Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, good morning, and welcome to the analyst conference call on the first quarter 2020 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 2020 and also in Ahold Delhaize's public filings and other disclosures. Ahold Delhaize 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 date they are made, and Ahold Delhaize does not assume any obligation to update such statement, 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 over to Alvin Concepcion, Vice President, Head of Investor Relations. Please go ahead, Alvin.

[Alvin Caezar Concepcion, VP & Head of Investor Relations]

Thank you, and good morning, everyone. Welcome to our first quarter 2020 results conference call. On today's call are Frans Muller, our CEO; and Natalie Knight, our CFO. After a brief presentation, we will open the call for questions. In case you haven't seen it, the earnings release and the accompanying presentation slides can be accessed through the Investors section of our website, aholddelhaize.com. [Operator Instructions]I'll now turn the call over to Frans.

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

Thank you very much, Alvin, and good morning to everyone. Before I go into the first quarter presentation, I'd like to mention a couple of things first.The first quarter of 2020 was unlike any we have ever seen before. The COVID-19 crisis has affected all of us and I truly hope that all of our stakeholders and, in particularly, the people who are out on the front line, are managing through the crisis as well as they can. I'm honored to represent the leadership and brands of Ahold Delhaize who are doing their utmost best to provide the essential service of helping to feed our local communities. I recognize and I'm very impressed by the hard-working and dedicated associates across our brands and geographies, including the people in the stores, distribution centers and supporting functions who have stepped up to serve their local communities in the face of immense challenges. We have been and will continue to be committed to protecting the health and safety of associates and customers as our first and foremost priority. We must continue to operate well and ensure that we are leading together with our business partners, vendors and service providers in order to provide customers better availability of food and supplies during this time. We must be able to adapt to a new paradigm shift in consumer behavior that emerge and invest as necessary, particularly in digital and omnichannel capabilities and in ways that allow us to serve our communities well during this crisis and ultimately, serve them even better after this crisis subsides. On a separate note, I'd like to welcome, of course, Natalie Knight, who was appointed as our CFO on April 8. And this is her first earnings call with us, and I'm delighted to have her here, and I'm also excited about what she can bring to the table. Now let's move on to Slide #4 on the Q1 results. Clearly, our Q1 performance across all our geographies were impacted by the unprecedented demand created by the COVID-19 outbreak. Natalie will go into more details on the performance. But keep in mind that the margin reported in Q1 is mainly the function of timing and is not a fair representation of the cost pressures we will experience related to COVID-19. Instead, it largely reflects the timing of unexpected higher sales, which preceded the timing of significant investments related to COVID-19 at the end of the quarter. The margin rate you see in Q1 is not sustainable and not likely to be in subsequent quarters. Nevertheless, we will maintain our full year outlook that our group underlying operating margin in 2020 will be broadly in line with 2019. On Slide 5, you will see some examples how we are deploying over EUR 170 million to prioritize safety, relief and support efforts during the COVID-19 crisis. This EUR 170 million figure is by no means the full amount and in fact, it will ultimately cost more than this. This is just what we are currently deploying. For our associates, we've implemented additional safety and protective measures, which also benefits our customers, of course. This includes Plexiglass shields at registers and new flow patterns in the stores to maintain social distancing. We have announced associate pay and benefits and are hiring more than 40,000 associates who can play a huge role in providing the essential service of helping to feed our local communities. We also provided contactless delivery options to the benefit of both associates and customers. For our customers, we are working with local governments and agencies to provide a safe shopping environment, which also helps our associates. We have announced already stringent cleaning and hygiene measures, like shopping cart cleaning before and after use. We have invested in security personnel and optimized customer traffic flows at our stores. We have provided special grocery delivery service for health care workers, and we're the first in our markets to offer special opening hours for the elderly. And for our communities, we are collaborating with our business partners, vendors and service providers to ensure food and supplies are available. We have also more charitable donations to local food banks, national and private health systems, the Red Cross and various medical facilities. While we are doing our part to prioritize safety, relief and support during the COVID-19 crisis, we also know it's not enough. In the nearer term, our priority is to continue to run operations safely and smoothly and offer our customers more convenience so we can serve them better in their time of need. This means there are a higher level of investments needed in the upcoming quarters to make this happen. I would categorize these nearer-term priorities into 3 buckets: improving in-stock levels, adapting store operations, and accelerating digital and omnichannel capabilities. Let me start with improving in-stock levels. It will be no surprise for you to hear that we, along with the broader food retail industry, have had challenges with in-stock levels in categories such as paper, sanitation, frozen, proteins and in some, cooking supplies such as flour. We are, therefore, proactively working with suppliers to provide better availability of products to our customers, including prioritizing SKU offerings to meet current levels of demand. We are using our scale to ensure that we have provided our fair share of allocation for these products. We're also leaning upon idle capacity in the labor force and foodservice distribution providers in order to overcome capacity