the next quarters with the update there. And then on Belgium, Jeff already mentioned how you should compare this with a very strong quarter last year within different set of opening days and with Easter also in Belgium in the second quarter. And we're very confident with the quality and the management and the inspiration of the team there, and we see positive trends if you compare properly -- positive trends to develop the profitability and in sales, a strong commercial plan. And this will, for the group, be a strong development with Delhaize in itself, but also with our other brands in Belgium, like bol.com and Albert Heijn in Flanders, we expect for the total company and good outlook for our market share -- overall market share in the Belgian market.

[Operator]

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

[Robert Jan Vos, Analyst]

Two questions from my side. In Belgium, is it fair to assume that you had lost a bit of market share in the first quarter? That's my first question. And then my second question, is it possible to quantify your ramp-up costs for the new warehouse? How big was the impact on underlying EBIT in the first quarter?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

I think, Jeff, the ramp-up costs we don't have to the warehouse as such specified for this specific quarter. We had some big operation with highly automated and very well introduction of [ Vandelonden ] Toyota in this warehouse, and we had a ramp-up period up to the end of the year to make our stores connected to the warehouse. It's gone overall very well. But, Jeff...

[Jeffrey Carr, CFO & Member of Management Board]

No. I think, if you look at it, we're down 20 basis points versus last year. This was one of the factors for that. It's probably about 50% of that, and 10 basis points is equivalent to about EUR 3 million, EUR 3.5 million in the quarter. So it's a relatively modest cost in relation to the exciting start-up that we have with this new warehouse. So it's -- and it's to be expected within the expectations of how we plan the ramp-up and the start-up of the warehouse, and it's equivalent to around about 10 basis points.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

And market share numbers for the first quarter of Delhaize in Belgium. I haven't seen yet.

[Jeffrey Carr, CFO & Member of Management Board]

I think it's fair to say over 2018 we've made good gains in terms of market share, but in terms of the first quarter, we are slightly down in terms of market share.

[Operator]

The next question comes from Mr. Maxime Mallet, Deutsche Bank.

[Maxime Mallet, Research Analyst]

[Technical Difficulty]The cost savings you already achieved in Q1 out of the EUR 540 million that you target for the full year. For the second one, just coming back quickly to this warehouse start-up costs you said to assume that some Q2 on this start-up costs will be significantly more minor on this aspect and whether there will still be an impact on the other side from transportation indication on the cost side. And the last one you mentioned Click and Collect to be a driver. One of the key drivers of online growth notably in the U.S. Could you remind us in Q1 how much your pure online sales were coming from Click and Collect.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Maxime, we missed the first part of your question. We heard you when you talked about EUR 540 million, and we were thinking that this is our Save For Our Customers program.

[Jeffrey Carr, CFO & Member of Management Board]

No. I think the question was about the Q1 relative savings.

[Maxime Mallet, Research Analyst]

Yes, exactly. Q1 cost savings achieved.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. I would say we're running in proportionate with the -- so roughly at around 25%, just slightly under 25% as we ramp up some of the projects. So we see a good delivery in the first quarter, roughly around the quarter of the EUR 540 million coming through. So I'm very -- and obviously, we mentioned in the narrative a strong performance, let's say, for our customer in the U.S. And you see that evident in the margin, whereas our investment plans are more falling into the next 3 quarters. So you will see the margin come down in the U.S. as a consequence of that.Just on the start-up, no, I think this is very much a ramp-up period, and we will not see any impact from the warehouse. We're not expecting to see any impact from the warehouse in the second quarter. On Click and Collect, you asked for the percentage. I don't have the number in front of me, so I'm going to be guessing, but I think it's something in the region of 80% home delivery, perhaps 20% or even less than that is Click and Collect.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

And of course, we had the first quarter a 13% growth in online. For this year, we have a promise to deliver 20% of online sales growth. And for next year, we're talking about the U.S. of course, 13%. We are on track to deliver the 20% for this year, and that is of course growing through a bigger share and bigger proportion of Click and Collect. And if you might remember from our C&D in New York, where we have now an 80-20 delivery versus Click and Collect, as Jeffrey mentioned. We see ourselves in the market more moving to 60-40, 50-50 over time that we talked about a couple of years. Certainly, we see the first -- I don't -- it's difficult to get actual numbers in the whole U.S. market, but we see the fastest growing -- Click and Collect is the fastest growing. Obviously, if you look at the peers, there's a lot of emphasis on Click and Collect. And we're certainly in a good position to continue to see strong growth in Click and Collect. We've obviously had a traditionally strong home delivery model with people and we continue to work on that expanded into same-day delivery. A lot of effort, a lot of capital and a lot of -- is going into the Click and Collect model, which economically is a slightly more advantageous model for us as well. But at the same time, our Click and Collect model is a fully proprietary model that it's important to see a lot of our peers buying Click and Collect vendor-supported models. We control our supply chain. We control our Click and Collect. We control our customer data. And that has been an important strategic starting point for ourselves.