bottlenecks. We're also adapting our store operations to changes in customer behavior, preferences and safety needs. We are working with local governments and agencies on health and safety measures for stores and distribution centers. And our leader know it's more important than ever to push for higher level of customer service through exemplary associate efforts. And we are adjusting our systems and processes, such as inventory ordering and labor scheduling, to better match the new demand patterns caused by community lockdowns and health and safety concerns. For example, weekends have historically been some of our highest traffic days, and customers have shifted towards more weekday and shopping during off-peak hours. We also know that for many reasons, including more recently, safety concerns and always for convenience that customers, both new and existing, younger and older, are preferring to engage us more online. Our near-term and long-term plans always involve investing more in digital and omnichannel capabilities even prior, as you know, to COVID-19. But we know we need to invest in accelerating these capabilities even further this year. This is a significant focus in both the U.S. and Europe, and we are accelerating our online sales. In the U.S., we initially target over 30% growth for this year, but we now expect it to be even higher at over 50%. In Europe, we expect to accelerate net online consumer sales growth this year, too. And in the U.S., we will be able to generate this higher level of online sales by investing in incremental associates and supplemental infrastructure, such as through more storage units, picking devices and stepping up the pace on a number of click-and-collect locations we plan to open this year in the U.S. We are upping our target to over 1,000 locations in 2020 versus our initial target of roughly 1,000. In Europe, higher level of net consumers' online sales will be achieved by accelerating the timing of 2 home delivery fulfillment centers in Netherlands, with one opening this summer in August and the other in fall around October. Albert Heijn will also begin to offer Sunday home deliveries this month, which is new. At bol.com, we will continue to press hard to increase the number of marketplace partners, where we added another 1,700 merchants in the first quarter, bringing the total to nearly 21,000 now. And this is key because these partners can flex us -- can help us flex capacity faster. These are just some of the ways we will expand our same-day and next-day offerings and capabilities in order to drive the higher levels of growth I just mentioned. I'm now on Slide 7. And while we are highly focused on our nearer-term performance, we will not lose sight of the long-term priorities and investments needed to drive our growth after the initial COVID-19 crisis. It's currently unclear what the long-term paradigm shifts in consumer behavior occur due to COVID-19. But we will monitor these, learn from them and quickly adapt to them. Regardless of what these shifts ultimately are, they are things we already can do now to accelerate growth over the longer-term and retain our #1 and #2 market position across our brands. There are 3 areas of focus I'd like to highlight that will be relevant in post-COVID -- in the post-COVID-19 world, which we think will increase our share of wallet and our share of stomach. These are, first of all, enhancing associate and customer well-being by continuing to take appropriate health and safety measures and offering competitive associate pay and benefits, and progressing on our health and sustainable retailing targets through 2025, which we already unveiled on February 25. These 2025 targets resolve -- revolve around ensuring customers have healthier choices and see more product transparency, and also that we are doing our part to eliminate food and plastic waste. We will have more news to announce in this area later this year as we are in the process of setting long term, science-based targets to reduce our impact on climate change. On offering competitive associate pay and benefits, we continue to focus on offering attractive and competitive packages to employee -- for opportunities -- with employee opportunities for advancement. On March 5, we signed a 4-year collective bargaining agreement for Giant Food, and we'll continuously work with our union partner's end on solutions to improve the position of our employee pension plans. The second item, we need to continue operating brands and supply chains smoothly in order to continue servicing local communities well, and we need to do it more efficiently. There are many ways we are focused on improving efficiency which can help us to keep pace with evolving customer needs while also improving our bottom line. A very good example of this is the 3-year strategy we embarked on this year to move the U.S. supply chain to a self-distributing model. This is not only reducing costs, which can be passed on to our customers, but it will also improve speed to shelf and improve product availability and freshness for our customers. We also continue to export technology to improve the efficiency of our operations, whether that is online with our micro fulfillment center pilot and innovation centers such as Peapod Digital Labs in the U.S. or artificial intelligence labs in the Netherlands, which aim to enhance the digital and omnichannel journey for our customers and improve our operations. Our stores are increasingly implementing electronic shelf labeling and various frictionless checkout options which provides savings and a better customer experience. Item #3. You first heard us talking about this at our November 2018 Capital Markets Day. But we remain committed to investing CapEx at around 3% of sales on a year-by-year basis in order to accelerate our digital and omnichannel capabilities, some of which I described a moment ago. And it will also be used to improve our store fleet through remodel programs such as Re-imagine Stop & Shop. And we will improve meal solutions capacity and private label offerings to further differentiate our offerings and help us gain more share of stomach. This is especially important if the consumer decides to eat more at home than in the past. Although our CapEx investments excludes M&A by definition, we will continue to explore partnerships and M&A opportunities. Slide 8 and 9 highlight some of our advancements and progress in the U.S. and in Europe. I've touched upon some of these highlights already. And for the interest of time, I won't go over them in detail, but I strongly encourage you to take a look. Now let me hand over to Natalie.

[Natalie M. Knight, CFO & Member of the Management Board]

Good morning, and thank you, Frans. I'm pleased to be here for my first quarterly results call with Ahold Delhaize, and I'm looking forward to meeting many of the analysts and investors who are on this call in the near future, hopefully, in person; hopefully, sooner rather than later and when conditions permit. But for now, let's get to the numbers. And as Frans already mentioned, our first quarter of 2020 was really shaped by the unprecedented levels of demand due to COVID-19. As a result, net sales grew 12.7% at constant exchange rates to EUR 18.2 billion. And operating income increased 40% at constant rates to EUR 964 million. Net sales were driven primarily by our 12.2% group comp sales, excluding gasoline. And net consumer online sales grew 37.7% at constant rates. Underlying operating income increased 35.7% at constant rates to EUR 961 million with underlying operating margin up 90 basis points to 5.3% largely due to the timing of the COVID-19-related sales. These higher sales preceded the timing of significant investments that only started to become material at quarter end. I'd also like to emphasize that this effect was more pronounced in the U.S. relative to Europe. As you probably remember, COVID-19 spread earlier in Europe, which correlated to earlier investments related to COVID-19. In the U.S., corona impacts really didn't begin until March, so the ramp-up of investments was later. Moving on to net income. It was EUR 645 million in Q1, up 45.1% at constant rate. As an update to our share buyback program, we repurchased EUR 336 million worth of shares in the quarter. Diluted EPS was EUR 0.59, an increase of 51.8% at constant rates, and diluted underlying earnings per share were also EUR 0.59, up 46.5% at constant rates. With respect to the first quarter performance by segment, net sales in the U.S. grew 13.7% at constant rate to EUR 12.5 billion. U.S. comp sales increased 13.8%, driven by double-digit growth at all brands. Food Lion and Giant Food led the way, and we believe we gained overall market share in the quarter as well. So we're very proud of our performance across the board. In the U.S., online sales grew 42.3%, and this increase comes despite considerable product availability issues early in the corona crisis which caused the U.S. to close click-and-collect operations under most banners for some portion of March. As Frans mentioned, we are now accelerating investments in our online business in order to rapidly expand our capacity. Q1 underlying operating margin in the U.S. was 6.7%, up 180 basis points from the prior year, driven largely by the timing benefit from higher sales preceding material COVID-19 investments. Product sales were strong across the board, and we continue to make progress on our Save for Customers program. We did see a modest shift toward lower-margin products in the period, but this had little influence on our margin as customers bought more products that were typically not on promotion, and product availability issues prevented us from running certain promotions. These gains were partially offset by higher shrink and lower vendor allowances. In Europe, net sales for the first quarter grew by 11% to EUR 6.9 billion. This development is strong but somewhat muted versus our U.S. growth due to the higher level of consumer lockdown restrictions and -- such as curfews and travel restrictions to our stores. It also is relevant to mention that the wallet share for food away from home is lower in European countries, so the shift to food at home was less pronounced. Europe's comp sales increased 9.8%. And while all countries experienced higher-than-normal demand, Central and Southeastern Europe -- European countries grew slightly faster than the overall segment. This translated to share gains in the Netherlands and Belgium and unchanged overall share in Central and Southeastern Europe. Net consumer online sales in Europe grew 36.3% despite capacity constraints. At bol.com, our online retail platform in the Benelux, net consumer sales grew by 39.5%. And bol's third-party sales grew 66% in the quarter with nearly 21,000 merchant partners on the platform. Moving on to the European underlying operating margin. It was 4.1%, up 10 basis points from the prior year despite COVID-19 investments, an EUR 11 million higher pension expense in the Netherlands during the quarter and additional planned investments in digital and omnichannel capabilities. While COVID-19 was clearly the main driver of sales growth in the quarter, I think it's worth mentioning that our business was also quite strong prior to the stockpiling period. What you'll see on this chart is that group comp sales growth, excluding gasoline in January and February, accelerated versus the full year growth rates in 2019. And most importantly, on an adjusted basis, at the bottom of this chart, where we exclude gasoline, weather, calendar effects, the Stop & Shop strike impacts from last year, to really give you what we see as our best view of the underlying business performance of the business. Sales growth was strong at 3.7% in January and February, which showed clear momentum versus the 2.5% adjusted sales growth we had in 2019. This trend is visible both in the U.S. and European segments, which speaks to the underlying strength of both businesses throughout the entire reporting period. Now let me move on to free cash flow. I'm proud to say that the cash position of Ahold Delhaize remains strong. Free cash flow in the first quarter was EUR 1.23 billion, which compares with negative EUR 136 million last year. This improvement was mainly driven by COVID-19 impacts on our profit and working capital balances at the quarter end, which resulted in dramatically lower inventories and higher account payable balances. And do note, these will return to more normal levels in subsequent quarters. Capital expenditure in the first quarter was EUR 708 million, up EUR 256 million from last year due to our acquisition of 3 C&S warehouses to help in-source our U.S. supply chain activities. Therefore, as we progress into Q2, capital expenditures will be lower than the level we saw in Q1. Moving on to our outlook for 2020. I'd like to mention that despite the uncertainty generated by COVID-19, we are reiterating the financial outlook we provided on April 7. Due to the significant quarterly fluctuation caused by the coronavirus, we do feel some commentary on Q2 is warranted. However, commentary on quarterly trends and expectations shouldn't be expected as a course of action in future periods. In April, continue -- we continue to see above normal baseline levels in both the U.S. and Europe when it comes to sales but not as strong as those of March. We also accelerated our online sales growth in both regions relative to what we had delivered in Q1, reflecting increased capacity and better in-stock positions we now have in the system. We believe these higher sales are occurring due to continued gains in share of stomach, particularly in the U.S. due to ongoing shopping restrictions. Despite this strong month, going forward, it is very difficult to project how sales will develop as COVID-19 restrictions are reduced and recessionary trends take hold. Therefore, we won't be providing any specific top line guidance in line with our standard practice. What is important to reiterate, however, is that the investments related to COVID-19, which became material at the end of Q1, will become significantly more visible in subsequent quarters. Therefore, it's important to understand that the margin level you saw in Q1 will not be sustainable in Q2. Please see the footnotes in the outlook table we provided which describe other minor factors to consider in 2020. All of these, we flagged to you previously and none have changed. Now on to some comments about free cash flow. In our April 7 update, we indicated that we expect our free cash flow to come in above the EUR 1.5 billion mark, which we had set at the beginning of the year. We have not changed this expectation. We are, however, modifying our view on what's driving that upside for the year. The upside is mainly related to the strong levels of free cash flow generated in Q1 rather than our previous indication that it would mainly be related to delays in capital projects. While some capital projects will inevitably be delayed versus our pre-COVID-19 plans, Frans provided detail about how we will accelerate investments in digital and omnichannel capabilities to expedite our efforts to better service changing customer needs and demands. And we will continue to focus resources on operating our brands and supply chain smoothly with associate and customer health and safety as really our first and foremost priority. Therefore, we expect capital expenditures to be at or around EUR 2.5 billion, loaded more towards the back half of the year. As you know, at Ahold Delhaize, we are committed to maintaining strong cash and liquidity position as evidenced by our recent placement of a EUR 500 million fixed rate bond due in 2027. We intend to maintain our dividend policy, which calls for a 40% to 50% payout ratio, and repurchase the EUR 1 billion in shares this year. So our shareholder return policies remain in place, however, like all responsible companies these days, we will continue to monitor any macroeconomic developments. Thanks, and I'd now like to hand it back over to Frans.