[Operator]

The next question comes from Mr. Rob Joyce, Goldman Sachs.

[Robert Joyce, Equity Analyst]

Two for me. Firstly, just on the Dutch pricing, I wonder if you could just say where your average basket price is now versus the discounters and give us an idea how that is versus history. Second one, just looking at the free cash flow statement, it looks like the lease payments have gone up over EUR 50 million, around 15% in the quarter. Just wonder what's driving that and whether we should extrapolate that into an annualized sort of EUR 200 million increase in lease payments.

[Jeffrey Carr, CFO & Member of Management Board]

Dutch pricing, we have a very competitive model in the Netherlands in terms of pricing relative to the discounters. And if you look at our own brand position, we have a very comparative entry price point level with comparative quality to the discounters. So I wouldn't like to quote a number relative to it, but I'd say it's very much on the level playing field in terms of the entry-price levels. And one of the key learnings that we had in Albert Heijn, where we're losing market share in 2013, 2014 to Lidl was to ensure that our -- was to ensure that our quality of our entry-level prior items and -- was very much in line with the discounters. And that's something we continue to focus on, not just the quality, but the innovation we have in the entry level we continue to maintain.

[Robert Joyce, Equity Analyst]

And Jeff, is that reflected in customer perception because that's been sort of an issue in other markets?

[Jeffrey Carr, CFO & Member of Management Board]

In terms of perception, Albert Heijn always has a little bit slightly -- it's not -- Albert Heijn always has a little bit of a higher quality, a higher price perception, but I think it's something we manage -- it's not as distinct as we see in some of the other markets that we operate in. So the perceptions scores are closer perhaps than we see in some of the other markets. Moving on to the cash flow, I would not extrapolate that for the full year. I think -- I know there are some timing issues in the expenses in the first quarter, and I'd expect to see it more in line with the full year numbers as we go through the next 3 quarters both in terms of the lease expense particularly, but also in terms of the total free cash flow reaching the level that we've guided to.

[Operator]

The next question comes from Sreedhar Mahamkali, Macquarie.

[Sreedhar Mahamkali, Analyst]

One quick follow-up on the market share and a couple of questions from me, please. Can you just update us on where market share was in the Netherlands for Q1 after the market share loss in '18, please? On the 2 questions are first one, in terms of shape of the P&L, a big picture level, last year has been driven by gross margin accretion, clearly driven by merger synergies particularly including the Q1 this year, 60, 70 basis points increase in gross margin if you look at the across the product line. As we look forward, as the merger synergies are replaced with cost savings for Save For Our Customers plan, should we now be looking more into the OpEx line where the delta is, as opposed to gross margin? Just in terms of the shape of the P&L from Q2 onwards. And second one is just give us a sense if you wouldn't mind remind us perhaps the PPA decreasing -- depreciation -- decrease for this year please and how much U.S.A. as part of that.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you, Sreedhar. On the market share in Holland, we lost slightly share in the first quarter, but much less than we used the previous 2 quarters, so we see a positive trend there. And our market share for the Dutch market was slightly below 35%, 34.7%. That is market share there. The other 2 things on your side, Jeff?

[Jeffrey Carr, CFO & Member of Management Board]

Yes. In terms of the PPA, we see about -- around $20 million impact in Q1 lower depreciation and probably around $40 million for the full year relative to 2018. And that's related, as you rightly say, if you remember back to the 2016 data that we published, that we certainly had to write up or we wrote up quite a significant amount of assets with short lives in the U.S., particularly but around the Delhaize brands. And obviously, they'll be rolling off their life in terms of 2018. We also already saw that trend in 2019. In terms of...

[Sreedhar Mahamkali, Analyst]

Half of that being in the U.S. or 60% of that in the U.S. presumably?