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

Thank you very much, Natalie. Let me wrap up. We had a strong first quarter performance, which was impacted by the unprecedented demand from COVID-19. But even prior to the COVID-19 demand, the underlying business performed solidly. Although there is uncertainty caused by COVID-19 and we are making significant investments in the near term to continue to run operations safely and smoothly, we are maintaining our 2020 outlook and shareholder return policy, but we'll continue to monitor the macroeconomic conditions like all responsible companies do. Longer term, we will anticipate and adapt to a shift in customer behavior, and our focus is to continue to invest in omnichannel growth to maintain our #1 and 2 market positions. We have a strong cash flow and liquidity position that will provide us the means to make the near- and long-term investment necessary to drive growth, while at the same time, returning capital to shareholders. I also would like to thank the teams across our brands again for their very hard and successful work in the first quarter. This is the end of our presentation, and we open now up for questions.

[Operator]

The first question is from Mr. Bruno Monteyne, Bernstein.

[Bruno Monteyne, Senior Analyst]

My first question is on grocery e-commerce in the U.S. A few years ago, you were clearly ahead of the competition of your people, brand. Then a few years ago, the competition was finally waking up and you were losing some market share. At the current growth rate, would it be fair to say that you're maintaining your growth in e-commerce market share? Or would you be gaining or losing it? And my second question is around, I think, if I'm not mistaken, one of your multi-employer pension plans in the U.S. is currently in the process of being renegotiated. Could you just remind investors exactly what the issue is with that multi-employer plan and how big potentially liability could be and what kind of options that are available to you in that whole process?

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

Yes, Bruno, let me take the first question and Natalie the second one on the pensions. Our e-commerce business in the U.S., you're referring to the U.S., is a food business only. And we have already a very strong store position on the East Coast but also an omnichannel position, which we consider to be the leading grocer on the East Coast in an omnichannel fashion. We grew this quarter 42%. We already gave you the outlook for the full year with 50% growth, and we're ramping up both our click and collect, our home delivery and our digital performance towards our customers. So the data on e-commerce sales are not available through companies like Nielsen and so on. So it's very difficult to see those market shares. But we feel that with a 42% growth of e-commerce in the U.S., we are at least maintaining our market shares in the food online business. A few things on the pension topics. In our annual report, we have a very clear paragraph on all the multi-employer pension funds with all the financials. But let me ask Natalie to give a little bit more color.

[Natalie M. Knight, CFO & Member of the Management Board]

Sure. Thanks for that, Frans. What you do see is we have several items open. And I think in Frans' comments today, you heard very specifically about some activities that we've done with Giant Food in resolving collective bargaining agreements where pensions have been one of the cornerstone topics in that conversation. That one, if you see in our notes, is related to FELRA. There are, as I said, others. We've disclosed the size of that as USD 750 million in terms of what the impact could be.

[Bruno Monteyne, Senior Analyst]

And that negotiation, that particular one is now completed. Would that be fair enough, Natalie?

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

It's not completely finalized, Bruno. But we know that it's a complicated negotiation process with 4 partners in place with the UFCW, with the PBGC, the pension fund, with Safeway and ourselves. But it's going very constructively, and we hope to finalize those discussions soon.

[Operator]

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

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

Welcome to Natalie as well. Two questions then. So the first one, we've seen quite a lot of press reports about some shortages, I think, particularly in the protein area. So I'm just wondering if you can comment on how you're seeing that yourselves and whether or not it's having an impact.And the second, if you could just help us out a little bit more on April just so we can shape Q2 a little bit better. But still good trends, a little bit below, but I'm wondering if you can put some numbers to that.

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

Good. Natalie will come back to April and a little bit -- potentially a little bit more color on the second quarter sales-wise. On protein, I think you're mainly referring to the U.S. because on-shelf availability in general in the European markets, we are close to be back to normal with some exceptions on baking products, some sanitization products and so on. But we are almost back to normal in all our European markets on supply. If we look at the U.S., the situations, they are different. We still face a number of supply chain challenges in the total chain. Together with our vendors, we simplified SKUs to make sure that we can simplify production and that we have fuller shelf sooner. And there, we see a number of shortages on the same -- sanitization, on the same things like baking products, like flour and these type of things because there's a lot of baking at home. There's so-so supply on paper products. And indeed, protein is, at the moment, the biggest issue due to COVID and due to how factories and slaughterhouses organized in the U.S., where people work shoulder-to-shoulder, with quite some interruptions due to health reasons in those plants and a number of big meat vendors were handicapped by that. We see now that protein is low, and that is both for -- that's for poultry, pork and for beef. That is a market -- overall market phenomenon. And we see now, slowly but surely, that supply is coming back. Same for our own meat factory but also for our vendors in the rest of the network. This will take some time. And because the procedures looks like this, that if there is an infection rate, which is too high, it will be closed down by the authorities. A deep cleaning process and a restart of the plants, that's what's happening at the moment. And with the new Defense Act of the President, I think we get a little bit more leverage there to do this faster so that the protein supply will come back sooner. But at the moment, it's still a topic, both for frozen and for fresh meat, but everybody is working on to bring that back. Overall, of course, in the U.S., there is enough food supply in the total chain. So it's not a worry on that end. Natalie, something on the second question on the second quarter sales?

[Natalie M. Knight, CFO & Member of the Management Board]

Yes. On April, I think what's fair to say if we look at April is that in Europe, we started to see sales levels, I'll say, normalize, whereas in the U.S., we were positively surprised at how strong the sales continue to be. So we definitely had very good top line growth in the second -- in the month of April. And the other thing that I think is really important though to call out is if we look at expenses, this is also really a period where we started to see those significantly higher level of operating expenses that we'd signal to you primarily around labor and safety. So when you translate that into your modeling for the second quarter, I mean you're going to see a deceleration of trends versus Q1, a little bit on the top line but definitely, when we look at margin and free cash flow because that's also been pretty heavily impacted by those big working capital gains we had in the first quarter.

[Operator]

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

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

Just 2 questions, if I may. Just on the EUR 170 million of costs, so you're expecting due to COVID-19. Can you help us to break that down across the quarters going forward? I'm just looking at the guidance that you set up for the full years. You said that you are expecting, of course, a lot of uncertainty about COVID, but you are still maintaining the guidance. So should we see the guidance and the comment about uncertainty, the kind of low-end guidance, i.e., you are very cautious when guiding flat margin year-on-year?

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

Would you like to take the EUR 170 million question, Natalie? It's how I understood from [ Xavier ] the question, the EUR 170 million due.

[Natalie M. Knight, CFO & Member of the Management Board]

Yes. And I think it was also as well just the guidance in general. And so I mean, I think when you look at the costs as for the rest of the year, you will see that basically in those same big buckets that we've talked about, labor being the biggest but in addition to that, big costs in terms of on safety, sanitation, hygiene, and those are things that we do -- currently do project will continue for the majority of the year. I think your comment in terms of how are we seeing those and what's the uncertainty, we tried very hard to be really clear in terms of guidance for the year on the margin, being very consistent with what we've said all year broadly in line with the prior year. So that does tell you we will be expecting lower margins for the rest of the year than what we saw in the first quarter. But I think it also says it's something that if you look across the period, that just reflects losing a little of the sales leverage that we've had so strongly in the first quarter.

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

Yes. And [ Xavier ], I think it's fair to say that about the EUR 170 million that Natalie already indicated the breakup in categories that, that EUR 170 million by the 7th of April was the committed costs we gave you. But roughly EUR 100 million of debt cost fell into the first quarter and the remaining will fall in Q2, plus additional costs we did not commit to yet on the 7th of April, but in the meantime, have committed. So we see a cost overhang in the second quarter, and that's why you should not extrapolate those margins from the first quarter. The second thing is that you referred briefly to consensus on the second quarter margin. We think that the consensus of the second quarter margin is at the low end of our expectation.

[Operator]

The next question is from Mr. Scott Mushkin, R5 Capital.