[Jeffrey Carr, CFO & Member of Management Board]

I don't have the number in front of me, but I think if you take 60%, you're probably not far off. So there is -- we don't -- I don't think we publish the EBITDA numbers by segment, but it's probably around 60% is in the U.S.In terms of the P&L, look, we have quite some mix effects going on as well in 2019 in CSE, for example, where we are seeing significant labor increases, as I mentioned earlier in Czech Republic, for example, both Romania, Greece. And those are offset some of that's priced through, obviously, on the shelf and all of it, which is one of the things which drives up a little higher OpEx relative to 2018. I mentioned earlier, even in the U.S., where we're seeing inflation level -- labor increases, we're not passing that through. So again, that puts pressure on OpEx. So I would say it's more in balance in 2019, the gross margin relative to OpEx, but I wouldn't say -- see a significant swing in terms of absolute reduction in OpEx. I think we'll still see as a percentage of sales a little bit of pressure on OpEx and not least because of those impacts in CSE.

[Operator]

The next question comes from Ms. Fabienne Caron, Kepler.

[Fabienne Caron, Head of Food Retail Sector]

Two questions from me, please. The first one on Holland. How does your favorite prices, how do they position compared to your private label, please? And the second question for the U.S. again and the union agreement for Stop & Shop in New England. If we were to try to put a number on this for the additional cost on a 12-month basis, do you think that something like $20 million would be fair?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Thank you, Fabienne. On the Price Favorites, maybe give a little bit more color because there's a few questions are -- with high interest on this item. 1,000 items priced both in line with Lidl but also from a specs and packaging perspective, very comparable. And we will add a few hundred more in this year. It's also linked to how do we price compared to discount to make sure that customers have also those choices when they would like to buy those types of products with us, they can find them in our shelves. They don't have to go to a Lidl or an Aldi.The second thing is the newly introduced [ whole ] campaign doing very well. We are very happy with that introduction, and it's -- Price Favorites is a private label, is an on-brand program. The second question, Jeff?

[Jeffrey Carr, CFO & Member of Management Board]

Well I wouldn't like to stick a dollar number on it, but I think we've said in line with inflation, which is running slightly below 2%. And you have to do your own math to figure out what the dollar impact to that is. But I don't want to put a dollar number on that. I think the 2% -- slightly below 2% inflation number gives you the information you need. And what is important, of course, that number is not higher than we projected ourselves initially. So it's not a deviation to our planning forecasts and budgets.

[Operator]

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

[James Robert Grzinic, Equity Analyst]

I have 2 quick ones. I think both for Jeff actually. First one is can you perhaps remind us what the benefit to margin in the U.S. and Belgium would have been of that Easter dilution at 2 and the mix of sales shifting to Q2 that you have in terms of trying to understand underlying profit dynamics in the U.S. in Q1. And the second point, I guess, I was a little bit surprised, Jeff, when you said I think a couple of times that Click and Collect is only slightly advantageous to you relative to a food delivery model in the U.S. I presume that is post a reinvestment into lower pickup charges relative to delivery charges. Is that what you're saying it's only slightly advantageous to be investing more into more of a subsidized delivery charge?

[Jeffrey Carr, CFO & Member of Management Board]

Yes. Absolutely. So what I'm saying is under the current pricing scenario, where we do see a charge, and I think in the U.S. our average charge is just under $10 for home delivery, whereas it's a much lower charge for Click and Collect. The economics are slightly in favor of Click and Collect. Of course, if you see a scenario in the future where there is no charge for a home delivery or Click and Collect, then the Click and Collect economics become even more attractive.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

That's only from a fee perspective, right? I mean...

[Jeffrey Carr, CFO & Member of Management Board]

Yes, because of the fee impacts. I'm not projecting there won't be -- we won't be able to sustain a charge for home delivery, but it depends obviously what happens in the market.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

I mean that we will see that our delivery baskets are bigger in size and better in mix. So if you look at the total economies of Click and Collect and delivery, I think, James, it's a little bit more complex than only looking at the fees.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. And generally, the market -- the basket size for Click and Collect and home delivery is a similar basket and a similar mix. Now in terms of your question -- were you asking for -- about the margin impact on the sales shift for Easter?

[James Robert Grzinic, Equity Analyst]

Yes, exactly. Both in the U.S. and Belgium, please.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. I don't -- I think the margin impact was slightly favorable in the U.S. I'm not going to quantify it. Obviously, although Easter gives us a beneficial sales impact, and we said 100 basis points, it is a promotional sales over the Easter period. And therefore, it was a slightly favorable benefit in terms of margin in the U.S. I'm not so sure about -- but it's fairly small impact, and I'm not so sure about Belgium. It's a less of an impact in the Belgian market. So I'd say margin was pretty neutral.