[Scott Andrew Mushkin, Founder & CEO]

So I wanted to just keep going on what you guys were talking about in the short term and ask a more long-term question. So on the margin, specifically in the U.S., I think you guys were coming into the strike, and I think they were down pretty significantly last year. It seems that our data sales are probably running still in the U.S., maybe in the mid-teens or something maybe a little higher. So when we think about incremental margins, understanding the expenses, it seems that margins in the U.S. should come up still quite a bit? Or am I missing something?

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

Yes. Scott, first of all, thank you for being so early with us. We gave you the guidance for the full year on margin, and we gave you a guidance on a number of other elements for the full year, which I think is pretty rich data compared to the uncertainty of COVID. And at the same time, we also gave you a guidance for upping the online sales in the U.S. up to 50%. And we know that the online sales is of lower-margin quality than our bricks-and-mortar sales. So we also absorbed that within our guidance. And we do not give, let's say, quarter-by-quarter, U.S. or European margin guidances.

[Scott Andrew Mushkin, Founder & CEO]

Okay. So I'll just move on to long term. And Frans, you were kind of going where I was going with the idea that omnichannel is going to be more of the business. As we think about that, what do you think the ramifications are, not this year, but even as we go out, if this is more permanent behavior changes and omnichannel becomes a much larger part of your business much more quickly? How should we think about that?

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

You know that, Scott, that our omnichannel proposition has always been a very big part of our strategy, and that is both in the European and in U.S. markets. And also the first question on Bruno on the e-commerce on the East Coast, I was also referring to that. We gave you a number of EUR 7 billion online sales by 2021, and that number might come closer and faster, looking at the growth rates we have at the moment, the 50% in the U.S., but also at the European end where we also grow almost 40% with our bol.com and also our very strong growth rates with our European business. What is clear for us is that online sales will be sticky in that growth perspective for our customers and be accelerated due to COVID-19, also for food. So that's one thing we see. The second thing is that we will have been always convinced as well that an omnichannel proposition, both the combination of online and bricks-and-mortar is a proposition where we get a higher share of stomach and higher share of wallet from our customer base. So we believe that in the end, it will drive growth, it will drive loyalty and in the end, it also will drive, let's say, profitability. And in the mix, this will be a good thing to have for us. The second thing is -- so that's the margin mix of the 2. The second thing is that on the cost levels of e-commerce fulfillment, we made quite some progress there. And also there, you see in different type of margin mix, we have now more sales growth coming from click and collect versus home delivery, which, as you can imagine, from a cost perspective, is a good thing. So it gets more economical, that sales. And the second thing is we have a lot of measures in place to increase productivity in our fulfillment centers, our pilots with micro fulfillment center and so on. So it's a combination of a number of things. As a sales perspective, it's a share of wallet. And we see -- we know that omnichannel customers are getting bigger, faster and are, in the end, also more profitable. And the third thing is our own ambition to get our e-commerce sales more economical by using it -- by working at productivity and a more favorable mix, click and collect versus home delivery. And the last data point, Scott, is that we started in the U.S. with a 100% home delivery proposition for online in our Peapod days, and we're cruising closer and faster to a 50-50 percent distribution of click and collect and home delivery. And this year, we will have more than 1,000 click and collect operations in the U.S. and therefore, also growing our penetration levels.

[Operator]

The next question is from Mr. Judah Frommer, Crédit Suisse.

[Judah C. Frommer, Senior Analyst]

I first just wanted to follow up on e-commerce in the U.S. Maybe you could help us a bit with the trajectory of e-com business as you move into second quarter. Availability of product and availability of delivery slots seem to have gotten better. So what are you seeing in terms of kind of in-store shopping into early Q2 versus the acceleration in online? And are you seeing that reverse at all as we get into May?

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

Yes. Thank you, Judah, and also for your early days -- or early moment in the day. Thanks for the question. When we had the hype of that stockpiling, we paused our click and collect locations on services because we gave preference and priority to our availability of stock for our bricks-and-mortar customers. In the meantime, we have reopened all our click and collect locations. So that has to do with the fact that stock levels are improving and getting better. And to give you roughly a number, we are not -- availability of stock differs a little bit by brand and by region and by category, but an over 80% availability of stock. So that's why we see a very good reason to reopen the click and collect locations, and we think that we can combine both now again. At the same time, as I mentioned before, we are going to increase our capacity from 700 to more than 1,000 click and collect locations for the U.S. in this calendar year. So we also opened more opportunities there, and that is the same for our home delivery services capacity-wise. So we increased capacity. We will have more capacity in our system than the 50% growth, so we also can grow further than the 50%, and that's maybe something we can talk about in the second or the third quarter when we know a little bit more about how the online sales is developing. Is that helpful or...

[Judah C. Frommer, Senior Analyst]

It is. No, that's great. And then kind of my second question was more related to gross margin implications for the U.S. business. You mentioned that products on promotion were less in terms of mix of total sales. And clearly, promotions across the industry have been pulled back on. So how do we think about price competition currently and as we re-ramp toward normalization in a post-COVID or in a reopening world?And then, separately, I did think you mentioned that shrink was an offset. I would think that faster velocity in the stores may actually improve shrink, people buying more fresh product, but why didn't that happen?

[Natalie M. Knight, CFO & Member of the Management Board]

So let me take that one because you've picked on a couple of topics that are all those fun things that help us think about margin as we go forward, and there's certainly lots of different pieces there. I think when we look at it from kind of the gross margin implication, and those are I think most of the topics you were looking at, if we look at promotion first, that's one where, obviously, we saw promotions decline quite a bit in the first quarter because there just wasn't a lot of product availability and it was all about how did we get product in-store and to our customers.What we've seen is we're still in a period where promotions are -- have declined certainly through the month of April. And that's just because, again, looking at what was available, responding, there's a certain amount of time it takes until you can change circulars, et cetera, and you saw that happening. We're now in the process of looking at how we start to re-ramp up some of that commercial activity. There will be several events that we know won't be happening as we look into the second quarter and third quarter that had initially been planned. I'm thinking about the Olympics; in Europe, Formula One; the European World Championships. But it is something where we're starting to see, I think, more activity and we know also from our competitors. So I think you'll see that normalize kind of May/June. Certainly, 4th of July in the U.S., we'd expect to see things at normalized levels. You also talked about shrink. And when we look at shrink again in the first quarter, think about the number of things that just because of the social distancing, when we think about our salad bars, our self-service, our bulk items, a lot of those things had to be closed down and definitely had impacts on it. They were also in the earliest days of the coronavirus, just the issue of getting things in-store, and we've started to see some of that correct itself in terms of just the, I'll call it, the paperwork and everything behind that. As we go forward, I think your assumptions on shrink will probably be more at normalized levels as we get past this kind of first surge in terms of prices -- of sales velocity. And then the last one you didn't mention but might be interesting as well is when we look at the vendor allowances. That's something that it's largely -- they're fixed levels, and so as volumes increase, that was something that worked a little against us in the first quarter. That, too, will, I think, normalize more as we go throughout the year. Hope that helps.

[Judah C. Frommer, Senior Analyst]

It does.

[Operator]

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

[Nick Coulter, Director]

Firstly, it sounds like the EUR 170 million cost figure for COVID is somewhat of a snapshot in time. When you think about the costs that are now coming into view, the kind of the uncommitted costs, so to speak, or perhaps the committed costs that have come to light subsequently, yes, how could that EUR 170 million scale over the coming quarters? Does it increase by 50%? Does it double? It would be really useful to get a sense of how you're planning for those expenses in future quarters.Then secondly, when you think about the building blocks or indeed, the reverse building blocks down to a flat margin, how does the online P&L investments scale versus the COVID-19 costs? Just to get a sense of what sort of drag you see in the income statement from the push into online. And then, lastly, if I may, just a supplementary. Frans, if you could update kindly on the partnerships to automate in online. I guess that's more pressing.

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

Thank you, Nick. Natalie will take your second question. Let me take the first. I gave you already some color on EUR 170 million. In the press release, we gave some color on what kind of categories it was, EUR 100 million booked in the first quarter out of the EUR 170 million and the remainder in the second quarter. If you look at the total cost for the full year related to COVID, that is, of course, very difficult to assess, right? I mean we have limited visibility how this will exactly develop, has strongly to do with government regulations when you talk about safety, health measurements, security in stores and all these type of things. But I would say that if you look at the first quarter, EUR 100 million in -- a couple of EUR 100 millions more in total remainder of the year, I would say, as an indication. And you have already EUR 170 million now. So it will be more than EUR 170 million for sure. We don't know exactly the amount.

[Nick Coulter, Director]

Okay. But it could broadly double then. I mean that sounds sensible to me.

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

No, that is a too early conclusion. But I'd say a multiple of the EUR 100 million in the first quarter, I don't know. I don't give you the notable number.

[Natalie M. Knight, CFO & Member of the Management Board]

Okay. What I would say, when you look at this question of COVID versus online, I think COVID is a meaningful cost for us as we look at Q2 and beyond. So I think it is fair -- it's very fair to assume that, for this year, the COVID cost impacts are going to be larger than the omnichannel dilution that we see. Having said that, one of the things that's really important to us as we look at the year is, and we maintained our guidance is that is how we've built our margin, is that we're looking at the opportunities to absorb both of those things and maintain our overall guidance.

[Nick Coulter, Director]

But when you look at the drag, it sounds like it's a fraction of COVID but a meaningful proportion. I'm just trying to get a sense of -- just obviously, you're accelerating and to a degree, you're using the operating leverage from the first quarter to push harder into online and to flex the customer demand.

[Natalie M. Knight, CFO & Member of the Management Board]

Yes, that's exactly right. You'll see, as we go through the year, investments both on the CapEx and the OpEx side to really secure those share of stomach gains that we've been able to achieve, and we think we can accelerate through the rest of the year.