[Operator]

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

[Nick Coulter, Director]

Two quick ones, if I may. Firstly, on the U.S. Backing out Easter, underlying volumes for the first quarter looked very robust. Could you talk to which banners are driving those volumes, please? And secondly, can I ask about the VAT increase in the Netherlands? It seems like you may have moved last and least and perhaps absorbed some of the increase. So I'm just trying to understand how you mitigated that, whether indeed that was a margin impact. And then if I may, just to clarify on CSE, are you saying that you could mitigate the wage increases in future quarters with respect to margin volatility?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Yes. Thank you, Nick. VAT Holland. Overall, we passed it on to our consumers like all the competition did. So we did not eat up a part of the VAT increase. Wages in Central and Southeast Europe, Jeff already mentioned strong wage increases in the Czech Republic and Romania, but also those are market wages as well. So also there, our competitors have to deal with the same thing. So the smarter we are to mitigate and to have our Save For Our Customers program successfully running, which is at the moment the case, I think will give us some benefit. And talking about the U.S., 1.2 growth number plus the 100 basis points for Easter correction is 2.2% overall, which gives us -- which is a good number for the U.S., in our view. And if look at the brands, then almost in all the brands we gained market share. And also here, Food Lion was still the strong growing brand in our U.S. operations and Stop & Shop the weaker brand as we already shared with you before. So all in all, many of our markets and geographies we gained market share most likely with a 2.2% correct for Easter.

[Operator]

The next question comes from Mr. Cedric Lecasble, MainFirst.

[Cedric Lecasble, Research Analyst]

Just 2 quick ones for me. The first one on the phasing of working capital potential swings during the year. You may be precise how we should look at it in terms of impact on free cash flow development? Is it more positive back-end-loaded? And the second one on Peapod. Given this emphasis on Click and Collect, do you need more scale or certain scale to get better profitability on Peapod? And how do you put Peapod into the global U.S. strategy?

[Jeffrey Carr, CFO & Member of Management Board]

Let me start with the working capital. And I appreciate the changes around working capital make it a little bit more difficult. What I've said is for the full year, we projected something in the region of EUR 100 million benefit from working capital inflows. That's significantly down, but it's still a good inflow relative versus last year where we saw over EUR 400 million benefit from working capital, but we do still see -- we expect for the full year to be at around EUR 100 million, and that means I expect to see positive working capital developments in Q2 and then in Q3 and Q4, with probably Q2 and Q4 being the highest inflows. I wouldn't go beyond that. The Easter timing did have an impact this year relative to last year in terms of the negative number in Q1. In terms of...

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

On Peapod, we already shared with you in November that we would grow our Click and Collect points from 200 to 600 by the end of the 2019 year and that we also connect this with 20% of growth, 13% in this quarter. So we will see this ramping up. And by ramping up -- and by growing the company in online, of course, we have scale benefits. Scale does matter. And if you go back to the pure play brand, Peapod in the Chicago markets, also for them, if they grow faster, then they will, of course, enjoy scale benefits. At the same time, at Peapod Digital Labs, these shared services growing from within Peapod servicing all the 6 brands in the U.S. for digital, e-commerce, online and these types of activities. They also will benefit from a technology manpower point of view when we have more underlying volume, and that's exactly what we're going to do. 20% growth in 2019, 30% for the 2020 year. Scale matters also here.

[Cedric Lecasble, Research Analyst]

Okay. So if we -- you don't discuss profitability, Jeffrey, but we should expect an improvement of the underlying profitability of Peapod in the U.S. in the coming couple of years?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Yes. We focus now on growth and market share in the food and fresh fruit propositions. Jeff, already mentioned to you that if we get a higher proportion of Click and Collect, it was a favorable effect on profitability as the underlying costs are lower for a pickup order versus a delivery order. And also here, scale will matter. Yes, of course, when we get more scales, I think we have a better view on profitability of PDL and Peapod as such.

[Jeffrey Carr, CFO & Member of Management Board]

Just to be clear, PDL, Peapod Digital Labs has an investment, a significant investment we're making in 2019. We discussed that at the Capital Markets Day. And then beyond that, obviously, as Frans mentioned, we understand the drivers to profitability, but in the competitive market, it's a bit difficult to project when we give guidance on profitability of home delivery for '20 and '21. There's so much happening in the marketplace in the U.S. It's more difficult to project.

[Operator]

The next question comes from Mr. Dusan Milosavljevic, Berenberg.