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

And we're very proud, Nick, about increasing our online presence and sales. Natalie already mentioned a number of cost elements linked to that. But in the meantime, we also launched our completely new PRISM, let's say, system to organize our store picks, and those are already operational with Giant/Martin's in Pennsylvania, and we rolled this out now through this year and the beginning of next year. This is all 100% proprietary software, and we are very proud and very strategically for us that what we do on omnichannel is, for a huge part, proprietary organized, both from systems, both from fulfillment, both from the way we market it, both from media monetization and so on. So it's a strategic part of our business, which we feel we keep it very much in our own hands. And that PRISM system is one of those elements. And so far, the experience is extremely good and the customer response on the front end is extremely favorable. If we just switch over to Europe, what's happening there is we will increase our capacity for Albert Heijn by pulling forward to home shop centers. And we also, as I mentioned before, we'll open up the Sundays for delivery to increase capacity for the market because, at the moment, we are running at full capacity. If we bol.com, doing extremely well in the Dutch market. But also in the Belgian market, we're growing very, very fast. And Natalie already mentioned in her comments that we grow with our Plaza 66% and that we have now 21,000 merchants on our platform. And also in the Belgium market, we get a lot of good feedback from our Belgian merchants on the platform as well. So I think strategically, we do the right thing here, and we're accelerating our implementation of our omnichannel strategy, but this in a way where we own, let's say, the majority of the fulfillment and front-end ourselves.

[Nick Coulter, Director]

And I know you're running a trial with Takeoff in Windsor. Are you running any other trials with other partners for micro fulfillment?

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

Yes. We are now looking at the full operation of the Takeoff center in Connecticut. You have seen it, and we are getting closer to the required productivity levels, but we also see other initiatives in the market. And of course, we keep our eyes open.

[Operator]

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

[James Robert Grzinic, Equity Analyst]

Frans, I guess as a follow-up, where is that 20,000 number now? It feels -- if it's a lower number.

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

It's a slightly lower number now. It's mainly concentrated in the New York and Washington markets. There is the biggest impact from COVID, the biggest impact on people getting -- falling ill. So that number is going down, and those are mainly part-time workers we hired.

[Operator]

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

[Fabienne Caron, Head of Food Retail Sector]

Two questions from my side. First, on Europe, I appreciate you don't give margin per regions anymore within Europe, but could you give us some qualitative comments on profitability development from the Netherlands, Belgium and Central Europe? I'm particularly thinking here of the Netherlands, given the high share of online food. And my second question would be regarding bol.com. How do you forecast sales of bol.com in the second part of the year or mainly already for Q2 given the much tougher economic environment?

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

Yes, Fabienne. Two things on the margins, and thanks for your understanding that we only report the European segment nowadays. In the Belgium market, we see a rather -- we see roughly flat margins compared to last year, but good increase of sales. We see in the Dutch market a slightly lower margin than last year, but it's mainly impacted, like we already said with the investment in our pensions of more than EUR 40 million for the full year and also our further investments on OpEx in digital and in online. So that's a little bit more color on those margins. They're very, very stable margins also in the rest of Europe, which gives us this slightly higher margin in the first quarter for total Europe. Your second question was on bol.com, what we see on the growth rates for the remainder of the year. You can imagine that we don't report out on this. But myself, I see, at this moment, no reason to assume that the bol growth rates we see now will be much lower for the second half of the year.

[Fabienne Caron, Head of Food Retail Sector]

Okay. So you don't see any change in consumer behavior regarding some items that they're buying within nonfood?

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

Yes. I think we have with bol a very strong proposition, and we also grow faster in Belgium now than last year. And you also know that we will attract more French speaking customers in Belgium by having the French language module operational by the middle of this year. So that will also help us. We have a very strong product and last-mile delivery in the Dutch market with a very high penetration. We, I think, have organized a good plan to make sure that we attract more customers given some new entries of competitors to the Dutch market. So we feel well positioned in the Dutch market, and we also make a number of combinations for bol with our Plaza partners, which understand the Dutch market extremely well. The last mile on fulfillment is unique, which bol offers in the Dutch market, especially also on evening deliveries and very reliable next-day deliveries. So we feel confident that we can grow further also with bol.com in the Dutch market.

[Operator]

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

[Robert Joyce, Equity Analyst]

So the first one, just on the costs you're incurring related to COVID. Are there any regional differences you're seeing in these costs? And do you consider these cost levels the sort of market standard costs? Are there any additional costs you're incurring that your competitors might not be? And then the second one, just if you could remind us, if we include the picking fee, are you -- are your click-and-collect sales equivalent profitability to your sales in-store?

[Natalie M. Knight, CFO & Member of the Management Board]

So let me start on the cost comment in terms of regional differences. I think the only thing that I would -- the biggest thing I would call out is just the timing of those differences that we saw earlier in Europe than what we saw in terms of timing for the U.S. I think what we believe is, as we go forward, there's costs related to safety and hygiene. Many of those are probably going to stay with us. And when we look at labor, those really do vary quite a bit depending on market and timing. So there have been some differences there in terms of how that plays out, and that's also part of the reason we've given you the guidance in terms of really expecting to see that increase in cost in the second quarter when you see the U.S. labor piece come in a much more substantive way than what we saw in the first quarter. When you -- I think your second question was just looking at -- if we look at click and collect versus in-store and how does that profitability vary, I think it's fair to say that even if you take the picking fee out, they're getting closer, but there still is a difference in those profitability levels today.

[Alvin Caezar Concepcion, VP & Head of Investor Relations]

All right. With that, thank you for joining our call. We appreciate the time. Have a great day, everyone, and take care.