[Dusan Milosavljevic, Analyst]

Just maybe one final question from me. On your cash flow dynamics, the EUR 100 million of working capital releases for the year. And obviously, we had guidance for EUR 2 billion CapEx. It's a little bit difficult to get to the free cash flow guidance for the year unless we assume that we'll have exceptional tax gains continue in 2019. You had, I guess, EUR 200 million of that in 2018. So how should we be thinking of that? And what moving parts in terms of cash flow should kind of got us there?

[Jeffrey Carr, CFO & Member of Management Board]

Well I'm not going to run through your model with you with everyone here. But what I'd say in working capital, we expect around EUR 100 million benefit in 2019. On tax, our cash tax will increase in 2019 versus 2018. And on capital expenditure, we've guided to around EUR 2 billion of capital expenditure in 2019. And then you have to work that through your model. We adjusted for the IFRS 16. The EUR 2 billion is equivalent to about EUR 1.8 billion because of the finance lease expenses that now come through the free cash flow line, which were previously treated effectively as debt repayment. So EUR 1.8 billion is the target for free cash flow based on the IFRS 16 accounting. I think that's quite a detailed narrative on the constituent parts of it.

[Dusan Milosavljevic, Analyst]

Yes. Just if I can follow up with the IR team after the call. Just maybe just a final one on in terms of how we should be thinking about, yes, the distribution center opening in the Netherlands. But even if you look at previous years, most or a lot of significant portions of your growth in the country is coming from bol.com. So that has obviously margin-dilutive impact. So is that kind of the outlook that we should maintain for the rest of the year? And should we extrapolate to essentially what we're seeing in Q1 for rest of the year in Netherlands? And similar question on Central and Eastern Europe. We should extrapolate labor costs for the rest of the year given that it just kicked off in Q1?

[Jeffrey Carr, CFO & Member of Management Board]

Well, I think from a guidance for the rest of the year we've given pretty clear group margin guidance, and we don't give guidance segment by segment, but we've given pretty clear group margin guidance that we expect margins to be flat year-on-year at a group level. Now obviously, we've announced the impact of around $100 million -- $90 million to $110 million from the impact of the strike, and that gives you a pretty clear guidance at a group level. In the Netherlands particularly, of course, we continue to see the fantastic growth of bol.com, and that is margin dilutive, although it varies quarter by quarter. So we have bol traditionally has more of a holiday impact in terms of its profitability and has a stronger margin in the fourth quarter and a weaker margin in the first quarter. But at some stage, as bol gets bigger, perhaps we need to report that out separately, but it doesn't dilute the benefit of the Albert Heijn business that I thought Netherlands margin may be under a bit more pressure because bol is growing. So that's a positive thing. And we -- I think we've -- given the fact that the margins excluding bol are around 5.6% in the quarter, so there's about a 60 basis points dilutive impact from bol. And then in terms of the CSE, no, I think we will see some recovery in the margin of CSE as we go forward in the next 3 quarters. And there's a variety, a multiple of impact -- issues impacting that.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

And the higher labor increase is pretty normal in that whole region. We deal with this already successfully for many quarters to mitigate those. It's part of our job to mitigate with these kind of numbers. We see this as very manageable like we have shown in past quarters.

[Operator]

The last question comes from Mr. Xavier Le Mené, Bank of America Merrill Lynch.

[Xavier Le Mené]

Two, if I may. The first one, just in the U.S., you've got your volumes improving, but can you give us a bit of color about the average basket versus footfall what is driving your volumes up in the U.S.? Just the second one on profit. You've got no synergies coming in the second half. So is it fair to assume that excluding the impact of the strike that your margin will be more under pressure in the second half than in the first half?

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

Let me answer the second question, then Jeff can look at the first. I think we gave already a guidance for the full year for our group. And we said, for the full year, slightly below our 2018. That was the guidance we gave you on the 23rd of April based on the strike, the direct related to the one-off strike impact. That's what we shared with you so far. We would like to keep it like that. On the other question, Jeff?

[Jeffrey Carr, CFO & Member of Management Board]

Yes. And in terms of specifically in the U.S., we do see transactions up in total in the U.S. slightly. Both transactions and basket showed some growth. Transactions being up slightly more. So it's positive that we're getting more footfall through the stores, and it varies by banner obviously. And as Frans mentioned earlier, Food Lion is the strongest of the banners, but we see a good performance, for example, Giant/Martin's and Hannaford as well. But all in all, we see positive transactions and basket growth.

[Frans W. H. Muller, President, CEO & Chairman of Management Board]

And inflation is still projected as being -- getting up to roughly 2% by the end of the year. That's what we also said earlier to you.

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

Okay. So that, ladies and gentlemen, concludes this conference call and webcast. Thank you very much for joining us, and have a nice day.